Water sector unlikely to escape recession

As negotiations on the AMP5 asset management programme draw to a close, the latest issue of Environment Analyst Market Briefing hears consultancies and their clients in the water sector predict what kind of projects will get the go-ahead and how the inter-AMP trough has been worsened by the economic downturn

The extent to which UK water companies are already feeling the pinch of recession is difficult to assess. Some companies have acknowledged publicly that demand from commercial customers has fallen noticeably. Severn Trent made headlines in January when it forecast that reduction in consumption by industrial clients would translate into a cut in its 2008/09 revenues of up to £25 million. Thames Water has also alluded to reduced commercial demand, citing it as one of several reasons why it will no longer seek to open a new reservoir near Abingdon in Oxfordshire, by 2019/20.

Two factors with the power to squeeze water companies' finances remain on the horizon. First is the possibility that Ofwat will impose tough caps on water prices. There is also the possibility that water companies will find it more expensive – or simply more difficult – to borrow money during AMP5.

With the water industry keen to rid itself of its recession-proof image – if only to reduce the risk that Ofwat will take a tough line in final price determinations – the question is whether poor economic conditions will prompt water companies to delay, sideline or moderate their AMP5 ambitions.

“Water companies suddenly have more headroom and as a result they may slow down in their efforts to increase capacity and use of water metering,”says Ernst & Young's Bill Easton.

Mott MacDonald's Jimmy Carter says its water sector consultancy business “is currently in the inter-AMP trough and it's been made worse by recession". He adds: "We can't move our water people onto work in other sectors as easily. Assuming we win the framework contracts we want, we should be fine once AMP5 work begins. Our difficulty is keeping people busy this year - and it is difficult. We haven't laid off staff because we want to be able to hit the ground running when AMP5 work begins.”

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• Environment Analyst Market Briefing April/May issue