On 23 July 2012 the Government published its analysis and recommendations to resolve the longstanding issues of cyclicality in the water sector.
The report Smoothing Investment Cycles in the Water Sector has been produced by Infrastructure UK (part of HM Treasury) in collaboration with Ofwat and the water industry. It sets out a number of recommendations to improve certainty, productivity and value for money; and to reduce the regular round of significant redundancies in the sector.
If the recommendations are implemented in full they could reduce the average customer water and sewage bills by 2 per cent, saving £6.50 on average annual bills; saving the water industry £600m every five years; and prevent up to 40,000 job losses over the next five years.
The Commercial Secretary to the Treasury, Lord Sassoon said:
Today’s report confirms that the issue of cyclicality is something that no longer needs to be accepted as a feature of the water sector.
Regulators and the industry will work together to consider how these recommendations can be successfully implemented. They will make a real difference to productivity and improve job certainty in the water sector, as well as putting money back in families’ pockets.
Chris Newsome, of Anglian Water said:
Cyclical investment has been an issue in the water sector since privatisation. The effects of this stop-start cycle within the supply chain result in lost productivity across the five year cycle, redundancies and an environment of uncertainty in which small and medium enterprises are particularly badly affected. The industry should support the recommendations made in this report, which highlights the need for regulators, water companies and their supply chains to work more collaboratively to address the issue.
Government, the regulators, water companies and the industry will all need to take action and view risks differently if money and jobs are to be saved.
Regulators will need to consider:
- measures to improve transparency and predictability within the price review process by raising confidence and certainty at the time of the draft determination;
- developing effective incentives that drive choices for investment across the transition, including, where appropriate, bringing projects forward, recognising the balance of costs and risks between company and customer; and
- improving clarity around existing incentive measures, including the overlap programme.
In return, water companies will be expected to:
- commit to early development of projects in advance of the next pricing control period;
- implement measures to provide greater visibility of their work programmes; and
- initiate early engagement and improved integration with their supply chains to improve productivity, efficiency and promote innovative solutions.
This autumn, Ofwat will publish its Future Price Limits consultation which will examine how these recommendations can be adopted, and set out the future process for price reviews.
Keith Mason, Senior Director of Finance and Networks at Ofwat said:
Ofwat welcomes the publication of this report which shows that cyclical investment in the water sector has led to inefficiencies and impacts on customer bills. Ofwat’s work on Future Price Limits principles will help address a number of incentives in this area, encouraging innovation and longer-term planning. Companies will also need to take action to plan more effectively, target investment, and work more closely with their supply chains.
Notes for Editors
Read the full report Smoothing Investment Cycles in the Water Sector: http://www.hm-treasury.gov.uk/iuk_cost_review_index.htm
The effects of cyclical investment are most acutely felt in the water sector but are also observed in rail, electricity, gas and roads investment. The Government is seeking to understand the causes of cyclicality in the delivery of the UK’s infrastructure and to take action to mitigate its impact - reducing cost to the taxpayer and consumers; and promoting growth and sustainability in the supply chain.
The Government committed, as part of the Infrastructure Cost Review programme, to work with Ofwat and the water industry to understand the impacts and causes of highly cyclical investment profiles in the water sector. The objective of this study has been to identify best practice and to make recommendations to enable key stakeholders to help smooth out investment cycles. This will in turn result in reduced costs to consumers and promote growth and sustainability in a vital sector of infrastructure delivery.
This study would not have been possible without the support of Ofwat and the three water companies, representative of the industry, which formed the basis of the detailed study interviews (Anglian Water, Southern Water and United Utilities).
If these recommendations are implemented, it has been estimated that companies could achieve efficiency savings of between 3 to 5 per cent. In investment terms, this equates to between £600m and £1.1bn. The £6.50 saving relates to a reduction in the average customer water and sewerage bill at the end of the current price limit period, should savings of up to £1bn be realised.