WET News

6 WET NEWS JULY 2014 Not enough focus has been put on total expenditure, according to economists Cost versus value – the industry needs to reassess its goals • The arrival of a totex approach in AMP6 is expected to provide opportunities for companies that are forward-thinking. Simon Thomas, managing Director of Asset International, explains. I t is now 25 years since the wa- ter industry in England and Wales was privatised. During that time, the UK's water compa- nies have spent more than £100B upgrading the UK's o en antiquated Victorian water and sewerage networks, resulting in hugely improved water quality. The main emphasis in the past 25 years has been on meet- ing legislative requirements, which has led to programmes to build and upgrade existing facil- ities to make sure they comply. With the bulk of that work now complete, there is going to be a huge shi in focus in the way the industry works, with an emphasis on consolidation and maintenance of the current infrastructure, and meeting new benchmarks set by Ofwat that are intended to govern the industry in the decades to come. Until now, Ofwat's priority has been to make sure the water companies upgrade facilities and comply with European water quality directives, very much achieved by a focus on 'outputs'. Ofwat is now encouraging companies to take a far less pre- scriptive approach, moving away from 'output based require- ments' and towards 'outcome based requirements'. Essentially Ofwat wants the industry to take account of the whole life costs of their assets, and not just be aware of the immediate bottom line. Currently there is an emphasis on short-term cost reduction over whole life cost, with many inside the industry understanding price but not value. Economists describe this as having too much focus on capital expenditure (capex), and not enough on totex. At the same time as the shi in Ofwat's focus, we must also set all this against a backdrop of the upcoming AMP6 pro- gramme, which is set to com- mence in 2015, following the conclusion of the £22B AMP5 project. As a result it is an incredibly busy time for contrac- tors and consultants alike, who are coming to market to negoti- ate the multibillion-pound con- tracts that will drive the industry forward in the years to come. Stringent scrutiny During this new AMP period, the shi from large capital pro- jects to asset maintenance, and from an awareness of capex to totex, will have far reaching consequences for everyone involved in the water industry, as all aspects of the procure- ment process will come under stringent scrutiny. Many within the industry see this as a great opportunity to focus on innovation and what customers want, but naturally there will be many challenges. In this new age of procurement new skill sets will be required, from finding 'outside the box' solutions to supply and quality issues, to delivering truly symbi- otic cost / value packages in line with Ofwat's new philosophy, as well as thinking in more macro terms across entire regions, rather than at individual treat- ment works or pumping stations for example. For many within the industry it is value for money for custom- ers and reduced flood events that have been identified as being integral to the success of the new AMP programme mov- ing forward, rather than the delivery of a pre-agreed capital investment programme. For us, as major suppliers to the water industry, we are wholeheartedly embracing Ofwat's new rationale, in the hope that it unshackles an industry that has previously been a slave to decades of bureaucratic legislation, and which has led to o en staid and ineffectual patterns of thinking. A major symptom of this ineffectual thinking is the obses- sion with lowest cost, rather than best cost, which has been a thorn in our sides for some time. Other industries have already moved to a 'best cost' rather than 'lowest cost' supply model. For a long time we have been operating within a very simplis- tic and frustrating model where everyone has been scrabbling to come in on tenders with the low- est possible cost. Now it is all about getting that balance, a more welcome advancement for innovative firms. "We are wholeheartedly embracing Ofwat's new rationale, in the hope it unshackles an industry that has previously been a slave" YOU SAY "It will be really interesting to see how companies embrace totex. It will mean different ways of dealing with the supply chain, and water companies must understand that." Cathryn Ross, chief executive, Ofwat "Totex will change behaviours, and how we work with suppliers and partners." Richard Boucher, business change & strategy director, Anglian Water "It will take time for the new regulatory mechanism to become fully embedded, but equally it will take time to implement the significant cultural and organisational changes and the capability builds that are required in order to maximise performance in a totex environment, seizing the opportunities created and establishing a sector leading position. The time to act is now." Jason Jones, director, Turner & Townsend News+ Tel 01234 750924 email enquiries@stonbury.co.uk www.stonbury.com STONBURY 31 YEARS AS MARKET LEADERS IN THE REFURBISHMENT OF WATER RETAINING STRUCTURES & ASSOCIATED ASSETS RESERVOIR & WATER TOWER REFURB - SEWAGE TREATMENT WORKS, PIPE BRIDGE & AQUEDUCT REFURB - STEEL & CONCRETE TANKS & VESSELS REFURB/ REPLACEMENT - SPECIALIST COATINGS - WATERPROOFING - INSPECTION CORROSION PROTECTION - CLEAN & CHLORINATION - CIVIL ENGINEERING - SECURITY WORKS INC LPC4 ACCESS COVERS, LADDERS, HANDRAILS & WALKWAYS concrete steel clean water civil engineering waste water

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