The Government has today published its analysis and recommendations to resolve the longstanding issues of cyclicality in the water sector, saying it no longer needs to be accepted as a feature of the industry.

The report 'Smoothing Investment Cycles in the Water Sector' has been produced by Infrastructure UK (part of HM Treasury) in collaboration with Ofwat and the water industry. It sets out a number of recommendations to improve certainty, productivity and value for money; and to reduce the regular round of significant redundancies in the sector.

If the recommendations are implemented in full they could reduce the average customer water and sewage bills by 2 per cent, saving £6.50 on average annual bills; saving the water industry £600m every five years; and prevent up to 40,000 job losses over the next five years.

The Commercial Secretary to the Treasury, Lord Sassoon said:

"Today’s report confirms that the issue of cyclicality is something that no longer needs to be accepted as a feature of the water sector.”

“Regulators and the industry will work together to consider how these recommendations can be successfully implemented.  They will make a real difference to productivity and improve job certainty in the water sector, as well as putting money back in families’ pockets.”

Chris Newsome, of Anglian Water said:

“Cyclical investment has been an issue in the water sector since privatisation. The effects of this stop-start cycle within the supply chain result in lost productivity across the five year cycle, redundancies and an environment of uncertainty in which small and medium enterprises are particularly badly affected. The industry should support the recommendations made in this report, which highlights the need for regulators, water companies and their supply chains to work more collaboratively to address the issue.”

Government, the regulators, water companies and the industry will all need to take action and view risks differently if money and jobs are to be saved.

Regulators will need to consider:

- measures to improve transparency and predictability within the price review process by raising confidence and certainty at the time of the draft determination;

- developing effective incentives that drive choices for investment across the transition, including, where appropriate, bringing projects forward, recognising the balance of costs and risks between company and customer; and

- improving clarity around existing incentive measures, including the overlap programme.

In return, water companies will be expected to:

- commit to early development of projects in advance of the next pricing control period;

- implement measures to provide greater visibility of their work programmes; and

- early engagement and improved integration with their supply chains to improve productivity, efficiency and promote innovative solutions.

This autumn, Ofwat will publish its Future Price Limits consultation which will examine how these recommendations can be adopted, and set out the future process for price reviews.

Keith Mason, Senior Director of Finance and Networks at Ofwat said:

"Ofwat welcomes the publication of this report which shows that cyclical investment in the water sector has led to inefficiencies and impacts on customer bills. Ofwat's work on Future Price Limits principles will help address a number of incentives in this area, encouraging innovation and longer-term planning. Companies will also need to take action to plan more effectively, target investment, and work more closely with their supply chains."

ICE Director General Nick Baveystock, said:

“A number of ICE studies over the years have consistently identified cyclicality as a driver of higher costs for the delivery of infrastructure managed by regulated utilities - costs which are ultimately paid for by consumers.  Addressing cyclicality will amongst other benefits provide a platform for growing skills and capacity in the supply chain, leading to greater value for money in the long run. This report setting out actions to resolve these long standing issues is therefore welcome and timely. We stand ready to work with Government, OFWAT and the Water Industry on its implementation.”