Introduction of Asset Management Plan (AMP)
In 1989, the wave of privatisation in the water industry led to five-year cycles known as AMPs. These were for Ofwat to make price reviews and evaluate key performance indicators (KPI).
AMP1 to AMP4 were focused on upgrading water facilities to meet strict limits imposed by the European Union. During AMP5, the aim was to reduce operational costs whilst optimising utilisation of existing assets. At the end of AMP7, it was predicted customers would no longer have to wait extended periods for water supply.
Regulation is managed differently across the UK. Ofwat regulates water and wastewater sectors in England and Wales and the Water Industry Commission for Scotland (WICS) is the regulator for the Scottish water industry.
Previous AMP periods have highlighted there are lessons to learn before future AMPs.
How do we capture these lessons?
Our water companies report against set AMP KPIs. For example, water leaks, sewage spills and an associated pricing review, intrinsically linked to KPIs.
Key lessons include:
- Delivery models need to be aligned to good practice to avoid sub-optimal, hybrid ways of working, significant rework, additional cost and loss of delivery time
- Allocation of risk needs to be to the party best placed to manage risk
- Framework scope needs to be specific and aligned to delivery requirements. Broad scopes reduced opportunities for specialist organisations and impacted innovation potential
- Work needs to be allocated at the appropriate time for supply chains and mitigate competition under frameworks producing specific ‘spot buy’ type gains which add to the supply chain cost base and must recouped across an AMP.
Introducing the AMP8 Period
Commencing in 2025, AMP8 is expected to provide increased challenges for English and Welsh water companies. This is illustrated by Ofwat’s ambitions for affordability, customer expectations and the environment, including climate change resilience and net zero.
To maximise profitability, meeting targets will be the primary goal of the water companies. This does assume however that the targets are achievable.
In December 2022, Ofwat published its final methodology for the PR24 price review.
Ofwat states, “Our methodology for PR24 sets out how we will drive companies to deliver more for customers and the environment. The methodology reflects our four key ambitions for the review:
- Long term focus
- Deliver greater environmental and social value
- Reflect a clearer understanding of customers and communities
- Drive innovation and efficiency improvements.”
This provides an opportunity for bidders to reflect on their outcome delivery incentives. EiB’s team of expert bid professionals will support bidders in crafting winning bids, weaving Ofwat’s themes into the submission and meeting their requirements.
The way forward
The small margins and strict delivery outcomes can create unsustainable commercial arrangements. In 2022, the Water Industry Forum published ‘A View From The Supply Chain’, providing suggestions for a successful way forward with two key approaches.
- Using alliance principles with large packages of work, clearly defined in outcomes, timescales and budgets
- Adopting a collaborative and integrated approach to take the programme from identification to commissioning and handover, using a broad range of skills from the supply chain
- Supporting a sustainable supply chain ecosystem for innovation and investment to result in increased performance, which will be rewarded.
Client-side ownership approach
- Quick-fire model where the supply chain are contracted once an Intelligent Client has defined the solution, determined risks and confirmed affordability. This enables the supply chain to focus on a fully defined solution, improving efficiency and reducing rework
- Allowing development of an efficient supply chain ecosystem, by targeting work directly to the appopriate supply chain tier
- Using increased client-side capability and capacity.
What does the future look like?
To maintain water quality and increasing demands, our water companies will be heavily reliant on their supply chain to offer a solution in line with Ofwat’s PR24 methodology.
Significant innovation will be needed to survive and thrive in the future. For example, in April 2019, Aquaflow Utilities Limited, a water retail company, went into administration affecting 74 businesses, following the compliance pressure and small margins.
Existing delivery models for previous AMP periods have not supported a sustainable supply chain. Efforts to achieve efficiencies have been difficult for the water companies and their supply chains to meet challenging targets over successive AMP cycles. We’ve seen several Tier 1 contractors leave the water sector in recent years and water companies will often be working directly with Tier 2 suppliers, who may have traditionally been subcontractors.
Are there support mechanisms for supply chain?
A future delivery model must develop a supply chain that enables water companies’ key suppliers to grow and develop, otherwise, many of them will fail to survive.
As such, it is crucial that future delivery models in AMP8 and beyond focus on ensuring a sustainable supply chain ecosystem. This will increase competition, attract suppliers, and reduce the risk of suppliers and water companies going out of business!