Evaluation of SA Water's Asset Management System Review Report
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Evaluation of SA Water's asset management system Review report Evaluation of SA Water's asset management system Review report 360807 Prepared for Essential Services Commission of South Australia 3 March 2020 3 March 2020 Cardno i Evaluation of SA Water's asset management system Review report Contact Information Document Information Cardno (Qld) Pty Ltd Prepared for Essential Services ABN 57 051 074 992 Commission of South Australia Level 11 Project Name Review report 515 St Paul’s Terrace Fortitude Valley QLD 4006 File Reference 360807-REPT-0A-00 - Australia Evaluation of SA Water's asset management www.cardno.com system.docx Phone +61 7 3369 9822 Job Reference 360807 Fax +61 7 3369 9722 Date 3 March 2020 Version Number A Author(s): Stephen Walker, Business Leader – Asset Strategies; Graydon Jeal, Director, Atkins Acuity; Effective Date 27/02/2020 Dr Christopher Bridge, Senior Consultant; Adel Abdulle, Consultant Approved By: Stephen Walker Date Approved 27/02/2020 Business Leader – Asset Strategies Document History Version Effective Date Description of Revision Prepared by Reviewed by 1.0 20/12/2019 Preliminary draft S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb 2.0 20/01/2020 Draft for issue S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb 3.0 31/01/2020 Revised draft S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb 3.1 31/01/2020 Revised draft S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb 3.2 05/02/2020 Revised draft S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb 3.3 07/02/2020 Minor amendments S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb A 27/02/2020 Final S. Walker, G. Jeal, C. Bridge, A. Abdulle Patrick Lamb © Cardno 2020. Copyright in the whole and every part of this document belongs to Cardno and may not be used, sold, transferred, copied or reproduced in whole or in part in any manner or form or in or on any media to any person other than by agreement with Cardno. This document is produced by Cardno solely for the benefit and use by the client in accordance with the terms of the engagement. Cardno does not and shall not assume any responsibility or liability whatsoever to any third party arising out of any use or reliance by any third party on the content of this document. Our report is based on information made available by the client. The validity and comprehensiveness of supplied information has not been independently verified and, for the purposes of this report, it is assumed that the information provided to Cardno is both complete and accurate. Whilst, to the best of our knowledge, the information contained in this report is accurate at the date of issue, changes may occur to the site conditions, the site context or the applicable planning framework. This report should not be used after any such changes without consulting the provider of the report or a suitably qualified person. 360807 | 3 March 2020 | Commercial in Confidence ii Evaluation of SA Water's asset management system Review report Executive summary Introduction The Essential Services Commission of South Australia (the Commission) under the Water Industry Act 2012 has regulatory functions which include regulation of retail services in the water sector. This includes regulation of SA Water’s service standards and maximum allowable revenue. This is the third time that SA Water has been subject to regulation of its maximum allowable revenue. The Commission previously made a determination for maximum revenue and minimum service standards for SA Water’s services for the period of 1 July 2013 to 30 June 2016 and then again for the period of 1 July 2016 to 30 June 2020 and will soon make a determination for the four-year period from 1 July 2020 until 30 June 2024. To assist with this function, the Commission engaged Cardno in association with Atkins to provide an independent financial and engineering assessment of the capital and operating expenditure plans of SA Water and the asset management system used to develop these plans. The objective of this review covers three tasks which require us to assess whether SA Water’s: decision-making systems and processes are consistent with the principles set out in its asset management framework (Task 1) capital expenditure in the current regulatory period (2016 – 2020) has delivered its intended outputs efficiently, and achieved its intended outcomes (Task 2), and capital and operating expenditure proposals for the next regulatory period (2020 – 2024) clearly identify intended outputs and outcomes, and reflect efficient costs of delivery (Task 3). Task 2 and Task 3 included a detailed review of a sample of capital expenditure projects and programs. The projects and programs were selected to provide coverage across the different services provided by SA Water and drivers of investment. SA Water SA Water is wholly owned by the Government of South Australia, established by the South Australian Water Corporation Act 1994. SA Water provides water and wastewater services to approximately 1.7 million customers via over 760,000 water connections and 590,000 sewerage connections across both metropolitan Adelaide and country South Australia. SA Water owns assets with a replacement cost of more than $23 billion, including: More than 27,000km of water mains. Approximately 9,000 km of sewer mains. 35 water treatment plants. 26 wastewater treatment plants. SA Water’s operations are primarily governed by the South Australian Water Corporation Act 1994 and the Public Corporations Act 1993. The Water Industry Act 2012 came into force on1 July 2012, replacing a number of other pieces of legislation that previously provided SA Water with its powers to operate and maintain its infrastructure and charge for these services. Methodology The overall objective was to evaluate SA Water’s asset management system, so that conclusions can be drawn on the prudence and efficiency of past capital expenditure and the prudence and efficiency of future capital and operating expenditure proposals. The methodology is informed by our team’s previous experience undertaking asset management process reviews and capital and operating expenditure reviews. Our review work commenced in late September 2019. The first two tasks were desktop assessments of information provided by the Commission and by SA Water during October 2019. Over four days in November 2019 (20th, 21st, 26th and 27th), we conducted face to face meetings with SA Water. The face to face meetings focused on Task 3 (relating to future capital and operating expenditure). Meetings were also held to discuss the initial findings from Task 2 (relating to past capital expenditure) and Task 1 (relating to embeddedness of SA Water’s asset management system). Following our interviews with SA Water, further information was requested of and provided by SA Water. 360807 | 3 March 2020 | Commercial in Confidence i Evaluation of SA Water's asset management system Review report To determine the recommended efficient level of capital and operating expenditure a concept of an efficient ‘frontier’ company competing in an open market to deliver services to customers was used. Under this framework, efficiency gains made by the frontier company are referred to as continuing efficiency, with catch- up efficiency applied to companies that are inefficient compared with the frontier company. Before applying potential efficiency gains, we adjusted SA Water’s expenditure proposals in the following areas: Adjustments to reflect better information provided by SA Water Adjustments to reflect our assessment of the prudence, timing and efficient level of expenditure of the specific projects and programs included in the sample subject to detailed review. Following these adjustments, continuing and catch-up efficiency factors were applied, as appropriate, to arrive at a determined level of prudent and efficient operating and capital expenditure. The catch-up efficiency factors were applied to capital expenditure net of the value of the capital expenditure projects included in the sample to avoid any double counting of efficiencies. The projects and programs sampled comprise 35% of the RD16 capital expenditure program and 43% of the RD20 program. Continuing efficiency is the scope for a frontier company to improve their efficiency. It reflects the continuing efficiencies being gained across all major sectors through innovation and new technologies. The continuing improvement element of efficiency relates to the increased productivity derived from process innovation and new technology that all well performing businesses should achieve, including frontier companies. This applies to a range of industry sectors and applies internationally to the extent that new innovations in one region are able to be adopted in other regions. Catch-up efficiency is the productivity gains that may be realised when agency business moves from its current position to that of the frontier utility. Our assessment of catch-up efficiency is based on a qualitative, process based assessment of SA Water against leading practice for utilities in Australia and internationally, supplemented by partial indicator benchmarking. This is largely informed by our conclusions drawn from Task 1. Our assessment was based on identified improvements to processes and business opportunities that would generate efficiencies in future years and enable SA Water to move towards a frontier utility. Asset management system Introduction Task 1 of this review is an evaluation of whether SA Water’s asset management framework is embedded in systems and processes, and that these processes are consistent with the principles set out in its asset management framework. SA Water’s approach to asset management is aligned with the requirements of the international standard for a management system for the management of assets, ISO55001:2014, which defines asset management as the coordinated activity of an organisation to realise value from assets. Value has to be defined by the organisation and may encompass financial and non-financial aspects and should support the organisation’s overall objectives.