Water and waste contractors are gearing up for “substantial challenges” after Ofwat’s final budget allowances for capital expenditure fell almost £2 billion short of what the largest clients claimed to need for the next five years.

The water regulator last week earmarked a total of £22.1bn for capital expenditure across the country’s 21 business water and sewerage and water-only firms under Asset Management Period 5.

A total of £20.7bn of the expenditure will come from the UK’s 10 largest water and sewerage groups – but the figure falls considerably short of the £22.4bn they told the regulator they would require for their 2010 to 2015 programmes.

The deficit had been much larger under the regulator and industry’s draft plans, with companies having originally claimed to need £27.4bn and Ofwat only promising £19.1bn. Contractors said the determinations were higher than they were expecting in the current climate, but were likely to mean the need for cost savings.

Black & Veatch managing director Chris Scott said: “Broadly speaking, the settlement is positive, but not without substantial challenges. “The increase in capital expenditure between the final determination and the draft determination is welcome.

However, it is important to remember that water companies are not a homogenous group; as a result, the determination will affect different companies in different ways.”

May Gurney chief executive Philip Fellowes-Prynne said it was most likely water firms would curtail their spending on the construction of new assets first, adding: “The likes of mains replacement and maintenance work will still be required, and obviously if you have water quality problems they need to be addressed.”

Costain’s group strategy and business development director Stephen Wells suggested that while water contractors had the right to negotiate deferrals for new projects, it was not the norm.

He said: “It would be wrong to say everything will go according to plan. The capital expenditure programmes will come under pressure but, under EU directives, the UK Plcs have an obligation to deliver assets.”

Mr Wells said contractors had expected the determinations to be tight. He added: “It is never ideal, but in our strategic planning we have taken account for these sort of eventualities.

“It is not about cutting margins, but clearly there are challenges for a lot of the Plcs to find efficiency savings, and it will be important to value engineer to help them get more asset for less cost.”

The water companies have two months to respond to Ofwat’s decision but some – including South West Water and Thames Water – have already highlighted funding deficits.

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