What has the UK Asset Management Industry Learned Over the Past 10 Years?

Jon GreensillSEAMS Ltd (UK)

• Reflecting on Regulated Asset Management in the UK

• Lessons learned and latest thinking• Water – Output Delivery Incentives &

Totex• Roads & Rail – Could do Better?• Electrical Distribution – A Common

Approach

Adoption of ‘Disruptive’ Technology – Geoffrey A. Moore

What group are you in?And your organization?

Where is ‘Asset Management’?Is it disruptive?

Of all the privatisations of the Thatcher

government, perhaps the most controversial was the privatisation of

water…

An Example UK Water Company• Population Served – 7.7M• Water Mains – 46,000KM / 28,000 Miles• Water Production – 1,800 MLD• Water Treatment – 2,500 MLD (>1000 Treatment Works)• ~40% Metered• Leakage 440MLD (24%)

Some Current Issues..• Strategic Elan Valley Aqueduct Wales to Birmingham• Landlocked so Sludge Management • Recent adoption of Private Sewers• Flooding!• Of Treatment Works• Of Customers

Climate Change – Tewksbury Example

2007

2014

Mythe Treatment Works350,000 people without clean water

supplies for 17 days(Cost to protect $10M)

Severn Trent’s Long Term Asset Planning Journey

Output Delivery IncentivesWhat’s the challenge?

• Each company has a set of industry wide and company specific outcomes that they must deliver – hard, measurable targets

• Companies could choose from a ‘menu’ but had to prove it was choosing items relevant to its own customer base - (Customer Willingness To Pay)

• There is serious money at stake. The incentives for the timely completion of major capital projects are high-impact, as minor delays can result in large penalties.

• The incentives to reduce water leakage expose companies to penalties in excess of $1.1Bn and rewards of up to $450M.

Some Example ODI Measures…

Some Example ODI Measures…continued

Output Delivery IncentivesThe regime prompts questions about the companies’ investment programmes…

• What contribution – if any – does each project make towards achieving specific outcomes, or to the outcomes as a whole?

• How can we get a clear view of our performance against achieving our outcomes on time and on budget?

• How can we better link our capital & operational programmes to outcomes across the business?

These questions are hard to answer because individual projects may affect multiple outcomes set by the regulator, or none of them.

It adds to the need to have a combined asset/finance view of the world

Who is winning so far…?

Money is Money - Totex• Whilst Capex and Opex still have to be

planned/reported the differentiation between the two is becoming less important.

• Money is money, ie Totex. (Fast and Slow money) • The financial incentives for spending one type of

money over another are changing• A natural extension of the concept of Whole Life

Costing

Has a bigger effect on the organisation than you might think…• Different maintenance strategies• More planning/collaboration between

disparate groups• Challenging some long standing

assumptions• Transfer of budgets between departments• Supply Chain?

It depends on your point of view…

Return on Regulatory Investment (RoRE) now between ~0 and 10%

•Retail Services• From April 2017, 1.2 million businesses and other non-household will be

able to choose their water and wastewater service Retailer• Retail services includes meter-reading, billing and customer services.• Ofwat consulting on cost/benefits of allowing domestic households to

choose suppliers•Security of Supply•Implications of leaving the EU – less water quality regulation?•Climate Change - Flooding

The Next set of Changes and Challenges

Now Water Industry generally accepted as very successful …what next?

16

‘’Why is it that other infrastructure - for example water - is funded by private sector capital through privately owned, independently regulated utilities... but roads in Britain call on the public finances for funding?’’

- Prime Minister David Cameron (2014)

A government review concluded that … ‘’the institutional framework for the management of the strategic road by the Highways Agency (HA) creates cost-inefficiencies for the taxpayer and does not deliver the best outcome for road users. Reasons include a lack of long-term certainty on investment in the network, a working culture dominated by the processes of wider government and no continuous external pressure for efficiency’’

Became

Became

First step – 2015A Government Owned Company (GoCo)

•Key Impacts• A 5 year funding cycle rather than • Agreed with and monitored by the

Regulator• Bring in-house the asset planning / decision

making resources that were previously outsourced with 14 maintenance contractors• But simultaneously allow more regional

decision making rather than centralised• More action to connect asset decisions to

customer preferences (via ‘Passenger Focus)• More or less roadworks?• JTR vs Safety?

Forced to Address the Asset Planning Systems Problem

Relate Customer/Regulator priorities to Asset Decisions

20

Total population served ~70M

– The UK and Ireland have recently adopted a standard approach for assessing and reporting• Asset Health• Asset Criticality

– Developed over an 8 year period• Combined best practice from all

groups• So far covers 63 asset types

– Quantifies the risk of condition based failure of the network assets

– Default values provided for all the required parameters

– When in a model can forecast future health/risk/cost of failures based on different investment scenarios

– Natural fit for Dashboard views– Convert the ‘complex’

methodology to a simple communication tool

– Supports the investment planning decision making process

– A common measure for Risk– Allows common comparison of

• Different asset types within the same business

• Different companies (which is what the regulator wants)

– Gas networks about to start the same approach

• Some ‘Asset Management’ initiatives start, are used by a few but never catch on

• If they don’t ‘cross the chasm’ at the first attempt, they will be overtaken by something else

• There has to be a driver for change

Summary of Key Points on UK Experience1. The regulatory regime has forced large parts of the UK

asset management water industry through several cycles of change (like it or not) relatively quickly by Utility standards.

2. Further change is inevitable and even though the next areas cannot be predicted exactly, the planning process in most companies is now more nimble and responsive

3. Financial and Asset Planning is more integrated – disconnections would be fatal. Supported by shared models

4. Relating Asset/Engineering decisions to Customer (and hence Regulator) outcomes is vital

5. Decision Support Tools are at their best when they act as a communication tool

Asset Planning is a vital corporate function – it deserves the same attention (and systems support) as other business functions.

Questions? Contact Me:Jon Greensill

SEAMS Ltd (UK)j.greensill@seamsltd.co

mSEAMSBuilding Analytic Capability