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Improving commercial efficiency in water Improving commercial efficiency in water utilitiesutilities

Review of business practices in private and public companies

Commercial Practices SessionMay 8, Vienna, Austria

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Table of Contents

Commercial Efficiency as a Concept 3

Focus Areas Selection 4-5

Idea Sources 6

Area 1: Commercial Cycle and Customer Service 7 – 10

Area 2: Financial Management 11

•Area 3: Business Planning 12 – 13

•Summary and Final Thoughts 14 – 15

•Contact Details 16

The Basic Idea

Commercial Efficiencies

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An industry that loses up to 80% of its product before it is physically delivered to the end client can hardly be called or even expected to be commercially efficient…

What can be done…

Some definitions:

Commercial: making or intended to make a profit

Efficient: (1) achieving maximum productivity, (2) working in a well-organized and competent way

Focus Areas

Commercial Efficiencies

Everyone thinks that utility ops is a technical & engineering business.

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Business PlanningFinancial managementCommercial Cycle & Customer Service

It is !!!

This presentation, however, will focus on rather business & commercial areas…

Common features:

Can deliver results in less than 1 year

Similar to same functions in other industries

Not very CAPEX intensive

Message: Even best performers in technical areas cannot afford to underestimate financial and commercial aspects of the job.

Focus Areas - Extended

Commercial Efficiencies

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Business PlanningFinancial managementCommercial Cycle & Customer Service

- Regulatory planning and tariff reviews

- Group-level long-term plans

- Investment programmes- Annual plans

- Financial accounting- Management accounting

- Budgeting and cost control- Treasury

- CAPEX planning- Inventory management

and procurement controls

- Meter installation, testing and maintenance

- Meter reading- Data entry and billing

- Collection- Call centres and

complaints handling- Interactive websites

Rarely a utility (or any other) company can perform greatly if some of these non-technical functional areas of the business are neglected. Terminology is not that important, what matters is processes and integrated management approach.

Idea Sources

Commercial Efficiencies

Sofiyska voda25-year Concession

Part of Veolia (private)1.3 million people served

> 4 000 km of network> 80 million m3 billed/y

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Dobrich WaterRegional Bulgarian operator

100% state owned< 200 000 population served

> 3 000 km of network< 8 million m3 billed/y

Message: Private operators focus on commercial and financial measures by default, municipal and state-owned ones – when the owner requires, when the management believes in that or when the situation demands such approach.

Commercial and financial management are integral business functions and priority of top management on daily basis.

Liquidity, cost of capital and collection rates became a priority after a rapid analysis undertaken as a result of a crisis.

1. Meter Installation and Testing

Stages of the Commercial Cycle of a Water Utility Operator

- Under-registration- Ageing- Blocking &

manipulation

- Under-registration- Ageing- Blocking &

manipulation

2. Meter Reading3. Data Entry and

Billing 4. Collection

Identified Issues among Water Operators

- Access to meter- Real vs. fake

reading- Illegal connections

- Access to meter- Real vs. fake

reading- Illegal connections

- Quality of data- Estimation rules- Control

mechanisms

- Quality of data- Estimation rules- Control

mechanisms

- Willingness to pay- Tracking

receivables- Control over clients

- Willingness to pay- Tracking

receivables- Control over clients

- Demand profiling & higher class meters

- AMR- Flow reducers

- Demand profiling & higher class meters

- AMR- Flow reducers

Scope of Measures to Address the Issues

- PDA-tracked real-time readings

- Daily schedules- Pipe tracing

- PDA-tracked real-time readings

- Daily schedules- Pipe tracing

- Implement estimation rules

- Exception handling process

- Implement estimation rules

- Exception handling process

- Aged debt report- Remotely-controlled

stop valves- External collection

- Aged debt report- Remotely-controlled

stop valves- External collection

FAILURE IN ONE STAGE = FAILED PROCESS

Commercial Cycle

Commercial Efficiencies

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Commercial Cycle: Example

Commercial Efficiencies

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Issue 2: Meter under-registration: solvableIssue 1: Falling consumption:

unsolvable

A useful Approach: Demand Profiling

Customer Service: Utilize Your Website

Commercial Efficiencies

Personalized accounts: simple way to collect customer data

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Visualized communication of interruptions of supply

Cheap & effective way to get meter readings

Develop brand identity

Make the life of your call centre easier…

Customer Service: Example

Commercial Efficiencies

Visualize Interruptions of Supply

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Financial Management: 3 useful concepts

Commercial Efficiencies

1. WACC matters. Why: In similar companies, depending on debt structure it can vary between 3% and 9%...

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3. One-step further: Activity based costing - 4 application areas

2. Budgeting is simple. 95% of the costs incurred can be summarized in 5-15 cost centres

Leak Repair Sewer Unblocking Meter Installation House Connection

Various types of planning

Commercial Efficiencies

1. The regulatory BP (usually 5-year)…

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2. The master business plan for the

shareholders…

4. The budget5. The annual business

plan (for the management)

3. The investment programme

Message: Annual business plans are down-to-earth management tools with specific and measurable targets.Multi-year (long-term) business plans are common commercial practice and should be implemented given predictability of CAPEX and regulatory requirements.

The Annual BP - Practical Approach

Commercial Efficiencies

The Annual BO is … annual

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Gives three targets to every director (at least three, at most five)

If the ops director, the commercial director and the financial director achieve all their targets, and the company is not making a progress, the CEO knows nothing about the business! Avoid easy targets!

The Annual Business Plan is the best communication tool for internal audiences!

It is also the easiest way to fire people in a legally and morally compliant way…

Summary of Good Practices

Commercial Efficiencies

1. High consumption users (>100 m3/m) & tackle their under-registration2. Introduce aged-debt reporting3. Create customer-registration option in your website

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Commercial Processes

1. Analyze who is financing the company (WACC)2. Simple cost centres & don’t forget profit centres3. Introduction of ABC where it makes sense

Financial Management

1. There are many plans, however for management and internal-communication purposes, one document has to be The Annual Plan.2 Goals & objectives3 People understand bonuses

Business Planning and Organizational Issues

Example Achievements

15% Collection improvement over 6 months

11% billed volume increase due to Class C block meters

System of 15 cost centres introduced and productivity of emergency repair teams almost doubled.

2-year stabilization plan outlined within a 6-month project.

Final Thoughts

Commercial Efficiencies

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Commercial efficiency is not about ownership, it is about management. It would be exaggerated to say that commercial efficiency is more important than technical proficiency. Business-wise, however, they are of equal meaning to a utility operator.

It does not happen overnight but a series of real measures can be implemented for something like 6 months. Results can be witnessed in less than 12 months.

Usually that is far quicker to carry out as compared to CAPEX-intensive technical projects while contribution is of similar magnitude.

Focus on where there is a combination of (1) real results, (2) visibility, (3) potential for replication.

Questions

Commercial Efficiencies

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Radoslav RussevSenior Advisor Water & Environment

New Europe Corporate Advisory Ltd.9 Narodno Sabranie SquareBG-1000 Sofiatel.: +359 (2) 988-7390Mob: + 359 886 442 758web: http://www.necadvisory.com

Question and Answers?