Utility Week

26 | 28TH FEBRUARY - 5TH MARCH 2020 | UTILITY WEEK Operations & Assets Analysis A MP7 cost pressures are leading to strained relationships between water companies and their contractors. Some are switching to employ tier 2 and 3 directly to make savings – others are just squeezing margins. A dearth of skilled peo- ple in the wake of Brexit is adding to the mix, leading to concerns that the resilience of the sector is at risk. Energy & Utility Skills chief executive Nick Ellins, who works with a number of the contractors in the water sector, is one of those concerned that utility firms could find that in driving out costs, they may find them- selves driving out construction firms. He says that a‡er the collapse of Carillion, members of the contracting community – from tier 1s to tier 3s – have had to re-evaluate whether or not the clients they work for bring them a sustainable return. EU Skills has been relaying these con- cerns to the regulator, says Ellins: "We invited Ofwat's Rachel Fletcher to meet the contractors to talk about [this shi‡ in pro- curement] and understand their view about why they would even choose to stick around in water because, if they don't, Ofwat has got to fund companies to do this as direct work- force, and that means bills are going up." He says the sector would be better placed to start seeing contractors more as inves- tors given that they are "multi-billion pound businesses that choose to operate within the utility sector and the day they don't, costs and complexity for the sector rises". This message came through loud and clear at a contractors' dinner hosted by EU Skills. Here, directors of tier 1 companies – all of which had significant work in water – raised alarm bells for the next price review period. Their beef is both a switch of pro- curement model by some water companies, but more generally the effect of Ofwat's final price determinations. This, it said, has sent water companies scurrying to cut costs and pass on more risk. Margins are already low and risks high, but they accepted that because of the upside. The positives of working in the sector are blue-chip clients who pay on time and work was o‡en counter-cyclical to recession. How- ever, they warned that the new cost-cutting regime risked jettisoning all the value they brought to a project by improving efficiency, innovating and working with water com- panies to bring down carbon emissions. All water companies have pledged to become net zero by 2030. "The crude cost-cutting undermines innovation and potentially risks health and safety," said one of the guests, "as well as all the work we've been doing on wellbeing, decarbonisation and digitisation." "It's all very well going to tier 2 and 3s," said another, "but they don't have any of the central company functions, I heard of one turning to the HR department of the water company to sort out apprenticeships for them. We bring a lot to the party that just isn't valued." Incentivisation is the key CECA civil engineering director Peter Cro- sland, who runs the organisation's water group, says that incentivisation is key to keeping both sides happy, adding that if this is missing, "contractors will go elsewhere and look for the least risky option". This is why water companies like Bristol Water and Yorkshire Water are weaving incen- tivisation into their procurement models. However, one of the problems these firms face in getting their message to be heard is the fact that when well-established compa- nies pull out, there is always another firm waiting in the wings – barriers to entry in construction are notoriously low. There is also another difficulty that has been looming large for some time. That is the need to find enough skilled people to do the work in utilities when skills will be under even more pressure because of Brexit. Civil contractors have warned that the new points-based immigration system the UK government plans to implement from next January will create labour market pressures for employers in some semi-skilled and man- ual labour jobs. Sir John Armitt, chair of the National Infrastructure Commission, has also voiced his concern about whether delivery of plans outlined in the National Infrastructure Assessment (which the Treasury is expected to respond to at the time of the budget in March) will be hampered by skills shortages. Addressing MPs and peers at a meeting of the all-party parliamentary group on infra- structure in the House of Commons, he said that the utility sector is now the largest sin- gle contributor in the £0.6 trillion National Infrastructure Assessment. In what is now "economic full employment" and the tight- est UK labour market since records began, ensuring the quantity and quality of the infrastructure workforce becomes ever more important to achieve productivity, affordabil- ity, safety and innovation. Sir John acknowledged that there is an insufficiently joined-up approach to infra- structure skills development in the UK, with a wide range of responsible bodies operat- ing across different geographic and political boundaries. "The human capital aspects of the National Infrastructure Plan for Skills need to be refreshed to help ensure our pipe- line of future workers is adequate for the challenges ahead," he said. Skills resilience Ellins, who has been pushing for skills resil- ience to become part of the NIC's consid- erations for some time, welcomes Sir John's point, saying: "The Infrastructure and Pro- jects Authority must now take action – as the designated owner of infrastructure's skills strategy and as an infrastructure champion on behalf of HM Treasury." Few would disagree that an overarching strategy for infrastructure skills needs to be part of long-term infrastructure planning. But in the short-term, contractors and water com- panies look set to continue to play their poker game, until the stakes really do become too high, and one side caves in with potentially unfortunate consequences for the sector. A strain on resilience? Cost pressures caused by AMP7 are straining relations between water utilities and their contractors. Robyn Wilson and Denise Chevin ask whether new contracting models can deliver. This article forms part of an exclusive report examining the new procurement models in AMP7 and the impact on contractors. The full report can be accessed at utilityweek.co.uk

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