TOTEX - Balancing Risk & Reward
Getting the right balance between risk and reward is a critical success factor for any business, but for UK water companies those cash prizes and penalties are driven by a regulator, through their Outcome Delivery Incentives (ODIs).
Against this framework, achieving game-changing shifts in water company risk-averse cultures can seem a distant prospect, especially when any aspirations for change are pitted against the pressing day-to-day realities of the UK’s five-year Asset Management Programme (AMP) merry-go-round.
These frustrations and limitations were clear to me at the latest Round Table debate hosted by Water & Wastewater Treatment. The topic “Embedding Effective Asset Management” developed the total expenditure (TOTEX) themes of the last event.
Representing the equipment supplier on the panel, a key question for me was how the water industry can successfully embed the whole supply chain to engineer true life-cycle value from its assets.
Without the co-operation of suppliers, surely the effective asset management goal can never be fully achieved?
The first step is recognising that ‘best price’ is not the same as ‘lowest cost’. An innovative solution should be one that reduces operating and maintenance costs over the 25 or 30-year life of an asset. That may demand higher standards of design performance to be set at the procurement stage. Although the capital cost could be higher, the result will be a net saving over the lifetime of the asset. This is particularly pertinent when addressing grit removal, as making what may seem like short-term savings during procurement may lead to significantly increased through-life costs.
To achieve this, however, a water company has to take a risk. It also has to have sufficient plant operating data to recognise when a difference has been made.
Successfully incentivising contractual suppliers to deliver TOTEX is far from straightforward. As one panel member astutely observed, our industry framework has created barriers between capital expenditure (CAPEX) and operational expenditure (OPEX), and what re-connects them is serviceability. Linking equipment investment more closely with a service and maintenance commitment is one way to encourage an outcome-based supply chain model that mitigates water company risk.
To find solutions will require cross-industry collaboration that consider, amongst other things, design standardisation, procurement and supplier frameworks, contracting practices and encouring innovation. I look forward to being involved.
Hydro International, Europe Wastewater Division