Delivery Assurance Group report: quarter 4 2021 to 2022

Section 1: Overview

The 2021-22 financial year has been a successful transition year with a significant rise in Scottish Water's level of capital investment. The total investment for 2021-22, including responsive repair and refurbishment expenditure, was £799^[1] million, £134 million more than the previous year when measured on a consistent basis with that being used for the 2021-27 regulatory period. This marks the largest increase in investment levels in more than a decade, supporting jobs and economic growth throughout Scotland.

Most of this investment (£622.5m), has been in projects and sub-programmes delivering asset replacement, planned repair and refurbishment (£334), enhancement (including flooding) (£232m) and growth (£56m) (classed as "Tier 2" investment). It also includes £97m invested on the delivery of projects that were planned to be completed in the previous period but have been delayed due to the impacts of Covid-19 and/or the realisation of other risks.

This level of Tier 2 investment was £10.5m above the end of year forecast (£612m) and is within the Interim Prospects and Performance report revised range of £600m to £650m. Investment in responsive repair and refurbishment of assets and RCC (Tier 1a) for the year was £176.5m. Our key performance indicator (IPOD) was well within the target range.

This increase in investment is a remarkable achievement when considered in the context of the historic trend among regulated utilities for investment levels to fall at the start of a new regulatory period.

Several things have combined to make this possible, include the new investment planning framework developed with our economic regulator and other stakeholders, our transformation work and forward planning and our success in putting delivery partners in place with sufficient time to plan for greater delivery capacity. We have seen many good examples of innovation, community engagement and carbon reduction across the programme and we are pleased with the collective approach taken with our partners to manage through COVID and the challenging market conditions.

Delivery Risks

We continue to monitor risks that may impact delivering to forecast. These risks fall into 3 broad categories:

• Third Party risk: Potential delays due to third-party issues.
• Construction risk: Unforeseen delays from allowable events or poor performance on site.

• Wider market risks.

The section below provides detail on key risks.

Construction market conditions: Market conditions continue to change and evolve rapidly - cost pressures and availability of materials, labour, and commodities continue to present challenges across the capital programme. Current projections on market conditions continue to vary significantly. There are 4 key areas of activity that we continue to pursue to understand and manage the likely impact of this:

• Price and availability of materials and commodities: - Our procurement teams monitor and report across all of our frameworks fortnightly and will undertake a detailed assessment during Quarter 1 (2022-23) with a particular focus on understanding the impact of inflated prices in excess of CPI. In addition, our procurement teams are looking at forward buying material (e.g plastic pipes) to manage the risk of future cost increases.

• Commercial Assessments: - We have seen a rise in the number of formal contractual notifications from our delivery partners and expect this to continue. Our assessment will quantify the impact on a project-by-project basis looking at direct and indirect impact.

• Planning: - Our delivery teams are looking at resequencing project design, planning and procurement following extension in lead times for some projects. An example of this is Motor Control Centres which has moved from a 3-month to a 12-month lead time. As part of this review particular consideration will be given to earlier design and procurement.

• Resourcing and Skills: - Our partners are seeing staff turnover levels increase up to 15% in our main alliances. We are working collectively with our partners on strategies to bring new skills in and retain industry skills while recognising that there is no "silver bullet".

COVID: Following the impact of the omicron variant absence levels are reducing. Version 7 of the safe working guidelines was withdrawn on 18^th April 2022 and replaced with a common standard.