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Infrastructure in 2014: Water industry now faces a sea change

The water industry is going through a major change in focus that will have a significant impact on water companies and the supply chain

It is now almost 25 years since the water industry in England & Wales was privatised. In that time, the UK’s water companies have spent over £100bn upgrading water and sewerage networks and improving water quality, with much of that money going on capital investment.

The main emphasis in the last 25 years has been on meeting legislative requirements, which has led to programmes to build and upgrade existing facilities to make sure they comply. With the bulk of that work now complete, there is going to be a huge shift in focus and an equally dramatic change in the way the industry works.

The biggest driver for this change is the regulatory regime under which the UK water industry has operated, says MWH UK managing director Cath Schefer. Until now, water regulator Ofwat’s priority has been to make sure the water companies comply with European directives on water quality - something that has been done by prescriptive rules that have led to a focus on “outputs”. Now, Ofwat is changing its emphasis. Instead of “outputs”, water companies must now think in terms of “outcomes” - a far less ­prescriptive approach that will allow them to think in a broader way about compliance.

The regulator has also told them to be far more customer focused, and to stop putting so much emphasis on capital expenditure (so-called “capex”) and instead think in terms of total expenditure (“totex”). These changes -due to come into force during the industry’s next regulatory period, AMP6, which starts in 2015 - are set to have far reaching consequences for the water companies and for the consultants, contractors and suppliers that work with them. New skills will be required that involve finding “no build” solutions to supply and quality issues, as well as understanding what is happening across an entire catchment, rather than at each individual treatment works or pumping station.

Cath Schefer

 

 

 

 

 

 

 

 

“We will need engineers who are trained to think about what’s best for the customer”

Cath Schefer, MWH

Particularly challenging is understanding what “totex” means. “The industry has always talked about capital expenditure and operational expenditure as total cost, but I think totex is much broader than that - it is going to mean really trying to think very differently about what you do,” says Schefer.

She gives the example of a water course that is used for abstraction, but is being polluted because of run-off from farmland. In previous years, the water company is likely to have addressed this by beefing up treatment, but Schefer thinks the new regulatory regime calls for different thinking.

“The best approach might not be to treat the water in the river, but to go back to the farmer and change what he does,” she explains. “That’s a completely different way of working, and not how industry has been geared.”

This change in emphasis is set to have a big impact on the industry. “We will always need traditional engineering, but when it comes to front end thinking, we will need engineers who are trained to think about what’s best for the customer and the overall best solution in terms of total cost,” says Schefer.

Mapping outcomes

One of the biggest shifts in the regulatory environment going into AMP6 is from “outputs” to “outcomes”.

“Historically, programmes in water organisations have been predicated on outputs, for example replacing a certain number of kilometres of pipe per year as a surrogate for reducing leakage, or building a new treatment works to achieve the required water quality,” explains MWH programme manager Andrew Stiven.

“That model has been very useful, because if you do what you say you’ll do, you are deemed to have achieved the output, and a massive improvement in water quality has been delivered by that.

“Now the industry is trying to move to a situation where they focus on achieving a particular outcome,” he continues, citing the example of drinking water quality.

“Adding a process to a wastewater treatment works isn’t necessarily going to significantly impact overall river water quality. It might - but you may have a bigger impact by working with farmers in the catchment, or by focusing on a particular pinch point in a river rather than improving treatment at every location,” Stiven says.

Water companies will be required to identify what their desired outcomes are, and then be measured against them by the regulator, as well as being held to account by their customers. Potential outcomes could include issues relating to business success, as well as water quality and treatment. Companies will have to show how every project they invest in helps to meet one or more of these stated outcomes by other means.

As this is all so new for the industry, Stiven thinks there will be a twin-track approach at the start of AMP6. Maintenance-driven projects, like replacing worn out water mains, will continue, albeit more intelligently targeted, much as before, with the emphasis on making those processes as efficient as possible. At the same time, though, there will be studies and pilot schemes based around achieving outcomes.

AMP6 will also require water companies and their supply chains to be even more integrated and collaborative. The current regulatory period, AMP5, has seen the water industry take the lead in progressive procurement and contract mechanisms, embracing frameworks, partnering and alliancing. MWH has made a study of recent capital delivery programmes to see which models work best, and which are likely to hold up best to the AMP6 priorities of totex, outcomes and customers.

“Many water companies are set up around planning, delivery and operations as different departments, and quite often you can get a breakage somewhere between two of these elements,” explains MWH director of strategy David Smith, who led the study.

“For AMP6 they will need to think about things in a much more joined up way, so they will need to be much more integrated.”

Interestingly, the study did not find that any one model has been more successful than any other in previous AMPs; success is far more closely linked to the attributes associated with the way the teams work.

“It works well when it is joined up across the functions, so the delivery models that are successful are those that allow that to happen. They are integrated, everyone has the right behaviours, and they are all appropriately incentivised,” explains Smith.

He says the industry is converging to two contractual models: the first is where an “expert” client does all the upfront work and then brings in partners to deliver that programme; and the second is the alliance model, where the water company and supply chain work together throughout the programme cycle.

“Either of these will work as long as they have the right behaviours, integration and incentivisation,” says Smith. This relies on aligning people throughout water company departments and the supply chain through a collective vision and integrated senior management generating a sense of trust, integrity and mutual respect, he adds. A mature approach to risk and reward is also a key element to success. “Striking the right balance of transfer to ensure that the risk lies with the party most able to manage it is crucial,” says Smith.

Customers

From now on, customers must be at the heart of everything water companies do - every pound of investment has to be justified in terms of how it benefits customers. This will result in a change in focus, although as yet it is not clear exactly what it will mean.

MWH customer consultant Emma Pryor says this move will affect water companies’ interactions with local communities both at the tactical and strategic level. At what she calls the tactical level, the current practice of community engagement through public meeting, leaflets and home visits may continue, but increasingly water companies will have to get to grips with the impacts of social media, and learn to “take conversations to where people want to have them”, says Pryor.

Even more complex is the issue of engagement at the strategic level - empowering customers to be involved in setting the water companies’ longer term priorities. Pryor has experience of this in Australia, where she says customers want to know the water company is managing water resources well and that they understand the needs of local communities.

One area in which she has experienced the need for community involvement is that of alternative water sources, such as desalination and indirect potable reuse. “The perception is that surface water and ground water are very pure,” she explains. “Most diversification options where you’re not using these two sources are viewed differently, and if you don’t bring customers with you and involve them from the earliest stage they will be difficult to get off the ground.”

 


Collaboration will be key to success in AMP6, be it collaboration within the water company, across the supply chain or with stakeholders. “It will be increasingly important to work with all stakeholders,” says Smith, “not just to gain approvals but to work together on identifying joint solutions that really solve the underlying customer need in the best possible way.”

For example, he says, to meet customers’ needs on flooding, the industry now needs to focus on solving all the causes of flooding, not just those within a water company’s direct responsibility and control.

“We see the new regulatory regime as both a challenge and an opportunity,” he says, “the challenge of balancing the competing pressures of resilience, maintenance and affordability but with the opportunity of working with customers and stakeholders to derive plans that best deliver agreed outcomes.”

He adds: “This new approach to AMP6 will require a culture of collaboration, innovation and customer focus and this is essential to underpin any delivery model.”

David Smith

 

 

 

 

 

“This new approach to AMP6 will require a culture of collaboration, innovation and customer focus”

David Smith, MWH

According to Schefer, another factor that will gain prominence in AMP6 is technology - from social media to predictive analytics and building information modelling (BIM). Schefer says the way customers communicate with water companies and with each other is vastly different to the way it was just two or three years ago, thanks to the arrival of Twitter and Facebook.

“Water companies may find out about a problem in their asset base because a customer has tweeted about it,” she says, adding that this means the companies need real time data so they know exactly what is happening in their assets at all times and can start to anticipate problems before they happen.

Collecting and analysing data means water companies can build up knowledge that helps them predict when they need to do maintenance or change the way they operate individual works. In turn, this should lead to enormous efficiency savings, because maintenance will be done when it needs doing, rather than on a routine maintenance cycle or in response to a crisis.

“Using this whole data set to analyse what’s happening in your asset enables you to predict what’s likely to happen going forward - and that then dictates where you intervene,” explains Schefer. “Water companies already have an awful lot of data, and they can probably do an awful lot more with it,” she adds. “If they can learn to get the right information at the right time, they can be much more effective about how they manage their assets.”

Schefer also predicts further changes in the way the industry will operate in the years to come, including far more emphasis on off site fabrication for any new assets that are constructed. Again, though, this will lead to changes in the skill set required in the supply chain - not just for contractors building new treatment facilities, but also for consultants.

“There’s a lot of change going on, and that’s why I think it’s a very exciting industry to be part of at the moment,” says Schefer. “It’s very, very dynamic.”

Totex

Regulator Ofwat wants water companies to decide on their priorities based on total expenditure (totex), but it is leaving it up to the companies to decide what that term means.

“The reason Ofwat brought it in is because they viewed the industry as capital-biased, and they are looking to encourage operational solutions,” explains MWH water sector director Richard Ratcliff.

“Some clients talk about it as whole life cost, while others are trying to look at it in more depth to really see what it means in terms of the business impacts.”

Options under the totex banner include controlling water quality at the source rather than spending on treatment and taking a catchment approach to manage water resources and quality.

“We’ve been in a very simple world where you have a capital cost and try to beat it.

“Now it is all about getting that balance,” says Ratcliff. “I think it presents opportunities for looking at different solutions.”

He believes the companies that do look beyond the “whole life”, asset-based approach and embrace wider issues - like the trade-off between maintenance, operational and replacement options, source control and catchment-based approaches - will best succeed in meeting their outcomes.

One example is that of taking a catchment-wide approach to wastewater treatment.

“For the last 25 years we have typically had ‘end of pipe’ discharge standards,” says Ratcliff, explaining that this means that all discharge points have to achieve the required water quality, irrespective of their impact on the overall quality in the receiving water course.

“We’ve done some work with one client where the Environment Agency has accepted that the issue is not about point discharge, but about the receiving water quality. If you get the same level of improvement, you can look at what’s the best solution in terms of the water. It may be more cost effective to upgrade one large treatment works than to upgrade four small works.

And while you do that upgrade at one site you have the ability to put in more instrumentation and automation, which leads to more operational benefits.”

Ratcliff thinks the totex approach will “unshackle the industry” to allow them to think about how to operate and invest in their assets in integrated way.

“It’s about what is the best solution,” he says.

 

 

 

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