Heather talked about the way the United States fund water systems. Heather is hoping that funding changes and incentives will be addressed eventually.
She observed that a lot of times the funding is going to the worst entities instead of the best entities and that creates a disincentive to effective management.
Sometimes you do something like asset management because the worst systems are getting the funding faster and sooner than the better-run-systems said Heather.
She mentioned that for entities having seen this, they would argue and ask, “Why am I doing all this if somebody else who’s worse than I am is getting all the money?”
Heather said that this is a sort of the moral hazard issue where we’re trying to do the right thing by improving public health but they have the opposite side of trying to say, “You’re not running your assets properly, you’re actually getting more funding.
Heather further said:
The more important component that we have is actually the idea that our funding agencies only fund capital projects. They don’t fund what they consider to be operation and maintenance. So sometimes a more efficient operation for an entity would be to do more maintenance, do maybe more intervention or preventative maintenance and so put off the need for a capital project.
For entities when they go to get funding the capital project is going to be funded, and what they had wanted to do couldn’t be funded because it’s more of a maintenance kind of dynamic.
Heather noted that eventually we have to come to grips with that, because being able to fund the efficient operation of a water network in the longer term is a good goal, as opposed to funding O & M (operation and maintenance) out of your customer revenues and you get funding from the federal or state government to fund capital projects. That funding arrangement can really be a problem with asset management.
Learning – Worst First vs. ODM
Ross shared about something they found over the last 18 years in New Zealand that one’s got to be really, really careful about the behavior “incentivizer”.
He said that if you’re putting a contract out, like maintenance or construction contract, if you write in such a way to incentivize a certain amount of behavior or punish a different behavior, then that will alter the way that the contract goes.
Ross explained that in terms of regulators or funders of utilities, if you incentivize worst-first behavior, which is just letting the system degrade to a level where you’ve got a heap of problems like breaks or a lot of overflows.
And then you spend a whole lot of money on that system or network because it has become a problem that’s on the front page of the paper every day – then that is like fighting a wildfire, he said.
Ross further said:
It’s just like fighting a wildfire. It feels good at a certain level but it can cost three or four times as much as running a system in an optimized way. So you’re wasting money that you could have otherwise used on other places or to do other work.
But the trouble is – there’s moral hazard because – if you reward that poor behavior, everybody else notices.
And so the people who are running their systems well then will have their own argument and say, “Hey, why don’t we just let our system run down like the next-door neighbors have and be able to get all this federal or regulator money — why have we done the job properly?” And it’s a really valid question.
So we’ve mostly managed to avoid encouraging that sort of behavior in New Zealand but every now and again it gets close.
It is important to reward good management and good behavior and good asset management, because it encourages good use of resources. For towns and authorities that let their assets fall to bits, make them pay for it. One way or the other do not reward that poor behavior because otherwise everybody gets the message.
FEATURED PHOTO CREDIT: The Plaza, Albuquerque, NM Glen Van Etten