Water Journal December Supplement 1984 by australianwater

AUSTRALIAN , WATER AND WASTEWATER ASSOCIATION

MANAGEMENT OF WATER AUTHORITIES

PAPERS PRESENTED TO THE 1984 SUMMER SCHOOL

Papers appended to WATER, Vol. 11, No. 4, Dec. 1984

MANAGEMENT OF WATER AUTHORITIES Contents Foreword P. Cullen . . . . . . . . . . . . . . . . . . . . . . . . . . . 1v New Responses to the Challenge of Managing the Water Industry A. I. Lawrence . . . . . . . . . . . . . . Corporate Management Strategies for the Water Industry A. McLachlan . . . . . . . . . . . . . . . . . . . . . . .

l 4

The Process of Corporate Management with particular reference to its practice in the NSW Water Commission A . McLachlan . . . . . . . . . . . . . . 12 Financial Management of Water Authorities C. G. Pollett

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Pricing for Optimal Resource Allocation Dr. P. Apps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 ,

Performance Measurement W 1 Robertson . . . . . . 25 Program Budgeting 1 Greer . . . . . . . . . . . . . . . . . . 30 Program Evaluation or Performance Monitoring P. Cullen

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

FOREWORD T H E 1984 Summer School was held in Canberra from 6th to I0th February. The Summer School covered several themes, including a number of presenta tions on iss ues related to the management of water authorities. In view of the interest displayed in the management issues, and the req uest of participants for written material covering these topics, Federal Council agreed th at papers should be compiled and published as an annex to the Journal. The enclosed papers outline: O the nature of changes in the operating environment of water auth orities and their implications for the m a n agem e nt of the a uth oriti es;

D the role of Corporate Management in enabling auth o rities to respond effectively and efficiently in a pluralistic environment ; D the nature of th e financial management iss ues confronting the water industr y, and their implications for revenue a nd capital borrowing ma nagement strategies; D the ro le of tariffs and charges as tools of economic ma nagement; D the use of Performance Monitoring and Budgeting techniques for improving efficiency, and; D the importance of inco rpo rating measures and review of effectiveness into ma nagement procedures. The assistance of Summer School speakers in providing the papers is gratefull y ac knowl edged . P. Cu llen

Chairman, 1984 Summer School Committee

New Responses to the Challenge of Managing the Water Industry A. I. Lawrence, Water Resources Engineer, NCDC I. SOURCES OJ<' CHANGE TH E provision of hi gh sta ndards of urban services and an extensive system of rura l water suppl y in a co ntinent characterised by ex tend ed periods of drought a nd periodic flood s is a remarkable sto ry of ac hi evement. Whil e th e skill s and qualities which und erly thi s sto ry of success a ugur well for th e future, signifi ca nt shift s will be required in the water indu stry's perspectives and management strategies to meet future c ha ll enges . Hi storica ll y, the indu stry has evo lved through four phases (re fer to Fi gure I) ; the politi call y orientated management of th e 1850s to 1880s, th e establishment of the statutory authorit y and ini tia l implem entation period of the 1890s to th e 1930s, and the co nsolidati on and ex pan sion period of 1945 to 1969. The current phase may be described as the period of re- politi cisa tion of the indu str y, during whi ch the ea rli er admini strati ve machinery has been dismantled , and the a bilit y o f the indu stry to pursue its preferred strateg ies has been seriou sly curtailed. During the re-politici sation phase, th e indu stry has bee n in a state of turbul ence. Thi s is a re fle cti on of a number of changes in the sociopoliti cal and phys ical operat ing en vironm ent of the indu stry. These changes include : (a) The grow ing inability of Governments to co-ordinate public work s programmes in a manner respon sive to changing regional pla nnin g, eco nomi c a nd soc ial goal s . Thi s is a refl ection of: • th e grow th in the ex tent of public works programmes underta ken by statutory authorities, each pursuing its own statutory function s in iso lat ion, • the inabilit y of stru ctures des igned to meet past socia l needs to adapt to chan gin g need s (I) , • the growth in the sca le of water re so urce co nstruction and developm ent programm es . Perhaps th e emergence of a significa nt bac klog in the provisio n of services by th e late 1960s served more than any ot her factor to highlight thi s difficult y. (b) Th e emerge nce of plura li sti c asp irations within th e community in the 1970s, refl ec ting a sub stantial attainment of basic need s within th e more affluent sectors of the co mmunit y; a growing concern regarding the visible level of environme nta l deterioration , and an in creas ingly voca l co mmunit y with an ex pectation of influ encing its own affa ir s. (c) Th e failure of the indu stry to adapt to and manage the problem of en vironmental deterioration emerging as a result of growth in un co ntrolled point so urce di scharges in the I 960s. (d) Growt h in demand for se rvices (di version of streams for water suppl y, and the di sc harge of wastes) approaching or exceeding the resource or assim ilat ive capacity of loca l waters. (e) A downturn in the economy in the mid 1970s, res ulting in extrem ely tight ca pital fundin g and pressure on taxes and rates . (f) The rate implications of the high loa n interest rates in the latter ha lf of th e 1970s, a nd a financial management strategy ba sed on sub stantial fundin g of capital wor ks from borrowing. (g) The fa ilure LO depreciate aging infra stru ct ures at their current cost valu e, with implica tion s for qu estions of soc ia l equit y and fu t ure costs. (h) A grow in g commitm ent to technology in post indu strial societi es as · fundamental to advances in li ving sta ndard s. Conversely, th ere is a lso concern rega rdin g the co ntinued exp loitat ion of nature through technology and th e a bilit y to co ntrol technology. (i) The in app li cabi lity of overseas water quality mod els and criteria to Australian co ndition s.

Figure I. Four Phases of Evolution of the Water Industry Political Phase-1850s to 1880s. Thi s was a period characterised by ex tensive political interference in th e estab li shm ent and management of water a uthoriti es, and politica l patronage. The period saw the demi se of Loca l Government as the basis of the provi sion of water suppl y and sewe rage servi ces, and th e establi shment of Water Commi ssion ers.

Establishment Phase- 1890s to 1930s. Thi s period saw the establi shment of the major urban and rural water suppl y authorities, and th e implementation of the major water supply and sewerage sc hemes that we re to la rge ly determine future directions up until the 1970s. While a uth orit ies had a large degree of autonomy during thi s period , governments used Royal Commission s of Enqu iry as a d evi ce for intervention in developm en t proposals and a uth or ity management. Expansion Phase-1945 to 1969. Thi s was a period of major augmentation a nd ex pa nsion , in an endeavour to provide se rvices commensurate with the rapid post World War II growth in hou sing and industry, and to service gove rnment national development programmes. Public Work s Committees and Loan C ontrol s now provid ed the principal device for government regulation of the indu stry. Re-politicisation Phase-1970 to 1984 . This was a period during whi ch community priorities other than the provision of water suppl y and sewerage se rvices emerged , and a situ at ion of scarcit y of reso urces generated conflict in the a ll ocation of resources across compet in g va lu es and interest group s. Government s enacted legislation to establi sh new stru ctures a nd function s more appropriate to the turbul ent environment. Authorities established planning procedures a nd decentrali sed control in an attempt LO better respond to changing com munit y asp irati ons.

2. IMPLICATIONS OF CHANGE FOR THE INDUSTRY THESE changes const itute a challenge to the indu stry LO adapt perspecti ves, strategies, structures and procedures LO more adequately reflect its operating environment. Th e cha ll enges may be summari sed as follows : (a) A need to collaborate more effect ive ly with Government in th e identification of strategies, procedures and programmes respon sive to changing community aspirations. This may necess itate a shift from the indu stry 's preferred strategies, or a loss in the functional effi ciency in a number of cases in the interest of improved effecti veness . The major ad vances in the water indu stry have bee n the result of clo se co llaborat ion between elected and appointed officia ls . The Vi ctorian Irrigation Act of 1886 drafted by Deakin and Murray, th e Vi ctorian Wa ter Act of 1905 drafted by Swinburne and Murray, and the rece nt adm inistrative and legislati -.,e refo rms in SA, NSW, WA and Victori a are cases in point. (b) A need to better inform the publi c regarding the nature of con straint s and options avai la ble, such that public aspirations wi ll bette r match rea lity; a nd a need to provide more effective stru ctures and procedures for community in vol vement in deci sion mak ing. (c) A need to shift from a funct ional perspect ive, with major fo cus on th e operation and a ugmentation of services, to a reso urce man agement perspecti ve , with primary focus on the a ll ocat ion of scarce resources, and the adoption of strategies best utili sing resources to respond to a wide range of co mmunity need s. Orga ni sation a nd management st ructures will need to embrace such objectives as effecti veness in the provi sion of co nditions meeting a range of needs a nd equity in th e a ll ocation of sca rce resources. Management programmes wi ll need to include programm e eva lu at ion, co nsum er surveys , a nd strategy revi ews in a changing operating environment. (d) A need to a dapt economic and fin a ncial management strategies in order to respond to a wide range of ex ternal a nd internal factors . Econom ic a nd financial management will need to embrace such objectives as flexibility, equit y, effic iency, and return on in vestment. Ma nagement techniques will include a shift to a greater level of self financin g, depreciation of assets at current value, a nd payment by use and at a rate reflecting the real cost of the produ ct. (e) A need for greater a nd more effective utili sation of technology. Th e role of tec hn o logy wi ll beco me increas in gly im portant in the areas of information handling, process co ntrol , sys tem s operation, a nd water and wastewater treatment.

(f) A need to mod ify mo ni to ring programmes a nd water qua lit y mod els to bett er reflect loca l syste ms. Progra mm es will need 10 mo re e ffecti ve ly in co rporate th e biota and co nsideration of water qualit y processes. Eva lu a tion will need to be extended to more close ly relate land use and man age ment a nd the na ture a nd pattern of streamfl ow co nstituent s. The ca use-e ffect specificit y and redu ct ionist domain of the physica l sc ienti st wi ll need to be more effective ly managed to provide in for mat ion releva nt to the ava il a bl e manage ment stra tegies. (2) (g) Education and retrainin g of perso nn el wi ll be requ ired within the industry to fac ilita te the adoption of new approac hes and perspec .. tives.

conc lud es that "a co-ordin a ted, ex panded a nd con tinuous na tion a l progra mme is necessary to improve publi c educat ion on water resource iss ues~' A number of a uthor ities have und ertaken internal reo rga ni sa tion with a view to devoluti on of a uthority on a regional basis. It is argued th a t in thi s way, th e a utho rities can id entify more closely with their cli ent s, and be more respon sive to loca l needs. In a simil a r manner, the ama lga mation and grea ter a utonomy reco mmendation s for loca l water a uth orit ies put forward by th e Publi c Bodies Review Committ ee, a im to strengt hen the finan cial , tec hni ca l and manage ment ac um en of loca l a uth o riti es such that th ey bett er re fl ect loca l prioriti es . Thi s object ive may of co urse directl y confli ct with th e centra l ad mini strati ve goa ls of Governments. The ama lgamatio n and grea ter au tonomy recomm endat io ns for loca l water a uthorities put forwa rd by th e Pub li c Bodies Review Committee provide local co nsum ers with a direct voice in the management of a uthorities, by mea ns of the elect io n of represe ntatives to th e boards of ma nage menl. Recent a mendment of the admini strati ve a rrangements of authorities have in a lm ost a ll cases prov id ed for more e ffecti ve representa tion of co nsum ers o n th e boards of ma nagement , or for the establi shm ent of Adv isory Boa rd s. T he d evelopment a nd forma li sation of pla nnin g procedures whi ch provide fo r co mmunit y input to po li cy form ula ti o n, has been adop ted by so me a uthori ties as a basis for publi c part icipat ion . Thi s may be viewed as a n extension to th e Environmental l mpact Assessment publi c co nsultation procedures. Traditionally, th e indu stry has per fo rm ed poorl y in the area of co nsumer s urveys, takin g th e view tha t the indu str y is best ab le to make judgement s on co nsumer needs. The re is little indica tion that th e indu stry will perform any better in thi s area in th e fu ture. Ideo logica lly, the indu str y is still posited well a nd trul y in th e positi vist mould (refe r to Figure 2). Eac h of th e four frames of reference identified in Fi gure 2 represent on ly a partial view of rea lity. Each represent s a wo rld view whi ch chan nels attention in specifi c direct ions and precludes th e investi ga tion of alternat ives. Co nseq uently, if o rganisation s a re to co mmunicate effectivel y with th e publi c, there wi ll be a need to develop ana lyti cal a nd communi ca ti ve skill s whi ch ut ili se a ll four frames of refere nce . Similar ly, there has bee n littl e a ttention in the indu stry to the moni torin g of performance other than the efficien cy of implementation of the preva iling st rategy. The paper by Mr Pet er C ull en addresses these iss ues .

3. RES PO NSES TO CHANGE TH E indu stry has respo nded in a va riety of ways to th ese changes in it s soc io-po liti ca l a nd p hys ica l operating environm en1. Th e res pon ses may be summari sed as fo ll ows: (a) C ollaboration with Government

Th e responses of a uth oriti es to the need for more effecti ve co ll abo rat ion with Govern ment may be ca tego ri sed under three hea din gs ; authority initi a ti ves, Governme nt in tervent ion, and a dapta tion of planni ng a nd management procedures . Wh ere a uthoriti es have been co nfronted by a resource crisis, such that the co ntinu ed p ursuit of establis hed stra tegies is clearl y not via ble, a uth o riti es have so ught Governm ent co ll aborati o n in a da pting leg islative, a dm in istrative, and tec hnica l a rran gements to achieve longer ter m resource management and co mmunit y goa ls. This is parti cula rl y the case for the EWS D in SA, a nd the Perth Metropo li tan Water Au tho rit y in WA. Wh ere such a reso urce cri sis has been less ap parent, autho rities a ppear to have been un a bl e to shi ft from their prim a ry foc us o n effecti ve a nd effi c ie nt imp leme nt a ti on of tradi tiona l services . Th e fi na l o utcom e of thi s co nfli ct is Government interventi o n in the man agement a nd adm inistrative arrangeme nt s of these a uth or iti es. Th ere has bee n a tend ency within some a uthorities to co nsider themse lves independ ent of gove rnmenl. It is forgotten that th e independent statu s identified in their statutes was delegated on th e basis th a t acti viti es wou ld be limit ed to the provision of services spec ified in their statutes . As no ted above, th e ramifi ca tion s of wa ter a uth o rit y programmes now have far reac hin g im pli cat ions touching upo n economi c, soc ia l, a nd environ menta l polici es. Recent Government inqui ries and amendm ent of a dmini strati ve st ru ct ures of the Melbourne & Metropo lit a n Boa rd of Works, a nd th e Syd ney Metro po lita n Water Sewerage & Drainage Board, a re indi ca ti ve o f Gove rnm ent dissa ti sfaction with the respon se of these a uth o riti es to Government polici es. Th e Vi cto ri a n Publi c Bodies Review Co mmittee ha s recomm e nded (3) to the Vi ctori a n Government the disso lu tion of some 400 publi c water a uth orities in that State, a nd their repl ace ment by loca l water board s or a malgamat io n into ex istin g wa ter boards. A number of aut hor ities has comm itted sign ifi ca nt resources to the modifi cat ion of structures and procedures to more effecti vely accommodate wider Governm ent prioriti es . The paper by Mr A ll a n Mclachlan out lines the ma nn er in which 'Co rporate P la nning' is bei ng deve loped as a mea ns of in co rporat in g th ese wid er iss ues into orga ni sa tion management. The development of State Water P la ns has been used in SA, NSW, Vi ctori a a nd th e ACT as a mecha ni sm for coo rdin a tion o f th e developm ent a nd ma nagement o f resources res pon sive to a wide ran ge of interests.

Th e indu stry has evo lved a perspecti ve within which the majo r focu s has been on improved impl ementation of the estab li shed strategies . As no ted by Wilenski (5) "a uthoriti es wi ll continue to carry on mee tin g their origin a l objectives. They may not have the breadth of vision within their organisation to perceive the changes, a nd there are in stitu tion a l press ures for them to continue to do what th ey have bee n doing".

Concepts of Hum an Behaviour

(b) Public Participation

C oncepts of Soc ia l Ord er

The respo nse of th e indu stry to the need for mo re effect ive in volvement of the public in dec isio n mak ing may be ca tego ri sed under four headings; devo lution of a uth ority, a ppointment of co nsumers to manage ment boards , the use of planning procedures , a nd the use of consum er sur veys a nd performance assessment. Given a substantial level of public tru st a nd support ove r th e years in the technical expert a nd sta tutory a uth or ities , the industry has had little need to educate the publi c regarding the nat ure of cho ices a nd costs. However, this failure to inform the public has exacerbated problems that the indu stry now faces. There is a continued reluctance to test comm unity a ttitudes a nd preferences. The POWR Report (4)

Deter mini stic, respo nse to environmen t , obj ec tive

Voluntari sti c, free will, subj ec ti ve

Ord er or co nsensus, unit y, regu lation

Structural fun ctiona li sm , systems theory, sc ience, technical rationa lism , Postivism

Interp retat ive, interac tioni sm , hermeneuti cs, phenomonlogy, soc ia l action theory, Id ea lism

Con fli ct or coercio n , di vision, change.

St ru ctura li sm , confl ict th eo ry Materiali sm

Humani sm , crit ical theory, ex istenti a li sm , Idea li sm

Figure 2: Sociological Frames of Reference and !heir philosophic sources. (adapa!ed from G. Burell & G. Morgan, Sociological Paradigms and Organisarional A nalysis, Heinemann 1979, pp. 10-37)

The increased co mplexit y of ystem management as a result of levels of streamflow uti li sat ion approach ing exp loitab le o r assimi lati ve capacit y, has necessitated greater a ttention to means,.of reducing cos ts and to in creased use of a ran ge of professio na l d isc iplines . Th e effecti ve utili sa ti on a nd co-o rdination of inter-d isc iplin a ry groups in prob lem so lvin g and ma nagement requires new management structures a nd new person nel s ki ll s. There currently appears to be littl e attent io n to these issues wi thin the indust ry. In view of the diverse climatic, environmenta l, and socio-economic situ at ions prevail ing across the cont inent, it is now rea li sed th a t there is no o ne opt imum so luti on a ppl ica bl e to all situ a tion s. Th e POWR Report (7) recom mends th e develo pm ent of low cost treatme nt processes for sma ll communiti es.

Agreement about Goa ls Hi gh Agreement about Ca usa tion

Low

Hi gh

Co muta ti o na l, specia li st

Barga in ing, represen tative

Low

Jud gemen ta l, co llegium

C harismat ic ano mie

Figure 3: Types of Decision Making Strategies & Structures. (J D. Th ompson & A . Tuden, Compara1ive St udies in Adminisrrar ion, Univ. Pi//sburgh P,: , 1956, p. 202). Fig ure 3 out lines the range of dec ision making strategies and stru ctures app li cabl e to most organisat ions. A number of a uthorities has undertake n restructur ing and th e development of a co rporate ma nagement or ientat io n , as a means of cons ideri ng organisation direction s in th e co ntex t of the wid er env ironment. Ma nagement by objectives is currentl y und er a ttac k. It is a rgued th a t it simpl y fac ilit a tes the domi na nt gro ups wi thin organ isation s press in g and legitim a tin g th eir own programmes and perspectives.

(h) Water Quality Mo nitoring and Eva luation Ear ly approaches to the eva lu a tion of the impacts of development proposa ls a nd to th e operation of fac ilities were based o n overseas models and crit er ia. It is now apprecia ted that many of the overseas co ncept s a re in appropriate to a system ex hibiting extreme va riabi li ty, a nd to an aqua tic fauna tha t has a dapted to signifi ca nt water quali ty a nd streamflow va ri ab ilit y. The POWR Report (8) co ncluded that the Water Reso urce Assessment Program me is no longer a ppropri ate to current a nd future needs, and th a t researc h to determin e water qualit y criteri a approp riate to indi ge no us aquati c fa un a is required .

(d) Reso urce Management Orientation As not ed ear li er, a number of a uth o rities has been co nfront ed by a reso urce cri sis, such that the co ntinu ed pursuit of esta bli shed strate. gies is no lo nger viable . These aut hor ities have so ught th e collaboration of Governments in the adapta ti on of legisla ti ve, admin istrative, a nd technical arra ngement s assoc ia ted with the management of the reso urce in a ma nner respon sive to a range of compet ing demands. Plannin g ha s been embraced by a number of a uthoriti es as a sys tematic a nd pa rti cipatory basis for th e a ll ocation of sca rce reso urces across a ra nge of co mpetin g dema nds and community aspirat io ns.

(i) Education and Training Associated with their fun cti o na l orientation, a uthority within water organisations has been la rgely hi erarchi ca ll y based, with knowledge a nd sk ill s tied to the preva ilin g stra tegies a nd tec hniques . Co nsequ entl y, th e orga ni sation s have ge nera ll y performed poorl y in res pect to pe rso nn el tra ining. Th e POWR Repo rt (9) co ncludes tha t ' broadl y based education will be required in the indust ry to ta ke acco unt of the wider co nsiderati o ns in decision ma kin g' . Lloyd (10) co ncludes th a t one of th e most impo rtant issues fac ing the industry is how to man age the work fo rce through the 1980s in th e face of rapid ly changing ro les. Orga ni sa ti ona l change will of necessity bring a bout a re-o rienta tion of knowl edge a nd s kills co nsidered approp ri ate to cha ngin g strategies.

(e) Efficiency There has been co nsiderable foc us on improved efficiency within the industry over the last decade. Tradit iona ll y, the focus of th e indust ry has been on ' impl ementation of the esta bli shed st ra tegy a nd procedures at leas t cos t ' . With the emerge nce of a ra nge of ma nageme nt and professio nal perspecti ves within most a uthoriti es, there is now a greater opportunit y for more effi cient strategies o r techniqu es to emerge. The ro le of ma nagement is one of ensuring th a t there a re no imped iments to thi s process of competing a pproac hes, as we ll as ensuring th at reso urces are utili sed efficientl y in the impl ementa tion of routine techniqu es. Th e management mec ha ni sms includ e improved di sse mi na tion of data, a nd more ri goro us performan ce monitorin g. Th ese iss ues are addressed in the papers by Mr Bill Robertson a nd Mr Jim Greer.

4. CONCLUS IO N This summ ary has sought to identify so me of th e responses to the major iss ues co nfro ntin g the in d ustry. While not a ll water authority perso nnel will be directl y in vo lved in the processes of organi sa tion reform , th ese respo nses will in evitab ly genera te cha nge in the ma nner in which a ll person nel app ly th eir knowl ed~ and sk ills in adva ncin g th e interests of th eir organisation and those of the com munit y. More importa ntl y, they each constitute a part of the o rga nisat ion. Th e effect ive im p lementat io n of c hange ultimately requires their accepta nce a nd suppo rt.

(f) Economic and Financial Management

Co nsiderab le attent ion is currently being given to mea ns of improvin g th e eco no mic and fin a ncia l management of water a uthoriti es . In th e case of th e Perth MWA, fin a ncia l management st rateg ies have bee n in corporated as an int eg ral co mponent of reso urce manage ment strategies . In a period of eco nomi c stringe ncy, auth orit ies a re movi ng to reform of pricing ta riffs and charges as a mean s of ma naging the growth in dema nd. The Perspec tives on Water Resources to the Yea r 2000 Study Report (6) has set a goal of a 20 per cent reduction in wa ter co nsump ti o n nation wid e, primarily by app li ca ti on of appropriate pri cin g stru ctures. Other aut horit ies have fo und that major c ha nges to pr icing a re not pol itica ll y viab le at this stage. All a uthorities a re movin g to more effect ive incorporation of economic and fin a ncial management into th eir corporate management stru cture. The papers by Mr C hri s Poll et and Dr Patricia Apps address th ese iss ues.

REFERENCES

I. Wi lensk i, P., Review of NSW Govern111e111 Administration: Directions for Change, NSW Govt Pr., 1977, p. 58 2. Ongley, E. 0., 'Information Requirements for Water Quality Management', in Han, B. T. (Ed) Water Quality Ma nagement: Monitorin g Programs and Diffuse Runoff, Chisho lm Instil. of Tech no l. & Austr. Society for Limnology, 1982, p. 19 3. Pub lic Bod ies Review Com mitt ee, Future St ru c1ures for Waler Manage111en1, Vic. Govt Pr. , 198 1, pp. 19- 275 4. Department of Resources a nd Energy, Wa1er 2000: A perspective 011 water resources /0 1he year 2000, AGPS 1983 , p. 8 1 5. Wi lenski, P., op .cit., p. 58 6. Departm ent of Reso urces a nd Energy, op.cit., pp. 69-70 7. ibid., p. 53 8. ibid., pp. 89-92 9. ibid., p.8 1 10. Ll oyd , B. E. a nd Nevill , C. J., Manpower and Educa1io n fo r 1he Wtuer l ndus1ry, AWRC Technical Pape r No. 57, AGPS 198 1, p. 3 16

(g) Technology The indu stry has shi fted from substa nti a l reliance on empiri ca l techniques of th e early I 900s and th eir associated rout ine tas ks, to utili sation of techno logy in th e interests of effect iveness a nd reduced costs. T hi s ha s occu rred on ly sin ce th e late I 960s. Th e I 984 S ummer Schoo l in co rporated prese ntati o ns o n th e importa nt a reas o f compute r technology and wastewater treatment tec hno logy.

Corporate Management Strategies for the Water Industry in the 1980s A ; McLachlan* (NSW Water Resources Commission) (A paper delivered at 1he A ustralian Water and Wastewater Association 's 1984 Summer School held in Canberra at 1he Canberra College of Advanced Educa1io n, 6- 10 February 1984.)

INTROD UCTIO N

Table I: Sources and Uses of Annual Water Used in Au stralia in 1977 {all percentages are of the total estimated water use of 17.8 million megalitres).

THI S pape r o utlines the major iss ues fac ing the wa ter indu stry in the 1980s a nd th e types o f ma nagement stra tegies seen as being necessa ry to reso lve these iss ues. Ma ny ex isting strategies in the wa ter indu stry deri ve fro m th e eco no mic , politica l, socia l a nd tec hn o logica l conditi o ns of t he 1950s a nd 1960s. A major co nt entio n developed in th is paper is th at the environm ent of the 1980s will be qua lita ti vely a nd q ua ntitat ive ly d iffe rent fro m th a t o f t he 1950s a nd 1960s a nd will req uire very di ffe ren t co rporate ma nagement st ra teg ies. T h is contenti o n is based o n th e view th a t ri sing sta nda rds of water services, in term s o f in creased reli a bilit y a nd qua lit y of suppl y, have beco me entre nched expecta ti ons of bo th th e co nsum ers of wa ter a nd the publi c age ncies suppl ying it. A t th e sa me tim e the water indu str y's capac ity to provide for ri sin g sta nd a rd s via t raditi o na l develo pm ent st ra tegies will dec rease. Thi s decrease result s fro m fundin g con stra ints a nd ph ysica l co nstra ints associa ted with th e hyd rol ogic cycl e a nd th e natu rall y ava il abl e suppl y o f water. Thi s co ntentio n of a 'squ eeze' o n publi c fund s is no t new a nd is no t limited to th e water indu stry. It has bee n proposed by Fisher & Gascoi ne (I 977), th e Australi a n In sti tute of Ur ba n Studies (1980) a nd by Eberh a rd t , Mc Do na ld & Pa podo po ulos, et.a l. ( I 983) a mo ngst o th ers. Corporate ma nagement strategies in the 1980s will have to contend with the gap o utlined a bove between expectati o ns of indu stry sta keho lde rs a nd limited indust ry capacity. Strategies whi ch emph asise th e ma nagement of ex isting capacity will become rela ti ve ly more impo rta nt tha n th o se encouragin g th e develop ment o f new capacit y. Thus th e corpora te ma nagement theme o f th e 1980s in th e wa ter indu stry will be a bo ut ' do ing more with less' .

Water Use

Source of Wa ter

Source of Supp ly

Urbani lndus1rial (rnegalitres)

lrriga1ion

Other Rural

Tomi

Sur face Gro undwa ter O ther a nd No t Indi ca ted

15.2 2.7

65.0 9.2

4. 2 1.9

84 .4 13.8

0.4

1. 4

1. 8

Publi c Private O ther a nd No t Indi ca ted

14.8 3. 1

45.0 2.9 .2

1. 5 4.7

6 1.4 36 .9

0.4

1.4

1. 8

TOTA L

17.9

74.6

7.6

Source: Department of Na tional Development and Industry Th e First Nat io na l Survey o f Water Use in Austra li a, AGPS 1981. No re: Slight discrepancies are due to rounding in 1he sur vey report. TH E MATU RE WATER ECO NOMY

TH E wa ter econom y a nd industry a re ge nerall y consid ered to be in a mature stage o f d evelopm ent. Thi s concept o f a 'm a ture' wat er eco no my has two ma in dim ensions: (I ) A physica l dimin sio n, in whi ch the overall qua ntit y of availa ble water ca n o nl y be increased ma rgin a lly a nd at a very hi gh capita l cost; a nd (2) A fund ing dim ensio n in which a bility to barga in fo r, a nd expendi ture of, publ ic funds dec reases . ;

TH E WAT ER IND USTRY IN P ERSP ECTIV E

T H E water ind ustry in Austra li a is ad mini stered by thirty-six bodi es a t Co mm o nwea lth a nd State levels a nd employs a ro und 55,000 peo pl e. In I 980-8 1 capit a l ex penditure on wa ter, sewerage a nd soil and water reso urces ma nagement by Sta te a nd loca l governm ent a uth ori ties a nd enterpri ses a mo unted to $ 101 7 milli o n a t current pri ces o r 12.6% of th e tota l capita l expenditure by th ese a uth o rities a nd enterpri ses. Recurrent expenditures (ma inl y wor king ex penses a nd interest payment s) by the water indu st ry a mounted to $575 milli o n in 1978-79 (Ll oyd & Nev ill , 198 1, p. 131). Th e fir st na ti o na l survey o f wa ter use in Au stra li a (Department of Na ti o na l Developm ent a nd Industry, 198 1) estim a ted a n a nnual wa ter use in Austra li a in 1977 o f 17.8 milli o n mega litres (adju sted fo r a n average clim a tic year). Ta bl e I shows th e source a nd use o f t his wa ter in perce ntage terms .

l. T he Physical Dimension In th e earl y stages of the wa ter industry, water could be harnessed chea ply, wa ter structures were new and performed efficientl y without la rge ma intena nce requirement s a nd what competition there was a mongs t users could be resol ved as there was plenty of room for ex pa nsion to accomm od a te growing demands. In the beginning of th e wa ter industry's development in Austra lia many proj ects were justified on socia l a nd not econo mi c grounds. A search o f the literature clea rly shows for example, tha t th e Murr umbidgee Irri gati o n Area was justifi ed o n social and not purely economic ground s. Funding policies a nd pricing st ructures a do pted in those early stages did not a llow fo r full coverage o f costs (which would have been ina pp ropri ate given t ha t no n-economi c facto rs largely d etermin ed the timing a nd size of ex pa nsio ns to regulated wa ter suppli es) nor were they designed to provide incenti ves for the effi cient use o f water. Subsidi es were relied upon to a la rge extent and th e costs of proj ect deve lopm ent were rela ti vely lower per project than in th e more mature stage of development. H owever, as t he water indu stry ' m atures' it is characteri sed by a lesser physical ca pacity for expa nsion a nd increased costs of incrementa l expa nsio n. As a n example, the 15 major agri cultural storages in NSW a lready control th e runoff from th e significant po rtion of the head water catchment a reas . Hence more and la rger da ms may no t increase water yield s significa ntl y. A lso , as the most cost effective sites have been utili sed a lread y, th e costs per megalitre of wa ter from furth er regulatio n must increase substa nti a lly.

Most water deri ves fro m sur face wa ter fl ows a lth o ugh, as increased suppl y fro m these sources becomes more di fficult, ground water supplies will beco me more significan t. The d o mina nce of the p ublic sector in p rovidin g water is indi cated by the fac t th at 61 per cent o f total water used is provided by the publi c secto r a nd tha t th e 37 per cent Âˇshow n in Tabl e I as being pri vately p rov ided includ es pri vate di versio ns fro m st ream s regulated by Sta te works . Of th e total water used in Australi a three-qu a rters is used by irri gators a nd a bout 18 per cent is used for urba n/ industrial pu rposes . However, the leve l of suppl y reli a bilit y for u rba n/ industrial use is, as a rule, much hi gher tha n for most rura l use .

â&#x20AC;˘ The views expressed in this paper are my own and should 1101 be regarded as 1he policy of 1he NSW Wa ler Resources Com mission and ifs Minis1er. I wish 10 con vey my apprecialion 10 colleagues in 1/t e Waler Resources Commission fo r 1heir assis1ance in lite prepara1ion of !his paper.

Thi s is illu strated through a compar ison of the cost and output from the existing Copeton Dam on the Gwydir River, from a seco nd major dam in the Gwydir and from an in land d iversion sc heme to th e Gwydir. Copeto n Dam was constructed at the best site, in terms of mo st water for the least cost, in the Gwyd ir Valley. It s mea n annu al output is a bout 300 000 megali tres at an approximate annua l cost of $2 1 per megal itre. Anot her major dam in the Gwydir wou ld add only 80 000 mega litres per yea r at an annual cost of $ 130 per megalit re. T hu s the co nstruction of another expe nsive dam o n an already hi ghl y regul ated ri ver wou ld produce o nl y a modest increase in the water availab le a nd at a high cost. Th e most attractive inla nd di vers ion to the Gwydir would add 55 000 megalit res per yea r a t a n a nnua l cost of $350 per megali tre. T hi s does not inclu de the cost of re-regu lat ing dams and we irs or the cost of river imp roveme nt wor ks o n th e inland ri vers. Only a few indu stri al users wo uld find water eco nomic at a cos t of $35 0 per megali tre. The mature stage is a lso cha racter ised by increased replacement and maintenance needs as the stock of structures and work s becomes o lder. Partl y as a result of the deterioration in existin g wo rks a nd structures-w ith water logging a nd salinity problems in irrigat ion a reas a nd waste treatment problems in urban areas, for example-the qua lity of water becomes an iss ue . In add iti on, beca use suppl y increments are lower and more expensive, compet iti on for water amongst ex isting users a nd uses increases. For example , in -strea m uses of water for recreation a nd environmenta l pÂˇur poses may co nfli ct with a nd demand priorit y over vario us offstrea m uses.

shown in Tab le 2, t he 12.6 per cent of tota l capital expe nditure by State a nd local aut hor ities (at current pri ces) spent on watlir, sewerage and soi l and water reso urces ma nagement in 1980-8 1, compares with 14 .9 . per cent in 1966-67 and 18.9 per cent in 1972-73 . Over the fifteen year period to 1980-81 , shown in Table 3 and Figure 1, there has been a tendency for capital expendi ture in the water industry to in crease, peak and t hen dec rease in real terms . Capita l expend iture (at 1980-8 1 pr ices) on water suppl y in 1980-8 1 was $389 million , co mpared with $339 million in 1966-67 and $497 million in 1972-73. A similar trend occurred in the provision of sewerage a nd drainage works with a nnua l capital expenditure in 1966-67 of $395 million (at 1980-8 1 prices), peaking at $7 10 million in 1974-75 a nd declining to $5 10 million in 1980-8 1. T he trend in the area of soil and water reso urces ma nagement (w hich includes irrigation) has been a stead y decline as displ ayed in Figure I . In this a rea, and again at 19808 1 prices, capital expend iture in 1966-67 of $ I 9 I million increased slightl y to peak a t $ I 97 million in 1968-69 and has sin ce decl ined (w ith some small increases in o ne or two yea rs) to $ 11 8 mill ion in 1980-8 1. As th e indu stry matures wor ki ng expenses will in crease as a proportion of the total expe nditure. For exampl e, working ex penses for water suppl y in the metropolitan areas of Austra lia grew at a n average a nnual ra te of 15. 7 per cent between 1974-75 and 1980-8 1 co mpa red wi th a n annual rate of increase of 10.6 per cent in the co nsum er price index over th e sa me period (Eberhardt, et.a l. 1983, p. 7). Most cap ita l expenditure in the wa ter ind ust ry in t he past has been funded by loans resu lting in large interest repayments now and in the future. For exa mple, with respect to the provi sion of sewerage services by metropolitan authorities in Australi a, interest payments in 1980-8 1 absorbed 42 per cent of revenues from sewerage provision (Eberhardt, et.al. 1983, p .8).

2. T he Fu nding Dimension

It is ev ident that capital in vestm ent in the water industry, as a proportion of the total in vestm ent by th e pub lic sector, is decreas ing. As is

Table 2: Ca pit al Expe nditure on water, sewerage and so il and water reso urces management by State and local gove rnm ent authorities and enterprises ($ million , current prices)

(I)

Sewerage and drainage (2)

Soil and waler resources managem ent (a) (3)

Total ware,; sewerage, soil and water resources management (4)

Total State and local governmenl authority & enterprise capital expenditure: all purposes (5)

92.6 10 1.3 I I 3.4 133.4 128.0 153.7 18 1.4 193.4 244 .4 298.7 321. 1 353.6 359.8 359. 1 389 .1

107.8 111.5 113 .9 140.6 173.7 2 10. 7 25 1. 0 285 .1 377.7 426.6 442.9 462.2 453.2 481.6 5 10.0

52. 1 50.9 56.8 57.8 61.9 63.3 60. 1 61.2 80.3 96.0 107.1 109 .3 100.5 99. 1 11 8. 0

252 .5 263.7 284.1 33 1. 8 363.6 427.7 492 .5 539.7 702.4 820 .7 87 1.1 925. 1 913.5 939.8 1017.1

1698.5 1782.2 1951. 8 2089.0 22 15.6 2397 .1 26 12.7 2924.2 42 12.8 5028.7 5344 .4 6035 .2 6584.5 7 123.7 8086.0

Water Supply

1966-67 1967-68 1968-69 1969-70 1970-7 1 197 1-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-8 1

Percentage of Total Capital Expenditure Water Supply (6)

5.5 5.7 5.8 6.4 5.8 6.4 6.9 6.6 5.8 5.9 6.0 5.9 5.5 5.0 4.8

Sewerage ~Soil and and water resources drainage management (a) (7) (8) 6.3 6.3 5.8 6.7 7.8 8.8 9.6 9.7 9.0 8.5 8.3 7.7 6.9 6.8 6.3

(6)

3.1 2 .9 2.9 2.8 2.8 2.6 2.3 2. 1 1.9 I. 9 2.0 1. 8 1. 5 1.4 1.5

Note: (a) In cludes irrigation. Source: Barnard and But/in (/981) and ABS, State and Local Government F inance, Austra lia, Catalogue No . 5504.0 as taken f rom J Eberhardt, et. al. Eco nomi c & Fin ancial Iss ues Water 2000: Consultants Report No. 3, p. 20.

+ (7) + (8) (9) 14.9 14.8 14.6 15.9 16.4 17.8 18.9 18.5 16.7 16 .3 16 .3 15.3 13.9 13 .2 12.6

Ta ble 3: State and Local A uthorilies Ex penditure o n New Fixed Assets; water, sewerage and drain age, soil an d water reso urces management (including irri ga ti o n) ($ millio n)

Wa ter

1966- 67 1967-68 1968-69 1969-70 1970-7 1 197 1-72 1972-73 1973 -74 1974-75 1975 -7 6 1976-77 1977 -7 8 1978 -7 9 1979- 80 1980- 8 1

Sewerage and Drainage

Soil & Water Resources Management (incl. irrigation)

Current Prices ($ m)

1980- 81 Prices ($ m)

Current Prices ($ m)

/980- 81 Prices ($ m)

Curren t Prices ($ m)

1980-81 Prices ($ m)

92.6 101.3 113.4 133.4 128.0 153 .2 18 1 .4 193.4 244.4 298.7 32 1.1 353 .6 359 .8 359 . 1 389. 1

339 362 394 446 405 452 497 462 459 486 469 477 454 403 389

107.8 11 1.5 11 3.9 140.6 173.7 210.7 25 1. 0 285 .1 377.7 426.0 442.9 462 .2 453 .2 48 1. 6 5 10.0

395 398 395 470

52. 1 50.9 56.8 57.8 61.9 63.3 60. 1 61.2 80.3 96.0 107. 1 109.3 100. 5 99 .1 118 .0

19 1 182 197 193 196 164 165 146 15 1 f56 136 147 126 111 11 8

550 620 688 680 7 10 693 647 623 572 54 1 5 10

Source: ABS, State & Loca l Governmen t Finance, Australia, (Cata logue No . 5504.0); Austra lian National Accounts: Nat iona l Income and Expend iture (Catalogue No. 5201.0) as taken f rom J. Eberhardt et. al. 1983, p. 22 & 9/.

TRENDS IN STATE AND LOCAL AUTHORITIES EXPENDITURE ON NEW FIXED ASSETS (AT 19801981 PRICES) - WATER, SEWERAGE AND DRAINAGE, SOIL AND WATER RESOURCES MANAGEMENT (including irrioation l

FIGURE I:

100

<II

6!10

I.I.I

c::

600

[l.

Cll

6 a) 2:! E

* <II I-

5 !10 500 4 !10 400

I.I.I

<II <II

0 I.I.I

3 00

)(

2 50

I.I.I

200

::,

I-

150.

I.I.I [l.

100

)(

I.I.I

50 0

1----.---.----- - ---,.- -.---.-- --.---.-- -,-- -,---,--....---, 67

YEAR 6

ernm ent will be seekin g improved effi ciency a nd effecti ve ness fro m it s va ri o us a uthorit ies a nd age ncies. P ublic fund s will be co nstra in ed at a stage when co nflicting interests a re dema ndin g mo r~ fro m govern ments. · In vesti gat io ns o f the NS W Publi c Service in general (Wilenski , 1982) a nd the Vi cto ri a n water indu stry specifi call y (for exa mple , Publi c Bodi es Review Co mmittee, 198 1) indicate the pressures o n the publi c sec to r to improve perfor ma nce. Moves include increased Mini steri al con tro l over departm ents a nd a ut ho rities, im proved po li cy mak ing capacit y a nd improvement s in technical a nd admini strati ve co mpetence. Dunphy also po ints to a number o f issues likely to impact o n o rga nisati o nal managem ent in the fu ture including: • the need for in creased orga ni sati on fl ex ibili ty a nd awa reness; • a heavy emphasis o n th e deve lopm ent of huma n resources, a nd • a need for greater in volvement in po licy dec isions by all key interest groups.

ECO NOMIC A ND SOCIAL CO NDITIO NS OF TH E 1980s 1. Economic/ Technological

Average levels o f economi c growth during the 1980s a re ex pected to be lower than those ex perienced in previou s decades . Unemployment is likely to remain in th e 5 per cent to 10 per ce nt range rather t han in the range 0 per cent to 3 per cent which cha racteri sed th e period fro m Jun e 1950 to Jun e 1975 . Interest rates a nd th e prevailing rates o f infla ti o n ca n be ex pected in th e I 980s to average a t levels higher than the pre1970 period . C ha rt s I to 4 attac hed show the differences between the eco nomi c co nditi o ns of th e I 950s and I 960s a nd th ose o f the I 970s quite clea rl y. The agri cultural sector, which is by far the la rgest con sum er of wa ter, is ex pected to continu e to experi ence a declin e in comm odit y prices (in real terms) ove r the I 980s (Baldersto ne, I 98 2 a nd the Bu rea u of Agricultural Econ o mics, 198 3). Fa rmers will co ntinu e to adapt to thi s situa tion through sustained imp rovements in producti vity achieved via the introdu ctio n o f new tec hnologies a nd th e move to large r scale enterprises . Fo r th e nex t decade it wo uld a ppear tha t th ere is little scope fo r real increases in fund s for public in vestm ent. During I 980-8 1 receipts of publi c a uthorities a mounted to 34. 5 per cent of G.D.P. , up from 24 per cent durin g 1949-50, 25 .5 per ce nt during 1959-60 a nd 29.7 pe r cent during 1969-70. G ove rnm ent outlays as a pro po rti o n of G.D.P. durin g 1980-8 1 a mounted to 38 per cent a nd it is ev id ent that ex isting press ures a re to reduce th ese outlays , o r a t least to maintain them a t prese nt levels. . The pace of technological cha nge, pa rticul a rl y in the fi eld s o f in fo rmati o n processing, telecommuni cati o ns, electroni c fund s tra nsfer a nd cybern eti cs, will accelera te durin g th e 1980s. De-regulati o n in th e telecommuni cations/i nfo rm a ti o n industri es in th e USA, a nd to so me extent in Au st rali a , will hasten t he introductio n of new technologies impac ting o n do mes tic a nd bu sin ess acti viti es.

KEY ISSUES IN TH E 1980s

Th e following a re con sid ered to be the key iss ues whi ch will confro nt the indu stry in th e 1980s: I . Financial issues. The key fin a ncial iss ues rela te to: • th e probl ems assoc ia ted with a squeeze o n publi c fund s generally whil st wor king expenses co ntinue to increase in real term s; • the ge neral probl ems assoc ia ted with hi sto rica l cost acc ounting such tha t; - pri ces do not refl ec t tru e costs, - revenues do not make a suffi cient contributio n to new capita l work s, -excessive reli a nce o n loan fund s resul ts in high interest repayment s, - inadequa te fund s a re ava ilabl e fo r replacement s a nd renewals of structures a nd wo rks . 2. Pricing and Allocation Policies. Incenti ves must be provided to users to con serve water a nd in crease effi ciency. A pro blem here relates to the fac t th a t ma ny past investm ent s were justifi ed on social a nd not eco nomic grounds (as will ma ny future in vestments no do ubt) a nd cann ot ' pay-their-way' witho ut major a nd un sati sfactory impacts o n th e user communit y in particular a nd soc iety in general. However, a di stin ct io n mu st be made between ' pay-for-use' pricin g regimes which may not recover full costs but still provide in centi ves for efficiency a nd ' user-pays' regimes which a ttempt to recover full costs from users. 3. Increa sed Customer Focu s, Awareness and Involvement. Public interest in th e industry will continue to in crease a nd must be accom mod ated. 4. Co-ordinated Land and Water Resource 1'1anagement. Th ere is increas ingly a co nfli ct between the management of la nd a nd the ma nagement of water reso urces altho ugh in th e na tural system the two a re ve ry close ly integrated. 5. Increased Efficiency in Water Use. As suppl y becomes co nstrained there is a need to a ppl y technol ogical , a nd perha ps o rgani sational, adva nces to the tas k o f improving effi ciency. In som e cases thi s need may extend to the re- use of water. 6. Adequate Provision for In-stream Uses and the Protection of Water Quality. These will become mo re important as conflicts a round wa ter use increase . 7. Data Coll ection and Research. A major impediment to ma naging a ' ma ture' water industry will be the lac k of comparable da ta a bo ut the availabl e water suppl y, cost of providing water (pa rti cula rly o f groundwa ter) a nd about the demands fo r water use . Th e limited research fund s in the fu ture will need to be a pplied to the maj o r iss ues co nfro nting water ma nagers . 8. Commonwealth Government Involvement. T he Commonwea lth 's role will be of major significance to the future o f the industry. The Comm o nwealth's fin a ncia l contributi o n to proj ect development , resource ma nagement , da ta coll ection , etc ca n influence th e direction th e indu stry ta kes over th e next ten years . In additi o n, ma ny of t he a bove iss ues have inter- Sta te dim ensio ns whi ch mi ght require ass istan ce fro m th e Cb mm onwealth fo r resoluti o n. Two iss ues o f major signifi ca nce , di rect ly rela ted to the other issues in the fundin g contex t, result fro m Australi a 's highly vari a ble rainfall. 9 . Drought Management. In th e ea rl y stages of th e water indu stry ' drought- proo fin g' was a sought after goal of water ma nagement. Economic pragma ti sm suggests however, tha t drought -proofin g is a n

2. Social / Demographi c

Proj ection s of government fo recasts indicate a likely Australian po pu la tion in th e earl y I 990s of 18 milli o n compa red with 14 .9 million a t 30 June 198 1. Thi s populati o n increase of t he o rder of 3 milli o n people ove r the nex t twenty yea rs-w ith na tu ra l increase a nd net intern a ti ona l migra ti o n bo th contributing equ al sha res-compa res with an increase o f 4 .5 milli o n people over th e peri od 1961 - 1981. With the ge neral ageing of the po pulation continuing and ho usehold sizes declinin g th e po pula rit y of fl a ts, hom e units a nd tow n hou ses will increase . According to th e Au strali a n Council on Po pula ti on and Ethnic A ffa irs (1983) th e foll ow ing di str ibuti o na l cha nges can be ex pected to occur over th e nex t decade: D cha nges in the urba n hi era rchy a t th e national level with Perth likely to overtake Adelaide, Canberra likely to overta ke Newcastle a nd th e Gold Coast likely to move up the hiera rchy; D a t the State level, recreati o n a nd retirement centres a re expected to grow rapidly a nd som e tow ns in ag ri cultu ra l a reas are expected to decline; D within the large urba n a reas, redi stribution to suburbs a t th e periph ery is likely to continue; D la rger urba n centres will continu e th e tendency to merge into conurba ti o ns . For example, Newcastl e, Wollongo ng, Brisba ne Wa ters a nd the Entra nce-Terriga l when combined with Sydn ey would hold a bout 23 per cent o f th e to tal Austra lia n popula tion. Dexter Dunphy in hi s publicati on Organizational Change by Choice (19 81) points to some soc ia l trends likely to influ ence Australia n society and , in tha t contex t, th e wa ter industry during th e 1980s. He con siders tha t change in a ll major a reas of society will co ntinu e to acce lerate although the direction a nd pattern o f change will be different a nd di ffi cult to predict. H e a lso a rgues (p. 24) tha t 's ignifi cant shifts in communit y va lues will occur with a gen eral move away from a uniform , a uth o rita ri a n , co nformi st a nd con servati ve value system to a more di verse, plu ralistic a nd cha nge-o ri ented value system ' . The ge neral educatio nal sta nd a rd of the co mmunity will increase as will th e available leisure tim e with a drop in the retirement age a nd decreases in th e number of working ho urs per week. 3. Political / Organisational Politi ca ll y, the 1980s can be expected to be characterised by a n increasing des ire o f con sumers/ voters to participa te in decision-makin g. Gov-

unrea li sti c, a nd perha ps a n una tta ina ble, goa l. Eco no mi c studi es have show n tha t irrigati on da ms beco me unecono mic when opera ted to prov ide protecti o n against d ro ught by ca rryi ng large vo lum es of water ove r fro m o ne seaso n to a no ther. T he benefi ts ga in ed in d rought yea rs are fa r o utweighed by th e benefit s foregon e in the majo rit y o f yea rs. Thi s is becau se the da ms ca n supply much mo re water on average when opera ted to re-regul a te water within a seaso n. D ro ught peri ods will undo ubtedl y recur during the I 980s a nd low cost ma nagement strategies will have to be developed to dea l with them . 10 . Floodplain Management. Once again the chall enge will be to fi nd and commit fin a ncial a nd other reso urces to ri ver ba nk stabili sa ti o n, protection o f life a nd propert y, th e prepa rati o n of fl oodpl ain ma ps, a nd th e necessa ry da ta coll ecti o n a nd pla nning to avo id po tenti al da mage. 11 . Organisational Iss ues. If appropri a te strategies to deal with t he a bove issues a re to be deve loped , cha nges will be requ ired to th e operati o n o f the o rga ni sa ti o ns co mpri sing the wa ter indu stry. A n estim a ted two-thirds o f th e existing water indu stry wo rk fo rce will still be working in th e indu stry in 1990 (LLoyd a nd Nevill, 198 1 p.316) a nd will have th e respo nsibilit y o f implementing the cha nges recomm end ed in thi s pa per. Furth er, as th e in d ust ry will ex peri ence limited o r no growth in em ploy ment (o r eve n nega ti ve growt h) over th e next ten yea rs it is more likely th a t experienced personnel will leave, rather th an jo in , the industry. Ma ny o f these iss ues have been raised already in the foltowing studi es : • Manpower and Education fo r the Water Industry LLoyd a nd Nev ill , 198 1. • Water Research in A ustralia: new direc1ions Aus tralia n Wa ter Resources Co uncil , I 982.

• Waler 2000: A perspeclive on A uslralia's warer resources to /h e year 2000 Depa rtment o f Resources a nd E nergy, 1983 a nd associated repo rts.

• Stale Warer Plan, NS W vario us in ternal working papers, NS W Wa ter Reso urces Commi ss ion. CORPORAT E ST RATEGIES FOR TH E 1980s

As a sta rting point it is ass um ed th a t: • th e indu stry a nd th e governm ent s o f the day will find the ' do no thing' o pti o n unpalatabl e. • the purs uit by the indust ry of ex ist ing stra tegies thro ugho ut the 1980s, wo uld produce undesirable di sto rti o ns o f the communit y's ex penditure pri o riti es a nd equity problems which would und o ubtedl y provo ke ad verse (fro m th e indu str y's po int of view) po liti ca l reacti o n. Th e fo ll owin g co rpora te strategies a re con sid ered necessa ry fo r a pos itive corpora te res po nse to the cha ll enges a nd o pportunities of th e 1980s. I. Management and Control

lt is esse nti a l tha t a mec ha nism be developed whic h will ena ble autho riti es res pon sible for wa ter ma nagement to set a ppropri a te o rga ni satio na l obj ecti ves and meas ure th eir progress in ac hiev ing them . T hese o rga ni sat io nal obj ecti ves must be subj ect to co ntinuo us rev iew as cha nging circumsta nces wa rra nt o r force cha nge in the organi sat ion's purpose a nd direction . The recommended mec ha nism fo r ac hi ev ing thi s sensi ti vity to cha nging circum stan ces is o utlined in th e pa per Th e Process of Corporale Managemen/ also presented a t th e I 984 AWWA Summer Sc hool.

3 . Demand Management

T he co ncept of dema nd ma nagement implies th e ide ntificatio n a nd imp lementatio n of va ri o us meas ures to influ ence (ge nera ll y to redu ce) dema nd (in scale, type o r di stribu tio n) so th at fewe r capital works a re required a nd ex isting capita l wor ks are used mo re effi cientl y. The concept is not new a nd has been th e respo nse o f a number o f a uth o ri ti es to cap ita l shortfa ll s. One well -know n exa m ple is t he Hun ter District Water Board wh ich is a ttempt ing to co nta in growt h in the dema nd for water thro ugh : • a pay-fo r-use ratin g system to refl ec t th e costs o f suppl y to custo mers;

• ad verti sing to enco urage people to co nserve wa ter; a nd • in ves tigating techn ical measures such as red ucin g water lea kages by contro lling water pressure . Th e concept is also ap plicable to t he ru ral wa ter suppl y scene . The Water Reso urces Com mi ssio n in NSW has traditi o na lly helped farmers by des igning far m da ms a nd irrigat ion sys tems suited to their la nd a nd ad visin g th em o n th e ad va nt ages a nd di sa dva nt ages of va ri o us types o f eq uipm ent. Vo lumetric all oca ti o n schemes a nd th e develo pment o f pay-fo r-use pricing poli cies in co nsultati o n with NSW irrigato rs a nd user groups a re consistent with the prin ciples o f dema nd ma nagement. 4. Increased Customer Focus

The water industry ex ists to serve ma ny sta keholders. One of the mos t impo rta nt is the custo mer o r user. It is evident give n the trends o utlined earlier th a t sta kehold ers are go ing to dema nd a greater involvement in indust ry decisio ns th a n in the past. The in du stry st ruct ure will have to a llow fo r thi s greater in vo lvement perh aps by decent ral ising, establishing ca tchment ad viso ry com mittees an d havin g stakeho lder representa ti ves o n po licy-ma king ma nagement boards. In additi o n the indu stry will have to esta blish mec hani sms for revea ling custo mer's preferences to a much greater extent tha n was prev io usly th e case. In the case of purely pri vate goods, free ma rket acti vity is the mea ns by which customers reveal their preferences a nd those orga ni sati o ns most serving those preferences pro fit a nd grow a t th e expense of t hose whi ch d o no t. Wa ter does not fulfil all t he requirements fo r classifi cati o n as a pri vate good however, a nd the ma rket ca nno t be relied upo n entirely to provide th e most effi cient a nd eq ui ta ble solut ion. Co nseq uentl y, t he ma rket has not been seen as a sat isfacto ry a rbiter of customer's wa ter needs a nd ad minist ra ti ve co ntrols have preva iled. In co ntrast the ma rket will be used to a greater ex tent in the I 980s to revea l custo mer preferences a nd deter mine resource all ocati o n . Social prioriti es a nd ma rket imperfectio ns can be acco mmoda ted ex pli citl y via the allocation of sub sidi es. Wa ter tra nsfera bility, tendering sc hemes a nd volumetr\r all oca ti o n poli cies , fo r exa mpl e, will encourage rura l water users to adju st to chan ging econo mic circum sta nces wit ho ut the need for co mplex admin istrative co ntro ls. T here will a lso be a need fo r the scientifi c assess men t of customer needs a nd preferences . Ma rket research tec hniques, success full y empl oyed in ma ny oth er indu stri es, will need to beco me more commo n in the water industry during th e t 980s . Demand ma nagement requires mo re info rm a ti o n a bo ut cus tomer needs a nd preferences a nd , in sa tisfy ing them , it will become necessa ry to differenti a te service prov isio n to d iffe rent custo mer groups to a greater ex tent tha n at present. 5. Organisational Structure

2. Financial Management

Future in vestments will have to be justi fie d in cost-benefit term s a nd estimates o f costs a nd benefit s will have to be broadened to include no n-mon eta ry compo nents. A significant capita l contribution sho uld be sought from beneficiarie s of new investments a nd water authoriti es should obta in sufficient fund s fro m users of existing facilities a t least to cover o pera tion a nd maintena nce costs. Suffi cient fund s for repl acement a nd renewals ca nn ot be generated in times o f high infla tio n when histor ical cost accounting practices are employed. A co ntinua tio n of these practices will lead to continuing sho rtages in fund s for replacement or renewal of ex isting assets a nd will mean th a t existing users will be subsidi sed by future users. 'C urrent ' cost accounting practices adju st for inflation a nd will aid decisions in resource allocatio n, cost co ntrol and fin a ncial ma nagement.

·,g

Ma ny o rganisati o ns in the wa ter indu stry a re structured tradition all y o n th e bas is of a stri ct divi sio n between engin eering a nd admini strati ve fu nctio ns. Furth er, within the engineering fun ctio n there is genera lly a di visio nal/bra nch split on the basis of the phases of project develo pment -investigati o n , development , pla nning, design , co nstructio n (Lloyd a nd Nevill , 198 l review th e structures of a number o f a uthorities conforming to this pattern) . This form of organisati o n is gea red more towa rds th e earlier stages of the development of th e water industry when proj ect deve lo pm ent a nd capita l work s were of preeminence. In the ma ture water indust ry however, dema nd management a nd a custom er service o rienta tio n require a greater integratio n of a ll fun ctions-a greater range of skill s must be brought to bea r. Ma nagers within orga ni sations (from middle-managers up) must esta blish a commitment to o rganisatio nal o utputs rather tha n just to the fun ctional input th ey a re presentl y respo nsible for. Organisational struc-

CHART N• I :

GROSS DOMESTIC PRODUCT ANNUAL GROWTH IN REAL TERMS 1949/50-1982/83)

c•1.

7'2

Year At avwaoe-At OHrate

At av.-av•

At averav•

19"•54 prlc:. 1909•60 prtces

1986-67 prices

1979•80 prlcee

-2

CHART N•2.: 24

CONSUMER PRICE INDEX ( o/e ANNUAL CHANGE 1949/50 - 1982/83 l

22 20

18 16 14 12

•4 IO

8 6

2 0

:,,4

Year

7'6

CHART N• 3 :

INTEREST RATES ON COMMONWEALTH GOVERNMENT SECURITIES ( 10 YEAR BOND RATE)

% 8

•

- - - R a r n on Aei.areolll• Banda ~

Rarn on Nan• ReoatNIII•

•

7'0

Bond•a

Year

CHART N•4: 10

UNEMPLOYMENT RATE ( UNEMPLOYMENT AS A o/. OF THE LABOUR FORCE) ;

0 50

Year JO

L011o~r

7'0

Force

Survey 78

tures which integrate functions and ski ll s and which encourage greater participation in decision-making will be necessary to cope with the changing environment. This commitment to outputs should not be limited to the individual organisation but should also be the orientation of the industry as a whole. The integration of land and water resource management, for example, requires an industry commitment to resource management in general. Obviously the industry structure must support this desired integration and a Water Management Audit is examini ng just this question in NSW at present.

economic if the industry in an appropr iate forum estab lished research and data object ives and regularly reviewed them. The co-ord ination of this activity might be an area in which the Commonwe.i'lth ca n become involved. CONCLUSIONS

Evidence suggests that the water industry is in mature stage of development. During the 1980s the industry wi ll need to move from an emphasis on supply management to demand management. This change in emphasis will have major impact on the way organisations compri si ng the water indu stry go about their business. Greater interna l funding and greater use of the price a nd market mechanisms for allocative purposes will characterise the industry. There will be pressures on organisations to restructure and considerable effort wi ll have to be applied to staff development. Technological developments to improve water and adm inistrative efficiencies will have to be encouraged. Industrial relations management will be seen increasingly as an important adjunct to productivity improvements. Fina lly the Commonwealth will need to become involved in industry wide issues such as research and data co llection.

6. Organisation Behaviour

The structu ral changes in an organisation can encourage, and remove impediments to, the sort of behaviour desired and necessary in the 1980s. They will not in themselves produce the desired cha nges in behaviour of the organisation members and, ultimately, the organisation itself. Given that most change wi ll have to come from those members already in the organisation there will be a need for a major staff development commitment in the industry. Organisations will have to spend considerab ly more on staff development-including staff training, rotation schemes, etc.-than in the past. Staff trained to operate in the sort of organisation appropriate to the early stages of the indu stry wi ll have to be re-trained to cope with the industry's cha nging needs. And if Dunphy is correct in hi s assert ion that change will be a continuous process, re-trainin g will be an on-going activity.

REFERENCES Australian Counci l on Popu lation and Et hni c Affairs (1983) Population Report No . 7: Population Changes 1976-81 AGPS. Australian Institute of Urba n Studies (1980) Urban Strategies for Australia: Managing the 1980s A IU S Publication No. 88. Australian Water Resources Counci l (1982) Water Research in Aus1ralia: new directions Report of the Working Group on Water Research Policy. AWRC: Water Management Series No. I, AGPS. Balderstone, J. S. et. al. (1982) Agricul/ural Policy: Issues and Op1ionsfor 1he 1980s Working Group Report to the Minister for Primary Industry, AGPS. Barnard , A. & Buttin, N . G. (1981) 'Australian Public and Private Capital Formation 1910- 1975' Economic Record, Vol. 57, No. 159, pp. 354-67. Bureau of Agricultural Economics ( 1983) Agricultural Water Demand and Issues Water 2000: Consultants Report No. 5. Department of Resources and Energy ( 1983) Wa1er 2000: A perspec1ive on Australia's water resources to the year 2000. AGPS. Dunphy, D. (198 1) Organisational Change by Choice McGraw-Hill. Ebe rh ardt, J. McDonald, D. Papadopoulos, et.al. (1983) Econom ic and Financial Issues Water 2000: Consu lta nts Report No. 3 AGPS. Fisher, N. W. & Gascoine, D. F. (1977) Resources/or Urban Developments A Review of Public Finance Prospects (Dept. of Environment, Housing and Community Development). A paper delivered at a seminar on Urban Management Processes, conducted under the auspices of UNESCO at 'Raywood' . Bridgewater, South Australi a, 22-25 August , 1977. Lloyd, B. E. & Nevill , C. J. (1981) Manpower and Education for the Water Industry Australian Water Resources Council, Technical Paper No. 57 AGPS. Public Bodies Review Committee (1981) Irrigation Management in Victoria from Neilson Associates . â&#x20AC;˘ State Water Planning Task Force ( 1983) State Water Plan NS W Various working documents internal to the NSW Water Resources Commission. Wilenski, P. (1982) Unfinished Agenda: Review of NSW Government Administration. NSW Governme nt.

7. Technology and Organisations

The enco uragement of technologica l development and its incorporation into the resource management and organisation contexts is most important in the 1980s. Iri the demand management arena, for example, the manufacturers of irrigation equipment can help immensely in the move towards greater efficiency in irrigation. Fixed overhead sprinklers, automatic controllers, filters and pumps are examples of innovations which can improve irrigation efficiency. In the urban water management field, technological developments include improvements in pipeline technology and water saving technology in household appliances. These technologies are often expensive to introduce and users will reach the correct investment decisions on ly if water and these technologies are priced at levels which reflect true costs. Given the increasing recurrent expenses in the industry there wi ll be an obvious need to use technologies to increase productivity in organisations to a greater extent. This may cause concern amongst emp loyees in a relatively low or no growth industry and will require negotiation and co-operation between management and staff. 8. Research and Data Collection

The need for technological innovations, for knowledge about water quality and quantity and water users' preferences, implies a need for research and data collection. These are areas where it wou ld be unwi se for organisations within the industry to 'go it alone'. It would be most

The Process of Corporate Management with Particular Reference to its Practice in the NSW Water Resources Commission A. McLachlan* (NSW Water Resources Commission) (A paper delivered at the Australian Water and Wastewater Association's 1984 Summer School held in Canberra at the Canberra College of Advanced Education, 6- 10 February, 19fJ4). INTRODUCTIO N

TO say that we li ve in a cha nging a nd complex wo rld is to use a cliche. Nevertheless we do live in such a world and in our society, no organisation can remain effecti ve, or survi ve, unl ess it rev iews its role, fun ctions, st ructure and reso urces continuously. The co rporate pla nning a nd management process can be seen simpl y as a systematic way of runnin g an organisation. I defin e it as a n ongoing process which provides: • a systematic approach to findin g out what yo u want to be; • a mea ns of deciding how you a re going to get there; a nd • a means of monitoring a nd co ntrolling progress in getting th ere . There are some obvious trends which will influence the water indus. try in the 1980s that make long-term planning a necessit y for organisations like the Water Reso urces Co mmission : • the ex pected low levels of eco nomic growth; • the co ntinuing downwa rd trend in rea l prices for agricultural co mmoditi es; • the limited scope for real increases in fund s for publi c in vestment and the co nsequ ence that governments will be looking for improved effi ciency and effect iveness from it s various a uthorities; • th e pace of tec hnological change particularly in the field s of information processing, telecommunications, elect roni cs fund s transfer a nd cy bernetics will accelerate durin g the 1980s; • the moderate increases in population during the 1980s with regional population trend s of significa nce to the water indu stry; • changing attitudes of people with respect to - indu strial relation s -w hat they expect from th eir work - th e total environment - livin g standard s -participation in decision-makin g; • the eleven iss ues identified in the pa per Corporate Management Strategies for the Water Industry in the 1980s also presented at the 1984 AWWA Summer School; (l) Financial. The key problem relates to the 'sq ueeze' on capita l funds. (2) Pricing and Allocation Policies. There is a need for a n in creased use of incentives for users to conserve water a nd increase efficiency of water use. (3) Increased Customer Focus. Public interest in the industry will continue to increase a nd must be accommodated. (4) Co-ordinated Land and Water Resource Management. There is increasingly a conflict between the management of la nd a nd water resources . (5) Increased Efficiency in Water Use. This requires the application of new technologies and organisational advances to improve distribution efficiency. (6) Adequate Provision for In-Stream Uses and the Protection of Water Quality. As conflicts about water use increase, the protection of water quality and consideration of in-stream uses become more importa nt. (7) Data Collection and Research. Attention to the a bove issues will be limited due to th e lack of comparable data about th e available water supply, cost of providing water (particula rly of groundwater) and th e demand for water use. (8) Commonwealth Government Involvement . The Commonwealth's financial contribution to project developm ent , re-

source management , data collection , etc can influ ence the direction take n by th e ind ustry over rhe next decade. (9) Drought Management. Drought periods will undoubtedl y recur during the next decade and low-cost ma nagement strategies will have to be developed to deal wit h them. (10) Floodplain Management. The indu st ry will need to commit fin a ncial and o th er reso urces to ri verbank stabilisatio n, protection of life a nd property, the preparat ion of floodplain maps, and th e necessa ry data co llecti o n a nd planning to avoid potential da mage. (11) Organisational Issues. If appropriate strategies to dea l with the a bove issues are to be developed changes will be required in the operation of organisations co mpri sing th e water indu stry. It is importa nt to point out that co rporate planning or lon g-ter m pla nnin g does not aim to influence future dec isions. On th e co ntrary, it aims to influ ence decision s ta ken today to ensure th ese decision s are co nsisten t with longer term goals . Co rporate planning recogni ses that decisions made today, particularly by the la rger infrastructureproviding bo dies, will have a signifi cant influence on the nature of decisions made in the future. Further, the fundamental importance of commitm ent to and participat ion in the corporate pla nning process must be stressed. Th e process is output-orientated a nd t he responsibility for outputs is assigned fir st to management and then, through management to staff. To establi sh co mmitm ent , a nd ensure that man agement and staff accept the principles of respon sibility and accounta bility, the corporate plannin g process must be participative and must ensure that: • all levels of ma nagement are involved ; • staff are in vo lved in decision s affecting their work content; and • there is communication throughout the organisa\ion o f defined strategies and plans. These three elements a re cru cia l to th e success of the process . Managers a nd those they ma nage mu st beli eve in the process and, because of that beli ef, be determined to ma ke it effective for the 1 organisation and for themselves.

The Process of Corporate Planning

T H E corpora te pla nning process, as practised in the Water Resources Co mmi ss ion, consists of the following basic and interrelated steps 1: l. Specifi cat ion of t he purposes of the Commission in terms of types of customer served, the particula r needs of these customer groups and the aspirations of the Commission in satisfying these needs. The Commi ssion 's purposes and aspirations are stated in the set of corporate objectives which specify what type of business we a re, what we do and how we do it. 2. Appraisal of the present position of the Commission and the water industry/market a nd factors interna l and external to both which might influence them over the next few years. 3. Identification of: -key st rategic issues with res pect to discrepancies between the Commi ssion 's aspirations and (with existing policies and strategies) its anticipated performance. - Options available to the Commission to enable it to resolve these key strategic iss ues. T his is the strategy formulation stage. 4. Selection of the favoured options for adoption by the Commission and inclusion in the statement of st ra tegies.

' Th e views expressed in th is paper are my own and should not be regarded as the policy of the NSW Water Resources Commission and its Minister. r wish to convey my appreciation to colleagues in the Water Resources Commission fo r their assistance in the preparation of this paper.

Following closely the process employed in the NSW Department of Main Roads.

5. Implementa ti o n o f the adopted o pti ons via action pla ns a nd spec ifi ca tion o f inpu ts for the Commissio n's operating pl a ns, programm es a nd bud gets . 6. Mo nitoring o f perfo rm a nce to meas ure the va ria ti o n from a pproved pla ns, programmes a nd budgets. Decisio ns a re made as to whet her th ese va riati o ns are within accepta bl e ra nges a nd selected opti o ns a nd strateg ies a re to be retained or whether a review is necessary. Thi s is th e ma nagement ph ase . The requirement s of each of th ese steps will be further deve lo ped in the foll ow in g section s. 1. Corporate Objectives

Unless th ere is a who lehearted co mmitment to th e process thro ugho ut th e orga ni sa tion the develop ment of wo rth while a nd significa nt corpo rate o bj ecti ves will no t be possib le. G iven th a t th ere is such a commitment thi s is still likely to be th e most d iffi cult step o f the corpo ra te pl a nning process . It is certainl y the most impo rta nt. The corporate obj ecti ves a re a sta tement of the purposes a nd prio ri ties of a n orga ni sa tion. In view of th e existence o f Acts of Parlia ment esta blishing publi c secto r organi sati o ns it is oft en a rgued tha t thi s step is unnecessa ry. However, leg islation is ra rely written in th e for m o f obj ecti ves , does not o utlin e succin ctl y th e purposes o f a n orga nisa ti o n a nd does not present pr ioriti es fo r acti o n . One way to es tablish a co mprehensive set o f co rporate obj ect ivesth e metho d used in th e Water Resources Commiss io n- is th e 'sta keholder' approach . Th e o rga ni sa tio n fir st id entifies th e sta keho lders (or groups) with a n interest in it s behavio ur. The next step is to determine each sta keholder's dema nd s u po n the o rganisati on. In the Water Resources Commi ssio n th e Bra nch H eads, in meetings specifi c to thi s purpose, identifi ed th e following sta keho lders a nd their likely dema nds upo n th e Co mmissio n :

Stakeholder

Demands

I. The Minister

(i) Proj ect a good im age of the Minister and th e Co mmi ss ion. (ii) Respon d to Government po licy. (iii) Avo id co ntroversy; predi ct a nd prevent problems . (i v) Ha ndle representa ti o ns speedil y. (v) Be a n effi cient a nd effecti ve a uth o rity. (vi) Wor k within budget all ocatio ns a nd sta ff ce ilings. (i) Suppl y cheap , reli a ble a nd sufficient water suppli es . (ii) P rovide water of accepta bl e qu ali ty. (iii) P rovide effecti ve fl ood ma nagement. (i v) A ll ow full pa rticipati on in decisio n-mak ing process . (v) Provide qui ck access to ad vice a nd informa tion . (vi) Have effecti ve legislati on a nd expla in how it wo rk s. (vii) Build more con servation wo rk s. (i) Provide cheap , relia bl e a nd sufficient water suppli es . (ii) Provide good qualit y wa ter. (iii) G ive timely, effecti ve ad vice. (i v) Strea mline o pera ting a nd li censing co nditio ns. (i) Open up cha nnels a nd methods of co mmuni cati o ns bo th ways . (ii) Provide good jo b sat isfact io n a nd security. (iii) Provide a good image a nd achi eve results. (i v) Improve ca reer a nd pro moti o nal prospects. (v) Increase worker pa rti cipa ti o n in dec isio nma king. (vi) Develop suppo rt with sta ff associa ti ons. (i) P rov id e adequ a te/ exce pti o nal protect io n aga in st develop ment . (ii) O vercome ex isting enviro nmental problems. (iii) Develo p rapport with enviro nmental groups . (i v) Allow full pa rti cipation in decision -ma king process.

(and the Government)

2. Rural Landholders

3. Industrial and Urban Users

4 . Staff

5. 'Environmentalists'

Id eall y, th ese dema nd s sho uld be determined in consultatio n with the sta keho lders as has bee n do ne in the Commi ssio n. T here is also a need to establi sh specific measures for each of thes-. dema nds. Fo r exa mple , 'chea p water supplies ' for rural landho ld ers may be mea. sured by compa ring water prices with the prices o f o th er commodities o r publi c services or in term s o f th e rate o f increase in prices co mpa red with movement s in the co nsumer price index . From these sta keho lder dema nds a set of corporate o bj ectives can be develo ped. The set develo ped in th e Wa ter Resources Commi ssio n res ulted largely fro m di scuss io ns between the heads o f bra nch a nd senior admini strato rs. T he dra ft obj ecti ves were then di stributed widely th ro ugho ut the Commi ss ion befo re a ' fin a l' set was agreed to . T he co rpo ra te obj ect ives will be reviewed by seni o r man agement in a n o n-go ing manner as po liti cal, econo mic a nd oth er fa cto rs make it necessary. T he Commissio n's co rpo ra te obj ecti ves cover six ma in a reas of endeavo ur (eac h stakehold er's dema nd s a nd obj ecti ves a re represented) : (i) Gove rnm ent a nd Communit y Rela tio ns. a. (ii) Assessin g Wa ter Resources. (iii) Ma naging Wa ter Reso urces . (i v) Ma naging Ri ver Cha nnels a nd Flood P la in s. (v) Environmental Res po nsibili ty. (vi) Managing t he Organi sati o n . T he general o bj ectives are then bro ken dow n into mo re specific obj ecti ves to guide eac h dec ision ma ker in th e orga nisati o n. 2. Position A pprai sal

T he o rga ni sati o n mu st review its ex tern al environment to determine poss ib le o ppo rtunities and threats a nd ma ke a n in ventory of the organisati on 's reso urces- fin a ncial, capita l and staff- to defin e the organi sa ti o n's strengt hs a nd weak nesses. Understa nding the ex tern al environment is cru cial to a success ful corpo rate pla nnin g process, pa rticul ar ly in periods o f accelerating cha nge in tec hno logica l developm ents, con sumer needs a nd soc ioeco no mi c circum sta nces generally. The review of the ex ternal enviro nment - beca use the ra nge o f in fo rmat ion is so broad-ought to be underta ken systema tica ll y with the impact of each factor o n the o rga ni sati o n specified . Co ll ecting in fo rm ati o n always costs tim e a nd mo ney a nd is oft en very ex pensive. Co nseq uently, a n organi sation sho uld rev iew carefull y the value of the in fo rma tion co llected . The New Sout h Wa les Sta te Water P la n project is in vestigating co mmunit y interests in water, water availa bility, prese nt a nd emerging probl ems, fut ure needs a nd iss ues, a nd industry develo pment a nd ma nagement o pti o ns. T hi s informati o n is being fed into th e corporate pl a nnin g system as a n o n-going process. The rev iew o f th e interna l resources of tl1e o rga nisation a ims to identify st rengths a nd wea knesses a nd the o rgani satio n 's areas o f di stincti ve a bilit y. Given the li kely cha nges in mar ket a nd operating environments o ne as ks whet her the o rga nisati o n is well-equipped fo r the req uired adjust ments. To determine the Co mmi ss ion 's interna l strengt hs a nd wea kn esses co nsulta nts were engaged to underta ke a n employee survey. Some 35 seni o r ma nagers a nd representatives o f th e three sta ff associa tio ns were interviewed by the consulta nts. A co mprehensive questi o nn aire was distributed to every member o f th e sta ff (I 500) seeking th eir views a nd feelings a bo ut t heir jobs a nd a bo ut th e opera tions of the Commissio n as a whole . Iss ues in the q uestionn aire included: â&#x20AC;˘ H ow effect ively do we communi cate? â&#x20AC;˘ H ow clearly do we esta blish o bj ecti ves a nd how effecti vely do we assess progress towa rds t hem? â&#x20AC;˘ H ow success fu l a re we in ca rrying o ut vario us acti o ns o f different pa rt s of the Commissio n's o rgani sation ? T hi s survey resulted in certain cha nges, including the a ppo intm ent of a strategic pla nning offi cer, to ensure the Co mmission (bo th th e bo dy co rpo ra te a nd th e sta ff) ada pts to th e cha nging needs o f the 1980s. A fu rther but more limited review is being underta ken to determine th e response, if a ny, to th e cha nges a nd initia ti ves already ado pted. 3. Strategy Formulation

A st rategy is defin ed as a sta tement a bo ut how the obj ecti ves, determined in step one, are to be ac hi eved given the environment a nd th e o rgani sat io na l strength s a nd wea kness determin ed in step two . In

simple terms this step decides in the light of the 'positi on' analysis; What we might do. What the organisation might do opens up the full range of strategies from cutti ng back operations, through maintaining the status quo, to seeking expansion. What we can do. What the organisation can do depends upon its distinctive and coll ective abilit ies as revealed by the completed internal analysis. This tends to narrow the range of strategies availab le. What we should do. What the organisatio n shou ld do will emerge from looking at the relevant political, legal, social, environmental and econom ic factors under which it operates . What we want to do. What the organ isation wants to do will emerge from the three earlier steps and would normally be decided by top management. In the Water Resources Commission it was decided that this step would best be managed by first identifying strategic issues. Strategic issues were defined as those that, if not dealt with, would impede the achievement of the Comm ission's corpo rate objectives. Branch Heads met and identified broad areas in which the Commission's performance, relative to its aspirations, might cause concern. Project teams, with members representing a cross-section of skills and experience within the Commission, were establi shed to: • investigate the demands of the stakeho lders; • assess the Comm ission's current position in handling the stakeholder demands and the issues identified; • formulate alternate plans for future action , either to rectify weaknesses or to cope wit h future issues, so that the objectives of the Commission can be met. To date, in conjunction with water user representatives, the project teams have identified strategic issues which merit senior management attention. Senior managers are in the process of reviewi ng these issues and determining the priority strategic issues for I 984-85. Issues being considered include: • drought management, • river and flood plain management, • distributional and on-farm efficiency, • private water diversions, • organisational performance and effectiveness.

Fl'GURE I

4. Statement of Strategies

This step forma lises the output from the previous step and wou ld trans late the organisation strategies into realistic op!rational or act ion strategies. Thus an evaluation of the alternative strategies would be undertaken as part of this step. The contribution of various Branches or functions to desired and achievable strategies is identified. Commitment is of particular sign ifica nce at this point and the involvement of many levels in the organisation is necessary. 5. Action Plans

T hi s step converts Branch or functional strategies into concise and effective plans or work sched ules . These plans describe: • the tasks to be performed; • who is to have responsibility for each task; • the target dates for completion of the components; • the staff and financial resources allocated for each task; and • how the tasks relate to one another. These action plans must supply inputs to the organisation's major operating workforce and financia l plans. Unless thi s bridge to other plans and programmes exists, all planning effort wi ll prove ineffective. 6. Management Phase A monitoring process is initiated to gauge the progress of implementation of the desired strategies. The action plans or budgets form the basic instruments of control. Actual performance wi ll be reported against plan or budget on a regular basis, possibly monthly. This reporting must be undertaken on a timely basis to ensure that prompt and effective action can be taken if needed. Effective monitoring will be associated with a review of strategies and action plans. It may be, for example, that changes external to the organisa ti on render the or iginal strategies inappropriate. Evaluation shou ld be incorporated formally in the planning and management process and shou ld measure systematically at least the fo llowing items: • changes in the env ironment; • changes in the organisation's capabili ties; • actions undertaken; • outcomes, in terms of the strategies and corporate objectives.

THE CORPORATE PLANNING PROCESS AND RELATIONSHIP WITH FUNCTIONAL PLANS AND PROGRAMMES

CORPORATE OBJECTIVES • Stakeholder Analysis

POSITION APPRAISAL

Survey of External Environment

Gap _ Analysis

Development of Key Issues

STRATEGY FORMULATION

Evaluatlon

•Political • Economic • Socio! • Te chologlcol

STRATEGY STATEMENT 8 ACTION PLANS

Survey of Internal Environment • Stoff Resources • Financial Resources • Physical Resources

FINANCIAL PLANS

WORKFORCE PLANS

MONITORING

CAPITAL 8 MAINTENANCE PLANS

CONTROL

OPERATIONS PLANS

In the Water Resources Commission a compromise between these two ext remes has been chosen. A Policy and Econom ics Unit has been established which , amongst other things, has th e ove~ight o f the steps T he introduction of corporate plannin g and ma nagement in to an prev iously outlined . The Director o f the Policy and Economics Uni t organi sation should avoid confusion and a breakdown o f ex isting · reports to the Chi ef Executive of th e Co mmiss ion. Within the Unit the Strategic Pla nner has specific responsibilit y to pl anning and programming processes . It mu st integrate existing pl ans and programmes in the achi evement of the organisation 's corpora te manage th e process and : obj ectives . Although it will overlay existing planning a nd program- • co-ordinate th e work o f others in the planning system; ming acti vities, introducing new information as inputs, it will receive • dra ft and issue guidelines, instructions, bac kground in fo rm ation , ass umptions, etc fo r use by Branch H eads; in return , through a monitoring and control system, inputs from established pl anning acti viti es. Figure I shows the interactions ta king • co-o rdinate meetings and seminars; place when the corporate pl anning and managem ent structure is oper- • underta ke vari ous internal and external analyses strategy eva lu ati ons etc; ating in an organisation. • assemble va ri ous contributions to the corporate plan; a nd • compile the necessary doc_u mentation . The Operation and Administration of Corporate Planning Neither the Pla nner nor the Policy and Economics Unit ma kes line The organisati on mu st manage the operation of th e co rporate pl annin g process. This requires that channels of communicati on a re es tab-· management dec isions within the planning process. Onl y line management is suffi cientl y in vo lved with the day to day problems to be able to lished within th e organisation (and between it and its shareholders) to ensure that information flow s to and from appropri ate groups in a identi fy fully th e Commission 's strengths and weaknesses, the threats timely manner so th at the variou s fun ctional resource plans can be and opportunities and the environmental influences which di ctate the Co mmi ssion 's course, a nd that o f the Branches within it. influenced . T his is the iss ue whi ch has caused the fa ilure of many attempts to The issues co nfronting organi sati ons in the wa ter industry over the introduce corporate planning in the public sector. Th e corporate plannext decade are interrelated and will require a n integrated app roach to ning unit has all owed itself (or been fo rced) to become in volved in day investigation and resolution . New chann els of communication will have to be es tablished within water organisation s. For example, fin a n- to day processes and decision ma king. It is a mi stake o f the gravest . cia l, pricing a nd effi ciency issues are intim ately related . Pricing struc- consequences. It is vital that corporate planning is accept ed by all as a tures mu st provide incenti ves for more efficient water use and ensure means of assisting management at all levels to make the decisions, not an adequate return to the authorit y. With fin ance a scarce resource, as a process whi ch will ma ke those decisions fo r management. th e authority may have to see k productivity improvements with associ- CONCLUSION ated employment and industri al implicati ons. T hus economic poli cy, The corporate pl anning and managemen t process is a means by whi ch fin ance, personn el and engineering fun ctions may all be involved in an organisation can adju st to its changing operating environment, th e the resolution of iss ues. cha nging aspirations of its sta keholders and changes in the reso urces The in vol ve ment of techni cal and administrati ve groups in th e cor- a nd capabilities o f th e orga nisation itself. In outlining the steps in th e porate planning process, can be considered with reference to Figure 1. corporate ma nagement process thi s paper has emph asised : All tas ks up to and including, the Statement of Strategy and develop- • the signifi cance of uncertainty and cha nge in the environm ent as ment of Action Pl ans may be considered as corporate-wide responsisomething which mu st be managed in a positi ve way and may not be bilities. The fin ancia l, workforce, ca pital, ma intenance and operations ignored ; pl ans are fun ctiona l res ponsibilities underta ken by th e fun cti onal spe- • the importance of commitment by seni or management and those ciali sts. Both administrati ve a nd tec hnical groups mu st contribute to responsible fo r implementing elem ents o f the planning process; the corporate-wide tasks. In the Water Reso urces Commission both • the process of co rporate pl anning and management , rather than have been in vol ved in the cor porate pl annin g proj ect teams with a view corporate pla ns, as the mea ns of guiding an orga ni sati on; to developing broadly based strategies with a greater co rporate input • th e integra ted nature of decision-making in a co rporate manageand commitment. ment a nd planning process. The interrelatedness between issues, and In addition to cha nnels of communication , th e information required therefore the integrated approach to co nsidering them , is the characfor the variou s pla nning and programming activities mu st be specified . teri stic which most ma kes them strategic in the fir st pl ace; The di stribution of 'all available' in fo rmation to 'all available' wo rk- • the selecti ve use of a nalytica l techniques qt different points in the ing units is inappropriate a nd in effi cient because as each working unit process , to enable the incorporati on of understanding as it develops. does not have the responsibility for a ll acti viti es it will not need , nor be The use of Corporate Planning in the management process will interested in , all inform ation . Th e biased filtering of in fo rmation a nd represent a change in the way most organi sations in the water industry the failure to act on criti cal iss ues a re possibl e outcomes of supplying operate. There mu st be commi tment by ma nagers and sta ff to co rpotoo much informati on. The fa ilure to provide necessary informati on , rate outputs rather than to functi onal inputs. Therefore a greater when it is available, leads to obvious problems. integration of fun cti ons and admini strati ve and technical acti vities is The best and most up-to-date informati on is useless unless that required . Beca use the corporate planning process emphasises the interin fo rmati on arrives at the right po int at th e ri ght tim e. Too often th is relati onship between issues it fo ll ows that it also emphas ises th e interobvious fa ct is overloo ked and information is sent , sometim es as an relati onship between decisions. To devote more reso urces to one iss ue afterthought , to a working unit a fter the decision it should have mu st ta ke reso urces away fro m others. Recogniti on of this one simple influenced has been made . fact is the key to understanding the process and that understa nding is A ttitudes to the administration of the corporate planning process the key to commitment. range between two ex tremes . One extreme considers th at the corpo rate The Water Reso urces Co mmi ssion has found that face- to-face compl anning fun cti on and its admini stration should rest with a sta ff group munication is th e most successful method for introduction of this loca ted somewhere near th e chi ef executi ve in the organisa ti on stru c- change. Time spent with sta ff encouraging their support , (without ture. The oth er extreme places the responsibility with line managers which th e process must fa il), discussing their aspirations for the future requiring each to recognise both work -unit and corporate responsibili- (which depend on its success) and debating poss ibl e strategies (to ties. secure that success), will be time well spent. CORPORATE PLAN NI NG:

Relationship with Established Planning Activities

Financial Management of Water Authorities C. G. Pollett, Corporate Planning Group, Metropolitan Water Authority, Perth, Western Australia (Abbreviated outline of an oral presentation to the A ustralian Water and Wastewater Association 1984 Summer School, Canberra, February /984.)

I NTROD UCTION

FI NANCIAL MANAGEMENT FRAMEWORK

TH IS prese ntatio n is d es igned to provid e d elegat es with a n overview of wa ter a uth o rit y fin a nc ia l m a nage m e nt a t th e corporat e or o rga ni sa ti o n-w id e leve l.

Simp lified Flow of Financial Resources

Th e fir st di agram shows the element s o f a simple finan cia l fram ework . It ca n be used to illu strate th e role of finan cia l ma nagement , a nd th e di stincti o n bet ween rec urrent ex penses a nd capita l ex penditure. Fina ncia l management refers to th e way in whi ch a wa ter a uth o rit y o bt a in s a nd a ppli es fin a ncia l resources necessary fo r capita l work s a nd o perat ion s. Th is type o f ma nage ment is not restri cted to those with fina ncia l tra ining o r bac kground . In fac t, engin eers a nd o ther tec hni cal peopl e a re d eepl y in vol ved in fin a ncia l dec ision s a nd so , in ma ny cases, techni cal factor s determin e how fin a ncia l management is perfo rm ed in th e wa ter industr y. Fina nce meets man y requirement s in th e business of a wa ter a uthorit y. It ca n: • mobili se phys ical resources (such as lab o ur and materia ls) • measure th e value of th ese resources a nd th eir flow s • record payment s and tran sacti ons (a n accountin g fun ction) • be a resource in its own right (a store o f wea lth, e .g. reserves) Th e di agram is use ful to int roduce th e co ncepts o f capita l a nd rec urrent expenditure. If a ll ex penditure required to run a wa ter a uth o rit y in a yea r was required to be met o ut o f that yea r's in come, a nnua l revenue wo uld vary grea tl y beca use ca pita l work s ex penditure wo uld be added to th e normal ex penses o f operation a nd ma intena nce. However, the benefit s of ca pital expenditure a re felt not just in the year in whi ch th e in vestm ent is made but over a number o f years (accordin g to th e useful life o f th e asset in vo lved) . Hence, unl ess the cost of capita l work s ca n be spread over a number of years, charges for services will be unstable and inequitable to customers ove r time . Th e simpl e mod el shown in the diagram is imperfect , but it se rves to introdu ce som e concepts a nd to show how closely finan cial a nd physical resources a re related to each o ther.

Di sc uss io n will conce ntra te on th ose o rga ni sa tion s wh ere th ere is interes t in measurin g, or a t least recog ni sin g, th e ex tent to which tota l costs o f providing servi ces a re met by in co me . Thi s point o f emph as is is import a nt beca use of the fund a menta l di ffe rences bet ween the governm ent depa rtm ent style of cas h acco unting, a nd th e accountin g perform ed in a statutory wa ter und erta king. In th e tra diti o na l a ccounting sys tems o f d epa rtm ent s there a re frequentl y probl ems in measuring overall fin a ncial performan ce because of th e diffi cult y of mat ching incom e with ex penses . Thi s comparison is ma de in a statutory water author ity, a nd is re fl ected in it s annual finan cia l statement s. Thi s di stin ction asid e, mu ch o f thi s presenta tion o n finan cial man age ment in the Au stralian water indu stry is appli cabl e to orga ni sa ti o ns whi ch a re no t sta tutory a uthoriti es . In th e las t fi ve years or so th ere has proba bl y bee n great er review o f financial planning a nd ma nage ment processes in the water indu stry th a n at a ny o ther tim e in the past. Thi s is associa ted with a des ire fo r grea ter effi ciency a nd effecti veness a nd with the presence of in creasing finan cia l press ures on wat er a uth o riti es. These facto rs are tendin g to p roduce changes to traditiona l thinkin g a nd ma nage ment meth od s. Improved fin a ncial manage ment is th ere fore o ne of the most signifi ca nt chall enges fac in g th e indu stry a t th e present tim e. Thi s presentation wi ll not att empt to provide a ny detailed a nalytica l treatm ent of spec ific financia l iss ues-a n approach more a ppropri a te to a meeting of finan cia l pl a nn ers or ma nage rs . Ra th er, it will ta ke a mo re ge nera l ma nage ment view- in keeping with th e th eme of thi s sess io n o f th e Co nference-a nd cover three broa d areas :

More Comprehensive Financial Framework

Th e nex t diagra m ex tends th e simplifi ed fra mewo rk to on e which is more co mprehen sive a nd reali sti c. It shows schema ti ca ll y the fl ow of fin a ncia l reso urces into a nd out of a wa ter a,;ith o rit y.

(i) a typi ca l fin a ncia l fram ework for a wa ter a uth o rit y (ii) the fin a ncial iss ues confro nting th e in d ustry a t prese nt , a nd (iii) th e use of co rporate pla ns to assist in fin a ncia l ma nagement.

FLOW OF FINANCIAL RESOURCES

SIMPLIFIED FRAMEWORK

MORE COMPREHENSIVE FRAMEWORK

RESOURCE INPUTS

WATER AUTHORITY

FINANCE

RECURRENT EXPENSES

PEOPLE

GENERATION OF INTERNAL FUNDS WHEN INCOME> CASH EXPENSES

MATER IALS

PAYMENT FOR WATER SERVICES

OPERATIONS AND MAINTENANCE

.,._ PAYMENTS

INTEREST

.,._PAYMENTS

APPLICATION DEPRECIATION----.

CAPITAL WORKS

OPERATIONS

LOANS -c GRANTS

INVESTMENT

OUTPUTS WATER SERVICES TO CONSUMERS

CAPITAL WORKS

POOL OF ASS_E TS

PAYMENT

[ CONTRIBUTIONS

,...PAYMENTS

. . _ - - - - - - - - - - - - - • • REPAYMENT OF CAPITAL

Note th a t: (i) a di stin cti on is made between rec urrent and ca pita l budgets. These are linked by an accounting con vention ca lled deprec iat ion, which is a mec han ism used to spread th e cost of a n asset over the yea rs of its use ful li fe. However, depreciati o n is not just a n accounting co nvention for thi s purpose. When cove red by inco me it a lso maintains the value of th e organ isa tion 's assets over tim e, and preve nt s overstatement of profit s. (ii) not a ll rec urrent expenses invo lve cas h out lays; provisions may be made for expe nses which a re no t match ed by cas h payment d epreciation a nd superannuation are exampl es. (iii) not a ll cas h outlays in a period a re recurrent ex penses (e.g. cap ita l ex penditure and repayment of debt). (i v) th e necessa ry fund s required for capita l works may not be ava ila ble in the bu sin ess. This wi ll necess ita te borrowings (w ith co nsequ ent pay ment of interes t a nd pri ncipa l) o r a policy of obta inin g ca pita l co ntribution s from custom ers o r deve lopers who req ui re new services. (v) when recurrent expenses a re covered by reve nu e, incom e norm a ll y will exceed the cas h co mponent of recurrent expenses . This will ge nerat e a cas h fl ow of int erna l fund s whi ch ca n be used within th e busin ess fo r working ca pital or in vestm ent in assets. Th is is a n important source of fund s for effective finan cial ma nagemen t. The framework gives a mu ch better view of the tru e rec urrent cos ts of operat in g a wa ter a uthority and th e income req uired to ac hi eve a b'a ianced budget. Traditiona l financi a l ma nagement of water aut hori ties has tended to place emph as is on acco unting for a nd contro l of direct expenses of operat ions, especia ll y cash ex penses. Co rporat e financia l management in a modern water au thority has add iti ona l features to the trad iti ona l approac h. Today much greater attent ion is given to: • recog nisin g interrelat ionships between element s of the financ ia l framewor k • und ersta ndin g the d eterminants of the financial reso urce flow s • recogni sing true ex penses of operat ions • recognising th at technica l co nsid era ti ons (e. g. servi ce standa rd s a nd their costs) a nd technica l d ecision s shape the fin a ncial fram ewo rk . Water a uthorities are th erefo re end eavo uring to create a ma nagement environment whi ch recognises the necessa ry balan ce between serv ice sta ndard s (and hence the cap ita l in vestment levels) and th e costs of se rvi cing to be recove red from customers . Effect ive pla nnin g in thi s a rea will avoid poss ibl e finan cia l shock s whic h may a ri se in the future because of inabilit y to finance se rvices or desired levels of in vestment , or to recover emerging expenses of operation. Corporate finan cial management means looking ahead to avo id critica l situ a tions, identifying co nstraint s and in co nsist encies, a nd ensuring that finan cial and tec hni cal plan s ma tch. Corporate management need s to ask such question s as: (i) Is the d emand for ca pital funds likely to exceed the capacity to obtain these fund s from present sources? (ii) Are we recoverin g a ll th e cos ts of our operations? (iii) How susceptible is our capital structure to var iations in int erest rates? (i v) Does our abi lit y to recove r costs through revenue match th e standard of service planned , and the planned ra te of capital ex penditure? (v) Are tariff systems a ppropriate to the type of se rvices being provided? (vi) Are suffi cient interna l funds being generated to meet the requirements for capital investment a nd for debt repayment ? Before leaving this fin anc ia l framework I should emp hasise th e la rge proportion of recurrent expenses associated with assets and the cost of prov idin g and using them. For exampl e, in the case of the Metropoli tan Water Authority in Perth about 60 per cent of rec urrent expenses is associa ted with interest a nd deprec iation.

- Th e first fo ur items ra ise spec ific eco nomi c an°d fin a ncial questions. The fifth one is mo re ge nera l and is rela ted to the responsibi lities of water a uthorities to acco un t for performance and for ~b li c reso urces entru sted to them . Capital Requirements

The water indu stry is o ne o f the most cap it a l-int ensive of a ll indu stri es because of the predom inan ce of assets wi th lo ng li ves (espec iall y und ergro und assets). Capita l in vestm ent is requ ired for va ri o us purposes, in clu d ing : (i) se rvices to new develo pm ent (ii ) increasing dema nd for serv ices in existin g a reas (iii) improvement to se rvi ces (i v) renewal of assets (v) environmental prot ect ion -assoc iated with proj ec ts Th e mi x of these requirement s varies widely. In Aust ra li a th e emph asis has been on (i), (ii) , and (iii), but this is shiftin g towards (i v) and (v) . The a mount of capital in vested is a lso dependent on: • th e service sta ndards chosen • th e type of proj ect chosen in compar iso n to var iou s alternative methods of provid in g services. Econom ic a nd fin a ncia l eva lu at ion of in vestment proposa ls is th erefore critica l in determining the requirement fo r ca pital funds. A systemat ic ap proach to set ting of se rvice standards a nd performing in vestment a na lys is is impo rtant in a hi ghl y ca pital intensive in dustry, a nd both these areas need carefu l exa minat io n to proper ly specify cap it a l req uireme nts. Financing Capital Investment

As we ll as eva lu a ting th e demand side for serv ices a nd hence fo r cap it a l, it is a lso necessa ry to eva lu a te the suppl y sid e for capita l fund s. T he principal methods of financing capital expenditure in water a uthoriti es a re: • loans • gove rnm ent gra nts • capita l co ntribution by new customers • internal funds T he avail a bility of loa ns and grant s have tended to decrease in recent years and th e trend has been towards greater use of interna l fund s and, to so me ex tent , capi ta l co ntributi ons by new customers. Intern a l fund s are made ava ila bl e when income exceed s immedi a te cas h outgoings o f a water authority. T hi s may ariSI! from annual provision s for expenses (such as deprecia ti on) o r beca use of th e ex istence of surplu ses. The mi x of capita l finan cin g method s used va ri es considerabl y bet wee n au th or ities. Th e mea ns by which a uthoriti es finance !heir capita l in vestment requirements have a la rge bearin g on revenue required from custo mers over time. Recovery of the Eco nomic Cost of Assets

One of the most serious past shortcomings of fin a ncial management has been tha t reve nu e obtained by water aut horities has been insufficient to cove r th e econo mi c cost of provid in g services. Without inflation there was not a probl em becau se th e cost of asse t usage was recovered by spreading the hi storic cost of assets over their producti ve or usefu l li ves. (As desc ribed earlier, capit a l expenditure beco mes part of the recurrent cost structure in thi s way). W ith inflation, however, the economic cost of using assets is not recove red because deprecia tion is based o n outdated hi stori c costs. Hence charges for services based on hi stori c costs lead to underpri cing of services. A lso, • custo mers get wrong signal s as to the cost of services they are using • th e asset base of the uti lity runs down in rea l term s • the rea l financia l positi on of an authority is overstated. Although asset li ves are long, they are not infinite. So if income is not sufficient in inflat io nary times fo r recovering th e infl at io nadjusted cost of usin g assets, a burden of asset replacement is placed on future ge nera tion s of customers for past consumpt io n of capital assets. A mea ns of avoiding these prob lems is to use the replacement cost of assets, ra ther than hi storic costs, in determining depreciation policy. Thi s requires regular updating of asset replacement va lu es, but the met hod gives a truer view of a nnua l financial result s a nd a t the sa me

KEY FINANCIAL MANAGEMENT ISSUES

I have li sted fi ve areas of financial ma nage ment wh ich are of importa nce to th e water indu stry a t present: • requ irements for capital • financin g inves tm ent in capit a l works • recoverin g the economic cost of assets • revenu e and tariffs • acco untab ilit y

time provides a cash flow which can be used to finance new or replacement capital works. A significant additional benefit of this method is a lower revenue requirement in the longer term. Attention to the recovery of capital costs is essential for the long term viability of water authorities, especially as water, sewerage and drainage systems become older and need replacement. Revenue and Tariffs

From our discussion of capital costs, it is clearly important that annual revenue requ irements be defined after a correct eva luation of the true ann ual expenses of a water authority. Once this is done, and a desired surplus or deficit position is decided, it is necessary to adopt tariff policies which raise the necessary revenue from customers. The paper by Dr Apps discusses pricing theory, so this is not covered here in any detail. However, pricing theory and tariffs are closely associated with the financial management issues which have already been outlined . Tariff systems must be designed to produce the desired level of income, whi lst at the same time recognising several criteria: • equity between customers • economic efficiency and conservation of resources • acceptability to the public • admini strative ease Concepts of equity differ according to one's point of view. In recent times we have seen a movement in emphasis from 'capacity-to-pay' tariff systems (such as those based on property val ues) towards 'payfor-service/ pay-for-use' systems which are based on either or both of: • the cost of hav ing the facility avai lable • the extent to which the facility is utilised Whilst there may be a desire to move further towards pay-forservice/ pay-for-use tariff systems, it is important to recognise that the rate of change will be constrained by likel y shifts in the incidence of charges and the resulting effects on groups of customers.

• quantified performance aims and methods by which performance can be assessed. Also, there is a need for agreement between watel• authorities and governments on performance aims-i.e. policy objectives against which the performance of water authority management can be assessed. Such agreement also yields clearer recognition of the constraints on water authority performance. Agreed objectives are very important because the range of performance and policy options is often very wide and those selected invariably have many economic, socia l and political ramifications. Other papers will address performance measurement issues.

4. THE USE OF CORPORATE PLANS TO ASSIST FINANCIAL MANAGEMENT

Water authorities can be assisted in dealing with the financial management issues outlined in this session by: • recognising and evaluating the interdependencies between the various elements that influence financial management, especially those between technical and financial issues • seeking a co-ordinated approach to management which takes these into account • developing clear objectives and a plan to achieve them. It has been the experience of many private and public organisations that improved performance and responsiveness can be achieved through this approach. In addition, it is now being recogni sed that effective performance of water authorit ies in today's business environment requires: • that organisational objectives be clearly identified at top management level • that these be expanded into operational objective, in quantified terms where possible, by corporate and branch management • that integrated plans be developed by corporate and line management to achieve these objectives • that practical and readily usable systems of performance review and measurement be set up so that managers can assess their performance and can report on it to those to whom they are accountable.

Accountability and Performance

One of the driving forces in the industry at present is the desire of parliaments, governments and the comm unity generally for greater accountability and demonstration of performance by public bodiesespecially stat utory authorities which raise revenue from the community for services provided. Within the water industry, authorities are seeking improved efficiency and effectiveness to assist in achi eving their objectives under tight economic cond itions. The industry finds itself concentrating more on the management of scarce resources than on new works development. The challenge being faced in the 1980s is to provide for continued growth and increasing asset replacement under conditions of financial stringency, yet to maintain service standards while conta ining charges. (The social and econom ic factors contributing to this situation have been outlined by the previous speaker Mr Mclachlan in his papers on corporate management in the Australian water industry.) These trends are leading water authorities to review: • corporate objectives • service standards, and

Preparation of a written corporate plan which sets out objectives, key issues, and plans for achieving objectives is useful. Corporate plans are being used more frequently by authorities to ensure that management plans and decisions are co-ord inated. A summary of the approach and typical issues addressed by a corporate plan is shown in the final diagram. The financial management issues discussed in this presentation, are namely: • • • • • • •

standards of service capital investment proposals capital financing methods recurrent expenses revenue requirements tariff structures accountability

All are important components of the corporate planning approach and feature prominently in corporate plans of water authorities .

Pricing for Optimal Resource Allocation Patricia Apps, Graduate School of Planning, University of Sydney (Paper presented at the Australian Water and Wastewater Association Summer School, 6-10 February, 1984, Canberra.)

INTRODUCTION

MANY public utilities tend to have a high degree of monopoly power, due to certain inescapable technological and economic features of their supp ly system. For example, it would be prohibitively costly to make avai lable to any one household a number of different distribution networks for water, or for gas, electricity and telecommunications, so that effective competition between a lternative suppliers is not a feasib le proposition. The possession of monopoly power gives these pub lic utilities a great deal of scope for choice in the levels and structure of their tariffs, and, unavoidably, the utility will have to develop some coherent set of principles to guide this choice. This paper is based on the proposition that these principles should differ from those applied by private firms because the appropriate objective of a public utility is to maximise consumer welfare, whereas the private firm seeks to maximise profits or some other private objective of the organisation. A crit ica l implication of these differing objectives is that a public ·utility ought to be concerned wth allocative efficiency and, under certain conditions, with the distribution of income. When the distribution of income can be ignored, the public enterprise should design its tariff struct ure and investment programme in such a way as to maximise economic efficiency, or more precisely, the excess of the benefit consumers derive from consumption of a good over the real costs to the economy of making that good available to them. Sections 2 and 3 of this paper explain this principle, and how it can be translated into a specific pricing policy, that of equating prices to marginal costs of supply. Of particular concern to the kinds of public utilities to which these principles are relevant is the 'two-part' tariff, consisting of a periodic fixed charge or rental and a running rate per unit of output. Section 4 discusses the application of marginal cost · pricing to the two-part tariff problem. Any practical attempt to implement marginal cost pricing would encounter issues of equity and fairness. In addition, there are likely to be further constraints on tariff design imposed by profitability requirements. When equity and profitability considerations are relevant, 'second-best' solutions involving departures from marginal cost pricing principles are appropriate. The terms 'first-best' and 'second-best' refer to policy design problems under different sets of constraints . In a first-best economy, the government is unconstrained in its choice of policy instruments. This implies that, among other conditions, redistributional objectives can be achieved by non-distortionary taxation, that is, by lump sum taxes. In a second-best world there are constraints on the government's choice of policy instruments. Typically, lump sum taxation is not feasible and public enterprises face profitability targets or rate of return requirements. Section 5 introduces equity in the discussion of the two-part tariff problem. Specific reference is made to the Hunter District Water Board's (1982) 'Equity Based Water and Sewer User-Pays Tariff as an example of the application of the pricing principles discussed. Section 6 focuses on the problem of designing an efficient tariff structure under profitability constraints. The problem is equivalent to the optimal indirect tax problem when distributional considerations are ignored. Extending the analysis to take account of equity leads to the optimal tax-pricng problem. Detailed discussion of this topic is beyond the scope of the present paper. The paper also omits discussion of the well known models for peak load pricing, fixed capacity plant and indivisibilities. The reader is referred to Rees (I 984) for a general exposition of marginal cost pricing principles and their application to these and other problems.

MARGINAL COST PRICING The social benefit of a good is the sum of benefits to each consumer which, in a partial analysis, is calculated as the area under the ordinary (Marshallian) demand curve. If we denote the output of a public enterprise by x and price by p, the demand function can be written in

in verse form as p = f(x) and the social benefit of x, B(x), is given by B(x)

f(x) dx

( I)

In a first best world, the public enterprise max1m1ses consumer welfare by maximising net social benefits, S(x), defined as the difference between social benefit and social cost. If the cost to the enterprise, C(x), is the social cost, the enterprise's problem is to maximise S(x) = B(x) - C(x) with respect to x. The first order condition requires (2) dB(x)/ dx - dC(x)/ dx = 0 From (I), dB(x)/ dx = p: marginal benefit is given by the price of x. dC(x) / dx is marginal cost (MC). Rearranging (2) we obtain the marginal cost pricing rule p = MC Because price gives a measure of the subjective value of an additional unit of the good to the consumer and marginal cost gives a measure of the value of the output sacrificed by supplying the marginal unit, social welfare is maximised at the output level where p is equal to marginal cost. In a first-best world marginal cost pricing ensures an efficient allocation of resources. The enterprise need not be concerned with income distribution because first-best assumptions imply that the government can achieve an ideal distribution of income by non-distortionary taxation (i.e. by lump sum taxes).

PRICING AND INVESTMENT DECISIONS

Short and long run pricing and investment decisions can be examined by introducing two time periods, year O and year I to represent the short run and long run respectively. The enterprise makes decisions at the beginning of each year, and at the beginning of year I that year becomes year 0. Consider a simple model in which the production of x requires two inputs, labour (L). and capital (K) . In the short run L is variable and K is fixed at R. In the long run both L and K are variable. Let p denote price in year O and P I planned price for year I. The enterprise must make two kinds of decisions. It must set a price for year O which will determine sales, costs and profit for that year, and it must plan a price for year I and initiate an investment programme to produce the resulting output. Thus, the decision variab les are p for year Oand p, and R for year I. The optimal values are derived by maximizing net social benefit and depend, therefore, on the enterprise's short and long run cost structure and on predicted and actual demand. The results yield the rule that at the beginning of year O price for that year should be set equal to short run marginal cost, which may or may not be equa l to long run marginal cost and which will equal long run average cost only under special demand and cost conditions. For the purpose of the present discussion, we focus on selected aspects of the problem using a graphical analysis (for a mathematical derivation, see Rees, 1984). The total cost function can be written as C = rK + wL where r, w are the prices of K, L respectively. In the short run, with capital fixed at K and no depreciation, the cost of capital is rR. Short run marginal cost (SMC) is the cost of labour required to produce an additional unit of output. A short run total cost curve, STC, is illustrated in Figure I (a). The shape of the curve implies that the production of x is associated with increasing average productivity of labour to the output level x• and with decreasing average productivity of labour beyond that point. Figure I (b) graphs the implied average and marginal cost curves for STC. Given the shape of STC in (a), the average cost curve SAC in (b) is U shaped . The marginal cost curve, SMC, intersects the average cost curve at the point of minimum average cost, that is, at x•.

STC

rK 0 ( a)

0 (b)

Figure t

STC

(a)

MC AC $

0 ( b)

Figure 2

Figure 3 FIGURE I The long run total cost curve (LAC) is the envelope of all the poss ible short run cost curves as illustrated in Figure 2(a). STC, STC', STC" indicate short run cost curves for three levels of pla nt , R, K', K". Figure 2(b) depicts the corresponding average and marginal cost curves. The SAC, SAC', SAC" and SMC, SMC', SMC" curves are the short run average and margina l cost curves derived from STC, STC', STC". Each of the short run average cost curves lies above the LAC curve except at the output for which short run cost is eq ual to long run cost, where they are tangent to it. Hence the LAC curve is the enve lope of all possible short run average cost curves. It is U shaped beca use of the sha pe of the LTC curve which implies that th e production of x is associated with increasing return s to scale (or falling average costs) to the output level x' and with decreasing returns to scale (or increasi ng average costs) beyond that point. The short run ma rginal cost curves cut the LMC cu rve at the outputs for which their respecti ve short run average cost curves are tangent to the LAC curve ; that is, at the point of tangency between SAC and LAC, SMC = LMC. Thus, at a n output at which the fixed plant is optimal, long run margi na l cost is equal to short run ma rgina l cost and long run average cost is equal to short run average cost. For example, if K is optimal, then at output x•, LMC = SMC and LAC = SAC. Simila rly, if K" is optimal, at x" we have LMC = SMC" and LAC = SAC".

FIGURE 2 To determine the optimal va lues of p, p 1 and R for year 1, the enterpr ise must have information on dema nd. Suppose that demand ca n be predicted accuratel y as o• in Figure 3. The enterpri se und ertakes the optimal in vestment plan in year O and short run average cost is SAC. At the beginning of year I (now the short run) margina l cost pricing implies p• = SMC = LMC and the optimal output x• where SAC = LAC. Alternatively, suppose the correctly forecast demand is D". Marginal cost pricing now implies p" = SMC" = LMC a nd the opt im al output x" where SAC" = LAC. In both cases plant size is optimal because dema nd is forecast accurately, and short run and long run marginal cost pricing are eq uivalent.

FIGURE 3 Now co nsid er a case where demand is not forecast correct ly. Suppose predicted dema nd is D" a nd actual demand turns out to be IS. Marginal cost pricing requires setti ng price equal to p and selling x uni ts of output. At this output short run and long run margina l costs are not eq ual, and so p # LM C . Setting price at long run marginal cost is effici ent o nly if plant size is optima l. Notice that if dema nd is o• the enterprise is producing in the region of falling average costs. As output increases, average cost declines. The enterprise is an increasing returns to scale industry. If the gove rnment requires the enterprise to price optimally, the enterprise will make a loss and will require a govern ment subsid y to cover the difference between price a nd average cost. If the enterp rise behaves as a profit maximising monopolist, sett ing margina l revenue eq ual to marginal cost, it produces at the suboptimal level xm as illustrated in Figure 4(a). The monopol y price is plJI and the enterprise profit is given by the a rea PmEFG. The enterprise 1s not producing at the allocatively efficient level of output. By expanding output to x• a net benefit ca n be achieved which is equal to the difference between th e areas under th e demand curve and the marginal cost curves between xm a nd x•. At the efficient output level x•, the enterpri se ma kes a loss of p*ABC.

~ x"

(a)

(b) Figure 4

Now suppose D" is the accurately forecast level of demand. Under marginal cost pricing, the enterprise is allocatively efficient producing at x" . However, this is in the region of decreasing returns to scale and the enterprise makes a profit by pricing at marginal cost . If it were to behave as a profit maximising monopolist ,- it would make an even greater profit as shown by the difference between areas p" mEFG and p" ABC in Figure 4(b). The enterprise breaks even pricing at marginal cost only if demand is both predicted and turns out to be D'. In this special case equat ing price to marginal cost is equiva lent to equating it to long run marginal cost and long run average cost. In Figure 3 the optimal output is x' where p' = SMC' = LMC = SAC' = LAC. These examples illustrate the way in which optimal pricing policies and profitability depend on the demand and cost structure of the industry. The examples are based on a very simple cost structure and first best conditions .

be prepared to pay some maximum sum of money per period to be allowed to consume at that price. This sum of money is simply the consumer's surplus and is indicated by Si in Figure 5 for consumer i when price is p 0 â&#x20AC;˘ It measures the excess of the total benefit the consumer derives from consumption of the good over the amount of money the consumer must pay to buy the good. Then if this consumer's surplus or net benefit exceeds the cost of putting that consumer onto the supply system, clearly there is an increase in welfare if this is done. On the other hand, if a consumer receives a net benefit which is smaller than the cost of being put onto the supply system then there is a net welfare loss in doing so. Thus we arrive at the conclusion that, at any given running charge, the price a consumer shou ld pay for being connected to the supply system is the marginal consumer related cost.

TWO-PART TARIFFS

Many public enterprises, water supply undertakings included, have a particular type of cost structure which makes it necessary to extend the foregoing discussion of marginal cost pricing. A significant proportion of costs is related to the number of consumers, N, being supplied rather than to the outp ut they consume, x. If a new consumer is added to the supply network there will first be the capita l cost of connecting the consumer to the system, installing a meter, etc. Subsequently there will be recurring costs of meter-reading, billing, routine maintenance, and so on, which do not vary with consumption. Suppose the cost function for this type of enterprise can be written as C = C,(N) + Ci(x) = cN + mx Where c is marginal ( = average) consumer-related cost and m is marginal ( = average) output-related cost. The marginal consumerrelated cost is the increase in the sum of amortised capital cost and recurrent costs per period (say a quarter, or a year) imposed by increasing the number of consumers, total output held constant. Since consumer-related costs do not vary with output it would be inappropriate to ' load' them onto consumption, e.g. by averaging over all consumers and adding this average to the marginal cost to give a price per unit of consumption. This would distort resource allocation, because the price a consumer pays no longer reflects the cost imposed by a marginal increase in consumption . Instead, a two-part tariff is called for, comprising a standing charge (fixed charge, rental) F which should be set equal to c, and a running charge (unit charge, unit price) p which should be set equal to m. The reasoning underlying this proposition is a simple extension of the basic argument for marginal cost pricing. Given the price per unit of output-the running charge- any actual or potential consumer will

Figure 5

Clearly, Si will vary with income levels, preferences, household characteristics, etc. If we assume a smooth distribution of Si, we can represent this distribution as a demand curve for connections, D 1 = N(F, p). This demand curve is illustrated in Figure 6(a) for p held constant.

(a)

( b) Figure 6

Suppose for example a fi xed charge of F 0 is set. Every consumer whose Si ) F 0 will want to be on the system , the marginal or N°th · consumer will have Si = F°, and non-consumers will have Si < F 0 • Reducing F, say to F*, brings in more consumers. Note that the position of the curve depends on price, p . If in fi gure 5 price rises, Si fall s and so margin al consumers, with F unchanged , would leave the network . This shifts the demand curve in Figure 6(a) to the left. Figure 6(b) represents the demand for output , D2 = x(p , F). Since demand for output depend s on F, as well as p ., th e curve shifts with changes in F. A rise in F reduces demand. It shifts the demand curve leftward, partly because the number of consumers fa lls a nd partly because a rise in F reduces consumers' real incomes and therefore has an income effect on demand . Since marginal cost pricing implies setting F = c, we have a given demand curve for output, and again applying marginal cost pricing, we set p = m. TWO-PART TARIFFS WITH EQUITY CO NS IDERATIO NS

As with th e basic argument for margina l cost pricing, thi s two-part tariff result may suffer from the defect that it ignores co nsiderations o f income distribution . If the ma rginal consumer related cost is relati vely high, the corresponding standing charge could be a considerable burden to low-income households and may deter some from consuming the good altogether, i. e. may lead them to choose not to be connected to the supply system , although thi s is unlikely with a necessity like water, unless the consumer has an altern ative if inferior supply source . Again , in a first-best world , th e consideration of the burden of a tariff on low-income households is not relevant because , by assumption, the government can supplement their incomes by direct tran sfers raised by non-di stortionary taxation . However, if the government cannot make such transfers, then it may be desirable to va ry charges on the basis of income . In the case of the two-part ta riff it may be desirable to differentiate the standing cha rge acco rding to income, or some other readily observable variable which is believed to be closely correlated with income. This may provide a rationale therefore fo r basing a standing charge for water on rateable va lue o f the house to be supplied . If th e runnin g charge refl ects margina l cost of output , while the standing charge is differentiated according to ability to pay, as indicated by rateable value, then this would appear to give a pricing structure which strikes a good balance between equity and economic efficiency. The two-part tariff introduced by the Hunter District Water Board for residential consumers provides an excellent example of a pricing policy justified on the basis of this rationale. The 'variable charge' is related to margina l cost of output and the ' fi xed charge' is distributed on the basis of land value as a n indicator of income . The document outlining the Board's policy correctly a rgues that the new tariff structure, while similar to the domestic tariffs of other public enterprises, is superior in that it takes account of equity by adjusting the fixed charge according to an indicator of ability to pay. In addition to modifying charges for equity reasons the presence of constraints imposed by profitability targets or revenue requirements also implies that the optimal tariff structure may depart from marginal cost pricing rules. Thus, in the case of the Hunter District Water Board 's policy, we would not expect to see strict adherence to marginal

cost pricing in the design of th e charges. In the following section we examine second-best pricing principles in vol ving departures from marginal cost pricing for reasons o f econ omi c effi ciency. PROFITA BI LITY

As the a nalysis set out in Section 3 made clear, marginal cost pri cing will imply a particular pro fit or loss for the enterprise, both in the short-run and long-run . Similarly, sett ing a ma rginal cost based twopart tariff as described in Section 4 completely determines the financial out-turn o f the enterpri se. It may well be the case th at these implied profits and losses will not be regarded as satisfactory. Fo r example we saw that overestimation of demand in a given year, when th e investment decision determining capacity in that year was ta ken , will tend to imply excess capacity and losses. Failure to generate enough revenue to cover capital charges may however be ruled out as a : matter of policy. It follows that we should formul ate the profit requirement for the enterprise, which may a rise because of the desire to break even , or to achieve som e specified level of self-fin ancing o f investment, as an explicit constraint on pricing a nd investment policy. The probl em can be formulated as one of meeting this constraint with the smallest possible loss in economic effici ency, i.e. the minimum possible distorti on to the effi cient allocati on of resources . This second-best problem is form ally equivalent to the optimal tax problem when distributional consideration s are ignored and because the solution was fir st formul ated in the context of taxation by F. P. Ramsey, itt-is often referred to as ' Ramsey pricing'. A straight -forward explanation of Ramsey pricing can be given a long the followin g lines. If the enterpri se produces only one output (i .e. sells all its output at one price) then there is actually no problem of choice. Price mu st be set at average cost plus whatever mark-up is required to meet the profit target (zero if the constraint is just to break even). However, if th e enterpri se produces two or more outputs (e.g. water · supplied to different cl asses of consumer for whi ch margin al cost of supply differs significantly) we have the problem of allocating the required profit over the different outputs. In the simplest case, in which dema nd for any one output depends only on its own price and not on that of any other, we have also a straight-forward Ramsey pricing rule . Let Pi, MC i, and ei be price, marginal cost and demand elasticity of the ith output , i = I , . . . , n. Then the optimal ' mark -up ' of price over marginal cost , expressed as a proportion of price, is given by the formula: 1, .

., n

Where ).. ~ 1 is a constant , the value of which is determined by the profit constraint, and is the same for all outputs. If the profit constraint were for maximum profit, then ).. = I , and we have effectively the ' profit-maximising monopoly' solution . As the constraint approaches the amount of profit (loss) which would be generated by

ma rginal cos t pri cin g,). a p proac hes in finit y. Thu s th e hi gher the p ro fit co nstraint th e sma ll er is th e fa ctor by which each dema nd elasti cit y is 'i nfl a ted ' LO o bta in th e o ptima l profi t ma rk -up . It th en foll ows fro m th e conditi o n tha t th e size of t he ma rk up of" pri ce over margina l cost for eac h o utput va ri es in ve rsely with th e elasti cit y of it s dema nd - th e . less elast ic th e dema nd , th e greater th e p ro fit co nt ributi o n, a prin ciple whi ch acco rds we ll with co mmercia l practi ce. An intuiti ve ex pl a nati o n o f Ra m sey pric in g is as foll ows. Ra isin g pr ices above ma rgina l co sts to ge nera te p ro fit s ca uses o utput s to fa ll , and so th e pa uern o f o ut p ut d iverges fro m the we lfare o pt imum , given by margina l co st pricing. A pro po rti o na te ri se in pri ce causes a bi gger fa ll in th e o utput of a good with an elasti c dema nd than o f one with a n in elas tic dema nd. It fo ll ows that th e extent o f the di sto rti o ns o f o utput s away from th e welfa re o ptimum is mi nimi sed if the pri ce ri ses o n in elast ic o utput s a re greater th a n those o n elasti c o utputs. Th e idea underl ying Ra msey pri cing ca n a lso be a pp lied to a twopart ta ri ff. Pro fita bilit y ca n be increased, relati ve to th e level impli ed by setting bo th pa rt s o f th e ta riff equ a l to th e co rrespo nding ma rgina l co sts, by ra ising bo th the fixed cha rge a nd the ru nning ra te . A simil a r principl e a pplies : the extent o f th e ma rk-up in each case will be pro po rti o na l to the rela ti ve elasti city o f dema nd : the elast icity of the num ber o f co nsumers with respec t to the fi xed cha rge o r the elas ti cit y o f o utput with respec t LO pri ce . There is indeed a specia l, but pla usible case in whi ch a two-part ta riff ca n be used to meet a profit ta rget with no di stortion in effi . ciency of resource a ll oca ti o n. T hi s is wh en th e number o f con sum ers is perfectl y inelastic with respec t to cha nges in the fi xed cha rge, over th e releva nt ra nge, as may well be th e case with good s such as wa ter a nd electricit y. In tha t case, th e runni ng charge ca n be set to equ a l th e ma rgin a l cos t o f o utput, a nd th e fi xed charge can be used to meet th e profi t ta rget. Th ere a re no di sto rti o ns beca use o utput a nd a lso the number o f consum ers a re then exactl y as th ey wo u ld be with ma rgina l cost pr icing in th e a bsence o f a profit ta rget. Of co urse , con sum ers a re ma de wo rse off by paying a hi gher fi xed charge, but this is a n inesca pa ble con sequence o f th e ex istence of a profi t ta rget. The poin t is th a t the welfare losses to con sum ers are minimi sed by adopt ing thi s way of meeting the pro fit co nstra int.

Thi s d isc uss io n, since it co nsid ers o nl y efficiency, aga in assum es the governm ent can ac hi eve th e desired di stribu ti o n of inco me by d irec t tra nsfers. In practice di stributi o na l considerat io n a re likely to be c ritica l. It may we ll be necessa ry to signifi ca ntl y a lter th e fi xed cha rge in li ne with a bil it y to pay, a nd so again a n eq uit y based fixed cha rge may be des irabl e. In ge neral, wh en di st ribut ional co nsidera ti o ns a re relevan t, th e prob lem o f choos ing opt im a l ta riff structures becomes equi valent to th e o ptima l indirect tax problem involving a tra de-o ff between effi ciency a nd equit y. A theo retica l qua lifi ca tio n should be a dded to th e a bove di sc uss io n of Ra msey pricin g. Th e disc uss ion ass umes th a t 'cross-effects' betwee n th e compon ent s of a tariff- th e effect o f a change in th e price of one good o n the dema nd fo r the o th er, o r th e e ffect of a chan ge in th e fi xed cha rge o n o utput demand-a re sma ll eno ugh to be safely igno red. If th is is no t th e case, th en th e a ppli cation o f Ra msey pri cin g becom es much mo re comp lex, and th e in fo rm a tiona l requ irements a re much greater. CONCLUSIONS T hi s paper has set o ut the theory of ma rgina l cost pricin g, has show n how it may be ex tended LO ta ke into acco unt iss ues of profita bili ty a nd eq uit y, a nd a ppli ed Lo the des ign of a two -pa rt ta riff. Inevita bly, in o rder to fac il ita te a cl ea r di scuss io n of th e prin cipl es in vo lved , th e models set o ut in th is pa per have bee n simplifi ed version s of rea lit y. H owever, it is our contention that it is poss ibl e to a pp ly these principles to ac hieve worka ble a nd practicable ta riff structures whic h need be no more co m plex th a n those currentl y in ex istence, a nd whi ch wo uld lead to signi fica nt improve ments in th e a llocati o n of reso urces .

REFER ENCES Rees, R ., 1984, Public Enterprise Economics (2 nd ed iti o n), Weiden feld & Nic ho lso n , Lo ndo n . Hunter District Wa ter Boa rd , 1982 , A n Equity Based Water and Se wer User-

Pays Tariff

Performance Measurement William J Robertson, Deputy Director of Engineering (Systems Operations), Melbourne and Metropolitan Board of Works The Challenge of The Eighties

Performance Indicators

THE decade of the eighties is bringing new chall enges to the Australian water indu stry. We have emerged from the expansionary period of the seventies to an environment of financial co nstraint, enhanced need for even greater attention to the allocation and managemen t of sca rce resources in a competitive market place and a growing communit y demand for enhanced accountability. Th e new cha llenges lie in our ability to co ntinue to mount the necessary engineering design, co nstruction and operations programmes required under such circumstances. In many cases existing assets are approaching a stage of deterioration and major rehabilitation / replacement works are beco ming a necessity. The challenges are accentuated by political a nd social developments within the community, long lead times for major projects a nd the impact of rapidly developing (exponential growth) technology. To successfully adapt to the environment of the eighties it is necessa ry that the water indu stry maintain its high professional capacit y and depth of necessary skills. It must a lso concentrate upon: • Programme performance-getting things done on tim e and in accord with the broad po licy objectives of government and the speci fi c corporate objectives of water authorities. • Budget performance-keeping expenditures within a llocations . • Quality performance-doing things well. • Cost efficiency-making the most of every dollar. • Accountability for actions-the dut y to inform the legislature about the conduct of vested duties and responsibilities. • Public relations-care about corporate image. • Safety-doing work safely to avoid injury to people and lost time on the job.

Performance indicators are stat ist ica ll y derived (desirably a lthou gh not necessa rily non-dimensional) measures of efficiency and effectiveness . Such indicators are expressed on a time base and may be used to compare actua l performance with estab li shed targets. Measures of performance fa ll co nve ni entl y into three categor ies depending on whether they relate to physical water systems, the customer or the agency it self: Physical System Indicators Measure the performance of a system as a whole and elemems of the system in technical terms. They may direct ly affect custom ers. Long term 'aud it' measures will give objective indicators of the integrity and probable future reliability of the system. Level of Service Indicators Measure aspects of perfor mance which directl y affect customers or the co mmunit y at la rge . As such they reflect the degree to wh ich public demands or expectat ion s are met a nd must be measured against desired levels of service, set as policy decisions. General Indicators Measure financial a nd managemen t aspects on overall utili sation of reso urces to achieve agreed standards of se rvice. The progressive development of performance indicators, coup led with enha nced financial co ntrol system s and human resources budgetin g constitutes a significa nt step toward s ac hievement of performance oriemed resources man agement. Indeed such systems also promote the introduct ion and practice of comprehensive audi ting. Within an agency the development of indicators can span the whole of the organisation from grass roots to co rporate level. Such indi cators can be built up on functional lines as well as for individual areas of responsibilit y and particular aspects or projects. It is stressed however, that the effect ive ness of indicators depends on the relevance and usefulness to particular individuals. Flexibility must therefore be reflected in th e design a nd development of finan cial and ma nagement information systems. In the field of asset creation the development of performance indicators needs to be tailored to suit circu mstances. Broad themes may be developed for nei ghbourhood scale works comparisons Csewer reticulation, water reticulation etc).However, major works (dams, trunk sewers etc) need to be co nsidered on their respective merit s with the indicators being specially developed for indi vidua l projects. Inter project compa ri sons may be meaningless. '" A suggested matrix of performance indicators is depicted in Figure 2. Desirably lower level indicato rs, should fit around programme, sub programme component and activity levels of 'programme' budgeting as adopted by an agency.

Performance Measurement

Because of the need for management of constraint within the water industry over the coming decade, internal analytical services need to be organised so as to assist corporate and line management operations. Such augmentations should increase focus on performance assessment, evaluation of alternative spending choices, continuou s cost co ntrol and enhanced productivity. Performance measurement is a management technique, with a rational framework, which can be of considerable assistance in such circumstances. Indeed it can be integrated into the overall programme budget process. In essence performance measurement is a technique to compare inputs and outputs with target and objectives. Ideally indicators of performance should be chosen after objectives and standards of performance (both asset creation and asset operations) have been decided upon. The grass roots, hands on, realities of performance measurement examine basic issues such as: • What is being done or proposed to be done? • Why it is, or to be, done and when? • Should it be done- in whole or part or not at all? • How is it done, or to be done, what are the alternatives? • What are the relevant levels of service? • What is the most cost/ effective solution? • Who should do it? • How should it be resourced? • What monitoring of efficiency/ effectiveness is required, at various levels, and how can it be best presented? As a consequence the development/ augmentation of management information systems and statistically based performance indicators is an integral part of the exercise which may well encompass the whole of the organisation of a particular water authority. Flexibility for sensitivity analysis in certain areas should be inbuilt. Successful performance measurement requires the commitment and support at all levels ranging from the level of the grass roots supervisor to that of the chief executive. The inter-relationship between Performance Measurement and other Corporate Management processes is schematically outlined in Figure I.

Organising for Performance Measurement

Specific organisational arrangements for performance measurement within an agency depend on many factors including: th e size and complexity of the organisation, the nature, magnitude and distri bution of the customers and the cultural attitudes a nd organisational climate. In seeking to serve -the 'analyt ical' needs of line management, at each relevant level in the organisation the broad choice lies between 'centralised units' or ' di str ibuted units'. In so me circumstances the model of a distributed network of small groups of support staff at line level, carefully integrated and coordinated with small central core gro ups of specia list experti se has attractions. Proliferation of such groups can be controlled by subj ecting all groups to periodic 'sunset review' and by maximising the rotation of seconded staff for specific assignments and/ or periods of time. (A useful component of a staff development programme). Organisational arrangements within the Engineerin g Branch of the MMBW are outlined in Figure 3. Activity in Australia

Within the context of the Australian water industry some considerable investment is current in performance measurement. No doubt thi s is a

Under t he Wat er St ructures Implem entatio n Group documents in draft for m, have been published o n programm e budgeting a nd no nfi na ncia l perfo rma nce meas urement a nd reporting. Tllese doc ument s are currently bein g reviewed. Other initiati ves a re a lso being underta ken within Vi cto ria a nd new acco unting a nd reporting guidelines, under th e Annual Reporting Act , now a pply.

ren ection o f the cha nging environment in whi ch the indu st ry find s itself. In additi on , however, th e restructuring a nd enha nced ma nageme nt of t he water ind ust ry in Britain has also had a carr y over effect. O n a na ti o nal bas is the Australian majo r water supply a nd sewerage auth o riti es have esta blished a wo rking pa ri y o n Perfo rm a nce Ma nagement. The working pa rty has met o n a number of occasions a nd has repo rted , a t a corpo rate level, o n the a rea o f o perat io nal performa nce. It is pl a nned that consideration s will be extended to no n-operati o na l a reas in I 984. From th e work undertaken to da te it is cl ea r t ha t there is a com mit ment by all major a uth o riti es to esta blish some form of performa nce meas urement as an integra l pa rt of t heir ma nagement a pproach . In the State of Victo ria a nd following on fro m t he wo rk of th e Publi c Bodi es Review Commi ttee co nsiderable work has been do ne in the developm ent of bud geting, acco unting a nd per fo rma nce meas urement regul a ti o ns a nd procedures to be used t hroughout the restruct ured Vi ctoria n Urba n Water Indu stry.

The Future

The future of th e Austra lia n wa ter indu stry rests la rgely in the ha nd s of the ma nagement a nd sta ff of age ncies a nd others engaged in the indu str y. By ta kin g up t he chall enge of the eighti es , employing modern ma nagement practi ces a nd gaini ng the co nfidence of legislature a nd th e community th e future needs of th e na ti o n will be ass ured . After a ll , outsid e Antarctica, Au stralia is the driest continent o n ea rth!

Figure 2: Suggested Matrix Performance Indicators

Figure 1: Corporate RelationshipsManagement Processes

•

Broad Govern ment Po licy Obj ecti ves - - - - . ~ - - - - - - - ~ Lo ng term strategic pla nning (systems) Corpo ra te G oa ls a nd Obj ecti ves • Corporate Planning/ Develo pm ent Function al G oals a nd _ _ • Strategies O bj ecti ves (water suppl y, • O rgani satio nal sewerage, drainage, h uman Development resources, admini strat io n ,

T H E PHYSICA L SYSTEM

MEDI UM I DI CATOR S

"'t /

M IC RO I NDI CATOR S

Levels of Service

I I • • • • • • • •

Sho rt term as pec ts (Rec urrent Expe ndi ture)

, SUGGEST ED CLA SSES O F MEASU REMEN T

Capi ta l Perfo rma nce Managemen t

(a) Wo rkl oad Indicators (b) Indi cators of Efficiency (c) Ind ica tors of Effecti veness

Operati o ns Perfo rma nce Measurement I

T Forwa rd Pl a nni ng O bj ecti ve criteria for wo rk s progra mmes Projec t evalua tio n Progra mme Budget ing (Pri o rity) Q uality Ass urance a nd Value A na lysis Proj ect Ma nagement Resource Pl a nning Perfo rma nce Measures/ Indicators

+ Asset Creation

F uncti o na l a nd / o r a reas of res ponsibilit y

• Fo rward Pl a nning • (Programme/ Emergency Maintena nce). • Perform a nce Budgeting • P rodu cti vity E nha ncement • Perform a nce Measurement • Perfor ma nce Indicators

•

PICO

Long term aspects (Capita l Expe nditure)

-- - -

GENERA L PERFORMANCE

MAC RO I N DI CATORS (CORPORAT E)

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MMBW ORGANISATIONAL ARRANGEMENT ENGINEERING BRANCH I Feb . 1983 I

Figure 3

Appendix 1 TYPICAL CORPORATE INDICATORS BEING CONSIDERED AT MMBW

WATER SUP PLY:

SEWERAGE:

Physical System Performance Indicators * Emergency Maintenance Manhours

Physical System Performance Indicators • Emergency Maintenance Manhours

Scheduled Maintenance Manhours An indication of asset deterioration and priorit y for recurrent fundin g . Based on actua l ma nhours wo rked. • System Wa ter Loss as O"/o of Water Supp lied at Source Measures effi ciency of distribution -system • Percentage of Water co mpl ete treated to total supplied Co nsiders physio-chemical treatm ent necessa ry beyond normal chlorinati on , a nd gives indication of sourci ng costs.

* Average Dry Weather Flow x 100 In stall ed H ydrauli c Capacit y A system e ffi ciency indicator. Assumed the faci lities were initia lly designed to meet peak wet weather flows hydrauli call y, and average dry weather flows for pollutant load.

• Total Usa ble Capacity

* Peak Wet Weather Flow x 100

Water Supplied at So urce An indica tion of the long term reliability and ad equacy of storages, when used with indi cato r below. * Percentage Utilisation of Available Streamflow Th e ratio of water suppli ed at so urce to average annual streamflow. Used with a bove indicator it relates to th e long term reliabilit y and adequacy of storages.

Level of Service Performance Indicators • Number of Days Res triction s, Outside Normal Operating Conditions, and the OJo of Populat ion E ffected . Indicates the effectiveness with which dema nd is being met. * Total Number of Customer Servi ce Co mpla int s per 1000 Co nn ections This is a lso a n effe cti veness indicator and excludes genera l enquiries. A co nnect ion is defin ed as a phys ical offtake from the distribution system . * 800"/o Respon se Time for Field Call-out to C ustomer Service Complaint s (Hours). An indi cation of service effi ciency, a nd meas ures the time from call to attendance at site a nd initial action. * Number of Connection s which Suffer Interrupti o n to Water Supply per 1000 Co nnection s. Thi s measures system effici ency and effecti veness. The interrup tion can be planned or unplanned loss of water suppl y.

General Performance Indicators • Direct Operating Expense KL Supplied at Source (c/ KL) Reflects on th e sourcing cost of water. It excludes interest payments but includes technical a nd direct management costs. * Operations and Maintenance Manpower GL Supplied at Source Indica tes manpower utili sation and efficiency. Manpower includes actual employees and est imated (imputed) contract labour. • Average Total Cost of Water ($/ KL) (a) Collection and Treatm ent (b) Distribution Co st efficiency indi cator. Includes net interest in cost . * Safety Statistics to as 1885 Time Lost (a) Duration Ra te

Number of Lo st Time Injuries Number of Lost Time Injuries x 106 (b) Frequency Rate Manhours Exposure Safety performan ce and loss co ntrol. Average Weekly Water (Domestic) Revenu e as A OJo of Average Weekl y Wage Indica tion of commodity pricing in relati ve terms. Difficu lty in obtaining 'average hou sehold income ' fi gures from ABS has led to the use a t the mom ent of 'Average Week ly Wage' which is a lower va lue. The MMBW has used household income fi gures compiled by its P lanning Bra nch . These figures should more accurately approximate hou sehold income than the ABS 'average weekly wage'.

Scheduled Maint enance Manhours An indication of asset deterioration and priority for recurrent funding. Based on actual manhours worked.

In sta lled H ydraulic Capacity A system efficiency indicator, for sewage collection. * Peak Flow al Plants x 100 Average Dry Weather Flow A system e fficien cy indicator, for sewage collection. * Estimated Dry Weather Infiltration x 100 Average Dry Weather Flow This infiltration figure relates to the asset deterioration or construction quality. * Number of Tim es Per Year Emergency Bypass (or O verflow) Fac ilit ies Ca me Into Operation. Measures system effectiveness and ca n be cau sed by any un plann ed activity anywhere in the system.

Level of Service Indicators * Total Number of Customer Service Complaints Per 1000 Connection s. Effecti veness indi cator and excludes genera l enquiries. A connection here is defined as a physical intake into the MMBW's collection system . • 800/o Respon se Time For Field Call-out to Customer Service Complaint s (Hours) An indication of service e ffici ency, .and measures the time from call to attendan ce at site . · * Number of Properties Experiencing Surcharges Per I 00 000 Connections. A measure of the sys tem 's hydrau lic capacity, and does not include surcharges due to physica l b lockilges. • Percentage of E fflu ent Meeting BOD/ SS Standards. Gives a guide to plant effec tiveness .

General Performance Indicators

* Direct Operating Expenditure Per Equivalent Head of Population Provides a comparative cost, excl uding interest but including tec hnical and direct management. • Operations and Maintenance Manpower Per 1000 Equivalent Head of Population Indicates ma npower uti lisa tion and efficiency. Equivalent head of population is th e annual maximum of: Annua l Flow 300 litres (per perso n) or Total BOD 75 gram s (per person) or

Total Suspended So lid 80 grams (per perso n) Safety Statistics to as 1885 (a) Duration Rate (b) Frequency Rate Safety performance.

Time Lost Number of Lost Time Injuries Number of Lost Time Injuries x 106 Manhours Exposure

* Average Weekl y Sewerage (Do mesti c) Revenu e as a 0/o of Average Weekly H o useho ld Income Indi cati o n of comm odity pri cing in rela ti ve term s. Di fficul ty in ob taining 'average househo ld inco me' fi gures fro m A BS has led to the use at th e mo ment of 'average wee kl y wage' whi ch is a lowe r va lue. T he MMBW has used ho usehold inco me fi gures compiled by its pla nning branch . T hese fi gures mo re accura tely a pproximate ho useho ld in come tha n th e ABS ' average weekl y wage' .

Programme Budgeting J. H. Greer, Programme Budgeting Engineer, Melbourne and Metropolitan Board of Works INTRODUCTION

ORGAN ISAT ION S have a lways had some system for the p rogra mtravel, rent and material s, or using a n ' incrementa l' approach based min g a nd budgeting of their act ivities a nd expenditures . H owever, the on last year 's budget. development o f integrated progra mme budgeting syste ms has ad ded a • The identificati o n of th e objectives of each programme. new dim ensio n to the processes in volved. • The identification and eva luation of possibl e a lternati ve mea ns of A PROGRAMM E is a set of acti viti es whi ch fo ll ows a planned achiev ing the objectives. course of ac tion to ach ieve spec ifi ed object ives. A BUDG ET is a n • Establi shin g prioriti es a nd eva lu at in g the implica tions of a lternative estimate of fin a ncial resources, manpower and materi a ls required over fundin g levels. a pa rticul a r period of tim e. PROGRAMM E BUDG ET ING is the • Monitoring the ac hi evement of programme objec tives. name given to th e process whi ch integrates th e respective facets of These fea tures are co nsidered further under the headings of Proprogrammes a nd bud gets, viz. th e formulation of programmes, d efi - gramm e St ructure, Progra mme Statement a nd Pri o rit y Setting. nition of the objecti ves to be achi eved , the planning of acti viti es, th e determination of th e reso urces required, and th e monito ring of Programme St ructure progress in term s of the effi ciency of reso urce usage and th e achi eveCentral to programm e budgetin g systems is th e use of a progra mm e ment of obj ectives. structure wh ich classifies a ll th e ac ti vities into a logica l hierarchy. An The term 'programme budgeting' fir st appea red in th e I 960s, when indi ca ti ve programme hiera rc hy for the water industr y is giw n in new development s took pl ace in the fi elds of programming and Figure I together with a n indi cation of the level within the Gove rn budget in g and new emphasis was la id on the relationship betwee n ment and th e water authority which has responsibi lit y for mak ing them. In the field of progra mming, th ese development s included th e decisions rega rding th e a pprova l of, a nd the a ppropria tion of fund s to, introduction of new techniques such as th e C riti ca l Pa th Method of the a cti viti es in the respec ti ve levels of the hi erarc hy. programm in g (C PM) a nd th e Programme Eva lu ation a nd Review An indi ca tion of the elem ent s comprising Level 3 (Progra mm es) and Tec hniqu e (P ERT). Added impetu s was given to these developm ent s by Level 4 (Sub-Programmes) is given in Table I . An examp le of th e the advent of the computer. The United States Depa rtment of Defence elements in Level 5 (Compon ent s) is given in Table 2 for the Subis credited with introducing the first integrated programme budget ing Programm es of Urban Suppl y (Water), Sewerage a nd Technica l Serystem into the public sector in 196 I and it was fo ll owed by other vices . United States Government departments and pri va te organisations. Act ivities (Level 6) co mprise those tasks (operation s and ma inteThis system was generall y re ferred to as th e ' Plannin g- Programmin gnance of existing system s, improvements to ex istin g sys tem, and co nBudgeting System (PPBS)'. Th e approach has bee n developed to struction of new works) whi ch produce a di stinct output in support of va ryin g degrees in many other countri es. th e objectives o f the respect ive Co mponent s (Level 5). The hiera rchy In Australia th e Melbourne and Metropolita n Boa rd of Works was co uld be furth er subdi vided int o Sub-Activiti es (Level 7) if required. o ne of variou s organisations to introduce th e system in th e late I 960s. At that tim e there was a n increasi ng works progra mme ai med at meeting community needs whi ch were widely ac knowledged as being neces sary; co nsequ entl y, the system concentrated on th e co-o rdination of act iviti es, th e achievement of target dates and working within Table 1: Exa mple of Programmes and Sub-programmes budgets . Sub-Programme (Level 4) Since the beginning of th e 1980s th e dec lining eco no mi c co nditi o ns Programm e (Level 3) and the less obvious need fo r new works has turn ed the foc us fro m Poli cy & Plannin g co nstruct in g new works to a qu estioning of the value of proposed Water Reso urces Planning and Management Water Resource Assessment progra mm es. This has led to th e development of a number of va riaRiver & Ca tchm ent Management tions of programme bud getin g including 'programme performance Flood Plain Manage ment budgetin g', 'priorit y programm e budgeting' a nd 'zero based budge tPo lluti on C~ ntrol ing' . These vari at ion s eac h have so me unique features but share an emphasis on obj ectives, a lterna ti ves a nd a cr itical co mpa ri son of the Irrigation resources required a nd the resu lt s ac hieved. Progra mm e budgeting Water Suppl y Do mestic & Stock sys tems with thi s new emphasis have been introdu ced by the South Urban Suppl y Austra li an Government in I 981, the New South Wales Government in 1982 and the Vi ctorian Gove rnm ent in 1983. Urban Drainage Wastewa ter Rural Drainage & Sa linit y Control Key Features of Programme Budgeting Sewerage The most obvious features of progra mme budgeting in it s cur rent forms which di stingui sh it from ea rlier programming a nd budgeting Tec hnical Services Co rporate Se rvi ces systems are: Administration • The appropriat ion of fund s a nd other reso urces on a ' programm e' Financ ial basis rather than using a ' line-i tem' approac h based on salaries, PROGRAMME ELEMENT

LEV EL

APPROVAL OF FUNDING BY

Poli cy Area

Government

Water Reso urces

Government

Progra mm es

Ministry

Sub-Programmes

Water Authority

Compon ent s

Water Authority

Activities

Water Authorit y FIGURE 1: EXAMPLE OF PROGRAMME STRUCTURE

Table 2: Examples of Sub-Programme and Components

Sub-Programme (Level 4)

Component (Level 5)

Urban Supply (Water)

Head works Water Qualit y Regio nal Di stribution Zone Di stribution Local Dist ribution

Sewerage

Treatment & Di sposa l Regional Collection Zo ne Co llect ion Local Reticulation .

Tec hni ca l Services

Bui ldin gs Survey Scientific La boratory Engineering Laboratory

The procedures for setting prioriti es a mon gs t the va riou s progra mm es, sub-progra mm es and components will genera ll y invol ve a co nsideration of the benefits and co nseq uences of a~cating alternative quantities of resou rces to th e respective proposa ls a nd the ma kin g of judgment as to th e relati ve mer it s of the proposa ls. This process will require an assessment of a wide ra nge of factors and th e making of both objective and su bj ect ive judgments. Th e best organisational arran ge ment s for making such judgments a nd for se ttin g priorities wi ll depe nd on th e size a nd type of the organisation, eg. for a small water authority such judgment s co uld be mad e by the General Manager and / or . Board, whilst for a large authority a number of 'pr iorit y' co mmittees may be required a t va riou s levels of th e organisation. The process may be facilitated by the formu lation of a number of a lternative · 'programme pa ckages', or a number of phase up / phase down increm ent s to th e basic programm e. OPERATION OF THE PROGRAMME BUDGETING SYSTEM Procedures The annual budget process for a wate r authority under a Program me Budgeting system co nsists of a number of basic steps. Th ey a re: I. Review of th e objectives of eac h Programme, Sub-Programme and Component hav ing rega rd to th e current po licies a nd object ives of the government a nd th e water a uthorit y. 2. Analysis of the current levels of serv ice provided by the a uthorit y to the co mmunit y in compariso n with desired levels. 3. Development of Budget Requ ests including the in vestigation of alternative means of achieving des ired leve ls of service, se lect ion of the preferred alternative, preparation of a work plan and resource budget for eac h ac ti vity, and th e preparation of a Programme Statement. 4. Approval in principle of th e res pecti ve components of progra mm es, subj ect to fund s being appropriated to them. 5. The formu lation of a number of a lternati ve ' programme packages', or phase up/ phase down increments to th e propo sed programme. 6. Determin at ion of the size and co mposition of the Annua l Cap ita l Expenditure Budget a nd th e Annual Rec urrent Expenditure Budget havin g rega rd to the ava ilabilit y of cap ital fund s, th e proposed levels o f servi ce to th e co mmunit y a nd the rates a nd charges required to provide such leve ls of service. 7. Monitoring of progress on the exec ution of programmes in term s of the efficiency of resource usage, analys ing deviations of progress a nd actual ex penditure from the programm e-bud get, and assessing th e effecti veness of programmes in terms of the achievement of objectives .

Programme State ment C urrent programme budgeting system s require the preparation of statement s which summari se the factors pert inent to the making of fundin g d ecisions. A 'statement' will generall y include the fo ll owing: (i) An out lin e of th e issues (eg. environmental, social, technologica l, economic, public health) which are of concern to th e water authorit y, co mmunit y and / or governm ent and the objectives of th e programme in relation to these co ncerns . (ii) Releva nt po li cies of th e water author it y and government and the degree of co mmitm ent to the proposed works. (iii) Levels of service indicators whi ch quantify in a meaningful and simple way the iss ues of co ncern. (iv) A brief desc ription of proposed works, time sc hedule for design and co nstruction, the capital fund s required and the associated recurrent costs . (v) The community and economic ben efit s which wi ll result from the programme. (vi) Co mments on other factors such as: • A lternatives for mee ting the objectives. • Community attitudes towards the proposed programme. • Sensitivity of the proposal to changes in underlying factors. • Other information such as emp loyment on the progra mm e, th e lead time required to commence construction, th e availabi lit y of supporting documenta_tion, cost-sharing agreements and programme achievement indicators. The degree of detail given in statements wi ll depend on the level of government or manage ment receiving th e statement.

Management Information Systems In most authorities it is likely that eac h Progr'amme, Sub-Programme and Compone'nt wi ll in volve ma ny se parate gro ups eac h having respon sibilit y for so me sections of the overa ll work. At the same tim e it is also li kely that each group will be in vo lved in several Components of Programmes. In order to facilitate the preparation of programme budge ts for eac h Programm e and to monitor the progress by each group on their respecti ve section of Programmes it may be necessa ry to have a separate Progra mm e Budge tin g Section within the organisat ion to undertake the necessa ry co-ordination, co llation and presentation of information . At th e same time it is necessary to maintain the respon sibility of ' line-managers' for th e performance of their respecti ve 'a rea of respo nsibilit y' within th e organisation. This mean s that the management information system s used by the organisation need to have the capabilit y of reportin g on both a ' Progra mme' basis and an 'Area of Responsibility' basis.

Priority Setting One of the major aims of programme budgeting is to faci lit ate the a ll ocat ion of resources between the vario us programmes according to identified government and water authority policies and to community needs. Other factors may, depending on the time span of the progra mm e, a lso influen ce th e making of deci sion s on fundin g for the respecti ve programmes; these factors are indi cated in Table 3.

Table 3: Factors Influencing Priorities

Time Horizon

Factor

4-10 Years

Levels of Service Objectives of Water Authority Economic Return Government Priorities Committed Work Levels of Employment Ava ilab ilit y of Capital Funds Existing Labour Force Lead Time Outside Agreements

2-3 Years

0- I Year

Time Tab le Th e Programme Budgeting system fo ll ows an a nnual cycle invol ving some or a ll of th e fo ll owing: • Strategy Plans • Ten Year Programmes

Programme Evaluation or Performance Monitoring Peter Cullen, Water Research Centre, Canberra College of Advanced Education The basic ass um pt io n of cos t-benefit analysis is that the a im is to max imi se nat io nal eco nomi c efficie ncy has of co urse been challenged by those co ncerned to protect th e environment and to create emp loyment in disadvantaged regions . Efficienc y is a necessary, but ha rdl y su ffi cient co ndition for effective water man agement , sin ce it is of co urse easy to be highl y efficient at doing th e wrong thing. Effectiveness refers to meas uring the object ives ach ieved by eac h of th e progra mm e action s. It is depende11t on havin g cl earl y stat ed and measurab le programme o bjecti ves, a nd has the basic assumption th a t there is a ca usa l linkage betwee n th e programme actions and the indicators used to measure the ac hi evement of obj ecti ves . Appropriateness of the objectives of a progra mme are a politica l judgment , but an eva lu ation will be an opportu ne tim e to look at th e obj ect ives. Sho uld we be do in g the programm e a t a ll ? Sho uld the obj ect ives be re-formul a ted in some way? Have un expec ted outcomes become apparent due to the program me?

INTRODUCTION

OV E R the past two decades there have been signifi cant changes 10 both the interna l a nd ex tern a l operat ing environ ment of the water indu stry. The internal changes have been a fun ction o f grow th a nd attempts to a djust to the rapidl y chan gin g external environm ent. As agencies have grown and deve loped speci a li sed branches the probl ems of intern a l co-ordina tion ha s beco me more ev id ent. C orporate plan s have bee n one co mm o n respo nse to the problem of getting va riou s pa rt s of a n o rga ni sa tion to see the whole. Th ey also of co urse serve the purpose of presenting a unifi ed face of the agency to politicians and the publics served by the agency. As operating and ca pital fund s became sca rce r it was necessa ry to put more effort in to trying to so rt out a nd agree on objecti ves. It beca me apparent that the as piration s o f particu la r gro ups within th e agency, whil e perhaps wort hwhil e in th emse lves, were not a su fficie nt basis for the age ncy to pl an its operat io ns and spend ing. Dri ving ma ny o f these intern a l cha nges has been a mo re in formed and art icu la te co mmunity, who no longer co ntinued to believe th a t the age ncy int erest was necessaril y the sa me as the public interest. Earlier . notion s that profess ionals were th ere to se rve the pub li c in a well paid but disinterested manner have now been di sca rded as it ha s beco me a pparent th a t self-interest is as domina nt with thi s group as with most ot hers in society. The a lliance between politicians who love to announce da m projects during election campai gns, a nd enginee ring organisations who like building th em, has now been see n as a device for transferring publi c funds to lu cky landho ld ers who ge l windfa ll , tax-free ga in s from such public in vestment, with out themselves co ntributing very mu ch. Co nsequ entl y there is now a publi c demand for accou nta bilit y fro m the water indu stry. Allied with thi s is a concern th at ma ny people have a n excess ive tax burden , which may lead to a US sty le tax revolt. The public are also now aware that th ey ca n change or at leas t delay proj ects that th ey don ' t like. Wid es pread and success ful politica l act ivit y associated wit h dam building, es pec iall y in Ta sma ni a, will no t on ly make politi cian s more ca utiou s, but will encourage those who o ppose such projects to make their views known . There are of cou rse al rea d y a series of formal mechanisms to in vo lve the public in s uch decision s through environmenta l impact assessment , pl a nnin g appea ls and direct public participation. Direct parlia ment a ry oversight is now increasin g as we move beyond Publi c Work s Commit tee hearings to parli a mentary a pproval s of programme budgets. The next inevita ble step is progra mme eva lu a tion a nd in co ming yea rs we have th e opportunity to develop appropriate tec hniqu es for co nduct ing such eva luations, a nd demonstrate th at programme o bj ectives are achi eved .

The Evalu ation Model

Th e eva lu a tion mod el di sc ussed above requires information on three things. Th e objectives of the programme mu st be clear ly stated , and th e actions o f th e programm e mu st be identified. What is done, by who and when is it do ne under this progra mme? The outcomes of the programe need 10 be measured, and this raises the techni ca l diffi cult y of finding va lid a nd reliable indicato rs to show if obj ec ti ves are being ac hi eved. Objectives may o f co urse be achieved desp ite the progra mme, not because of it, so th ere mu st be prim a facie ev idence linkin g th e progra mm e actions with the progra mm e o utco mes . Difficulties in Identifying Programme Goals

One of the majo r difficulties in eva luatin g a programme is in identifying the goa ls of the progra mme. Legislative goa ls are often ex pressed in a genera l manner that ma kes it difficult to develop appropriate measures of how well th ey mi ght be achi eved There a re a number of other commonly ex perien ced difficulti es: I. Many progra mmes have multiple goa ls. 2. Objectives may co nnict, so problem of which takes precedence. 3. Often difficult to identify real o bjectives and ma ke th em specifi c. 4. Obj ecti ves a re ra rely stati c and may chan ge over time. Th e Public Service Board in Victoria in a report to the Pa rliam enta ry Public Bodies Rev iew C ommittee pointed out the need for a more systematic a nd expli cit approach to the set~ing of o bjecti ves at bo th Stat e a nd regional level. They co uld find no clear sta tement of objecti ves for the water indu stry, but in fe rred the following general goa ls: (a) Co nserva ti on, development and utili sa tion of water resources to the best a d va ntages of th e people of Victoria. (b) Exte nsio n and development of sewe rage a nd drainage services . (c) Provision of adequate water as far as practicable for conservation of flora a nd fauna. While these might well be des irable goals for the water indu stry, th ey give litt le directi on for a stru cture nor do they identify a ppropriate function s. From th e eva luation view point they are inadequate in thi s form since th ey give no indi cation of what is a n acceptabl e perform a nce for th e indu stry, or how thi s co uld be measured . For objectives to be use ful they need to be d es irable , but al so mu st be expli cit and meas urabl e. For water suppl y, approp ri ate objectives would refer to th e probabi lit y of acceptab le quantity and quality for major users with in a region. For floodin g o r drainage, object ives mi ght relate to some level o f acceptabl e losses fo r so me defin ed event s. In the case of sewerage, object ives co uld be ex pressed in term s of acceptab le changes to receivin g waters. If a iming to protect in -stream users, th en it is necessary to id entify wha t biota we are trying to protect and what are the requirement s fo r such co mmuniti es . These obj ect ives obviously conta in value judgments, and so it is necessary to have th e public in vo lved in their formu lat ion and periodi c review. The professional certa inl y has a role in helping the public und erstand th e co nsequences of a lternative dec isions, but does not have any special qualifica tion s for deciding what the comm unit y wa nt s.

Programme Evaluation

The term programme eva lu ation refers to a retrospecti ve exam ination of the operation of a progra mm e as a guide to future fundin g. Th e past is exa mined not to apportion bla me for fa ilures, but to give a guide to the future. Such a n eva lu a tion commonl y investigates how well has th e progra mm e been administered, to what ex tent has it achieved it s objec ti ves a nd at what cos t? It wi ll a lso usuall y address th e issue of whether th e programme is wo rth doing a nd wh ether its objecti ves were with hind sight , the a ppropriate ones. The jargon a nd approaches of programm e eva lu a tion have bee n developed mainl y in th e United States to assess th e effect iveness of programm es in health , education and law enfo rce ment. American legis lation suc h as th e Coasta l Zo ne Management Act of 1972 ma de it mandatory to co nduct forma l eva luation s of progra mm es in natural reso urce manage ment, and techniques for doing thi s arc now evo lving. There a re three critical aspects to a n eva luation: Appropriateness: Do we have appropri ate Obj ect ives? Effectiveness: Are we doing th e right things to achi eve the Objectives? Efficiency: H ow well are we doing those things? This rela tes input s to outputs. Efficiency is a criteria that has been part of th e water indu stry for many years, having some or igin s in a udit requireme nt s, but being further emphasised with the recent popularity of cost-benefit analysis.

Performance Monitoring

Th e wa ter indu stry has moved in recent years to beco me more accou nt a bl e a nd has developed per fo rm a nce m o nito ring in a n a ttempt t0 measure e ffi ciency. Th ese a pproac hes a re.a use fu l sta rt, but fa ll sho rt o f eva luation since th ey addres o nl y th e qu esti o n o f how well we ac hi eve pa rtic ul a r end s rat her tha n wha t mi ght be the mo re impo rt a nt qu es ti o n o f wheth er th ey a re the ri ght ends . Per for ma nce mo nitor ing ce rta inly rela tes to corporate obj ecti ves, but often in a fa irl y narrow tec hnica l sen se of engin ee ring o r fin a ncia l cri ieria d epending o n t he rela ti ve power o f th ese groups within th e organi satio n. Operationa l criteria used in perfo rmance monito ring includ e 1he minim ising o f rat es, th e reduction o f treatm ent pla nt or ma int ena nce costs or so me fo rm o f reli a bilit y criteri a . In some situ a ti o ns th ese meas ures have been used to develo p perfo rma nce budge1s 1hat show th e cost o f a tta inin g eac h measure .

c ha nge the o peiating sta nda rds . Th ese a re necessa ry, but pro ba bl y no t su ffic ient co ndi tio ns fo r effec ti ve ma nage ment. We a lso need to be clea r as to th e social purposes of th e wa ter industry. We a re not just a bo ut bui lding more and more da ms to irri gate mo re fa rmland , however pro fess ionall y sa ti sfying such projects mi ght be. Our a im s mu st be to satisfy va ri o us hum a n needs, a nd th ese are sim ple with rega rd to d omes ti c water su ppl y. People wa nt a relia ble suppl y of high q ua lity water for do mestic purposes . Many communi ti es do no t have this a t the mo ment. Social a im s fo r other aspects o f the wa ter industr y such as in du strial uses , efflu ent di scharges and flo o d prot ec tion are less cl ear, a nd wi ll not be reso lved without ha rd wor k a nd co mmunit y in vol vement. But until we are cl ear as to wh at we wa n! from th e wa ter industr y, the n th ere is nothing to guide ma nage rs except whim a nd the po rk ba rrel.

Concl usions

REFER E CES

In times of fin a ncia l stringe ncy we mu st be cl ea r a bo ut wh a t a re acce pt a ble pe rfo rm a nce standa rd s for our va ri o us ope rati o ns, a nd wha t happens bo th to the budget a nd the qua li ty of service if we

Ru1rn a n , L . ( 1980) Plan ning Useful Eval11a1ions. Sage Pu b l. Beverly Hills, USA. PalO n , M. Q. ( 1978) U1 i/iza1io11-Focussed Evalu a1ion. Sage Pub!. Beverly Hill s, USA.