1.3 Overview of o ffshore wind technology
1.3.4 Classification of o ffshore wind turbines
This chapter will examine in detail the four organisational structure models identified in the previous Chapter in accordance with the Terms of Reference.
ORGANISATIONAL STRUCTURE MODELS – EVALUATION CRITERIA
The Minister has stated that he wants those who deliver the services and those who utilise the services to produce the models that provide the best results in terms of safety and security of water supplies, returns to councils and enhancement of jobs. The models
discussed in Chapter 5 and those selected for further assessment in this Chapter are those that have been proposed by stakeholders.
The Terms of Reference require “the Inquiry to identify the most appropriate institutional and regulatory arrangements for the water supply and sewerage industry in NSW in order to ensure that services are efficient, reliable, affordable and safe”. Further, the Terms of Reference state that in considering the merits of any new industry arrangements, the Inquiry should take into account:
institutional and regulatory options available, including the relative merits and drawbacks of each;
the impact of any changes on the viability of councils; and
the socio economic impacts on the community of any new arrangement.
This chapter deals with the organisational or institutional options. The regulatory options are dealt with in Chapter 7.
To identify the appropriate organisational structures or models it is proposed to consider their impacts on water and sewerage services, local councils and communities. The table below specifies the assessment criteria that are consistent with the Terms of Reference.
Table 5. Organisational Structure Evaluation Criteria Assessment Criteria
Water and sewerage services
Viability – ability to raise sufficient revenue for operating and capital requirements
Expertise – ability to attract the required skills to operate a successful business and satisfy regulatory requirements
Efficiency – willingness to accept independent pricing review and maximum price setting
Effectiveness – ability of the organisation to deliver positive commercial, social and environmental outcomes
Local councils Economies of scope – ability of councils to continue providing services other than water supply and sewerage services
Planning integration – ability of councils to continue with integration of water supply and sewerage planning, land use and development Employment – impact of organisational structure on employment Communities Social and economic – impact of organisational structure
on communities
MODEL ASSESSMENT
1) Mandatory (or binding) alliances
The Local Government and Shires Association of NSW Options Paper authored by the Institute for Sustainable Futures describes the mandatory alliance model as being a
“minimalist option imposing least change on participating local water utilities”. The alliance would conduct certain services (not specified) centrally and these would be paid for by each council on some apportionment basis. The benefits flowing from the model are assumed to derive from the efficiencies gained from pooling resources. Assets would continue to be retained by individual councils. The control and delivery of services would continue to be delivered by individual councils.
A separate body, distinct from the council members of the alliance, is established to coordinate the agreed functions of the alliance. This body could take the form of a committee appointed by councils or a distinct legal entity.
The Institute for Sustainable Futures’ option paper states that the alliance must be binding
“or it risks falling apart in the face of difficulties or a lack of interest”. Mandating membership of an alliance will require legislation.
The paper warns that the risk associated with adopting the alliance option is that the only benefit derived is the supplementation of resources and that the option “may not achieve a step change in performance”.
There are two very different alliance models proposed, the Lower Macquarie Valley Alliance and the Riverina and Murray Regional Organisation of Councils (RAMROC) Alliance. A third alliance model is proposed by Armidale, Dumaresq, Guyra, Walcha and Uralla which builds on an existing alliance sharing “back-office” functions such as information technology, human resources, audit and finance. This report examines the Lower Macquarie Valley Alliance and the RAMROC Alliance.
1a) Lower Macquarie Valley Alliance
The Lower Macquarie Valley Alliance is a formal arrangement between member councils to share resources and assist each other to comply with the Best Practice Management Guidelines.
Individual member councils will continue to own, operate and maintain water supply and sewerage assets. Strategic planning will also continue to be a function of the member councils.
A deed of agreement specifies the structure of a board of management and a technical advisory committee, the funding arrangements for a secretariat, sharing of data and intellectual property, and stakeholder reporting.
The alliance coordinating body is a committee established by the councils. The councils are not obligated to implement measures that would achieve the objectives of the alliance.
This alliance model is not intended to be “binding”. This alliance proposal is underpinned by a four year agreement which presumably can lapse after that time and the former constituent members revert to the status quo.
Viability criterion
This model does not compel member councils to adopt and implement performance improving strategies. Consequently, members could choose not to implement any or all initiatives proposed by the alliance coordinating body which would effectively result in little or no improvement in performance. There is, therefore, greater uncertainty around the member councils’ ability to generate adequate revenue to fund operations and the required
capital expenditure in the face of the identified challenges. The inability of the alliance to compel members to implement strategic initiatives is a fundamental flaw in this model and as such it does not meet the “viability” criterion.
Impact on financial sustainability of councils
As all the assets and the bulk of the water supply and sewerage revenue would be retained by each member council, there would be minimal impact.
Effectiveness criterion
The model cannot be assessed as meeting this criterion because the model
is unable to provide any degree of certainty that the objectives of the alliance can be achieved while member councils are not compelled to adopt and implement performance improving strategies.
Efficiency criterion
The alliance proposes to retain the current system for pricing. There is no independent review of pricing to ensure that the expenditure associated with operating and capital plans is not under or over estimated and will provide an efficient outcome. Chapter 8 “Options for Pricing Regulation” supports independent review of price setting. This alliance model would not meet this criterion under its current price setting proposal.
Expertise criterion
The alliance area contains a large regional centre (Dubbo) which has the services and facilities to attract skilled personnel.
Economies of scope
The model does not propose to remove water supply and sewerage services from the direct control of member councils, consequently economies of scope will be retained.
Planning integration
The model does not propose to remove water supply and sewerage services from the direct control of member councils, consequently planning integration will be retained.
Employment criterion
Member councils retain the management and operating responsibility for providing water supply and sewerage services. Consequently there is no impact on jobs.
Social and economic
The model is unlikely to have a detrimental impact on communities because there will be little or no difference in the way the member councils provide water supply and sewerage services.
Summary and Verdict
The alliance model proposed by the Lower Macquarie Valley Alliance fails to meet the viability, effectiveness and efficiency criteria. Although the model provides Alliance members with an opportunity to benefit from professional strategic business planning, the model leaves it to members’ discretion as to the adoption of the strategic business plans developed by the Alliance’s coordinating body. In addition, members are not compelled to remain in the Alliance after the term specified in the Alliance’s deed of agreement. Consequently, the benefits gained by the community from the operation of the Alliance would diminish if any members left the Alliance at the expiry date of the deed of agreement.
The Alliance’s nominated pricing model, the status quo, is not the preferred model of the Inquiry. (Refer Chapter 8 - Pricing Regulation Options).
The alliance model as proposed by the Lower Macquarie Valley councils is inadequate to achieve the changes needed to meet the Government’s expectations outlined in the Terms of Reference, that is:
responding and planning in advance to the challenges facing the industry;
financial self sufficiency;
compliance with environmental and public health standards; and
implementing cost-effective service standards.
1b) Riverina and Murray Regional Organisation of Councils (RAMROC) Alliance The proposed RAMROC Alliance model differs substantially from the proposed Lower Macquarie Valley Alliance model. The RAMROC Alliance body is a distinct legal entity from its member councils and formulates strategic planning initiatives for implementation by the alliance members. The alliance body is proposed to be established as a corporation.
The model also provides for service level agreements between the alliance body and the member councils to specify all of the parties’ responsibilities. The alliance body is
responsible for identifying and funding infrastructure requirements in accordance with its strategic plans. Funding is obtained from annual contributions provided by member councils.
The alliance body is also responsible for price setting while the member councils are responsible for billing. This alliance model is predicated on binding membership by constituent councils.
Viability criterion
The RAMROC model provides for the alliance body to have the power to compel member councils to perform in accordance with their agreed obligations. The model provides for the necessary powers to be enshrined in the alliance’s constitution and shareholders
agreements and embodied in the service level agreements with the individual councils.
Notwithstanding these arrangements, legislation needs to be created to compel member councils to implement the directions of the alliance body. The legislation would add greater certainty to the ability of the alliance to meets its revenue and capital objectives.
As all the assets and the bulk of the water supply and sewerage revenue would be retained by each member council, there would be minimal impact.
Effectiveness criterion
The alliance body will be established as a corporation with a board of directors appointed by the shareholders (member councils). Provided member councils are able to be compelled to implement the alliance body’s directions, the objectives of the alliance are achievable through this model.
Efficiency criterion
This model does not preclude a pricing structure that is both independent and sustainable.
Expertise criterion
The geographical scope of the alliance includes several medium to large regional centres (for example, Griffith and Albury). Centres with relatively large populations and good community facilities generally attract skilled labour. The alliance entity, as a corporation, will be in a better position to offer competitive salaries to attract skilled personnel.
Economies of scope criterion
In regard to economies of scope, the model does not propose to remove water supply and sewerage service supply from the direct control of member councils, consequently
economies of scope will be retained.
Planning integration
The model does not propose to remove water supply and sewerage service supply from the direct control of member councils, consequently planning integration will be retained.
Strategic planning, including integrated water cycle management, will be performed by the alliance entity. However, this planning will be conducted in consultation with member councils. Planning integration across council functions should remain unaffected.
Employment criterion
Member councils will continue to own, maintain and operate water supply and sewerage assets. Consequently operations staff are unlikely to be affected by the formation of the alliance. The RAMROC model is unlikely to result in employment losses.
Social and economic criterion
The cost of operating the new alliance body will be reflected in water supply and sewerage prices and this may have an affordability impact. RAMROC estimates the annual cost of their alliance model to be between $375,000 and $700,000. This equates to an annual increase in household water bills of between $6 and $11. RAMROC does not envisage any impact on employment as a consequence of the new arrangements. However there are benefits that will flow to communities that are likely to offset the costs of the alliance. These benefits are:
Professional strategic planning underpinned by specialist planning expertise and centralised total asset management systems;
Access to specialist technical skills for all member councils ( from Albury and Griffith cities);
Flexible structure that is able to provide enhanced service levels;
Improved overall regional performance of water supply and sewerage functions through collaboration and shared operational expertise;
Improved opportunities to access funding from Governments for water supply and sewerage infrastructure;
Potential to achieve new and upgraded infrastructure much earlier; and
Opportunities for group cost savings through group purchasing activities.
There is also the potential for positive socio economic impacts on small communities arising from the RAMROC Alliance model. The alliance entity establishes pricing principles for member councils and this has the potential for “postage stamp” pricing across the alliance region which may improve the standard of water supply and sewerage services for less well resourced member councils.
Summary and Verdict
The model generally satisfies the evaluation criteria.
To ensure a high degree of confidence that the model is capable of satisfying the “viability”
criterion, legislation would be needed to make membership of an alliance compulsory and to compel member councils of the alliance to implement the strategic directions of the alliance entity.
The additional operating costs of this model are relatively low – between 11 and 21 cents per week per connection. These additional annual operating costs of the alliance body are very likely to be offset by the benefits flowing from resource sharing, professional strategic planning, vastly improved asset management systems and access to specialist expertise to meet water quality and environmental obligations.
A suggested binding alliance model, based largely on the RAMROC model, is provided in Appendix 2.
3) Council-Owned Regional Water Corporation
A council-owned regional water corporation would be established by legislation. The only shareholders of the corporation would be the constituent councils. The shareholding councils are accountable to their respective communities and this will ensure that the operation of the corporation broadly reflects the communities’ interests. The corporation’s board of directors would be nominated / appointed by the shareholders and could include independent directors with relevant expertise. The corporation would be able to make dividend and tax equivalent payments to the shareholders.
All water supply and sewerage assets and related staff would be transferred from the constituent councils to the corporation. The corporation would be responsible for all aspects of water supply and sewerage service delivery including maintenance, pricing, billing and handling customer enquiries, connection applications and complaints. Notwithstanding the transfer of assets to the corporation, the councils as shareholders will have considerable influence on the corporation’s operations and set the broad strategic direction for the corporation.
The corporation model is widely accepted as the “best practice” model for commercial undertakings. The principles of corporatisation are:
Clarity of objectives – the corporation will have specific performance targets that are distinct from the local council responsibilities
Competitive neutrality – the advantages and disadvantages of local government ownership are removed to ensure the corporation operates on the same basis as private sector corporations
Management autonomy and authority – the board of directors will have the autonomy and authority to make commercial decisions
Strict accountability for performance – the board of directors will be held accountable for its performance against its Statement of Corporate Intent which sets out the tasks to be performed and the performance targets that are to be met.
The corporate model is intended to provide a commercial discipline for the operation of water supply and sewerage services so that these services are provided on a commercial basis and adequate incentives can be made available to improve the efficiency of service delivery.
The Central Coast Water Corporation Act 2006 provides for the establishment of a council-owned regional water corporation and future regional corporations would probably be designed on the basis of the Central Coast model.
Assessment – Council-Owned Regional Water Corporation Viability criterion
This model proposes the transfer of all water supply and sewerage functions from individual councils to another entity. The transfer of functions will have an impact on the affected councils’ economies of scope and revenues because shared functions would no longer benefit from the water supply and sewerage functions’ share of contributions towards costs.
This may affect employment or the level of community services provided by councils or result in increased rates for property owners or a combination of the three. However, the
corporation could be required by its shareholders to pay dividends and tax equivalent payments that would at least offset the loss of revenues from shared functions.
As water supply and sewerage provide 30% to 40% of the total revenue of councils, removal of these functions, could make the residual operations of many small councils unviable.
Expertise criterion
The geographical scope of the corporation, if centred on one or two large regional centres will generally attract skilled labour. Consequently, this model is likely to have reasonable access to skilled labour.
Efficiency criterion
The corporation model does not preclude a pricing structure that is both independent and sustainable.
Effectiveness criterion
The corporation structure would probably be the best practice management structure for an entity with a commercial function. The corporation, as a distinct legal entity, would be able to make the decisions needed to secure future water supply and adequate sewerage services that councils may be reluctant to make. The corporate structure provides an opportunity for directors to be appointed that have relevant specialist skills. This will ensure that sound commercial decisions would be made without the undue influence of council political imperatives. Dividends would be paid to the shareholders, that is, the constituent councils and this will ensure that the corporation’s surpluses are retained for the benefit of the community.
Planning integration criterion
Strategic planning will be performed by the corporation. In view of the local council
shareholding and representation on the corporation’s board of directors, planning integration with shareholding local councils should be achievable.
Employment criterion
The centralisation of all water supply and sewerage functions in a corporation may result in employment redundancy in the councils that are within the corporation’s area of operations.
Field operations staff are unlikely to be affected by the formation of the corporation.
The impact on employment could be mitigated by transitional provisions to protect affected employees for up to 5 years.
Social and economic criterion
There are both positive and negative impacts on communities from the establishment of a corporation. The positive impacts are:
lower water supply and sewerage bills arising from scale economies that generate cost efficiencies;
potential for “postage stamp” pricing which could benefit smaller communities through improved and affordable standards of water supply and sewerage services for less
potential for “postage stamp” pricing which could benefit smaller communities through improved and affordable standards of water supply and sewerage services for less