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A BRIEF HISTORY OF ASSETS

- WHITE ELEPHANTS OF THE FUTURE?

David Hope

Presented at the Australian Water Association’s Enviro 2000 Conference

Darling Harbour, Sydney. April, 2000.

EXECUTIVE SUMMARY

Urban water authorities in Australia own over $50 billion worth of assets. Most of these assets have changed little in their basic technological concepts, or their mode of operation.

History tells us that mature industries like the water utilities industry are prone to unexpected, and unforeseeable, changes in technology which can wipe out older industries in one fell swoop, rendering their assets and their business worthless.

This paper traces the development of the typical Australian urban utility through various historical stages.

The Bureaucratic Stage lasted until about the 1970's. This period was characterised by competent, but conservative, organisations which rationed out the provision of services. Authorities tended to be authoritarian, with a "we know best" attitude, which by-and-large was accepted by a community grateful to be granted the services.

The First Winds of Change began to arrive in the 1970's, with the inflexible and inefficient bureaucratic style coming under attack. Managements were purged and reformed in a quest for "customer focus" and better environmental performance. During this period authorities also started to realise that they had built a lot of new assets, particularly since the War, and that the day of reckoning in terms of looking after the old assets may well be nigh.

The Era of Competition had arrived by the 1990's, driven by a realisation that Australia's standard of living was dependent on competitive performance against other nations. The Hillmer Report (1993) set in train a policy generally adhered to by all Australian Governments which has seen far reaching changes in structure, management, regulation and costs. The large monoliths of the past have become much leaner, with many activities outsourced, and subject to a renewable "Licence to Operate" which reflects contemporary expectations over a range of performance criteria. Asset Managers have had to respond to these changes with new tools and approaches.

The Near Future is bound to see more-of-the-same competition and expectation driven reform. Utilities will continue to be reshaped, internal resources will be reduced, and cleverer solutions will be need to be applied all around to many capital and operational challenges.

My Crystal Ball is applied to the future in this paper with a great deal of latitude. Some of the historically more revolutionary inventions, both in technological and social terms, are discussed - the steam engine, the railroad, and the computer/telecommunications/internet.

The concept of "Natural Capitalism" is discussed in terms of the water industry. The potential impact on current operations and technologies, including the displacement of existing assets with completely different, less wasteful technologies and service philosophies, is awesome. For the potential of "Natural Capitalism" to be unlocked, the Australian water industry will need to display a vision beyond that of achieving existing world benchmarks and be prepared to engage in research and to take short-term risks. The contemporary Australian approach to innovation and research - leave it to the people overseas - most definitely needs to be overturned.

Amongst the predictions quoted, one by Arthur C Clarke, writer of "2001: A Space Odyssey", holds that we'll one day achieve the alchemist's dream of making our own water.

The paper concludes:

  • that water utilities need to continue to pursue the improvements demanded by National Competition Policy, the customers and the regulators in order to keep their franchise, and to continue to look after their assets - but keeping in mind that these assets may not be needed forever
  • that water utilities are ill-placed to meet paradigm shifts caused by breakthrough technologies, or new approaches such as "Natural Capitalism"
  • existing water utilities are very vulnerable to being wiped out by any major paradigm shift or "big bang", and that more effort and entrepreneurism needs to be put into picking such a shift and preparing for it. No individual Australian Water Utility appears to have the terms of reference from its shareholders, the business and technical skills, the flexibility, or the critical mass to effectively make this shift
  • history favours the big bang theory, which could see current operators wiped out and billions of dollars worth of assets rendered worthless
  • aggressively planning for change, well beyond the less ambitious approach in response to National Competition Policy, may reap much larger rewards both in terms of the environment and financially
  • Australia as a whole seems to be treading water with regard to managerial and technological innovation, content to let others lead - the threat of a future paradigm change could well be turned into a golden opportunity for the local water industry, provided we have the vision and the energy.

 

KEY WORDS

Asset management, infrastructure, water utilities, competition, paradigm change.

INTRODUCTION

Urban water authorities in Australia, in common with most other places in the world, came

into being to provide clean drinking water for the protection of public health against cholera and other water borne diseases. Later challenges included:

  • securing sufficient quantities of water often through the building of dams
  • providing satisfactory water distribution systems
  • building sewerage systems to protect the environment and public health
  • responding to the growing expectations of the community and the impact of competition policy

Water authorities were generally invested with strong powers and were, by design, fairly independent from governments. This independence was thought to be necessary to ensure that the building of long-life infrastructure was not compromised by shorter-term considerations, which often motivate elected governments.

Things began to change as Australia became more prosperous after the Second World War. People began to become more generally discerning as "customers" and were less accepting of "authority". Governments began to change laws to give themselves more say in the running of the "Authorities". The Authorities themselves responded by changing to less bureaucratic management structures, and by introducing concepts such as "customer focus". Terms such as "the ratepayers", which had overtones of ownership of the people by the Authority, started to disappear.

By the 1990's, Governments had begun issuing "Licences to Operate" which can be awarded to others if the performance of the incumbent is not up to scratch. "Authorities" had become "companies" who were expected to perform commercially and competitively, whilst meeting increasing customer expectations, health and environmental standards, and other regulatory requirements, notably workplace safety.

The Water Companies are facing the future with infrastructure which has barely changed in its concept for delivering services since the infrastructure was first installed. This infrastructure continues to be constructed and renewed as though it will provide a monopoly to the licence holder forever.

The risk to the water companies is that this infrastructure, with a book value of over $50 billion in Australia, may be rendered worthless, almost overnight, by a paradigm shift in technology. This leaves us with a question: will water industry assets become white elephants sometime in the future, and how should water companies deal with this prospect.

This paper tracks the cultural development of urban water and sewerage suppliers, and attempts some crystal ball gazing at what the future may hold.

THE BUREAUCRATIC AUTHORITY WITH A FOCUS ON BUILDING AND OPERATING ASSETS - TO THE 1970's

Urban water authorities began to be set up in the late 1800's to meet the needs of growing urban communities.

These authorities invariably came under government control, such was the importance of their work. They were granted strong powers to levy rates, compulsorily acquire private property, and to build assets such as sewer mains, within easements in private property. They had strong self-regulatory powers, which typically covered areas such as the quality of the drinking water, the disposal of sewage, and the specification of standards for all private plumbing connected to their systems.

The community was thankful for any infrastructure services provided, trusted the authority to do the best that could be done, and respected authority in general. They respected the role of government organisations as providers of employment and did not object too loudly about resulting inefficiencies. People were a little in awe of the capabilities showcased by the construction of large structures such as dams, pipelines and reservoirs - the technology and engineering was not taken for granted as it tends to be today.

In this climate, it was not surprising that infrastructure providers and operators in areas such as water, telephone and electricity, became heavily bureaucratic, technically competent but conservative, and internally focused - "we know what's best for you".

Most authorities had large backlogs of work, particularly in the provision of sewerage services, which led to a heavy focus on capital works.

There was a justifiable view that, once built, these assets (or their replacements) would continue to provide the same service, in the same way, indefinitely.

Engineering standards were devised to ensure that asset lives were maximised (to avoid expensive replacement), both through the physical robustness of the asset, and through sizing. Design lives of 70 years for buried water mains and sewers were (and still are) fairly typical.

Capital backlogs were attacked in many places after the distractions of the Second World War, aided by more efficient technology, and the availability of relatively cheap loan funds within the context of a more prosperous community. By the end of the 1970's, backlogs were becoming less of a problem, but future maintenance of the burgeoning and ageing infrastructure was beginning to cause rumbles of concern. There were suggestions that the assets were in fact liabilities, which would eventually bring cities undone, if not properly managed.

FIRST WINDS OF CHANGE - CUSTOMER FOCUS AND INTERNAL EFFICIENCY - THE 1970's and 1980's

The bureaucratic and inflexible style of water authorities began to come under serious challenge in the 1970's. Customers sought improved, cheaper and more responsive service and Governments began to look for more efficiency, responsiveness to their own political priorities, and a "return on assets" to help with budgetary problems.

This resulted in the replacement of the old style, multi-layered organisations with flatter management structures focused on outputs more so than inputs. Staff numbers were reduced as "make-work" work practices were reformed, and a good deal of fresh blood was recruited from outside. This included recruitment at senior and middle levels, with some incumbent staff being forced to move out - a virtually unprecedented event in the previous "job-for-life" culture.

Assets were still recognised as the essential element in conducting the business, and organisations began producing "Asset Management Plans", designed to ensure the ongoing viability and good stewardship of the assets. These plans typically looked at the drivers (customer service, meeting regulations, and keeping the assets properly maintained and renewed) in conjunction with an integrated strategy of investment in new assets, renewals, maintenance and operations.

A landmark study by Sydney Water, the "Asset Management Review" (Dr EG Jones, April, 1986), concluded that Asset Management practices had the potential for future chaos as the assets aged. Key issues included: lack of basic appreciation that assets were the key to customer service; poor corporate information and the lack of a systematic framework in which to collect it; no explicit standards of service; no formal operations and maintenance plans; lack of consideration for later operations and maintenance issues in the asset creation phase; under-spent renewals programs; inefficient resource allocation; lack of learning between authorities in Australia and overseas; and depreciation policies which grossly under-provided for the future.

The old concept of valuing assets at their book value at construction (historic value) gave way to the concept of "replacement" value, which gave a much better indication, when assessed with other information, of the true value of the assets and the potential liabilities. It also gave governments a better means, as "shareholders", of securing a "Return on Assets". In Sydney Water the historic value of around $3 billion in 1986 was upgraded to a replacement value of $20 billion. This has since been reduced to around $13 billion, better taking into account the effect of newer technology, more efficient methods, and more comprehensive information.

The importance of good records and modern information management systems was recognised and much effort was put into this area.

ERA OF COMPETITION - THE 1990's AND BEYOND

The view that competition within the economy was important if Australia's standard of living was to keep pace began to gain wide currency in the 1980's.

As a result of this growing view, all Australian Governments (Federal and States) were parties to the commissioning of an Independent Committee of Inquiry in October, 1992. The Committee's Report, known after its Chairman, Professor Fred Hillmer, was published in August, 1993. The Hillmer Report (1993) made wide ranging recommendations, which have since been supported (and to varying extents implemented) by Australian Governments, through the Council of Australian Governments (COAG) forum and the National Competition Council.

Hillmer pointed to the then structure of Public Monopolies as being particularly inappropriate in promoting competition. The report recommended a set of principles involving

 

  • the separation of regulatory and commercial functions
  • the separation of natural monopoly and potentially competitive activities
  • the separation of potentially competitive activities into a number of smaller, independent business units

More progress has been made on this agenda in telecommunications (new entrants) and electricity ("national" market and privatisation) than in the water utilities. In water, there has been progress in areas such as user-pays pricing reform, reducing operating costs, outsourcing competitive activities, standardisation, restructuring, separation of regulation from service delivery and licensing tied to performance.

Information on the progress of National Competition Policy and some interesting papers comparing different water industry structural models is available on the National Competition Council's website www.ncc.gov.au.

Asset managers have responded to these changes by improving all aspects of their planning, and their method of managing resources and service providers. In NSW, the Department of Public Works has published a series of manuals. New tools such as Value Management Studies and Environmental Impact Statement Studies are being used to ensure that projects hit the mark better, in overall business terms, and leave better legacies for the maintainers and the community.

THE NEAR FUTURE

Future reform to the extent implemented in the telecommunications and electricity industries will be difficult because of the natural monopoly of the catchments and distribution systems, the common over-capacity of pipes and pumps, political forces, and issues such as responsibility for health standards. In NSW, the earlier corporatisation of Sydney Water (to make it more commercial) was actually reversed to bring it more under the control of the government after the Giardia/Cryptosporidium scare in 1998.

Nevertheless, relentless international competitive pressures will continue to drive reform in industry generally, and in the supply of water and sewerage services, in particular, into the foreseeable future. In my view, Governments and utilities will respond with a range of strategies:

  • improved demand and pricing management
  • structural changes such as corporatisation, privatisation, breaking up existing organisations, and combining others
  • amalgamation of retailing and/or distribution with other utilities to improve economies of scale. These may then be opened up to competition so that a consumer could go to, say, Telstra or AGL or Sydney Water for all their utility requirements - introducing competition at that level
  • outsourcing of more services to reduce costs
  • fine tuning of existing outsourced contracts
  • cleverer capital solutions
  • use of newer technologies to reduce costs in areas such as pipeline renovation (trenchless technology), asset control systems, more efficient pumping, billing, etc
  • use of standardised production and maintenance techniques to capitalise on economies of scale and to minimise field-based work, where risks of accidents and errors are higher
  • higher levels of cooperation on business and technical innovation and standardisation

THE CRYSTAL BALL

As you read this, just keep in mind the fact that crystal ball gazing, over the ages, has had a very mixed record!

The arrival of Water Utilities helped create a social and industrial revolution in the 1800's. With the provision of water and sewerage services, modern-style city life became possible through the control of killer water-borne diseases, and the supply of water in sufficient quantities to support high density living and industry. The water utilities industry still delivers its products and services in much the same way as it did in the 1800's. It is nevertheless very hard for most people to imagine the monopoly that the dams, pipes, pumps and treatment plants now hold being broken by some other product or technology.

However, in history, there are many examples of unanticipated breakthroughs in technology leading to even greater technological and social changes. Some of these have been described by Professor Peter F Drucker (1999). They included the invention of the steam engine in the first industrial revolution. Production of a whole range of existing products - cotton textiles, paper, glass, bricks, ironware, weapons - was mechanised with huge increases in the volume of production, and massive reductions in price. Drucker wrote that the social consequences included the creation of factories and the working class, and helped slavery make a comeback in the US, driven by the need for cheap labour for the cotton spinning factories.

When the railroad came along, around 50 years after the steam engine, Drucker says that this product "truly without precedent….forever changed economy, society and politics". The effects, "virtually unanticipated, (gave) humans true mobility, for the first time in history". Amongst other things, Drucker credits the railroad with welding France into one nation and culture.

The speed and the effects of the information revolution are familiar to us all. Personal computers have revolutionised many business and private functions, and the Internet has the potential to break down the boundaries of nations and commerce. Bill Gates has become the world's richest man, from a standing start, by selling things that are not even "concrete". The E-commerce company AOL has sprung from nothing to take over the long established Time-Warner in a multi-billion dollar deal. The chances are that these new companies may be subsumed by new companies and technologies almost as quickly as they sprang to prominence.

Against the changes referred to above, the water industry appears completely pedestrian. However, even with existing or nearly-existing technologies it is possible to imagine that consumers may one day disconnect from their mains water and sewerage system - thus rendering our now revered assets worthless.

Lovins, Lovins and Hawker (1999) advocate a move by industry to what they call "Natural Capitalism". This approach seeks to put a true value on a scarce resource, nature, and to seek ways to redesign business and production processes to dramatically reduce the waste of resources, at the same time improving satisfaction and business profitability. Our industry is certainly ripe for the Lovin's treatment - with its profligate use of water for sanitary and other purposes. By adding massive amounts of water to other "waste" we create high costs for transport and treatment, and use large amounts of energy, at the same time making it much more difficult to treat some pollutants. The "New Capitalism" approach, apart from being perhaps price competitive, may give a new competitor an ethical competitive advantage while, according to Lovins et al, "companies perceived as irresponsible lose their franchise, their legitimacy, and their shirts".

In a short article I wrote recently for "Water" magazine (2000), I outlined a number of technologies that have the potential to become inexpensive commodity technologies and to replace the older, less environmentally friendly methods. They have the potential to allow customers to disconnect from mains water and sewerage systems and might also pass the "Natural Capitalism" test. Amongst these possibilities are:

  • Composting toilets, which are already a reality. Further refinements in design could make waterless toilets odour-free "fashion items", with easily removable capsules which could be collected with the household garbage or used on the garden.
  • Cooking can already be done with little water in a microwave oven. The future may see the greater use of partially processed food, which requires less preparation and cooking.
  • Clothes may be made of materials (or treated with chemicals) so that they can be cleaned by simply shaking, or by being "washed" in some waterless appliance.
  • Showers, baths and handwashing could be replaced by some waterless electro-mechanical people-cleaning device. Alternatively, a finely controlled air-water spray "cleaner" requiring minimal water use may be perfected.
  • Water treatment machines - about the size and cost of a dishwasher - may treat any grey water produced and allow recycling for household and gardening requirements. These requirements could be supplemented by rainwater tanks, or with larger machines for commercial and appropriate industrial uses.

EVEN MORE WAY OUT PREDICTIONS

Arthur C Clarke, the 82 year old writer of "2001: A Space Odyssey" is credited with successfully predicting satellite communications. Perhaps he's become a bit old and doddery, but here are a few predictions he made for the new millennium (from Sydney's Daily Telegraph, 1/1/2000):

2011 No need for powerlines. "Quantum Generators" will tap space energy. Available in household models.

2015 By product of the Quantum Generator. Matter will be controlled at atomic level. Old dream of alchemy realised.

2016 Currencies abolished. Megawatt hour becomes the unit of exchange.

2020 Artificial intelligence starts to outstrip humans.

2040 Universal Replicator. Any material can be replicated from any other material, provided you have the recipe. Household models available

From the water industry's point of view the Universal Replicator would be the Mother of All Paradigm Shifts. Pure water made directly in the home or factory from anything!

CONCLUSIONS

  • Water utilities need to continue to pursue the improvements demanded by National Competition Policy, customers and regulators in order to keep their franchise, and to continue to look after their assets - but keeping in mind that these assets may not be needed forever
  • Water utilities are ill-placed to meet paradigm shifts caused by breakthrough technologies, or new approaches such as "Natural Capitalism"
  • Water utilities are very vulnerable to being wiped out by any major paradigm shift or "big bang", and that more effort and entrepreneurism needs to be put into picking such a shift and preparing for it. No individual Australian Water Utility appears to have the terms of reference from its shareholders, the business and technical skills, the flexibility, or the critical mass to effectively make this shift
  • History favours the big bang theory, which could see current operators wiped out and billions of dollars worth of assets rendered worthless
  • Aggressively planning for change, well beyond the less ambitious approach in response to National Competition Policy, may reap much larger rewards both in terms of the environment and financially
  • Australia seems to be treading water with regard to managerial and technological innovation, content to let others lead - the threat of a future paradigm change could well be turned into a golden opportunity for the local water industry, provided we have the vision and the energy.

LASTLY

By now, you may think that some of the possibilities put forward in this paper are unlikely, or even absurd. They may well be, but based on history, some completely unanticipated new invention is likely to completely change our industry one day.

For the Doubting Thomases, the immortal words of one Charles Duell, Director of the US Patents Office circa 1899, uttered just before the invention of the aeroplane and many other marvellous things, are worth remembering: "Everything that can be invented, has been invented".

REFERENCES

Drucker, Professor Peter F. (1999). The End of Distance. Sydney Morning Herald, 18th November, 1999 (reproduced from the Atlantic Monthly).

Hillmer, Professor Frederick G. (1993). National Competition Policy. Report of the Independent Committee of Inquiry (The Hillmer Report on Competition). Australian Government Publishing Service. August, 1993.

Hope, David (2000). My Point of View – world.without.water. "Water" magazine. Australian Water Association, January / February, 2000.

Jones, Dr E.G. (1986). Asset Management Review. Sydney Water Board, April, 1986.

Lovins, Amory B., Lovins, L.Hunter, Hawker, Paul. (1999). A Road Map for Natural Capitalism. Harvard Business Review, May/June, 1999.

 

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