The Continuing Importance of Value and Risk Management to the Water Industry?

Kevin Luff
This article follows on from my last and reviews some of the recent documents issued by several parties in the water sector.

In my original article, 'The importance of value and risk management ', I concluded, "the challenges of the Ofwat’s new regulatory regime mean that a focused value management (VM) and risk management (RM) strategy will be required to deliver rewards and benefits to all parties." There have been several documents issued by various parties since this article and a review of some of these suggest my initial conclusions appear well supported. It would also appear some companies did not fully utilise VM and particularly RM throughout the PR14 Periodic Review process. This article is an update on the original and reviews some of the recent documents and comments accordingly.

Totex and ODIs

The clear challenge to delivery of Asset Management Programme (AMP6) is the change in Ofwat’s regulatory strategy with a focus on totex and outcomes and use on outcome delivery incentives (ODI's). This has radically changed companies programme risk profiles, requiring a clear understanding of customers and stakeholders wants and what they are willing to pay set against the implications of failure to meet a set outcome. This needs a clear identification of all potential options and alternative approaches together with the identified risks involved.

One of the key messages of Ofwat’s company monitoring framework document is, "having information that is easy to understand and navigate provides transparency and helps everyone build trust and confidence in water."

One of the key messages of Ofwat’s company monitoring framework document is, "having information that is easy to understand and navigate provides transparency and helps everyone build trust and confidence in water." Although this document is related to provision of a yearly set of performance data this monitoring framework document could easily be said to identify a fully focused VM and RM process in that these provide a clear and transparent understanding of the decision making process. The monitoring framework document also states, “it is important that they continue to review what information their customers and other stakeholders want and need."

Expenditure Decision Making

Research undertaken by UK Water Industry Research (UKWIR) to re-visit their work on ‘Capital Maintenance Planning - A Common Framework’ has resulted in the development of a new Framework for Expenditure Decision-making. The Level 0 overview of this process identifies the following key questions:

  • What risks do we face in achieving our objectives and how will they change in the future?

  • What are our options to manage those risks?

  • What is the best balance of activities to manage our risk and meet our objectives?

The Level 0 overview also highlights a list of key activities which includes the following:

  1. Assess the type scale and value of risk faced by the business.

  2. Develop range of intervention options.

  3. Assess the effectiveness in managing risk. 

  4. Assess scenarios against stakeholder and business objectives.

Items 1 and 3 clearly relate to RM while items 2 and 4 relate to VM as key tools in the decision making process. In fact item 4 clearly envisages the use of Stakeholder Analysis which identifies those key stakeholders (groups of individuals) with an influence or interest with the aim of focussing attention where the priorities are required i.e. satisfaction of key stakeholder interests. This process shows a clear link to the monitoring framework requirements identified above for continual review of customers and stakeholders wants and needs.

Value as a Delivery Tool

There may still be a misconception in some areas that VM is a cost cutting tool, however, this is not the case. VM is a project delivery tool and used correctly it is a business decision tool. Some of the VM techniques clearly focus on the business decision making process for example:

  • Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis – a tool to assist in focussing activities where required and minimise those items that can have a negative impact. Ofwat’s Company monitoring framework document states under the targeted monitoring approach, "Water companies, in conversation with stakeholders, are best placed to identify where the risks, strengths and weaknesses arise in providing information that Stakeholders’ want and will trust." So again while related to delivery of yearly performance data the VM process is clear envisaged.

  • Cost Benefit Analysis - Used to analyse the costs of implementing something compared to the benefits to be achieved. Often used in VM to review procedures and processes in business case decisions.

In Ofwat’s 'Reflections on the price review – learning from PR14' they comment under section 3.2 Wholesale Costs, "there are opportunities for ourselves and/or companies to improve the quality of special cost factor claims – for example, the quality of analysis and evidence from some companies on risk identification and management could be improved substantially."

This seems to indicate that while RM approaches to support decision-making in planning expenditure has increased it is still not universal or embraced to its fullest extent. While both VM and RM require a good deal of appropriate and reflective data the collection of such data should not prohibit the development of these processes. Nor should the lack of data lead to a higher level of risk allowance being added to budgets included in business plans to the detriment of customers’ bills. As suggested in Ofwat Reflections on the price review – learning from PR14 document which states, "some companies embraced the new methodology and delivered high-quality plans that we were largely able to accept in the round under our risk-based review. But there were still many examples where we considered that companies could have done more. This was most apparent in relation to the allocation of costs, and the way companies sought to identify and manage risks, which typically resulted in requests for higher cost allowances."

In conclusion while the various documents identified in this article are not specifically related to VM and RM their concerns and issues can clearly be linked to VM & RM principles. Therefore it is incumbent on the water companies to fully utilise VM & RM to provide transparent, risk balanced and efficient delivery of current and future business plans.

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