The water industry has seen a huge amount of change since privatisation but it is set to see more in the next five years than it has in the last twenty-five.
April 2017 will see one of the biggest changes to hit the UK Water Industry with the opening of the retail market to all business customers. In short, any business customer irrespective of size will be able to choose who they buy their water from. This is already resulting in some big decisions both for the customers, the companies and the shareholders. Whilst the customers may be considering looking for a new retailer, new entrants are applying for licences and the existing companies are deciding what do they want to be in life – a wholesaler focussed on the maintenance and operation of the asset continuing to provide the core essential water and wastewater services or a retailer potentially looking to widen the service offering and possibly even across sectors. It will be an interesting time when the market opens and not least for the investors who will be asking themselves as to whether the nature of their original investment is changing and will the retail market create more risk or more opportunity. What is clear is that it will place an even greater focus on customer service.
The opening of the retail market is a big change but one that has been well rehearsed following experience in Scotland and the other utilities. The next set of changes facing the industry are likely to have a far greater impact on the underlying wholesale business with proposals to introduce greater competition in water resources and bio resources (treated sewage or sludge) and also seeking companies to consider Direct Procurement for the larger schemes.
The background to widening the use of Direct Procurement has come from the success of the development of the Thames Tideway Tunnel where not only has a new separately licensed company been created for the delivery of the tunnel but in addition to the tendering of the construction contracts the financing has also been subject to competition. The creation of the separate business to construct and own the tunnel has enabled clear lines to be drawn around the scope of the scheme and the risks to be borne by the investors alongside those provided for as part of the government support package recognising that certain catastrophic risks need a higher level of protection. The outcome of the approach has ultimately benefitted customers with a reduction on the impact on bills from the original government estimates of £70-80/year to £20-25/year. The challenge that has now been set by Ofwat to the industry is whether similar benefits can be gained on other schemes with an indicative whole-life totex value of over £100 million.
It would be easy to argue that there is a fundamental difference between the development of a £4.2bn tunnel and a scheme with a far lesser value more akin to the routine programme of the water industry but it is perhaps more important to focus on the potential opportunities and the attributes that lead to success.
The success of the tendering the tunnel was the clear definition of the separate scope, deliverables, responsibilities and risks over the long-term ownership and not just short-term construction– probably very similar to any major project. In considering this within an existing capital programme the use of Direct Procurement will be more suited to the construction of a new treatment works or “end-of-pipe” solution than perhaps the partial upgrade of an existing works or the renovation of the current network. The second interesting point to note is the reference to “whole-life totex” and with many of the newer small footprint and highly energy intensive treatment plants the list of £100 million schemes suddenly becomes a lot longer than people first envisaged. So without much imagination you can quite quickly see that the industry is being encouraged to consider a strong move towards the DBO/PFI schemes or long-term operating concessions that we have seen in the past but perhaps now with a better view on many of the lessons learnt.
Ofwat has been very clear in purposefully not setting prescriptive rules or guidance on what is expected but leaving it to the industry to explore and develop proposals that will ultimately provide the biggest benefits to customers. To really take this challenge on it is worth pushing the boundaries even further recognising that the answer may not sit with the current incumbent water companies or even within the current supply chain but the bigger benefits are to be gained across the sectors and the broader infrastructure programme.
One of the greatest challenges that we have is to develop and deliver an efficient and effective long-term infrastructure plan that supports the forecast levels of growth as well as dealing with the huge pressure that already exists.
As an example we can see the increasing challenges on domestic waste recycling, renewable energy generation and use of bio resources but rather than look at individual solutions for each of these areas there is clearly a better approach. The development of a single scheme taking industrial and commercial waste into a combined treatment works generating renewable energy and district heating is not a major step from where we are today – but perhaps better delivered through third party ownership outside of the current regulated sectors. So the aspirations and aims that Ofwat has set out in the future programme for the next price review do not seem that far way – and it may just be one of the many catalysts that we need.