Opportunities abound…step up!

I see some massive opportunities in the global water industry right now, but who is stepping up to the plate?

Anyone who has been in the industry for a while understands that the water industry is all about process risk.

Everyone from the consumer to the biggest industrial player wants water to “just work”. This means they want to pay for water of a particular quality and have the vendor take risk for the whole process.

Whenever a big industrial conglomerate tries to play in the water space (think GE and Siemens), they find that only the lowest margin, most commoditised equipment can actually be treated like a pure-play product. Everything else is actually a unit process, and has to be provided with a guarantee that it will work. Given that every feed-water is different and highly variable, this means you have to offer an engineering service.

Suddenly the scale-based advantages you get from being a massive industrial based conglomerate is working against you as you try to manage the engineering risk for thousands of customised global projects via an elaborate hierarchy.

For me Veolia Water is the barometer for the industry. To me they had two major advantages. They have water people all the way up the organisational hierarchy who instinctively understand the nature of the water industry. Secondly they have traditionally not needed to impose a traditional management hierarchy because everyone went to the same few Grandes Écoles and understood each other implicitly.

These days Veolia trying to manage project risk by putting thousands of small projects through a lengthy approvals process of the type preferred by the Securities and Investments Commission…and it is not working well.

So come on. Bring your start-up capital, come to us to find you some BD, commercial and process talent…set up a sensible risk management process, then all you have to do is grab some project finance and you are away.

Infrastructure Australia Report

 

In my previous post I mused on the possibility of governments selling or leasing brownfield infrastructure. Infrastructure Australia, a Federal Government peak body influencing infrastructure policy in Australia, just released a report on this topic.

The report promised to identify assets suitable for sale, but sadly it was  devoid of much juicy detail. It did however aggregate the asset base value of all publicly held water infrastructure in Australia, working at an equity value of 1.1x the asset base.

Australia has AUD96 billion dollars worth of water assets, but is carrying 36 billion dollars of debt over those assets, leaving a net balance sheet value of 60 billion dollars.

There is definite interest in offloading some of these assets, and the metropolitan areas of Sydney and Melbourne were singled out as geographical regions where the regulatory structure is already in place to allow it to occur.

You can find the report from Infrastructure Australia here: Infrastructure Australia Report.

We have customers?

I am blogging from the Australian Water Association annual conference, Ozwater, in Sydney. It has been a relatively quiet conference, as the local water industry is in a bit of a hole. Sydney Water has spent all its capex budget on a big desal( which will be mothballed in a couple of months) and is not releasing much work while they go through yet another round of restructuring.

The interesting narrative I am taking away from the conference is an increasing focus on customer value. In his keynote address the new MD of Sydney Water, Kevin Young, placed the focus of his organisation squarely on generating value for the customer.

Australian East coast water utilities have as much as doubled their customer tariffs to pay for the emergency drought infrastructure they built in the latter part of last decade. Customers were not too thrilled to be paying so much for drought infrastructure while they were trying to deal with floods (welcome to Australia).

In one case community anger actually compelled the struggling Queensland government to reverse the amalgamation of three local government utilities into one more sensibly sized entity. Watching one senior water executive being (figuratively) torn down by an angry mob seems to have really got the attention of the rest. Cochabamaba style civil insurrection seems just around the corner (okay…i am dramatising a bit for effect here).

At previous Ozwater conferences it would always amuse me how little the word customer would come up. If you were to do a word cloud with the different words appearing in the conference proceedings customer would be microscopic. At this conference it would still come a long way down the list after asset, corrosion, disinfection etc. but after having front row billing in the keynote speech of the MD of one of the country’s biggest utilities, you can bet it will pop up a lot in 2013.

Sydney city recycled water network to employ ASR

A recent article in the Sydney Morning Herald reported that the City of Sydney plans to utilise an aquifer to the south of the city for storage in the operation of a city-wide non-potable water network. The network will be integrated with a  decentralised trigeneration  network.

The most interesting thing about this is that the corporatised water utility Sydney Water provides water and wastewater services to Sydney City, and the City of Sydney local government entity has no experience with operating water and wastewater systems. In fact the terms of the original design tender specified that the system should be able to constructed under a PPP arrangement, where presumably a private entity will operate the system.

This will be complicated from a governance perspective, let alone an engineering one, and I will be watching progress with interest. The introduction of the aquifer storage solution introduces a lot of additional complexity from an environmental perspective. 

Certainly if it gets off the ground, this will be a project of sufficient size to be well and truly on the global water radar, and the global water majors will be interested. I wonder who will have the capability and the appetite to take on the risk profile of a large unconventional system like this one?

Water industry opaque to outsiders

I was excited to see a full length article about the water industry in the Financial Times hit my inbox this morning. For a large industry, water gets very little coverage in the world’s premier financial publication. Water stories generally appear under Energy in the iPad version.

I was unsurprised then to find the analysis shallow, and while making a valid point, largely wrong.

The drive of the article is the industry must globalise further to meet the challenges of water shortages. I am inclined to agree, although the inherently local nature of water related challenges limits the traction global firms can get.

The authors claim that ” few water companies operate outside a confined geographical area”. Even by the narrowest definition there are many global water players, and if you broaden the definition to include technology firms there are hundreds.

They also claim that European  firms have not been involved in developing water supplies for India, China etc., which is completely wrong.

Where they are correct is that from a British perspective the general trend seems to be against globalisation. Most of the regulated UK utilities have sold their overseas interests over the past 5-7 years.

However the Middle East remains a playground for major infrastructure providers from all over the world. North Africa, the Philippines and India are all trending towards increased foreign participation in their water markets.

While China has seems to be less excited about foreign participation in their water sector, there has been an interesting increase in globalisation inside the chinese speaking countries, with Singaporean firms significantly increasing their mainland China presence. Also in Asia, the Japanese trading houses are developing their water DBO capability as fast as they can through international acquisitions.

Finally the Spanish water DBO firms are expanding internationally at breakneck speed, achieving significant wins in South America, North Africa and Australia.

I think we can safely say that the trend is towards globalisation, and the pace is just about as fast as is politically possible.

We can also say that the water industry is still an enigma to the broader business world.

Build global talent shortage into planning

The global water talent market looks increasingly constrained, with a shortage of mid-level talent even in countries with high levels of unemployment. I cannot emphasise enough that you should build high salaries and talent-shortages into your business planning.

We are observing the most severe talent shortages in Brazil and China, where it is very difficult for global companies to identify English speaking talent with a reasonable level of techical knowledge and relevant experience. I will reiterate that companies should not expect to pay substantially lower salaries for high-impact professionals in China than they would in Europe or North America.

In Brazil they can expect to pay more.

Australia continues to lead the world on water industry salaries, with another resources investment boom working its way through the economy; mine infrastructure construction is sucking up the tiny amount of spare capacity that was there previously. Expect to pay between 1.5x and 2.5x what you would pay in Europe or North America for junior-mid-level Engineering talent.

For high-impact, strategic hires (H2Otalent‘s specialty) you should be prepared to offer both competitive salaries and a compelling organisational structure and strategy. See my earlier post on attracting leaders here.

Even more critically you should have a policy in place for opportunistically hiring and utilising water leadership talent even when you do not have a formal vacancy in your organisation. The alternative is to make-do with whoever happens to be available when you have a vacancy, which could mean the best people going to your competitors.

China and Point-Of-Use

Could China be bypassing the centralised potable water treatment paradigm and skipping straight to POU?

I recently attended Aquatech China in Shanghai, the biggest water technology trade show in China. There were hundreds of Chinese membrane manufactures present, with both high-pressure and low-pressure membrane solutions.  Most were targeting the domestic market, and it was clear that the government endorsed strategy to grow a domestic membrane industry is working.

More interestingly though, at least half, and perhaps two thirds of the exhibitors were selling  point-of-use products. Over the years I have heard many  people argue that it is ridiculous to send potable quality water through the network for all household use, when only a tiny fraction of the water consumed is actually for human consumption. Third-pipe systems are an alternative, but require costly duplication of infrastructure.

The alternative is to send partially treated water down the network and have consumers treat their own water at point-of-use. This idea is an anathema to those steeped in the John Snow school of taking control away from the consumer for their own good, and seems unlikely to get anywhere in developed countries.

In China however, where the availability of high quality potable water out of the tap is far from universal, but a relatively wealthy and educated middle-class is growing rapidly, demand for high quality potable water is resulting in a high demand for point-of-use treatment solutions.

I wonder if the bulk of China’s cities may bypass the John Snow paradigm and move straight to consumer control of their own water quality.

Water Leadership – the H2Otalent doctrine

The global water industry is going through a transition. A transition from  an industry focused on the incremental improvement of a century-old water management paradigm, to an adaptive industry that can manage the rapid and dramatic changes occuring  in climate, technology and society.

Incremental improvement and rapid adaption require very different leadership approaches, and this has created  a leadership deficit throughout the industry.

This is complicated by the fact that water management is one of the most challenging wicked problems we face. It has more stakeholders than any other industry, making for a highly complex socio-enviro-political environment. It intersects pretty much every human endeavour, meaning to optimise water management at a society/ecology-wide level is a task of extreme complexity, ambiguity and uncertainty.

Leadership is this kind of environment is really as hard as it gets.

In this post I am putting forward a universal model for leadership in the water sector. This is based on H2Otalent’s experience recruiting across the sector, as well as the latest thought on leadership in complex systems. I would love to get readers views on this set of leadership qualities/strategies as this is just one step of an iterative process.

Leaders need not be managers, and leadership can be displayed at all levels of organizations, as well as outside organizational structures. Leadership is also much more about what you do than who you are.

1. Self-Aware
Having a good understanding of ones self is absolutely the most critical leadership skill. If you don’t know your own strengths and weaknesses, and your own biases and tendencies, you will never be able to lead effectively because you will not be able to manage yourself. Self-awareness naturally leads to an understanding of others.

2. Internal locus of control

Individuals with an internal locus of control fundamentally believe that they can influence outcomes (rather than being the victims of circumstance), and are willing to take responsibility for outcomes.

3. Visionary
In a changing environment leaders must drive for change, and that requires clarity, a big-picture perspective, and a vision of what can be.

4. Authentic
People will follow you if they believe what you believe. Leaders must take a position and be true to their values

5. Enabling
Leaders must empower others to act. You can achieve nothing on your own. This requires giving authority and control to others, not just delegating tasks.

6. Emergent
While leaders must provide vision and values, in complex environments it is better to allow solutions and tactics to emerge in a bottom-up way rather than take a hierarchical directive approach. In complex environments undergoing rapid change, there is no way that one person can always know the right course of action. It is the leaders responsibility to create an environment where this is possible, and let go of certainty over outcomes.

7. Experimenting

Complex system environments are non-deterministic, so planning and forecasting are often doomed to fail. The best way to test ideas is by trying them, and trying lots of them.  Leaders must provide an environment where early stage failure is encouraged, so that major failures can be avoided.

8. Disruptive

Continuous adaption to a changing environment is much more desirable than the step-change phenomenon that tends to occur in natural systems when a system is pushed beyond its level of resilience by external change and collapses. Leaders need to be able to continue disrupt the status quo to provide room for change

9.Transcendent

Powerful leaders have the ability to consider a choice of two or more undesirable alternatives, reject both and find a third previously non-existent path which combines the positives of both.

Readers, tell me why I am wrong and where I am right on this list of key leadership qualities/approaches. Different parts of the industry will have radically different perspectives, so I am keen to hear them.

Decentralised solutions gaining momentum

In a small suburban development on the far western outskirts of Sydney’s urban sprawl, the city’s first suburb-wide, privately owned decentralised wastewater reuse scheme is about to start construction. The development is Vermont, in Pitt Town.

The privately-run scheme will collect sewerage from 900 houses and deliver third-pipe recycled water back to the same homes for a slightly lower price than the state-owned utility currently provides drinking water. The scheme will operate under a new regulatory frame-work specifically designed to encourage new market entrants, and I would imagine that it could be highly profitable, given that they will be collecting sewerage rates on top of the price of the recycled water but only have to run one plant. I suspect that the cost of constructing and maintaining a third-pipe is not dramatically higher than maintaining two.

No doubt the recycled water will be plumbed directly into the toilets and gardens of the homes before purchase, so they have a captive market.

Small scale reuse schemes seem likely eat away at the market of major utilities by providing decentralised solutions to outlying suburbs and small communities. The major utilities are vulnerable in the locations where pumping distance and geography erode the efficiencies of large centralised plants.

 If the population ever accepts recycled sewerage as potable water then the decentralised business model becomes dramatically more compelling. If you can bundle in stormwater harvesting then you are really talking.

It seems to me that if the major utility business are able to create divisions that specialise in operating and maintaining decentralised schemes, then there is no need for them to lose that market share to smaller players. For better or worse I think that they are unlikely to do this. Large utilities tend to be big, lumbering, heavily unionised beasts that are impossible to steer and which crush innovation.

A smart utility executive interested in entering a more lightly regulated market might see an opportunity to create a 100% owned subsidiary with a separate management structure to target these potentially highly profitable opportunities. It would require a far less hierarchical management approach and very lean and very smart operations. They will need to select executives and management who know water and sewer well, but who also have an entreprenurial mind-set and the ability to rapidly innovate.

If they don’t, then they can kiss that market share goodbye.

The Next Big Thing

I am confident now that the Next Big Thing in water in Australia will be urban stormwater harvesting for potable water supply.

 Why do I think this?

We recently heard here that our population is forecast to almost double in the next 40 years. Australia’s most densely populated south east corner has already experienced dramatic falls in average rainfall, and this is expected to worsen with climate change. Perth has already experienced this http://andrewkable.com/2009/06/19/step-change-next-decades-key-concept/ .

Meeting the water demands of population growth with declining rainfall will require every water supply and demand management option available.

Desalination will of course remain a growth area in spite of its challenges, but the big desal boom is already well underway and the market is already highly competitive. Potable  Reuse faces such high levels of societal pushback that it is politically very tricky.

As we have seen in Perth, conventional catchments experience dramatic falls in yield under climate-change conditions. Because of increased evapotranspiration and drying soils, the reduction in run-off far exceeds the fall in rainfall. Much less water gets to dams. Also our dams tend to be 100kms or so inland, and those catchments are very vulnerable to geographical shifts in rainfall patterns.

Our major cities however are all immediately next to the ocean, and get reliable rainfall. Urban impermeable surfaces are not effected by the evapotranspiration and dry soils effects, so urban water harvesting is a climate-change resilient option for water supply.

For the past 10 years or so, capacity to deliver stormwater harvesting solutions has been increasing, and Australia’s first potable stormwater harvesting scheme was commissioned last year in Orange, NSW, last year.

Delivering urban stormwater harvesting solutions requires water providers to go far outside their traditional scope. The only way to make it cheap and effective is to build your urban area around water sensitive urban design principles. This means that everyone has to get involved, from the urban planning phase onward.

If you are going to be involved in the Next Big Thing, how will you respond to the challenge of stormwater harvesting and WSUD?