Transport Colloquium 2005 Tomorrow’s Transport Infrastructure 18-19 May 2005 Championing Innovation & Value Creation for Price Regulated Infrastructure Presented by Garry Bowditch Email: garry@vmax.com.au Ph: 0414 977 683 Web: www.vmax.com.au All rights reserved, © vmax Consulting 2005 Introduction Policy responses to infrastructure challenges… Simple (static) Use price adjustment to create right incentive Infrastructure Dilemma …suggests that the problem requires a dynamic solution? Systemic market failures demanding comprehensive response Innovation Value Creation Price-Quality Spectrum Productivity Complex (dynamic) Innovation & Value Creation …there is more than one way of getting there Efficiency lower unit costs Innovation Value Creation (productivity growth) higher unit prices Customer Responsiveness Quality Targeting the right competitive model From… To… Strategic Differentiation Cost Focus Productivity Growth Centric Value Creation Imitation Price Discounting Evolution Regulatory System Preferred regulatory emphasis Innovation (dynamic efficiency) 70% Value Build (static productivity) 20% Profit / Rate of Return (allocative efficiency) 10% Stakeholder Motives Stakeholder Asset Owners Operators Motivations Generic Value Creation Strategies Value Build P& L centric Funds Managers Max. Risk (adj.) Return Customers Value Seeker Market Wide Shaping Business (asset) Level Initiatives Bundle complementary services Cost efficiency (dominant) Regulator Government Monitoring, Redress market failure Productivity Growth centric Differentiation (emergent) Customer Centric Asset Synergy (interoperability) Interdependence (whole of supply chain driven) Externality Rich Externality Rich Initiatives The market conduct of owners / operators of infrastructure may pose challenges for competition regulators Context Market Wide Shaping Asset value build initiatives Objective Legacy of government ownership; low starting point Poor interoperability of infrastructure Fragmented supply chains Poor work practices Asset value re-rating + seamless value propositions Whole of supply chain shaping Better inter-link infrastructure assets road, rail, ports etc Seek harmonisation & standardisation to enhance efficiency Behaviour Work beyond firm boundaries to achieve: Optimising efficiency through scale economies and standardisation Process leadership ( in at least few critical areas such as supply chain management, marketing & acquisitions Acute cost control Market dominance in order to set uniform & propriety standards Establish intensely competitive complementors within supply chain Watch Points for Regulators Vertical separation requirements Limiting price flexibility (also limits entrepreneurial action) Misinterpret market conduct (where joint ventures / alliances are required to establish competitive supply chains) Market Conduct & Regulation Value Creation What are we looking for … Market Instruments Anticipation and prevention Regulatory reform pricing policy Cost reduction imposed as best route to lower prices Command and Control Partnership & Collaboration Hybrid Approaches Strategic and tactical planing to improve conduct Life cycle approach Prevention and control Strategic and longterm plans fully integrative between customer & industry Limited regulatory intervention Corporate citizenship Voluntary agreements Productivity approach & triple bottom line reporting Act on assumption of guilt ; Regulators take operational role ; Denial & resistance prevails; Compliance driven regulations viewed as cost prescription principles Evolution Regulatory System Cross Industry, competitive lessons from a water monopoly • • • Source: Stormwater Harvesting and Utilisation in the City of Salisbury High regulated price invited competition ☑ Contestability Differential (higher) pricing of commercial water usage yielded competition in water storage & distribution. Disproved assumptions of natural monopoly and homogeneity of water. New entrant challenged & exploited ‘fit for purpose’ water usage. Regulatory system needs to accommodate technology disruptors as a cornerstone to value creation and community welfare. New entrant reduced water from Murray River + damage to wetlands Government mandated incumbent water utility inappropriately (i.e. consistent quality + supply) ☑ Positive Externalities ☑ Fulfilled customer need Shadow Pricing grey water ‘highly profitable’ ☑ Profitable Incumbent assumed customer preferences ☑ Improved customer engagement Value Creation Customer Engagement Cross over from ‘cost leadership’ to ‘differentiation’ for infrastructure providers will enable above average returns, a high level of customer satisfaction reflecting better long term strategic planning, embed a culture of consultation & collaboration and rely less on regulators as umpire with customers Differentiation Emergent Price / Quality spectrum Sell who you are Anticipate & shape future & latent customer needs Sell what you know Indexed return benchmark Sell what is required Sell what is made Partnerships with customer towards solutions Cost Leadership Dominant Rate of Return, Price Cap React to customer need Day to day service Time, experience, effort Leadership Lessons Commercial & Policy Lessons The Goal The Key Innovation / Value Creation Whole of Supply Chain Regulatory Lessons Accommodate all sources of value creation Principles based approach Joint Ventures & Alliances Vertical Integration The Means Customer Engagement Avoid simplistic customer assumptions Over Done Cost Leadership Diminishing benefit to customers & economy Thank you Any further questions please refer to our contact details below. Garry Bowditch Patricia Pascuzzo garry@vmax.com.au Ph: 0414 977 683 patricia@vmax.com.au Ph: 0400 292 441 Transport Colloquium 2005 Tomorrow’s Transport Infrastructure All rights reserved, © vmax Consulting 2005