Delivering efficiency in the water business

Making sustainable changes that deliver more for less is a challenging task. Substantial, sustainable change primarily focused on improving efficiencies requires a willingness to change the very nature of an organisation: what it does, how it gets done and even who does it. Taking on such changes requires courage, conviction and long-term commitment. It takes learning and exploration, and it involves an element of risk. If change is successfully adapted, however, the wins could be huge for the organisation and for its customers, who will reap the benefits of receiving an improved and better value-for-money service.

In the wake of the global financial crisis and the end of the Australian water industry’s investment peak necessitated by the millennium drought, the expectations of customers, regulators and political leaders are increasingly focused on improvements in efficiency. Calls are regularly heard for reductions in water bills and, at the same time, for increased levels of service in terms of enhancing the livability, sustainability and resilience of our urban centres.

Similar pressures exist around the globe, but depending on the local circumstances, the response taken can vary substantially. Ultimately, there are two attitudes of response that organisations and institutions can take:

• Defence of the status quo and doing enough to satisfy criticism; or
• Leadership and commitment to develop new ways to deliver fully on these demands.

Taking the high road is a difficult task, as journeys that require change always are. However, there are three key elements necessary for success:

1. Identification and acceptance of the opportunity to do better.
2. Leadership and organisational behaviour.
3. Opportunities for cooperation outside the utility.

Benchmarking

A common approach to understanding the question of efficiency is benchmarking. Benchmarking provides a relative view of efficiency, depending on the comparators or benchmarks selected, and also on the population against which the comparison is made. However, as it cannot address the specific circumstances of the utility directly, it cannot provide a definitive answer of the level of absolute efficiency and, thus, the gap between the ideal and the current state.

Therefore, while benchmarking provides a useful relative analysis of where efficiencies worthy of investment and implementation might be found, further work is required between such an assessment and the quantified implementation of improvements. This may lead to a subsequent analysis of the specific mitigating circumstances of the business, including differences in hydraulics and topography of the service area, customer demographics, source water quality or environmental regulations, soil types, historical asset management policies and more.

It is also appropriate to consider the definition of efficiency in the context of the environment facing water utilities and the expectations being placed on them. Rather than efficiency meaning lower costs and spending cuts, a more enlightened view considers the call for efficiency as a call for more and less: more in terms of a greater value through the benefits that the urban water industry delivers in the broader context of livable and resilient cities; and less in terms of the cost to achieve them, relative to that value.

For the purpose of this analysis, three key means are addressed in regard to the ability of water utilities to effectively implement improvements in efficiency.

Leadership and commitment

What most strongly determines the approach taken by an organisation is the response of the leadership group. Leaders must balance the safe operation of the utility with its internal and external pressures, as well as its responsibilities in the community, so delivering an agenda that includes improvement and transformation requires courage and commitment throughout the chain of command.

Establishing priorities and responding to imperatives is the role of the leadership group in setting strategy. They must provide direction in how to tackle the implementation and the continuous support for its success. Fundamentally, what is done and how it is done on the ground must change to realise the gains.

Leaders can influence culture by example through their own behaviour. By questioning the way things get done, and inviting staff into that discussion, leaders can create opportunities for people to learn and expand their own influence, creating motivation and the initiative needed for innovation to thrive. Acting transparently and in alignment with a clear purpose, as well as recognising and rewarding such behaviours within the organisation, helps to legitimise the need for change.

In addition, it is critical that the program is managed in a timely manner. There is nothing worse for momentum than an announcement of proposed changes followed by a long period of inaction or, even worse, action with no visible success. Aligning the measurement and management of progress with the organisation’s internal processes, and supporting it through targeted communications and cultural support, helps leaders achieve success.

Operational improvements

Scope for operational improvements exists across the entire operation of the utility, on both the cost and revenue sides of the ledger. In fact, the search should consider new activities that might be undertaken and whether all that is done today should be done or might better be done by somebody else.

With ever-evolving technologies and methods across the industry, new opportunities can emerge. The process of innovation and the experience of others, including offers from suppliers and contractors in the market, create endless opportunities. Even if it has the techniques in place in-house for identifying possibilities, no organisation can change everything at once — and not all changes are worth the investment required.

Part of selecting what initiatives to pursue is effective and constant prioritisation and adaptation, taking into account both the benefit to be gained and the difficulty expected in implementation. There are many partners and service providers able and willing to help with these steps.

Benchmarking provides a guide of where efficiency improvements might lie undiscovered, but further work is needed to assess and prioritise the best opportunities for adoption. Advice and experience shared from partners, consultants and peers, as well as customers, regulators, academics and politicians, are valuable sources of insight to be used in that process.

Partnerships and risk transfer

According to the AWA State of the Water Sector Report 2014, 81% of respondents believe there exist more opportunities for public-private partnerships in the water industry. Collaboration outside your organisation provides means to take the continuous process further and more rapidly than through internal developments alone.

The different approaches to private sector participation can be characterised in three ways: as advice (with no risk for the efficiency outcomes for the partner who is paid for recommending actions); collaboration (where risk is shared for efficiency outcomes and both partners earn value based on the results); or service delivery (with extensive transfer of risk for the efficiency outcome to the partner and high certainty for the utility).

In the case of advice-based options, utilities receive recommendations on opportunities and challenges for implementation. Because these kinds of contracts remain outside-in and do not require change, they are easy to participate in for the utility. Management will need to address the findings in some way, but the call to action and the success of implementation are not addressed directly through the work. In the worst instance, such studies might be used against the case for actual action.

At the opposite end of the spectrum, more traditional models of PPP exist. Delegated management and O&M outsourcing, DBO and BOOT projects transfer the responsibility for service provision to the private partner, with varying degrees of risk transfer. In essence, these are effective ways for the utility to lock in the efficiency gains for extended periods. However, the decision to ‘hand over the keys’ is a challenging prospect for the utility.

Alternative models of cooperation and collaboration are becoming increasingly popular. Alliance contracting, where services are delivered by a joint team with full transparency and shared commercial risk, has been popular in Australia for more than a decade. There also exist other forms of contracts with variously contingent payment models, like energy services or ESCO contracts, and performance contracting models like PPS as used in the USA. These models have the advantage of leveraging knowledge and skills through co-creation of value while retaining the existing employees in the delivery of service, making them less challenging to implement.

Case study

Australia has a long history of finding improvements and efficiencies, driven by COAG and productivity reforms as well as through public-private partnerships. While authorities like Sydney Water, SA Water and Coliban Water have taken advantage more than others, there remains potential for more cooperation and improvement.

Historically, BOOT and DBO contracts were favoured and saw substantial risk transfer with large savings for utilities. More recently, alliances have been utilised for capital projects, DBOs and operations and maintenance contracts, although industry opinion seems to have been mixed as to the outcomes of these collaborative projects where they are based on target budgets that are established after being awarded or re-established after a short initial period of operations. This compares to the more certain forms of PPP where prices are locked in for long periods at commencement, subject only to indexation.

There appears to be evidence of a current trend back towards DBOs as well as O&M outsourcing, and the possibility of future capital recycling may lead to further conventional outsourcing contracts with high levels of risk transfer and price and efficiency potential achieved through competitive processes. These more conventional types of partnership can deliver efficiencies with high surety of outcomes.

In 2014, Hunter Water outsourced the operations and maintenance, including asset management, of its 25 water and wastewater plants. The contractor was able to implement an integrated operator/maintainer model, reducing management overheads and improving labour productivity to deliver immediate savings. The project will also implement systemic improvements to asset management systems, which will ultimately serve to improve service levels through reliability gains, and reduce maintenance costs by increasing asset effectiveness and availability.

Hunter Water reports on its website a study finding that it has become ‘Australia’s Most Affordable Water Utility’, stating, “Examples of cost savings by Hunter Water which have been passed onto the customer include … sourcing a new operator for our treatment plants at a discount of $23 million.”

Conclusion

The mandate for efficiency improvement in water utilities will continue as changing demands, technologies and experiences make opportunities for more efficient service delivery possible and regulators and customers continue the call for better value for money. Two key ways and means are recommended for success in this area: the leadership and commitment of the organisation towards achieving more for less; and a willingness to explore and engage outside the organisation.