WET News

10 WET NEWS JULY 2016 ONSITE ProcUrement in AmP6 And beYond Procurement puzzle over risk management approach • Procurement in AmP6 and beyond was the subject of a lively debate when some of the industry's leading experts got together recently. maureen Gaines reports. projEcT SpEcS • How much progress has been made on embedding totex and whole-life cost assessment into the procurement process? • Has enough been done to mitigate the negative impact of the five-yearly regulatory cycle on the supply chain? W hile the second year of AMP6 is well and truly underway, the water industry is still getting to grips with the challenges that the current five-yearly cycle has brought with it. These challenges – Totex and whole- life cost assessment, outcome delivery incentives (ODIs) and the peaks and troughs associated with the AMP cycle – ensured a lively discussion at the WWT and WET News' round-table Water Industry Procurement in AMP6 and Beyond, held in association with Hydro International. The arrival of AMP6 was meant to be the start of a new era, with the boom and bust aspect traditionally associated with the five-yearly regulatory cycle being consigned to the scrapheap once and for all. Work behind the scenes to make this happen ensured a feeling of optimism in the industry's supply chain. However, the reality is that it has been the same old story, with contractors and suppliers having to cope with slow project starts in AMP6 and the continuing impacts of cyclicality on their businesses. The introduction of ODIs and looming competition have been distractions from Totex, with water companies admitting they have struggled to make the switch from a capital expenditure (Capex) bias to an approach that takes more account of operational costs. Capex-biased Ian Pemberton, principal, analytics at Ofwat, said: "Taking my regulator's hat off, I would say that from my experience in previous roles, the water companies have a very good handle on Capex and a lesser understanding of Opex. Therefore, the Totex calculation is still very heavily Capex-biased." "We were privatised for Capex reasons, fundamentally, and we certainly delivered that in the early years. It's how you make that transition now," said Steve Crake, head of procurement at Northumbrian Water. "I can understand the levels of criticism in terms of being Capex-biased. In terms of the data to drive that, you would think that a'er 30 years of privatisation we'd have a little bit of it to work with. But we are on that journey, and certainly in my company, we're probably in a phase where we're delivering effective Totex on a project basis." Another area that is prolonging the procurement process in AMP6 concerns the water companies adopting risk- based solutions, and addressing the question of how much risk is devolved down the supply chain. "There's certainly challenging conversations we've had with contractors where we've said 'look, there's a sewage works here where we'd normally have three lanes but we think we can get away with doing two lanes'," said Andy Clark, head of procurement & contract management at Yorkshire Water. "It's proving harder to get into contract with suppliers because it's a fit-for-purpose contract and there's a lot of discussion around risk transfer; how much risk we need to keep as a client. I think that's been one of the reasons that we've had this slow start." Asset optimisation The participants were in agreement that this risk management approach has placed a greater focus on asset optimisation, as the water companies prioritise investment decisions and question whether an asset is performing as well as it can, whether a new one is needed, and whether it is required now. As a result, engineers, finance departments and operators are being asked to think differently. It was also suggested that equipment suppliers could be engaged more in asset optimisation services. Jeremy Mitchinson, UK business director of water at MWH, said the water sector as a whole has now reached a turning point. "A lot has been achieved since privatisation, but it's now going into that next phase," said Mitchinson. "We've built a lot, we've got a lot of assets in place, and I guess it's now about asking - how do we manage the estate better to achieve what we need to achieve?" Clark added: "Our performance expectations for operations have never been greater. It's an environment where failure is not an option. In that context, to then have this risk-managed approach is a challenge." The problem is that the new thinking on risk is not filtering down the supply chain so that all parties think in the same way to deliver an effective solution. As a result, opportunities for a risk-based, or best whole-life cost solution, are not being carried through. The water companies said that too o'en the Totex conversations they were having with Tier 1s were not filtering down to Tier 2s and 3s. The areas where suppliers can add value to help improve life cycle costs are stripped out through lowest-cost Capex-based contracting in Tier 1 projects. Keith Hayward, Hydro International's European Wastewater Sales and Marketing Manager, agreed with the observation. "Either we have to strip things out to get down to the level needed to win the work. Or if we don't strip it out, then the Tier 1 does." 'Boiler house' However, he added that his company was now more likely to be asked by consultants to get involved when a solution is first developed. "We all want to go to this model and deliver it because it will be better for everybody. It's just not yet filtering, and it's an enormous frustration because it's costing the industry on a daily basis." Northumbrian's Steve Crake added: "We recognise SMEs are the boiler house for innovation. For SMEs to invest, they need continuity and visibility of workload. Yet on the other side the round table delegates get down to business. inset: Hydro's Keith Hayward (2nd right) makes a point in association with

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