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Early Start has not ended cycle of drought and flood

Ofwat's attempt to spread water maintenance jobs over the next five-year asset management plan has only improved matters slightly and further measures are needed, finds Alasdair Reisner

'WELL that was a complete bungle wasn't it?'These are the words of one frustrated business development manager at a specialist water civil engineering contractor.Oddly this is his reaction to something that was supposed to make his life easier - the Early Start Initiative.

This well-trumpeted proposal was the response of water regulator Philip Fletcher to claims by contractors that the boomand-bust nature of workloads in the water sector was destroying their ability to set sensible plans for business growth.

Once every five years regulator Ofwat tells the water companies how much money they will be able to spend during the following five-year asset management plan (AMP) period.

The problem is that the uncertainty about the future around the time of this decision tends to mean that workloads dry up for the first months of the next period.

Mr Fletcher's solution was to give the water companies the early nod in December last year to spend £1 billion on 1,000 projects in the first year of AMP4, which is due to start in April next year.

By giving the water companies a year's head start on the final determination, due to be announced next month, it was hoped that the roller-coaster ride of spending in the sector would be levelled out.

Sadly this did not turn out to be quite the innovation many had hoped for as Carol Hickman, executive director of the Society of British Water and Wastewater Industries, explains.

She says: 'Yes, the early start programme has been a bit of a disappointment.We felt a substantial amount of work would be brought forward but this hasn't transpired.'

£1 billion sounds like a huge amount of funding but, compared with the £16 billion that will be available for projects across the full period of AMP4, it is clear that the level of work carried out in year one is likely to be significantly less than in the later years.

Another contractor picks up the theme: 'The early start programme just didn't happen. I think this stemmed from a failure by Ofwat to manage the process.The water companies needed to be allowed to charge more in the last years of AMP3 in order to provide funding for the early start works, but this did not happen.'

But Paul Mullord, UK director of contractors and suppliers trade association British Water, is less keen to lay all the blame at Ofwat's door.

He says: 'It was a great idea, so it is disappointing that only £1 billion will be spent in the early start initiative.That's not as big as it could have been.

The problem was that the water companies needed the certainty of funding in order to start procuring works for the early start initiative.

Equally, Ofwat needed certainty about the nature of the works before it could release funding.There is a mismatch between these two concepts.'

So where does this leave the industry? It all sounds fairly gloomy.

Fortunately, while the early start initiative may not have smoothed out the yo-yoing spending in the sector, other factors are helping to achieve this.

The first is the fact that there is still work left over from AMP3.While contractors complained about water companies back-end loading the work to be done in each period, it now means that some projects will spill over into AMP4 to be mopped up by contractors waiting for the next wave of contracts.This supplemental work is further boosted by Scottish Water, which is currently in the middle of delivering a massive works programme.

But perhaps that brightest point for the sector is the fact that one of the key causes of the drought-followed-by-flood nature of work in the sector now seems to have been sorted out.

'The fact is the water companies have got their construction partners in place earlier, ' says Mr Mullord.'We are more established in the procurement of frameworks than we were at this point last time.'

Ms Hickman adds: 'I think next year will be slower than average but not as quiet as the first year last time around.There will be more work, since the water companies have done better at getting their procurement in place in time.'

But she does point out that a few of the water companies are still in the process of appointing framework contractors.While these frameworks are likely to be in place before work needs to start it does continue the uncertainty for bidding contractors which as yet do not know how much work they will have on their books next year.

This is just one part of the wider issue of sustainable procurement that has risen in prominence since the start of AMP3.While the sector has been at the forefront of innovation in construction procurement, this has often gone hand-in-hand with some pretty adversarial relationships between the water companies and their suppliers.

'All of our members are concerned about margins, ' says Mr Mullord.

'Some water companies, such as Thames and Southern, were talking about margins of 2 per cent.A lot of our members cannot, and will not, work for that.The best companies will go and work for the water companies that offer the most sustainable procurement methods.There is a risk that some of the companies that are prepared to work at that margin are - how can I put this? Not in the top rank.'

But can the water companies be blamed for trying to screw down the margins achieved by their suppliers? The £16 billion they will collectively have to play with over the next five years is 25 per cent less than the funding they asked Ofwat for.

While Philip Fletcher does have the power to raise this £16 billion draft figure in his final determination next week, industry sources say this is unlikely.

So, over the next five years the water sector will have to find efficiencies in the order of 25 per cent. Passing this as risk and reduced margins down the supply chain is not an option if standards are to remain high.

Balfour Beatty Utilities chief Phil Brookes explains the challenge this sets for the sector.

He says: 'There is a tendency for water companies to pass the need to deliver efficiency gains straight onto their contractors. But they will only reach these targets by taking some of the risk themselves.While the water sector is much more efficient than it was 15 years ago, I have grave doubts that contractors can go on shouldering the entire burden.'

To try that really would be a bit of a bungle.