Keeping heads above water
How water companies should plan for AMP8 assurance requirements
Asset Management Period 8 (AMP8) represents a massive step-up in water sector investment, with allowances totalling £104bn and bills increasing by an average of £31/year. Speedy delivery is required to drive greater quality and better environmental outcomes for an impatient public.
Alongside the enormous task of delivering these improvements, Ofwat’s monitoring and assurance requirements for enhancement schemes and major projects creates other challenges for companies.
Poor assurance will have serious consequences - Ofwat may not approve large projects and can threaten legal action against third party assurers.
Following the start of AMP8 last month, we look at the assurance requirements water companies in England and Wales now face, the challenges these create, and what companies can do to mitigate their risks.
How assurance requirements will evolve at AMP8
The table below summarises AMP8 monitoring and assurance requirements. In addition, Ofgem has placed a ‘duty of care’ on assurers, meaning Ofwat will have a right to legal redress for poor assurance (which must be specified in the contract between companies and third-party assurers).
Table 1: AMP8 assurance requirements
How companies should respond?
The new requirements will create operational challenges for water companies. However, well-executed assurance can provide valuable learnings and a fresh perspective as water companies embark on a once-in-a-generation investment programme.
We consider companies should look at the following areas to meet the challenges arising from Ofwat’s AMP8 assurance agenda:
Develop a view of company resources needed to support assurance activities over AMP8: although a lot of the ‘heavy lifting’ on AMP8 assurance will be done by companies’ independent assurance providers, significant internal input will be required to drive a successful assurance process.
Ofwat has provided granular detail on what it expects to see in assurance reports for enhancement schemes/large projects, and how it expects assurers to scrutinise ongoing performance.
Companies should identify what support their assurance providers will require to deliver these activities successfully in order to develop a set of resource planning assumptions.
Develop a provisional timetable for AMP8 assurance work: we would expect companies’ compliance teams to work with project delivery teams to understand when individual projects are likely to submit assurance reports to Ofwat. This ‘assurance calendar’ will allow the company to build up an overall resource profile across AMP8 and can be amended when there is greater certainty around the timing of individual projects.
Agree split of responsibilities between project and central compliance teams: once the company has a view of the overall resource profile, it can allocate responsibilities between its central compliance team and the project teams responsible for delivery.
Smart working: given the increase in workload, compliance teams should seek operational efficiencies to ensure they have sufficient capacity.
In particular, they should address:
Information management: How they maintain information around processes and data. Is information stored centrally? Are there robust change control processes around them? Are descriptions comprehensive enough for a new team member to pick up and understand with minimal supervision?
Automation: the extent to which transposing and manipulating data requires manual input and whether there is additional automation that could be built into specific processes.
Data quality: Ofwat will only approve funding for projects when it is provided with robust information in a timely manner. Assurers will also require high-quality data for their review. However, the data Ofwat requires for assurance purposes may be more granular than that which companies (and their lead contractors) typically hold. In order to mitigate the risks around inadequate quality data, companies should:
Identify Ofwat data requirements: based on PR24 documentation, companies should review what information their assurers will require to meet Ofwat’s requirements.
Review data flows: internal PMO teams and project contractors should work closely together to agree the processes to feed information into project governance packs: these should be designed with Ofwat’s assurance requirements in mind as they will form a key source of information for the assurer.
Standardise reporting across projects: companies should seek to deploy standard data templates across projects as far as possible.
Coordinate with ongoing management reporting: management information for the steering groups of large projects should reflect Ofwat’s information requirements to ensure efficiencies and avoid duplication.
Secure assurers’ buy in: given their duty of care to Ofwat, assurance providers will want reassurance that they will be provided with the necessary information to do their job. Once a data gathering approach has been agreed with lead contractors, companies should test (either with appointed assurers or internal audit teams) that this is sufficient for assurance purposes.
Summary
AMP8 will see a large upswing in investment, but companies will have additional responsibilities to demonstrate value for money and timeliness or risk losing out on funding.
In order to demonstrate compliance with Ofwat’s requirements, companies need to plan their assurance activities to ensure that they have the necessary bandwidth to meet Ofwat’s additional requirements while still meeting ongoing requirements from AMP7. Companies will need to ensure that they can provide high-quality, timely project data in order to secure Ofwat approvals.
AMP8 has already kicked off, and our experience from other regulated sectors is that data issues can take time to rectify (especially when a great deal of the information Ofwat requires will come from third party contractors). We think that water companies need to get these planning activities underway as soon as possible.
