Viewpoint - Terry Povall

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How water companies spend the £27bn they propose over 2010-2015 will be up to them, but there are some fundamental issues at stake, says EC Harris' director of utilities Terry Povall

Draft business plans submitted by water companies to Ofwat show that the sector still has significant levels of investment and, for many, represent a source of long-term sustainable business.

While the credit crunch will impact on other sectors, new entrants are being drawn into the water sector with the onset of the new Asset Management Plan (AMP 5). This will increase competition and create the necessary impetus to ensure the right delivery providers are selected for the right reasons and are working to a business-aligned strategy.

Future water charges have been quoted at levels above inflation to fund these capital expenditure needs. However, the use of published indices for inflationary adjustment of price submissions has to be a concern for water companies, as real inflation seems to be outstripping headline inflation.

There are currently significant cost increases on steel, oil-based products and fuel – that are affecting costs on materials such as aggregates – which look set to continue. Other sectors have effective risk management on this critical area and water companies need to address it too.

The milestone of the draft business plan is often the starting point to develop appropriate smart delivery models. There are several critical elements of best practice delivery models, but they are seldom comprehensively considered between successive AMP periods.

For example, some companies will import other successful models within the sector without giving full consideration to how it aligns with their own business goals. The best model is the one that fits your business and delivers real value.

Partnering, incentivising models, forms of contract and target cost-setting principles are all areas of great attention between successive AMPs. This takes the focus away from the imperative of making sure the right delivery providers are selected in all aspects. For example, how many companies:

• Secure the right balance between client control and collaboration in the delivery model?

• Optimise the blend of different delivery providers to achieve programme objectives?

• Develop effective programme delivery vehicles that can bundle up the large number of small projects, which are inevitable as the work mix in the new programmes changes?

• Successfully balance resource capacity and capability between the client and delivery provider?

• Make sufficient effort to transition both clients and delivery providers to the new models?

• Ensure that an effective programme management office is established prior to April 2010, so that there is full visibility and appropriate control of performance from the outset?

These are all areas with which the sector is already familiar, but if we are to see real improvement and truly effective delivery models that can run on into AMP6, then we need to address fundamental issues now.