Tackling Boom and Bust - We've only Just Begun
Infrastructure UK's widely-welcomed report 'Smoothing Investment Cycles in the Water Sector' has emphatically confirmed that 'boom and bust' spending is having a real and damaging impact on our industry - and the consumers we serve.
Cyclicality adds an extra £5 to £6.50 to customers’ annual bills, as well as costing the industry up to £1.1 billion every AMP cycle, says the Government report which has been applauded by many leading industry and engineering groups.
The report’s conclusions follow the excellent representations made by groups including British Water that have clearly evidenced the cycle’s ‘hire and fire’ impact on supply chain employment levels.
The report acknowledges that the situation is not improving. So far attempts to mitigate its effects have had little success. There is now wholehearted acceptance of the problem from all parts of the industry and OFWAT, but finding solutions that can bring about real change will be another matter.
The report suggests that there is no ‘simple, single cause’ for the investment patterns that have emerged since privatisation and no one part of the industry is to blame. Instead, it says the cyclical effect has become ‘cultural’ and the industry needs to make a conscious effort to challenge ‘learnt behavior’.
Isn’t there an ‘elephant in the room’ here - that the simple, single cause of the problem is the regulatory structure itself? Admittedly, all suggested solutions to change the structure by staggering AMP cycles in some way have failed to convince regulators and investors that they are worth the risk. Longer price control periods of up to eight years may be considered before AMP7 begins in 2020.
For now the Government is pinning its hopes on better planning to smooth out the peaks and troughs, including introducing transition funding arrangements. It is challenging the industry to improve collaborative working and communication and to introduce more imaginative contractual structures.
After such a positive acknowledgement of the problem, it would be churlish of me to be defeatist, but I have to confess to being concerned that these recommendations will at best only smooth out the rougher edges of the problem.
Ofwat will consider the recommendations as part of its Future Price Limits consultation this autumn and I look forward to the British Water conference on the Report to be held on November 15.
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