Global infrastructure company AECOM is warning that Ofwat’s expectation for companies to align their performance commitment targets in year 1 of AMP7 without a transition period could trigger increased investment at the end of AMP6, causing many contractors to face an unexpected squeeze on resources.

Adrian Rees, Regional Director, Water at AECOM was commenting on Ofwat’s final 2019 Price review (PR19) methodology published yesterday. He explained:

“Ofwat ..expects companies to align their performance commitment targets with the forecasted upper quartile performance of their peers in year 1 of AMP7, without a transition period. As a result some companies will need to invest more in the latter years of AMP6 to avoid under performance payments in the first year of AMP7.”

“ This increased investment could cause many contractors to face an unexpected squeeze on resources. Pressure on resources combined with work needing to be completed potentially faster than previously anticipated are likely to result in contractor tender prices rising in the coming years.”

Rees said the water companies need to ensure they work closely with their alliancing partners and contractors to ensure they receive the best prices for any increased work in AMP6. The companies should also analyse their procurement processes and look to directly procure their materials and subcontractors for their Tier 1 contractors using increased economies of scale and fixed framework contracts to mitigate cost increases due to greater demand.

More broadly, in his view for many water companies, the changes set out by Ofwat would be welcomed and would also help to provide  a positive profile for the sector at what he described as “a politically delicate time.”

According to Rees, the changes are already driving step changes across the industry, putting water companies under pressure to optimise their investment decisions to improve performance for customers as the means of generating returns to their investors, rather than through financial levers such as beating the challenging 2.4% cost of capital.

Water companies should start focusing on AMP7 performance commitments which provide an optimal financial position

He continued:

“The increase in common performance commitments from five to 14, which benchmark water companies and their ability to deliver key services to customers and the environment is certainly a highlight of these changes. A greater scale of outcome delivery incentive outperformance payments and underperformance payments will place water companies in a competitive race to outperform each other, so they can gain rewards.

“Water companies should start focusing on those AMP7 performance commitments which provide an optimal financial position, as well as those that will respond fastest to specific solutions. The expectation from Ofwat that companies adopt in-period ODIs means water companies will need to be even more certain that their investments are resulting in increased performance and provide the best value for money.”