Tackling value in the water sector with a mindset shift

By Director Jason Jones, Director Alan King and Director, Turner & Townsend Suiko, Richard Lyle.

At the same time, the impact of climate change is being felt in shifting weather patterns affecting the reliability, quantity and timings of precious rains. Nearly two-thirds of the global population experience severe water scarcity, during at least one month of the year.

This is a challenge that affects parts of the developing world, but it is also changing the dynamic of water assets in highly developed infrastructure markets. In the UK, household water usage per capita sits at around 143 litres, up from just 85 litres in the 1960s.

On the other side of the globe, water security is a challenge with some of the most populous parts of Australia experiencing a multi-year drought that sees major river systems run dry, and tankers of bottled water supplied to communities.

Despite the geographic distance, the similarities between these markets, in terms of the nature of the asset base, create useful parallels to assess how water companies prepare for and manage the impending challenges of water scarcity and security of supply.

A total mindset shift in how we define value in the planning, delivery and operation of essential infrastructure is needed.

Breaking the cycle

The first challenge is to unpick some major myths around how we talk about value in the water sector, and especially how it relates to investment cycles. Companies are overseen by regulators in both the UK and Australia – in the UK by OFWAT using the Asset Management Period (AMP) system and in Australia through state-owned or major water authorities such as The Independent Pricing and Regulatory Tribunal (IPART) of New South Wales.

Investment patterns follow these cycles, whether through private sector funding as is the case in the UK, or a combination of state and private funding in Australia.

These investment periods trigger an almost inevitable cycle of inconsistency, where financial planning and resource falls most significantly into the early part of the cycle. There are models to support effective and efficient deployment of investment through robust benefits identification and management process through the lifecycle of investments

However too often they are not used and, instead, in years one and two, when there is the comfort of a long investment period to follow, costs and time overrun often occur. Spend is not always aligned to value for money or cognizant of the budget because there is still plenty of budget available.

The need for greater financial efficiency is then felt in the second half of the period which forces spending to become smarter and more prudent.

Projects are often scaled back or cut to align with funding. This is a quick fix rather than addressing the core business risk or problem and fundamentally skews assessments of efficiency, which is falsely achieved not by doing something better, faster or more productively, but by not doing it at all.

Adopting a smarter spend approach

To break the cycle, we need to adopt a smarter spend approach. We need to re-evaluate how we view efficiency in the sector and understand what this means. Doing so can help equalise decision-making and investment across the regulatory period, in a way that achieves more consistent outcomes across all areas of need.

The answer lies in the creation of a common currency in the form of a cost per megalitre of water as it travels end-to-end through the system, from source to reservoir, to tap, to sewer and to treatment not solely as a regulatory tool but as a fundamental part of company decision-making.

This common currency needs to align to outcomes, regulator ambitions and the ambitions of stakeholders such as shareholders and communities.

A common language for making decisions

Establishing this currency can quickly transform the mindset of delivering optimised investments – reconnecting investment and management decisions back together with the core product itself, water.

A positive comparison globally is to look at the treatment of energy resources – most specifically oil and gas. Here, a global supply chain, concentrated in many cases in the hands of a small number of key players, has seen the development of one of the world’s most vertically integrated systems.

Extraction, transportation, treatment and storage are intrinsically linked and decision-making is focused around the common currency of cost per gallon or barrel.

In addition to a common currency, the oil and gas sector has also adopted a smart spend approach. They are putting efficiency and productivity in focus by investing in continuous improvement and innovation, whether that be testing new technologies or adopting approaches.

This means that by realising efficiencies and investing to get a changed return, they will get a greater return on investment in the long term.

While the end product differs, the principle of a semi-closed system has significant parallels with water assets operated under licence. If water companies can create the same commonality of thinking, we have the opportunity to redefine and transform efficiency.

Breaking down silos

Establishing our common currency provides the opportunity to remove barriers to better decision-making. Most significantly this includes the dynamic between capital investment compared to operational expenditure, where an absence of holistic thinking can severely impact productivity.

The nature of water organisations can mean that the part of the enterprise focused on capital investment does not always wholly appreciate the full impact of that programme on operational day-to-day performance.

To take an example, if a major network renewal programme is delayed or put on ice then that preserves capital. However, it also then creates costs (often referred to as ‘propex' i.e. costs to prop up performance of life expired assets) for operational teams that must now continue to maintain and repair the asset.

Quite quickly, a position can be reached where the known capital efficiency saved may be lost on a whole life or total expenditure (totex) basis through the impact of propex and risks to operational performance or customer service.

This shift to an evaluation of totex, versus siloed capital and operational expenditure (capex and opex) requires an enterprise-level commitment to increasing oversight and governance of decision-making.

Using the common currency of a megalitre unit moving through the network, it is possible to shape a series of potential investment plans that allow senior decision-makers to evaluate options in the round, fully understanding the implications and making it easier to identify the route forward.

Water industry collaboration

Another key area for breaking down silos is the importance of working together at an industry level to maximise investment. Currently, each water company is owned and operates independently as its own enterprise; with each company investing in innovation within their own area or company.

A less siloed model would see multiple organisations investing together or working across companies to develop solutions and maximise investment.

More ‘bang for buck’ would be achieved, new solutions could come to market faster and overall, cost per megalitre would reduce for all companies, while still maintaining competition between companies where this is necessary for regulatory purposes.

Incentivising performance

This will ensure better decision-making and an appreciation of value within the client organisation. However, it is equally important to then look at how these priorities can be embedded and assured in the delivery of key projects.

In many ways, the contracting supply chain within the water sector is more sophisticated than other infrastructure sectors, with the relatively widespread adoption of alliance models where shared business planning and cultural programmes are put in place to align behaviours and rewards between supplier and client.

This is particularly true in Australia and the UK, where successful alliances like that at Anglian Water or as recently adopted by Sydney Water, are helping drive up key performance indicators including leakage reduction and the introduction of smart metering.

These results rely on the marginal gains associated with greater efficiency project-by-project and job-by-job, identifying ways of working and opportunities for innovation. In these instances, with a diverse supplier base, the emphasis is on alignment of principles and behaviours with clarity on shared goals, while allowing the flexibility for each supplier to bring their own expertise and working practices to the table.

Working positively with regulators

Perhaps more challenging – but just as critical – is for water companies to look at how they can work more closely and collaboratively with regulators to redefine value. Currently, the relationship can be cast too simply as a confrontational one, where a robust regulator directs asset owners to invest while maintaining low utility pricing.

In the UK this has been manifested in a move from an incentive-based mechanism under the previous AMP, to a more penalty-focused structure from 2020. This approach can drive a behaviour where water companies focus on short term targets, rather than creating brilliant and sustainable performance improvement through efficiency and effectiveness.

Applying measures and targets

The following considerations can help drive change in performance and behaviours, ultimately leading to the cultural change required by the regulator:

• By thinking about the measures and targets they apply, regulators can help water companies focus on the product (water or wastewater) and understand the entire value stream. Everything the business does should be driven by improving the sustainability, customer value or cost to produce or treat, and be measured.
• By capturing and understanding these measures it will allow decisions on investment in operational and capital expenditure to be made against improvements in cost per unit, sustaining water supplies while improving customer value, with clear measurable returns on investment.
• This measurement then gives accountability to the people who operate the system as well as those who make decisions on capital expenditure. This represents a fundamental shift and will require the development of a new operating model, and a change in organisation design with different measures and targets (leading and lagging) effectively cascaded and deployed.

Coming together as an industry

The issue of water scarcity is going to become more pressing for far more people if that change in approach isn’t achieved with urgency. In addition to the actions outlined above, water companies across the globe must identify how the refocus on value can meet the objectives of the regulator both within the current cycle, but also to shape the parameters of future control periods.

They need to come together and help the regulator frame the right environment for productivity by demonstrating the opportunity that exists in delivering more efficient assets, while also helping inform how the regulator frames future requirements.

By encouraging an industry environment that is more collaborative, and outcome-focused, we can break down the inefficiencies within the current system.

The result will be both a more sustainable, productive and collaborative model, and one which protects and guarantees the security of our most precious resource.