Presentation - OECD workshop on the performance of utilities for wastewater, From comparing costs to benchmarking development plans, Tim Keyworth

1. From comparing costs to benchmarking
development plans
Tim Keyworth
tim.keyworth@kcecon.co.uk
OECD Workshop - The performance of utilities
for wastewater collection and treatment
Brussels, 31 January 2023

2. Understanding the current state of play
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Benchmarking of costs and performance indicators can greatly enhance
understandings of the current state of play
• For regulators, customers, and other stakeholders
• But also – importantly – for utilities themselves (and their financiers)
It can provide important insights
• Notwithstanding the many practical challenges, and inevitable limitations associated with the simplifications that are required
to enable the development of useful and accessible comparisons, benchmarking of costs and performance indicators has the
scope to provide important insights into:
• What ‘good’ and ‘poor’ performance currently looks like across a range of measures that relate directly or closely to outcomes that
matter to customers, citizens and the environment; and,
• Where particular utilities – and types/clusters of utilities – sit on that spectrum in relation to those different measures.
And help generate powerful dynamics
• It can prompt - and allow a broader range of actors to ask – (often awkward) questions about current performance levels
• It can create impetus to refine performance measures and the sophistication of comparisons and, also, importantly, for utilities
to improve their measured performance

3. But future wastewater management challenges will be
considerable…
3
The provision of wastewater collection and treatment services can be expected to face
multiple significant pressures in the coming years, including because of:
• More stringent requirements are applied to existing pollution sources
• New treatment requirements to address additional sources of pollution (notably, micro-pollutants)
• The proposed lower threshold for application of UWWTD
• Pressures to reduce GHG emissions, and make greater use of circular economy approaches
• The need to maintain and renew existing infrastructure (the initial construction of which may have been underpinned by EU funding)
• Growing resilience pressures
Raises the question of how benchmarking could inform and influence how these
challenges are tackled
• The challenges imply that all utilities are likely to need to identify and develop new service delivery approaches
• Benchmarking of costs and performance indicators can help track absolute and relative progress over time
• But benchmarking can also be directed at planning processes:
• that is, the processes through which alternative potential responses are identified and assessed

4. Why benchmark development plans?
4
Investment decisions can have major and long-lasting impacts on relevant outcomes
• The scale of likely investment requirements, and the scope for different options to be adopted when seeking to deliver compliance with
environmental requirements and meet relevant policy objectives, suggests the potential for significant variations in outcomes.
• Decisions to adopt particular approaches can have long-term implications for the cost, quality and environmental consequences of service
provision (given the likely extent of sunk costs and potential ‘lock-in’ issues)
A range of factors can tend to dampen incentives to explore and develop more ambitious plans
• It can require material up-front investment and relevant expertise – both may be scarce, and shorter-term pressures may limit the capacity for
engaging in such activities, particularly for smaller utilities
• More ambitious plans can imply utilities bearing greater risks, particularly where step changes in approach may be under consideration – there
may be a perceived first-mover disadvantage
• Utilities may perceive there to be little benefit from taking on such risks, if it is expected that the benefits of delivering improvements are likely
to quickly passed on to customers and the environment, and relevant benchmarks ratcheted up
• There may be significant inertia associated moving away from ‘the pack’
• Limitations in the availability of information on what ‘good’ looks like in relation to planning processes can have wide-ranging (externality)
effects
It is a practical option
• We considered options in as part of an OECD study looking at options for facilitating greater consolidation of Water and Sanitation Services in
Estonia and Lithuania
• Experience from Australia and the UK provides some relevant reference points

5. How can the benchmarking of plans be used?
5
As an informational resource
• Help improve awareness of how alternative options are being assessed by others, and provide reference points and templates
that could be drawn upon
• Have reputational benefits for those who perform well (including in relation to financing), and disbenefits for those who
perform poorly
To encourage and support the development of more ambitious plans
• The development of a framework for evaluating plans can help provide a basis for credible, up-front regulatory commitments
to be made that affect expected financial performance (eg access to ‘low’ cost finance, higher assumed returns in price
reviews, more flexible use of depreciation policy to improve a utility’s cash position),
• Those commitments could be targeted at areas that otherwise be viewed as likely to be given insufficient attention (eg
consolidation options, nature-based solution, etc.)
To try to create a competitive dynamic
• Rewards could be identified up-front as a form of prize that companies then compete for in the development of their plans
• The Essential Services Commission (ESC) in Victoria (Australia) and Ofwat (UK) operate this kind of approach to overall
business plan evaluation

6. How could the benchmarking of plans be applied?
6
The approach taken could be adapted to relevant priorities
- Benchmarking could focus on capex planning, by reference to a framework (which would need to be developed) specifying the different
features of the planning process that would be assessed, and the criteria that would be applied in that assessment
- But narrower or broader approaches could also be taken (as noted above, the ESC and Ofwat have formed overall evaluation of business
plans)
Meaningful evaluations can be made notwithstanding the inevitable challenges
• While defining what ‘good’ looks like in relation to relevant plans can be very difficult in the abstract, judging relative performance between a
set of different plans under consideration can be more straightforward, and provide concrete and identifiable bases for differentiation
• A key challenge, though, would be to seek to develop a systematic approach, by reference to a defined framework
The approach could evolve over time
- As with benchmarking more generally, initial assessments can raise challenging questions that can generate a desirable dynamic, encouraging
effort to refine the assessment process and improve performance within it
- Past assessments can provide for concrete case studies of what might be regarded as ‘good’ under difference circumstances, and could
potentially provide a basis for raising the bar in terms of assessment expectations over time.

7. Thank you
Tim Keyworth
tim.keyworth@kcecon.co.uk