Feigning Economic Discipline

In my view, tight economic discipline is very definitely the key ingredient driving companies to achieve quantum leaps in their asset management programs, plans and practices. Of this there is no doubt.

And no matter how you play it, budget constraints is nowhere near as compelling as a group of angry shareholders, career risk, and the possibility that the company could cease to exist. (A la Metronet)

That is all very compelling of course. But bringing about mass privatization of the industry, large scale PPP intervention, or even the Asset Manager / Asset Owner separation is something for governments and administrative boards... not something for lowly asset managers like us.

So if real economic discipline is out of the question for now, how can we fake it till we make it?

Economic discipline is driven by risk. Not only the risks associated with asset performance, but also the risks to personal careers, company survival and profitability.

Creating the environment for tight economic control revolves very clearly around introducing these risks.

Before continuing let's be very clear. As with past articles, the goal is not to do things cheaply; but to do things effectively. Cost effective delivery of agreed service levels or performance levels.

Not run down public buildings unable to be maintained because budgets have run dry.....

So if we are going to introduce this risk into a public organization, how can we go about it?

A sense of urgency

If you have worked with public sector companies you will have noticed this phenomenon. Everyone complains about the way time is wasted but nobody is authorized to do anything about it.

Simulating the private sector people must have something at risk when they make decisions, or (even more importantly) when they omit to make decisions.

Holding people accountable in the public sector is difficult for many reasons, some of them associated directly with our form of government. So we are not talking about sacking people for incompetence.

But something needs to be included... bonus or pay rises at risk, the risk of downgrading the level they have achieved and pay rate they are currently on, or alternatively (and the one I far prefer) the possibility of a significant bonus for achieving serviceability AND cost forecast controls.

Before we can change the way people act we need to change the way they think. And in the public sector this means introducing the same career risk, or at least similar, to what exists in the private sector.

Long term accountability

The financially regulated utilities sector in the United Kingdom the regulator plays the part of competition. While not perfect, this introduced the element of accountability to the long term planning for utility companies.

While this is obviously complex and deserving of it's own article series, we are going to focus here on what made this successful, not what needs to be fixed.

One of the key elements they introduced when shifting to the privatized and financially regulated model was a need to confidently justify expenditure over the medium term. In their case this generally boils down to 5 year planning cycles.

Key to this planning cycle is the ability to deliver an agreed upon level of service. Without this there is only a one sided argument and the consumer can be made to suffer so that people meet their cost

The prepare their asset management plans, they submit them through to the regulator who challenges them, and ultimately there is an amount awarded.

The regulator doesn't actually allow them to have the cash, rather, he agrees that they will need to spend "X" in their asset management plan, meaning they will need to charge "Y" to the consumer in order to cover costs and to make an agreed profit margin. (9% as I recall)

With this agreed guarantee of income levels, (well almost guaranteed, usage aside) they are able to obtain credit from finance markets at reasonable rates because the risk of default is firmly covered by what they have laid out and agreed.

So what happens if they get it wrong?

There are mechanisms in there to ensure they do not over charge, and transparent publication of accounts is part of this. But if they charge too little or spend too much what happens?

They lose money. Significantly. They already have serviceability measures against them. Measures that, if they miss them, will cost them dearly in fines and charges. So they cannot effectively just cut costs.

So they have to wear the costs... costs that can seriously affect profitability, something that is not tolerated very well within private companies (another career ending event often), or they may even become non-viable as a stand alone entity.

It tends to sharpen the wits in terms of the decisions made, and they way they are implemented. A keenness that cannot be easily replicated where this level of economic consequence is absent.

Introduction of Asset management Planning is one step, and impartial verification and evaluation is a second step. These are hard to set up, but definitely possible.

From there their needs to be opportunities to openly state "we got it wrong". This is not a hanging jury by any means. But there also needs to be significant rewards as well as consequences for hitting targets as agreed.

Lastly, and very definitely, this needs to be publicized widely. Throughout the local government sector and through the media, even to the point of trying to get political sponsors. People need to back themselves on this.

Loss of face isn't only important in Asian cultures let me guarantee you...

There is obviously more steps that could be taken. But the few listed here can trasnform the asset management processes, cost effectiveness and internal accountability of any department - just as they have done for entire industries.