British Water - How The Supply Chain Can Effectively Deliver Environmental And Customer Improvements

This article introduces a letter from Lila Thompson, CEO of British Water, written ahead of the publication of the final determinations for PR24. In the letter, Thompson shares important recommendations on behalf of British Water and its members. These suggestions aim to support the successful delivery of the AMP8 investment programme and its desired outcomes.

Letter from Lila Thompson, CEO of British Water:

Dear David,

How The Supply Chain Can Effectively Deliver Environmental And Customer Improvements

I am writing to you ahead of the publication of the final determinations for PR24. On behalf of British Water and its members, I would like to share some suggestions which we believe will maximise the likelihood of successful delivery of the AMP8 investment programme and its outcomes.

Ofwat has recognised the important role of the supply chain in the PR24 process to date. We appreciate this, and in particular your attention to deliverability – including through the requirement for water company board assurance in this area. We would also like to thank you and your team for your ongoing engagement with us and our members.

We believe that a smooth and efficient AMP8 delivery would be in everyone’s interests. British Water members are looking forward to playing their part by supporting water companies to deliver more than ever before for customers and the environment.

I hope therefore that you will consider these further constructive suggestions as Ofwat makes its final choices in December, and then monitors water company performance and delivery from April 2025 onwards.

1. The Need To Move At Pace

It is clear that the AMP8 investment programme will dwarf previous programmes in terms of size and ambition. The supply chain has geared up in response to signaling from both the industry and Ofwat. Many of our members have significantly ramped up recruitment, investing in graduates, apprentices and others to ensure they have the necessary skills on board. Some have restructured to meet expected future demandand invested in new products, services and technologies.

While we do not expect the AMP8 programme to be significantly cut back – we see Ofwat’s draft determination view of an £88 billion spend as a baseline – it could still prove extremely difficult for supply chain companies if water companies dither over delivery.

Some are showing welcome signs of being ready to hit the ground running, but others seem to be waiting for Ofwat to finalise the mandate in December before they commit to contracts. In one of the worst-case examples, one water company has not corresponded with one it is key suppliers for six months, while it seems to await the final determinations.

Supply chain staff and resources are ready to be deployed. We would like to see Ofwat signal in the final determinations that it expects water companies to move at pace in getting their delivery plans underway.

2. Consistent And Coordinated Delivery

As well as getting started promptly, our members need water companies to invest consistently across the AMP.

You will be well aware that cyclicality of spend has been a long-standing problem for the supply chain, and an issue long raised by British Water. Well over ten years ago, we identified that boom and bust work cycles create recruitment and other costs of around £600k per AMP, and that over the decades since privatisation, work peaks and troughs have caused sustained damage to our sector estimated to stand at £4.2bn by the end of AMP7. (The latter was cited in the attached 2012 Treasury report on Smoothing investment cycles in the water sector).

We appreciate that Ofwat has led some initiatives to improve this situation – for instance, through accelerated spend and transitional spend arrangements. But even more needs to be done in light of the size and complexity of the AMP8 programme. If work is compressed into the middle years of the period with dips at either end, it simply won’t be possible to deliver everything required on time.

We urge Ofwat to encourage a steady rate of spend. We see no reason why base allowances in particular could not be consistently apportioned across the five years. This would also help address the issue of allowance underspend that Ofwat has highlighted, including recently in the Water Company Performance Report.

Looking further ahead, we urge Ofwat to consider introducing a mechanism to require water companies to coordinate their delivery schedules. At present, each company follows its own path. This can lead to tenders for similar assets and work being issued in close succession, which in turn can lead to higher costs and – potentially – insufficient availability of products, services and other resources.

Smart metering is a good example. Each company is running its own smart meter procurement, many simultaneously and to different specifications. That is simply inefficient and unnecessarily risky. Greater coordination and collaboration would produce better results for all.

This is particularly the case given AMP8 introduces a number of new elements on top of routine practices. Gated projects, major water resource schemes with highly specialised expertise requirements, and new procurement models (DPC and SIPR) all make for a more complicated landscape and point to the need for more central planning and coordination.

3. Better Visibility And Communication

Clear visibility of forward work is essential for the supply chain. It provides confidence to continue
investment, enables timely preparations, and allows new/prospective suppliers to assess opportunity. Some water companies do this well, but the picture is not consistent across the industry.

Project pipeline visibility at some water companies is currently poor for some British Water members, notably those lower down the chain and those not already signed up to frameworks. Members in tier one and two positions have better visibility, but report that companies often do not adhere to the plans they have shared –a product of continual re-evaluation of options and re-scoping, typically to meet cost targets.

Greater visibility for all, and greater programme delivery discipline, would support better engagement from suppliers and reduce time wasted from second guessing which projects might come forward and when. This is especially important given that the water sector is competing for suppliers and talent with other sectors across the UK.

Crucially, greater visibility and discipline must be paired with much more frequent and higher quality communications from water companies. In particular, we would like them to produce clear, accessible and openly available versions of the relevant parts of their Ofwat-agreed PR24 business plans for a supply community audience.

Together, better communications and greater visibility would help water to be an attractive sector to work in, given fierce competition for supply chain services from energy and other markets.

These are purely behavioural issues and within the industry’s gift to address. Our view is aligned with the message Ofwat has recently been promoting, that the culture of the sector needs to change.

4. Greater Procurement Standardisation

There is a level of standardisation in sector procurement. Tender processes, for instance, follow consistent and predictable arrangements. However, after the engagement and appointment phase, there is wide variation. Water company commercial terms are inconsistent and, in many cases, onerous and complex. Again, this is incredibly inefficient and in the gift of water companies to resolve.

Some efforts have been made to increase standardisation, through industry working groups, and our own Supply Chain Taskforce Procurement Working Group which dates to 2021 and comprises our members and water company representatives.

This group previously made a number of recommendations, including to clarify technical standards, thin out complex approval processes and improve communications. Regarding contracts, we recommended contracts should:

• be fit for purpose – e.g. range from small and simple for simple jobs, to deep collaboration for complex solutions;

• have standard terms and conditions where possible to avoid bespoke terms and conditions being negotiated each time, which takes time and erodes trust at the start of a project;

• be aligned to commercial risk profile and financial rewards;

• be based on whole life cost; and

• be accessible to SMEs

However, the pace of change remains slow. Our Procurement Working Group will be publishing further recommendations in the new year. You previously expressed interest in this group and members were pleased to hear that greater standardisation is an area of interest to you. I will send you a draft for comment before these are published and hope Ofwat will be able to support the constructive recommendations in pursuit of greater efficiency.

5. Nature-based Solutions

British Water members remain very keen to explore opportunities to deliver new solutions and technologies that will play a part in the future delivery of water and wastewater services. We very much welcome Ofwat’s signaling in support of innovation, and its practical resourcing through the (soon to double) Innovation Fund.

While this is a wider issue, we wanted to highlight in particular that our members stand ready to support much greater use of nature-based solutions in AMP8 and beyond. We share the disappointment expressed by both Ofwat and environmental NGOs that natural schemes only comprise £2bn of the planned spend in water company business plans, despite the obvious benefits for nature recovery and net zero targets.

We believe joined up working is needed across the water ecosystem to facilitate its adoption and to make mainstreaming nature-based solutions a feasible prospect. In particular, we highlight the need for much closer working with the Environment Agency, to help them gain confidence to try out alternative solutions and build a robust evidence base on the pros and cons of different types of investment. This may support a fresh approach to the possibility of failure to establish a new framework for compliance risk.

I would be delighted to discuss the contents of this letter with you further. I look forward to working together over the coming weeks and months to ensure AMP8 can be successfully delivered for the benefit of all.

Yours Sincerely,
Lila Thompson 
Chief Executive