Ofwat calls for cultural shift at PR24 to plan for the future

Ofwat has said a cultural shift will be needed from water companies in order to move away from producing five-year business plans in isolation.

The regulator said a fundamental shift towards a long-term mindset would require culture change at all levels of the business and asked boards to show leadership.

In a letter to regulatory directors it set out expectations for “minimum requirements” on long-term strategies. These should integrate five-year business plans with wider reaching environmental strategies to ensure investments are made at the most beneficial time.

The regulator reiterated its position that each AMP cycle should be a building block that fits with 25-year water resource management plans (WRMPs) and drainage and waste management plans (DWMPs) as well as the Water Industry National Environment Programme (WINEP) in England, the National Environment Programme (NEP) in Wales.

In its initial framework for PR24 published in May, Ofwat expressed the need for the sector to schedule infrastructure investments to ensure it can meet supply and environmental targets to 2050, especially for projects that involve more than one company across regional boundaries.

It said company boards should own and be accountable for their long-term delivery strategies, which includes ensuring the plan is high quality. Ofwat expects each board to provide an assurance of how it has challenged each aspect of the strategy.

It said long-term delivery strategies should be made up of five parts:

• Ambition: setting out what the company aims to achieve over the next 25 years
• Strategy: how the company will aim to meet this ambition over the next 25 years
• Rationale: why the long-term delivery strategy represents the best way of meeting short- and long-term ambitions
• Foundations: the key assumptions and uncertainties underpinning the long-term delivery strategy
• Board assurance: how the company board has challenged management to deliver a high-quality long-term delivery strategy

Strategies should be based on the ambition of where the company plans to be in 25 years’ time and what it wants to achieve for its customers over that period. Ofwat’s expectation for company boards was that they should “explicitly sign up to both the vision and the ambition for the company”.

It pressed them to focus on adaptive planning to be flexible enough for the changing environmental and societal challenges companies may face in the coming decades. This, Ofwat said, would allow companies to schedule and prioritise spending.

Strategies should be underpinned by a number of assumptions relating to factors both in and out of companies’ control, such as regional impacts of climate change; socioeconomic factors and policy changes, as well as those more under control such as cost efficiencies and asset health management. Ofwat said plans should set out the areas of greatest uncertainty and how they have been accounted for.