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 £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 and the continuing need to maintain the above and below ground assets.

Gross capital investment in 2007-08 totaled £4.9 billion - the amount spent on maintaining the network alone was £2.5 billion

Of this, £2.47 billion was invested in the water service and £2.45 billion in the sewage service. This is 9% less overall than Ofwat had expected in the first three years of AMP4 but this is partly due to a 4% reduction due to efficiencies

Capital expenditure has always fallen around the time of the price review, leading to a roller coaster pattern of investment that builds up later in the period. This dip every five years causes those in the industry considerable concern but despite the advent of 'early start' projects the dip still occurs. See UKWIR report on the regulatory cycle and its impact on the efficiency of the supply chain for more detail.

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 anticipated drop in capital investment in 2009-10 compared with 2008-09.

£ billion

Future capital investment

Future investment plans are given in the 'Draft Determination' published by Ofwat (Final Determination is published in November 2009). Over the period 2010-15 Capital expenditure is planned to be £20.8 billion or just over £4.1 billion per year. This includes:

• Infrastructure renewals expenditure £4.2 billion
• Non-infrasture capital maintenance £7.9 billion
• Supply/demand balance £2.5 billion
• Quality enhancements £4.4 billion
• Enhanced service levels £0.9 billion
• Large projects (London Tideway Tunnels) £0.9 billion

.One of the major drivers for investment are EU Directives such as the revised EU Drinking Water Directive. On the sewerage side it is driven by legislation such as the Urban Waste Water Directive the Water Framework Directive, Bathing Waters and Habitats Directive.

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.