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Making better capital investment decisions

A new report has looked at 26 water utilities across the country to determine best practice when it comes to spending on infrastructure. 

In an interview on the AWA podcast series about her paper Capital Investment Decision Making Approaches and Tools, Kristina Campbell, an associate director in KPMG engineering and asset management practice, said that she was tasked with identifying how utilities could improve their practices around capital investment.

“We wanted to understand how you could improve some specific issues, like investing across different asset classes — so how do you actually prioritise when you're investing across different asset classes or across different business drivers,” she said.

The review evaluated practices from Australian and international asset intensive organisations to establish the challenges that arose from different approaches.

“There was a really strong perception in the industry that the UK water utilities had some more mature approaches — probably driven by increased regulatory scrutiny in the area — and the power industry was also identified as being an industry that potentially had more maturities,” she said.

Campbell then investigated what it was that these utilities were actually implementing that was different to the Australian water industry, for better and for worse, and how these processes were implemented.

Small utilities feeling the squeeze

She set up intensive workshops with representatives from each of the 26 participating utilities, and tried to identify existing pain points and anticipate future trends. The groups also tried to come up with success criteria by challenging people in the water sector to answer that question of what success looks like.

“We broke them up into metro and regional, and into large and small, so we had four different groups. And we used those groups to flesh out what their individual challenges were, and then came back as a group to compare and contrast and see what was common across the industry and whether it was actually some differentiation and challenges,” she said.

“In particular, the small metropolitan utilities were the ones that were being most heavily impacted by cost pressures from customers, and a low ability to actually leverage economies of scale compared to the larger utilities.”

The next phase in the process was finding case studies for how utilities have leveraged assets, and to understand and build solutions that were fit for purpose for different utility types.

Practical solutions

Campbell wanted to develop and test solutions that would be practical for utilities to both implement and benefit from.

“One of the key challenges that we were trying to find a solution for was how do you take different investment options for different business objective outcomes and for different asset classes — how do you determine whether you want to invest in say an underground pipe or in IT software,” she said.

For Campbell, it boiled down to the question of how do you do that in a way that's fair and equitable, and that's driven by better business outcomes?

“How to do that was to have a common assessment criteria. It was moving towards processes that regardless of what the information going in was — whether it was expert opinion, whether it was evidence-based data — that it was consistent across the business,” she said.

The second broader trend that Campbell identified was adopting quantitative evaluation techniques for utilities regardless of size.

“With these processes, you’re starting to develop metrics, which fit the scale between a full qualitative assessment and quantitative evidence based assessment, and starting to use expert opinion to inform models of how assets degrade, and what’s the impact of those failures,” she said.

This is where customer impact data comes in, so that utilities can start to quantify the impact of an outage for a customer, and the associated benefits valuation.

“We can start to make decisions once you remove some of the subjectivity from that decision, and get towards more of an equitable, fair customer-based and values-driven outcome.”

Soft factors still count

Campbell’s research found there are elements in terms of leadership and change management practices within an individual organisation that will continue to dictate whether new approaches are successfully implemented.

“One of the interesting things that emerged was that it is difficult to understand the quantification of the costs and benefits associated with some of these initiatives when they were delivered in utilities,” she said.

In terms of the value that they provide for an organisation, and the ability an organisation has to actually implement them, was dependent on a number of different factors.

“First and foremost, the appetite for change in the organisation was really key. A common theme that was identified in the ability for an initiative to be successfully delivered. Support from leadership was key — and that was ongoing support,” she said.

A constant theme in initiatives that were not successfully delivered was changes in leadership that cost a project drive and support. She found that there needs to be “ground up” support, ownership, and belief of processes as they are developed. 

She also found that organisational maturity played a strong role on what utilities were ready and able to achieve. 

“For organisations coming from a lower maturity, some of these solutions wouldn't have been right for them. They wouldn't have delivered value because they didn't have the asset information to actually support the process, or they didn't yet have the internal capability to really understand and implement effectively the processes to get the right outcomes,” she said.

“For the smaller metros, cost was a really big factor. Whereas, for larger organisations, they had the economy of scale; cost was less of a factor — it's more about optimising the overarching cost of the capital program which can get up into the multiple millions of dollars.”