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Copyright © Pinsent Masons LLP 2008 I Pinsent Masons Water Yearbook 2008-2009 Copyright © Pinsent Masons LLP 2008 Published by Pinsent Masons LLP Pinsent Masons LLP 30 Aylesbury Street London EC1R 0ER Telephone: 020 7490 4000 Facsimile: 020 7490 2545 Email: [email protected] Website: www.pinsentmasons.com ISBN (10) 0 9551747 4 0 ISBN (13) 978 0 9551747 42 Previous editions: Pinsent Masons Water Yearbook 2007 – 2008 ISBN 0-9551747-3-2 Pinsent Masons Water Yearbook 2006 – 2007 ISBN 0-9551747-1-6 Pinsent Masons Water Yearbook 2005 – 2006 ISBN 0-9537076-9-5 Pinsent Masons Water Yearbook 2004 – 2005 ISBN 0-9537076-7-9 Pinsent Masons Water Yearbook 2003 – 2004 ISBN 0 9537076-5-2 Pinsent Masons Water Yearbook 2002 – 2003 ISBN 0 9537076 4 4 Pinsent Masons Water Yearbook 2001 – 2002 ISBN 0 9537076 2 8 Pinsent Masons Water Yearbook 2000 – 2001 ISBN 0 9537076 1 X Pinsent Masons Water Yearbook 1999 – 2000 ISBN 0 9537076 0 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. Whilst every effort has been made to check the accuracy of the information given in this book, readers should always make their own checks. Neither the author nor the publisher accepts any responsibility for misstatements made in it or for misunderstandings arising from it. The main text of this work reflects the information obtained by the author as at October 2008. II Pinsent Masons Water Yearbook 2008-2009 PINSENT MASONS WATER YEARBOOK 2008-2009 PREFACE Human foibles and their impact on every sphere of human endeavour condemn history to repeating itself and in few fields more persistently than the industrial sector, with its water component a contender perhaps for the wooden spoon. Nationally and globally, it’s an industry of habit, of fixed and restricted itineraries through foreseeable avenues of repetition which, in a novelist, say, might be reassuring in guaranteeing the reader a predictable and easy ride, but in an industry sector it’s a threat to all that depend on it, especially the supply chain. This is a near-universal phenomenon, particularly in public service industries governed by contracts involving the private sector. Arguably, however, it’s worse for publicly-owned service facilities where investment spending priorities are determined as much by political ideology and horse-trading as by social need. The UK To be fair to the industry at the national level, however, it’s the regulatory regime, driven by legislation, that is ultimately responsible for the adverse consequences of this historical repetition. We’re on the verge of the twentieth anniversary of water privatisation in England and Wales, a period throughout which recurrent themes of past Asset Management Programmes re- emerged with unfailing regularity, demonstrating the point. Lean threshold spending at the outset of a five-year investment programme, “balanced” by a tailing off again towards the end, and interspersed with a roughly three-year bounty period during which the supply chain is stretched to the full and beyond, have challenged the industry supply chain, stymied invariably by acute staff shortages triggered by the preceding famine period. It’s a recipe for serial havoc, and long-term erosion of industry capacity, as suppliers are forced to grapple with the peaks and troughs that have seemed an implacable feature of the industry’s landscape. We may, however, be at the dawn of a revolution in industry practice. The water companies, in the run-up to PR09, have been obliged to submit Strategic Direction Statements (SDS) containing an overview within the scope of their draft business plans, for a twenty-five year period - a challenge of alignment of commercial aspiration and strategic vision, not to say creativity! The plans themselves envisage an unprecedented investment of GBP27bn - up from GBP17bn in the previous AMP period – in the years 2010-2015, with just three companies (Thames, United Utilities and Severn Trent) accounting for 50 percent of the total programme and Thames alone committed to more than GBP6.5bn over the period. In addition, there are also signs of further change in industry practice, which suggest that the water companies may be moving away from the partnering arrangements of AMPs 3 and 4 by adopting a more hard-nosed approach to programme management. Delivery partners are iii Pinsent Masons Water Yearbook 2008-2009 increasingly being expected to shoulder a greater burden of risk and undergo competitive tendering for additional work under the AMP, or individual projects. In the south-east, all this inevitably begs an especially pertinent question of construction industry capacity. Whether, in particular, the clash between this major water industry spend, the huge Olympic games infrastructure programme and the imminent Cross Rail project is likely to put construction staff resources sufficiently under pressure to trigger escalating prices that will affect all three, not to mention the consumer, is a moot point. The regulator, moreover, doubtless sensitive to mounting public and political concern over cost escalation in public and utility services across the board, has also placed greater emphasis on costs vs benefits, throwing in a new Capital Incentive Scheme aimed at rewarding more challenging and accurate cost forecasting and methodologies for achieving them. Of course, whether measures such as these are substantive enough to add up to step- improvements in regulatory performance, with benefits to industry productivity and efficiency overall, as well as in service delivery, remains to be seen. And we shall all be watching. The wider picture A major UK national priority highlighted by the Pitt Review, and earlier neatly and dramatically demonstrated by the widespread flooding in parts of England in 2007, is for “urgent and fundamental changes in the way the country is adapting to the increased risk of flooding and in…..improving the country’s flood resilience”, a process in which our industry will have to play a leading and formative role. As a priority, however, this is not a phenomenon confined to the UK, since climate change orthodoxy confidently predicts a global surge in extreme weather conditions, including flooding on an unprecedented scale, throughout the developed and developing world. While in theory this represents potential human catastrophe on a scale unknown since records began, it also offers enormous challenges for politicians and planners everywhere – and opportunities for the water industry. The author of this Yearbook, in common with other industry thinkers, has long advocated the more widespread adoption of private finance in the provision of water and wastewater services, as a means of accelerating infrastructure development, enhancing administrative transparency and combating the corruption rife in many countries. He does so once again in this latest edition, with his customary eloquence, his arguments given added force by the prevailing world financial crisis, not to mention the dwindling prospects for the Millennium Development Goals, a lesson, maybe, for the politicians responsible for this aspirational puff - less cant and posturing, more realism. However, in the absence of affordable and sustainable charging mechanisms in iv Pinsent Masons Water Yearbook 2008-2009 many countries, it has to be debatable whether foreseeable returns will ever be sufficient to pull the private investor. Local conditions will always ensure that problems will be unique to particular regions and localities, although the impact of flooding, for example, will always be aggravated by a cavalier approach to urban development in flood plains. While this might be unavoidable in some cases, it is wilfully and dangerously negligent in past and prospective development in England, for example, where a government has ridden roughshod over urban planning guidelines that were once the archetype for the world. Prudent development policies are needed to protect the public everywhere from disaster. An abiding problem in all societies, however, is that, wherever we are, the urban legacy from the past will largely dictate the scope for future development, since we cannot re-locate conurbations to more convenient, or safer, locations. All development, moreover, imposes strains on infrastructure, notably water. This is an object lesson for the developing world - where creeping industrialisation fuels urbanisation and mushrooming water consumption - which is being heeded in some countries. It drives us irresistibly to policies aimed at encouraging the use of water wisely, technological innovation, the more judicious planning of water extraction practices and the areas that perhaps offer the greatest potential for relieving water stress - improved water-efficiency/re-use in all its forms and desalination. All of these practices are becoming widespread in many countries, including, for example, Australia, Israel and Singapore, who almost certainly lead the UK, where progress in these areas has been very limited. The potential is enormous, at the micro level as well as the macro, inter alia, through measures like rainwater harvesting, dual plumbing systems, greywater recycling to lavatories, water-efficient fittings, zero-flush urinals and the use of non-potable source water (recovered sewage effluent) for irrigation, among other conservation practices. These are solutions to some of the most pressing
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