Capital investment

Historic | Future

Historic capital expenditure

The historic record of capital investment is given in the graph below. Note AMP refers to Asset Management Plans - the five year business plans submitted by each water company and agreed by OFWAT. The industry's capital investment programme has been running at about £3.4 billion a year since privatisation in 1989. The main driver for investment has been the need to meet higher standards for drinking water and sewage treatment.

Gross capital investment in 2005-06 totalled £3.4 billion - this comprised £2.8 billion on above ground assets and £0.6 billion of expenditure on infrastructure renewals.

Of this, £1.65 billion was invested in the water service and £1.75 billion in the sewage service. This is a decrease of around 8% compared with 2004-05. It is £1 billion or 23% less than expected when Ofwat set the 2005-10 price limits in the Final Determination.

Capital expenditure has always fallen in the year following a price review, leading to a roller coaster pattern of investment that builds up later in the period. This means that capital investment next year will certainly be higher. The current lag in investment is causing Ofwat concern and comes at a time when the water industry is under considerable public scrutiny with the continuing drought problems especially in the South East.

Note the water industry currently invests over 50% of its turnover in new assets. This is a very high level when compared to other industries.

Data below shows the historic position. It clearly indicates the cyclical nature of capital investment. This trends continues with the drop in capital investment in 2005-06 compared with 2004-05.

£ billion

Future capital investment

Future investment plans are given in the 'Final Determination' published by Ofwat. Over the period 2005-10 Capital expenditure is planned to be £16.8 billion or just over £3.3 billion per year. This includes:

• Capital maintenance £8.4 billion
• Supply/demand balance £2.3 billion
• Quality enhancements £5.5 billion
• Enhanced service levels £0.6 billion

.The major driver for investment is the revised EU Drinking Water Directive. However considerable investment will continue on sewerage driven by legislation such as the Urban Waste Water Directive and the Bathing Water Directive. In future years the Water Framework Directive will become a very important driver of investment.

Paul M Hipwell can provide a detailed briefing on how capital expenditure will change over the next five years and the main drivers for investment. Call 01934 733411 for details.