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Money down the drain

Agenda: While the proposed 12 per cent fall in household water bills may be a welcome change to beleaguered customers of the privatised water industry, it could come at a price to the construction industry and its long-suffering workforce.

'IT IS time for the profits made from greater efficiency to go back to customers and the environment.'

This is the stance Ofwat's director general of water services, Ian Byatt, has adopted in the water industry watchdog's report on future water and sewerage charges between 2000 and 2005.

The sentiment is fine, in theory, and to many people a 12 per cent drop in household water bills will represent a welcome panacea to their otherwise strained bank balances.

But the private water companies, contractors and suppliers believe Ofwat's judgement is somewhat skewed.

The report on pricing states that the water industry's capital investment programme 'has been running at about £3 billion a year since privatisation'. But, in truth - and judging from its own figures in thereport - the total is nearer £4 billion for the current year. It is set to drop by a quarter next year to about £3 billion in 2001; and by 2005, levels of capital expenditure will fall below this mark to £2.9 billion.

As a result, all 10 water service companies have been forced to rethink the way they spend.

Mr Byatt hopes this will spawn a culture of increased efficiency. The companies have responded by paring back their lists of framework contractors. Less money equals less work.

While those on the lists will not complain, many contractors will be left out in the cold.

Thames Water has already acted decisively, appointing Gleeson, Laing and Costain to take care of three quarters of its work, estimated at £500 million over five years.

And Yorkshire, Northumbrian and Severn Trent have recently asked contractors to prequalify for their framework deals.

The privatised water service companies believe the infrastructure needs much greater levels of capital expenditure in order to meet the higher European standards for drinking water quality and to deliver the environmental improvements identified by ministers.

In fact, all the companies submitted their business plans to the regulator with their own projected costing for capital expenditure.

But Ofwat was fairly scathing about the plans.

It said: 'In many cases, as in 1994, the companies' business plans appear to be bids for resources rather than coherent board strategies that set out the views of all their stakeholders, including customers.'

Ofwat believes its proposed price limits will allow the industry to continue to invest 'at a very high rate'.

It has set the total capital expenditure (including capital maintenance), which itbelieves can be financed within the price limits, at £15.6 billion (£8.5 million a day) over the five years, averaging around £3 billion a year.

Water UK, which represents the water companies in Britain, believes the firms have been put in a difficult position - balancing the aspirations of shareholders with those of their customers.

SouthWest Water said the review 'represents a major challenge', while Yorkshire Water also called it 'very challenging'. But many of the other firms preferred to remain tight-lipped until they announce interim results this month.

Water UK chief executive Pamela Taylor said: 'There's no doubt about it, this is a tough settlement all round. The impact will obviously vary considerably from company to company and now they will all be looking in detail at what the regulator has allowed them to deliver. But, at this early stage, it looks as if [Mr Byatt] has taken money from other things we need to do.'

Ms Taylor said the industry wanted a fair crack of the whip, with sensible settlements that would allow companies to carry out improvements to services.

She viewed Mr Byatt's proposals as a short-term fix that threatened the fabric of the water distribution and sewerage systems, putting public health and the environment at risk.

But the process is far from over. Those companies which decide that it will not be possible to deliver the programmes needed to meet their obligations, have two months to lodge appeals with the Competition Commission.

Ofwat is aware the spectre of job cuts hangs over the pricing proposals. The report mentions that sewer flooding was a key concern of both Unison's Severn Trent Branch and Midlands Region. Each argued for greater funding. In addition, Unison and the GMB raised the possibility of significant job losses if July's draft determinations were confirmed.

A report commissioned by transport union TGWU has further fanned the flames of discontent. It estimated that up to 9,000 jobs could go, which is about one in four in the industry. And it demanded the water companies reduce profits rather than axe jobs.

Water UK's Ms Taylor agreed with this point. She said: 'The review places thousands of jobs in our industry, and in those industries that support it, in jeopardy.'

She said no company would shed jobs to protect the balance sheet, but accepted that balance sheets would get tighter following the review.

'Profits will fall, borrowings will spiral and the industry's cash negative position will simply get worse,' she added.

The unions believe the privatised firms could afford to trim their profit margins instead of seeking to pay for price reductions by squeezing their workforces and suppliers still further. One UK-based contractor confirmed the construction industry's fears.

He said: 'The industry is genuinely concerned that the spend cuts will put the water companies under more pressure to screw the contractors for more.'

But it is not only contractors that are feeling the pinch, suppliers are too.

The Concrete Pipe Association (CPA) also reacted angrily to the review. It said that Ofwat had ignored the report by the House of Commons Select Committee on Sewerage Treatment and Disposal issued on February 11, 1998. In particular, the recommendation that 'by 2000, water companies should have sewer renewal programmes in place which will ensure that sewers are replaced at least as quickly as they deteriorate'.

In addition, CPA pointed out that Ofwat's own statistics reveal that in 1997, 10 per cent of critical sewers were rated Grade 4 (some brick loss or badly made connections or moderate loss of level) or Grade 5 (collapsed or severely deformed). In total this accounts for some 7,170 km.

CPA chairman Philip Boon fumed: 'There is a significant difference - in the order of 30 per cent - between what the water companies believe they need to spend on maintenance and the figure Ofwat is proposing. We believe there should be an increase in expenditure to deal with the poor condition of the ageing sewerage system.'

The CPA believes that Ofwat's proposals will ensure this does not happen and that the sewers will deteriorate further.

Mr Boon added: 'We call on Ofwat toreconsider the level of investment it is proposing in the sewerage system taking into account the wishes of the water companies.'

The TGWU research, conducted by the trades-union backed independent international research body Public Services International (PSI), also compared the UK industry with its counterparts in Europe. It revealed that UK water companies' earnings were far greater than elsewhere on the Continent.

Several international water companies gave data to the research. It showed that water industry earnings levels in Britain were typically three or four times greater than in France, Spain, Sweden or Hungary last year.

PSI's Chris Kaufman insisted: 'Price cuts should not be on the back of job cuts.'

But Water UK has rebuffed these findings. Economic regulation adviser Robert Weedon said: 'They are not comparing like with like by looking at profits as a percentage of sales.'

For some, the swingeing price cuts are still not enough. The National Consumer Council said Ofwat did not go far enough in reducing household bills.

'Consumers should receive cheaper bills than Ofwat is proposing,' it said.

All of which leaves construction caught in the middle of a battle royal between consumers wanting cheaper prices; water companies protecting profits; a government demanding higher standards; and a regulator who thinks it is possible to deliver all of the above simultaneously.

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