Keeping the money flowing

The rules have been changed to allow transitional spending from one AMP period to the next. Conor McGlone reports.

Ofwat’s agreement last October to allow water companies to bring forward spending from AMP6 was hailed as a triumph by British Water. The trade body has been campaigning for an end to the “boom and bust” nature of spending, driven by the regulatory cycle, which leads to up to 40,000 job losses in the supply chain at the bottom of the cycle. It reckons companies will be eager to use the option of bringing forward transitional investment, and has predicted that hundreds of millions of pounds will be spent next year in what would traditionally be a massive trough for the sector as the next regulatory agreement is hammered out. But are water companies keen?
Under the new rules, water companies are able to finance projects a year early, with this investment recognised in year one of the following AMP period.
In the past, investment has declined significantly in the last and first years of the five-year regulatory period, while ramping up in the middle. According to a government report of 2012, the new rules could save the water industry £1.1 billion every five years.
Severn Trent has so far committed the most to transitional expenditure, at £80 million, which it says will reduce the peak-to-trough range by 24 per cent. Next is Anglian Water, which has set aside £58 million. Yorkshire Water has advanced £48 million and Wessex Water £6 million, putting the amount pledged so far by water and sewerage companies at £192 million.
But that figure does not include some big names, including the biggest, Thames.
Industry sources suggest that Thames’ transition figure will be large. The company would not give a number, but its pioneering Eight2O alliance programme suggests it will be keen to make the most of investing early. In December it announced that it was already working on plans to deliver billions of pounds of investment over AMP6.
British Water had expected companies to confirm the amount of transitional investment they would accelerate as part of their business plans submitted last month, but some companies are being cagey.
Like Thames, United Utilities (the third-biggest water company) refused to reveal an amount. Welsh Water, Northumbrian Water, South West Water and Southern Water have all also declined to tell.
Not all of these companies appear to be embracing the concept of transitional expenditure.
United Utilities said there would be transitional investment, but it expected it to be “fairly modest in the context of the overall capital programme”.
One reason some companies might be reluctant to commit to a large chunk of transition expenditure could be because they already have work that spans AMP cycles.
Wessex Water said the relatively small amount of £6 million it had committed as transitional expenditure was because it already had major work under way spanning AMP5 and 6, such as its £230 million water supply grid project. Similarly, South West Water said it was already investing £18 million in bathing water schemes ahead of the next period.
As well as these companies, the final figure will be swelled by contributions from the smaller water-only companies.
The rule change is described by Water UK as “good news all round”, but without proper publicity its effectiveness will be dramatically diminished. According to Paul Mullord, a director of British Water, if suppliers are unaware of the room now allowed for water companies to invest early, there will be a “tendency for them to start laying people off as they have done in the past”.
“The idea is to get the message out there that it is going to be different this time. We have done our bit but the water companies need to back that up. The supply chain needs to hear it from either Ofwat or the water companies,” he said.
Mullord is optimistic that the remaining companies will unveil their grand designs soon and it is expected that Ofwat will announce the collective total transition amount by 16 January. Any further delay could put this long-awaited solution to an age-old problem in serious jeopardy.