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Will Scottish civils run dry?

AGENDA - Scottish civil engineering fi rms are worried that work could grind to a halt while Scottish Water clashes with regulators over a £1.2 billion black hole in its spending plans. Russ Lynch reports

IN LESS than two weeks, Scotland's Water Industry Commission will announce its final verdict on utility spending ? and it could have profound implications for civil engineering firms north of the border.

On November 30, WIC chairman and water industry veteran Sir Ian Byatt will give his final determination on the billions to be spent upgrading the country's water infrastructure over the next four years under the Quality & Standards 3 programme. This covers everything from the refurbishment of water mains and sewers to building major water and sewage treatment works.

Here is the problem. Scottish Water, which is responsible for delivering the improvements between 2006 and 2010, said that the work would cost £3.4 billion. But Alan Sutherland, the former water commissioner and now chief executive of the WIC, said in his draft determination earlier this year that he wants the work done for just £2.2 billion.

Scottish Water has already described this as 'grossly insufficient funding' and added in a strongly-worded response to the WIC: 'At a time when companies in England and Wales are increasing capital maintenance, it is not credible that we ? with our legacy of poor quality assets ? should be cutting back this investment.' Scottish industry observers fear that if the WIC sticks to its original plans it will be capital schemes that suffer from the £1.2 billion shortfall.

The significance of the decision is highlighted by the fact that the first stage of the spending plans, Q&S 2 ? running between 2002 and 2006 ? involved £1.8 billion of spending and accounts for between 30 and 40 per cent of the entire Scottish civil engineering market.

An estimated 8,000 construction jobs are supported by Scottish Water's investment.

Alan Watt, chief executive of the Scottish Civil Engineering Contractors Association, said: 'Under the WIC's figures there is an effective reduction in capital maintenance from current levels at a time when our own site experience on Scottish Water's assets leaves us under no illusions about the work still to be done.' But it is the likelihood of a protracted argument over the commission's final decision that worries the CECA.

Mr Watt said: 'If there are prolonged Q&S 3 negotiations and challenges following the final determination in November then construction on the ground will inevitably suffer, with a consequent impact on jobs and skills in Scotland.' The hiatus could cause yet another example of the stop-start spending in utility work that has so frustrated contractors lured by the apparent stability of four and five-year spending programmes.

The Q&S 3 work will be delivered by two consortia: UUGM, made up of United Utilities, Galliford Try and Morgan Est; and Stirling Water, a combination of Thames Water, Gleeson, KBR and Alfred McAlpine.

These teams work with Scottish Water in a joint venture company, Scottish Water Solutions.

But the managing director of one firm said: 'The trouble is that you build up teams to handle the workload and then you will have periods when the workload tails off and then they've got nothing to do.

'The spending took a while to come on stream when Q&S 2 began in 2002. You always have these problems in England in the transition between five-year Asset Management Plan investment programmes as well.' Consultants like Mott MacDonald, which has been working for Scottish Water during Q&S 2, have felt the pinch ahead of the contractors as work dries up.

A senior source at the company said: 'It always hits the likes of us first. We're a big company so we can relocate staff but we've taken around 60 people off Q&S 2 and put them on other AMP projects. But you know that in six to nine months you will have to build the team up again.' This point is reinforced by Mr Watt, who said: 'It has been a tough struggle to get the requisite skilled workers in place already. It would surely be damaging in both business and human terms to shed them pending the outcome of costing deliberations only to have to regenerate them again later in the programme.' Scottish Water is keen to play down fears of a hiatus in workload. It argues that there will be enough projects overlapping from Q&S 2 to keep the market ticking over. Some major schemes ? such as Gleeson's £100 million Loch Katrine project ? were held back by planning delays and will not be finished until 2007.

The utility is also promoting an early start programme of works under Q&S 3 with the aim of bridging the gap between the two periods but acknowledges that there will always be some degree of hiatus.

Geoff Aitkenhead, Scottish Water's asset management director, said: 'In the regulated utility markets capital investment programmes are always cyclical, with a dip in activity at the beginning of each new regulatory period.

'We wish to retain key design and construction skills in Scotland and will be doing everything we can to minimise the dip in activity between our regulatory periods.' He added: 'The early start programme will retain the skilled design resources that are needed for the 20062010 investment programme.

'It will also generate construction work in 2006-07 that will afford some continuity to the construction resource currently employed on Scottish Water's investment work.' Scottish Water will have two months to consider the implications of the WIC's final determination. It has until January 31 to decide whether to accept it or seek a referral to the Competition Commission.

This could be the most troubling scenario for the industry. While recognising that the WIC has to protect customers' interests and keep water prices as low as possible, Mr Watt said: 'We understand that if the final determination is challenged then construction should theoretically be able to continue using it as a basis to proceed.

'But it would be difficult for Scottish Water to select suitable stand-alone packages from Q&S 3 without losing cross-programme efficiencies ? and Scottish Water would have an understandable reluctance to commit to a high level of construction when huge elements of the programme are still at issue.' The issue is exacerbated by the other problems currently besetting the Scottish civils market. The longdelayed £350 million scheme to extend the M74 to the M8 at Glasgow took another setback this year when environmental campaigners launched a legal challenge.

This will not be heard before next June ? adding to the frustration of the teams of contractors that had lined up to tender for the job back in January. The Scottish Executive originally advertised the project in the Official Journal in January 2004 but the job is now unlikely to get to site before the end of 2007.

The Scottish Executive has acted to plug this gap in the market by pushing forward plans to build a £90 million crossing of the Forth Estuary. Construction work on the project ? a 1.2 km-long bridge from Kincardine in the north to the M876 in the south ? should begin by next summer.

But the question is whether this will be enough to keep contractors happy if there are significant delays to water work ? the bread and butter of many firms ? due to a row over spending.

CECA has already taken its campaign to Scottish politicians in a bid to ensure a swift resolution of any Q&S 3 negotiations and maintain workload, jobs and stability. The Scottish CBI has also weighed in to argue that everyone ? customers, contractors and ministers ? will suffer if unrealistic efficiency targets are inf licted on Scottish Water.

Now the Scottish civils market is in the hands of Sir Ian Byatt. If his final determination sticks to the same brutal efficiencies set out by his predecessor, firms may find that the steady f low of contracts could be reduced to a trickle.

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