WET News

THE DISRUPTION: THE FUTURE OF ALLIANCES What's the deal: Alliancing is a procurement route that solves many of the challenges caused by adversarial contracts, and as such becomes a useful approach for projects that have high levels of complexity and risk or urgency, as well as major capital programmes. The project alliance concept was first introduced in the early 1990s, in the North Sea offshore oil and gas industry. Perhaps one of the best-known, and certainly the largest, infrastructure alliances in the water sector is Thames Water's eight2O, which includes Thames Water, and two design-and-build joint ventures made up of Costain, Atkins, Black & Veatch (CABV); and Skanska, MWH and Balfour Bea y (SMB). MWH also leads programme control and IBM is the technology innova on partner. Together, the alliance will carry out £1.75 billion of capital investment work during the AMP6 period (2015-2020), with the poten al to extend the contract to 2025. This includes a large mains replacement programme, with a required outcome of reducing leakage, bursts, flooding, and increasing capacity for growth. Why it ma ers: In recent years, alliance contrac ng has emerged as a popular procurement route for large complex infrastructure developments. In fact in our research, 60.8 per cent said they feel alliances are the most effec ve and efficient approach to the delivery of major capital programmes. Previously, partnering was the preferred method for enhancing collabora on, but since key elements of project partnering were legally non-binding, partnering did not offer the protec ons of a legally enforceable contract. But an alliance requires a culture which transcends the culture of the individuals and organisa ons involved in it. Unlike the tradi onal partnership model, an adversarial "master- contractor" dynamic will not work, and an alliance requires a complex governing model. While the partners in an alliance or JV s ll control their own opera ons, sharing resources and risks requires a lot of trust. In a research document, PwC says se ng the goals of an alliance or JV too high can be an issue. Companies must have a plan for if and when the alliance will be unwound, including the dispersal of any shared resources. These can be sensi ve conversa ons, but failing to agree on these crucial points can jeopardize the partners entering into the alliance. Add to that the fact that our research found 21.6 per cent of supply chain respondents worry that working with some u li es could nega vely impact their own brand, and it becomes clear that these alliances must be chosen and formed carefully. THE DISRUPTION: ASSET-LIGHT NETWORKS What's the deal? The concept of "asset light" u lity infrastructure operators is arguably a logical extension of the considerable degree to which construc on and maintenance of u lity assets are already delegated to key contrac ng partners. The idea essen ally involves today's monopoly u li es – our energy networks and water companies – taking a declining stake in asset ownership, instead building capability to operate their systems at a high level, managing data flows and overseeing new markets for balancing demand and supply. Meanwhile, current er one suppliers or new entrants could compete to provide system capacity and enabling infrastructure. According to our survey, it's a direc on of travel a significant minority of supply chain partners are keen to pursue. Over a third (36.5 per cent) said they believe their company could undertake the bulk of infrastructure management as a service to u lity companies within the next ten years. Why it ma ers: A total shi to asset-light u lity networks would be a radical step for the industry. It would significantly shi the risk profile of today's asset-heavy monopoly network operators, heavily impac ng their value proposi on to investors. Nevertheless, it may be inevitable. At U lity Week Live 2016, UK Power Networks' chief execu ve Basil Scarsella openly speculated about the poten al for networks to follow the models pioneered by the likes of Airbnb and Uber which have rapidly risen to become the largest hotel and taxi companies in the world, but which own no hotels or cabs. Such a model might become increasingly a rac ve in the energy system as distribu on network operators move to take on roles as distribu on system operators, Scarsella implied. Meanwhile, recent regulatory developments suggest Ofgem and Ofwat too see benefits a ached to decentralising asset ownership for u li es. In water, the ini a on of direct procurement for customers will similarly provide an opportunity for ambi ous contractors to directly own, maintain and operate increasing propor ons of cri cal na onal infrastructure as a service to water companies who will retain responsibility for service quality and con nuity. THE DISRUPTION: INNOVATION What's the deal? Innova on, innova on, innova on. Everywhere you look in the u li es sector, market par cipants old and new are professing their enthusiasm for innova on, for embracing the impact of global technology trends and their interac on with environmental and social shi s like climate change, popula on growth and devolu on of power to regions. Supply chain partners have a cri cal role to play in delivering the increasing levels of innova on u li es need to discover. Many of them produce original technology solu ons, honed to answer specific industry issues, and they are o en more fleet of foot in responding to market forces than their regulated u lity counterparts. But is innova on from the supply chain being encouraged and exploited to the full by mainstream u li es providers? Anecdotal evidence, back up by U lity Week Live's industry research, suggests not: just a fi h (20.3 per cent) of supply chain respondents to U lity Week Live's disrup on survey said the supply chain arrangements of their major u lity clients allow them to bring forward ground breaking new ideas. Why it ma ers: U li es of all stripes desperately need to sustain or increase their levels of innova on. Primarily this need is driven by efficiency and the ongoing requirement to deliver more for less, but mul ple other drivers for innova on also exist, including existen al challenges like climate change. Regulators have aligned behind these drivers, bringing forward new mechanisms and funds to try and accelerate innova on in their sectors. Their aim is to ensure innova on benefits for companies are shared with consumers. And recently regulators have given direct considera on to the ways in which they might incen vise be er innova on partnerships between third par es and u li es. This development clearly represents a huge opportunity to players large and small in the u li es supply chain. And it should also push u li es to review their procurement and supply chain management prac ces with a view to unlocking more intelligent and open-minded ways to solve problems. Currently, just a third of suppliers say their u lity partners take an "intelligent" approach to rela onship management. An alliance requires a culture which transcends the culture of the individuals and organisa ons involved in it... an adversarial master-contractor dynamic will not work I N A S S O C I A T I O N W I T H wwtonline.co.uk | MAY 2018 WET NEWS 23

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