It’s time that utilities be developed, financed and managed as assets. Governments should not view them as liabilities but should rather take a proper capital budgeting approach to their development. After all, everyone knows that a secure electricity supply is the cornerstone to economic development.
The struggling utility
A growing number of utilities are experiencing large financial losses due to a number of reasons. These include economic volatility, fast-paced change of regulatory and compliance criteria, energy efficiency, operational and technical challenges, and renewable generation integration.
Just the decline of Europe’s utilities has been startling. At their peak in 2008, the top 20 energy utilities were worth roughly €1 trillion ($1.3 trillion). Now they are worth less than half that. Since September 2008, utilities have been the worst-performing sector in the Morgan Stanley index of global share prices. In 2008 the top ten European utilities all had credit ratings of A or better. Now only five do.
Often, the public sector continues to feel the strain of maintaining this infrastructure (often in the form of increased electricity tariffs). Some governments choose to simply ignore the problem.
Capital budgeting approach
While it’s true that the success of a utility is largely dependent on outstanding leadership qualities and an expert workforce, it is also essential that the establishment is viewed with a capital budgeting approach. Utilities will begin to flourish as its needs will be better understood and managed accordingly. The government will then be better equipped to successfully approach issues ranging from contract design to legal challenges.
Sustainability and long term vision
Life-cycle costing will not only help the government to take in to account the cost of developing infrastructure but it will also take in to account the costs of operating and maintaining it. Finding the cheapest deal may not always be the answer as far as sustainability goes either. A long-term approach is what needs to be adopted.
Highly skilled and experienced advisors, transparency, efficiency, expert leadership that supports innovation and sufficient competition will ensure long term success.
Good asset management will help to ensure that the utility’s public mission is accomplished instead of merely realising the highest price sale or the lowest recurring cost. It gives governments the capacity to really understand the value of assets without sacrificing important public needs, such as providing subsidised services to poor populations.
Understanding the private investor
Once the government understands the value of the utility, it will gain a better understanding of what potential private sector partners are looking for in terms of investment opportunities. Through this understanding, the government will then also be able to guard against windfall returns by potential buyers. In addition, a transparent approach will also attract support from the public and private sector.
Good contracting practices
Good contracting practices play a major role in asset management:
- It gives the government the ability to exit the contract if a vendor is under-performing.
An asset management approach in the contract allows the vendor to manage the infrastructure, suggesting new ways to earn revenue, while guarding against windfall returns and ensuring that both benefit when the asset returns value above the model for the deal.
In order to ensure a high standard of service, contracts should be written to reflect a performance-based approach where good work is incentivised. A set of guarantees and targets must be clearly set out.
End of contract issues should be clearly outlined to ensure an efficient transition
The contract should be clear on assessment procedures to gauge whether maintenance standards have been met.
Through successful asset management and by adopting a capital budgeting approach, the utility can look forward to long-term sustainability which can only promise better results for the tax payer and a country’s economic development.