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Disappointment replaces AMP6 optimism

The first year of AMP6 is complete but has the regulatory cycle lived up to expectations of renewed vigour, or has it been the usual roller-coaster ride for the industry's supply chain?

The water industry’s supply may have to endure the AMP cycle roller-coaster for another two AMPsThe water industry’s supply may have to endure the AMP cycle roller-coaster for another two AMPs

It has been a year since AMP6, the regulatory cycle covering 2015-20, began. It started with an air of optimism in the water sector’s supply chain that the traditional boom and bust experience might just be alleviated.

In the build-up to AMP6, a lot of work took place behind the scenes as the Cyclicality Working Group brought together water companies, trade associations, Ofwat, contractors and suppliers to try and reverse the negative impact normally associated with the five-yearly cycle.

A lot was achieved including the introduction of early contractor involvement (ECI) procurement processes, and Ofwat’s agreement that the water companies could bring forward hundreds of millions of pounds into the final year of AMP5.

So, one year in, was the optimism well-founded? Not quite, with water sector contractors and suppliers giving mixed views on the subject, with some reporting delays to projects. But while year two is gearing up to be a strong one, it is the delays in project starts that have brought most angst to the industry’s supply chain. The feeling is that while water regulator Ofwat has worked with the industry to try and smooth the peaks and troughs of the AMP cycle, its introduction of a totex approach to capital investment projects along with Outcome Delivery Incentives (ODIs) put a spanner in the works.

The Future Water Association (FWA) says its members are reporting year one of AMP6 to be the worst since privatisation. “There’s been a general disappointment. After 30 years, we should be able to get it right,” says Martyn Hopkinson, now operations director and former chairman at the FWA.
In addition to the introduction of ODIs, Hopkinson says suggested reasons include the distraction caused by the impending opening up of the non-domestic retail market in England next year; and changes among the senior executives within water companies.

However, he says that while totex, for instance, will have a positive effect on the regulatory cycle it could be at least two more AMPs before the ‘boom and bust’ aspect is consigned to the scrapheap.

A spokesperson for Ofwat told WET News: “We have seen a big step forward in terms of levelling out investment, and many in the sector have welcomed the steps taken in PR14 to enable transition spending between regulatory periods. As part of Water 2020, we are considering further steps to encourage a longer term focus by the sector, but we now have a framework that enables businesses to make longer term decisions and we are starting to see them respond.”

James Stoner, managing director, Stonbury, insists the industry’s contractors and suppliers need to work with the AMP cycle rather than against it. “We all know what’s going to happen with the AMP cycle. We need to plan around those humps.

“The AMP cycle isn’t a barrier to entry, it’s a challenge”

Richard Coackley, chair of the Cyclicality Working Group, agrees with the ‘mixed’ response. “It’s been a slowish start generally to AMP6. But it’s fascinating, and for different reasons, and possibly why there’s a mixed message.

“We got the money in the transition period but some water companies have been changing the model that they’re operating and that’s had a difference on incorporating the supply chains. Also, there’s been a reticence by the contracting empire to get involved with the water companies because of it being a hard AMP5 and learning the lessons from AMP5, and new terms and conditions being put in place.”

He says the AMP cycle peaks and troughs are not just about finance but other attributes as well, including the changing of business models.

Coackley observes that water companies which maintained the same model have flown through. However, it has been a different story where others have changed their model, which has delayed the process of projects coming through.

It is a challenge for the supply chain to maintain the delivery of the workforce with such swings within one specific AMP, never mind the transition between two.

Coackley does not want the cyclicality group to carry on through this AMP period, and will consult with British Water and Water UK to “get a rain check and call it a day”. He says: “I want to look back on that transition at the end of the year and say ‘this is what we were set up to do, this is what we’ve managed to do but these are the observations we’ve had while going doing that journey.”

The overall aspect of the contributing factors “have been disturbing for me”, says Coackley, because the whole process of what should be happening in the water industry is continuity of workforce. “As soon as you start to get these fluctuations whatever they’re for, whether it’s Ofwat putting in measures that people aren’t aware of, or changing of models, it’s something we should get away from because it just increases the inefficiency within the supply chain, you lose the supply chain or it costs more money.”

But while AMP6 has earned a mixed review so far, it seems a different cycle may also be benefitting the industry’s supply chain. This parallel cycle concerns major projects that are happening outside of the AMP, such as the Tideway Tunnel scheme.

Then there is building information modelling (BIM) and totex where Coackley’s idyll would be the day when potentially Ofwat and the water companies just pressed a button in a BIM model and that would be the AMP periodic review submission.

Coackley explains: “Think of it as the chief exec being similar to a captain on an aircraft that’s been built by capex using a BIM model, and then then it’s flown using a BIM model in opex. That captain is the chief exec of a water company and the regulatory process is all about looking at that relationship between capex and opex, and the enjoyment of the passengers – the consumers – on the flight.

“It’s as simple as that and we need to get the water industry at that level. Ofwat’s got a big part to play in that because it’s got to be led from the front. I’d love to see that whole process happening – a joint, cooperative, collaborative touching of the button.”

There are expectations the transition to AMP7 will be smoother. That can only happen if the water firms and supply chains can plan ahead, with visibility of any new regulatory measures from Ofwat.

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