OUTSOURCING MAINTENANCE SERVICES: AUSTRALIAN OVERVIEW AND SYDNEY WATER CASE STUDY Colin Rymer 1, John Davis 2 1. Sydney Water, Sydney, NSW 2. Infrastructure Transaction Network, Brisbane, QLD ABSTRACT Operations outsourcing in the Australian water industry now has a twenty year history, but few papers have considered this important aspect of water utility business management; or, moreover, considered how the changing dynamics of the industry influence these decisions to outsource and the contracting models adopted. This paper reviews the history, diversity and current trends in contracting Operations and Maintenance (O&M) Services; including noting the different types of contract adopted and the suppliers in the marketplace. The overview is put in a current context by a case study of the recent outsourcing by Sydney Water of its mechanical and electrical services work, outlining the strategy adopted, the primary challenges, and the lessons learned. INTRODUCTION Australia now has had exposure to a diverse range of operations and maintenance outsourcing models over a 20 year period, since Sydney Water pioneered the substantive engagement with the private sector with its water treatment Public-Private Partnerships (PPPs), and Melbourne Water engaged the market with its civil and Mechanical & Electrical (M&E) maintenance contracts in the early 1990s. Prior to that period, only design, construction had been substantively sourced from the private sector (to varying degrees across the country), together with specialist minor contracts in the civil maintenance and specialist supplier support in the M&E sector. Now, twenty years later, the majority of Australia s major urban water and sewerage systems are maintained and operated in outsourcing arrangements with the private sector. Aspects of these contracts are rarely discussed in open forums or papers; perhaps because of the infrequency of the tender processes, or because of continuing industrial relations sensitivities. However, the extent to which private sector companies are now responsible for compliance and service continuity for a substantial part of Australia s urban supply sector warrants a better understanding and more frequent discussion. AUSTRALIAN PRACTICE OVERVIEW Four Phases over Two Decades The development of the private sector operations market in Australia has effectively occurred in four phases, split over the last two decades, as follows: 1993 1996 The initial wave 1997 2003 The slow consolidation 2004 2010 The Millennium Drought boom 2011 2013 The diet The Initial Wave: 1993 to 1996 Private sector participation in the Australian water sector came with the wave of utility and infrastructure procurement reforms by State Governments in the early 1990s; led by the Kennett and Greiner governments in Victoria and NSW. In a hint at the generational nature of such changes, the impact of the 1987 financial crash had links to the 1990s reform in much the same way as the Global Financial Crisis has partly influenced the current trend in Australia by Governments to rein in rising costs-of-living with a renewed wave of reform. The initial wave, however, was characterised by two different contracting forms with quite different change opportunities. Maintenance services outsourcing was characterised by the introduction of work practice efficiencies under new Enterprise Agreements (EAs) with skills-based pay increments, which offered large workforce reduction opportunities. Work practice changes included crew size reduction, supervisory reorganisation, start-on-the-job practices and related depot rationalisation, and a zero blood alcohol requirement. The catalyst effect of the change of employment to the private sector facilitated a substantial workforce redundancy.
In the major PPP infrastructure projects (commonly called BOOT projects at the time, for Build-Own-Operate-Transfer); now more often described as DBFO for Design-Build-Finance- Operate) the drivers were quite different. Although the common public perception was that the private sector financing and the avoidance of public sector debt was a key driver, subsequent studies at a University of NSW based Cooperative Research Centre in the late 1990s into the procurement strategies identified that the key drivers for adoption of the DBFO model were its attendant taxation rules that there could be no control by the utility procuring the arrangement. This meant that the DBFO format offered the opportunity for the utility to sidestep costly conservatism within its design and project delivery, with a full and effective transfer of project delivery and performance risk to the private sector. The end of this initial wave saw the introduction of project alliancing as a delivery model, led by Water Corporation in Western Australia who became a world leader in adopting the alliance methodology to field services contracting. By the mid-1990s, the world had come to the Australian water sector: Degrémont, CGE (now Veolia), North West Water (now Trility) had material presences in operations delivery; and SerCo in maintenance. However, local firms had also established themselves. The Services arms of Transfield and Thiess became established in this period, and the water utility maintenance contracts became key facilitating platforms to the long term development of those businesses. The size of the contract arrangements was also world-scale, with Prospect Water Treatment Plant the largest in the world at the time it was commissioned and the Adelaide metropolitan contract (integrated management, operations and maintenance) the largest of its type in the world at the time. However, smaller water businesses were also participating in the change, including an integrated O&M contract at Coliban Water and maintenance outsourcing at Gippsland Water. The context had thus been established that significant engagement with the private sector in operational areas was not just for large utilities. The Slow Consolidation: 1997 to 2003 Immediately following the successful experiences of the large utility contracts, a number of smaller water businesses and local governments began to engage with the new private sector market; with the attractiveness of full turnkey contracting and operational performance risk transfer appealing to a number of those businesses that had been disappointed with the performance outcomes of their traditional arrangements. In Queensland, where local governments dominated the public water sector, financing regulations effectively prohibited the use of the DBFO model at this time; and as such these businesses widely adopt the DBO (Design- Build-Operate), also known now as DBO/M (clarifying the Maintenance aspect). Wastewater Treatment plants and Water Treatment plants at Noosa, Beenleigh, Redcliffe, Port Douglas and Atherton were implemented. Notably, some longer term contractual issues with of a couple of these projects have highlighted the need for proper transaction management and an understanding of how tender assessment and contract oversight must properly appreciate the risk transfer model. In Victoria, the regional water utilities implemented a number of DBO and DBFO contracts including several at Coliban Water; with some examples, notably the AQUA2000 contract in Bendigo, highlighting that effective risk transfer to the private sector does occur under properly constructed contracts. In NSW, the uptake was comparatively restrained, with perhaps only the DBO contract Bega Valley sewerage scheme, notably including the first application of a competitive alliance transaction model for a major part of the works, being a substantial engagement with the private sector operations market. By the end of this consolidation phase, a number of transaction models were now established, providing several pathways for the public sector to engage the private sector under differing risk profiles. The major international water companies consolidated their presence in this period; but other local maintenance and treatment groups also became more established, e.g. Programmed FM, John Holland, Tenix and ESI, Lend Lease Services (then Abigroup Asset Maintenance), and United KG. A highly competitive market had effectively been established across the full range of infrastructure maintenance and operations services. The Millennium Drought boom : 2004 to 2010 The very large surge in infrastructure required in response to the Millennium Drought saw a deeper engagement of private sector operations businesses. Major infrastructure projects in dams, desalination and recycled water were
implemented; with the latter project types bringing in major step changes in O&M systems complexity. In delivering those projects, DBO/M and DBFO were widely used, including through Alliance DBOs, as follows: DBO/M desalination for Sydney Adelaide DBO Alliance desalination for Gold Coast and Perth DBFO desalination for Melbourne Significant DBO contracts were also adopted during this period, although not driven by the drought, for Mackay, Townsville and Wagga. Further operations or maintenance only contracts were taken up for the South East Queensland (SEQ) water recycling plants and the SEQ water distribution grid. The growth in projects saw a very large upswing in the capacity of a number of engineering design and construction businesses, and also saw the Spanish firm Acciona Agua firmly establish itself in the Australian market with long term operational roles within the DBO/DBFO sector. The diet: 2011 to 2013 After the sugar hit of the Millennium Drought projects, governments across the country have faced a significant surge in consumer charges to repay the very large debt and operating expenses of the new infrastructure. That political focus on the cost of living has driven a demand to pull down the operating costs of the water utilities; and that pressure on operating costs has now sparked a renewed round of examination of operating and maintenance sourcing arrangements. In Adelaide, the expiry of the original 1995 integrated outsourcing sparked a major review of the sourcing strategy, with new alliance and collaborative management arrangements for, separately, O&M and capital project management replacing the old contract form and asset management returned in-house. Water Corporation has increased its engagement with the private sector by moving to an Alliance arrangement for its treatment services. On the east coast, Hunter Water has commenced contesting its treatment operations services, which has been provided for many years by its Hunter Water Australia subsidiary, Queensland Urban Utilities is in the midst of a major outsourcing movement, and Sydney Water has moved the whole of its mechanical and electrical maintenance into a single integrated outsourcing based on a collaborative model with tight financial constraints. All of these sourcing strategies are complex transactions with many facets that require deep understanding of the business; as frequently the business processes and interfaces that are affected by the contract are not well defined by the business and not clearly understood in the context of an external sourcing rather than a business as usual rolling internal management environment. The case study following in this paper highlights these aspects of a major O&M services transaction. SYDNEY WATER CASE STUDY Sydney Water Mechanical Electrical Maintenance The Need for Change Sydney Water had previously delivered mechanical and electrical maintenance services through a combination of internal and external providers. This delivery methodology caused inefficiencies through: High overhead cost model Differing EAs and work practices Larger than required workforces to deliver the total services. The new commercial model for delivery of Mechanical/Electrical and Facilities maintenance was developed around three core requirements: 1. reducing maintenance costs to sustainable cost levels. 2. the need for culture change through the development of collaborative relationships between Sydney Water and the maintenance provider, and 3. improving asset data quality to improve asset decision making processes. Sydney Water took the decision in March 2012 to take its M&E maintenance services to market. Included with the M&E services was the Facilities Maintenance (FM) requirement with the aim of extracting maintenance synergies between the two maintenance services and provide a more attractive offer to the market. The contract was a 5 plus 2 year arrangement. Commercial Model The key features of the selected commercial model were: a do and charge framework with a target budget set in the contract for each maintenance service (M&E and FM) as an annual budget covering all of the work; management fee with upper limiting amount;
a core focus on collaborative management to deliver productivity and cost efficiency improvements; a fixed Guaranteed Maximum Price (GMP) to act as a cap to that expenditure, beyond which the contractor cannot recover any other costs of the work in a year; all of the contractor s margin at risk against performance measures; margin improvement only available where efficiency plans are documented and executed to achieve sustainable savings; a provision for Abnormal Operating Events, to deal with major storms and fires, managed outside of GMP; no margin allowed where Sydney Water s materials and services contracts are used and procurement conducted through Sydney Water s procurement system; leveraging our total expenditure through bulk purchasing of materials and services across the entire M&E and FM budgets; and the contractor using Sydney Water asset management and financial systems, to provide better quality data for ongoing asset management decisions and budgeting. The first three years of the contract was established as a do and charge arrangement primarily because of improvements required in asset data quality so the true cost of maintenance could be determined. Allowance has been made in the contract that in years 4 to 7 of the contract that the commercial model changes to a schedule of rates/performance based contract which can be negotiated between the parties with fall back provisions if agreement cannot be reached. Transition The transition period consisted of 6 months from January to June 2013, which involved some key activities such as: A complicated trade recruitment and engagement process of around 150 trade positions coming from threes sources: ex Sydney Water, ex outsourced provider and new staff; which could only occur after Union negotiations had been agreed. Establishment of a management team of around 55 M&E and FM managers and supervisors. EA trade negotiations by Sydney Water resulting in an EA for all transferring Sydney Water staff which transitioned to the maintenance provider. Implementing a transition of FM provider to the new provider. Migrating FM asset data from supplier to Sydney Water asset systems. A significant IT project to operationalise IT systems for use by the maintenance provider. On-boarding and off-boarding processes and systems (almost 500 staff movements inwards and outwards to be managed over one day). Training of the new maintenance provider and staff (which they didn t have yet) prior to go live. Challenges During the transition process key negotiations on staff transition processes were developed and agreed with Unions. Until this process was agreed around the rules of transfer for those Sydney Water employees being successful for a position with the maintenance provider, no recruitment processes could occur. This process took 3 months to complete and greatly impacted on the transition timetable. The result of the transferring employees is that Sydney Water employees conditions are different (preferentially) to other trades staff. While they were always different with the previous outsourced maintenance provider, the staff never worked together and remained in separate geographical areas. Now, the staff are doing the same jobs and working side by side but are on different pay rates and allowances. This causes a level of anxiety among trades staff that continues today and has had impacts on negotiating the remaining EA for all other staff (still ongoing). Training is another key challenge that could only be completed in the last few weeks before go live but required considerable effort to develop the training program. Safety is another key challenge as it required a culture change when moving internal and external staff to a new supplier. This takes time and by only having a workforce available on the first day of the contract imposes significant issues around developing and embedding that culture. It has required a continual effort to embed new cultures and safety behaviours. The first few months resulted in high rates of incidents that could have been due to the new workforce arrangements, equipment, vehicles, and the desire to blend the workforce to ensure diversity of skills and experience. Collaboration why is it important? Sydney Water desired to achieve improved productivity through leveraging the data in its asset management system to provide ongoing cost savings to the Corporation. A Collaborative model of engagement was considered the only way that the maintenance services could provide improved services as it requires a close
working relationship between the maintainer, operational staff and engineering personnel. Figure 1 shows the collaborative framework that underpins the contract. Figure 1: Collaborative Framework The framework for the contract is established around the three arms of the business working together to achieve reliable maintenance outcomes. Culture change is an important and necessary concept to the success of the contract. Collaboration as we define it is: Working co-operatively to achieve a common goal Engendering a sense of one team Having open, frank but positive communications across the business We achieve this through using a common language and behaviours which include: We use a common language of us or we We discuss issues freely and respectively We take ownership of issues that we raise We acknowledge and draw on each other s capabilities and skills We exchange ideas and information to achieve our goals A prime focus of the contracts team is to deliver a changed workforce that prides itself on working as one team with Sydney Water and delivering ongoing innovations and improvements. We are achieving this through an ongoing culture program, surveys and being consistent with corporate culture programs. Business processes are being implemented that have as their foundation the need for agreement by all three parties (operators, engineers and maintainers) before work or projects is undertaken. Improvements to Our Transition Process After reviewing our transition performance we agreed some key issues that we could have done better. Appoint an independent Project Manager to take over management of area(s) being outsourced and all transition activities to ensure all transition tasks are performed effectively. Communications is the key to success, and regardless of the amount you do it is never enough. Deliver clear and consistent communication to staff with regards to transition status, risks, and issues. Communicate with other business areas regularly to update them on activities that may manifest in day to day interactions as they are key to ensuring the message is getting out into the field. Provide clarity to impacted staff as a result of outsourcing on a regular basis and as soon as possible. Develop strategies to actively manage performance for those being made redundant. Lessons Learnt Some of the key lessons learned from the outsourcing project have been identified as: 1. Business process redesign is easily delayed as lower priority to other activities. You then modify systems such as IT platforms without full knowledge of business processes resulting in suboptimal processes. 2. Low morale of staff severely impacted on business performance over the 15 months of the outsourcing project. 3. Do not underestimate the importance of training your new workforce it s part of your culture change process. 4. Resourcing for go-live expect the unexpected and plan for incidents and contingencies. 5. No matter how well you develop and negotiate a contract, you can be sure things remain unclear between the parties and even though it s a commercial arrangement, more time should be spent going through meaning within the contract. CONCLUSION The current political and regulatory governance environment in 2013/14 suggests that cost reduction pressures will continue on Australian water utilities; and that as a result more will consider large scale services outsourcing as a strategy to drive cost-of-service reforms. Certainly, the private sector supplier market is well-established to competitively respond to almost any form of contract; and the return to
decade-old (lower) levels of infrastructure spend has made the market much keener and competitive than during the Millennium Drought period, as evidenced in a number of recent tender outcomes. A range of contract models can be effectively utilised. The Sydney Water commercial model is an example of a highly collaborative framework that introduces a field based decision framework and focusses on improving business outcomes and sharing in those benefits. Culture change is an important element for the success of the contract. All major sourcing strategies for operations or maintenance in water utilities are complex transactions with many facets that require deep understanding of the business; as frequently the business processes and interfaces that are affected by the contract are not well defined by the business and not clearly understood in the context of an external sourcing rather than a business as usual rolling internal management environment. Aspects of the Fair Work Act provide significant challenges to commercial structuring, although State-based governance aspects (political and administrative) may have as much or more influence. Ensuring effective collaboration in delivery, particularly in optimising the management interface and in asset management, remains a challenge.