You get what you pay for. So goes the well-worn maxim and, as a relative newcomer to the water industry, I cannot deny that I have been surprised at what passes as acceptable procurement practice in the regulated market. Traditional arrangements, with contractors seeking “lowest cost” solutions for higher upfront capital spend, are still commonplace.
The sheer inefficiency of the system is not just an issue for the supply chain, it inevitably transfers to utilities’ bottom line – and from there to customer bills. With its eye on cost constraints in AMP6, Ofwat has made a smart move by shifting investment targets to a total expenditure (totex) model.
Praise where praise is due – there is some exemplary best practice emerging, with groundbreaking alliances and partnerships between water companies and main contractors, such as Thames Water’s Eight2O alliance. Further down the supply chain, though, early-engagement and strategic partnering can be the stuff of dreams.
For example, our contract teams are often tasked with repeat pre-qualification submissions to win a place on a water company equipment framework, only to have to complete several more rounds with each contractor before winning an order. Even after the order is won, there can be more amendments and re-pricing. The process is both unwieldy and costly.
Most importantly, these are structural constraints to innovation. What is needed is the whole-life costing of solutions through innovation in sourcing, investment and technology. Equipment with a higher upfront cost, but a shorter life, higher energy use or more demanding maintenance, should not cut it in AMP6’s cost-sensitive landscape, but this is not always the case. There is also a surprising lack of standardisation in the way equipment is specified, packaged and tendered, even among different contractors working for the same water company.
It makes perfect sense to ask suppliers to deliver a solution with, for example, an extended 25-year warranty, linked to a preventative service and maintenance programme – and for the utility to budget accordingly over the long term.
Procurement and supply chain management in the water industry are still viewed as being well behind the curve when compared with other sectors. Let us hope the regulator’s new outcomes-based incentives and costing structures lay waste to that charge by the time AMP7 comes around.
Keith Hayward, UK sales and marketing manager, Hydro International Wastewater Division