Asset management – the overlooked gains from efficiency projects

Water utilities' responsibility to provide high quality standards on a sustainable basis requires a significant effort in the adequate use of resources and on the management of its assets to ensure safe drinking-water quality and to meet customers' expectations. Water utilities are increasingly challenged to improve their efficiency; however, decisions on the implementation of efficiency projects like non-revenue water (NRW) reduction projects, are often reduced to short-term economic criteria or to a cost-benefit analysis, at best.

Narrowing the decision on implementing efficiency projects to operational costs or capital expenditure needs without properly evaluating the direct and indirect gains generated from this type of project is a biased analysis that overlooks the improvement of the utility's intangible assets.

Intangible assets such as knowledge, skills, relationships, processes, brands or culture are vital strategic resources. Governments have started highlighting the importance of intangibles as drivers for economic growth and encouraging firms to pay higher attention to their intangible assets. Investment in intangible aspects of business is essential for companies to provide added-value products and services (Mehta & Madhani 2008).

Urban water infrastructure delivers a range of services to communities that have societal value and are paid for through water bills and/or taxes. Changes in the structure, type, function and management of this infrastructure influence both the cost of service provision and the value generated (Marlow et al. 2011). Investment in infrastructure should ideally be assessed in this context, which requires the analysis of cost and benefits at various spatial and temporal scales, including strategic and tactical levels. If these are not included, there is a tendency to adopt short-term management strategies that could result in lower service levels in the future, which increase the overall level of cost imposed on a community (Burn et al. 2007).

An example is the investment required when implementing NRW reduction projects, understood as the implementation of intentional actions to decrease the volumes of real losses, apparent losses and unbilled authorized consumption. Typically, these projects involve investment regarding the purchase of flow meters to increase metering coverage, valves to implement district metered areas (DMA), leak detection equipment for location of invisible bursts, network rehabilitation to improve the infrastructure's condition, and customer meters to decrease metering inaccuracies in customer billing. While the investment and the operational costs associated with these projects are generally well estimated, the benefits derived from these projects are not.

The benefits of NRW reduction and control are many and interlinked. NRW represents an opportunity cost not only for the concerned service provider, but also for cities, the environment and the broader economy. As stated by World Bank (2016), NRW directly improves several aspects of water utilities (Figure 1 – black arrows) as part of an ongoing cycle where these aspects contribute to the improvement of others (Figure 1).

The value generated from efficiency projects can be divided into direct gains, such as reduction of real losses, and indirect gains, such as the improvement of water system's operational control. Additionally, the benefits can also be divided into tangible and intangible gains.

On one hand, tangible gains typically fall into one of the following categories: cost reduction, revenue optimization, risk reduction, regulatory compliance and the ability to enter new markets and to develop new products (Sherman 2015).

Intangible gains, on the other hand, correspond to non-monetary assets that cannot be seen, touched or physically measured (Mehta & Madhani 2008) being typically grouped into three broad categories: rights (e.g. leases, agreements, licenses), relationships (e.g. trained workforce, customer relationships) and intellectual property (e.g. patents, trademarks, marketing strategies).

A proper identification of the value generated by NRW reduction projects can support water managers to make a reasoned decision on the implementation of these projects based on quantifiable or qualitative criteria and learning from the experience of other utilities.

AGS, a company owned by Marubeni and responsible for the management of 13 water utilities in Portugal and Brazil under concession agreements and public-private partnerships and for the service provision of engineering services to water utilities in Europe, South America and Asia, must deal with a significant amount of assets, including physical, human (Feliciano et al. 2016), technological and intangible assets, to get the most value from them.

Although the valuation of intangible assets has become a widespread topic of interest in the new economy (Tsai et al. 2016), very few project development studies, at inter-organizational project level, adopt a comprehensive view of value considering long-term and intangible gains (Yan & Wagner 2017). When evaluating projects at an urban water utility's level, the consideration of such gains seems to be even less common.

To our knowledge, the identification, quantification and/or classification of intangible gains resulting from NRW reduction projects has not been formally done. As such, the aim of the present work was to analyse the true benefits and gains resulting from such projects and why these should be part of decision-making processes on whether to implement the projects or not. A proper identification of the value generated by NRW reduction projects can support water managers in making a reasoned decision on the implementation of these projects based on quantifiable or qualitative criteria and to learn from the experience of other utilities.

Two water utilities currently implementing NRW reduction projects under AGS' coordination and technical support based on infrastructure asset management methodologies were selected to determine the direct and indirect gains of the projects. To acknowledge the tangible and intangible gains generated by the projects, two alternatives were considered: a status-quo alternative, corresponding to not implementing the project (t0) and project implementation after three years (t3).

The water utilities were firstly characterized and evaluated in terms of operational performance at status quo and after three years of project implementation. Selected metrics (Table 1) included the assessment of NRW (%), real losses per input volume (%), apparent losses per input volume (%), mains bursts [no./(100 km.year)] and service connections bursts [no./(1000 sc.year)] (Alegre et al. 2016). Additionally, the Infrastructure Value Index (IVI) was also considered at utility level as it provides an indication of the maturity level of a specific water network, being defined as the ratio between the current value of an infrastructure and its replacement cost (Alegre 2007).

The qualitative assessment of each measure, in terms of ‘good’, ‘fair’ or ‘poor’ performance was accomplished by comparing the results with reference values from the Portuguese water Regulator assessment system (ERSAR 2019).

A set of direct and indirect gains were identified for these water utilities, covering areas such as organization, human resources, data and information, operational control, quality of service, relationship with stakeholders, environmental, economic and infrastructure sustainability (Table 2).

To make reasoned decisions on the adoption of a NRW project, one should compare two alternatives: the implementation of the project and a status-quo alternative. In both cases, it is important to include all the relevant criteria for comparison purposes, even though some of them are difficult to quantify (intangible gains).

According to Delgado-Galván et al. (2010), when dealing with intangibles, judgments are rarely consistent unless they are forced in some artificial manner. The problem derives from the fact that comparisons will only work with well-defined scales of measurement. Nevertheless, direct comparisons are necessary to establish measurements for intangible properties that have no scales of measurement. To evaluate intangible gains generated from NRW reduction projects, a qualitative scale for the identified gains is proposed in Table 3. For each intangible gain, support data was identified to substantiate the qualitative evaluation and diminish the inherent subjectivity.

To allow a reasoned analysis of the alternatives considered, metrics and qualitative levels were converted to a normalized scale ranging from zero to three through performance functions (Cardoso et al. 2004). These functions convert variables into performance indices where values between zero and one correspond to poor performance, values between one and two correspond to fair performance and values between two and three correspond to good performance (Figure 2).

Additionally, an analysis of the economic benefits derived from the projects was carried out to complement the approach. For this purpose, investment costs (network rehabilitation, customer meters, flow meters and equipment) and accumulated results (tangible direct and indirect gains) were determined for an adequate timeframe that would allow to incorporate the results of the adopted NRW reduction measures (10-year period).

The economic benefits for the intangible gains were determined considering the number of working hours saved in resolving customer complaints and managing large amounts of data and increased revenue from externalizing the increased know-how acquired in the project.

Table 4 presents the main characteristics of the water utilities chosen for this study. Utility A is located in an arid area with water scarcity problems and has a somewhat aged infrastructure with a high level of burst frequency. Utility B is located in a Mediterranean climate area with abundant water availability, and presents a balanced infrastructure, a high level of real losses level and lower water production costs when compared to Utility A.

Figure 3 presents the utilities' assessment in terms of economic, environmental and infrastructure sustainability before (t0) and after three years (t3) of the start of the project based on selected metrics from the literature.

Analysing the results, it is possible to observe that NRW levels have decreased in both utilities (from 36% to 27% in Utility A and from 43% to 36% in Utility B), corresponding to a combined reduction of about 10.5 million m³ in the first three years of the project. NRW reduction resulted from the decrease of input volumes (direct gain), achieved from active leakage detection activities supported by network sectorization, metering and real-time flow monitoring software, and from the increase in revenue volumes (direct gain) through customer meter replacement and detection of unauthorized consumption. The observed increase in the level of apparent losses resulted from a more accurate estimation of metering errors when compared to the projects' initial stage. In terms of burst frequency, the number of natural bursts increased in Utility A, evidencing infrastructure problems, mainly due to aging and poor installation conditions of younger pipes, while in Utility B natural bursts have decreased, evidencing a good infrastructure condition that sustains reduction of real losses.

For comparison purposes, the tangible gains identified in Table 2 were quantified through established metrics while intangible gains were evaluated considering the qualitative matrix presented in Table 3. These were converted to a scale from 0 to 3; that is, from poor performance to good performance (Figure 4) using the respective performance function (Figure 2). When assessing the gains of NRW projects, typically only NRW-related metrics are considered. However, when including other types of gains, tangible and intangible, the impact of the project and the different improvement areas it enables (e.g. organizational efficiency, data management) become clear, even if intangible gains are estimated in a qualitative manner.

To have an integrated analysis of this type of project it is also important to analyse the economic dimension.

• m: number of direct gains

• n: number of indirect gains

When analysing accumulated results, one can observe that the project's break-even is obtained around six years for Utility A and Utility B, evidencing that when short-term analysis of NRW projects are adopted they can turn out to be disadvantageous from an economic perspective by not allowing enough time for the economic gains to overcome costs and amortizations associated with the project.

The incorporation of indirect gains such as the decrease in Regulator's fines or the postponing of infrastructure capacity investment (differential area highlighted in grey in Figures 5(b) and 6(b)) will result in earlier break evens for both utilities, as expected.

Although Utility A presents higher water production cost when compared to Utility B, the latter will achieve positive results earlier than Utility A because NRW reduction volumes are greater in Utility B. Additionally, the incorporation of indirect gains is estimated to have higher impact in Utility B as the NRW reduction allowed them to postpone investment to increase systems' capacity in some areas of the distribution system that were at the limit of storage capacity.

• m: number of direct gains

• n: number of indirect gains

• p: number of intangible gains

The case-study herein presented demonstrated that cost-benefit analyses of NRW reduction projects should be developed in a timeframe that allows the effect of the adopted NRW reduction measures (investment and operational expenditures) to be accommodated and that indirect gains should be incorporated in the decision-making process of implementing efficiency projects. Also, intangible gains should be considered in the decision-making process. Even if they are not easily quantifiable in monetary terms, a qualitative evaluation of intangibles will provide water managers with additional arguments to justify systems' improvement and efficiency. Thus, an identification of all possible short, medium and long-term benefits should be done and qualified or quantified when possible in order to obtain a clear picture of the impact that efficiency projects will have in the water utility. The methodology presented is an approach to the identification and incorporation of overlooked gains from NRW reduction projects in the economic analysis of the benefits derived from them. Further work is required to diminish the subjectivity inherent to intangible gains estimation.

Infrastructure asset management requires a strategic view of water systems based on the long-term balance of performance, cost and risk, aiming at the adequate management of utilities' physical, human, technological and intangible assets. Water managers should change decision-making processes from purely economic criteria to include environmental and social criteria as well, considering not only tangible gains but also the intangible ones since the long-term effect of current water systems' inefficiencies can translate into significant capital expenditures, environmental and social consequences in the future.