Cost Versus Value - Why the Water Industry Needs to Reassess Its Goals

30/05/2014 13:20 BST | Updated 28/07/2014 10:59 BST

The water industry is currently undergoing a sea change that will have a significant impact on the way water companies and their partners operate in decades to come.

It is now almost 25 years since the water industry in England and Wales was privatised. During that time, the UK's water companies have spent over £100bn upgrading the UKs often antiquated Victorian water and sewerage networks, resulting in hugely improved water quality.

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 in the way the industry works, with an emphasis on consolidation and maintenance of the current infrastructure, and meeting new benchmarks set by Ofwat that are intended to govern the industry in the decades to come.

Until now, Ofwat's priority has been to make sure the water companies upgrade facilities and comply with European water quality directives, very much achieved by a focus on 'outputs' (for example building a new treatment works to achieve required water quality). Now however Ofwat is encouraging companies to take a far less prescriptive approach, moving away from 'output based requirements' and towards 'outcome based requirements'. Essentially Ofwat want the industry to take account of the whole life costs of their assets, and not just be aware of the immediate bottom line.

Currently there is an emphasis on short term cost reduction over whole life cost, with many inside the industry understanding price but not value. Economists describe this as having too much focus on capital expenditure ("capex"), and not enough on total expenditure ("totex").

At the same time as the shift in Ofwat's focus, we must also set all this against a backdrop of the upcoming AMP6 programme, which is set to commence in 2016, following the conclusion of the £22bn AMP5 project. As a result it is an incredibly busy time for contractors and consultants alike, who are coming to market to negotiate the multi billion pound contracts which will drive the industry forward in the years to come.

During this new AMP period, the shift from large capital projects to asset maintenance, and from an awareness of capex to totex, will have far reaching consequences for everyone involved in the water industry, as all aspects of the procurement process will come under stringent scrutiny.

Many within the industry see this is a great opportunity to focus on innovation and what customers want, but naturally there will be many challenges. In this 'new age' of procurement new skill sets will be required, from finding 'outside the box' solutions to supply and quality issues, to delivering truly symbiotic cost/value packages in line with Ofwat's new philosophy, as well as thinking in more macro terms across entire regions, rather than at individual treatment works or pumping stations for example.

For many within the industry it is value for money for customers and reduced flood events that have been identified as being integral to the success of the new AMP programme moving forward, rather than the delivery of a pre-agreed capital investment programme.

For us, as major suppliers to the water industry, we are wholeheartedly embracing Ofwat's new rationale, in the hope that it unshackles an industry that has previously been a slave to decades of bureaucratic legislation, and which has led to often staid and ineffectual patterns of thinking.

A major symptom of this ineffectual thinking is the obsession with lowest cost, rather than best cost, which has been a thorn in our sides for some time. Other industries have already moved to a 'best cost' rather than 'lowest cost' supply model, however in an industry that has always been described at best as traditional, and at worst antediluvian, the world of water has been slow on the uptake.

For a long time we've been operating within a very simplistic and frustrating model where everyone has been scrabbling to come in on tenders with the lowest possible cost, regardless of the long term value it offers the contractor. Now it is all about getting that balance, which couldn't be a more welcome advancement for innovative firms like ours frustrated by the lack of agility within the sector.

Simon Thomas is the managing director of Asset International, a leading manufacturer of large diameter plastic pipes. Asset International Ltd supplies bespoke designs to the water and construction industries from surface drainage to foul sewers and inter-process pipework