Water comes out of a tap, electricity comes out of a socket, and getting rid of wastewater is as easy as flushing a toilet. Most of the construction industry shows a similar lack of interest in the utilities sector – which is surprising, considering the money to be made there. Lattice, the sector's largest company, spends more than £1bn a year on capital investment in construction, and is a bigger client than BAA. Add to this the slump in the commercial sector at the moment, and utilities look more appealing than ever.
"The slower activity in the commercial sector is an incentive, there's no doubt about it," says Martin Hewes, an economist who specialises in construction. "It's safe from the economic cycle, and the margins are always higher for this type of work – we're talking 5%, compared with 2.5% for general contracting." That's good news for people like Graham Billin, director of utilities at outsourcing firm Capita. He says the sector is attractive because "utilities have a level investment programme that continues irrespective of fluctuations in Britain's economic climate".
The term "utilities" covers pretty much everything that's fed into buildings through underground pipes: water, electricity, gas and telecoms. The latter constitutes a sector in itself, and telecoms firms have blown so much on unprofitable third-generation mobile licences that they aren't high on any construction firm's list of potential clients at the moment. Gas is in better shape, but remains a small sector compared with electricity and water, where the leading companies each spend hundreds of millions of pounds on construction and maintenance every year.
In the energy world, one new feature dominates the landscape: wind farms. The government wants 10% of electricity to come from renewable sources by 2010, and is to fine electricity suppliers that fail to meet the quota. This policy, known as the "renewables obligation", will require the construction of many wind farms and other renewable energy sources if suppliers are to meet the target – we're only at 3% today.
The government's commitment to green energy was underlined when outgoing energy and construction minister Brian Wilson used his final press interview to emphasise the work that remains to be done. He told Building: "The only people making money out of generating electricity now are the ones that are best in renewables, and that opens up huge construction potential."
Wilson highlighted the 600 MW wind farm set to be built on the Isle of Lewis, subject to planning consent as an example. He also said he was "delighted" that the first major hydroelectric power station to be built for 40 years is planned for a site near Loch Ness, and added that there is £250m worth of refurbishment work available at existing hydro stations.
Utilities have a level of investment that continues despite fluctuations in the economy
Graham Billin, utilities director, Capita
Innovation in the sector is not confined to sources of energy: the way power lines are built into developments is also changing for the better. Traditionally, utility companies have laid their own supplies: the water company lays pipes, the electricity company lays the cables, and so on. The result: different groups of workmen often end up digging up the same bit of road three times. But now, a new type of company is emerging that does the whole lot in one go.
This has led to a method of laying connections known as self-lay, whereby developers hire these multi-utility providers rather than leaving it to utilities firms. Take, for example, Core Utility Solutions, a joint venture between Alfred McAlpine Utility Services and Scottish Power in February 2002.
"Laying utility pipes and cables is often only 5% or 6% of a contract's value, but it accounts for 50% of the hassle for developers," says Peter Carolan, managing director of Alfred McAlpine Utility Services. "We take away the hassle for them." Carolan joined McAlpine when it bought up his old company, Kennedy Utility Management, in 2001. With hindsight, it looks like a good purchase, judging by Carolan's upbeat description of the business: "We have a very buoyant workload into the foreseeable future. McAlpine bought the company because of the attraction of long-term contracts and steady margins."
Self-lay is used on half of new developments in the North-west, where United Utilities has been actively promoting it. But it is used on only 10% of developments in the Midlands region served by Severn Trent Water, and is almost unheard of in the South-east. "For some reason, self-lay isn't taking off in the South-east – we need to educate developers about its benefits," says a spokesperson for the water regulator Ofwat. She suspects that in some regions, water companies are resisting self-lay schemes that break their monopoly on pipe-laying: "If a water company is playing dirty and doesn't want to give approval, we don't have the legal power to do anything about it." However, the water bill currently before parliament will compel water companies to let other firms lay their pipes, provided their standards are high enough.
Ofwat plays a key role in an industry that is made up of a few large companies with government-sanctioned regional monopolies. Ofwat's director of cost and performance, Bill Emery, explains: "We try to simulate a competitive market even though it's a monopolistic industry." The regulator sets minimum standards and maximum prices for water, so the only way water companies can increase profits is by cutting expenses. And that's why good quality construction is so important to the sector.
"The construction industry has played a huge part in the success of the water industry since it was privatised in 1989," says Emery. "The water companies have delivered profits only because the construction industry has delivered on time and on, or below, budget." Every five years, water firms have to agree an asset management plan with Ofwat, specifying required "outputs" – targets such as improved water quality. Each company has to build the infrastructure needed to deliver the outputs – and the cheaper it does it, the more money it keeps for its shareholders.
Sun, sea and sewage: Eastbourne’s hidden treatment works
The works treats up to 74 million litres of sewage produced by 140,000 people every day, then pumps the cleaned water out to sea through a 3.2 km pipe. The second phase of construction finished last summer, upgrading the treatment processes to comply with the EU bathing water directive. The first phase started in 1993, because the Environment Agency demanded that Southern Water treat its sewage before pumping it into the English Channel.
Useful contactsOfwat (water regulator) 0121-625 1300
Ofgem (energy regulator) 020-7901 7066
British Water (contractors organisation) 020-7957 4554
International Water Association 020-7654 5500
Renewable Power Association 020-7963 5852
Association of Electricity Producers 020-7930 9390
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