Trust and asset management—lessons from the energy crisis
March 31, 2023
March 31, 2023
How important is trust when managing huge budgets and important infrastructure? And how does the right asset-management system support trust?
Last year, Australia’s energy market suffered through a crisis driven by global factors. These include increases in global prices for gas, coal seam gas producers favouring export contracts, and an increased uptake in renewable energy. These factors impact affordability of essential services and result in supply shocks for customers.
The energy market, whether for export or domestic production, is capital intensive and relies on extensive infrastructure chains from generation to distribution. Asset management is instrumental in realising the value infrastructure has created. It’s also intended to meet the expectations of stakeholders, including customers. Therefore, the crisis in the energy market must also mean an asset management crisis. Through research, we’ve established the importance of confidence in asset management and looked at the key factors contributing to this. Our findings? Trust is necessary for optimal asset management.
Trust is often a high priority of our clients. We wanted to explore what our are our clients’ expectations relating to trust and how it’s known and measured? We asked, how can an asset management system support trust for clients and stakeholders? We also wanted to know this: what needs to change from the status quo so that asset management can realise the promise of trust?
Our team researched the benefits of trust in asset management. We discovered that they included improved customer attraction and loyalty, increased clarity on what an organisation stands for, the ability to reduce or have favourable regulation oversight, acceptance and maintenance of social license, increased employee satisfaction, improved collaboration and knowledge sharing, and enhanced continuous improvement.
While these factors are intangible, all can have a financial impact, whether it’s opportunity for increased revenue or reduced costs. For example, water utilities in Victoria are subject to a PREMO model of regulation. This model rewards businesses that have well-made regulatory proposals demonstrating customer understanding and support. It’s all about trust.
We explored the importance of trust to asset management using two case studies. They are the cost overruns on Australia’s mega infrastructure projects and the repeated failure of Southern Water in the United Kingdom to meet the fundamental expectations of its customers.
Mega projects and mega cost overruns
There are significant cost overruns when looking at seven mega projects from across Australia completed in the last 10 years or currently in progress. Among the projects are the Clem Jones Tunnel, Snowy Hydro, Sydney Metro City and Southwest, and the Melbourne North East Link. The combined initial estimates for all seven of these projects are just under $29 billion. But the current estimated costs for all projects is forecast at double the estimate—with more than $32 billion of cost overruns. The best-performing project in this list, Sydney Metro, has an overrun of 46 percent. Other projects are three to four times the initial cost estimate.
Questions we should consider: Should the project have proceeded if it was known with more certainty the actual costs? What would a retrospective cost-benefit analysis look like for these projects, and what other needy investments were shelved in their place? Perhaps more deceptive than the cost overrun and compromised cost-benefit analysis is the business case that never sees the light of day but the project proceeds regardless. These figures only cover capital cost. What are the implications if the operational costs far exceed the initial estimates? Audits of subsequent operational costs are rarely undertaken and presented to the public.
The repeated occurrence of mega cost overruns is a cross against the three dimensions of trust: (1) against the competence of the cost estimating function, (2) the integrity of decision making, and (3) where the public could perceive that a mega project has more to do with reelection of a politician than community benefit or best value for public money.
While it might be considered that this circumstance is more reflective of the over-enthusiasm and optimism bias by project proponents, including the political class. But the planning, design, and cost estimating is inevitably performed by asset owning and managing agencies. Moreover, the asset owner or manager often has the task of recovering cost overruns from users over time.
Southern Water, a water utility that services the south of England, was penalised GBP126 million in 2019 for neglect of its responsibilities to society and the environment. It was found that the company engaged in a coordinated effort to hide poor sewage treatment plant performance through manipulating sampling and falsifying reporting. Southern Water’s penalty requires it to pay rebates to customers. But it will need to do a lot more to regain the trust of its customers, as the business recorded one of the worst customer satisfaction ratings last year, which led to a further fine from its regulator.
While the scale and nature of Southern Water’s actions leading to the 2019 fine is hard to accept, the postscript is that the company failed further performance targets in 2021-22 that led to a GBP30 million penalty. That suggests that changing culture is difficult.
We asked, how can an asset management system support trust for clients and stakeholders?
Philosopher Onara O’Neil has researched and argued extensively for the importance of trust in public life. His view is that individuals and organisations should not seek to be trusted, since trust can only be granted by others. Instead, the important first step is to demonstrate the trustworthiness of their work, which will lead to authentic trust. Therefore, this concept of organisations being intelligently transparent means that information is transparent, in a form clients can understand, and it’s able to be checked.
Employees also play an important role within the trust paradigm of an organisation. Trust is built from the inside out—customers are unlikely to trust an organisation if its own employees don’t trust it.
What does this mean for us? Based on our work, these are the ways asset-management practitioners can understand and promote the importance of trust. They must recognise that leadership occurs at all levels of an organisation and everyone has a part to play. They need to evaluate their asset-management system to establish areas for improving trust and evaluate the level of trust between work groups and organisational levels, and they need to identify opportunities for improved trust to facilitating continuous improvement. Just as importantly, consider what is not reported but should be, consider whether your assurance processes are sufficient for building trust, and consider the case studies presented, which point to systemic failures in organisations.
There is a need for all of us to be fearless and not fall into the trap of thinking that because someone else gave permission that everything is OK.