Scottish Water - Delivery Assurance Group: performance progress report - quarter four 2022-2023

2. Executive Summary

2.1 Progress with Investment

Scottish Water's (SW's) investment programme is one of the largest infrastructure programmes in in Scotland – delivering the vital assets that enable us to maintain and improve the water and wastewater services people depend on every day - and supporting growth and development to ensure that communities can flourish. Scotland's communities can only flourish with the fit-for purpose infrastructure – above ground cities, towns and villages need our below ground pipes and our treatment works to be future proof.

At the end of 2022/23 SW's Tier 2 planned investment was £687m, up from £623m in 2021/22, and towards the top end of the range of £620m - £690m in the Scottish Water Delivery Plan.

When we include responsive repair and refurbishment expenditure it was £880m, up £105m (+12%) on the previous year.

Note that the above figures are in out-turn prices and the equivalent total investment in 2017/18 prices is £718.1m (+23%) compared to an average of £585m in SR15 in 2017/18 prices.

We have successfully delivered year on year growth in investment which has only been possible by us putting in place the following:

• upskilling our people and working in collaboration with our supply chain partners to bring in new skills greater capacity and capability into the construction sector.
• embracing innovation and maximising on the benefits brought from digital construction rehearsals; off-site manufacture; new water and wastewater technology; and innovative construction techniques.
• addressing the challenge of reducing embodied carbon with our partners trialling net zero construction sites.
• Putting in place our, Transforming of Future Delivery' projects such as 'Get to Site in Half the Time'.
• Scottish Water and its partners taking the opportunity to engage with communities before; during and after the delivery of projects - enhancing our reputation in communities and leaving them with knowledge of the importance of their local infrastructure.

A significant proportion of our planned investment (£405m) has been in the refurbishment and replacement of existing assets to continue to deliver a high level of service to our customers. Many of these assets have been in place for a long time and modernising them in line with circular economy principles means they will continue to function for many more years. However, we have also invested significantly in adding to our asset base to enhance water quality, environmental performance (£182m) and to facilitate growth (£75m)

2.2 Progress with Delivery Against Forecasts

Investment needs are identified and then a balanced investment programme is created which will contribute to meeting objectives set out by Ministers for the regulatory period. Once these needs are developed, associated investment projects and programmes of work are created and are committed to. Updates are then given to DAG via the 'Progress to Committed List' report. The 'Committed List' is therefore updated dynamically and forecasts for delivery are included.

The Indicator of Progress of Overall Delivery (IPOD) provides a high-level measurement of Scottish Water's progress in delivering the Committed List for projects over £1m. It assesses the progress of these investment projects monitored across 3 delivery gates combining this information to give an overall score with the intention of gaining and implementing learning and monitoring delivery. The overall capital programme is considered 'on track' if IPOD is within the forecast range.

Having been outside the range at the end of Q3 the IPOD indicator has recovered to be at 609 points, against a range of 564 to 683 points. For the 3 delivery gates, progress is: -

• Start On Site – 145 points against forecast range of 108 to 151
• Acceptance - 233 points against a forecast range of 247 to 272
• Financial Completion - 231 points against forecast range of 209 to 260 points

It is evident from this that the 'Acceptance' milestone remains outside the range, albeit with an improved performance from Q3 (14 outside the range compared with 35 last quarter). 17 projects that have not yet had acceptance signed off are now substantially complete and are forecasting acceptance in Q1, with a further 8 forecasting acceptance in Q2.

An example would be Coalburn Road CSO, where the primary scope is a new CSO with powered screen to replace existing and associated connections. All CSO build works are now complete. However, Scottish Water has had difficulty in securing wayleave for a new communications link. The communications link will now be provided via 4G and, acceptance is forecast for Q1.

Lessons have been learned from the projects that missed their acceptance forecasts. Some that were committed in the early stages of the SR21 period suffered from optimism bias where we endeavoured to establish challenging targets for our delivery teams. Lessons learned on how we assess schedule risk together with additional governance checks on committed dates (especially Gate 100 Acceptance) have been included on more recent project's commitments. This should mitigate the risk that the actual delivery on projects varies significantly from our commitment forecast.

It is important that when committing to the delivery of a project we balance the likelihood of delay due to risks against setting an over cautious target with the potential to lose focus on the need to drive delivery.

On the SR15 completion programme the most significant issue to overcome is with 7 projects that are yet to start on site. These have all been subject to revised optioneering and scope definition. The new IPPF process mitigates similar issues occurring in this period as projects are only added to the Committed List after conclusion of optioneering.

Bilateral meetings are in place with both DWQR and SEPA where projects of specific interest to these stakeholders are reviewed to give detailed updates on progress on projects that missed their original forecast for acceptance.

In addition to forecast delivery dates, Scottish Water monitor actual costs at financial completion compared with forecasts at the time of commitment. We aim for being within +/- 5%, and like IPOD there is a focus on gaining and implementing learning. At the end of 2023/24 the IFAC indicator was within the target range at -4.2%

2.3 Ongoing Delivery Risks – What are they, - how do we mitigate them and how do we continue to learn?

Scottish Water continue to monitor and endeavour to mitigate the 3 broad categories of risks that may impact our forecasts:

• Third Party Risk - Potential delays due to third-party issues. Mitigated through our prepare process and close relationships with third parties.
• Construction Risk - Unforeseen delays from allowable events or poor performance on site. Mitigated by collaborative working with our delivery partners.
• Construction Market Conditions - this continues to be a key area and is detailed further below.

Construction market conditions have received a lot of general media attention over the last couple of years – from the price of building materials, through to the availability of electrical components globally, shortage of HGV drivers and constraints with experienced people in the UK and beyond. Scottish Water's capital programme has not been immune to these issues. Consequently, in the last year we have faced a range of risks and challenges to the delivery of our capital investment programme, including construction market conditions, construction risks, third party risks and the availability of some material and labour. Inevitably this has meant the delivery of some projects has been impacted and project completion timelines have had to be adjusted resulting in some customer benefits coming later than planned. Key issues experienced, and mitigating actions put in placed were:

• Price and availability of materials and commodities – Scottish Water has frameworks in place for all key materials and in the last year prices fluctuated significantly, resulting in an aggregate increase in costs of circa 1.5% above CPI inflation. Through our frameworks, strong relationships and forward planning we have been able to mitigate a lot of delays and cost impacts but not all.
• Certain key materials, particularly microchips and electrical components for our motorised control systems, are on significantly longer lead times of up to a year. Projects in delivery have been impacted, and for projects in the design phase resequencing has been put in place along with advance procurement.
• Our delivery teams have had to alter our delivery processes to facilitate resequencing of project design, planning and procurement to cater for fluctuating prices and materials shortages.
• Our delivery partners have also experienced higher than normal staff turnover levels and some shortages. We are working closely with them on skills requirements and recruitment strategies. Recruitment of graduates and apprentices has been ramped up. Strategic demand forecasts have been developed to ensure we have the right skills for the future – a big collaborative effort with our partners and trade bodies.

An example of a project impacted by some of these risks is our project to upgrade the Water Treatment Works at Invercannie, near Banchory, one of the largest projects in our capital programme.

The project involves a new water storage tank and a dissolved air filtration plant, with capacity to produce up to 63m litres of drinking water a day for our customers. Delivery of the project was paused during the Covid-19 pandemic, during which Sand Martins nested on site and had to be protected until their young left the nests months later. Additionally, the electrical sub-contractor on the project went into administration and our delivery partner had to procure the service of a different firm. There was also a shortage of key electrical components which led to delays or cancellations in delivery. Most recently there have been some challenges with the integration of new software into existing software. The project is now close to going into service.

To achieve our desired outcome of efficient and effective investment delivery it is important that we understand both what went well and what did not go so well in the delivery of capital projects. This requires the learning from both live and completed projects to be made available to the planning and delivery teams in a consistent and easily consumed format. To allow us to better capture knowledge and learnings, we have been working to develop a new Lessons Learned portal. This online 'app' enables anyone involved in the delivery of a project to record learnings which are then accessible for others to see and implement, where appropriate. Common themes and key learnings are validated, collated and best practice shared in the form of improvements to our Risk/Design libraries and targeted toolbox talks.

2.4 Customer Benefits

At a high-level customer benefits from investment are identified as part of the assessment of investment needs. Each need is linked to either a Ministerial Objective or asset management policy (Management Approach), and therefore projects added to the Committed List are known to deliver these needs.

It is recognised that further work is required to produce metrics with which to measure outputs and outcomes. At the DAG for quarter 3 an update was given on the definition of SR21 outputs to achieve this and comments where sought.

Since then, there have been discussions and an exchange of correspondence between Scottish Water and WICS on the subject of the completeness and quality of reporting progress to the satisfaction of WICS for the remainder of this regulatory period. Further additions to DAG on customer outputs and outcomes has been put on hold and will be picked up as part of the programme of work being developed following this correspondence.

2.5 Conclusions

The DAG is invited to note that:

• Year 2 Tier 2 Investment to the end of Q4 2022/23 was £687m made up of planned repair and refurbishment (£405m), enhancement (including flooding) (£182m), growth (£75m) and Support^[1] (£25m). It includes £61m invested on the delivery of projects that were planned to be completed in the previous period. This is an increase from £623m in 2021/22 - a step up in investment to the benefit of customers.
• The IPOD indicator is back on track at 609 points, against a range of 564 to 683 points, demonstrating that the overall programme is on track.
• Notwithstanding an improved position Scottish Water are experiencing delay in achieving Acceptance on a number of water and wastewater projects as delivery risks are realised – broadly due to scope variations; third party risks; construction risks and challenging construction market conditions. Scottish Water continue to monitor service risk and the impact on customers on these projects. Where appropriate, and if necessary, temporary mitigation is put in place to maintain service. In addition, learning is being taken for new additions to the committed list whilst maintaining the aim of setting realistic but challenging forecasts. This is in keeping with the principles of the new IPPF framework under which Scottish Water look to set forecasts, monitor variances and take on board learnings.