Round Table: Water Industry Procurement in AMP6 and beyond
Have procurement practices so far in AMP6 reflected the regulatory shift towards whole- life cost and Totex? Participants in WWT's round table, sponsored by Hydro International, found that there is still much work to be done
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1. Outcome delivery incentives will vary between water companies, meaning subtle differences in emphasis for procurement.
2. The industry risks losing its brightest people to other sectors if it cannot smooth out the peaks and troughs of the AMP cycle .
3. There will be different levels of service in terms of resilience, flood risk that will have a customer bias.
4. In some cases assets are being managed and optimised to standards that are out of date with what could be achieved.
5. A risk solution offers a partnership opportunity between the client and supply chain.
by Maureen Gaines
While the second year of AMP6 is well and truly underway, the water industry is still getting to grips with the challenges that the current five-yearly cycle has brought with it. These challenges – Totex and whole-life cost assessment, outcome delivery incentives (ODIs) and the peaks and troughs associated with the AMP cycle – ensured a lively discussion at the WWT and WET News’ round-table Water Industry Procurement in AMP6 and Beyond, held in association with Hydro International.
The arrival of AMP6 was meant to be the start of a new era, with the boom and bust aspect traditionally associated with the five-yearly regulatory cycle being consigned to the scrapheap once and for all. Work behind the scenes to make this happen ensured a feeling of optimism in the industry’s supply chain.
However, the reality is that it has been the same old story, with contractors and suppliers having to cope with slow project starts in AMP6 and the continuing impacts of cyclicality on their businesses. The introduction of ODIs and looming competition have been distractions from Totex, with water companies admitting they have struggled to make the switch from a capital expenditure (Capex) bias to an approach that takes more account of operational costs.
Ian Pemberton, principal, analytics at Ofwat, said: “Taking my regulator’s hat off, I would say that from my experience in previous roles, the water companies have a very good handle on Capex and a lesser understanding of Opex. Therefore, the Totex calculation is still very heavily Capex-biased.”
“We were privatised for Capex reasons, fundamentally, and we certainly delivered that in the early years. It’s how you make that transition now,” said Steve Crake, head of procurement at Northumbrian Water. “I can understand the levels of criticism in terms of being Capex-biased. In terms of the data to drive that, you would think that after 30 years of privatisation we’d have a little bit of it to work with. But we are on that journey, and certainly in my company, we’re probably in a phase where we’re delivering effective Totex on a project basis.”
Another area that is prolonging the procurement process in AMP6 concerns the water companies adopting risk-based solutions, and addressing the question of how much risk is devolved down the supply chain.
“There’s certainly challenging conversations we’ve had with contractors where we’ve said ‘look, there’s a sewage works here where we’d normally have three lanes but we think we can get away with doing two lanes’,” said Andy Clark, head of procurement & contract management at Yorkshire Water. “It’s proving harder to get into contract with suppliers because it’s a fit-for-purpose contract and there’s a lot of discussion around risk transfer; how much risk we need to keep as a client. I think that’s been one of the reasons that we’ve had this slow start.”
The participants were in agreement that this risk management approach has placed a greater focus on asset optimisation, as the water companies prioritise investment decisions and question whether an asset is performing as well as it can, whether a new one is needed, and whether it is required now. As a result, engineers, finance departments and operators are being asked to think differently. It was also suggested that equipment suppliers could be engaged more in asset optimisation services.
Jeremy Mitchinson, UK business director of water at MWH, said the water sector as a whole has now reached a turning point.
“A lot has been achieved since privatisation, but it’s now going into that next phase,” said Mitchinson. “We’ve built a lot, we’ve got a lot of assets in place, and I guess it’s now about asking - how do we manage the estate better to achieve what we need to achieve?”
Clark added: “Our performance expectations for operations have never been greater. It’s an environment where failure is not an option. In that context, to then have this risk-managed approach is a challenge.”
The problem is that the new thinking on risk is not filtering down the supply chain so that all parties think in the same way to deliver an effective solution. As a result, opportunities for a risk-based, or best whole-life cost solution, are not being carried through.
The water companies said that too often the Totex conversations they were having with Tier 1s were not filtering down to Tier 2s and 3s. The areas where suppliers can add value to help improve life cycle costs are stripped out through lowest-cost Capex-based contracting in Tier 1 projects.
Keith Hayward, Hydro International’s European Wastewater Sales and Marketing Manager, agreed with the observation. “Either we have to strip things out to get down to the level needed to win the work. Or if we don’t strip it out, then the Tier 1 does.”
However, he added that his company was now more likely to be asked by consultants to get involved when a solution is first developed. “We all want to go to this model and deliver it because it will be better for everybody. It’s just not yet filtering, and it’s an enormous frustration because it’s costing the industry on a daily basis.”
Northumbrian’s Steve Crake added: “We recognise SMEs are the boilerhouse for innovation. For SMEs to invest, they need continuity and visibility of workload. Yet on the other side you have got us, the clients, who have a natural focus on aggregating and therefore slimming down the supplier base. It is how we get better engagement with Tier 1s and Tier 2s to allow them to successfully invest in the resources and innovation and all those great ideas.”
Phil Tomlinson, sales & marketing director at telemetry supplier Metasphere, said wide and engaging conversations are needed at the start to ensure longer-term savings can be achieved. “That’s the starting point in the process. The difficulty on our side as a Tier 2 is that those type of conversations seem to exist between Tier 1s and the customers; sometimes the Tier 1s engage and sometimes they don’t.”
In summary, participants were in agreement that a more collaborative approach is needed and that proactive engagement needs to take place throughout the supply chain. An important area for attention was ensuring that industry design standards keep pace with opportunities for innovation, so that instead of becoming a limitation and something to conform to, they can push the best whole-life solutions forward.
Round table participants: Andy Clark, head of procurement & contract management, Yorkshire Water; Paul Horton, chief executive officer, Future Water Association; Jeremy Mitchinson, UK business director for water, MWH Global; Keith Hayward, European Wastewater sales & marketing manager, Hydro International; Steve Crake, head of procurement, Northumbrian Water; Ian Pemberton, principal, analytics, Ofwat; Paul Mullord, UK director, British Water; Neil Wilson, head of risk & investment, Wessex Water; Phil Tomlinson, sales & marketing director, Metasphere.
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