Water, water everywhere

Some of the biggest construction projects in the coming years will be floated in the water infrastructure industry. But what are the risks water companies need to be aware of?

The water industry is gearing up for its biggest ever programme of investment, with more than £100bn earmarked to revamp infrastructure in England and Wales over the next five years. But the funding comes at a time of intense pressure in the sector, where expectations to deliver on time, on budget and in line with regulatory requirements have never been higher.

The eighth asset management period (AMP8), which runs from 2025 to 2030, opens the door to a much-needed modernisation of ageing infrastructure while strengthening the long-term resilience of water supplies in the face of climate change and population growth.

But significant challenges lie ahead, not least the requirement to meet increasingly stringent environmental obligations against a backdrop of financial fragility in the water industry.

At the heart of AMP8 lies the commitment to achieve net zero operational emissions by 2030, along with a significant reduction in the frequency and volume of sewage spills from storm overflows. Water companies, also required to deliver at least a 10 per cent increase in biodiversity, are turning to innovative nature-based solutions such as wetlands and rain gardens to meet their obligations.

Zoe Channon, director of business development and partnerships at Surrey Wildlife Trust, believes there is a growing understanding that major public infrastructure projects, or any other new development, will be more successful if they work with, rather than against, nature.

“Healthy rivers, wetlands [and] woodlands play a vital role in regulating temperature, protecting against fire and flood, reducing pollution and enhancing physical and mental health,” she says. “It is not just desirable but essential that both government and the private sector take responsibility to firstly avoid and then minimise impacts on nature, ensuring unavoidable impacts are substantially compensated for by habitat creation and enhancement that is well planned, properly monitored and effectively enforced.”

The trust is pressing for a minimum 20 per cent uplift in biodiversity over the original baseline, which it sees as an achievable target. “Biodiversity net gain, while not always a perfect vehicle, represents a significant step forward in securing and delivering sustainable outcomes which support long-term economic and social growth and resilience,” says Channon.

The transformation of the water industry under AMP8 is taking place amid concerns over the financial resilience of both water companies and their contractors, with a string of high-profile collapses serving as a major wake-up call. The latest official data from the Insolvency Service shows a slight increase in construction firm insolvencies, and the number of failures remains above pre-pandemic levels.

Matt Cullum, head of UK construction at insurance broker Willis, believes the threat of supply chain collapses represents a major risk in the water industry. “With margins being so tight, contractors are really working up against the wire,” he says.

Strategic insurance

The uncertainty of the operating environment has turned insurance from a backstop to an increasingly important strategic tool.

However, he warns that the traditional approach of relying on insurance purchased by individual contractors puts major projects at risk as the coverage may stop as soon as that firm’s involvement in the job comes to an end. “If a defect occurs from a previous contractor, that’s not going to be covered – it will be on the head of the water company,” says Cullum.

As a result, there has been a growing appetite in recent years for owner-controlled insurance programmes (OCIPs), which offer greater control over delivery timescales and protection of capital investment.

While contractor-controlled programmes tend to be limited in scope, covering only the contractor in question and any subcontractors they appoint, OCIPs are designed to provide comprehensive cover for all the key parties from start to finish.

According to Cullum, the owner-controlled model offers significant advantages to water companies in an increasingly risky operating environment. “You have the benefit of controlling the loss ratio – you are not relying on a contractor’s policy which may have limitations under it as a result of external losses,” he says. “The water company is in control of it from day one and if something’s not going right, [we] will work closely with them to understand the issues and how they can be rectified in real time.”

Contractors also stand to benefit as any claims made will not affect their own insurance. “It reduces their exposure to loss or worsening loss ratio under insurances because the risk is taken away,” he says.

Firms also gain from a reduced administrative burden and, in many cases, better coverage under the policy than they would have been able to secure on their own.

“We recommend OCIPs that cover employers, contractors and subcontractors from day one,” says Cullum. “With Willis already advising six of the UK’s top 10 water companies, we have a deep understanding of the sector’s risks and are well placed to design programmes that deliver real resilience.

For more information, visit our website or contact:

Matt Cullum
T: +44 7921 864 990
E: matthew.cullum@wtwco.com

James Pearce
T +44 7823 901459
E: james.pearce2@wtwco.com