AMP 6 is coming: But what does it mean for you?

2015 is set to be a key year for the water industry, as we move into the sixth asset management period (known as AMP6 by industry insiders). The new AMP phase follows on from a long period of tendering and intense negotiations as the many billions of pounds of AMP6 contracts were put up for grabs by the water companies. But what is AMP6, and how does it affect the average person in the street?

To fully explain AMP6, we must first look back to 1989. The iron curtain that had divided the world for so long was beginning to lift, the internet was made available to the public for the first time, and Margaret Thatcher was coming towards the end of her tenure at Downing Street. After a decade of privatisation of state-owned companies by the Thatcher administration, the regional water authorities in England and Wales were also privatised, meaning that their upkeep and maintenance became the responsibility of private companies, rather than the state.

This led to the first Asset Management Period (AMP), whereby the newly privatised water boards tendered contracts to construction firms to help keep infrastructure properly maintained, and – more importantly – update the industry’s antiquated assets, some of which dated back to Victorian times. This first AMP period lasted five years, and was followed by four further five year periods, bringing us up to 2015, as we move into the sixth period – AMP6.

Mrs Thatcher’s wide-ranging privatisation reforms remain controversial to this day, but as someone who works in the water management industry it’s hard to see why water privatisation should be viewed negatively. The introduction of private money to the industry has allowed much of the Victorian-built structures to be replaced, and as we move into AMP6 two and a half decades later, the focus of investment has begun to shift towards keeping assets running smoothly. The fact of the matter is that we tend to take our water infrastructure for granted, yet in 2015 there aren’t many places in the UK where a reliable source of water isn’t available. This can be directly attributed to the scale of private investment brought on by privatisation.

Of course, some Victorian infrastructure still remains – portions of the Greater London sewer system being the most prominent example – but even that has seen significant improvements in the AMP era. Generally, the water system in the UK has vastly improved as a direct impact of the billions of pounds of investment that privatisation has brought with it.

The impact to the consumer, of course, as with any kind of privatisation, is that bill prices increase. This may seem like a negative, but consider the alternative. Public bodies tend to be more inefficient – and less well funded – so we can only imagine what state  the water industry would be in had in not been for private investment.  This is especially poignant when you consider the current Government’s austerity measures; of which the public sector has borne the brunt. .

The rapid modernisation of water infrastructure would have been virtually impossible to achieve, and it’s likely that some parts of it could have fallen into serious disrepair. With modernised structures – and more investment than ever before being pumped into maintaining those structures – consumers can be confident that the supply of water to their homes and workplaces is running more efficiently than ever before.

However, it is vital that such progress is maintained without increasingly escalating costs for consumers, and so the aim of AMP6 for all water companies is to prevent any rise in bill prices by increasing efficiency.

So how will they aim to do this during the AMP6 period – beginning this April 2015 and due to run through until 2020? The major issue for many is the need for a shift from capex (capital expenditure) to totex (total expenditure). Up until now the focus has been on capex, placing an emphasis on short term cost reduction. Seeing as the vast majority of assets in place now were hastily installed to urgently replace ageing infrastructure, this makes sense. But now that our water system is in far better shape than it was 26 years ago, the focus must shift towards totex; building upgrades that will last longer and cost less to run, but represent a more significant financial outlay up front. This has the potential to make AMP6 the most financially costly AMP period to date, but in the long-run will save water boards – and eventually the consumer – money.

Cutting operational expenditure (opex) has also been touted as a necessity by many, the sound logic being that if water companies can cut the cost of their operations, the financial impact upon the consumer is lessened. So how can opex be cut?

There are a few ways. Firstly, cutting the amount of wastage is absolutely paramount. In isolated cases, leaky pipes may seem like a minor issue, but if you consider the issue on a nationwide scale, the financial loss is huge. Another issue is maintenance; in order to be effective it needs to be pre-planned where possible and not reactive. Of course, reactive upkeep cannot be avoided sometimes, but more planned repairs will reduce their overall cost.

Overall, AMP6 will be an expensive period of investment, there’s no point pretending otherwise. But if it is successful, by 2020 it will have built on the successful foundation the first 25 years of private water investment brought with it to provide the public with a cost-effective system in years to come. AMP6 may seem confusing at first to the layman, having a working knowledge of it will serve you well when trying to understand any changes in your water bill.

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:www.weholite.co.uk