Sydney Water Corporation - Expenditure Review · Figure 3-3 Trends in WWTP Non-compliant discharges 2008-2015 40 Figure 4-1 Sydney Water’s Strategic Asset Management Framework 49

IPART

Sydney Water Corporation - Expenditure Review Final Report

21 December 2015


Sydney Water Corporation - Expenditure Review | Version 1.6 | 21 December 2015 | 5142678 2

Notice

This document and its contents have been prepared and are intended solely for IPART’s information and use in relation to Sydney Water’s expenditure review 2015.

WS Atkins International (Australia) Limited (‘Atkins’), in association with Cardno (Queensland) Pty (‘Cardno’), assumes no responsibility to any other party in respect of or arising out of or in connection with this document and/or its contents.

This document has 283 pages including the cover.

Document history

Job number: 5142678 Document ref:

Revision Purpose description Originated Checked Reviewed Authorised Date

Rev 1.0 Draft JNSJ, GJ, JAJ, DF

SJI JNSJ GJ 06/11/15

Rev 1.1 Draft – all projects JNSJ, GJ, JAJ, DF


Rev 1.2 Final Draft (draft) JNSJ, GJ, JAJ, DF


Rev 1.3 Final Draft JNSJ, GJ, JAJ, DF


Rev 1.4 Final Report JNSJ, GJ, JAJ, DF


Rev 1.5 Final Report -complete JNSJ, GJ, JAJ, DF


Rev 1.6 Final Report -public JNSJ, GJ, JAJ, DF




Table of contents

Chapter Pages

Table of contents 3

Glossary 8

Executive summary 12

1. Introduction 27 1.1 Terms of Reference 27 1.2 Sydney Water Corporation submission to IPART 27 1.3 Review Process 27 1.4 Methodology 28

2. Business Environment 34 2.1. Legislation 34 2.2. Regulatory Requirements 35 2.3. The Regulated Business 36 2.4. The Non-Regulated Business 36 2.5. Sydney Desalination Plant 36

3. Strategic Management Overview 37 3.1. Operating Environment 37 3.2. Business Planning 40 3.3. Governance Arrangements 41 3.4. Organisation, Structure & Functions 42 3.5. Business Systems & Processes 42 3.6. Cost Allocation 44 3.7. Conclusions 46

4. Asset Management 48 4.1. Scope of review 48 4.2. Strategic Asset Management Framework 48 4.3. Corporate Strategy / Plan 49 4.4. Product & Asset Strategy / Planning 51 4.5. Product & Asset Decision Making 51 4.6. Cost Estimating Process 52 4.7. Procurement 53 4.8. Risk Management 53 4.9. Conclusions 54

5. Output Measures 55 5.1. Output Measures 55 5.2. Past Performance 55 5.3. Measures for Future Price Path 56

6. Operating Expenditure 58 6.1. Methodology 58 6.2. Overview 59 6.3. Operating Expenditure in Current Price Path 66 6.4. Prudent and Efficient Expenditure in the Current Price Path 74 6.5. Operating Expenditure in the Future Price Path 75



6.6. Operating Expenditure in the Future Price Path 82 6.7. Conclusions 87

7. Capital Expenditure 90 7.1. Methodology 90 7.2. Overview 90 7.3. Investment Drivers 94 7.4. Water Service Capital Expenditure 96 7.5. Wastewater service capital expenditure 113 7.6. Stormwater 128 7.7. Recycled Water 136 7.8. Corporate Services 136 7.9. Prudence and Efficiency in Current Price Path 152 7.10. Prudence and Efficiency in Future Price Path 154 7.11. Conclusions 162

8. Asset Classification 165 8.1. Methodology and Assumptions 165 8.2. Findings and Recommendations 165

9. Specific Issues 167 9.1. Finance Leases 167 9.2. Sydney Water IT Expenditure 169 9.3. Projects subject to Government Directions 169 9.4. Environmental Protection Licences (EPLs) 171

Appendices 173

Appendix A. Project review summary sheets - Capex 174 A.1. North West Growth Centre 174 A.2. South West Growth Centre 179 A.3. Developer Operations 184 A.4. North Head Biosolids Amplification 188 A.5. Winmalee WWTP - nutrient upgrade 191 A.6. Wet Weather Overflow Abatement 193 A.7. Rouse Hill Trunk Drainage 197 A.8. Stormwater Renewals 201 A.9. Green Square Trunk Drainage 205 A.10. Bargo Sewerage 208 A.11. Galston Sewerage 211

Appendix B. Project review summary sheets – Capex Renewals 215 B.1. Critical Water Main Renewals 215 B.2. Reticulation Water Main Renewals 219 B.3. Reservoir Reliability Program 222 B.4. Water Pumping Station Renewals 225 B.5. Avoid Fail Sewer Rehabilitation Program 228 B.6. Dry Weather Overflow Reduction Program 231 B.7. Energy Management 234 B.8. Wastewater Treatment Plant Renewals Program 237 B.9. Malabar WWTP Improvement Program 240 B.10. Quakers Hill WWTP Improvement Program 243



Appendix C. Project review summary sheets – Other 245

Appendix D. Scope of Work 269

Tables Table 1-1 Efficient Level of Operating Expenditure 17 Table 1-2 Efficient Level of Capital Expenditure in the current price path 20 Table 1-3 Proposed Capital Efficiencies 23 Table 1-4 Efficient Level of Capital Expenditure in the future price path 23 Table 1-5 Prudent expenditure in the future price path 25 Table 3-1 Sydney Water Business Processes (Source: Atkins/Cardno analysis) 43 Table 3-2 Allocation of Activity Codes to functions (Source: Atkins/Cardno analysis) 45 Table 3-3 Capital Expenditure Drivers (Source: Sydney Water) 46 Table 4-1 Summary of Cost Estimation Techniques 52 Table 5-1 Proposed output measures 56 Table 6-1 Variance analysis of Support Services expenditure for 2012, 2015 and 2020 65 Table 6-2 Current Price Path Variance Analysis by Product 67 Table 6-3 Current Price Path Variance Analysis by Expense 68 Table 6-4 Current Price Path Bulk Water Variance Analysis 69 Table 6-5 Current Price Path Electricity Variance Analysis 70 Table 6-6 Current Price Path Electrical Mechanical Variance Analysis 71 Table 6-7 Current Price Path Materials Variance Analysis 72 Table 6-8 Future Operating Expenditure compared with 2015 base year 76 Table 6-9 Future Operating Expenditure by Activity 77 Table 6-10 Future Price Path Electricity Forecasts 80 Table 6-11 Proposed Operating Cost Efficiencies 85 Table 6-12 Efficient Level of Operating Expenditure 86 Table 6-13 Efficient Level of Operating Expenditure by Service 89 Table 7-1 Summary of Rouse Hill Trunk Drainage Expenditure in the Current Price Path 133 Table 7-2 Summary of Efficient and Prudent Rouse Hill Trunk Drainage Expenditure in Current Price Path 134 Table 7-3 Summary of Rouse Hill Trunk Drainage Expenditure in 2017-20 135 Table 7-4 Summary of Efficient and Prudent Rouse Hill Trunk Drainage Expenditure in Future Price Path 136 Table 7-5 Meter Replacement Activity and Cost Adjustments 151 Table 7-6 Comparison of projected and outturn spend in 2014-15 (15-16M) 153 Table 7-7 Summary of Efficient Capital Expenditure in the Current Price Path 154 Table 7-8 Future Price Path – Proposed Capital Efficiencies % (Source: SWC SIR and Atkins/Cardno analysis) 157 Table 7-9 Water Service: Summary of Efficient Capital Expenditure 158 Table 7-10 Wastewater Service: Summary of Efficient Capital Expenditure 159 Table 7-11 Stormwater Service: Summary of Efficient Capital Expenditure 160 Table 7-12 Corporate Service: Summary of Efficient Capital Expenditure 161 Table 7-13 Efficient Level of Capital Expenditure 163 Table 9-1 Proposed Asset Lives for Finance Lease Assets 168

Figures Figure 1-1 Operating Expenditure 2008 to 2016 Comparison with Determination ($15-16M) 15 Figure 1-2 Operating Expenditure 2013 to 2020 ($15-16M) 15 Figure 1-3 Capital Expenditure 2008 to 2016 18 Figure 1-4 Expenditure in the Current Price Path by Service 19 Figure 1-5 Breakdown of capital program by driver and product 21 Figure 1-6 Efficient Level of Capital Expenditure 24 Figure 2-1 Map of the Sydney Water Corporation Area 34



Figure 3-1 Long Term Trends in Water Main Breaks and Leaks 2003-2016 39 Figure 3-2 Long Term Trends in Sewer Main Chokes 2004-2015 39 Figure 3-3 Trends in WWTP Non-compliant discharges 2008-2015 40 Figure 4-1 Sydney Water’s Strategic Asset Management Framework 49 Figure 4-2 Sydney Water's Corporate Strategy 50 Figure 4-3 Sydney Water's Corporate Strategy 50 Figure 4-4 Investment Governance Framework 52 Figure 4-5 Transition of Procurement Approaches 2012-2015 53 Figure 6-1 Expenditure comparisons 2008 and 2012 Determinations 59 Figure 6-2 Actual and Proposed Operating Expenditure 2013 to 2020 60 Figure 6-3 Expenditure Variance by Service from 2013 base 61 Figure 6-4 Comparative costs per property and per unit volume 2013/14 62 Figure 6-5 Totex comparison of $/Ml and $/property– water service 63 Figure 6-6 Totex comparison of $/Ml and $/property– wastewater service 64 Figure 6-7 Actual and Forecast Operating Expenditure 2009 to 2016 75 Figure 7-1 Total Capital Expenditure 2009 to 2021 (15/16 prices) 91 Figure 7-2 Breakdown of Expenditure in Current and Future Price Paths by Purpose ($15/16m) 92 Figure 7-3 Breakdown of capital program by driver and product 92 Figure 7-4 Comparison of current and future capex by driver 93 Figure 7-5 Comparison of current and future capex by product 94 Figure 7-6 Breakdown of Expenditure in Current and Future Price Paths by Product ($15/16m) 95 Figure 7-7 Breakdown of Expenditure in Current and Future Price Paths by Driver ($15/16m) 96 Figure 7-8 Water capex trends 97 Figure 7-9 Water service capital expenditure by project: current price path 97 Figure 7-10 Water Capital Expenditure by Driver 2012 – 2021 98 Figure 7-11 Water service capital expenditure by project: 2017-20 99 Figure 7-12 Risk Profile of CWM (2015) 102 Figure 7-13 Trends in Renewals Expenditure and Service Performance 103 Figure 7-14 Population projections for Sydney 105 Figure 7-15 Water Service Growth Expenditure by Project 107 Figure 7-16 Water Growth Capex: Current Price Path 108 Figure 7-17 Water Service Growth Capex – Growth 2017-20 110 Figure 7-18 Water Service Growth Developer Operations Capex 110 Figure 7-19 WGC Capacity & Growth Projections 111 Figure 7-20 Changes in dwellings in greenfield areas within Sydney Water's area of operations 112 Figure 7-21 Reprofiling of NWGC water service expenditure 112 Figure 7-22 Wastewater capex trends 113 Figure 7-23 Wastewater service capital expenditure by project: current price path 114 Figure 7-24 Wastewater Capital Expenditure by Driver 2012 – 2021 114 Figure 7-25 Wastewater service capital expenditure by project: 2017-20 115 Figure 7-26 Wastewater Service Growth Expenditure by Project 123 Figure 7-27 Wastewater Service Growth Developer Operations Capex 125 Figure 7-28 Reprofiling of NWGC wastewater service expenditure (excludes Riverstone WWTP Amplification) 126 Figure 7-29 Wastewater ‘Government Program’ Schemes in Current Price Path 127 Figure 7-30 Stormwater capex trends 128 Figure 7-31 Stormwater service capital expenditure by project: current price path 129 Figure 7-32 Stormwater Capital Expenditure by Purpose 2012 – 2021 129 Figure 7-33 Stormwater service capital expenditure by project: 2017-20 130 Figure 7-34 Evolution of capex projections for Rouse Hill Trunk Drainage 133 Figure 7-35 Rouse Hill Trunk Drainage Expenditure by Creek and Type 134 Figure 7-36 Corporate capital expenditure 2012-2021 137 Figure 7-37 Corporate Capital Expenditure – By Driver 2012-21 138 Figure 7-38 Corporate Capital Expenditure – By Project 2012-16 139 Figure 7-39 Corporate Capital Expenditure – By Project 2016-20 140 Figure 7-40 Assessment of Efficient Capex versus the Proposed Level by Product 164





Glossary

Term Definition

ACCC Australian Competition Tribunal

ADWG Australian Drinking Water Guidelines (2004), National Health and Medical Research Council and Agriculture and Resource Management Council

AIR Annual Information Return

ANZECC Australia and New Zealand Environment and Conservation Council

ARMCANZ Agriculture and Resource Management Council of Australia and New Zealand

AWTP Advanced Water Treatment Plant

Balancing Item All capital works under $10 million have not be listed in the 2008-12 and 2012-16 SIR reports and are categorised as a ‘balancing item as agreed by IPART and Sydney Water.

BASIX Building Sustainability Index

BIC Business Improvements Committee

BMIS Business Management Information System

BOO Build, Own, Operate

CEO Chief Executive Officer

CMA Competition and Markets Authority, UK

CMP Conservation Management Plan

CMS Customer Management System

CRC Current Replacement Cost

CRM Customer Relationship Management

CSC Customer Service Committee

CWM Critical Water Main

DBOM Design, Build, Operate and Maintain

DMS Demand Management System

DPI Department of Primary Industries

DSP Developer Service Plans



Term Definition

ELL Economic Level of leakage

EMS Environmental Management System

EPPM Enterprise Program and Project Management

EPA Environmental Protection Authority

EPL Environmental Protection Licences

ERP Enterprise Resource Planning

ESC Energy Saving Certificate

ESD Ecologically Sustainable Development

E&W England and Wales (water companies of)

FRM Field Resource Management

FTE Full Time Equivalent

GIS Geographical Information System

Gl/a Giga (109) litres per annum

HACCP Hazard Analysis and Critical Control Points

HAF Housing Acceleration Fund

IICATS Integrated Instrumentation Control and Telemetry System

ILI Infrastructure Leakage Index

IPART Independent Pricing and Regulatory Tribunal

IS Information Services

ISO International Organisation for Standardisation

IWA International Water Association

LCD Litres per capita per day water consumption

LGCS Large-scale generation certificates

KPI Key Performance Indicator

MCA Multi-Criteria Analysis

MDP Metropolitan Development Plan

MEERA Modern Engineering Equivalent Replacement Asset

MLD Megalitres per Day



Term Definition

MMWF Modern Mobile Workforce

MOU Memorandum of Understanding

NATA National Analytical Testing Authority

NHMRC National Health and Medical Research Council

NPV Net present value

NSW New South Wales

NSW Health NSW Department of Health

NWGC North West Growth Centre

NWI National Water Initiative

OEH Office of Environment and Heritage

OH&S Occupational Health & Safety

PAMS Product and Asset Management System

PBC Program Business Case

P50 50th Percentile

P80 90th Percentile

PCG Project Control Group

PSP Priority Sewerage Program

RAB Regulated Asset Base

RBCE Risk Based Cost Estimate

R&D Research & Development

RCM Regulatory Cost Model

RWQMP Recycled Water Quality Management Plan

SAP It is a trademark name for a leading Enterprise Resource Planning system (Systeme, Anwendungen, Produkte in der Datenverarbeitung which translates from German into Systems, Applications & Products in Data Processing).

SCADA System Control and Data Acquisition

SCA Sydney Catchment Authority

SCI Statement of Corporate Intent



Term Definition

SDP Sydney Desalination Plant

SIR Special Information Return

SNIP Strategic Network Investigation Plans

SSIP Strategic System Investigation Plans

SOP Standing Operating Procedure

SCT Small-scale Technology Certificates

STP Sewage Treatment Plant

SWC Sydney Water Corporation

SWIMS Sydney Water Information Management System

T2020 Billing system replacement for Access

UKWIR United Kingdom Water Industry Research

WAMC Water Administration Ministerial Corporation

WAS Water Accounting System

WELS Water Efficiency Labelling Standards

WES Water Efficiency Standards

WERF Water Environment Research Foundation

WFA Water Filtration Agreement

WFP Water Filtration Plant

WaterNSW Water New South Wales which has superseded the Sydney Catchment Authority

WSAA Water Services Association of Australia

WWTP Wastewater Treatment Plant



Executive summary

This report presents the findings of our review of the capital and operating expenditure for the regulated

services of Sydney Water Corporation (SWC). It addresses the prudent and efficient expenditure in the

current period from 2013 to 2016 and for the future price path period 2017 to 2020.

We have based our findings on submission dated June 2015, the annual and special information returns

presented to IPART by SWC in September 2015, four days of structured interviews with the agency General

Managers and staff, information provided by the Corporation and responses to subsequent written

questions. Our findings are also informed by our review of the long term investment processes in September

2015. We reviewed functional activities and a representative number of capital projects in the current and

future price paths.

Our view of efficiency is based on the concept of a Frontier Company competing in an open market where

it has strong internal cost controls. The Frontier Company will continue to seek efficiencies from

technological development and innovation. Other companies or agencies will seek greater efficiencies to

catch up with the Frontier Company. This concept has been applied in previous efficiency reviews of Sydney

Water in 2008 and 2012 and for Hunter Water in 2011 and State Water in 2009. The concept was also used

by Ofwat, the economic regulator in England and Wales, in 2009.

The report takes account of the comments made by IPART and Sydney Water on the draft version of this

report.

Operating Environment

Sydney Water’s supplies potable water to over 1.9m households and businesses. It purchases bulk water

from the WaterNSW and the Sydney Desalination Plant. A greater part of its bulk water is treated at four

privately owned water treatment plants under BOO arrangements. It is directly responsible for the operation

and maintenance of five water filtration plants, 250 service reservoirs, 164 pumping stations, 5,000km of

critical mains and 16,300km of reticulation mains.

Sydney Water collects and treats wastewater from a similar number of customers through a network of

2,700km of critical sewer mains, 22,150km of reticulation sewer mains, 679 pumping stations, and 28

wastewater treatment facilities (including recycled water). Effluent is subject to a range of treatment

processes depending on the disposal route; for example primary treatment for ocean discharge at the North

Head treatment works, tertiary treatment to a high effluent discharge standards (biological nutrient

reduction) and additional nutrient removal and disinfection at some water recycling plants. All sewage

sludge from treatment is disposed to agriculture, composting or landfill.

Water demand has been successfully reduced during the drought which has led to a new normal demand

assumption. The application of this lower demand to assessment of the current system has given headroom

in the network to meet future growth in demand. This has enabled significant current-period expenditure to

promote water efficiency to be scaled back.

Business Structure

Sydney Water responded positively to our 2011 efficiency report. It carried out a business restructure shortly

after the 2012 Determination. A new Service Delivery Division combines the previous Operations and

Maintenance Divisions. The Liveable City Solutions Division now combines the Asset Management and

Solution Delivery Divisions. Support Divisions have been restructured resulting in eight Divisions compared

with ten in 2012.



Efficiency initiatives have been promoted during the current price path including outsourcing the electrical/

mechanical maintenance work and driving productivity savings in civil works activities to match best

performers in the market. A more effective procurement approach has delivered savings in chemical and

other materials costs.

Asset Management & Long Term Planning

This efficiency study was preceded by a strategic management and asset systems and processes review

particularly focussed on Sydney Water’s long term planning processes and the linkages between this

process and the medium term price path period. We have noted a marked improvement in planning

systems and processes since we undertook the efficiency review in 2011/12. A comprehensive asset

management framework is in place and confirmed from our Asset Management review. The continued

development of an asset management framework and the new processes and systems for planned

maintenance provide the opportunity for a comprehensive risk-based approach to asset management and

the potential to drive further efficiencies. This enables a debate on the level of risk, performance and

charges to customers.

The provision of a long term investment strategy is considered an essential element of the efficiency review,

so that the medium term price path period can be seen in relation to long term plans. We found that while

Sydney Water’s asset management systems represent good business practice and benchmark at the top

of their peers, the long term planning process is still developing. Some focus has been given to developing

regional strategies and facility blueprints and a Strategic System Integrated Planning model is being used

to optimise investment. However, some work is still required to develop these plans further and increase

their coverage of the asset base and thereby provide a greater opportunity for optimisation of capital

expenditure. Indicative long-term plans and the reasoning behind them would have helped us better

appreciate the context of Sydney Water’s immediate capital expenditure plans.

Performance

Good performance has been maintained against the Operational Licence performance parameters with, for

all measures, a clear headroom against the targets set. Sydney Water has performed well against the EPA

licence criteria and has demonstrated good performance in customer service measures when compared

with other Australian water agencies.

Asset performance in terms of water quality, mains bursts and sewer chokes suggests that the serviceability

of assets is stable. To us, this is an indication that the current level of proactive capital and operating

expenditure to maintain assets is likely to be sufficient to maintain a stable asset base although priorities

may vary.

Benchmarking

We have compared Sydney Water with other water utilities in Australia and England & Wales (E&W). When

comparing water unit costs with other water utilities in Australia, Sydney Water is at the lower end of the

range of utilities and close to but lower than SA Water. Hunter Water and Water Corporation WA show

lower unit costs. We compared Sydney Water’s proposed totex with water utilities in E&W which are

comparable with similar performance levels, customer expectations and extent and age of assets. This

shows that a gap remains between Sydney Water and many of these well-performing E&W companies.

Output Measures

Output measures are important in assessing the efficiency of investment programs when viewed in

subsequent price reviews. In the current price path a large proportion of the outputs were delivered

generally to target. The main shortfall was in growth where the number of new connections was 50,000

below target. This is no reflection on Sydney Water’s performance as the timing of new development is



determined by others. For the capital expenditure outputs, a significant number were “under-delivered” that

is the actual outputs were less than the targets, however this “under-delivery” was predominantly a result

of efficiencies achieved by Sydney Water to deliver the same service level performance at a lower cost.

System integrated planning was used to decommission rather than renew assets, renewals lengths were

reduced, and better condition assessment resulted in some planned renewals not being required.

We are proposing a small number of output measures so that the progress in delivery of the programs set

out in the Sydney Water submission can be confirmed in the future and efficiencies assessed. These

proposals for asset maintenance, delivery of projects and environmental drivers take into account

comments from Sydney Water. Definitions may need further development before implementation in the

future price path. Numeric values need to be agreed following rephrasing of renewal activities. We have

proposed an additional serviceability measure which could be developed as a high level basket of current

and new measures.

Operating Expenditure

Sydney Water has outperformed the efficiency targets set in the 2012 Determination. Savings from external

energy cost reduction form one third of this reduction with other savings from management action to drive

efficiency initiatives through the business.

Figure 1.1 compares actual expenditure over the years 2013 to 2016 with the Determination, including bulk

water and desalination water which are pass-through costs. This figure also shows a consistent reduction

in actual expenditure from 2012, compared with the Determination. We also show the variation on the

previous price control from 2008 to 2012 where actual and Determination total costs were similar. Forecast

expenditure through to 2020 is also shown for comparison.

Source: SWC AIR/SIR and Atkins/Cardno analysis



Figure 1-1 Operating Expenditure 2008 to 2016 Comparison with Determination ($15-16M)

Sydney Water has proposed operating expenditure for 2017 to 2020 at a similar level as the 2015 base

year after adjustment for finance leases. Figure 1.2 shows expenditure in the current price path from 2013

to 2016 and in the future period from 2017 to 2020. Expenditure is shown by service area. The current

period determination profile is also shown. All service areas show similar even trends.

Source: SWC AIR/SIR and Atkins/Cardno analysis

Figure 1-2 Operating Expenditure 2013 to 2020 ($15-16M)

Operating Expenditure in the Current Price Path

We have seen positive changes in Sydney Water since our previous review in 2011. The business has

responded positively to the recommendations we made at that time and has over-performed the efficiency

targets we proposed. Two thirds of the efficiency savings were due to management action; the other

savings relate to reductions in energy costs outside the control of the business.

Sydney Water has delivered a good performance against the Operational Licence performance parameters

with, for all measures, a clear headroom against the targets set. We concluded that the reduction in

operating expenditure has had no material impact on Operating Licence performance.



performers in the market. A proactive approach to materials costs has shown savings in chemical costs

and more effective procurement.

Determination

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

2013 2014 2015 2016 2017 2018 2019 2020

Operating Expenditure by Product

Water Bulk water Wastewater Stormwater Recycled water reg Determination



The September 2015 SIR actual expenditure for 2015 was $11m less than the June 2015 forecast. Sydney

Water has explained the reasons for this reduction which we have accepted. Sydney Water also explained

the reasons for the operating expenditure increase in year 2016 which we have also accepted.

There are examples of some slippage of expenditure related to periodic and other maintenance amounting

to $26.6m which have been deferred to the future price path.

We concluded that the actual operating expenditure tin years 2013, 2014 and2015 represents efficient expenditure. We also found that year 2016 represents the best estimate of forecast expenditure for the year.

Operating Expenditure in the Future Price Path

Our approach to efficient expenditure in the future price path follows the concept of catch-up efficiency to

achieve the performance of a frontier agency and the continuing efficiency it will make over time through

innovation, systems and improved management processes.

Sydney Water has stated in its submission of the importance of customer engagement and the need to

involve them in decisions on performance and investment. We found that it is taking the right approach but

is at an early stage compared to many other utilities. For this review it is making several assumptions on

what customers want and has yet to develop willingness to pay methodologies. We have looked at the

balance of risk between customers and Sydney Water as this is important in defining work activities,

assumptions and efficiency adjustments. We found that a low risk approach is taken across both operating

and capital expenditure and there is little appetite to increase this. At the same time, there are no regulatory

incentives for Sydney Water to take greater risks on service provision to drive greater efficiencies. While

this will be debated through the next price path period, we have identified some areas where risks are not

shared equitably with customers. In these areas, both operating and capital expenditure, we have made

adjustments as a surrogate for the impact of incentives.

We have noted the significant efficiencies achieved through the current price path, greater than those set

in the Determination. These initiatives will continue to drive efficiencies through the current price path.

We have made adjustments to two specific areas: energy costs to reflect balancing cost risks with

customers and Service Delivery expenditure where we would expect further optimisation and risk based

approached will lead to an even trend in expenditure. We considered applying a reduction in this trend but

concluded that effective planned maintenance is essential to be able to defer some capital expenditure

presented in the submission. We amended the expenditure forecast following Sydney Water’s

representations.

Our benchmarking comparisons of totex show that Sydney Water has further efficiencies to make to

approach a frontier company or the average of the UK companies using the CMA analysis. We have applied

catch-up efficiency increasing from 0.5% in 2017 to 2% in 2020. We adjusted the level of catch-up following

representations from Sydney Water. This reflects the full impact of the initiatives implemented in the current

price path and the impact of the procurement strategy currently being implemented. In addition, we note

the Business Improvement initiatives being promoted and the forecast benefits from the ERP information

technology system being implemented. We also take account of the current transformation project and the

likely changes this will bring towards the latter half of the future price path. This adjusted level of catch-up

efficiency does not assume that Sydney Water should be at the frontier by 2020 but reflects the achievability

of delivering further cost reductions over the future price path.

We assume a continuing efficiency of 0.25% per annum to reflect overall technological improvements and

innovation that a frontier company competing in an open market with strong commercial pressures, would

be implementing. This is consistent with the 2012 Determination. We have excluded bulk water, recycled



water and energy costs from the adjustments we have made. These efficiencies are challenging but the

Corporation has experienced professionals who are motivated to deliver.

The impact of our combined continuing and catch-up efficiency is to set a level of efficient expenditure of

an average 0.75% per annum cumulative although weighted to the second part of the future price path. We

have compared this with a recent efficiency analysis supporting the UK Competition and Markets Authority

(CMA) determination on Bristol Water. Our proposal is below the CMA analysis in Section 6.6 and

recognises that Sydney Water may need more time to achieve improved level of efficiency compared with

others.

We conclude that the level of efficient operating expenditure is as presented in Table 1.1 below.

Source: SWC AIR/SIR and Atkins/Cardno Analysis

Table 1-1 Efficient Level of Operating Expenditure

SYDNEY WATER EFFICIENT EXPENDITURE

($k 2015/16) year ending June 2017 2018 2019 2020 Total 2017

to 2020

Water 229.6 230.7 230.5 229.2 920.0

Wastewater 506.5 505.3 501.9 497.8 2011.5

Stormwater 12.2 12.6 12.8 12.8 50.5

Bulk Water 480.5 480.0 479.2 483.3 1922.9

Recycled Water 27.2 27.1 25.7 25.8 105.8

Finance Leases 0.0 0.0 0.0 0.0

Less Rosehill Scheme -3.1 -1.7 -1.7 -1.7

Total Regulated Services 1252.9 1254.1 1248.3 1247.2 5002.5

Total less bulk water 772.5 774.1 769.1 764.0 3079.6

Electricity -1.9 -5.0 -5.9 -6.5 -19.4

Service Delivery Reprofile -1.0 -2.5 -2.5 -2.5 -8.5

Water 228.6 228.3 227.7 226.2 910.8

Wastewater 504.6 500.3 496.2 491.8 1992.9

Stormwater 12.2 12.6 12.8 12.8 50.5

Reprofiled expenditure 745.4 741.2 736.7 730.9 2954.2

Continuing Efficiency (%) 0.25% 0.50% 0.75% 1.00%

Catch-up Efficiency (%) 0.50% 0.75% 2.00% 2.00%

Water 227.1 225.6 222.0 220.1 894.8

Wastewater 501.0 494.4 483.6 478.1 1957.1

Stormwater 12.1 12.5 12.4 12.5 49.5

Recycled Water 27.2 27.1 25.7 25.8 105.8

Rosehill Scheme -3.1 -1.7 -1.7 -1.7

Total Efficient Expenditure 764.3 757.9 742.0 734.8 2999.0

EFFICIENT EXPENDITURE

SERVICE

EXPENDITURE SUBJECT TO EFFICIENCY ADJUSTMENTS

REPROFILING

ADJUSTED EXPENDITURE BEFORE APPLICATION OF EFFICIENCY TARGETS

EFFICIENCY ADJUSTMENTS



Capital Expenditure

We show in Figure 1.3 the trend in actual expenditure compared with the Determinations for the period

2009 to 2020. During the current price path, Sydney Water has delivered a significantly smaller capital

expenditure program relative to the previous 2009-2012 price path period, during which significant capital

expenditure was directed towards the desalination project. In the previous price path period from 2009-

2012, Sydney Water spent an average of nearly $850m per annum (15/16 prices). In the current price path

this fell to around $640m per annum. Sydney Water has proposed to increase this to just over $690m for

the 2017-2020 period.

Source: SWC SIR and Atkins/Cardno Analysis

Figure 1-3 Capital Expenditure 2008 to 2016

Figure 1.3 shows that expenditure in the current price path has been consistently below both the 2012

Determination levels except projected 2015/16 spend. Sydney Water has explained the reason for this

increase which we have accepted.

Capital expenditure in the current price path

Figure 1.4 shows expenditure by service over the period 2012 to 2021. We compare current price path

expenditure with the 2012 Determination for each service.




Figure 1-4 Expenditure in the Current Price Path by Service

Solid lines are actual figures, while dashed lines are forecast figures for the SIR/AIR submissions in 2012.

The chart shows forecasts made for the 2013 to 2016 price path and also for the 2017 to 2020price path.

We found that:

i. Water service expenditure is consistently below the 2012 Determination. We noted an

increasing trend in water expenditure in 2016;

ii. Wastewater service expenditure was lower than the 2012 Determination in 2013 and 2014

although increased above in 2015 and the 2016 forecast.

iii. Corporate expenditure shows an increasing trend over the period resulting in a marginal

increase above the Determination;

iv. Stormwater expenditure is relatively small but shows an increasing trend above the

Determination due to an increase in renewals spend.

Expenditure driven by maintaining existing standards showed a marginal reduction on the Determination;

increases in wastewater expenditure was more than offset by reductions in water spend. Growth

expenditure was 15% below the Determination where anticipated new developments have slipped.

We applied the efficiency and prudence tests to expenditure. We found that expenditure to maintain existing

and new standards was prudent in that it was based on well prepared asset plans and processes and

procurement was appropriate. Expenditure on the timing of growth is based on detailed plans but

dependent on external factors.



We confirmed based on the review of asset management process, variance of expenditure against the

2012 Determination and a sample projects representative of 70% of the program that expenditure is efficient

and should be included in the asset base. There is one adjustment where expenditure for Rouse Hill

stormwater expenditure was omitted from the September SIR submission. Efficient capital expenditure in

the current price path is summarised in Table 1-2.

Table 1-2 Efficient Level of Capital Expenditure in the current price path

Capital Expenditure in the Future Price Path

Our view on the level of efficient expenditure is based on the review of the Information Return, the review

of sample projects and the assessment of asset management and capital expenditure processes.

Sydney Water has proposed expenditure at just over $690m/a for the 2017-2020 period which is an

increase from $640M/a outcome in the current price path. Figure 1-5 below shows the breakdown of the

capital program by driver and product and shows the key differences in expenditure between the current

and the next price path periods.

SYDNEY WATER CORPORATION - EFFICIENT EXPENDITURE IN CURRENT PRICE PATH

($m 2015/16) year actual and forecast expenditure 2013 2014 2015 2016 Total

Water 206.9 172.4 137.5 175.3 692.2

Wastewater 364.3 330.2 394.7 377.5 1466.7

Corporate 70.2 62.9 85.3 116.9 335.2

Stormwater 10.6 10.4 19.8 35.6 76.4

Regulated Recycled Water 0.6 0.1 0.2 0.0 0.9

Total actual expenditure 652.6 576.0 637.5 705.3 2571.4

Atkins/Cardno Recommended Adjustments

Adjustment for effect of updating Rouse Hill SW projections 0.0 0.0 0.0 12.9 12.9

ATKINS/CARDNO ASSESSMENT OF EFFICIENT EXPENDITURE

Water 206.9 172.4 137.5 175.3 692.2

Wastewater 364.3 330.2 394.7 377.5 1466.7

Corporate 70.2 62.9 85.3 116.9 335.2

Stormwater 10.6 10.4 19.8 48.6 89.3

Regulated Recycled Water 0.6 0.1 0.2 0.0 0.9

Total efficient expenditure 652.6 576.0 637.5 718.2 2584.3




Figure 1-5 Breakdown of capital program by driver and product

In summary, the key features of Sydney Water’s proposed 2017-20 capital program, include in terms of drivers:

(i) A large increase (+$69.5m per annum) in Existing Mandatory Standards expenditure but also in Growth (+$16.0m per annum) and New Mandatory Standards (+$12.3m per annum)

(ii) A near complete drop-off in Government Program expenditure from $51.2m to $0.7m per annum.

(iii) Stable levels of Business Efficiency expenditure

In terms of products:

(i) A large increase in expenditure in storm water spend, which is projected to more than double from an

average of $19.1m to $39.9m per annum.

(ii) Significant increases in corporate expenditure (+14% or +$11.8m per annum), water (+$9.6m per

annum) and wastewater (+$8.4m per annum).

(iii) No recycled water expenditure.

Expenditure to maintain existing standards forms 64% of total proposed expenditure. In assessing the need

for this level of expenditure, we take into account performance of key measures in the Operating Licence

and compliance with the EPA licence requirements. Sydney Water has achieved all the performance

targets. Many of these show a good headroom with performance well under target. We also take into

account the stable serviceability of assets. We noted that some planned asset replacement was based on

age with little account taken of their serviceability and the impact of planned maintenance.



We note the progress with delivery of the current price path outputs and the deferral of some replacement

activities through risk assessment and re-programming. We consider the balance of risk between

customers and Sydney Water and that these are shared in an equitable way. We compare how private

companies at the frontier manage a renewals program within their regulatory regime.

We have made some adjustments to the existing standard maintenance expenditure to defer replacement

of some assets to reflect the factors above. We have accepted some asset groups of expenditure and

moderated the increase for some other groups. We explain the logic of these adjustments in Section 7.

The approach is consistent with a frontier company who would be looking to maintain expenditure at current

levels and balance risk and opportunities across programs.

Growth servicing strategies have been further developed to ensure the timely delivery of infrastructure on

the basis of confirmed plans. This was one of the reasons for lower expenditure than planned in the current

price path. We found the process well controlled but there are inevitably uncertainties from the scope and

timing of new developments. From our review we accepted the expenditure profile for the South West

growth area but re-phased some of the North West costs as scope and timing were less well defined.

We noted there has been a backlog of maintenance expenditure in the stormwater service and confirmed

that the level of renewal expenditure should be increased to meet defined needs. We have made a small

adjustment to the expenditure profile.

We have made other scheme-specific adjustments where we found the need and/ or timing were not

justified. Our assessment of the level of capital efficiency able to be achieved by Sydney Water in the future

price path is a progression of the methodology which we applied to our 2011 review, Hunter Water in 2012

and State Water in 2009. This methodology applies the concepts of continuing and catch-up efficiency.

Continuing efficiency is that which a Frontier Company would seek to achieve through new technology and

innovation. We have assumed a continuing efficiency of 0.25% per annum which is consistent with these

earlier studies and currently assumed by Ofwat in the UK in its 2009 Determination for water companies in

England and Wales.

Catch-up efficiency relates to the improvements in systems and processes to achieve the performance of

a frontier company over time. Our review of sample projects identified four business processes where there

is an opportunity to lever efficiency savings on the expenditure proposals in the SIR. These relate to

Program Management, Value Engineering, Cost Estimates and Procurement. We have made an

assessment of the extent of efficiencies that can be made to catch up with the frontier company. The

efficiencies that we have applied are summarised in Table 1.3 below.

Source: Atkins Cardno analysis

2017 2018 2019 2020 2021

Continuing efficiency at the Frontier 0.25 0.5 0.75 1 1.25

Catch-up: capital program management and optimisation 0.5 1 1.5 2 2.5

Catch-up: value engineering 0.4 0.8 1.2 1.6 2

Catch-up: cost-estimating 0 0 0.5 1 1

Catch-up: procurement 2 4 4 4 4

Catch-up efficiency 2.9 5.8 7.2 8.6 9.5

Total efficiency 3.15 6.3 7.95 9.6 10.75

Cumulative efficiency challenge (%)



Table 1-3 Proposed Capital Efficiencies

We have then applied these efficiencies to derive an efficient level of capital expenditure by service area

and in total as summarised in Table 1.4. The table details the adjustments we have made. Explanation of

these adjustments are presented in Section 7.

Source: Atkins/Cardno analysis

Table 1-4 Efficient Level of Capital Expenditure in the future price path

The tables in Section 7 detail the derivation of these adjustments and the level of efficient expenditure by

service. Note that about 65% of the adjustments relate to the timing of outputs and 35% on efficiency

savings in the way projects appraised and implemented.

Figure 1.6 presents our findings on efficient expenditure by service and compares with the Sydney Water

proposals.

SYDNEY WATER CORPORATION PROPOSAL - CAPEX - COMPANY LEVEL

($M 2015/16) year ending June 2017 2018 2019 2020 2021 2017-20 Total 2017-21 Total

Water 194.8 189.4 185.4 161.2 174.4 730.8 905.1

Wastewater 371.9 404.5 386.7 337.0 347.2 1500.2 1847.4

Stormwater 49.3 42.4 42.3 25.4 51.8 159.4 211.2

Corporate 99.3 96.2 93.6 93.5 93.0 382.6 475.6

Total 715.3 732.5 708.0 617.1 666.4 2772.9 3439.4

Atkins/Cardno recommended adjustments for specific programs or projects

"Critical Watermain Renewals" -2.0 -2.0 -2.0 -2.0 -3.8 -8.0 -11.8

" Reticulation Watermain Renewals" -6.5 -6.5 -6.5 -6.5 -7.5 -26.1 -33.6

" Reservoir Renewal and Reliability" -5.8 -5.0 -4.9 -4.9 3.6 -20.5 -16.9

" WPS Renewals" -4.0 -5.7 -2.0 -1.4 -1.1 -13.1 -14.2

Reprofiled NWGC spend 0.0 -11.9 0.7 5.6 5.6 -5.6 0.0

Adjusted Meter Investment Program -1.4 -1.9 -1.9 -1.9 -2.5 -7.1 -9.6

"Avoid Fail Sewer Renewals" -8.1 -6.7 -8.4 -11.0 -4.4 -34.3 -38.6

"WWPT Renewals" -22.6 -22.6 -26.1 -30.1 -79.5 -101.5 -180.9

Reprofiled NWGC spend 0.0 -7.1 -7.9 7.3 7.8 -7.8 0.0

Energy management -1.2 -3.8 1.4 1.4 0.0 -2.2 -2.2

North Head Biosolids 0.0 -13.3 0.0 0.0 0.0 -13.3 -13.3

Minor Stormwater Renewals 0.0 -3.5 -1.2 -0.6 -34.1 -5.3 -39.3

Adjustment for updated Rouse Hill projections -1.6 0.0 0.0 0.0 0.0 -1.6 -1.6

Elizabeth Macarthur reprofiling -1.2 -5.6 -2.9 2.2 3.7 -7.5 -3.7

Field Management 0.0 0.0 -1.5 -1.5 0.0 -3.0 -3.0

Specific adjustment for ERP Stage 2 0.0 0.0 -4.0 -4.0 -4.0 -8.0 -12.0

Total -54.4 -95.5 -67.3 -47.5 -116.0 -264.7 -380.7


Water 175.1 156.4 168.7 150.1 168.8 650.3 819.1

Wastewater 340.0 351.1 345.6 304.5 271.2 1341.2 1612.3

Stormwater 46.5 33.3 38.3 27.0 21.4 145.1 166.6

Corporate 99.3 96.2 88.1 88.0 89.0 371.6 460.6

Total 660.9 637.0 640.7 569.6 550.4 2508.2 3058.6

Atkins/Cardno recommended additional capital efficiency targets (beyond those applied by the company)

Continuing Efficicency (%) 0.25% 0.50% 0.75% 1.00% 1.25%

Catch-up efficiency (%) 2.90% 5.80% 7.20% 8.60% 9.50%



Water 169.8 147.2 156.3 136.9 152.4 610.2 762.5

Wastewater 329.6 330.2 320.1 277.9 244.8 1257.8 1502.7

Stormwater 45.1 31.4 35.4 24.6 19.4 136.6 155.9

Corporate 96.2 90.5 81.6 80.3 80.4 348.6 429.0

Total Efficient Expenditure 640.7 599.3 593.5 519.7 497.0 2353.2 2850.2




Figure 1-6 Efficient Level of Capital Expenditure

The Sydney Water expenditure proposals are shown by service in broken lines. Comparisons are shown

with the current price path. The main area of adjustment is for the wastewater service.

There is an opportunity for Sydney Water to demonstrate at the next price path the extent of prudent

expenditure incurred whether this is greater or less than the levels of efficient expenditure proposed.

Prudent Expenditure

We found one potential imprudent expenditure in the future price path where the Customer Relation

Management System which was commissioned in 2011 is likely to be decommissioned in 2018 as its

functions will be superseded by the new billing system. Our view is that this asset is being decommissioned

before the end of its asset life and should be considered as a stranded asset. We have shown this

adjustment for prudent expenditure in Table 1-5

SYDNEY WATER FUTURE PRICE PATH PRUDENT EXPENDITURE

($M 2015/16) year ending June 2017 2018 2019 2020

Total

2017 to 20

Total Expenditure 640.7 599.3 593.5 519.7 2353.2

Adjustments related to the Prudency Test

IT CMS system - residual value of

asset from planned write off

because of T2020 Customer

Billing System 0.0 -24.8 0.0 0.0 -24.8

Prudent Expenditure 640.7 574.5 593.5 519.7 2328.4




Table 1-5 Prudent expenditure in the future price path

Information Technology Expenditure

The expenditure was identified as a Special Review Item in our scope of work. Sydney Water are proposing

$328M in the SIR for several major projects including a new billing system ($123M) and Enterprise

Resource Planning (ERP) ($78M) which is a central platform to support a wide range of business data and

activities.

Sydney Water’s IT personnel, strategy and approach to delivering projects has undergone a major overhaul

since our previous review in 2011. We witnessed a significant improvement in the level of capability and

maturity. We found that the IT investment planning cycle is now aligned with Sydney Water’s business

planning process. There is one material exception relating to the implementation of an ERP solution. The

preparatory work and documentary evidence to support the investment being sought is not as strong as it

could or we would be expected it to be in order to allow us to come to a reasonable view on the prudence

and efficiency of the expenditure.

There is comprehensive documentation to support a business case for the replacement of the ACCESS

billing system, which is now referred to as T2020. The need for replacement has been demonstrated and

the costs are robustly developed. There is still the potential for driving efficiencies as the project is further

developed and implemented. Our assumptions on catch up efficiency cover this. In our view the T2020

system is dependent on and consistent with the ERP implementation which is planned as part of an overall

business improvement and any approvals should be made on the basis of them being a joint package. If

the billing system was considered as a stand-alone system, the business case for the chosen solution would

be weakened and there are likely to be lower cost solutions available.

We support in principle the proposed ERP system as this can be a fundamental building block for the

business. It is a business change project and in order to gain maximum benefits it is necessary to transform

the whole organisation to fit the SAP solution. We have not seen sufficient information to give us comfort

that the costs have been rigorously derived. It has also not been possible to confirm the robustness of the

efficiencies. The timeline for project development could have included more detail in the Sydney Water

submission and taken into account the price review timetable to allow for a full and thorough review. We

have therefore made an adjustment to reflect the cost uncertainties at this stage.

We found one potential imprudent expenditure in the future price path where the Customer Relation

Management System which was commissioned in 2011 is likely to be decommissioned in 2018 as its

functions will be superseded by the new billing system. Our view is that this asset is being decommissioned

before the end of its asset life and should be considered as a stranded asset. Our estimate of this imprudent

expenditure is shown in Table 1.5 above.

There may be other assets which might also fall into this category and this will need to be considered at the

time of the review for the subsequent price path.

In summary, we had some difficulty in tracking the changes in costs and supporting information from the

SIR proposals to the more recent business cases and supporting information provided. Sydney Water still

needs to clearly demonstrate the scope, inter-dependency, costs, benefits and timeline for the complete

ERP, T2020 and related systems package so a clear and consistent view can be taken of the prudence

and efficiency of the proposals in relation to its whole business transformation.

Asset lives for the various IT projects have been assumed as five or fifteen years. Taking the weighted

average of asset lives including the business-as-usual asset replacement, the average life is 10 years. We



tested the impact of varying asset lives on the weighted average and noted no material difference. The 10

year life is consistent with Sydney Water’s asset like assumptions.

Finance Leases

We reviewed the asset lives used to calculate regulatory depreciation. We found that the asset life

assumptions are appropriate with one exception. The civil asset live are low when compared with Sydney

Water’s similar assets and assumptions used in other companies. These assets are generally large civil

structures and storage reservoirs and form a greater part of the asset base. We suggest a 100 year asset

life from the date of commissioning. We confirmed that the forecast operating costs are soundly based and

are appropriate.

Properties subject to Government Directions

The current operating costs for the Rosehill-Camellia recycled water scheme average $17.8m. The fixed

charges are linked to the contract with the operator and there is no evident scope for efficiency savings. A

similar level of expenditure is forecast for the future price path although we question why costs should

increase above the current costs at the 2016 price base. We found that operating costs are overstated by

$0.9m over the period. The revenue from the scheme reduces to $1.3M over the future price path due to

fewer customers taking recycled water. There is no capital expenditure related to this scheme.

The operating expenditure for availability and usage for the Replacement Flows St Mary’s AWTP is

unchanged from the 2015 base year. There is an increase in ‘other’ which relates to the replacement of

membranes. The timing and costs are consistent with the maintenance schedule in the contract. This is an

efficient level of operating expenditure.

Acknowledgement

Atkins/Cardno would like to take the opportunity to thank Sydney Water Corporation for the professional

manner in which it prepared for and presented information at interviews and responded to our questions

and requests for further details through the expenditure review.



1. Introduction

1.1 Terms of Reference

In August 2015 the Independent Pricing Tribunal of New South Wales (IPART) appointed the Atkins/Cardno

consortium to carry out a detailed review of the Sydney Water Corporation’s operating expenditure and

capital expenditure. The purpose of this review is to inform the Tribunal’s Determination on prices for the

upcoming price control period which applies from 1st July 2016 to 30th June 2020.

This report has been prepared in accordance with the Terms of Reference set out in the contract between

Atkins/Cardno and IPART dated 4 September 2015. These are reproduced in the Appendix D.

The findings of this report form an important component of the overall price review process as set out in the

IPART Issues Paper. The conclusions relating to prudence of expenditure in the current price path inform

what IPART includes in Sydney Water Corporation’s opening Regulated Asset Base value. The conclusions

relating to efficient operating and capital expenditure in the future price path assist the Tribunal’s

assessment of what are justified requirements to be included in the ‘building block’ model for determining

future prices.

The Terms of Reference state that the price control period is for a period of up to four years, 2017 to 2020.

1.2 Sydney Water Corporation submission to IPART

IPART required Sydney Water Corporation to provide a submission outlining and substantiating its

proposed prices for the period 2017-2020 and historic costs for the current price path from 2012 to 2016.

The following versions of this information have been used in the preparation of this final report:

Submission to IPART dated 30th June 2015;

Special Information Return (SIR) dated September 2015; and

Annual Information Return (AIR) dated September 2015.

The September version of the SIR and AIR included actual expenditure for the year ending June 2015.

Whilst we have endeavoured to satisfy ourselves as to the provenance and robustness of the data provided,

a detailed audit of the completeness and accuracy of the information lies outside the scope of this project.

1.3 Review Process

We, the Atkins/Cardno team, commenced our review on 9th September 2015. We submitted an Inception

Report to IPART on 21 September 2015. Following initial review of available date, we submitted an

Information Request to Sydney Water on 22nd September 2015. Documents were provided by Sydney

Water from 1 October 2015. Our review team arrived in Sydney on 3rd October.

We held interviews with Sydney Water between 5th and 9th October 2015 with key Sydney Water staff.

Over the week long interview period we requested additional supporting documentation relating to a range

of issues. We believe that the Corporation provided us with this information in a timely manner and to the

best of its ability. We then requested further information and queries over the subsequent two weeks to

which Sydney Water was able to respond.

Atkins/Cardno would like to take the opportunity to thank Sydney Water Corporation for making its staff

available for the interview days and for the professional manner in which the organisation responded to our

challenges and requests for further detail.



We submitted a draft report to IPART on3rd November IPART and Sydney Water were invited to comment

on the draft.

This Final Report is the outcome of our review of the efficiency and prudence of Sydney Water’s expenditure

proposals presented in the SIR. It is based on the information provided to us by IPART, submissions made

and supplementary information provided by Sydney Water. We draw our findings from the review of the

strategic management planning and business processes and asset management planning, the findings of

our interviews and the outcome of the presentations and associated dialogue. This final report takes into

account the comments made by IPART and Sydney Water on the draft (see detailed responses in Appendix

E and F). Where appropriate we refer to the Company’s comments in the text.

1.4 Methodology

Our review and assessment of capital and operating efficiency is based on the hypothesis of a Frontier

Company competing in an open market to deliver services to customers, the continuing efficiencies that a

Frontier Company makes through innovation and technological development, and the catch up efficiency

required of Sydney Water to achieve the performance of a Frontier Company over time. We use this

approach to compare the business processes and systems with current best practice and to identify the

extent of catch-up that may be required over time to reach an efficient level of operation. The approach is

similar to that taken for the 2011 efficiency review of Sydney Water and the 2012 review of Hunter Water.

We review the decision making processes for both operating and capital expenditure to test whether there

is sufficient challenge and rigour to deliver best value solutions. We comment in Section 3 on Sydney

Water’s management systems and processes and identify areas with the potential to drive further

efficiencies over the price path period.

Within the Expenditure Review we have considered the asset management practices, the capital

investment appraisal, the estimating methodology and procurement process insofar as they are used to

identify investment needs and timing, appraise solutions, prioritise projects within defined budgets and

procure and manage timely delivery.

Task 1 of the Expenditure Review was to review the long term investment planning and asset management

practices and processes. We examined the longer term investment strategy and the key assumptions

driving this expenditure. We checked that the price submission and SIR were consistent with this long term

investment program. We were able to compare asset management frameworks with best practice. Our

analysis was focussed on the ability of the asset management systems and processes to deliver efficient

expenditure. Our review is consistent with the IPART paper ‘Regulatory Tests of past and forecast Capital

Expenditure’, December 2010.

Operating Expenditure

IPART requires us to assess:

the efficiency of operating expenditure for the period from 1 July 2012 to 30 June 2016, to the

extent necessary to assess the efficiency of the proposed operating expenditure; and

the efficiency of proposed operating expenditure for the period from 1 July 2016 to 30 June 2020.

Our assessment is based on the actual operating expenditure in the Submission, the robustness and

confidence of these estimates taking into account the basis of the estimates and confidence in the need,

timing and scope of the requirements. We also take into account whether additional expenditure proposals

have been through the internal approval and challenge processes.

Our approach to forward-looking operational efficiency is based on a combination of process-based

qualitative and quantitative assessments. We consider how Sydney Water performed against the 2012



Determination and the reasons for outperformance, whether due to exogenous factors or actions taken by

the Company. In 2011 we identified business structures as a potential efficiency gain; we also found

potential gains in maintenance planning. The lack of a comprehensive strategy for IT also contributed to

our view. These were all factors related to catching up with the frontier.

Looking forward we test how the efficiency gains in the current price path will impact on opex in the future

and the potential for further gains through improved processes. Our approach therefore includes an

assessment of the agency’s operating expenditure proposals and scope for further efficiencies by function

and process. We focus on the material areas of expenditure such as energy, operations and maintenance

activities. We also test the extent to which planned maintenance is able to extend the life of assets and

defer capital expenditure.

We focus on risk management and the approach taken by Sydney Water in balancing risk between the

agency and customers. We also sought to what extent customers are engaged in the development of the

Business Plan. The extent to which customer views are taken into account is a good test of the Plan. There

is an increasing customer engagement in developing business plans across many utilities including the

frontier. Sydney Water has recognised this but is at an early stage of customer engagement. We take

account any productivity benchmark analysis which may be applicable. Again this is a guide to what extent

the agency may be at or behind the frontier.

We recognise that a proportion of operating costs may not be directly controllable because they are driven

by external factors. But this impact could be two-sided; for example there could be potential savings in

energy prices where the benefits may not be shared equitably with customers. We would normally exclude

non-controllable costs but take a view on the risk taken by Sydney Water through their inclusion. We also

identify areas where we consider operating costs are unduly low in relation to industry averages; we may

suggest some increase in operating costs to reduce the risk of failure in service level provision.

We look to offset these efficiency targets with any efficiency programs demonstrated by Sydney Water.

The evidence of such efficiency programs is indicative of an Agency which is looking to catch up with the

frontier.

We interview the functional managers, review supporting reports and documents and asses the current

position on the development and implementation of corporate systems used to set budgets, control and

monitor costs and allocate expenditure to the IPART expense types.

We present our analysis of the future expenditure proposals contained and comment on each main activity

in terms of the potential for efficiencies to be achieved through the robustness of estimates, the need and

timing of expenditure and absorbing of some activities within base opex as a surrogate for the application

of internal challenge and budget control.

We present our review of operating expenditure and our present proposals for an efficient level of future

expenditure in Section 6.

Capital Expenditure

IPART requires us to assess:

the efficiency and prudence of capital expenditure for the period from 1 July 2012 to 30 June 2016;

and

the efficiency and prudence of proposed capital expenditure for the period from 1 July 2016 to 30

June 2020 – in order to ensure that planned capital expenditure is directed to the most appropriate

projects at an efficient cost.



Our assessment of the prudence of schemes in the current price path is based on a review of a

representative sample of projects. We reviewed the need for each project, its timing and the difference

between actual costs and outputs against planned. We considered the basis of costs and the procurement

route for implementation of sample projects. For the year 2016, we took a view of the most likely outturn

expenditure based on the current status of schemes in the program.

Our approach to the assessment of allowable future expenditure is based on a review of the asset

management and capital expenditure processes, project appraisal and decision processes and a review of

a representative sample of schemes in the program. Our methodology involves the following steps which

we apply to all expenditure at a real 2015/16 price base price base:

Any inconsistencies in inclusions and allocation of capital expenditure by driver recorded in the

SIR;

Adjustments to the scope and assumed workload of asset replacement projects given

Adjustments to the timing of some projects due to uncertainties in the implementation programs;

Adjustments for specific scheme cost estimates; and

The scope to gain efficiencies through the implementation of the appraisal and cost estimating

process, the approach to procurement and the program management process discussed in

Section 4.

We have reviewed the increase in asset renewal expenditure in the context of headroom in the operational

licence performance measures and the EPA licences and the stable serviceability of the assets. Asset

replacement is considered in the light of historic expenditure and levels of risk and question whether the

future is any different. Asset age is not considered a sufficient driver for asset replacement. We have

assumed that SWC will balance risk and interventions across the asset base.

Our previous reviews identified three business processes where there is an opportunity to lever efficiency

savings on the expenditure proposals. These relate to investment and asset planning, cost estimates and

procurement. We make an assessment of the extent of efficiencies that have been made since the previous

review and the scope for further efficiencies to catch up with the frontier company.

In our review of investment and asset management planning, we test the assumptions underlying asset

replacement expenditure in relation to service level outputs such as water continuity, sewer chokes and

other measures. This is to confirm whether the most efficient and timely solution is identified to maintain or

enhance current service levels.

We then confirm that the cost estimates in the submission reflect the likely cost of efficient solutions, and

the extent to which risk contingencies may be applied. Good practice is to include some risk contingency

where justified but at programme level rather than individual projects.

The test the procurement strategy to confirm whether the approach is the most effective and to what extent

this reflects best practice compared with alternatives. Our experience shows that agencies have made

good efficiencies through new and innovative procurement models.

We also test to what extent risk is shared between Sydney Water and customers. For example where

operating licence performance shows a healthy headroom below the reference levels, we question whether

there is scope to take a greater risk on performance while reducing asset replacement activities and costs.

We present our review of capital expenditure and present proposals for an efficient level of future

expenditure in section 7.



Sydney Water comments

Sydney Water has provided detailed comments on the draft report which are included, with our responses,

in Appendix F. We have selected six key comments on the efficiency methodology as set out below together

with our response.

Continuing Efficiency

Sydney Water commented that

Atkins-Cardno has applied a continuing efficiency adjustment of 0.25% a year to both opex and capex.

The rationale given for this adjustment is that it is the factor applied by Ofwat in its 2009 review of prices

for water and wastewater businesses in England and Wales. No evidence is provided to demonstrate why

this makes it an appropriate adjustment for an urban water business in NSW in 2015. That is, Atkins-

Cardno does not show that this is a reasonable expectation of improvement in a frontier company in the

urban water sector in NSW over the period 2016–20.

We are concerned about the application of overseas findings to the urban water sector in NSW. We note

that the Australian Competition Tribunal is currently considering the AER’s latest price determination for

electricity distributors in NSW and the ACT. This includes the use of international comparators in the data

set for and estimating the base level of opex and forecast opex productivity growth.

Our view is that the expenditure review of Sydney Water should be based on international comparators

using water utilities with similar operating characteristics because this is the most effective way to compare

the performance of Sydney Water with other water utilities of similar size, networks and assets and

operating environments. Our view, as demonstrated in leading water companies subject to greater

regulatory and commercial pressures, is that larger gains are obtained through innovation and business

enhancements than experienced in local councils and many government-owned agencies.

Catch-up Efficiency


We estimate that we should be marginally closer to the Frontier Company than we were at the 2012 price

review.2 However, Atkins-Cardno’s recommendations imply we are 2.5 times further away than last time.

That is, the Frontier Company has accelerated away from Sydney Water.

For Atkins-Cardno’s findings to be correct, we estimate that we would need to have experienced a

productivity slowdown of approximately 8% over the four years. This does not align with the observation

that two-thirds of the $200m opex efficiencies realised over the current regulatory period have been driven

by improved management performance.

We commented in our 2011 report (p17) that ‘we found from our qualitative assessment that the catchup

efficiency is likely to be greater that [the efficiencies applied] but have recognized the possible limitations

of Sydney Water to achieve these efficiencies over a single four year price path.’ We did not assume that

Sydney Water would reach frontier company performance over a single price path. We also assumed that

only a proportion of the operating expenditure was controllable. The Sydney Water June 2015 Submission

showed that the extent of controllable costs was greater than our earlier assumption. Had we applied the

efficiency adjustments to a greater element of operating expenditure, then the savings achieved would have

been of the same order as our assumption.

Our approach is based on an assessment of the business and asset management process in place, their

application and the initiatives being implemented to deliver further efficiencies. This is a broad and

pragmatic approach and not limited to the definitions of productivity.



Explanatory Factors


The concerns with using international data include:

• comparability issues between the countries owing to substantial differences in respect of scale, population density, network characteristics, weather, terrain, regulation and service expectations

• apparent inconsistencies in the definition and basis of preparation of the data from the different countries, which have the potential to materially confound the analysis.

We also note that (compared to energy) there is a significant degree of heterogeneity in operating

circumstances between urban water businesses in NSW alone (i.e. genuine and intrinsic differences) – let

alone between NSW and other countries.

Our view is that the international comparisons with companies in England and Wales are valid as all have similar scale, population density, network characteristics and service performance. Operating standards are very similar. Regulation follows a similar process For example some of the issues of mains breaks and sewer blockages are common. We have carried out previous work in this area to confirm that comparators are valid. There are no material differences in the way that data has been prepared.

Productivity Sydney Water commented that

We also note that IPART makes a productivity adjustment where it regulates prices using a cost index. The productivity measure IPART uses is a 15 year average of the ABS’s market sector value-added multifactor productivity (MFP) based on quality adjusted hours worked. The most recent use of this was for the 2015–16 rate peg for NSW councils, where the productivity adjustment was 0.04%. This compares to the continuing efficiency adjustment of 0.25% a year applied by Atkins-Cardno.

Our assessment is based on a wider view of potential efficiencies rather than a productivity measure.

Productivity is computed by dividing average output per period by the total costs or resources consumed

over that period. Our view, as experienced in leading water companies subject to greater regulatory and

commercial pressures, is that larger gains are obtained through innovation and business enhancements

than experienced in local councils and many government-owned agencies.

Economic analysis


Atkins-Cardno has not demonstrated that it has undertaken a similar level of economic analysis to establish

an efficient frontier in this instance. Nor has any information been provided to demonstrate Sydney Water’s

position relative to that frontier, to justify the recommended continuing and catch-up efficiencies. Rather,

as discussed below, Atkins-Cardno appears to have applied efficiency adjustments made previously by

the UK regulator and subjective adjustments (in general and at a program level) that have no obvious link

to a Frontier Company.

We commented in our 2011 report (p17) that ‘we found from our qualitative assessment that the catchup efficiency is likely to be greater that [the efficiencies applied] but have recognized the possible limitations of Sydney Water to achieve these efficiencies over a single four year price path.’ We therefore did not assume that Sydney Water would reach Frontier company performance over a single price path.

We have extended the text in Section 6 - Operating Efficiency - to compare Sydney Water’s performance

against other water utilities in Australia, its totex position against water companies in England and Wales,

against European benchmarks and comparing support service costs over the previous, current and future

price reviews. These assessments show that while Sydney Water is within the range of water company

performance, there is still scope for further efficiency improvements.

Our approach to continuing and catch-up efficiency is based on comparative analysis of costs, business

processes and asset management processes, the level of risk taken and performance against Operational



Licence and EPA measures. We focus on these business processes and their application as there is

insufficient data available to carry out econometric modelling as applied to the E&W companies.

Capex Adjustments

Sydney Water commented that:

Atkins-Cardno has applied catch-up efficiency adjustments to both opex and capex. We have a number of concerns around these recommendations:

• The subjective nature of the adjustments and the lack of evidence supporting the proposition that they reflect our performance compared to a (relevant) Frontier Company.

• The potential for some of the assumed catch-up efficiencies to have been ‘double-counted’ in Atkins-

Cardno’s program specific adjustments and/or our initial expenditure forecasts (Efficiency gains were

factored into a number of our programs and subsequently our expenditure forecasts).

Our view is that the capex adjustments are based on our observations that service performance is good

and assets are in a stable position. Asset renewal should be based on performance and risk and not simply

age or condition. SWC has not made a robust case that expenditure needs to increase above current levels

(we noted that the Sydney Water comments referred to cuts; our adjustments relate to the increases

proposed and not the base level of asset renewal activity and costs). Companies with commercial pressure

will look to limit asset renewal to a defined level and manage risks consistently across the asset groups.

For example, if there is a greater risk and need on wastewater, then the water asset program may reduce

as risks may be less. This needs further risk modelling which Sydney Water may wish to consider.

Continuing and catch-up efficiencies have been applied after program-specific adjustments so we consider

that there is no double counting

Following Sydney Water’s comments, and further information provided, we have made some changes to

the operating expenditure assumptions which we discuss in Section 6. While Sydney Water raises several

issues which should be considered in relation to its proposals on incentives in future price paths, we have

not made any changes to our methodology.

Output Measures

IPART requires us to assess Sydney Water’s performance in the current price path against outputs defined

in the 2012 Determination and to comment where any measures have not been achieved.

We also review and recommend output measures for the future determination period, taking into account

the activities planned and any proposals made by Sydney Water in its submission to IPART.

We present our findings in Section 5.



2. Business Environment

2.1. Legislation

Sydney Water is a state-owned corporation, wholly owned by the New South Wales Government, under

the State Owned Corporation Act 1989. The Corporation operates under the enabling legislation, the

Sydney Water Act 1994. Sydney Water’s area of operations comprises the greater Sydney area, the

Illawarra, and the Blue Mountains. The Corporation has three equal principal objectives, which are:

to protect public health;

to protect the environment; and

to be a successful business.

Figure 2-1 Map of the Sydney Water Corporation Area



Under the IPART Act 1992, IPART is responsible for setting prices for Sydney Water. The last price path

review covers the period to June 2016. The future price path period will cover a period of four years until

2020.

Sydney Water Catchment Management Act 1998 established the Sydney Catchment Authority (SCA) to

manage Sydney’s storage dams and catchment areas, which had previously been managed by Sydney

Water. The Act has been superseded by the WaterNSW Act 2014 and the establishment of WaterNSW.

WaterNSW’s role is to manage and protect the catchment areas and catchment infrastructure, to be a

supplier of raw water and to regulate certain activities affecting the catchment areas. Sydney Water

purchases bulk water from WaterNSW and is its major customer. IPART is also responsible for determining

the maximum charges for bulk water services to customers within the Sydney Water Corporation regulatory

business.

2.2. Regulatory Requirements

Sydney Water’s Operating Licence is a requirement of the Sydney Water Act. It authorises the functions

that Sydney Water can undertake and sets out the terms and conditions under which it functions. The

Licence is granted by the Government of NSW. IPART is responsible for administering the Operating

Licence. The form of the Licence was reviewed in 2009 and updated with new requirements.

A Memorandum of Understanding is in place with each of NSW Health, the Office of Environment and

Heritage, the Environmental Protection Agency and the Metropolitan Water Directorate.

The key contents of the Operating Licence insofar as it impacts on the efficiency review are:

i. Growth - drinking water and wastewater services must be available on request for connection to

any property in the area of operations, subject to any conditions to ensure safe, reliable and

financially viable supply to properties.

ii. Customer rights and complaint/dispute handling - customer contract, hardship procedures, rules

on disconnection for non-payment.

iii. Asset Management and infrastructure performance: asset management requirements, system

performance standards, service quality indicators, response times for water main breaks.

iv. Priority Sewerage: towns to be serviced under the Priority Sewerage Program;

v. Water Delivery Operations: water quality requirements for drinking water, recycled water, storm

water.

vi. The economic level of water conservation: requirements to reduce the quantity of drinking water

used and the level of leakage, water efficiency programs and recycling;

vii. The Environment: requirements to maintain an environmental management system certified to

AS/NZS ISO 14001:2004 and report on environmental performance indicators; and

viii. Performance Indicators: these define service delivery performance for customers including water

pressure, continuity and wastewater overflows/

Performance against the Operational Licence is audited annually and reported by IPART.



2.3. The Regulated Business The regulated business of Sydney Water is responsible for:

Water treatment;

Drinking water distribution;

Wastewater collection;

Wastewater treatment;

Recycled water treatment in defined schemes

Recycled water distribution in defined schemes; and

Stormwater collection and treatment.

2.4. The Non-Regulated Business Sydney Water undertakes some activities which fall outside the regulated business, defined as those

activities not within the remit of the IPART price review. These activities relate mainly to some recycled

water activities, radio transmission masts and are small when considered in relation to the regulated

business. These non-regulated costs are excluded from the efficiency study.

2.5. Sydney Desalination Plant Sydney Water has an agreement with the separate Sydney Desalination Plant (SDP) for the provision of

potable water based on operating rules and dependent on the level of storage in the impounding reservoirs.

The agreement includes an availability charge, and volumetric charge when the plant is operational. For

the future price period, Sydney Water assumes an availability charge only. Where the operational rules

require the SDP to be operational, there is a separate regulatory arrangement to address any volumetric

related charges. The Sydney Desalination Plant is not included as part of this review.



3. Strategic Management Overview

3.1. Operating Environment

Sydney Water’s business is to supply potable water to over 1.9m households and businesses. It purchases

bulk water from WaterNSW and, under certain operating conditions, the Sydney Desalination Plant. A

greater part of its bulk water is treated at a privately owned water treatment plant under BOO arrangements;

it owns and operates a small number of water treatment works. It is directly responsible for the operation


critical mains and 16,300km reticulation mains.



wastewater treatment facilities (including recycled water).

Effluent is subject to a range of treatment processes depending on the disposal route; for example primary

treatment for ocean discharge at the North Head treatment works, tertiary treatment to a high effluent

discharge standards (biological nutrient reduction) and additional nutrient removal and disinfection at some

water recycling plants. All sewage sludge from treatment is disposed to agriculture, composting or landfill.

Sydney Water also manages 440 km of stormwater channels mainly in the Eastern Suburbs and south and

south west of Sydney and trunk drainage land in Rouse Hill.

Asset Management

A key challenge to Sydney Water is to maintain assets in the long term to achieve a stable serviceability to

meet Operational licence requirements. Our review of the asset management shows that the methods,

processes and systems are in place to manage the assets. The challenge is to achieve an equitable balance

of risk between Sydney Water and customers in relation to asset performance, cost and risk of failure.

Water Demand

In the current price path, there has been an increasing demand from 500 Gl/a in 2011 to 515 Gl/a in 2015

over a period of population growth. New connections are forecast at 24,000 per annum over the future

price path period. Total demand is forecast to increase to 554 Gl/a by 2020 driven mainly by an increase

in household demand. Average per capita consumption is assumed to remain at the current level through

to 2020.

Water Supply

There are no major increases in resource and treatment capacity over the future price path. The SDP

provides an additional resource should impounding reservoir levels fall below operational control curves.

There is some evidence of deteriorating water quality impacting mainly on the BOO plants where process

enhancements are envisaged. These works are significant although as BOO plants the capital costs do

not form part of this review. However, the costs are likely to have a future impact on finance costs and are

likely to impact on the nominal regulatory value (RAB) in the price control.

Growth

Growth in the current price path has been lower than forecast. Higher growth rates driving major

developments to the North West and South West of Sydney are expected in the future period to 2020

although the scope and timing is dependent on economic factors.



3.1.1. Customer Services & Environment Outcomes

Operating Licence performance

Sydney Water reports annually on its performance against the Operating Licence1. Water service

performance is measured through incidents of pressure below the 15 minute standard, water continuity in

terms of properties experiencing interruptions exceeding five hours and repeat events, response times to

mains breaks, per capita consumption and leakage.

The business performs well against all these indicators: water pressure is 80% under the reference level

and water continuity 20% under the reference level. This gives significant headroom in performance. There

was an increase in properties 2014/15 which was due to an incident on a critical water main although this

was considered to be abnormal. Continuity performance over the last five years is at a similar average

20% under the reference level.

Sydney Water achieved 100% compliance against the drinking water guidelines.

The good performance against the water outputs reflects in part the low risk taken by Sydney Water in

managing its water assets. The Operating Licence performance measures will be unchanged over the

period to 2020.

The Response time for water mains breaks is a measure of operational effectiveness and not related to

asset performance.

The leakage target continues to be achieved. The water conservation target of less than 329 litres per

person per day has been achieved for the last eight years. The number of mains bursts reduced from 42

to 28 per 100km over the period 2006 to 2010. Thereafter there is a relatively even trend between 22 and

30 per 100km up to 2014. This is indicative of stable serviceability. Long term trends are demonstrated in

Figure 3-1 below.

Sewerage service outputs relate to the number of properties that experience a sewage overflow in dry

weather. Over the period 2011 to 2014, the measure was 35% below the reference level. The trend over

the last five years is relatively even indicating a stable serviceability. A further measure is the number of

properties with three or more dry weather overflows. Repeat sewage overflows are 65% below target.

Another measure is the number of sewer chokes mainly due to tree roots. Sewer breaks and chokes have

reduced from a high of 83/100km/yr in 2007 to 54/100km/yr in 2014. Performance continues to be 35%

below the EPL reference level of 90 chokes per 100km. Trends in performance are shown in Figure 3-2

below which clearly shows performance has been stable over the past four years.

1 Operating licence 2010-2015 System performance Standards Report, Sydney Water 2011Submission Appendix 3, June 2015



Figure 3-1 Long Term Trends in Water Main Breaks and Leaks 2003-2016

Figure 3-2 Long Term Trends in Sewer Main Chokes 2004-2015



Environmental Compliance

Wastewater network performance is measured by chokes and odour complaints, dry weather overflows,

pumping station overflows and uncontrolled overflows. The performance graphs show an increase in dry

weather overflows from 190 in 2012 to 280 in 2014. Sydney Water states that it complies with the EPA

standard ‘with no significant increase in penalties for wastewater incidents in the period’. This suggests

that there may be some deterioration in performance for the dry weather overflow incidents.

Wastewater treatment works non-compliance shows a variable performance against EPL standards.

Performance is affected by wet years with the main cause for failure is ‘treatment by pass and flow’. Figure

3-3 below shows the trend over the past years.

Figure 3-3 Trends in WWTP Non-compliant discharges 2008-2015

Customer Consultation




what customers want and has yet to develop willingness to pay methodologies.

Sydney Water are planning to develop a Customer Engagement Framework in the next price path period

but have stated some elements of the proposed framework have been used for some stormwater projects.

3.2. Business Planning

Capital Investment Strategy

One of the outcomes from the IPART review ‘Regulatory tests of past and forecast capital expenditure2’

was that businesses would be required to submit a long term investment strategy covering at least ten

years. Some water utilities prepare longer term plans to include asset replacement, demand forecasts and

growth assessments. These plans set out a broad strategic direction, where key assumptions are

2 Regulatory tests of past and forecast capital expenditure, IPART 2010



considered and tested. A well-managed water utility could be expected to have a long term strategic plan

in which the medium term investment program can be considered. Such a plan would address operating

as well as capital expenditure and provide a long-term strategic review.

The requirement for a longer term capital investment strategy was to require a business to submit the

reasoning and rationale underlying the plans. IPART considered that the indicative long term plans and the

reasoning behind them would help them to appreciate better the place of the immediate capex plans within

a long term concept. The Plan would also help IPART to understand the impact of strategies and plans

which extend beyond a four year price path period into the long-term plan.

Our strategic review identified that Sydney Water has put some effort into long term planning with the

development of regional servicing strategies, facility blueprints, and the use of Strategic System Integrated

Planning. Further discussion on this is presented in section 4.4.

Business Planning

The Submission to IPART dated 30 June 2015 presented Sydney Water’s proposals for setting maximum

prices for the period 2017 to 2020. It included estimates of operating and capital expenditure required to

meet its operational obligations of providing water supplies, wastewater disposal and other services under

the terms of its Operating Licence.

We reviewed proposed expenditure over the period 2017 to 2020 to assess efficiency and prudence. We

formed the view that the Submission had been prepared by the Divisions to represent their view of

expenditure needs over the next four years. We note from Section 4 that asset management processes

including project appraisal, capital prioritisation management of the investment program have been applied

in preparing the program. However, the Sydney Water submission showed insufficient evidence of a

structured and comprehensive business planning approach, for example using a scenario approach.

As part of the business planning process we would expect that scenario testing would be carried out to test

the robustness of the program. We saw no evidence of a rational testing of scenarios including ‘level

pricing’ and the impact on service to customers, level of risk and asset serviceability. There is no evidence

of any willingness to pay surveys by Sydney Water.

The Corporate Plan 2015/16 sets out a strategy to transform the structure to a more customer-focused

organisation. Current activities include the new customer information management through the new billing

system; further plans include an enhanced experience for customers and further customer and community

engagement. There are plans to improve the customer service score and reduce the amount of effort

required by customers when they deal with Sydney Water. An organisation change management is

underway with a Change Management Office to bring in new ways of working and the ability to meet

changing needs. In addition to the IT initiatives, activities underway include a process excellence team to

address ineffective and inefficient business processes and improvements in investment decision making to

align more with the corporate strategy and changing operational needs.

New measures are proposed including a product quality index and a measure of totex per property. The

Submission includes a measure of totex per property per year. All these activities are consistent with

promoting good practice across the business and driving further efficiencies. One of the objectives is

achieving world class performance.

3.3. Governance Arrangements

Sydney Water has a Board of nine members including the Chairman and Managing Director. Reporting to

the Board is an Executive Team comprising the Managing Director and seven General Managers of the

functions defined in Section 3.4.



3.4. Organisation, Structure & Functions

In our Efficiency Review in 2011 we commented that

The current structure of ten Divisions is unwieldy and not conducive to effective and efficient management.

Sydney Water has responded positively to our report and carried out a restructuring soon after the 2012

Determination. This included a Service Delivery division, the largest in the organisation, formed from the

previous Operations and Maintenance divisions. The Liveable Cities Division combines the earlier Asset

Management and Solutions Delivery divisions. Other divisions were re-labelled as Business Strategy and

Resilience, Finance and Corporate, Information Technology, People Leadership and Culture. The result

is a reduction of two divisions at the 2011 efficiency review. There is an additional Transformation Division

which is tasked to further restructure the business to be more customer focused similar to a retail/ wholesale

split which is now in place with UK water utilities.

The Service Delivery function is responsible for the operation and maintenance of the water treatment

plants, distribution networks, sewage treatment works, wastewater systems and stormwater assets. It

comprises six functional areas including monitoring services, networks, treatment, hydraulic services,

operational services and business management. The Division is responsible for managing bulk water

supplies and disposal of bio-solids. The Division is responsible for the Control Room and SCADA systems

and promotes energy management through the business.

The Customer Services Division is responsible for managing Sydney Water’s interaction with customers

including meter reading and customer accounts, the customer contact centre, on-line services and looking

after business customers. It also manages communications and marketing for the whole of the business

with contributions from the Business Strategy and Resilience Division. The Division had managed the water

efficiency program which now has a lower priority.

The Administration and Support functions are carried out in four Divisions titled Finance and Corporate

Services, Business Strategy and Resilience and People Leadership and Culture. A new Information

Technology Division has been established. There is a separate the Office of the Managing Director. The

Business Strategy and Resilience Division includes the Company Secretary, internal audit and strategic

planning. A new Transformation Division has been established to implement future restructuring of the

business consistent with its Corporate Plan. Expenditure forecasts suggest that this activity will shrink after

2018.

3.5. Business Systems & Processes

The quality, extent and application of the Sydney Water business systems provide an important measure

of the effectiveness of the business and the potential for leverage of further efficiencies over time. We list

the key business systems and their current status in Table 3-1.



Table 3-1 Sydney Water Business Processes (Source: Atkins/Cardno analysis)

Functional Area System Date or Last updated

Comments

Finance and Regulatory

Financial Management Information System (FMIS)

Last major update in 2012

Financial management and reporting using PeopleSoft packages: includes General

Ledger, Fixed Assets, Project costing, billing, expenses

Customer and Community Relations

ACCESS provides customer billing, invoicing, payment processing and

credit collection

Implemented in 1997

Custom application managed ‘in house’. Priority for

replacement with a SAP solution in 2018.


Customer Management System Implemented in 2011

Looking to replace with SAP solution in 2018.

Maintenance Asset

Management

MAXIMO works management for civil, mechanical, electrical and asset

management

In place 2011/12

Operations


Click scheduling tool Implemented 2015/16

Maintenance Field Resource Management (FRM) for job scheduling and despatch.

Enables the delivery of reactive and programmed work orders to field

personnel who report back on progress

2008

Operations LIMNOS Water quality reporting and environmental data

2009 Custom application.

Asset Management and

CCR

e-Developer for management of new developments

2003 Custom application.

Asset Management

Water Modelling System (WMS) for network modelling of water mains

2011

All HYDRA GIS system for water mains and sewer asset records

2003

All Business Intelligence used for internal data collection, collation and

reporting

2012 Managed in house. Minor maintenance planned

All IConnect intranet which supports a number of applications

2011

All BMIMS and SWIMS document control systems

Operations IICATS for operations resource management



Information Technology

Since our last review, the NSW Department of Finance and Services engaged Third Horizon in 2013 to

conduct an external strategic review of Sydney Water’s expenditure which we have also considered

although the terms of reference was different and we have not specifically followed up on individual findings

as our selection of projects has been different.

Sydney Water’s IT personnel, strategy and approach to delivering projects has undergone a major overhaul

since our last review. We witnessed a significant change in the level of capability and maturity for the better

compared with 2011. We noted:

Significant improvements in the governance structure and processes, quality of business cases

and cost management of IT initiatives

Sydney Water Corporation has started to address the fragmented and complex application

landscape which resulted from its previous “best of breed” strategy through its 4+4 Roadmap which

has at its centrepiece the implementation of an ERP solution

Adoption of the NSW ICT Services Scheme for acquisition of services to improve the delivery and

outcome of IT procurement

Implementation of AGILE project approaches that supporting delivery of more effective outcomes

and lower risk

One area we question is the validity or appropriateness of targets contained in the IT Strategic Plan. It is stated that by 2018 Sydney Water will be able to demonstrate: 25% improvement in customer value; 100% of information assets quantified and categorised; and 100% of IT systems life cycle and roadmaps documented. In our view, these do not appear to be critical targets to support the rest of the business in meeting service standards or customer outcomes and it was unclear what link they have to the proposed IT investments over the current and future price paths (e.g. T2020, ERP). We believe that the IT targets should better reflect the IT department’s role as customer to the rest of the business as well as directly linking to the proposed investments.

In 2011, we observed that: “…We formed the view that the IT investment planning cycle does not appear to be aligned with Sydney Water’s business planning process [and regulatory timetable]; it is not sufficiently developed to justify all of the proposed expenditure”. Overall, we would conclude the opposite this time but with one material exception relating to the implementation of an ERP solution which we discuss in more detail below. There was limited information available during the formal review and this has limited our ability to enter into a dialogue with Sydney Water on the finer detail of these investments.

3.6. Cost Allocation

Sydney Water has continued to apply a methodology to apportion operating expenditure to product and

activity. This Regulatory Cost Model (RCM) process was implemented from 2009/10 and superseded the

previous activity based costing approach. The RCM approach uses a ‘bottom up’ methodology where

information for cost allocation is provided by line managers. Where possible the RCM process assigns the

directly-attributable costs to the designated product and service. The direct allocation of costs is dependent

on the level of disaggregation and confidence within each Division. The reliability of data depends on the

staff within each Division and consistency across Divisions.

The shared or common costs such as planning, administration, financial management IT, human resources

and property costs, where these cannot be directly attributable to a product, are allocated to the core water,

wastewater and stormwater products in proportion to the direct costs.



For ease of analysis and to be consistent with the Brief, we have grouped these activities into Operations

and Maintenance and Corporate (Support Services). The mapping of functions to these principal activities

is shown in Table 3.2.

Table 3-2 Allocation of Activity Codes to functions (Source: Atkins/Cardno analysis)

Primary

Function

Function Activity

Operation and

Maintenance

Customer Services Customer Billing, Metering Customer Contact and

Compliance.

Service Delivery Operation and maintenance of treatment works, distribution

networks, sewerage systems, biosolids disposal

Liaison with bulk water suppliers and BOO treatment plants

Liveable City

Solutions

Asset management, development planning, asset plans,

program management, solution delivery

Corporate

(Support

Services)

MD / Company

Secretary

Strategy, Governance

Business Strategy

and Resilience

Corporate Affairs, Competition and Regulation, Corporate

Strategy, legal. Strategy and Governance

Finance and

Corporate Services

Business Governance, Financial Accounting, Management

Accounting, Procurement

Information

Technology

Strategy, Architecture and Solutions, Applications,

People Leadership

and Culture

HR functions, Health and Safety,

Transformation Business Improvements, Strategic Initiatives

RCM analysis is available from 2013 with forecasts to 2020. This data is used for populating the SIR and

Sydney Water’s submission.

Corporate costs are allocated to the main service areas: water, wastewater and stormwater although it has

not allocated these costs to recycled water activities, both regulated and non-regulated and only the

marginal costs are allocated. This appears inconsistent when considering that the stormwater service

expenditure is about half that of recycled water. There is a case to share the common costs across all

products.

Transfer of Costs between the regulated and non-regulated business

The RCM process allows separation of costs between the regulated and non-regulated business. The main

areas of non-regulated business are parts of the recycled water program.



Drivers of Capital Expenditure

Capital expenditure is reported in the SIR against key drivers to maintain and enhance the asset base.

These drivers are shown in Table 3-3.

Table 3-3 Capital Expenditure Drivers (Source: Sydney Water)

Function Activity

Maintain mandatory

standards

Expenditure to maintain assets to deliver

current Operational Licence standards

New mandatory

standards

Expenditure to meet new environment or

licence standards

Growth Expenditure to meet demand from new

customers

Government Programs Projects undertaken under Government

Direction

Business Efficiency Expenditure which is shown to be deliver

clear efficiencies to the business

3.7. Conclusions

Our review has focussed on the business management processes and systems in place, under

improvement or being developed to make the decisions on how to invest in and maintain assets. This

informs us of the scope to lever efficiency savings in the future price path.

Sydney Water’s supplies potable water to over 1.9m households and businesses. It purchases bulk water

from WaterNSW and the Sydney Desalination Plant. A greater part of its bulk water is treated at four

privately owned water treatment plants under BOO arrangements. It is directly responsible for the operation


critical mains and 16,300km of reticulation mains.



wastewater treatment facilities (including recycled water). Effluent is subject to a range of treatment

processes depending on the disposal route; for example primary treatment for ocean discharge at the North

Head treatment works, secondary and tertiary treatment to a high effluent discharge standards (biological

nutrient reduction) to inland rivers and tertiary treatment where effluent is recycled. All sewage sludge from

treatment is disposed to agriculture, composting or landfill.

Water demand has been successfully reduced during the drought which has led to a new and lower normal

demand assumption. The application of this lower demand to assessment of the current system has given

headroom in the network to meet future growth in demand. This has enabled significant current-period

expenditure to promote water efficiency to be scaled back.

Sydney Water responded positively to our 2011 efficiency report. It carried out a business restructure shortly

after the 2012 Determination. A new Service Delivery Division combines the previous Operations and

Maintenance Divisions. The Liveable City Solutions Division now combines the Asset Management and

Solution Delivery Divisions. Support Divisions have been restructured resulting in eight Divisions compared



This efficiency study was preceded by a strategic management and asset systems and processes review

particularly focussed on Sydney Water’s long term planning processes and the linkages between this

process and the medium term price path period. We have noted a marked improvement in planning

systems and processes since we undertook the efficiency review in 2011/12. A comprehensive asset

management framework is in place and confirmed from our Asset Management review. The continued

development of an asset management framework and the new processes and systems for planned

maintenance provide the opportunity for a comprehensive risk-based approach to asset management and

the potential to drive further efficiencies. This enables a debate on the level of risk, performance and

charges to customers.

The provision of a long term investment strategy is considered an essential element of the efficiency review,

so that the medium term price path period can be seen in relation to long term plans. We found that while

Sydney Water’s asset management systems represent good business practice and benchmark at the top

of their peers, the long term planning process is still developing. Some focus has been given to developing

regional strategies and facility blueprints and a Strategic System Integrated Planning model is being used

to optimise investment. However, some work is still required to develop these plans further and increase

their coverage of the asset base and thereby provide a greater opportunity for optimisation of capital

expenditure. Indicative long-term plans and the reasoning behind them would have helped us better

appreciate the context of Sydney Water’s immediate capital expenditure plans.

The Corporate Plan sets out the basis for further business transformation to provide a more customer-

focused structure and further potential to be more effective and efficient, supported by the proposed

enhancement to IT systems.

Good performance has been maintained against the Operational Licence performance parameters with, for

all measures, a clear headroom against the targets set. Sydney Water has performed well against the EPA

licence criteria and has demonstrated good performance in customer service measures when compared

with other Australian water agencies.

Asset performance in terms of water quality, mains bursts and sewer chokes suggests that the serviceability

of assets is stable. To us, this is an indication that the current level of proactive capital and operating

expenditure to maintain assets is likely to be sufficient to maintain a stable asset base although priorities

may vary.

.



4. Asset Management

4.1. Scope of review

IPART is seeking a strategic review of Sydney Water’s long term investment planning and asset

management systems and practices, in particular to determine how the medium term planning horizon (the

price path period) can be considered in the context of long term investment planning.

This review advises on:

Whether the longer term capital investment strategy is the most efficient, and whether processes supporting this including procurement processes, whole of life cycle planning and assessment of capital and operating expenditure trade-offs are best-practice and therefore likely to result in prudent and efficient investment decisions;

The key assumptions that are driving expenditure (e.g., asset replacements, demand forecasts, growth assessments, environmental requirements, licensing standards), including comment on the reasonableness of these assumptions and how they have been considered and tested by Sydney Water

The consistency of Sydney Water’s proposed five year capital expenditure program with its longer term; program of capital expenditure, and implications and risks associated with the five year program for the longer term program;

The robustness of systems for linking asset management decisions with current and future levels of service and performance requirements, including customer service and environmental outcomes;

The way in which Sydney Water manages the risks associated with asset failure or underperformance; and

Any particular concerns or issues relating to Sydney Water’s process for determining and prioritising future infrastructure expenditure and asset management decisions.

4.2. Strategic Asset Management Framework

Sydney Water has developed a series of processes, systems, practices and plans that aim to ensure its

assets are optimally delivering the services demanded by customers and regulators. Together they form

the strategic framework for asset management which is adapted from the Institute of Asset Management’s

model and is illustrated in Figure 4-1.

The Strategic Asset Management Framework provides the high level guidance and approach to asset

management for Sydney Water. Its key elements are:

The Corporate Strategy and Plan

Customer service and product strategy

Asset management policy

Servicing and Asset management processes and plans

Decision support tools

Risk management framework

Business management systems (quality, environmental, OHS, enterprise AM)

People, leadership and culture



Continuous improvement (benchmarking, R&D)

Figure 4-1 Sydney Water’s Strategic Asset Management Framework

4.3. Corporate Strategy / Plan

Sydney Water has an integrated corporate framework that incorporates corporate strategy and planning,

business planning, asset planning, program and project management and financial management. There is

a high level of inter dependency between the various planning documents and processes which includes

both a ‘top down’ and ‘bottom up’ approach to planning. The ‘top down’ approach considers high-level

strategic issues while a ‘bottom up’ approach provides a detailed understanding of asset capability,

condition and performance and their ability to meet existing and future service requirements.



Figure 4-2 Sydney Water's Corporate Strategy

This framework sits within the context of Sydney Water’s new corporate strategy, called lifestream, as

shown in Figure 4-3 below.

Figure 4-3 Sydney Water's Corporate Strategy



4.4. Product & Asset Strategy / Planning

Asset strategy / planning is the process by which Sydney Water ensures that it continues to provide the

services required by customers. The asset strategy sets the objectives and principles of the management

of the assets and the asset planning sets out the specific targets / service levels, the actions required to

manage the assets, and the process by which actions are prioritised.

Asset planning can be done at all levels (corporate to asset specific) and timeframes (short (1 year) to the

long term (10-15 years and beyond). Taking a longer term approach to planning provides greater

opportunities to consolidate similar projects and optimise management processes.

Sydney Water’s current product and asset planning documents include the following:

Asset Management Plans by asset class (e.g. water mains, treatment plants);

Regional Servicing Strategies;

Thematic plans covering, for example, corrosion and odour, energy management;

Facility Blueprints as a precursor to System Blueprints;

Strategic Network Integration Plans (SNIP);

Strategic System Integrated Planning (SSIP).

4.5. Product & Asset Decision Making

Sydney Water has a well-developed capital investment governance process, which includes a number of

key stages. This process has undergone significant improvements in the current price path with further

improvements scheduled for the next price path period.

Development of Program Business Case (14 PBCs);

Project Initiation;

Needs Approval - investment needs are identified using:

Local / Precinct / Area / Regional servicing strategies, layout and staging plans;

Asset management / System plans which assess existing asset condition, performance, capabilities and needs in existing area; and

Service improvement strategies (e.g. leakage, pressure);

Options Approval – using a consistent and sustainable process; and

Delivery Approval.

The decision making process is supported by a number of specialist tools, including:

Decision Frameworks;

Risk profiles for assets (based on corporate risk approach);

Condition (critical assets) and performance assessment (lower risk assets) undertaken using trend analysis;

Value management framework including strategy, planning, options and engineering focussed workshops, project health checks, and a post implementation review process;

Commercial approach – NPV analysis including all lifecycle costs and benefits;

Hydraulic modelling – taking a system wide approach;



Business Intelligence tools – CMMS / Maximo;

Long term investment plans.

The overall investment process is governed by a specific framework as shown in Figure 4-4 below.

Figure 4-4 Investment Governance Framework

Sydney Water is in the process of implementing an Enterprise Program and Portfolio Management (EPPM) program with a new centralised ERP management system which is designed to improve capital investment decision making.

4.6. Cost Estimating Process

Sydney Water uses a range of cost estimating techniques depending on the overall assessment of the

project’s risk and the gateway approval stage. The techniques are summarised in Table 4-1.

Table 4-1 Summary of Cost Estimation Techniques



4.7. Procurement

Sydney Water outsources a significant amount of its activities and in the past have typically used Alliance

type methods to deliver. The 2012 Determination included a number of recommendations in regards to

Alliance procurement models and after a review of their efficiency, Sydney Water have transitioned into

more partnership / collaborative type procurement models. Figure 4-5 depicts the transition process from

disparate delivery models into a unified approach.

Figure 4-5 Transition of Procurement Approaches 2012-2015

Further improvements to the procurement process are proposed for the next regulatory period with the

expiration of the IPT. A new Delivery Management Procurement Strategy has been developed which

incorporates a two dimensional tender evaluation method, contractor performance KPIs, league tables, and

networks panels.

4.8. Risk Management

Sydney Water has a structured Risk Management Framework which is applied throughout the organisation

to assess the relative importance of identified gaps and risks. Risks are prioritised to identify these that are

unacceptable and require risk mitigation action including maintenance and renewals.

Risk assessments are carried out at strategic, divisional and operational levels:

Strategic risks are higher order risks, tend to be long term in nature and impact on the future direction of Sydney Water;

Divisional risks are lower order risks, then to be short-term in nature and focus on the business and operating environment; and

Operational risks are identified in day to day business operations, capital investment planning and managing projects and contracts.

For most asset categories an assessment is made on the criticality of the asset based on the consequences

of failure. High criticality risks such as large diameter water main sewers are managed on an ‘avoid-fail’



basis while less critical assets such as reticulation mains are managed on a run-to-fail basis. We observed

that capital investment decisions were prioritised based on risk.

4.9. Conclusions

Overall, we found that Sydney Water had well developed and robust program, project and asset

management practices, supporting systems and documentation. Sydney Water indicated that their

practices would continue to be refined as the organisation sought to further improve its performance. This

assessment is supported by recent asset management benchmarking conducted by the Water Services

Association of Australia (WSAA) which assessed Sydney Water to be at or near the top of the participant

scores for the major of assessment categories. In relation to the specific issues identified in the scope:

We found that in general the recently implemented procurement models, the implementation of EPPM, the focus on lifecycle assessment, and the clear focus on demonstrated NPV criteria for project prioritisation are all good business practice approaches. However the longer term capital investment strategy is not fully developed with longer term strategies still not prevalent across the capital expenditure programs although this is planned. The use of Strategic System Integrated Planning is allowing bigger picture assessment and challenge of projects and.

The key assumptions driving expenditure have been assessed in section 7.3 of this report.

The consistency of the five year capital program in the context of longer term investment plans (excluding the 20 year financial plan) or strategies is not fully demonstrated given the lack of robust long term program assessments. The development of long term planning strategies is on-going.

The linkage between capital projects / asset management decisions and service / performance levels is not fully developed. The majority of decisions are made on assessed asset life or condition profiles rather than the actual service performance of the assets / facilities / systems. It is recognised, however, that whether an asset is critical or not does influence the asset management decision and does introduce the element of failure probability into the decision making process. A further issue is around the service level requirements desired by customers. At present, Sydney Water is still developing a customer engagement framework and although the customer is at the heart of everything, direct customer engagement in the decision making process is limited with Sydney Water staff acting as a proxy representing the customer in the assessment process.

The management of risks due to asset failure or underperformance are, as indicated above, dependent on whether the asset is deemed to be critical or not. Avoid fail or “to fail” approaches are equally valid where applied to the correct asset base.



5. Output Measures

5.1. Output Measures

Efficiency is typically defined as a relationship between inputs and outputs. Typical inputs include capital

and labour resources, while typical outputs for a water business include maintaining required standards,

meeting customer expectations and growth in demand. A business can be more efficient if it produces the

same outputs for reduced inputs. Cost savings that are achieved at the expense of required outputs are not

efficiency savings. It is therefore important to include defined and measurable outputs to assess whether a

business has achieved the efficiency targets that it has been set. Output Measures are used as a means

of monitoring the progress of the water business in delivering its plans. They enable the assessment of

prudent expenditure and they allow reporting of variance from targets and are therefore important for future

efficiency reviews. The Output Measures are not in themselves targets to be achieved in the price control

period as there may be good reasons for variance. The main issue is to be able to identify actual outputs

achieved against the related expenditure to provide greater clarity on any efficiency gains.

5.2. Past Performance

Sydney Water has reported on the output measures that were set in the 2008 IPART Determination to track

the delivery of the Corporation’s capital program over the period from 2008 to 2012. Sydney Water reports

that 47% of the target measures have been or will be met, 11% have been exceeded and 42% of the targets

were not met3:

Water Service

Renewals of critical water mains – 45km has been renewed compared with the target of 51km. Sydney Water comments that a further 6km has been decommissioned. The shortfall is attributed to more targeted renewals, shorter lengths, better condition assessment, better understanding of failure modes and a higher risk appetite which is made possible by the headroom in service level performance;

Renewals of distribution mains – under target by 31% (198km renewed of 287km target with 5km decommissioned) – the shortfall is attributed to similar reasons as above;

Reservoir renewals – reservoir roof renewal is marginally behind the 13 target. Reservoir relining is behind plan with seven of the 24 completed. There has been a deferral of planned relining through an improved risk based approach and better understanding of both condition assessment results and failure modes. The original planning assumption was based purely on asset life;

Water pumping stations – there is a shortfall of five sites compared with the 24 target geographical areas have been covered as originally planned. The variance is because some pumping stations planned for renewal have been de-commissioned. The original planning assumption was based on asset life;

System Reliability – the three projects have been deferred beyond 2016;

Water meter renewal – under target by 20% (309,000 of 384,000) – due to the revision to the criteria for renewal extending the life as defined by the lower of volume throughput or 25 years.

3 Conclusions should not be drawn on the basis of meeting, not meeting or even exceeding output targets. There are reasonable explanations why targets have not been met so it would not be appropriate to draw the conclusion that this was a negative. Similarly, exceeding a target is not necessarily be considered a positive. Each output measure must be assessed on an individual basis.



Wastewater Services

Renew critical sewers – under target by 16% (54km against a target of 64km). The variance was due to a risk based approach to renewals, some access constraints and use of magnesium hydroxide coating to defer renewals;

Rehabilitate wastewater mains subject to dry weather overflows – under target by 19% (112km out of 137km) – due to the lower quantity of renewals identified from CCTV surveys;

Major Wastewater Treatment Plant renewals – Sites at Cronulla and Malabar to be complete by 2016 and North Head substantially complete but some overlap into 2017. Three of the 11 HV renewals have been deferred due to condition assessment and planning issues;

Reduce wet weather overflows – three schemes at Northern Beaches, Illawarra and Southern Catchments complete.

Stormwater

Pipe and channel renewal and rehabilitation – the output has been achieved (3.6km compared with 3.5km).

Condition assessment – activity is significantly greater than planned (174km compared with 92km target)

Several of the measures show reduced asset renewal activity where new risk-based methodologies have

been applied when original planning decisions were made on asset life. Examples are water mains

renewals, reservoirs, pumping stations, critical sewers and wastewater mains.

5.3. Measures for Future Price Path

Sydney Water has proposed a basket of 31 output measures to be applied in the future price path. We have

rationalised this list to focus on key asset renewal activity. These are based on the outputs planned by

Sydney Water and are summarised in Table 5-1. These are indicative and need to be adjusted to take into

account re=profiling of expenditure proposed in Section 7 –capital expenditure in the next price path

Table 5-1 Proposed output measures

Output (or activity) Measure Output

Water services Indicative measures subject to amendment following the Final Determination

Critical water mains renewals 47 km Large valve renewals

Large valve renewals 120

Reticulation water mains 180 km

Reservoir reliability program 33 reservoirs renewed

Water pumping stations 15 pumping stations renewed

16 HV upgrades

Renewal of customer water meters 471,500 meters



Wastewater services Indicative measures subject to amendment following the Final Determination

Large wastewater mains 34 km 80 Deep maintenance hole and vent stacks 4 km pressure mains

Dry weather flows 112 km

Wastewater treatment plant renewals 163 wastewater treatment

41 chemical system renewals

11 Odour control

82 solids treatment

Wastewater pumping stations 19 major renewals

37 pump renewals

Stormwater services Indicative measures subject to amendment following the Final Determination

Stormwater assets 7km conduit renewal

3km open channel renewal

160km condition assessment

The application of the Ofwat serviceability measures applied to companies in England and Wales should

be developed to show the linkages between output measures and investment. Serviceability measures can

be considered for water mains, sewerage networks and above ground assets such as treatment works,

service reservoirs and pumping stations. The approach is to measure serviceability from a basket of

existing output measures. From the value and trend of these basket of measures we can assess whether

serviceability is stable, improving or deteriorating. An intermediate marginal measure can be used. Thus if

the serviceability assessment is stable then the investment to maintain assets would be maintained. While

England and Wates companies have moved to performance commitments, these serviceability measures

are still important components of the new measures.

With respect to stormwater renewals, stormwater assets are currently maintained and prioritised on a

condition based assessment. While this appears the most practical measure, we would welcome a more

systematic way to capturing preventative and reactive operational maintenance activities (opex), in addition

to monitoring capital maintenance spend (capex). In this way, Sydney Water can demonstrate the

serviceability (performance) of the assets as well as their condition.



6. Operating Expenditure

6.1. Methodology

In this section, we present the results of our review of the efficiency of Sydney Water’s operating

expenditure. We identify the major cost drivers and explain the variances in the current price path

expenditure against the 2012 Determination. We comment on the prudence and efficiency of operating

expenditure in the 2012 Determination period which is used to inform our view of future efficiency. We

comment in Section 3 on the strategic management of the business and the structures and systems used

to plan and manage expenditure.

We then make an assessment of an efficient level of expenditure for the period 2017 to 2020 taking into

account our discussions with Sydney Water, documents presented and subsequent answers to questions

we raised. We note the efficiencies proposed by Sydney Water. We discuss the cost drivers and efficient

cost level recommendations for operational and support activities.

The methodology for the review of operating expenditure has focused on an evaluation of:

(i) Actual expenditure for financial years ending 2013 to 2015;

(ii) The current budget for year ending 2016; and

(iii) The projected costs for the financial years ending 2017 to 2020.

The evaluation of operating expenditure was undertaken using Sydney Water’s 2015 Submission and

supporting AIR and SIR spreadsheets updated in September 2015. Our assessment is based on the actual

operating expenditure in the Submission, the robustness and confidence of these expenditures taking into

account the basis of the estimates and the confidence of the need, timing and scope of the requirements.

We also take into account whether additional expenditure proposals have been through the internal

approval and challenge processes.

We have interviewed the functional managers, reviewed supporting reports and documents and assessed

the current position on the development and implementation of corporate systems used to set budgets,

control and monitor costs and allocate expenditure to the IPART expense types.

We have taken particular attention to the efficiency proposals at functional level made by Sydney Water in

its submission.

We present our analysis of the future expenditure proposals by Sydney Water and comment for each activity

on the potential for efficiencies through the robustness of estimates, the need and timing of expenditure

and absorbing of some activities within base opex as a surrogate for the application of internal challenge

and budget control.

Our views on future efficiencies are based on the hypothesis of a Frontier Company, the continuing

efficiencies that it makes through innovation and technological development and the catch up efficiency

required of Sydney Water to achieve the performance of a Frontier Company over time.



6.2. Overview

In the 2012 Determination4, Sydney Water was set efficiency targets from 0.0 to 1.8% per annum on the

assumption that only a proportion of its costs were controllable. This was based on a catch-up efficiency

of up to 2.0% per annum and continuing efficiency also of 0.25% per annum pro-rated to controllable costs.

Sydney Water has out-performed the Determination for the current price path. Figure 6-1 below compares

actual expenditure over the years 2012 to 2016 with the Determination. Figure 6-1 also shows actual

expenditure for the previous 2008 to 2012 price path against the Determination. Forecasts of operating

expenditure for 2017 to 2020 are shown for comparison of trends.

Note: expenditure excludes finance leases

Source: SIR and Atkins Cardno 2012 report and analysis

Figure 6-1 Expenditure comparisons 2008 and 2012 Determinations

Figure 6-1 includes expenditure for bulk water and desalination water which are pass-through costs. Year

2016 in the current price path is a forecast. Expenditure in the 2008 to 2012 period is impacted by

desalination costs which are now limited to an availability charge. Actual expenditure from 2013 to 2016 is

consistently below the 2012 Determination at an average 7.2 %/a below the Determination. We discuss

the reasons for this variance in Section 6.3.

Sydney Water has proposed a level of operating expenditure for 2017 to 2020 marginally below the forecast

2016 base year. This is shown in Figure 6-2 below which presents expenditure by service over the current

44 Review of Prices for Sydney Water Corporation’s Water, Sewerage and stormwater and other services, IPART June 20122008.

1000

1100

1200

1300

1400

1500

1600

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Actual v Determination Expenditure

Determination 2008 Determination 2012 Actuals 2008 Actuals 2012 Forecast 2016



and future price path. The Figure includes bulk water costs for completeness although these do not form

part of the Sydney Water controllable costs. The 2012 Determination operating expenditure is shown for

comparative purposes.

The expenditure forecast is based on the efficiencies gained through the current price path and cost

reductions from external factors such as electricity. Sydney Water advised us that further efficiency

assumptions for the future price path have been made, these are offset by other cost increases.

Figure 6-2 shows current and future operating expenditure by service.

Source: Sydney Water SIR and Cost by Product

Figure 6-2 Actual and Proposed Operating Expenditure 2013 to 2020

The forecast expenditure for the future price path 2017 to 2020 is consistent with the long term Financial

Plan.

Expenditure Trends by Service

Sydney Water has restructured and relabelled Divisions since the 2012 Determination so comparisons at

this level are not relevant. The new structure and efficiency initiatives has enabled the business to reduce

expenditure well below the Determination. These savings have been in all service areas. Figure 6-3 shows

the variance in service area operating expenditure from the year 2013 at the start of the current price path.

Determination

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

2013 2014 2015 2016 2017 2018 2019 2020

Operating Expenditure by Product

Water Bulk water Wastewater Stormwater Recycled water reg Recycled water nonreg Non Reg Determination



Source: Sydney Water SIR and Cost by Product

Service expenditure includes a proportion of Corporate; excludes finance leases

Figure 6-3 Expenditure Variance by Service from 2013 base

The water service shows a reducing trend over the current price path with a relatively even trend from 2016.

The variance in wastewater service expenditure is less marked with an increasing trend from 2014 to 2016

and a reducing trend to 2020. Stormwater has reduced to a lower value in 2014 and continues as an even

trend. The one service showing increases is recycled water as new assets have been commissioned.

Operating expenditure comparisons

We compare Sydney Water’s performance against other water utilities in Australia, the UK and Europe to

show its position in relation to best performing companies. These comparisons show Sydney Water’s

indicative position in relation to other water utilities in Australia, England and Wales and in Europe. We

include four specific comparators.

comparisons of unit operating costs per property and per unit volume across Australian water utilities

comparison of total expenditure (totex) per property and per unit volume with the 2014 Determinations for water companies in England and Wales

using the European Benchmarking analysis

comparing Sydney Water’s support services costs with operations costs between Determinations

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

2013 2014 2015 2016 2017 2018 2019 2020

Operating Expenditure by Product - Variance Analysis

Water Bulk water Wastewater Stormwater Recycled water reg



Comparison of unit operating costs in Australia

Figure 6-4 shows an analysis of operating expenditure with total water and wastewater costs per Ml/d of

water delivered against the water and sewerage cost per property. This is based on 2013/14 data.

Figure 6-4 Comparative costs per property and per unit volume 2013/14

The figure shows that Sydney Water is at the lower end of the range of data and close to but lower than SA

Water. The two lower cost water utilities are Hunter Water and Water Corporation WA.

Totex Comparison

We have taken the Sydney Water proposed capital and operating expenditure for the future price path

period 2017 to 2020 and compared with the wholesale totex outcome for England and Wales (E&W)

companies for the five year period 2016 to 2020. We have normalised the E&W data to four years. The

results of the analysis are shown in Figure 6-5 for the water service and Figure 6-6 for wastewater.

0

1

2

3

4

5

6

0 200 400 600 800 1000 1200 1400

Co

mb

ined

op

erat

ing

cost

-w

ater

an

d w

aste

wat

er/

Tota

l so

urc

ed w

ater

($

/MLD

)

'Value - Operating cost - water and wastewater ($/property)

Sydney Water



Source: Ofwat FDs and Atkins Cardno analysis

Figure 6-5 Totex comparison of $/Ml and $/property– water service

We converted the E&W companies’ totex to $ using the current exchange rate. We tested this assumption

against the Purchasing Power Parity factor (ppp5) of 1.2 from UK £ to Australian dollar and found that the

gap between Sydney Water and E&W companies widens with this lower value. For the water service we

have excluded the desalination plant costs. The E&W data points represent the outcome totex following

the price review process. The analysis shows that Sydney Water is at the upper end of the data range as

$ totex/ property compared with the ten E&W water and sewerage companies. The closest E&W companies

are Thames Water and South West Water. When compared as $ totex per unit volume, Sydney Water is at

the lower end of the range. The closest E&W company is Northumbrian Water. The lower unit cost per

volume is probably due to the higher water use of Sydney Water customers compared with the UK.

When we compare wastewater totex costs we see a similar analysis as shown in Figure 6-6 there is a wider

spread of companies using the totex per property axis with Sydney Water at the upper end of the range of

data and higher than the median. Sydney Water’s low totex per unit volume is driven by the higher per

property water use when compared with the E&W companies.

5 http://data.worldbank.org/indicator/PA.NUS.PPPC.RF

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

200 300 400 500

$ p

erM

l

$ per property

Anglian Northumbrian Severn Trent South West Southern Sydney Water pre

Thames United Utilities Welsh Wessex Yorkshire Sydney Water post

Sydney Water proposal

Sydney Water post adjustments



Source: Ofwat FDs and Atkins Cardno analysis

Figure 6-6 Totex comparison of $/Ml and $/property– wastewater service

The closest E&W companies are Southern Water and Welsh Water. The outlier above all other companies

is South West Water.

While there are explanations for some of the cost variances across the data set, the purpose of this analysis

is to place Sydney Water’s expenditure position in relation to other comparable water utilities with similar

performance levels, customer expectations and extent and age of assets. This shows that a gap remains

between Sydney Water and many of the well-performing E&W companies.

European benchmarking

The European benchmarking group includes water utilities, both public and privately owned, in Europe and

across the world. We looked at using some of the European benchmarking analysis data which is in the

public domain but found this to be limited and inconclusive. There may be merit in Sydney Water taking

part in this benchmarking analysis as this would provide greater access to the data and enable a wider

range of comparisons to be made.

We have compared the costs for operations and maintenance and support services prepared for the 2012

Determination and as submitted for this review for the period 2015; the latest year of actual expenditure.

This is to understand the reason for variances. Our analysis in 2012 was presented in our expenditure

500

1000

1500

2000

2500

3000

200 250 300 350 400 450 500 550 600

$ p

er M

l

$ per property

Anglian Northumbrian Severn Trent South West Southern Sydney Water pre

Thames United Utilities Welsh Wessex Yorkshire Sydney Water post

Sydney Waterproposal

Sydney Water post adjustment



report6 which allocated expenditure to operations and support services using the Divisions in place at that

time. For the 2015 analysis we have assumed that Operations comprises Service Delivery, Customer

Services and Liveable City Solutions and the remaining Divisions as support services.

We have taken years 2012 and 2015 where actual costs are reported to demonstrate the variance in

operations and maintenance and support service costs. The results are shown in Table 6-1 below. We

found that total expenditure has reduced by 12% between 2012 and 2015 following significant actions by

Sydney Water to deliver sustainable cost savings. For example, operation and maintenance costs have

reduced by 27% through targeted efficiency promotion in several areas of the business which we discuss

in Section 6.3 below. The reduction from 2015 to 2020 shows that there is a further 5% reduction over the

future price path.

Source: Atkins Cardno report and Sydney Water SIR & Cost by Product

Table 6-1 Variance analysis of Support Services expenditure for 2012, 2015 and 2020

Support service have increased by $22.6M or 13% between 2012 and 2015. While the analysis is high

level and some support services might be considered as operations and maintenance, these changes are

not likely to make a material difference to the increasing trend. This 13% increase on the 2012 base

continues through to 2020.

6 Detailed Review of Sydney Water Corporation’s Operating and Capital Expenditure, Atkins Cardno November 2011

2011 Efficiency Report

2011/12 price

base

2015/16

price base

Operations 421.3 466.4

Maintenance 325.2 360.0

Support 162.4 179.8

Bulk Water 469.2 519.4

Total 1378.1 1,525.6

606.9

202.4

526.1

1335.3

17.9%

25.0%

-12%

-27%

Increase in support costs 13%

SUPPORT SERVICES OPERATING EXPENDITURE

Year 2015 expenditure (latest year of actual expenditure)

Support costs as percent of total costs

2012

2016

Reduction in operation and maintenance costs

Year 2012 expenditure

Operation and maintenance

Support services

Total expenditure

Bulk Water

Total

Cost variance 2012 to 2015



These comparisons of operating expenditure indicate that which Sydney Water has made delivered

significant savings over the current price path period mainly related to operational costs, the support costs

has been maintained at a similar level and increased as a proportion of total costs.

6.3. Operating Expenditure in Current Price Path

Overview

Sydney Water’s submission compares actual expenditure in the current price path against the 2012

Determination and explain the reasons for cost variances. We have analysed the operating expenditure by

service area or product and identify and comment on material variances. We identify cost savings and

increases as a result of external factors and Sydney Water’s management actions. We also comment on

the prudence of expenditure in the current price path and identify any areas of expenditure which are not

consistent with the definition.

Sydney Water has continued to use the established RCM process, used at the 2012 Determination, to

allocate costs for all years to each service and sub- service and to the regulated and non-regulated

businesses. Together with the SIR, the outcome from the RCM analysis provides the basis for our analysis

and presentation.

We have taken actual and forecast expenditure for the current price path from 2013 to 2016 and compared

these values with the Final Determination 2012 brought up to the 2016 price base. We have calculated the

variance at service level or product level as shown in Table 6-2.



Table 6-2 Current Price Path Variance Analysis by Product

Source: SIR and SWC product cost analysis. Bulk Water includes raw water, DSP and BOO costs. Actual expenditure

in 2013 excludes $22m actuarial labour provision reported in the AIR/SIR but not used for monitoring operating cost

performance.

Year 2015 actual expenditure was updated in September 2015 to reflect total actual costs. Actual costs

were $11m below the June 2015 submission. Year 2016 is a forecast which is reported as $11.5m above

the 2015 expenditure reported in June and increases to $27.1m on the September submission. .

Table 6-2 shows actual expenditure $247.8m below the Determination for the current price path, equivalent

excluding bulk water costs, beyond the efficiency targets set in 2012. This is equivalent to a 7.2% reduction.

The variance is due to external factors and management action. The former relates to energy costs forming

nearly 40% of the variance and mainly outside the control of Sydney Water. The remaining variance is due

to management initiatives.

All the services show similar reducing trends. The water service shows an 8.4% variance on the

Determination over the period and 10% in 2016. Comparative values for the wastewater service shows

savings of 6.5% and 3.4%. The stormwater service shows a significant reduction of 29% over the period.

Corporate expenditure is allocated across all the services except recycled water in proportion to direct costs. In 2015, 30% of corporate expenditure was allocated to the water service, 68.6% to the wastewater

SYDNEY WATER OPERATING EXPENDITURE: CURRENT PRICE PATH

($k 2015/16) year ending June 2013 2014 2015 2016

Forecast

Variance

Actual to

Determination

2012 Determination 292.3 291.3 288.0 285.9

Actual 279.2 272.3 253.2 256.1

Actual > Determination -13.1 -19.0 -34.8 -29.8 -96.7

2012 Determination 552.1 549.7 549.7 545.2

Actual 564.5 553.5 546.7 543.9

Actual > Determination 12.4 0.0 -3.1 -1.3 11.9

2012 Determination 556.8 548.0 545.8 543.6

Actual 528.8 483.1 515.0 525.1


2012 Determination 15.5 18.8 18.8 18.8

Actual 16.0 12.6 10.6 11.9

Actual > Determination 0.5 -6.2 -8.2 -6.9 -20.8

TOTAL REGULATORY OPERATING EXPENDITURE

2012 Determination 1416.7 1407.8 1402.3 1393.5

Actual 1388.5 1321.5 1325.5 1337.0


Variance as % excluding bulk water -3.26% -10.06% -9.01% -6.66% -7.24%

WATER OPERATING EXPENDITURE (including S16A recycling net costs)

BULK WATER OPERATING EXPENDITURE

WASTEWATER OPERATING EXPENDITURE

STORMWATER OPERATING EXPENDITURE



service and 1.4% to stormwater. These percentages vary through the period depending on the relative level of direct costs. Expenditure allocated to corporate has reduced from $213.8m in 2012 to $179.4m in 2016. This compares with $173.9m in 2008. As no determination was published in 2012 for corporate costs we do not have the information to compare this expenditure with the Determination.

Efficiencies delivered in the Current Price Path

Sydney Water explains in its submission the main reasons for variance which we summarise in Table 6-3

2 below.

Table 6-3 Current Price Path Variance Analysis by Expense

Source: Sydney Water –note annual cost profiles not available

Sydney Water explained that it undertook a restructure of its business following the 2012 Determination to

deliver savings in the current and future price paths. A new Managing Director was appointed in 2012 and

changes were made to the Executive Team. This restructure reduced employee numbers from 2681 in

2013 to a forecast 2495 in 2016 or 7% over the period. A further reduction to 2392 is planned in the future

price path to 2020. By far the largest reduction in labour was in the new Service Delivery function related

to the outsourcing of the electrical/ mechanical maintenance and an initiative to reduce civil works costs.

We comment below on the reasons for variance for each of these areas of expenditure.

Bulk Water

Bulk water are external costs to Sydney Water and comprise raw water purchases from NSWWater, an

availability charge for the Sydney Desalination Plant and treatment of treated water from the BOO treatment

plants at Prospect, Macarthur, Woronora and Illawarra. These costs are based on long term agreements.

Sydney Water states that it has no direct control over these costs, although it appears to have influenced

some cost savings in the price path. There may also be future liabilities where process improvements are

required to address, for example, deteriorating raw water.

An analysis of the bulk water variances is shown in Table 6-4.

OPERATING EXPENDITURE CURRENT PRICE PATH


Forecast

Variance

Actual to

Determination

Electricity -14.8 -20.3 -23.1 -28.4 -86.6

Carbon tax repeal -35.6 -35.6

Elec mech outsourcing 0.0 -3.1 -1.6 -2.8 -7.5

Contracts -54.7

Labour -49.4

Materials -6.0 -9.90 -9.30 -7.00 -32.2

Other -49.4

Exceptional Item: Redundancy 31.8

Exceptional Item: Assets 44.1

Unexplained variance -8.3

Total -28.2 -86.3 -76.8 -56.5 -247.8

VARIANCE ANALYSIS: DETERMINATION - ACTUAL BY EXPENSE



Table 6-4 Current Price Path Bulk Water Variance Analysis

Source: SWC Table 7-3 data

There is a variance of +$11.9m mainly as a result of year 2013. The $5.4m cost increase from NSWWater

is outside the control of Sydney Water and is due to higher demand for water offset by the carbon tax

savings and cost escalation savings in 2013 and 2014. In 2015 and 2016, there is no material variance

from the Determination. The $4.5m desalination plant savings relate mainly to year 2013 when there was

a transition to shutdown plus some higher electricity network charges although variance is not material in

later years. The BOO plant expenditure includes finance costs; it shows a small variance although a larger

churn in costs. Higher demand for water in 2013 and 2014 and deteriorating raw water quality has increased

costs by $27.9m. Corresponding cost reductions of $26.2m relate to lower cost escalation, lower chemical

power and labour costs, maintenance savings, repeal of the carbon tax and fixing of interest rates. Sydney

Water can influence some of these costs through for example common procurement of chemicals.

Energy

There has been a significant reduction in energy costs compared with the 2012 Determination. This has

been driven by a combination of reduced energy use, external costs and management action. Variance in

units and costs are shown in Table 6-5.

SYDNEY WATER BULK WATER OPERATING EXPENDITURE


Forecast

Variance

Actual to

Determination

2012 Determination 209.5 211.6 212.7 213.8

Actual 213.0 213.8 212.6 213.7


2012 Determination 206.5 203.2 201.0 196.6

Actual 210.9 202.3 200.9 197.8

Actual > Determination 4.4 -0.9 -0.1 1.1 4.5

2012 Determination 136.1 134.9 136.0 134.8

Actual 140.7 137.4 133.2 132.4


2012 Determination 552.1 549.7 549.7 545.2

Actual (1) 564.5 553.5 546.7 543.9


WATERNSW OPERATING EXPENDITURE

DESALINATION PLANT OPERATING EXPENDITURE

BOO OPERATING EXPENDITURE

TOTAL REGULATORY OPERATING EXPENDITURE



Table 6-5 Current Price Path Electricity Variance Analysis

Source: Sydney Water Energy Presentation

There has been a 25 GWh increase in demand over the period compared with a similar forecast although

the starting position in 2013 was lower. This has resulted in an 82 GWh reduction in total demand over the

period compared with the Determination and a 68 GWh saving in grid supply. It could have been lower had

all the forecast renewables been delivered. The earlier shortfall in renewables was addressed during the

period and the year 2016 position shows an increase to 75 GWh per annum. The lower level of renewables

generated is mainly related to the non-operation of the Prospect hydro generation unit because of high

water levels in the dams. Sydney Water explained that the units would have operated beyond their design

envelope. The plant was also out of service for a period of time.

The $86.6m total expenditure variance comprises $56.6m due to exogenous factors and $30m attributable

to management action. The exogenous factors comprise reductions in retail rate savings of $26.5m as

more capacity came available and network rate savings of $30.1m. Sydney Water has stated that its

management actions related to load savings of $11.6m and proactive approaches to retail rates, $10.5m,

carbon price $4.2m and managing environmental costs, $3.8m.

In addition and not shown in Table 6-5, the carbon tax was repealed resulting in a saving of $35.6m. To

summarise, of the $122.2m cost reduction in the current price path, $92.2m is due to external factors and

$30m because of management actions

.

SYDNEY WATER PROPOSED OPERATING EXPENDITURE


Forecast

Variance

Actual to

Determination

2012 Determination 427.0 431.0 436.0 443.0

Actual 404.0 408.0 414.0 429.0


2012 Determination 69.0 69.0 69.0 69.0

Actual 59.0 61.0 67.0 75.0

Actual > Determination -10.0 -8.0 -2.0 6.0 -14.0

Grid Purchase Determination 358.0 362.0 367.0 374.0

Actual Grid 345.0 347.0 347.0 354.0

Variance -13.0 -15.0 -20.0 -20.0 -68.0

2012 Determination 67.2 72.3 65.3 66.4

Actual 52.4 52.0 42.2 38.0


Load saving 2.4 2.9 2.7 3.4 11.4

Rate saving 12.4 17.4 20.4 25 75.2

REASONS FOR VARIANCE($M)

ELECTRICITY DEMAND -TOTAL (GWh)

ELECTRICITY DEMAND -RENEWABLES (GWh)

ELECTRICITY DEMAND -GRID (GWh)

POWER OPERATING EXPENDITURE ($M)



Service Delivery - Electrical and Mechanical Maintenance Outsourcing

Sydney Water restructured its Operations and Maintenance Divisions into one Service Delivery business.

As part of this transition, it outsourced all its Electrical and Mechanical work from July 2013. This decision

was made following a detailed evaluation of options for delivering efficiency savings. Previously some 40%

of this work was outsourced under a separate contract which expired in June 2013. The transition to the

new contract has continued over 2014 and 2015 with the main efficiencies delivered from 2016. The full

year impact of the $13m annual savings will be from 2017.

This initiative includes the implementation of the Modern Mobile Workforce (MMWF) program and the

efficiencies in work management this brings.

In the current price path Sydney Water has shown a net saving of $7.5m. Table 6-5 shows that while

contractor costs have increased, there are significant savings in labour; material costs have been

reclassified in contractors. By 2016, the annual savings are shown as $2.6m per annum. This is part of

overall savings of $13m per annum from 2017 comprising elec/mech outsourcing as below, civil works

savings of $7.5m per annum and fleet and corporate savings.

Table 6-6 Current Price Path Electrical Mechanical Variance Analysis

Source: Sydney Water data (NJ 90-01)



Materials

Sydney Water is showing a $32.2m saving in operating expenditure over the current price path shown in

Table 6-6 below. Some $17.2m of this is due to a reallocation of costs to ‘contractors’. There has been a

reduction of $6.3m on periodic maintenance programs although this appears, by definition, to be a deferral.

There are reported savings in chemical usage with a change from ferric to ferrous chloride together with

optimisation of chemical dosing at sewage treatment works and procurement savings. Deteriorating raw

water quality has been cited as the reason for increasing chemical use at Sydney Water’s own water

treatment works.



Forecast

Variance

Actual to

Determination

ELECTRICAL AND MECHANICAL OUTSOURCING

Labour 0.0 -14.7 -13.8 -13.7 -42.1

Contracts 0.0 20.8 21.4 20.1 62.3

Chemicals 0.0 0.01 0.01 0.01 0.02

Materials 0.0 -6.9 -6.9 -6.9 -20.6

Transport 0.0 -2.38 -2.33 -2.33 -7.04

Energy 0.0 -0.03 -0.03 -0.03 -0.08

Total 0.0 -3.1 -1.6 -2.8 -7.5



Table 6-7 Current Price Path Materials Variance Analysis

Source: Sydney Water data (NJ 92-01)

Labour

Initiatives included bringing together the former Operations and Maintenance Divisions in to one Service

Delivery function. In addition the former Asset Management and Infrastructure Delivery Divisions were

combined to form Liveable Cities Solutions Division. This restructure moved from ten Divisions in 2012 to

eight in the current structure. There is a $49.4m reduction in labour costs. Redundancy costs are classified

as an exceptional item of $31.8m. The major areas of savings were in Operations, Liveable Cities (-$8.7m),

and Support Services: Business Strategy and Resilience ($15.2m), and Information Technology ($7.5m).

Savings from the outsourcing in Service Delivery are offset in part by contractor costs. These savings are

from a 278 reduction in FTE numbers from June 2012 to a forecast at June 2016. This includes 136 from

the electrical/ mechanical outsourcing.

Contracts

Sydney Water is reporting a saving of $54.7m on contractor services, which is $42.1m net of electrical/

mechanical contract savings. The main drivers of cost savings are from Civil Delivery works, $33m offset

by growth areas, $7.7m and Wet Weather Overflow Abatement $2.6m. Other savings are from customer

service operations and administration.

Sydney Water reviewed its civil works operations as part of the restructuring of the Service Delivery

business. From a benchmarking analysis in 2012, the civil works activities were shown to be 18.5% above

the best performer. A program was established, termed by Sydney Water as ‘meet and beat the market’

through improved work practices and greater productivity. By the end of 2014, an efficiency of 12% was

delivered and initiatives were on track to meet a 19% target by June 2015. These savings are mainly in

labour costs. The implementation of the MMWF program has facilitated some of these savings. The overall

impact of the civil works productivity is to reduce annual expenditure by $7.4m per annum.

Exceptional Items

Sydney Water has identified three areas of expenditure where it has raised provisions for restoration costs

as it states it has a legal or constructive obligation to do the restoration. There are three areas of

expenditure: redundant cabling, asbestos and a sewer collapse.

There is a provision of $21m to rectify redundant cabling at its sites. The work comprises identifying cables,

termination and isolation, risk assessment of sites and remedial works where identified, installation of fixed



Forecast

Variance

Actual to

Determination

MATERIALS VARIANCE

Chemicals -2.1 -2.5 -2.1 -1.7 -8.4

Major Periodic Maintenance -0.3 -1.7 -1.9 -2.4 -6.3

Change in mix of civil projects -1.7 0.0 -2.3 -0.1 -4.1

Savings and Efficiencies -0.3 -0.4 -0.4 -0.9 -2.0

Other (reclassifications) 0.7 -3.3 -2.7 -2.3 -7.6

Impact of carbon tax -1.2 -1.2 0.0 0.0 -2.5

Other -1.0 -0.8 0.1 0.4 -1.3

Total -5.9 -9.9 -9.3 -7.0 -32.2



residual current devices and locking mechanism for electrical cabinets. It is unclear whether this work

relates to operational or non-operational sites. We raise two challenges here: the basis of the cost estimate

and whether the cost of removing cabling on any non-operational land should be offset against land sales.

There could also be some benefit from offsetting these costs by material sales or apply a suitable

procurement route in the market. We were advised that costs are likely to outturn at around the current

estimate. This activity appears to arise from shortfalls in the effective completion of works and clearance

of sites on completion.

A provision of $15m has been made for inspecting and removing asbestos and other hazardous materials

from buildings and work locations.

The third item is a $3.1m write back of assets following a sewer collapse in 2013. This resulted from a

sewer collapse during relining work. Sydney Water asserted the sewer failure was caused by its contractor

and sought to recover costs under the contract in place. The contractor went into liquidation and Sydney

Water was able to recover some costs through a bank guarantee and is looking to recover further amounts

from insurances in place. We question whether this expenditure should be included as prudent as it

appears that customers should not be asked to fund this item.

Ring Fencing of Recycled Water Costs

We are required to advise on the appropriateness of direct and allocated operating costs that Sydney Water

has ring fenced from its other operations associated with recycled water services.

Sydney Water incurs operating expenditure on recycled water schemes. The Rosehill-Camelia and St

Mary’s schemes form part of the regulated business and have defined cost codes; total operating

expenditure in 2015 was $24.1m. Other recycling schemes at Rouse Hill, Hoxton Park, Wollongong and

smaller schemes are unregulated; expenditure in 2015 was $3.9m.

Sydney Water allocates costs for all activities through its Regulatory Cost Model which codes costs to

products and services and segregates regulated and unregulated recycled water activities. Direct costs are

allocated to cost codes by service and activity. Common or shared costs are allocated across the business

to service in proportion to the direct costs incurred. For example, sewerage direct costs in 2015 were

$395.8m and corporate costs of $110.7m were apportioned. Similarly for stormwater the direct costs of

$7.6m attracted a corporate cost allocation of $1.04m.

Sydney Water explains that there is no allocation of common or shared costs to recycled water activities,

both regulated and unregulated, as they are an extension of the wastewater treatment process. It also

states that the corporate overhead costs are not materially influenced by recent recycled water activities.

We formed the view that the recycled water activities, both regulated and unregulated, form a part of the

Sydney Water business. Direct operating costs are twice as large as for stormwater activities for which

there is a corporate allocation. Management time is taken in the routine financial, contractual and HR

management of the recycled water business. The activity probably incurs much greater regulation activity

compared with other parts of the business. We concluded that it was appropriate and equitable to allocate

a proportion of common or shared costs to recycled water activities using the same proportional rules as

for other services.



6.4. Prudent and Efficient Expenditure in the Current Price Path

Efficient Expenditure

We have reviewed the variations in operating expenditure from what was allowed in the 2012 Determination

and have commented above on the reasons for variance.


with, for all measures, a clear headroom against the targets set. We are not aware of any failures of the

Operational Licence Measures. We concluded that the reduction in operating expenditure has had no

material impact on Operating Licence performance.

The business has been restructured following the 2012 Determination including a new Service Delivery

Division which combined the previous Operations and Maintenance Divisions. The Liveable City Solutions

Division now combines the Asset Management and Solution Delivery Divisions. Support Divisions have

been restructured resulting in eight Divisions compared with ten in 2012.





Changes to the energy market and network charges have delivered significant cost savings. This accounts

for some 40% of total cost savings over the period.

The cost savings are reflected in the service expenditures, with a significant reduction in controlled water

service costs and a modest reduction in wastewater costs.

On the basis from what we have seen, we confirmed that expenditure relates to the regulated business.

We confirmed that the actual operating expenditure to 2015 represent efficient expenditure. The actual

2015 expenditure is $11.0m less than the June 2015 forecast. The reductions relate to a higher proportion

of operating costs are offset against increased non-regulated revenue, lower than normal insurance costs

and reduced water filtration costs from improved water quality.

Year 2016 represents an increase of $22.0m above the 2015 re-stated outturn. This reasons for this

increase relates to a return of insurance costs to normal level, increase in IT labour, higher material

expenditure for spoil disposal and chemical costs at new sites. There is a significant increase in service

contractor costs offset in part by other savings. In the time available we have reviewed the basis of these

costs but have accepted these explanations.



We confirmed that, subject to these comments, variations in expenditure are justified.

Exceptional Expenditure

We found two areas of expenditure which are considered as exceptional. These are removal of redundant cables on Sydney Water sites and the cost of a sewer failure. The $26.1m expenditure was not included in the 2012 Determination.

Sydney Water commented that:

By funding the works [removal of redundant cables] from operating expenditure that was not included in the 2012 Determination, Sydney Water is bearing the cost and not the customer.



For the sewer collapse costs other than those that have been recovered:

The shortfall was not covered in the current determination and no subsequent recovery from customers is sought.

6.5. Operating Expenditure in the Future Price Path

Sydney Water has proposed a level of operating expenditure for the period 2017 to 2020 which continues

at a similar level as year 2015 and 2016. Figure 6-6 shows proposed expenditure in the future price path

by year and service. We also show expenditure in the current price path to show longer term trends.

Source: Sydney Water RCM analysis

Figure 6-7 Actual and Forecast Operating Expenditure 2009 to 2016

For completeness we have included expenditure for bulk water and desalination water although these costs

are not controllable by Sydney Water.

The proposed expenditure form the future price path is compared with the base year 2015 in Table 6-8. For

comparative purposes we have extracted finance costs as these are excluded from the future price path.

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2013 2014 2015 2016 2017 2018Water Bulk water Wastewater Stormwater Recycled water reg



Table 6-8 Future Operating Expenditure compared with 2015 base year

Source: SIR and Sydney Water RCM analysis

We have included year 2015 actual expenditure and 2016 forecast for comparable analysis. Water service

expenditure excludes bulk water costs comprising bulk raw water, the BOO operating costs and the

availability charge for the desalination plant.

The water service expenditure shows a relatively even trend through to 2020 although 2016 is an exception.

The wastewater service shows a marginally reducing trend from 2015 although 2016 is again a small

increase. Stormwater expenditure follows an even trend from 2015. It appears that the 2016 forecast is

overstated with no specific reason provided.

There are continuing efficiencies from the current price path which have not fully wound out in 2014/15. It

is not clear whether the exceptional items for electricity cabling and asbestos have been delivered before

2014/15 or the impact on this expenditure profile.

Methodology

Sydney Water has applied a structured approach to deriving a medium term budget for the future price path

period. This started in August 2014 and involved all the business units in compiling expenditure projections.

There is evidence of internal challenge through a ‘heat map ‘process where potential cost savings have

been identified and evaluated. Sydney Water’s Executive has been engaged in the process. Internal audit

reviewed the budget process and commented that ‘the operation of the process and related controls had

been evidenced and provide assurance on the accuracy and completeness of the information’. There was

also an external review of the budgeting process by consultants. They confirmed that the governance

structure is highly advanced and compares favourably with other companies. They also confirmed that the

heat mapping process is effective in identifying potential cost savings and budget reductions. The process

was ranked ¾ with high scores for governance and use of technology with a shortfall in linkage to the

Corporate Plan.

Assumptions

The key assumptions used in setting the budget comprise

average weather conditions;

the desalination plant does not operate hence no volumetric charges;

SYDNEY WATER PROPOSED OPERATING EXPENDITURE: BY SERVICE

($k 2015/16) year ending June 2015

Actual

2016 2017 2018 2019 2020 Total 2017

to 2020

Water 228.9 233.1 229.6 230.7 230.5 229.2 920.0

Wastewater 506.5 512.0 506.5 505.3 501.9 497.8 2011.5

Stormwater 12.9 11.9 12.2 12.6 12.8 12.8 50.5

Bulk Water 212.4 213.7 197.2 199.8 203.8 209.9 810.7

SDP 200.9 197.8 194.0 190.9 187.8 185.2 757.9

BOO 112.8 88.3 89.2 89.3 87.7 88.1 354.3

Recycled Water 27.0 27.0 27.2 27.1 25.7 25.8 105.8

Finance leases 28.9 57.2 0.0 0.0 0.0 0.0 0.0

Less Rosehill Scheme -4.1 -4.1 -3.1 -1.7 -1.7 -1.7 -8.2

Total Regulated 1326.3 1336.9 1252.9 1254.1 1248.3 1247.2 5002.5

Unregulated 12.4 12.4 14.2 14.3 14.3 14.3 57.1

Total Forecast Expenditure 1338.7 1349.3 1267.1 1268.4 1262.6 1261.5 5059.6



NWS Water purchase costs based on IPART Determination;

Long term projections for growth

No deterioration in raw water quality

Operations and Support Expenditure

Expenditure by Operations and Support activities is summarised in Table 6-9. We have termed operational

activities to include Service Delivery, Customer Services and Liveable City Solutions. For comparison of

overall expenditure trends we have itemised separately the bulk water and finance lease costs. For the

future price path, finance leases are to be reported within the RAB and not as an operational expense

although real operating expenditure remains in the BOO bulk water charges.

Table 6-9 Future Operating Expenditure by Activity

Source: Sydney Water RCM analysis. There are small t differences in expenditure for years 2018 and 2019 between

expenditure by service (and SIR) and expenditure by Division. The analysis is based on the former. Analysis by Division

is indicative and these differences are not material.

($k 2015/16) year ending June 2015

Actual

2016 2017 2018 2019 2020

Service Delivery 478.0 470.8 472.0 474.2 473.5 475.0

Bulk Water 526.1 499.8 480.5 480.0 479.2 483.3

Finance Leases 28.9 57.2 0.0 0.00 0.00 0.00

Customer Services 56.9 60.1 57.2 57.6 61.6 62.7

Liveable Cities Solutions 27.9 26.3 24.4 23.6 23.6 23.4

Sub total Operations 1117.8 1114.2 1034.0 1035.4 1037.8 1044.4

Business Strategy & Resilience 31.6 36.0 32.3 33.0 31.8 31.8

Finance & CorporateServices 66.3 65.1 65.7 65.7 65.5 65.7

Information Technology 58.4 63.7 64.0 63.7 63.6 63.6

Office Of The MD 1.0 0.7 0.7 0.7 0.7 0.7

People Leadership and Culture 19.8 22.0 21.3 21.3 21.1 21.4

Transformation 15.2 15.2 15.2 12.5 7.1 2.0

Corporation Level Adjustments 8.5 20.0 19.7 17.2 16.7 17.6

Sub total Support Services 200.9 222.7 218.9 214.2 206.4 202.8

Total Operations and Support 1318.7 1336.9 1252.9 1249.6 1244.3 1247.2

Less Finance Lease costs -28.9 -57.2

Less Bulk Water -526.1 -499.8 -480.5 -480.0 -479.2 -483.3

Total 763.7 779.9 772.4 769.6 765.1 763.9

OPERATONS

SUPPORT SERVICES

TOTAL

SYDNEY WATER PROPOSED OPERATING EXPENDITURE: BY DIVISION



There is an overall level trend in total operating expenditure, varying within +/-1%. In 2017, support services

represent 17.5% of total expenditure reducing to 16.2% by 2020. In 2015, support services formed 15% of

total expenditure including bulk water; this increases to 16% by 2020.

Year 2015 is the latest full year of actual expenditure. We use this as the base year to compare trends in

forecast expenditure. Year 2016 shows an increase on $16.2m on the total less finance lease and bulk

water costs. Material variances between 2015 and 2016 include mainly support services offset in part by

reductions in water and wastewater operational costs. The variance comprises:

a reduction of $7.2m in Service Delivery as current price path efficiency benefits are rolled out;

and increases of

$3.2m in Customer Services;

$4.4m in Business Strategy and Resilience;

$5.3m in Information Technology

$2.2m in People, Leadership and Culture

$11.5m in Corporate Adjustments

Plus smaller variances

These variances result in a $21.8m increase in Support Services expenditure when Operations expenditure

reduces by $3.6m. Year 2016 is a budget estimate.

Service Delivery

This is the largest Division and includes the former Operations and Maintenance Divisions. In Section 6.3

we commented on the efficiency initiatives of the electrical and mechanical outsourcing contract and the

cost reductions in the civil works activities to meet market rates. These efficiencies, continue to be made

through 2015 and 2016 and into future price period with an overall savings of $13m per annum from 2017.

Forecast expenditure shows a marginal increase from 2016 comprising several additional cost areas offset

in part by savings in other areas. Additional expenditure of $55.4m has been identified for growth, asset

reliability and service standards. Growth expenditure of $26.9m includes $4.6m per annum civil works and

$1.5m per annum water/ wastewater treatment in new estates. Asset reliability is planned to increase by

$22.3m as a resumption of the normal opex program of work equivalent to $5.1m per annum, advanced

water treatment membrane replacement and desilting of airport pits; these activities are offset by

capitalisation of some labour costs.

Sydney Water has identified labour savings mainly due to unfilled vacancies and non-labour savings of

$23m comprising reductions in facilities management work and a range of smaller activities including

chemical dosing optimisation and sewage pumping station operations. The combined impact of these

forecast savings is a $7.9m per annum saving.

Sydney Water has taken a proactive approach in identifying efficiencies and the risk of likely additional

activities and related expenditure. The net impact of the forecast additional expenditure and likely savings

results in an increase of $5m per annum by 2020 compared with the 2016 base; this is equivalent to a 1%

increase. We noted that Sydney Water has a risk-based process to optimise its planned maintenance

activities. We understand that the additional activities and potential savings have yet to go through this

optimisation process. We consider that following optimisation, the maintenance activities and expenditure

could be managed to a level profile, if not a reducing trend over the period. This is consistent with the likely

actions of a Frontier Company.



We concluded that there is scope for further productive efficiencies to be delivered through winding out the

current price path initiatives and applying risk-based planned maintenance. We are also mindful that the

proposed capex renewal adjustments will place greater focus on planned maintenance. There is a need to

have a robust planned maintenance program which focuses on extending the life of assets. We have taken

note of the Sydney Water comments on the draft report and have accepted a marginal increase in

expenditure and a lower level of catch-up efficiencies.

Customer Services

Benchmarking information provided by Sydney Water shows that the Division is outperforming or in line

with other Australian utilities. The analysis also shows that there is scope to improve areas such as first

time and escalated customer complaints. FTEs are forecast to reduce over the period although contractor

costs are forecast to increase. Expenditure follows a relatively even trend from the 2015 base year although

increase in 2019 and 2020 because of contractor costs associated with the implementation of the new

billing system. The efficiency gains from the new billing system are not likely to be evident until the 2020

expenditure review.

We questioned the scope for a reduction in meter reading from the current three months to six or twelve

months. We understand that electricity retail companies have a longer meter read frequency in parallel

with regular monthly fixed payments. Sydney Water responded that the new billing system should provide

the facilities to enable a longer meter reading frequency to be applied with customers able to submit own

readings on line.

Liveable Cities Solutions

This division combines the previous Asset Management and Solution Delivery Division functions. It is

accountable for long term planning through to the delivery of infrastructure. The division is forecast to reduce

FTEs from the 2015 head count and continues with a flat profile over the period to 2020.

Support Services

We comment on the combined Divisions representing Support Services. There is an 11% increase in 2016

compared with the 2015 base year. The Business Strategy and Resilience expenditure shows a one year

increase in 2016 attributable to the tasks which were subsequently transferred to Liveable Cities Solutions.

IT shows a step increase of $5m from the 2015 base year and continuing at the same trend through to

2020. This is largely due to filling positions that became vacant in 2014-15 as part of the reform of the IT

Division although we would expect some staff costs to be capitalised. This step increase continues at an

even profile through to 2020. People Leadership and Culture shows a smaller step increase from the 2015

base year although there is a small reduction on FTEs.

The Corporate Level Adjustments is controlled by the Chief Financial Officer and include for corporate

insurances, redundancy payments, exceptional items for maintenance and administration and other

exceptional items for asset decommissioning and remedial expenses. Sydney Water explained that the

2015 expenditure is lower than average due in part to lower one-off insurance expenses.

There appears to be a long term increasing trend in Support Services expenditure increasing from $190m

in 2012 to $200.9m in 2015 and 202.8m in 2020.

Bulk Water

There is a forecast increase in raw water demand from 528GL in 2017 to 544 GL in 2020, equivalent to 1%

per annum. Bulk water costs are subject to a separate Determination by IPART. Sydney Water has

assumed that costs will be lower than the 2015 base year although rising over the period. This is attributable

to a likely lower WACC offset by likely increased charges from major capital works. Sydney Water has no

control over these costs.



Sydney Water has assumed that the Desalination Plant will not operate during the future price path and

costs will be limited to an availability charge. This charge reduces over the period as the value of the RAB

decreases.

Costs for the BOO plants at Prospect, Macarthur, Woronora and Illawarra are forecast to continue at a

similar value through the future period based on contractual availability and usage charges. There is an

assumption that there is no deterioration in water quality over the period which would drive any cost

increases. The finance costs of these plants is excluded from operating expenditure and covered in the

RAB. We discuss this is Section 9. There are likely to be increasing costs to upgrade the plants which are

likely to be funded under finance leases and are not included within the expenditure review.

Energy

Energy costs represent some 6% of operating expenditure. Sydney Water is forecasting an increase in

power requirements over the future price path. A detailed analysis of power requirements at each site has

been carried out. Total load is forecast to increase by 17 GWh related mainly to increased flows and growth

at the West Camden, Riverstone and Picton wastewater treatment plants. Increased flows at the Waterloo

water pumping station is related to the Green Square growth area. The increase in demand is less than the

actual increase over the current price path. The forecast demand, supply and costs are shown in Table

6-10.

Table 6-10 Future Price Path Electricity Forecasts

Source: SWC electricity presentation

Sydney Water has an Energy and Eco-efficiency 2020 strategy which focuses on reducing costs while at

the same time recognising the environmental benefits from reducing emissions. To achieve these

objectives, Sydney Water has set a target to maintain electricity purchases below the 1998 level of 365

GWh/a. It focuses on a flexible approach to purchasing and delivering savings from energy efficiency.

SYDNEY WATER PROPOSED OPERATING EXPENDITURE

($k 2015/16) year ending June 2016 2017 2018 2019 2020 Total 2017

to 2020

ELECTRICITY DEMAND -GRID (GWh)

Total Load Forecast 429.0 434.0 438.0 442.0 446.0

Grid Purchase 354.0 355.5 357.0 358.5 360.0

Renewables 75.0 75.0 75.0 75.0 75.0

Additional Renewables 0.0 3.5 6.0 8.5 11.0

ELECTRICITY OPERATING EXPENDITURE

Proposed expenditure (SIR) 38.3 40.3 43.3 44.2 44.8 172.7

Unit rate $/GWh 108.3 113.3 121.4 123.3 124.6

Increase on 2015/16 4.6% 12.1% 13.9% 15.0%

ADJUSTMENTS

Continue 2015/16 unit rate 38.3 38.5 38.7 38.8 39.0 154.9

Grid level profile 354.0 354.0 354.0 354.0 354.0

unit rate profile 108.3 108.3 108.3 108.3 108.3

38.3 38.3 38.3 38.3 38.3 153.3

Adjustments 0.0 -1.9 -5.0 -5.9 -6.5 -19.4



Sydney Water is expanding the renewable generation capacity to meet the grid target. The energy

efficiency component is reflected in a saving of 45 GWH/a saving by 2020. It is unclear how this saving is

factored into the forecast demand.

The current renewals component is 75GWh which is assumed to continue through the future price path. A

new renewals projects has recently been commissioned at North Head wastewater treatment plant and a

new cogeneration capacity at the Cronulla plant.

Sydney Water explained that one of the reasons for the energy cost savings in the current price path was

a reduction in market rates for electricity because of additional headroom in the market. There were also

reductions in network charges. For the future price path, Sydney Water has considered likely energy

commodity rates, network forecast charges, large scale generation certificates (LGCs), and small-scale

technology certificates (STCs) and energy savings certificates (ESCs). This results in an increase in unit

rats as GWh/a by 15% by 2020 with a total $172.7m over the period. The methodology identifies budget

risks including the variance in retail rates, a significant reduction in network rate and small variations in

LGCs, STCs and ESCs; the largest impact is the reduction in network rates from a recent AER

Determination.

We found that Sydney Water is taking a structured approach to forecast expenditure taking into account all

material factors. Nevertheless this is low risk approach for Sydney Water to likely energy cost savings and

does not taking into account the likely reduction from network charges and the variability of the retail rates.

We would also expect that the 2020 strategy will deliver further energy savings beyond those forecast

following management action as in the current price path. Our view is that the risk of energy cost variance

should be shared more equitably with customers. We therefore assume that the unit electricity rate remain

constant at the 2016 rate, which takes into account the likely savings in access charges coming through.

We have also assumed that grid supply should remain at the 2016 value and increasing demand taken up

with renewables and energy efficiency. This analysis shown in Table 6-9 above shows that energy costs

would be of the order of $38m per annum or $152m for the period.

Labour

Direct labour as FTEs reduced by 7% over the period from 2013 to 2016 including the outsourcing of the

electrical/ mechanical maintenance work. A further 1% is forecast over the future price path to 2020. The

restructure in the current price path from ten to eight Divisions brought significant efficiency savings. While

the period to 2020 shows a relatively stable level of manpower, the structure can still be considered higher

than a Frontier company is likely to hold.

We were provided with the Business Cases related to the ERP and T2020 after completion of the draft

report. We note that Stage 1 of the ERP is to be commissioned in 2017 and the benefits of the system and

related processes are to be delivered from 2018. We have taken these benefits into account and amended

our operating expenditure forecasts. We note that main benefits from the T2020 billing system are to be

delivered after 2020 so have not made any changes to this project.

Procurement

A new approach to procurement of operating activities and capital works was established in the current

price path. The objective was to enhance the maturity of the procurement process to achieve leading

performance by 2017 and subsequently to excellent performance. Sydney Water states that this new

procurement process will enable it to optimise its buying power through new initiatives and by grouping

products and services together. The benefits being delivered are estimated as $90m over a three year

program to 2017 both operating and capital savings, and a further $20m per annum in future years. Benefits

in 2014/15 are shown as $27.5m. Sydney Water has shown its top ten procurement initiatives, eight relating

to operating expenditure, one impacting on the BOO contracts and one encompassing the capital program.



The eight operating expenditure initiatives are forecast to deliver $21m savings as a midpoint estimate. The

initiatives include Corporate and IT activities and Operational Services.

We support the implementation of the new procurement strategy and activities as these have and will

continue to deliver both operating and capital efficiencies. However, Sydney Water has yet to demonstrate

the impact of these procurement efficiencies over expenditure in the future price path. We formed the view

that significant savings have been achieved in the current price path and there are opportunities to drive

further savings in the period 2017 to 2020.

6.6. Operating Expenditure in the Future Price Path

6.6.1. Scope for Efficiency Savings

We set out our approach to assessing the scope for efficiency savings in Section 1.4. We take account of

performance against the Operating Licence requirements, the EPA licence criteria and customer service

measures. The data presented shows that Sydney Water has performed well against all these measures

with a healthy headroom in many instances.





We have looked at the balance of risk between customers and Sydney Water as this is important in defining

work activities, assumptions and efficiency adjustments. We found that a low risk approach is taken across

both operating and capital expenditure and there is little appetite to increase this. At the same time, there

are no regulatory incentives for Sydney Water to take greater risks on service provision to drive greater

efficiencies. A proposed form of incentives is being considered in this determination with any adjustments

being made at the subsequent determination. We have identified some areas where we consider that risks

are not shared equitably with customers. In these areas, both operating and capital expenditure, we have

made adjustments.

We also take note of the significant efficiencies achieved through the current price path, greater than those

set in the Determination. We have also taken note of the Sydney Water comments on the draft report and

have moderated the level of further efficiency savings over the future price path.

Our analysis of the information provided by Sydney Water at meetings and through subsequent questions

and documentation has identified several areas where we believe there is scope for making efficiencies

across the business. We discuss these areas below.

Energy

We found that while most of the energy costs are not controlled by Sydney Water, the forecast costs should

reflect an equitable balance of risk with customers. We are influenced by the significant reduction in network

charges following a recent Determination of prices. We have therefore assumed that unit rates will remain

unchanged from the 2016 base compared with the 15% increase to 2020. We have also assumed that

purchases from the grid should be no more than current levels with the small forecast increase me through

energy efficiency and renewable energy. The adjustment is from $1.9m per annum in 2017 to $6.5m per

annum in 2020.

Service Delivery

We consider there is further scope to reduce costs as activities go through the risk based planned

maintenance review. While we consider there is scope to reduce below the current 2015 level of



expenditure, we have limited the adjustment to maintain a level profile over the period. This is because the

planned maintenance continues to take an important role in deferring some asset renewal works. The

adjustment is from $0.5m per annum in 2017 to $2.5m per annum in 2020 and lower than the draft report

proposals. There is also the full impact of the efficiency roll-out from the initiatives in the current price path

which are addressed in catch-up efficiency. We have reduced the level of catch-up efficiency following the

Sydney Water comments.

The Business Structure

We have noted the restructure of the business in 2013 from ten to eight Divisions has delivered significant

efficiencies in labour and some major outsourcing. We note the Transformation program, set out in the

Corporate Plan, should be bringing further restructuring in the second half of the period. We understand

that this would give greater focus for customer service. This is similar to the retail/ wholesale split we see

in the UK water industry. It is for Sydney Water to plan its management structure but we agree this further

transformation would give greater focus on effective and efficient delivery of services. From our experience

and review of structures in utilities of a similar size, there are further opportunities to deliver efficiencies.

We also note the effectiveness of the Business Improvement team within the Transformation Division to

deliver further efficiencies in the second half of the price path. This confirmed our view that the management

is proactively seeking further efficiencies in the short run. We assume that this activity will continue through

the future price path.

6.6.2. Continuing Efficiency

Continuing efficiency is the scope for top performing or frontier companies to continue to improve their

efficiency. It reflects the continuing efficiencies being gained across all major sectors through innovation

and new technologies.

The continuing improvement element of efficiency relates to the increased productivity derived from process

innovation and new systems and technology that all well performing businesses should achieve, including

Frontier Companies. Sydney Water commented that it had built in continuing efficiency into its forecast

expenditure although this has not been demonstrated. Operating expenditure shows an even trend through

the future price path. We have responded in Section 2 on Sydney Water’s comments on the methodology

applied to this expenditure review.

In the 2012 Determination, Sydney Water was set operating efficiency targets7 of 0.25% per annum

continuing as applied to controllable expenditure. The efficiency targets were offset by those identified by

Sydney Water resulting in efficiencies of up to 1.8% p.a. in year 4. We note that Sydney Water significantly

over-achieved these target efficiencies set for the current price path.

Sydney Water commented that the 0.25% assumption for continuing assumption was greater than

productivity efficiencies delivered in NSW. Our view, as experienced in leading water companies subject

to greater regulatory and commercial pressures, is that larger gains are obtained through innovation and

business enhancements than experienced in local councils and many government-owned agencies.

The 2009 Determination for water companies in England and Wales8 established a continuing efficiency of

0.25%. This was lower than the 2004 Determination which set values from 0.8% to 1.0% including

outperformance potential. The Ofwat methodology changed for the 2014 Determination using econometric

models to determine total expenditure (totex) and a balance between short (opex) and long (capex) money.

There was also a move for greater customer involvement and to incentives with define Performance

Commitments and associated penalties and rewards. In New South Wales there is currently little incentive

7 Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other assets, IPART June 2012 8 Future Water and Sewerage Charges 2010 to 2015 Final Determination, Ofwat 2009



for a Water Agency to outperform. Sydney Water has proposed a form of incentives for IPART to consider

but these are issues to be addressed at the 2020 Determination. For this expenditure review and for

consistency with previous Determinations, we have retained the 0.25% continuing efficiency. It may not be

feasible to extrapolate this approach beyond this expenditure review and alternative approach would be

needed in the future.

6.6.3. Catch-Up Efficiency

The second element of operating efficiency is the catch-up from an agency’s current position to that of the

frontier utility or benchmark utility. Our qualitative assessment was based on a comparison of the agency

operational control processes compared with current best practice in Australia and England. It is based on

the professional judgement of our team formed from their broad and in-depth understanding of these

processes across many utilities. Our assessment was based on identified improvements to processes and

business opportunities which we discuss in Section 6.6.1 above. These improvements would generate

efficiencies in future years to enable the agency to move towards the frontier utility. We have noted the

efficiencies generated form initiatives in the current price path and their impact on the future price path.

We have also taken into account the opportunities for further transformation and to focus the shape of the

organisation over time to be more effective in delivering services to customers. We also recognise the

leverage of new risk management systems for maintenance and a closer application of the latest asset

management processes to drive further efficiencies.

We have made a judgement in relation to the impact of improved processes that could be achieved by the

end of the future price path and have assumed a cumulative increase in efficiency over time. This gradual

increase recognises that expenditures in the first year of the future price path are reasonably certain but

that the confidence of these estimates reduces over time.

In the draft report, we assumed an average 2% per annum catch up efficiency over the price control period.

We have reviewed this assumption based on the additional information and representations provided by

Sydney Water. We have also carried out further benchmarking which we presented in Section 6.1. This

showed that while Sydney Water is in the range of E&W companies’ level of expenditure, it confirms our

view from the expenditure review that there is scope for further catch-up efficiency. We have assumed a

catch-up efficiency increasing from 0.5% in 2017 to 2.0% in 2020 which represents an average of 1.3% per

annum. This reflects the time and constraints of delivering greater catch-up in the future price path and

further efficiencies are likely after 2020. This catch-up efficiency is not applied to bulk water costs, recycled

water costs and electricity charges. This is based on our assessment of Sydney Water’s performance

against the frontier and in particular the delivery of efficiencies in the current price path.

The resulting additional efficiencies are modest in the first two years but become more challenging in the

latter two. This should give sufficient time for ongoing efficiency plans to be delivered.

We compared our findings with the recent UK Markets and Competition Authority report on the Bristol Water

referral9. This report reflects the latest view of potential efficiency gains of a water company in an open

competitive market. The Ofwat Determination of Bristol Water’s submission was referred to the CMA for an

independent review. The report considers operating expenditure efficiency as a combination of continuing

and catch-up components and evaluates methodologies developed by Ofwat, proposed by Bristol Water

and with other recent regulatory reviews and Determinations. It considered the Ofwat approach of using

the upper quartile value of water company data and an initial catch-up efficiency and then a marginal

increase in input costs with an alternative approach using an average benchmark and assuming the catch-

up occurs over a five year period. For Bristol, this results in a net efficiency of 1% per annum, It considered

9 Markets and Competition Authority report ‘A referral under Section 12 (3) (a) of the Water Industry Act 1991,

October 2015



the Bristol Water proposal of 0.5% per annum and considered would over-state its level of efficiency

expenditure. We use this comparison to place our findings in the context of efficient expenditure of a water

company in an open market.


an average 0.75% per annum cumulative although weighted to the second part of the future price path.

This is below the CMA analysis above and recognises that Sydney Water may need more time to achieve

improved level of efficiency compared with others.

The level of efficient expenditure is shown in Table 6-11.

Table 6-11 Proposed Operating Cost Efficiencies

Source: Atkins Cardno analysis

We apply these efficiencies to the controllable costs.


($M 2015/16) year ending June 2015 2016 2017 2018 2019 2020 Total 2017

to 2020

Water 228.9 233.1 229.6 230.7 230.5 229.2 920.0

Wastewater 506.5 512.0 506.5 505.3 501.9 497.8 2011.5

Stormwater 12.9 11.9 12.2 12.6 12.8 12.8 50.5

Bulk Water 526.1 499.8 480.5 480.0 479.2 483.3 1922.9

Recycled Water 27.0 27.0 27.2 27.1 25.7 25.8 105.8

Finance Leases 28.9 57.2 0.0 0.0 0.0 0.0

Less Rosehill Scheme -4.1 -4.1 -3.1 -1.7 -1.7 -1.7 -8.2

Total Regulated Services 1326.3 1336.9 1252.9 1254.1 1248.3 1247.2 5002.5

Total less bulk water 771.3 779.9 772.5 774.1 769.1 764.0 3079.6

Electricity 0.0 0.0 -1.9 -5.0 -5.9 -6.5 -19.4

Service Delivery Reprofile 0.0 0.0 -1.0 -2.5 -2.5 -2.5 -8.5

Water 228.9 233.1 228.6 228.3 227.7 226.2 910.8

Wastewater 506.5 512.0 504.6 500.3 496.2 491.8 1992.9

Stormwater 12.9 11.9 12.2 12.6 12.8 12.8 50.5

Reprofiled expenditure 748.4 757.0 745.4 741.2 736.7 730.9 3051.8

Continuing Efficiency (%) 0.0 0.0 0.25% 0.50% 0.75% 1.00%

Catch-up Efficiency (%) 0.0 0.0 0.50% 0.75% 2.00% 2.00%


Water 227.1 225.6 222.0 220.1 894.8

Wastewater 501.0 494.4 483.6 478.1 1957.1

Stormwater 12.1 12.5 12.4 12.5 49.5

Recycled Water 27.2 27.1 25.7 25.8 105.8

Rosehill Scheme -3.1 -1.7 -1.7 -1.7 -8.2


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6.6.4. Efficient Level of Operating Expenditure

We present in Table 6-12 our proposals for an efficient level of operating expenditure for the future price

path period. The table includes the adjustments for the timing and scope of activities for each function and

applies a combined continuing and catch-up efficiency to the revised expenditure.

Table 6-12 Efficient Level of Operating Expenditure




to 2020

Water 229.6 230.7 230.5 229.2 920.0

Wastewater 506.5 505.3 501.9 497.8 2011.5

Stormwater 12.2 12.6 12.8 12.8 50.5

Bulk Water 480.5 480.0 479.2 483.3 1922.9

Recycled Water 27.2 27.1 25.7 25.8 105.8





Electricity -1.9 -5.0 -5.9 -6.5 -19.4


Water 228.6 228.3 227.7 226.2 910.8

Wastewater 504.6 500.3 496.2 491.8 1992.9

Stormwater 12.2 12.6 12.8 12.8 50.5




Water 227.1 225.6 222.0 220.1 894.8

Wastewater 501.0 494.4 483.6 478.1 1957.1

Stormwater 12.1 12.5 12.4 12.5 49.5

Recycled Water 27.2 27.1 25.7 25.8 105.8




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We have proposed two specific adjustments relating to electricity costs and Service Delivery expenditure.

The forecast electricity expenditure has been adjusted to take account the likely changes to market rates

and network charges; the latter has arisen because of the outcome of a recent Determination of these

charges. We have also made a modest adjustment in total demand to give greater focus on energy

efficiency. With these adjustments we believe there is a more equitable balance of risk between customers

and Sydney Water.

An adjustment to the Service Delivery expenditure is proposed to reflect the likely impact of the planned

maintenance optimisation process. We recognise the importance of planned maintenance in delivering

good service and deferring capital renewals. We have therefore retained the level of activity consistent with

a marginal increase on the 2016 expenditure.

We recognise that further efficiencies from the current price path initiatives will continue to be rolled out

through 2017 and 2018. We also note that the new procurement process is to deliver further efficiencies in

the cost of delivering maintenance activities, the cost of materials and other support service activities. Our

estimate of these savings have been wrapped up into a catch-up efficiency which is tapered over the price

path. There is an opportunity to deliver these efficiencies earlier in the period.

Our assumption on continuing efficiency is consistent with the proposed transformation proposals and

ongoing restructuring. While significant efficiencies have been delivered in the current price path,

transformation is an ongoing process to focus the business on customers.

We have noted the efficiency initiatives included in Sydney Water’s proposals. We have also seen the focus

of managers to seek and deliver efficiencies in their areas of work. In many areas, these efficiencies have

been used to offset additional works or activities resulting in level profiles for water and wastewater services.

We also noted that Sydney Water continues to deliver the performance measures in the Operating Licence

most with a comfortable headroom. This suggests a low risk is being taken in delivering these measures

6.7. Conclusions

Current Price Path

We have seen positive changes in Sydney Water since our previous review in 2011. The business has

responded actively to the recommendations we made at that time and has over-performed the efficiency

targets we proposed. Two thirds of the efficiency savings was due to management action; the other savings

relate to reductions in energy costs outside the control of the business.


with, for all measures, a clear headroom against the targets set. We concluded that the reduction in

operating expenditure has had no material impact on Operating Licence performance.





The actual 2015 expenditure is $11m less than the June 2015 forecast for valid reasons which were

explained. The $22m increase for year 2016 has been explained.





We confirmed that, subject to these comments, variations in expenditure are justified. We concluded that

the actual operating expenditure to 2015 represent efficient expenditure. Expenditure in 2016 has been

explained; with five months into the financial year, this is subject to some variation from the forecast.

Future Price Path

Our approach to efficient expenditure in the future price path is, set out in Section 0 follows the concept of

catch-up efficiency to achieve the performance of a frontier agency and the continuing efficiency it will make

over time through innovation, systems and improved management processes.





We have looked at the balance of risk between customers and Sydney Water as this is important in defining

work activities, assumptions and efficiency adjustments. We found that a low risk approach is taken across

both operating and capital expenditure and there is little appetite to increase this. At the same time, there

are no regulatory incentives for Sydney Water to take greater risks on service provision to drive greater

efficiencies. While this will be debated through the next price path period, we have identified some areas

where risks are not shared equitably with customers. In these areas, both operating and capital expenditure,

we have made adjustments as a surrogate for the impact of incentives.

We also take note of the significant efficiencies achieved through the current price path, greater than those

set in the Determination. These initiatives will continue to drive efficiencies through the current price path.

We have made adjustments to two specific areas: energy costs to reflect balancing cost risks with

customers and Service Delivery expenditure where we would expect further optimisation and risk based

approached will lead to an even trend in expenditure. We considered applying a reduction in this trend but

concluded that effective planned maintenance is essential to be able to defer some capital expenditure

presented in the submission.

Our benchmarking comparisons of totex show that Sydney Water has further efficiencies to make to

approach a frontier company or the average of the UK companies using the CMA analysis. We have applied

catch-up efficiencies to reflect the full impact of the initiatives implemented in the current price path and the

impact of the procurement strategy currently being implemented. In addition we note the Business

Improvement initiatives being promoted. We also take account of the transformation project and the likely

changes this will bring towards the latter half of the future price path. We have noted Sydney Water’s

comments on operating efficiency assumptions in the future price period and have made adjustments to

the catch-up assumptions stated in the draft report. We assume that catch-up efficiency will increase from

0.5% in 2017 to 2% in 2020.

We assume a continuing efficiency of 0.25% per annum to reflect overall technological improvements and

initiatives that a frontier company would be making over the period. This is consistent with the 2012

Determination. We have excluded bulk water and energy costs from the adjustments we have made.


an average 0.75% per annum cumulative although weighted to the second part of the future price path. We

have compared this with a recent efficiency analysis supporting the CMA (UK) determination on Bristol

Water. Our proposal is below the CMA analysis in Section 6.6 and recognises that Sydney Water may need

more time to achieve improved level of efficiency compared with others.

These efficiencies are challenging but the Corporation has highly experienced professionals who are

motivated to deliver. We have identified efficiencies which are higher than our proposals but we have noted



the likely constraints in the rate of operating efficiencies that can be achieved over the price control period.

These constraints of a government owned agency are greater than our frontier company.

We conclude that the level of efficient operating expenditure is as presented in Table 6-13 below.

Table 6-13 Efficient Level of Operating Expenditure by Service

Source: SIR and Atkins/Cardno analysis



to 2020

Water 229.6 230.7 230.5 229.2 920.0

Wastewater 506.5 505.3 501.9 497.8 2011.5

Stormwater 12.2 12.6 12.8 12.8 50.5

Bulk Water 480.5 480.0 479.2 483.3 1922.9

Recycled Water 27.2 27.1 25.7 25.8 105.8





Electricity -1.9 -5.0 -5.9 -6.5 -19.4


Water 228.6 228.3 227.7 226.2 910.8

Wastewater 504.6 500.3 496.2 491.8 1992.9

Stormwater 12.2 12.6 12.8 12.8 50.5




Water 227.1 225.6 222.0 220.1 894.8

Wastewater 501.0 494.4 483.6 478.1 1957.1

Stormwater 12.1 12.5 12.4 12.5 49.5

Recycled Water 27.2 27.1 25.7 25.8 105.8




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7. Capital Expenditure

7.1. Methodology

This section presents the results of our review of the efficiency and prudency of Sydney Water’s capital

expenditure. We identify below the major investment drivers and explain the variances in the current price

path expenditure against the 2012 Determination. We comment on the efficiency and prudency of capital

expenditure in the current price path and our view of future efficiency.

The methodology for the review of capital expenditure has focused on gaining an understanding of Sydney

Water’s external and internal environment as well as reviews of large projects and programs. Our views

are guided by the evaluation of asset management and capital investment processes through interviews

and Sydney Water presentations, which we discussed in Section 4 of this report. We have commented on

the main asset management systems and processes used to budget, track, monitor and report capital

expenditure.

We then make an assessment of an efficient level of expenditure for the period 2016 to 2020. We discuss

the cost drivers and efficient cost level recommendations for each of the capital drivers (Existing Mandatory

Standards, New Mandatory Standards, Growth, Government Programs and Business Efficiency) and the

specific activities contained therein.

We have selected a representative sample of capital projects from the 2012 Determination and proposed

for 2016 to 2020 to gain an understanding of the efficiency and prudence of the investment; prudence as

defined by IPART:

The prudence test assesses whether, in the circumstances existing at the time, the decision to invest in an asset is one that Sydney Water, acting prudently, would be expected to make. It should assess both the prudence of how the decision was made to invest and also the prudence of how the investment was executed where the asset has been built (i.e. the construction or delivery and operation of the asset), having regard to information available at the time.

Each project has a summary of our findings presented in Appendix A, B and C.

We present our analysis of the future expenditure proposals and comment on each driver on the potential

for efficiencies through the robustness of estimates, the need and timing of expenditure and the impact of

internal challenge and budget control.

Our views on future capital expenditure efficiencies are based on the hypothesis of a Frontier Company,

the continuing efficiencies that a Frontier Company makes through innovation and technological

development and the catch-up efficiency required of Sydney Water to achieve the performance of a Frontier

Company over time. Our methodology is set out in Section 1.4.

7.2. Overview

During the current price path, Sydney Water has delivered a significantly smaller capital expenditure

program relative to the previous 2009-2012 price path period, during which significant capital expenditure

was directed towards the desalination project. In the previous price path period from 2009-2012, Sydney

Water spent an average of nearly $850m per annum (15/16 prices). In the current price path this fell to

around $640m per annum. Sydney Water has proposed to increase this to just over $690m for the 2017-

2020 period.



Source: Sydney Water Information Return 2008, 2012 and Atkins/Cardno analysis

Figure 7-1 Total Capital Expenditure 2009 to 2021 (15/16 prices)

Figure 7-1 also shows that expenditure has been consistently below both the 2011 Submission and 2012

Determination levels, although projected 2015/16 expenditure shows an increase, followed by a continued

increase in the 2015 Submission projections until a slight drop off in 2020.

Figure 7-2 below sets out the trends in expenditure by broad Purpose, where “Maintaining Standards”

represents the sum of both Existing Mandatory Standards & New Mandatory Standards drivers. This

category represents the main factor affecting the increase in expenditure with growth, business efficiency

and government programs all showing a net decrease.

Figure 7-3 below shows the breakdown of the capital program by driver and product and shows the key differences in expenditure between the current and the next price path periods.



Figure 7-2 Breakdown of Expenditure in Current and Future Price Paths by Purpose ($15/16m)

Figure 7-3 Breakdown of capital program by driver and product



In summary, the key features of Sydney Water’s proposed 2017-20 capital program, include:

In terms of drivers:

A large increase (+$69.5m per annum) in Existing Mandatory Standards expenditure but also in Growth (+$16.0m per annum) and New Mandatory Standards (+$12.3m per annum)

A near complete drop-off in Government Program expenditure from $51.2m to $0.7m per annum.

Stable levels of Business Efficiency expenditure

In terms of products:

A large increase in expenditure in storm water spend, which is projected to more than double from an average of $19.1m to $39.9m per annum.

Significant increases in corporate expenditure (+14% or +$11.8m per annum), water (+$9.6m per annum) and wastewater (+$8.4m per annum).

No recycled water expenditure.

Figure 7-4 shows the changes in the average annual capital expenditure by driver while Figure 7-5 shows the same by product.

Source: SIR Capex 2

Figure 7-4 Comparison of current and future capex by driver



Source: SIR Capex 2

Figure 7-5 Comparison of current and future capex by product

7.3. Investment Drivers

Figure 7-6 summarises the trends in capital expenditure by product.

Note: no regulated recycled water was included in IPART’s Determination and actual total spend in the

current price path is only $0.2m.

Figure 7-6 shows the underlying movements within the total capital program, by product. Solid lines are

actual figures, while dashed lines are forecast figures from the SIR/AIR submission in 2015. The red lines

show IPART’s 2012 Determination by product.

The chart shows that the biggest area of underspend relative to the 2012 Determination relates to the water

product (total spend $271.7m lower than Determination) and wastewater ($34.5m lower). Total expenditure

on stormwater meanwhile was $48.2m above the Determination.

It is also notable that expenditure was significantly below the 2012 Submission for all products except for

Stormwater where SWC’s own submission also underestimated the expenditure which would be

undertaken.



Figure 7-6 Breakdown of Expenditure in Current and Future Price Paths by Product ($15/16m)

As can be seen in Figure 7-7 below SWC is projecting a significant increase in growth spend, and increasing

trend in ‘maintaining standards’ (a combination of new and existing mandatory standards) and a decline in

‘government program’ spending. ‘Business efficiency’ is also projected to increase.

We reviewed a sample of larger programs/projects with significant expenditure in 2013 to 2016 and 2017

to 2020 to understand the scope of programs/projects, the program/project delivery process, the planned

and actual program/project delivery, the reasons for variance in forecast and outturn costs and the

contribution to outcomes. Our key findings are summarised in the following sections under the relevant

product. Individual scheme summary sheets are listed in Appendix A and included in Appendix B Summary

Sheets for Capital Projects Reviewed.



Figure 7-7 Breakdown of Expenditure in Current and Future Price Paths by Driver ($15/16m)

7.4. Water Service Capital Expenditure

Water capital expenditure is projected to increase by 6% compared to the average spend in the current

price path period. Expenditure trends are shown in Figure 7-8.

Capital expenditure in the current price path is dominated by a number of large projects, particularly water

mains renewals, developer operations and North West Growth Centre.



Figure 7-8 Water capex trends

Source: Capex by project

Figure 7-9 Water service capital expenditure by project: current price path



Figure 7-10 below shows water capex by purpose.

Figure 7-10 Water Capital Expenditure by Driver 2012 – 2021

The increase in water service capex is driven by a 6% increase in “existing mandatory standards” (+$7.5m

per annum) and 10% increase in growth expenditure (+$5.3m per annum). These increases are mitigated

by SWC’s assumption that there will be no “new mandatory standards” (average $1.7m per annum in the

current price path) or “business efficiency” spend ($1.5m per annum average).

The profile of projects in the next price path period is similar to the current period as demonstrated in Figure

7-11 below:




Figure 7-11 Water service capital expenditure by project: 2017-20

Reservoir reliability and the North West Growth Centre have become more significant projects than in the

current price path, whilst mains renewals and Developer Operations are projected to reduce in scale.

7.4.1. Existing Mandatory Standards

Current Price Path – 2012-16

WEM 040 - Critical Water Main Renewals

The program covers larger diameter mains (>=300mm) and other diameters which have a higher

consequence of failure (e.g. sole source of supply; supply to sensitive customers like hospitals, schools; or

are located under railways or major roads). Sydney Water has nominated 4,700 km of mains as being

critical which equates to 22% of its total mains. The length of critical mains in the previous price path was

4,800 km (22% of network). An “Avoid-fail’ maintenance strategy is adopted for these mains.

For the current price path 2012-16, the delivered outputs were:

Project 2012-16 Outputs

Critical water main renewals 41

Critical water main condition assessment 300



Valve inspections 20,000

Valve Renewal 102

System Operation Manuals 1,270

The key performance driver for water mains is the rate of leaks and breaks and for these Avoid Fail mains,

the objective is to renew assets prior to the failure. The level of expenditure on Critical Water Main renewals

has been reducing significantly over the past price path periods with actual expenditure for the current price

path around 50% lower than the 2012 Submission. Over the same period, however, service performance

has been relatively stable.

This is an ongoing program that will continue through the 2016-20 price path.

WEM047 - Reticulation Water Main Renewals

Sydney Water has around 16,300 km of reticulation water mains (77% of the network) which are renewed

on the basis of failure history and compliance with a number of Operating Licence conditions consistent

with the Critical Water Mains program. Main breaks have reduced from a peak of 50 breaks and leaks / 100

km / year in 2001/02 to around 28 breaks and leaks /100 km / year in 2014/15. Mains that trigger these

performance levels are prioritised for further investigation, evaluation and prioritisation for renewal based

on failure rate and criticality. Renewals are progressed if the NPV of maintenance costs exceeds the cost

of renewal. This process is detailed in the reticulation water main decision framework.

The proposed renewal rate for the 2012-16 price path was around 1.1% of the total length of mains. This is

similar to the rate in the 2008-12 price path. Approximately 195km of mains were renewed over the 2012-

16 period against a planned output of 288km.

As identified above, the key performance driver for water mains is the rate of leaks and breaks and the

objective for these mains is repair/renew mains prior to exceeding service performance criteria. The level

of expenditure on Reticulation Water Main renewals has been reducing significantly over the past price path

periods with at least a 45% reduction on originally planned expenditure. Over the same period, however,

service performance has been relatively stable.


WEM046 - Reservoir Reliability Program

Sydney Water has 265 service reservoirs in its water supply network comprising 192 surface, 46 elevated

and 27 in ground reservoirs (including 11 listed under ANCOLD as small dams). Most of the reservoirs

were roofed in the late 1960s / early 1970s to ensure the maintenance of drinking water quality in the

network. A number of these roofs are now reaching the end of their remaining life (taken as 50 years). A

number of steel reservoirs also still have bitumen linings, which are in poor condition, while some

mechanical / electrical equipment including re-chlorination facilities require renewal.

Around 45 reservoirs (17% of total) have roofs in poor or very poor condition, with the latter representing 35, or around 13%, of the total. This is a large increase from the previous period which had 1% of assets rated as very poor condition and 14% of civil assets are rated as being in a poor condition.

All reservoirs have now undergone a level 1 condition assessment (using divers doing visual inspections) with reservoirs scheduled for this inspection every 5 years. Where required, this is supplemented by more detailed level 2 inspections which involve structural engineers assessing the reservoir using small boats. Renewals are identified based on factors such as asset condition, business efficiency and poor performance. The assessment process includes an analysis of the current and future operating context,



potential efficiency improvements. Sydney Water is looking at alternative designs and materials to reduce lifecycle costs. The selection of candidate renewal projects is based on NPV analysis.

Where renewals are undertaken, work includes re-lining of the reservoir and roof replacements as well as

renewal of mechanical / electrical equipment including re-chlorination plants, instrumentation and valves.

Planned outputs for the current price path included 15 roof renewal and 25 relining projects however the

actual delivery was 12 roof renewals and 8 relining projects. Actual expenditure was generally consistent

with that allowed in the 2012 Determination.


WEM051 - Water Pumping Station Renewals

Sydney Water owns 161 water pumping stations comprising 120 conventional pumping stations supplying reservoirs, 22 booster stations supplying areas that need additional water pressure, nine hydro pneumatic stations which are being replaced, and ten water recycling pump stations. The program aims to maintain assets to meet the required condition, performance, efficiency standards.

Renewal needs are identified through the Facilities Decision Framework including level 1 condition assessment and development of 5 year plans. This is then followed by the development of one year plans that identify assets for renewal based on condition, performance, business efficiency, safety risk and obsolescence using processes such as FMECA and HAZOP. The assessment process considers options such as operational modifications, need for changes in capacity (increase/ decrease) etc.

Assets are programmed for renewal if the future cost of maintenance exceeds the cost of renewal and then prioritised based on risk. The approach to the risk assessment process is based on the likelihood of a consequence occurring, but no weightings are applied to any of the consequence categories.

The planned outputs over the current period were the renewal of 24 water pumping stations at a cost of $39m however the forecast output is 18 stations at a cost of $32m. Half of the expenditure variance is explained through the decommissioning of two pumping stations saving $3.5m (plus two stations contributing $1.3m in 30 year NPV savings).


Energy Management

This program assesses the business case for investment in energy efficiency and renewable energy generation assets to reduce Sydney Water’s energy spend. The program covers a number of strategic themes including:

(i) Electricity purchasing – managing rates, sites and usage

(ii) Lifecycle costs – assessing the balance between capital and operational costs

(iii) Renewable energy – using biogas, hydro and solar to supply electricity at a lower cost

(iv) Resource recovery – to provide sustainable reuse alternatives and new revenue streams

(v) Energy efficiency – reducing energy use and improving technology

(vi) Reporting & compliance – reporting operational statistics and ensuring compliance with targets

The aim of the program is to cost effectively maintain non-renewable energy purchases to pre-1998 levels. NPV analyses are undertaken for all projects with payback periods assessed on a whole of life basis.

The current energy management assets include:

Hydro – pressure reduction and gravity flow generating energy – 5.9MW installed capacity

Biogas – generating energy from wastewater treatment process at eight WWTPs – 9.9MW capacity



Solar – PV installations on buildings becoming more cost effective with technological improvements – 90kW installed capacity

This is a relatively small program of work however delivery over the current price path was around 45%

lower than planned in the 2012 Submission. This was predominantly because suitable project candidates

could not be found, that is, the projects did not meet the required NPV ratio or acceptable payback period.

Future Price Path – 2016 to 2020

WEM 040 - Critical Water Main Renewals

The program is a continuation of the 2012-16 program and covers larger diameter mains (>=300mm) and

other diameters which have a higher consequence of failure.

The SIR has the total expenditure for the 2016-20 price path as being $116.0m. This is a decrease of about

15% over actual expenditure in the 2012-16 price path and represents a total reduction in expenditure of

about 60% from the 2012 Submission. The length of renewals is programmed to decrease from 41km in

the current price path to 38km in the future price path. Sydney Water explained that the decrease in renewal

lengths and expenditure is due to a number of factors including:

System Integrated Planning – model analysis and challenge of need for assets given current system;

Improved condition assessments leading to deferred and/or optimised renewals;

Higher risk appetite resulting from confidence in failure data, mechanisms and effects;

Better targeting of renewals and feedback reporting from project close out reports for condition assessment investigations leading to shorter lengths renewed or alternative renewal actions.

Figure 7-12 below shows a current risk profile for critical water mains with the total length of main in each

category shown in kilometres. This profile shows a low number of very high and high- A risk mains with

mains in the high-B category requiring only continued condition assessment. In addition, there is no clearly

demonstrated net movement of mains from lower risk categories to higher risk categories.

Figure 7-12 Risk Profile of CWM (2015)

Expenditure over the past years has been decreasing significantly. Figure 7-13 below shows the trend of

expenditure compared to performance levels and demonstrates that despite the significant decrease in

expenditure, performance has been quite stable over a period of greater than 10 years. This, and Sydney



Water’s continuing trend of excellent performance against Operating Licence targets, supports the case for

further reductions in renewals expenditure.

Figure 7-13 Trends in Renewals Expenditure and Service Performance

We are therefore proposing a marginal reduction in expenditure over the 2016-20 period to an average of $27m per year.

WEM047 - Reticulation Water Main Renewals

The program is a continuation of the work in 2012-16 which saw a significant reduction in expenditure and

output levels, yet without a corresponding reduction in performance against the relevant Operating Licence

target measures.

The proposed targets for the 2016-20 price path period are $134.0m expenditure to achieve around 180km

of renewals. The expenditure represents a 50% reduction from the 2012 Submission to achieve

approximately the same length of renewals, with this being generally achieved through more efficient

procurement processes.

Given the significant headroom that Sydney Water enjoys in relation to their Operating Licence targets,

particularly in Properties Affected by 3 or more Interruptions, we are of the view that further reduction of in

the planned renewals by the end of the future price path is unlikely to significantly impact on the level of

mains breaks or performance against the Operating Licence. We therefore propose a revised level of

expenditure for Reticulation Water Main Renewals at an average of $28.5m per annum.

WEM009 - Reservoir Reliability Program

The program is a continuation of the 2012-16 program which involves the renewal of reservoir roofs, relining

of walls and renewal of some mechanical / electrical equipment including re-chlorination facilities, valves,

mixers and instrumentation.

The proposed program of work represents a 75% increase in expenditure and a 175% increase in the

proposed roof renewals rate (65% increase if relining renewals are also added). Sydney Water has stated



that the increase is required due to an increasing age profile of reservoirs, condition assessments which

identify 20% of reservoirs (up to 53 total) as poor or very poor condition, and an increasing number of re-

chlorination plants requiring renewal.

Given the historical performance in delivering this program, the proposed use of the same Integrated Project

Team, the expected expiration of the Integrated Project Team arrangement in the next price path (and

therefore the slowdown in delivery performance normally associated with the transition process), we have

some concern over the delivery of this significantly expanded program. In addition, there is a lack of

explanation in the Program Business Case on the actual correlation between reaching the assumed roof

life of 50 years and the determination that its service life is zero. Approximately 25% of the reservoirs have

been condition assessed and approximately 20% have then been identified as requiring action immediately

or within five years, which seems to be a very high conversion rate.

Determining a relative delivery conversion rate for the current price path, assuming the same method above

was used, the planned renewal rate is 37 reservoirs which turns into an actual work delivery of 20 renewals,

yielding a “conversion” rate of 55%. Based on this rate we could reasonably apply this to the total proposed

expenditure yielding a revised expenditure equivalent to the actual delivery performance for the current

price path.

However, balancing the delivery performance and comments above against the increasing age profile of

reservoir roofs, we propose to allow approximately half the proposed increase in expenditure, with the

variance spread equally across the four years of the next price path period.

WEM012 - Water Pumping Station Renewals

The is a continuation of the 2012-16 program with the scope of the proposed 2016-20 work includes the

renewal of mechanical and electrical equipment and ageing HV equipment, which represents approximately

40% of total expenditure. The proposed program expenditure is $57.9m, which represents an almost 83%

increase over the current price path, to deliver a slightly larger program of renewals with a greater focus on

high voltage renewals. In addition, Sydney Water states that approximately $26m has already been taken

out of the proposed expenditure as removed projects (reduced scope or deferred beyond 2020). Including

this removed expenditure, the increase over the current price path would have been approximately 165%.

The proposed program expenditure includes a net allowance of $7.4m, comprising a forecast $11.9m in

carryover from 2015/16 less $4.5m in forecast closing WIP. This carryover has previously been assessed

as part of the 2012 Determination and should not be included in the assessment of expenditure in the next

price path. We are therefore removing this full amount from assessed expenditure.

A deeper analysis of components of the program identified that some unit rates used vary significantly

particularly for the electrical renewals. Assuming the lower of the unit rates (as per the current price path)

would result in a $5.2m saving in expenditure. Combined with removing the $11.9m and $4.5m figures

above, this results in a revised total for the next price path of $48.5m.

We expect that a more detailed assessment of this program will still identify projects with potential for

decommissioning or downsizing. We are concerned that delivery could be affected by the expiration of the

Integrated Project Team model. We therefore propose to further reduce the proposed expenditure to the

equivalent of allowing half of the proposed increase over the current price path. This reduces the total

expenditure to $44.8m.

Energy Management

This program is continued from the current price path with additional projects identified as presenting a

positive net present value outcome for Sydney Water. The program is based around three key projects, at

Shellharbour WWTP, Malabar WWTP and a general capacity upgrade. A Gate 1 business case is currently



in preparation; however the expected projects and savings have been identified. In addition, there is a set

amount of $1m per year to account for ongoing energy efficiency investigations.

All projects in this program are required to meet specific NPV hurdles including NPV ratios and maximum

payback periods. In addition, the projects must deliver on reductions in operating expenditure to meet

efficiency targets, and reductions in greenhouse gas emissions, to meet Sydney Water’s corporate target.

The current price path allowance was underspent due to a lack of suitable candidates identified after

detailed investigations. Given detailed investigations have not been completed for the next price path

period, a similar outcome could result. We therefore propose to reduce the proposed expenditure and re-

phase expenditure towards the end of the price path period. Our recommended expenditure is $10m for

the total period re-phased to allow $2.5m each year.

7.4.2. Growth

Significant growth is expected in Sydney, whose population is projected to increase from 4.7 million in 2012 to between 5.2 million and 5.6 million in 2021. This is reflected in significant levels of capital expenditure on servicing growth. This is shown in Figure 7-14.

Figure 7-14 Population projections for Sydney

Source: Australian Bureau of Statistics, Population Projections, Australia, 201310

10 From http://www.abs.gov.au/ausstats/[email protected]/Lookup/3222.0main+features72012%20(base)%20to%202101 on

13 October 2015

http://www.abs.gov.au/ausstats/[email protected]/Lookup/3222.0main+features72012%20(base)%20to%202101



Sydney Water spent $205.7m on water service growth in the current price path and projecting expenditure of $226.9m in the next price path. The trends in expenditure are summarised by project in Figure 7-15 below.

At the previous review, projections were based on the Metropolitan Development Plan (MDP). The MDP has not been updated recently and is no longer considered up-to-date. Sydney Water now bases its projections primarily on figures provided by the Department of Planning and Environment (DPE), which appear to be informal projections, not formally documented.

SWC’s approach to growth is informed by its Growth Servicing Plan (2014 to 2019) which sets out the framework for decision-making and an overview of growth expectations and by location-specific Water/Wastewater Growth Servicing Strategies which consider future growth levels, strategy analysis and the preferred servicing strategy.

SWC has developed an improved approach to planning for growth which carry out the detailed planning at an early stage but deferral of the decision to start construction until demand is demonstrated and there is a low risk of delay. This approach is summarised in their Growth Servicing Plan as follows:



Figure 7-15 Water Service Growth Expenditure by Project



Current Price Path

Figure 7-16 shows the changes in the largest water service growth projects in the current price path were

Developer Operations and North West Growth Centre – Package 2.

Figure 7-16 Water Growth Capex: Current Price Path

Developer Operations

Developers are responsible for putting in place the reticulation network and must supply these assets free

of charge to SWC. Developer Operations includes this Developers-delivered infrastructure and works

related to External Authorities (including for road, rail and council authorities), which are not necessarily

driven by growth, but may apply to projects which are required to deal with other-agency investments which

affect SWC assets. The processes involved are described in the project description in Appendix A.

This is the largest single type of water service growth expenditure. Expenditure in the current price path

($107.5m) has significantly exceeded SWC’s 2011 Submission projections ($80.7m). It is mainly a reactive

expenditure type which is not fully within SWC’s control.

North West Growth Centre (WGO015, WGO020, WGO021, WGO022)

This section addresses spend on four connected projects all related to expenditure to service the North

West Growth Centre (NWGC): North West Growth Centre – Packages 1, 2 & 3 and Minor Northwest Growth

Centre Projects <$10m. With over $66m water spend in the current price path these projects are one of

the major capital investment areas for SWC.

The NWGC was established in 2005 by the NSW Government to plan Sydney's growth on its urban edge

and better coordinate infrastructure. NSW Government anticipates development in NWGC to

accommodate 200,000 people in 70,000 new dwellings over the next 25-30 years (DOP-



0064_Guide_to_Sydneys_GC_v13-web). SWC developed an Area Plan in 2008, followed by a Drinking

Water Servicing Strategy Review in August 2014.

In its 2011 Submission, SWC projected that $71.7m expenditure would be required in the current price

path. At $66.4m, outturn expenditure is below this projection. This is understood to have been achieved

by staging of expenditure, utilising existing infrastructure longer based on a risk-based servicing approach.

Package 1 had been considered completed. However, SWC has had to pay for a Package 1 trunk main

($7m cost since 2011-12) to be moved from where it was originally constructed. This is because the laying

of the main preceded the finalisation of the road layout and SWC had to agree to move it at a later date if

required.

South West Growth Centre (WGO017, WGO025, WGO027, WGO031)

This section addresses spend on four connected projects all related to expenditure to service the South

West Growth Centre (SWGC): First Release Precincts Spring Farm trunk mains (Oran Park and Turner

Rd), First Release Precincts Turner Road Water, Second Release Precincts Water Austral Leppington,

Other Minor Southwest Growth Centre Projects <$10m.

The SWGC was established in 2005, at the same time as the NWGC, by the NSW Government to plan

Sydney's growth on its urban edge and better coordinate infrastructure. NSW Government anticipates

development in SWGC to accommodate 300,000 people in 110,000 new dwellings over the next 25-30

years (DOP-0064_Guide_to_Sydneys_GC_v13-web).

The First Release Precincts Spring Farm trunk mains (Oran Park and Turner Rd) project is complete. The

other three projects are ongoing/entering delivery phase.

There has been significant underspend on water infrastructure in the current price path compared to SWC’s

2011 Submission (-$69.6m or -71%). This is apparently due to deferral of expenditure in line with SWC’s

policy of only investing when there is demonstrated demand and the risk of delay is low.

Future Price Path

The largest water growth projects in the next price path are Developer Operations, North West Growth

Centre – Package 3 and SWGC projects First Release Precincts Turner Road Water and Second Release

Precincts Water Austral Leppington.



Figure 7-17 Water Service Growth Capex – Growth 2017-20


Because it is largely reactive and dependent on outturn levels of development, projecting Developer

Operations spend can be challenging. SWC has projected a reduction in capex spend in the 2017-20 period

($71.6m) compared to the current price path ($85.7m).

Figure 7-18 Water Service Growth Developer Operations Capex



We would recommend that the projected increase in expenditure in 2020/21 be revisited at the next price review given the uncertainty in growth projections. We have not made any specific adjustments to this program.

North West Growth Centre

This is a continuation of the NWGC growth program. Packages 1 & 2 are complete and the expenditure in

the next price path relates to Package 3 ($30.4m) and minor projects ($5.4m). SWC’s projected expenditure

is significantly less (-46%) than the $66.4m spent in the current price path.

The timing of SWC’s proposed investments is based on projected growth as follows:

Figure 7-19 WGC Capacity & Growth Projections

Source: SWC document: “GJ_68-01_ 141204_2012-16 performance – NWGC"

Expenditure in the 2017-20 period is based on the objective of completing Package 3 by mid-2019.

As demonstrated in Figure 7-20 below, new greenfield connections have tended to be lower than dwelling projections (based on MDP in this case). This may be because of the sometimes aspirational nature of development projections.



Source: Comparison of Sydney Water Connections with 2008 and 2010 MDP Forecasts to 2014/15. (Sydney Water

document: GJ_71-01_MDP 08 vs 10 Connections Factsheet)

Figure 7-20 Changes in dwellings in greenfield areas within Sydney Water's area of operations

Given the strong tendency for outturn greenfield growth to be below projections, the potential to phase the

roll-out of infrastructure and SWC’s risk-based servicing approach, we have re-profiled the NWGC

expenditure over five years rather than three, whilst keeping 2017 projections constant, i.e. assuming that

the roll out is complete in 2020/21 as shown in Figure 7-21 below.

Figure 7-21 Reprofiling of NWGC water service expenditure

We have applied this re-profiling to our view of capital expenditure summarised below.

Only year where SW connections > average MDP forecast



South West Growth Centre

With a total spend of $62.5m between 2017 and 2020, SWC has projected a significant increase (+116%) in water service growth capex for the SWGC, as development is expected to accelerate. The two biggest SWGC water service projects are the Second Release Precincts Water Austral Leppington ($40.4m) and First Release Precincts Turner Road Water ($20.5m).

The Turner Road scheme is a continuation of the scheme which has commenced delivery within the current price path. The Leppington Scheme has been subjected to a review of the effect of different development projections and a value management process11 and the likely need for implementation during the next price path appears to be reasonably robust.

We have not made any specific adjustments to this program.

7.5. Wastewater service capital expenditure

Wastewater capital expenditure is projected to increase by 2% compared to the average spend in the current price path period.

Figure 7-22 Wastewater capex trends

Capital expenditure in the current price path is spread across a significant number of projects / programs, of which three are particularly large: WWTP renewals, avoid fail sewer rehabilitation and Developer Operations. These are shown in Figure 7-23 below.

Figure 7-24 below shows wastewater capex by purpose.

11 SWGC Second Release Precincts Wastewater Infrastructure – East Leppington, Leppington North and Leppington precincts- Options Report, December 2013




Figure 7-23 Wastewater service capital expenditure by project: current price path

Figure 7-24 Wastewater Capital Expenditure by Driver 2012 – 2021



The increase in wastewater service capex is driven by an 18% increase in “existing mandatory standards”

(+$34.1m per annum), 53% increase in “new mandatory standards” expenditure (+$13.2m per annum), 7%

increase in “growth” (+$6.7m per annum) and 79% increase in “business efficiency” (+$4.9 per annum).

These increases are mitigated by SWC’s assumption that there will be a reduction in “government

programs” from an average of $51.2m per annum in the current price path to $0.7m per annum in 2017-20.

The profile of projects in the next price path period is projected to be more focused than in the current

period, with a shorter ‘tail’ of smaller projects as demonstrated in Figure 7-25 below.


Figure 7-25 Wastewater service capital expenditure by project: 2017-20

The WWTP renewals and avoid fail sewer programs are projected to increase significantly compared to the

current price path as is the wet weather overflow abatement program.


Current Price Path

SEM055 - Avoid Fail Sewer Rehabilitation Program

This program renews high risk sewers before they reach the end of their service life. Sewers have been

classified as either “Avoid Fail” or “Run to fail” based on the consequence of failure. The “Avoid Fail”

strategy applies to high risk sewers which have an unacceptable consequence of failure.

Sydney Water has a network of 24 separate sewerage systems comprising over 24,850km of sewer mains.

Of these, approximately 2,700km of sewers (including around 330 km of pressure mains) are classified as

Avoid Fail. This accounts for around 11% of the network. Avoid fail sewer mains are typically greater than



DN375, are located in sensitive areas (National Parks, next to critical infrastructure), and include Sydney

Water’s largest sewer mains such as the South Western Suburbs Ocean Outfall Sewer (SWSOOS) and

the Northern Suburbs Ocean Outfall Sewer (NSOOS).

Avoid Fail sewer mains are routinely inspected to track their deterioration and to estimate their years to end

of service life so that they can be rehabilitated before major structural works are required (that is, the end

of service life). Typically, structural rehabilitation costs around four times more than non-structural

rehabilitation (which includes relining or applying surface coatings).

The program also includes around 75,000 maintenance holes (with around 620 man holes greater than

15m deep) and associated access assets (including steps, ladders and platforms) and a focus on corrosion

and odour control which has been identified as a major source of condition degradation for these sewer

mains. Corrosion and odour control assets include around 12,500 vent stacks (to dissipate odours), 60

chemical dosing units (to prevent odour/corrosion) and 65 odour control units (to treat odours). These

works are represented in the following programs in the SIR:

Corrosion and Odour Strategy – SEM039

Cronulla STP Odour Control – SEM040

Malabar Odour Management – SEM044

NSOOS and North Head Odour and Corrosion Management – SEM047

Network OCU and CDU renewals – SEM063

Corrosion and Odour strategy – SBE002

NSOOS and North Head Odour and Corrosion Management – SBE005

The current price path program targeted 64km of mains for rehabilitation at a planned cost of around

$266.3m and delivered around 54.8km at a direct cost of $181.1m (excluding expenditure for the additional

works identified above). The underspend was generally a result of:

No condition based structural collapses for gravity sewers

Few rising main failures or recommendations to replace ($20m saving)

Rehabilitation deferral for the SWSOOS 1 and 2 through use of alkaline spraying ($40m saving)

Deferral of pressure main renewals ($20m saving)

Introduction of ROMA critical review process to challenge renewal recommendations


SEM042 - Dry Weather Overflow Reduction Program

This program addresses renewal of “to Fail” sewers which accounts for around 90% of the sewerage

network. The strategy aims to:

Minimise the number of customers experiencing repeat sewer blockages;

Minimise overflows to waterways; and

Renew sewers where breakdown maintenance is no longer cost-effective (3 or more blockages in 5 years).

The process involves:

Identifying sewers which meet certain criteria (blockages (3 in 5years), flooding of homes, overflows to watercourses etc.);



Undertaking investigation and condition assessment;

Determining appropriate action using the lifecycle costing and prioritisation tool. Options range from breakdown maintenance, root cutting, dig and repair or re-lining;

Prioritising and packaging projects; and

Implementation

The strategies adopted to individual sewers are based on service and structural grades and these strategies

range from breakdown maintenance, root cutting, dig and repair through to re-lining. Other options being

progressed by Sydney Water includes education regarding tree planting and the voluntary private sewer

blockage reduction program (around 30% of blockages are from private sewers)

The current rolling 5-year choke frequency is around 55 chokes per 100 km down from around 72 chokes

per 100 km prior to 2012 (the operating licence limit is 81 chokes per 100 km.) The program has been very

effective in meeting Operating Licence targets with significant reductions in the number of properties

affected, repeat chokes and overflows to waterways occurring since 2012.

Over the current price path, expenditure has been trending down with a reduction of around 32% over the

2012 Submission and a reducing rolling average which flattens out at around $11.9m per year.


SEM055 - Wastewater Treatment Plant Renewals Program

Sydney Water owns 13 wastewater treatment plants (WWTP), 12 water recycling plants (WRP) and 3 storm

flow plants with a current replacement cost (MEERA) of $4.26 billion.

The renewals program is designed to assist in meeting all Operating Licence requirements, maintaining

performance against Environment Protection Licences and creating positive impacts on community

aesthetics by improving waterways and beaches.

Service performance measures include reducing non-compliant discharges, breakdown work orders less

than 4%, lost time injuries performance trend improvement, and maintaining satisfactory asset condition

profiles.

Renewal needs are initially identified through five year plans and level 1 condition assessment. This is then

followed by the development of one year plans that identifies assets for renewal based on condition,

performance, business efficiency, safety risk and obsolescence using processes such as FMECA and

HAZOP. Assets are programmed for renewal if the future cost of maintenance exceeds the cost of renewal.

Facility Decision Frameworks and Facility Blueprints are used to guide selection and prioritisation of works

with active challenge processes such as the ROMA review used. Clear NPV positive projects are action to

proceed whilst lower scoring projects are deferred for more regular monitoring.

Sydney Water proposed expenditure of around $129.3m in the 2012-2016 price path, which represented a

very significant increase over the $59.3m planned for the 2008 Submission, however actual expenditure is

expected to exceed $188m. The primary reason for the significant variation include the identification of

high priority work from detailed condition assessments and safety audits.

The delivered outputs for 2012-16 were:

$30m works at Cronulla WWTP including upgrading screens, digester, odour and corrosion renewals ($15m of the increase), sludge dewatering, centrifuge poly dosing, and a HV upgrade

$17m high voltage upgrades including 12 projects across 11 WWTPs to remove obsolete equipment and renew poor condition assets. Three projects will delay into the 2016-20 period however of these;



Quakers Hill has been incorporated into planned works and North Richmond will be deferred until the plant is amplified due to growth.

$9m Data Integrity Project

$8m Facility Blueprints




Figure 7.10 Wastewater Capital Expenditure – Existing Standards 2012-16

Future Price Path

SEM055 - Avoid Fail Sewer Rehabilitation Program

The program is a continuation of the 2012-16 program and involves the renewal of high risk sewers before

they reach the end of their service life. The next price path proposes the renewal of 34km of gravity sewers

and 4km of pressure mains. The total expenditure for the next price path has been assessed in conjunction

with the separately identified components (refer section on Current Price Path above). Total outputs

including mains renewals are shown in the figure below:

The next price path period shows a focus on condition assessment with over 1100km of sewers being

scheduled for assessment. Actions in the current and previous price paths such as installation of pre-

Avoid Fail Sewer Rehabilitation Program 2013-16 35%, $240.5m

Balancing item 6%, $41.9m

Castle WWTP Reliability 2%,

$13.6m Cronulla Odour Management 0%, $1.1m

Current Unidentified Civil Assets 1%, $7.9m

Dry Weather Overflow

Reduction 2013-16 10%, $68.2m

Malabar Odour Management 0%, $2.3m

Malabar WWTP

Improvement Prgm 6%, $43.8m

NSOOS and North Head

Odour and Corrosion Management 7%, $48.7m

Odour and Corrosion Control, 4%, $28.2m

Replace SP0259 Quakers Hill

3%, $20.3 m

Saltwater Ingress Reduction 1%, $3.9m

Wastewater Pumping Station Renewals Program

2013-16 8%, $54.5m

Wastewater Treatment Plant Renewals Program 2013-16

17%, $116.9m

Wastewater 2012-2016: Existing Mandatory Standards $691m



treatment facilities by major trade waste generators and investment in odour and corrosion control have

reduced the rate of corrosion and are likely to continue this in the future. Sydney Water commented that

the pre-treatment is restricted to only a small section of the network and the full benefits of the odour and

corrosion control investment are unlikely to be seen until 2020 or beyond.

We note that the investment in innovative strategies such as use of a sacrificial alkali gel to extend the

asset useful life has and will continue to allow some major renewal projects to be deferred, and although

the continuing effectiveness of this strategy remains uncertain, in the short term it is expected that significant

savings can continue to be made. In addition, expected efficiencies from innovative condition assessments,

further development of chemical sprays and planned design and procurement efficiencies for the odour and

corrosion works will further contribute to reductions in renewals expenditure.

As a result, we propose that the program expenditure is reduced slightly for the next price path. We are

proposing that the average wastewater main renewals per year remain the same as that achieved in the

current price path. The overall reduction is 7.3% from that proposed by Sydney Water.

SEM042 - Dry Weather Overflow Reduction Program

The program is a continuation of the 2012-16 program and addresses renewal of “Run to Fail” sewers which

accounts for 90% of the sewerage network. Previously we have been advised that investment in this

program over the past price path periods had mainly overcome a backlog of work. This is reflected in

reduced actual and forecast expenditure projections for the next price path and a further reduction forecast

in 2021 just beyond the next price path.

Sydney Water’s performance on sewer blockages / dry-weather overflows in recent years is well within its

Operating Licence and this performance continues to improve, however we are of the opinion that Sydney

Water has proactively reduced its expenditure and therefore a further modest reduction in expenditure in

the future price path is likely not warranted. Should the proposed stability in expenditure not cause any

undue effects on service performance, then further reductions in expenditure beyond 2020 would be

expected.

SEM055 - Wastewater Treatment Plant Renewals Program

This program includes the continued renewals of wastewater treatment plant assets and represents one of

the largest increases in expenditure across the capital expenditure program with an almost 150% increase

from the 2012 Determination amount to the proposed expenditure for 2016-20. There is also a significant

increase planned in 2021 of around 65% over the peak expenditure year in this price path period.

The primary basis for the proposed program is the expected shift in the asset condition profile into the poor

or very poor condition range which presents an unacceptable performance risk for Sydney Water. However

this expected shift occurs in the absence of any renewals investment. There is no consideration in the

Program Business Case for scenarios assessing how different levels of expenditure affect the shift in the

condition profile and whether these alternative scenarios would result in an acceptable risk. For

comparison, the expenditure for the current price path period ($188.3m) contributed to Sydney Water

meeting all Operating Licence requirements, maintaining performance against EPLs, and providing positive

impacts on community aesthetics by improving waterways and beaches.

In our view there was insufficient evidence provided to demonstrate a significant shift in performance

against service levels (for example, Operating Licence targets, EPLs, breakdown work orders) that would

assist in justifying such a significant increase in expenditure.

One of the largest components of the proposed expenditure is the Quaker’s Hill / St Marys project which is

also related to the Riverstone WWTP project considered under the Growth driver. There has been a

reasonable volume of work completed to scope the Quaker’s Hill / St Marys project however the project is



still at a very early stage. The proposed expenditure covers the progression from the Needs Approval

Business Case completed in July 2015 to the Options Approval Business Case and to the Delivery Approval

Business Case which is expected to be completed by July 2017. Construction is expected to commence

in July 2018 and be completed by July 2020. This project demonstrates some of the advantages of strategic

planning and particularly the System Integrated Planning approach which facilitated the combination of the

three projects and a joint assessment and subsequent optimised outcomes across the three facilities. We

have therefore not recommended any specific project adjustments to these projects.

7.5.2. New Mandatory Standards

Current Price Path

SNM016 - Wet Weather Overflow Abatement

This program aims to abate the impact of wet weather overflows from the sewerage network. It is driven

by Pollution Reduction Programs (PRPs) issued by the EPA. The original basis for the program was a set

of long term (2021) wet weather overflow frequency targets proposed by SWC in 1998.

Spend in the current price path ($88.7m) has been significantly less than foreseen in SWC’s 2011

Submission ($203.5m) because some of the spend was brought forward into 11/12, significant expenditure

has been deferred awaiting clarification of regulatory requirements and alternative solutions have been

sought in order to reduce costs. An example of an alternative solution applied was the implementation of

an operational solution (increase in frequency of desilting of the Coogee Grit Pits) rather than capital works

for Southern Beaches.

There are also a number of areas where expenditure was significantly in excess of expectations, for

example around $14.3m spent on the Hotspots 3 program which was not envisaged at the time of the 2011

price submission. The program was apparently developed by SWC in response to concerns from the EPA

that SWC was not investing in improving the wet weather overflows in the period before improvement works

were generated by the strategic framework for wet weather overflow management. There was also

significant overspend in the “Discharges to property” element of the program due to rainfall events within

the price path.

Future Price Path

SNM016 - Wet Weather Overflow Abatement

SWC’s proposal for the next Price Path is based on reducing the number of Category 1 (highest risk)

discharges from 28 to 18 and the number of Category 2 discharges from 71 to 49 by 2021.

SWC has put significant effort into shifting the program to an effects focus, rather than simply overflow

frequency. The old, frequency emphasis, led to expensive large storage solutions. SWC estimates that it

would have required >$5.5b for the four coastal systems to meet the original 1998 Targets. The budget

assumes that all of the discharges are screened, i.e. rather than storage solutions. The EPA is apparently

supportive of the approach, but has not yet approved the proposed program.

The spend is projected to be fairly even spread in the next Price Path (rather than back-loaded awaiting investigations and EPA approvals) because SWC is apparently quite close to being able to deliver a number of the larger screens already and because the Hot Spots III program is well developed. Expenditure is projected to continue for one year beyond the next Price Path, with total expenditure from 16/17 to 20/21 estimated to be $160.9m. We have not made any specific adjustments to this program.



7.5.3. Growth

Sydney Water has spent an average of $95.7m per annum on wastewater growth expenditure in the current price path and is projecting an increase of around 7% to $102.3m per annum in the 2017-20 period.

The breakdown of actual and projected spend by project is summarised in Figure 7-26 below.



Figure 7-26 Wastewater Service Growth Expenditure by Project



Current Price Path

The largest projects/programs in the current price path relate to the North West and South West Growth

Centres and Developer Operations.


This is the largest single type of wastewater service growth expenditure. As with the water service,

expenditure in the current price path ($163.1m) has significantly exceeded SWC’s 2011 Submission

projections ($121.1m). It is mainly a reactive expenditure type which is not fully within SWC’s control.

North West Growth Centre (SGO025, SGO030, SGO031, SGO036, SGO037)

This section addresses spend on five connected projects all related to expenditure to service the NWGC:

NWGC Package 3, NWGC- HAF, Riverstone STP Amplification, Riverstone WW Lead Ins (HAF 2) and

Minor Northwest Growth Centre Projects <$10m.

Spend of $48.5m in the current price path expenditure is significantly less than SWC’s 2011 Submission

assumption of $134.5m. The drivers for this are strategy refinement, deferral of development, better (lower)

wastewater flow projections, use of low infiltration sewers (about $6m) and deferral of Riverstone

amplification (about $2.7m).

Some of SWC’s investment in NWGC has been funded by the Housing Acceleration Fund (HAF). SWC

put forward proposals having spoken with the council about where the HAF investment would be most

useful. The investment funded by HAF was originally included in Package 3 (as defined in 2008). The

chosen area was put forward as it was considered to be the part of Package 3 most likely to help to enable

development.

South West Growth Centre (SGO027, SGO041, SGO043, SGO044, SGO052, SGO053, SGO054,

SGO022, SGO056, SGO049, SGO050)

This section addresses spend on eleven connected projects all related to expenditure to service the SWGC:

Austral Precinct, Leppington Wastewater (ELLaNL), First Release Precincts Spring Farm, First Release

Oran Park Stage 2 – Wastewater, Second Release Stage 2 - Leppington North, Austral, Second Release

Wastewater Stage 2 Leppington, SPS 614 & Rising Main Amplification, West Camden WWTP - Biosolids

Upgrade and Amplification, Edmondson Park Wastewater Servicing and SPS 484 Narellan Augmentation

and Other Minor Southwest Growth Centre Projects <$10m.

Of these projects, those with greatest spend in the current price path are: Leppington Wastewater ($40.4m),

West Camden WWTP ($21.3m) and Austral Precinct ($19.4m).

Unlike the water service, where SWGC expenditure in the current price path is less than envisaged in

SWC’s 2011 Submission, wastewater expenditure in the current price path ($108.2m) is significantly higher

than SWC foresaw in its 2011 Submission ($33.4m). Sources of overspend include c.$44.0m on 8,600 lots

which weren’t foreseen in the 2011 submission in the Second Release precincts of Leppington, Leppington

East, and Leppington North WW, about $5.9m on West Camden Bio-solids Amplification and about $4.3m

overspend on First Release Precinct Oran Park Stage 2.



Future Price Path

The largest wastewater growth projects in the next price path are Developer Operations, NWGC, SWGC

and North Head WWTP - Biosolids Amplification.


SWC has projected a reduction in wastewater service growth Developer Operations spend in the 2017-20

period ($124.0m) compared to the current price path ($141.8m).

Figure 7-27 Wastewater Service Growth Developer Operations Capex

North West Growth Centre

This is a continuation of the NWGC growth program. At $123.5m, SWC’s projected expenditure in 2017-

20 is significantly more (+$75.0m) than the $48.5m spent in the current price path. The largest elements

of expenditure are Riverstone WWTP Amplification and NWGC Package 3 ($38.4m).

Riverstone WWTP Amplification has been deferred from the current price path. The cost allowance in the

SIR Capex 2 is $78.2m (including the current price path expenditure). This compares with the October

2014 Options Analysis estimate of $86.1m and the Risk Based Cost Estimate (RBCE) dated August 2015,

which suggests a P50 of $109.9m and P80 of $115.2m. Both sets of estimates are in excess of the SIR

submission.

It is not clear to us that the RBCE is significantly more robust than the Options Analysis, and it does not

provide a thorough explanation for the increase in cost. SWC carried out a similar capacity upgrade at

Rouse Hill (about $63m) 4-5 years ago which is supportive of the SIR estimate. We have therefore not

recommended a change to the allowance for this scheme. The degree of variance between the cost

estimates does raise questions over the robustness of SWC’s cost estimation processes as discussed in

Section 4.

The timing of SWC’s proposed investments is based on the same growth projections as for the water

service. As with the water service, we have re-profiled the NWGC expenditure over five years rather than

three, i.e. assuming that the roll out is complete in 2020/21 as shown in Figure 7-28 below. This is to take

account of the strong tendency for outturn greenfield growth to be below projections, the potential to phase

the roll-out of infrastructure and SWC’s risk-based servicing approach. We have excluded Riverstone

WWTP Amplification from this re-profiling as it appears likely to be required in the next price path, albeit it

will be subject to the wider efficiency challenges we set out below.



Figure 7-28 Reprofiling of NWGC wastewater service expenditure (excludes Riverstone WWTP Amplification)

We have applied this re-profiling to our view of capital expenditure summarised below.

South West Growth Centre

With a total spend of $51.8m between 2017 and 2020, SWC has projected a reduction (-52%) in wastewater

service growth capex for the SWGC. First Release Oran Park Stage 2 – Wastewater is the largest SWGC

wastewater project, with projected spend of $33.4m in the next price path.

We have not made any specific adjustments to this program.

North Head WWTP Biosolid Amplification

North Head WWTP is SWC’s second biggest WWTP, serving an estimated 1.1million people in 2011. This

project is to increase biosolid digester capacity in response to, and in anticipation of growth in the North

Head catchment area.

There are currently three digesters on site and the project costings are based on an additional two units,

adding approximately 65% to digester capacity. This compares to about 30% growth projections by 2036,

see below SWC’s growth projections:

Source: SWC presentation ‘P_07-10-15_2. DF North Head wastewater system’

The case for two additional digesters appears to be based on growth projections to 2036. We have made

an adjustment to the expenditure in the next price path as we consider that SWC has not made a strong

case that a single additional digester would not be sufficient to cope with anticipated demand in the medium



term (e.g. next price path + 5 years). The adjustment reduces total pre-efficiency challenge expenditure

allowance for this project by a third, i.e. $13.3m.

7.5.4. Government Programs

Current Price Path

Spend in the Current Price Path is spread between a number of NSW Government Priority Sewerage

Program (PSP) schemes as summarised below:

Figure 7-29 Wastewater ‘Government Program’ Schemes in Current Price Path

We have reviewed two of these schemes: Bargo and Galston as detailed below.

Bargo Sewerage Scheme (SGP008)

This project is part of the NSW Government Priority Sewerage Program (PSP), which aims to sewer urban

villages in environmentally sensitive areas. Bargo is one of six villages fast tracked in November 2011.

SWC’s Operating Licence requires it to have sewered Bargo by 30 June 2014.

A revised strategy for serving Bargo in 2013 (triggered by higher costs than originally envisaged) resulted

in a combined solution for Bargo & Buxton (another PSP scheme), involving transfer to Picton WWTP via

Tahmoor, which provided the lowest life cycle cost and overall risk.

The combined Bargo & Buxton scheme involves upgrading of the pumping station at Tahmoor including a

new chemical dosing unit (for odour and corrosion prevention), and capacity upgrade at Picton WWTP,

involving land purchase and irrigation capacity increase. A pressurised sewerage network has been

constructed rather than gravity to minimise cost.

Timescales were short for delivery of this scheme. The Board approved the PSP Program budget in

September 2012 and the PSP Alliance TOCs for $34.3m for Bargo (plus $26.8m for Buxton) in February

2013. Overall the combined Bargo & Buxton outturn cost is projected to come in at $15.3m below the

approved $102.1m because of reduced land purchase and lower than anticipated contingency use.

The sewerage network was available for customers to connect in June 2014. However, some works remain

to be complete (not affecting ability to connect) in the next price path (2017/18), see below.

Galston Sewerage Scheme (SGP013)

Like Bargo, this scheme is part of the PSP Program. SWC’s Operating Licence requires it to have sewered

Galston, and the nearby village of Glenorie, by 30 June 2015.



The Options Report prepared in 2013 looked at a number of options, including separate WWTPs for Galston

and Glenorie. The preferred option involves a pressure sewer system, sewage pumping stations, chemical

dosing units and a combined transfer for Galston and Glenorie to an existing treatment works at West

Hornsby, where no upgrade is required. This option had the lowest NPV.

The Board approved the PSP Program budget in September 2012 and the Stage 3 (Delivery) business

case for the combined Galston and Glenorie schemes in September 2013. The Board approval was for

$47.8m (P80), with an estimated P50 of $46.3m for the combined schemes. SWC is expecting to spend

less than these allowances, projecting total (nominal) capex in SIR Capex 2 of $44.9m.

Construction commenced in late October 2014. The assets are constructed but pumping stations are being

operated with some manual intervention at present. They will be fully automated. One property in Galston

is not yet connected to the network. There is a dispute with the owner of the building which already has

on-site pumping. The owner wants SWC to take on its existing pumps.

Future Price Path

SWC has projected only $2.6m capex spend in the 2017-20 period. Nearly all of this ($2.2m) relates to the

completion of the Bargo and Buxton scheme outlined above.

7.6. Stormwater

Stormwater capital expenditure significantly exceeded the 2012 Determination and SWC’s 2011 Submission. It is projected to more than double to $159.4m (+109%) compared to the total spend in the current price path period.

Figure 7-30 Stormwater capex trends



Capital expenditure in the current price path is made up of a number of key programs/projects: Green Square Trunk Drainage, Minor Renewals, Astrolabe Park, Cooks River Bank Renewal and Rouse Hill (including Elizabeth Macarthur and Strangers Creek) three main projects/programs, as demonstrated below.

Source: SIR Capex 2

Figure 7-31 Stormwater service capital expenditure by project: current price path

Figure 7-32 below shows water capex by purpose.

Figure 7-32 Stormwater Capital Expenditure by Purpose 2012 – 2021

The increase in stormwater service capex is driven by a 167% increase in “existing mandatory standards”

(+$16.1m per annum) and 49% increase in “growth” (+$4.7m per annum).



There are a number of new projects in the next price path period, including Waterway Health & Johnstons

Creek Renewal & the Flood Risk Program as demonstrated below:

Source: SIR Capex 2

Figure 7-33 Stormwater service capital expenditure by project: 2017-20

The Green Square project is covered separately in Section 9.5.1


Current Price Path

Stormwater Renewals (DEM003, DEM010, DEM011)

In its 2011 Submission, SWC projected $29.7m of stormwater renewals expenditure in the current price

path. It has spent $38.1m. This is largely because the largest individual project, Astrolabe Park Renewals,

has seen a significant cost increase, with costs rising from a feasibility estimate of $6.3m in 2010, to an

Options Business Case estimate of $17.7m in 2012 to a Delivery Business Case (P80 rather than P50)

estimate of $29.7m in 2014. The SIR has a full cost estimate of just under $28m.

The project is driven by the need to renew Condition 5 assets assessed to be a high collapse risk. The site

is contaminated, flood prone and is a State Heritage listed waterway. SWC has identified the following

reasons for the costs increases:

• Detailed field investigations and hydrologic / hydraulic analysis

• Better understanding of scope and characteristics of contaminated land / groundwater and their

impacts

• Design development

• More accurate cost estimation incorporating potential risks

A set of value engineering initiatives is in place to mitigate these costs pressures, including use of vertical

sheet piling instead of open cut with trench batters.

One of the other significant individual renewals projects, Cooks River Bank Renewal, is scheduled to

complete in 2015/16 after capex of $8.0m in the current price path.



Future Price Path

Stormwater Renewals

SWC is projecting a significant increase in its stormwater renewals program. Projected spending in 2017-

20 is $58.3m compared to $38.1m in the current price path, an increase of 53%. This is made up of $15.9m

to complete Astrolabe Park, $27.9m for a program of minor renewals and $14.5m for Johnstons Creek

Renewal.

SWC has established a rolling 10 year program of asset inspection, which is currently about.75% complete. The inspections have been used to define a condition-based program of renewals for the next four years. The basis of the “stormwater minor renewals” program is that most of the known Condition Grade 5 assets (“imminent failure”) and some Condition Grade 4 assets (“0-2 years to end of service life”) will be renewed or rehabilitated in the period to 2019/20. No allowance has been made for further Condition Grade 5 & 4 assets emerging as a result of the inspection survey.

A significant increase in renewals expenditure is projected for 2020/21. This is driven by a change in

methodology. For assets for which SWC does not have condition data the expenditure projections from

2020/21 onwards are based on the assumption that assets are replaced when they reach their theoretical

asset life. We do not consider that simple asset life models form a robust basis for deriving the magnitude

of a renewal program for a long life asset.

We have recommended a re-profiling of the ‘minor renewals’ program spend. This is to take account of the

difficulty in robustly establishing remaining useful asset life, requiring renewal rather than repair, based on

a condition survey. We have assumed that the ongoing condition survey will uncover additional Condition

Grade 5 & 4 assets in proportion to the remaining asset base (i.e. a further third) and that all of these

renewals will take place over six rather than four years. This leads to a reduction of -$5.3m compared to

SWC’s projected 2017-20 spend. The program remains bigger than in the current price path.

7.6.2. Growth

Current Price Path

Rouse Hill Trunk Drainage (DGO005, DGO006, DGO007)

Sydney Water is the Trunk Drainage Authority for the Rouse Hill Development Area (RHDA). Local

Environment Plans for the Rouse Hill area identify SWC as the land acquisition authority for all land in the

1:100 floodplain to allow conveyance. Historically this meant that SWC had an obligation to purchase any

land which was offered for sale, making it difficult to foresee and manage expenditure. SWC has therefore

been acquiring land progressively since the early 1990s. Legislative changes such as the Land Acquisition

(Just Terms Compensation) Act 1991 and Environmental Planning & Assessment Act enabled SWC to

decline to purchase land, except in the case of an owner-initiated hardship process on the part of the

vendor.

SWC’s policy for acquisition of land in RHDA sets out a number of criteria for determining whether

acquisition of (non-hardship) land is appropriate:

SWC RHDA Land Acquisition Policy Criteria:

1. The land provides flood conveyance and/or floodplain storage based on up to date modelling of

flood behaviour within the catchment.

2. The land contains Sydney Water Trunk Drainage Infrastructure.



3. Sydney Water has plans to undertake Trunk Drainage Works on the land within the next 2 to 3

years.

4. Sydney Water is likely to need to undertake Trunk Drainage Works on the land to address

unacceptable flood risks to public areas or infrastructure.

5. Acquisition of the land would significantly improve access by Sydney Water to and along the Trunk

Drainage Land for maintenance purposes.

6. Sydney Water may include small areas of land ancillary to that required for flood storage or flood

conveyance in the area to be acquired if it assists in the orderly roll out of infrastructure and

development of lots.

7. The land is close to land already owned, or to be owned, by Sydney Water and its acquisition

would enable more effective and efficient debris management, weed control, fire risk reduction and

bush regeneration.

8. Any other matters that are relevant to achieving the outcomes that Sydney Water is obliged to

deliver as Trunk Drainage Authority.

Land has been purchased in the current price path in the Second Ponds area to allow SWC to own the land

where it carried out civil works some time ago, made up of basins and channel modifications. For Strangers

Creek land purchase is part of a package with civil works and SWC has identified that the purchase meets

criteria 1, 3, 4 & 5 above. The civil works undertaken by SWC in the current price path mainly involve

clearance, re-profiling and armouring of river banks and bed, converting unmanaged rural creeks into safe

urban drainage.

According to SIR Capex 2, SWC has spent $12.2m on Rouse Hill Trunk Drainage in the current price path,

including $6.9m on Rouse Hill Trunk Drainage Land Acquisition, $4.9m on Strangers Creek Trunk Drainage

and $0.4m on Elizabeth Macarthur Creek Trunk Drainage which all fit within the Rouse Hill program.

However, SWC has provided an update spreadsheet (‘GJ_A112-03_Rouse Hill Stormwater Capex v3’) as

its current view of capital expenditure. There are significant variances between the September 2015 SIR

Capex 2 projections and SWC’s update, as shown in Figure 7-34 below.

This variance appears to be a result of the way in which SWC was required to complete the September

2015 submission. In the September 2015 submission SWC updated the 14/15 figures but was not permitted

to amend the forecast expenditure in 15/16 or afterwards. The costs of some land purchase in Second

Ponds and Strangers Creek were delayed from 14-15 to 15-16, leading to an underspend of c$11.4M in

14-15 relative to the June 15 submission. As the forecast for 15-16 and afterwards could not be updated

this then led to an $11.4M under-reporting of expected expenditure.



Figure 7-34 Evolution of capex projections for Rouse Hill Trunk Drainage

For the current price path, SWC’s updated spreadsheet indicates that the following activities and

expenditure have taken place:

Table 7-1 Summary of Rouse Hill Trunk Drainage Expenditure in the Current Price Path

Creek Activity Expenditure ($15-16m)

Strangers Creek 4.2ha land purchase 5.7

Civil works 2.1

Second Ponds 6.2ha land purchase + 4ha of easement

10.0

Elizabeth Macarthur Creek No land purchase 0.0

Civil works 0.5

Other 3.6ha hardship land purchases 6.9

of which $5.6m on hardship land purchases and $1.4m ‘other’.

Source: SWC spreadsheet ‘GJ_A112-03_Rouse Hill Stormwater Capex v3’

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

SIR Capex 2- June 15 SIR Capex 2- Sept 15 SWC Updated Capex Spreadsheet

Delay in land purchase in Second Ponds and Strangers Creek reflected in SWC update but not in September 15 SIR Capex 2 (not allowed by IPART)




Figure 7-35 Rouse Hill Trunk Drainage Expenditure by Creek and Type

We recommend that the current price path capex be based on SWC’s updated projections and have made

the adjustment to the September 2015 SIR Capex 2 expenditure projections as set out below:

Table 7-2 Summary of Efficient and Prudent Rouse Hill Trunk Drainage Expenditure in Current Price Path

Green Square Trunk Drainage (DGO003)

Green Square is covered as a Specific Issue under Section 9.

Future Price Path

Rouse Hill Trunk Drainage

Expenditure in the 2017-20 period is projected to increase to $33.0m according to SIR Capex 2 or $31.5m

according to SWC spreadsheet ‘GJ_A112-03_Rouse Hill Stormwater Capex v3’.



According to the SWC spreadsheet, this expenditure in 2017-20 will be made up of $24.0m civil works, of

which $13.3m is in Elizabeth Macarthur Creek and the remainder in Strangers Creek. These works are to

stabilise channel banks and beds. It also assumes the purchase of 4.5ha of land in Elizabeth Macarthur

Creek and 0.6ha in Strangers Creek as summarised below:

Table 7-3 Summary of Rouse Hill Trunk Drainage Expenditure in 2017-20

Creek Activity Expenditure ($15-16m)

Strangers Creek 0.6ha land purchase $0.8M

Civil works $10.8

Second Ponds None n/a

Elizabeth Macarthur Creek 4.5ha land purchase $6.7M

Civil works $13.3M

Other No allowance n/a


The proposed civil works are projected to be complete in 18-19 and SWC has stated that no trunk drainage

land purchase is forecast beyond 2019-2012.

The expenditure in Strangers Creek is in support of the Strangers Creek Rehabilitation Trunk Drainage

Strategy. This is a detailed study which sets out the need (existing flood corridor is insufficient to contain

1:100 year flood) and proposed approach to improving the flood risk in the Strangers Creek area.

The level of solution definition provided for Elizabeth Macarthur Creek Trunk Drainage appears to be

significantly less advanced than for Strangers Creek. The urgency of delivery timescales (i.e. completion

of civil works by 18-19) is not clear.

We have applied a re-profiling of the expenditure on Elizabeth Macarthur Creek to allow time for the strategy

to be refined and detailed designs to be developed. We have assumed that the level of expenditure on

Elizabeth Macarthur Creek is half of SWC’s projections for 2016-17 taking account of the likely ramping up

of expenditure and that it is then even for a further 5 years to allow for completion by 2022-23.

We have also adjusted the expenditure (current and future price path) to take account of SWC’s updated

capex projections as summarised above. The resulting efficient and prudent expenditure for Rouse Hill

Trunk Drainage is summarised below. Although the service-level efficiencies discussed in Section 7.10

below do not necessarily apply at a project or sub-project level we also present the expenditure with these

efficiencies applied for illustrative purposes below.

12 SWC email 2 November 2015



Table 7-4 Summary of Efficient and Prudent Rouse Hill Trunk Drainage Expenditure in Future Price Path

We note that SWC is not proposing any expenditure after 2019-20. Catch-up and continuing efficiency

challenges have also been applied to this expenditure at a service level as set out in Section 7.10 below.

7.7. Recycled Water

There has been very limited capital expenditure (about $0.9m) in the current price path, relating only to the

“Western Sydney Replacement Flows” project. No capital “recycled water” expenditure is expected in the

next price path.

7.8. Corporate Services

The other significant area of capital expenditure is corporation-wide projects, classified in the SIR under

Corporate. Figure 7-35 shows total corporate expenditure through the current and future price path.



Figure 7-36 Corporate capital expenditure 2012-2021

Between 2012 and 2016, capital expenditure on corporate projects is forecast to slightly exceed the amount projected in the 2012 price submission. Actual expenditure is $223 compared with $213m in the IPART 2012 Determination and considerably less than the $320m (2011/12 prices) originally requested in the 2012 submission. This actual expenditure is also considerably less than half the $560m (2011/12 prices) expended in the previous price path.

We focused our analysis on the two most material areas of corporate expenditure in the current and future price plans: IT Services and Property. In Section 3 we comment on the Information Technology Strategy which is relevant to the review of these projects.

Information Technology and Property expenditure generally sit under either Existing Mandatory Standards or Business Efficiency. The analysis of corporate expenditure by driver and by projects in the current and future price paths are shown below.



Figure 7-37 Corporate Capital Expenditure – By Driver 2012-21



Figure 7-38 Corporate Capital Expenditure – By Project 2012-16



Figure 7-39 Corporate Capital Expenditure – By Project 2016-20

7.8.1. Information Technology

We saw evidence of significant strides made in the level of maturity of IT business planning and management of the delivery of IT projects. We noted in particular:

Significant improvements in the governance structure and processes, quality of business cases

and cost management of IT initiatives

Sydney Water Corporation has started to address the fragmented and complex application

landscape which resulted from its previous “best of breed” strategy through its 4+4 Roadmap which

has at its centrepiece the implementation of an ERP solution

Adoption of the NSW ICT Services Scheme for acquisition of services to improve the delivery and

outcome of IT procurement

Implementation of AGILE project approaches that supporting delivery of more effective outcomes

and lower risk

As noted below, Sydney Water continues to be a significant outlier in terms of its IT total expenditure compared with other utilities and businesses, which we highlighted back in 2011 is also picked up in the Third Horizon report commissioned by NSW Department of Finance and Services in 2013 to conduct an external strategic review of Sydney Water’s expenditure.

At a Corporate level, we believe that there are three main areas for improvement:

Focus on total expenditure. The SWC submission to IPART focuses only on capital IT investment

and this is reflected in some of the business cases as well which do not always robustly factor in



the opex implications of the capital expenditure items and/or do not consider if there is an opex

solution to deliver the same outcome.

Business Efficiency is a major driver behind IT initiatives however we questioned whether there is

a robust mechanism in place to formally track whether IT business efficiencies as set out in the

Business Cases have been delivered/realised. We have found it challenging to track the capital

and operational efficiencies in the current price path which directly informs our view on the prudence

and efficiency of those investments. We believe that more work needs to done on benefits

realisation of major IT Business Efficiency investments in the future price path, in particular how

they are tracked by the wider business as it is not the IT department’s role to track the delivery of

capital and operational efficiencies, which will inform a robust analysis of the successful delivery of

those projects.

Putting customers at the heart of Sydney Water is a commendable objective and we would suggest

therefore that the IT business cases should more explicitly consider the long-term benefits for the

customer as part of the justification for investment as they tend to be very business centric.

Conversely, there may be cases where there is no discernible benefit to customers that it may be

appropriate to re-asses the need for the investment, notwithstanding that there are some essential

back office functions which could fall into this category.

We have undertaken benchmarking which is useful to inform the appropriateness of Sydney Water Corporation’s level of IT investment. The major limitation of benchmarking a business’s capital expenditure within relatively short timeframe is that businesses may be at different points in their investment cycles although IT investments have relatively short lives so we think the risk is reduced.

For utilities in Australia, the data we have access to allows us to benchmark Sydney Water’s IT capital and operating expenditure separately as a percentage of total capital and operating expenditure.

Capex benchmarking 2013 2014 2015 2016 2017 2018 2019 2020

Sydney Water 4.9% 7.1% 6.3% 11.6% 11.5% 11.2% 11.6% 13.3%

Mean* 4.6% 5.1% 6.2% 5.9% 6.4% 7.0% 6.4% 6.0%

No. Australian Utilities 22 16 21 21 19 17 17 12

* Benchmark calculated as IT capital expenditure divided by the corporate capital expenditure. The mean line represents the weighted average across all included participants, the mean is calculated when there is data available for twelve or more utilities for the year. Source: Recent commercial in confidence IT expenditure benchmarking survey from a global management consultant

Opex benchmarking 2013 2014 2015 2016 2017 2018 2019 2020

Sydney Water 4.7% 4.3% 4.5% 4.9% 5.0% 5.0% 5.0% 5.0%

Mean* 6.6% 7.0% 7.4% 6.4% 6.6% 6.7% 6.7% 6.3%

No. Australian Utilities 19 14 11 6 6 6 6 5

* Benchmark calculated as IT operating expenditure divided by the corporate operating expenditure. The mean line represents the weighted average across all included participants, the mean is calculated when there is data available for five or more utilities for the year. Source: Recent commercial in confidence IT expenditure benchmarking survey from a global management consultant.

We also compared Sydney Water’s rates of investment with data that is available from the UK for total IT

expenditure against total corporate expenditure. We note that Sydney Water argues that there are

limitations of benchmarking a business’s expenditure in a different market as that it does not have access

to the breadth and depth of IT providers that UK businesses have.



Period

2015-2020 2014/15 2012-16 2016-20

Utility Northumbrian Water

Yorkshire Water

Severn Trent

Anglian Water

NCC Utilities

UK plc

Sydney Water

Sydney Water

Total Budget Ratio

3.15% 4.3% 5.0% 5.00% 4.5% 2.5% 5.6% 7.4%

There was also a Third Horizon report commissioned by NSW Department of Finance and Services in 2013 to conduct an external strategic review of Sydney Water’s IT expenditure which reported:

IT spend as a percentage of revenue in 2013 decreased but was still 0.7% higher than the Gartner Utilities industry benchmark.

IT FTE as a percentage of total FTE compared well to the Gartner industry benchmark.

IT capital expenditure as a percentage of total IT spend was consistently higher than the Gartner Utilities industry benchmark for the past five years.

Sydney Water is going through a significant transformation at the moment and has multi-year capital projects, such as the Billing System Replacement project, that are due to start within the current period. As such, it is expected that Sydney Water expenditure will trend upwards in comparison to the Gartner benchmark during the subsequent period.

While we may expect that Sydney Water is an outlier in one price path where there is a necessary and

justified peak in expenditure, we would not expect to see Sydney Water consistently higher than average

as this would suggest an underlying inefficiency. The benchmarking with other Australian utilities suggest

opex is under the average and that capex is higher than the average, which we also observed in 2011.

SAP

Sydney Water has two once-in-a-generation IT investments which cut across both the current and future

price paths and which are inextricably linked in our opinion. These synergies and dependencies are not

made clear in Sydney Water’s submission although they are acknowledged in the Business Cases provided

subsequent to submission of our Draft Report. They relate to its T2020 billing solution and its ERP

implementation, which are both SAP solutions.

We understand why for internal purposes they are managed as separate projects but in terms of the wider

context and also reinforcing the Business Case for the billing system, it is essential to understand the links

and to treat as a package. We set out below why we believe that the approval process for the T2020 SAP

solution and the ERP SAP solution should be managed in this way.

Another key issue from a prudence and efficiency perspective has been consideration of any remaining

asset lives in the systems that the billing solution and ERP will be replacing.

Our analysis has been informed by discussions with two experienced SAP project managers who have

respectively been involved in SAP implementations in two multi-national corporations and three UK water

utilities.

SAP Enterprise Resource Planning solution

Enterprise resource planning (ERP) is business management software - typically a suite of integrated

applications— that a company can use to collect, store, manage and interpret data from many business activities,

including cost, sales, payment, project planning, service delivery, sales, customer management, asset inventory



and people management. ERP provides an integrated view of core business processes, often in real-time, using

common databases maintained by a database management system.

It is a multi-billion dollar industry and there is broad consensus in the world’s leading corporations that it is a vital

organisational tool because of the way it integrates varied organisational systems, incorporates best practice by

reflecting the vendor's interpretation of the most effective way to perform each business process and facilitates

error-free transactions and production. This promotes efficiency, reliability and provides additional management

insight compared with best of breed solutions to support better decision-making.

There are only two market leaders in this space, Oracle and SAP. However within this small group, SAP is often

considered the standout option because it is a truly integrated solution. It is an integrated system which has

everything in one place, breaks down silos and ensures all information talks to each other – creating one version of

the truth to borrow a cliché – promoting better asset management, more effective billing and the strongest piece in

the jigsaw is quality of financial management information driving better decision-making and driving efficiencies.

In work commissioned by Sydney Water, the consultant commented that in Australia both Oracle and SAP Billing

implementations have had mixed success with overruns and differing levels of acceptance. User acceptance is a

function of exposure to the system, nature of experience and willingness to change. Both Oracle CC&B and SAP

ISU billing options have their supporters and detractors and Oracle is accepted better by users whereas SAP is

better accepted by Management. In summary, the consultant concluded the selection of Oracle CC&B vs SAP ISU

(billing systems) or Best of Breed vs ERP is ultimately a function of the Business Strategy and Resilience as

enabled by the IT strategy and the procurement process that supports this decision. There is no one single factor

that determines which system is better than the other, rather the system that is implemented must be the one that

most effectively and efficiently supports the business strategy.

In other words, SAP implementation should not be viewed as an IT project. It is a business change project and in

order to gain maximum benefits, it is necessary to re-engineer the business to fit SAP. The amount of integration

with other systems and customisation being sought drives complexity, implementation time and ultimately cost.

The key to reducing complexity and thus cost is to minimise or avoid reprogramming SAP so that business

processes are re-designed to fit into SAP processes. Heavy customization can also undermine the principles of

ERP as a standardising software platform.

Benefits can be summed up as:

improve quality and efficiency of the business

supports upper level management by providing information for decision making.

creates a more agile company that adapts better to change.

improve data security.

provides increased opportunities for collaboration across a business.

Some challenges or disadvantages are:

customization can be problematic. Compared to the best-of-breed approach, ERP can be seen as meeting an organisation’s lowest common denominator needs, forcing the organization to find workarounds to meet unique demands.

re-engineering business processes to fit the ERP system may damage competitiveness or divert focus from other critical activities.

it can cost more than less integrated or less comprehensive solutions.

extensive training requirements take resources from daily operations.

user acceptance can be a challenge compared with existing/other solutions.

In the UK, SAP is used in some form or another at the following water companies: Anglian Water, Bristol Water,

Severn Trent Water, Southern Water, Thames Water, United Utilities, Welsh Water and Yorkshire Water. SAP is

generally considered in the United Kingdom as a good fit for the water industry in three primary areas:

Back office Finance, HR and Procurement

Works management (alongside add-on products like Click software)

Capital programme management



Anglian Water, Southern Water and Thames Water have or are implementing the SAP CRM and Billing

components, the other companies integrate with different solutions.

Current Price Path

IT Program - Integration Platform Renewal (IPR)

Sydney Water had been running three integration platforms and a number of supplementary applications, to satisfy its integration needs. These platforms enable around 300 services that transfer and share information between applications, including business critical processes. The three historic integration platforms, supplied by Sun, were end of life and hence renewal was required.

There is evidence that other appropriate options were considered (purchasing a new platform versus consolidating the three legacy platforms to the latest version of these products, different approaches to transitioning the existing services, purchasing an integration platform that will also provide extra capability to enable other projects) and there is a robust decision-making process to support the basis on which the chosen option was made.

In September 2012 approval was sought for $14.9m in capital and $3.9m in ongoing operational expenditure over 3 years. The final outturn costs across 2012/13 - 2015/16 are forecast to be $8.5m (total project cost is forecast to complete is $8.98m) with a reduction of about 30% on the original opex costs.

The project has been delivered behind planned schedule, under budget and in line with the original scope. This is clearly a good news story in terms of significantly reduced capex and opex costs from the original estimates, although it may beg the question about the robustness of the original estimates and whether they were too conservative.

Current and Future Price Path

IT Program - Field Services Management (includes SIRIUS)

Field Services Management including SIRIUS is a programme of linked projects replacing the legacy field

mobility platform used by Sydney Water’s workforce to manage day to day operational work. The new

platform will deliver a single consolidated mobility platform to support ongoing efficiency improvement

programs and provide a foundation for future strategic improvements. A key component is an automated

scheduling and field based solution which has required investment in hardware, software and services to

reduce paper processes in the field and bring efficiencies into office based resource scheduling.

Previously staff have been required to return to depots when needing to interact with corporate applications

which does not promote efficiency or the most effective customer management. The project has therefore

also focused on implementing a range of corporate applications onto the handheld devices deployed in the

field to drive improvements in the quality and availability of information and subsequent changes in

behaviour. A secondary objective has been activation of Global Positioning System for Mechanical

Electrical delivery mobile users to provide improved decision-making information. The reach is also much

wider than the previous solution. There was approximately 400 user base for the original Field Resource

Management solution. It is intended that it is rolled out to 1,000 users across business functions including

to contractors.

Three vendor solutions were identified and there is a good audit trail relating to procurement documentation

setting out consideration of options, including the opex implications of the various solutions, and the basis

of the award of the contract. The software system is being provided with integration to Sydney Water

systems including Maximo, its work management system.

There were schedule delays on the BCS Field Mobility project component due to inconsistent application

of the delivery methodology and the poor execution of the agile methodology. Sydney Water decided that

the best approach to achieve a successful outcome was to cease the original project and write off $1.2m



worth of inefficiencies under IT opex and initiate a new project leveraging “re-usable” components using a

different execution methodology and a refreshed overall delivery approach. We have therefore deemed that

this expenditure was not efficient or prudent. Also, in the future price path we understand that $3.2m in the

last two years of the future price relates to upgrades to SIRIUS, potential Mobility refreshes to be determined

for future business needs and/or new versions of software which require functional or operational changes.

We do not believe this expenditure is robustly justified and suggest that this could be pushed back to the

following price path.

We have also considered alignment with T2020 and ERP projects as part of our review. While the business

cases and supporting documentation state that evaluation included an assessment of the proposed solution

against business and IT requirements, we saw no evidence that the scope included consideration of

interaction and connectivity with SAP. We are aware that the Click product is compatible with SAP and we

conclude that it is therefore positive that the selected solution interacts well with SAP (there is no formal

relationship but there are many examples of co-existence and integration between SAP and Click).

However, this appears to be more by accident than design, or at the very least this was not considered to

be a major criteria in the evaluation process.

IT Program - IICATS / SCADA Renewals

IICATS and SCADA comprise Sydney Water’s operational control and monitoring systems which are an

essential business support tool for SW’s asset operations process. IICATS is SW’s telemetry system,

broadly consisting of centralised IT and communications equipment, communications networks and

Remote Telemetry Units (RTUs) at 2,120 facilities. SCADA systems are installed at 34 water and water

treatment works and SW use of the term SCADA includes the site PLCS and communications networks.

Instrumentation such as flow and pressure monitors that are exclusively connected to RTUs are also

included in the remit of IICATS / SCADA systems.

The need for replacement and/or enhancement of parts of the IICATS / SCADA asset base is driven by

renewals and specifically the need to maintain business as usual with the systems providing defined levels

of service, reliability and availability to the organisation. The schedule of replacement is reviewed annually

and derived from a risk based approach. Technological obsolescence, emerging standards and O&M

efficiencies that can be gained by standardisation are also drivers for replacement. Each individual business

case within the IICATS / SCADA program is assessed on a benefit/cost basis with the options of do nothing,

do part or do all.

SWC is trialling Level 5 automation at 20 sites which would qualify as an enhancement to the current service

and on the phased basis that the company is proceeding, this could be described as an “incremental step

change”.

We believe that the Corporation’s approach and plans for IICATS and SCADA renewals appear to be in

line with good practice. The strategy is well developed, demonstrates forward-thinking and innovation, and

takes a sufficiently long-term view. The costings appears reasonable and we are satisfied with the approach

to procurement. There was also good supporting documentation backing up the high level plans. Other

than the four significant variations which can be considered as “unforeseen” events rather than business

as usual, the program from 2012-2016 has been delivered on time. The 2016-2020 program is financially

smaller than 2012-2016 and broadly technologically similar. The program should be achievable. Overall,

we are satisfied with the prudence and efficiency of expenditure in the current and that proposed in the

future price paths.

IT Program – T2020

Overall, there is a full and detailed audit trail dating back 10 years to support the replacement of the

ACCESS billing system. There is no doubt about the need and overall the costs are built up in a robust way

with one exception highlighted below. It should be noted that the scope of the original project reviewed in



2011 has changed materially from replacement and decommissioning of ACCESS to include replacing the

Customer Management System (CMS), which was implemented in 2011, and satellite systems. The new

solution is underpinned by SAP IS-U and SAP CRM.

Total capital expenditure for the life of the program to date up to FY 15/16 is forecasted at $29.7m. The

T2020 program is expected to incur a capital cost of $111m including capital uplift, excluding contingency

over three years. This estimate covers the implementation of both SAP IS-U for billing and SAP CRM for

customer management. The following is a summary and reconciliation against the $158m capital cost

previously forecasted:

Description Cost ($m)

Expenditure to FY15/16 30

Forecast costs (excluding contingency) 111

Contingency for T2020 9

Savings for ERP 8

Total

158

Both Sydney Water’s Business Cases for both T2020 and ERP highlights a saving of $8m which has been

recognised in the ERP Program as a benefit due to avoided costs related to implementation and software

costs. We are therefore unclear why the cost is not reduced to $150m.

There are $344m of tangible benefits identified over 10 years. The overall ROI is a positive 119%. By far

the biggest benefit is the avoided cost of a catastrophic IT failure of not implementing a replacement for

ACCESS. These benefits will be realised from 2020 and are summarised below. We are unclear why ERP

benefits are realised at a much quicker pace when compared with the benefits for T2020. Sydney Water

advised us that it estimated the benefits to be

ERP Stage 1: $8m cost reduction in delivering T2020 in 2017/18 (reduced integration complexity). Annual savings of $2.1m in 2017/18 growing to $10.3 million in 2019/20. The savings are a mix of operating and capital cost reductions, avoided costs (both opex and capex) and productivity improvements.

ERP Stage 2: Benefits from Stage 1 plus a further $17.7 million a year achieved by 2020/21. The savings are a mix of operating and capital cost reductions, avoided costs (both opex and capex) and productivity improvements.

From a prudence and efficiency perspective, we have considered the remaining asset life in the systems

that the billing solution will be replacing. We have identified the Customer Management System as a

stranded asset. The historical context is important because in 2007 Sydney Water’s consultant

recommended considering SAP as combined provider, which is of relevance given the path originally

pursued by the Corporation was to implement Oracle’s Siebel CMS solution and it is now pursuing a

combined SAP solution. The consultant stated that: “…While there are limited examples of utilities

implementing SAP CRM without SAP IS-U, we would recommend keeping SAP CRM in the frame for

consideration at this stage. SWC could engage SAP locally to establish if they would be confident to

propose SAP CRM standalone without SAP IS-U in a competitive tendering process”. CMS was

implemented in 2011 with a value of $42m when it was put into the Regulatory Asset Base.

We have challenged Sydney Water about the seven year asset life it has been assigned as we do not

believe that this is consistent with the asset life of other comparable systems. We have based our

adjustment of a stranded asset on a 15 year asset life when CMS is replaced in 2018 by the combined SAP

IS-U and SAP CRM solution. Based on the information made available, we have not identified any other

assets which have not been fully depreciated. There may be other assets which fall into this category and

this will need to be considered at the time of the review for the subsequent price path.



Crucially, we believe that T2020 and ERP should be jointly approved, which is not currently envisaged.

Sydney Water is proposing that the decision for T2020 goes to its Board for approval in principle to be

followed by submission of the T2020 Business Case to NSW Treasury for a Gateway Review and NSW

Government approval. This is because the SAP IS-U and SAP CRM solution is both dependent on and

consistent with the ERP implementation. Sydney Water’s Business Cases highlights that

“the T2020 Program will consider the ERP Program in its planning and similarly, the ERP Program will need to keep abreast of the progress of the T2020 Program and consider the status as part of ongoing program planning”

and that “the SAP ERP Stage 1 is targeting having SAP environment enablers and SAP Core deployed by July 2017…This ensures that by June 2018 there is a stable and settled SAP ERP base in place for T2020 to leverage” and “an integrated schedule will be developed highlighting dependencies”.

Thus if approval is not granted for the ERP implementation, we believe the whole basis for selecting a SAP

billing and customer management solution would need to be re-assessed. Without the synergies and

benefits of having an integrated ERP, the business case for T2020 is significantly weakened. There are

very few examples of corporations selecting a SAP billing and customer management solution which is not

part of a wider SAP ERP solution. In our opinion, it is not compelling as a standalone solution and we

believe that there would be other lower cost and viable options which could be considered. The crossover

and synergies are such that we do not understand why the approval process is not being treated as a

package.

IT Program – ERP The implementation of a SAP ERP is a major business change project which we support in principle. As

previously cited, there is broad consensus in the world’s leading corporations that an ERP is a vital

organisational tool because of the way it integrates varied organisational systems, incorporates best

practice by reflecting the vendor's interpretation of the most effective way to perform each business process

and facilitates error-free transactions and production. This promotes efficiency, reliability and provides

additional management insight compared with best of breed solutions to support better decision-making.

However, there are a number of material areas relating to the Corporation’s plans which have been it

challenging for us to assess the prudence and efficiency of these plans. The ERP documentary evidence

presented during the formal review phase to support the investment was limited and impacted directly on

our ability to assess the program. The challenge we made to the Corporation was that it would have been

more prudent for Sydney Water to accelerate work in this area to fit in with the regulatory cycle and thus

better support its business case for the significant investment being sought. Sydney Water recognised that

the documentation made it difficult to assess the program and has subsequently provided a Business Case

and other supporting information which we have considered, however this has not been subject to the full

review process hence there are a number of areas which we have not resolved.

Costs

There was a statement in Sydney Water’s submission that the cost estimate to deliver the IT capex program

was $375m however the Corporation was only seeking funding from IPART for $328m over 2016

Determination period to drive efficient expenditure. The submission stated that the Corporation would carry

the risk of the $47m funding gap relating to this internal efficiency expenditure cap. The difference related

to $47m of planned expenditure on ERP. However our discussions with Sydney Water Corporation clarified

that the original estimate was $375m but as part of its internal challenge process and better understanding

of the costs the forecast budget for ERP in 2016-2020 is within the $328m envelope.



In our Draft Report, we cited that the total cost is forecast to be $136m for ERP implementation minus the

T2020 component. If the T2020 component is included, this equates to $294m over three price paths. This

included investment in the 2020-24 price path which Sydney Water had confirmed to be $29m. Since our

Draft Report, we have sight of figures in the ERP Business Case but we cannot reconcile costs with the

budget breakdown we were previously provided (e.g. $28.9m versus $5.3m in 2015/16) and Sydney Water

has confirmed that other costs have changed.

We understand from the ERP Project Summary that the variance to information provided in pricing

submission is because:

‘The 4+4 Roadmap has been redefined and refined as a result of further analysis. Due to the staged delivery approach which will reduce risk and provide business benefit sooner, the deliverables previously defined as Master Data Sources, Data Services, Business Intelligence and Document Management have now been absorbed within the scope of each ERP project. The activities which were to be performed within these projects and the allocated funding has been re-distributed to the remaining projects within the re-defined roadmap. As a result the budget associated with the Finance, Procurement, HCM and Payroll and EPPM projects has increased as the costs of the Master Data Sources, Data Services, Business Intelligence and Document Management are absorbed. ‘

Furthermore, we have been informed that a decision on one of the potential components, Enterprise Asset

Management, will not be taken until 2019/20 and thus the $29m cited above does not form part of the total

cost of implementation at this point in time. While the Business Case states that Enterprise Asset

Management is out of scope of the ERP Program, we are not satisfied that that the implications of this

statement are clear. This relates to a decision on the future of Maximo: one of the options that will be

considered is implementing a SAP asset management solution which could therefore form part of the ERP

implementation. However, there is no visibility on this in this Business Case although it was costed in a

previous iteration of a financial breakdown shared with us for the ERP. If a SAP asset management solution

is not the preferred option, there are then implications for additional systems integration costs to consider

and some of the benefits of using a SAP ERP integrated solution will not be realised if a non SAP asset

management solution is employed.

The ERP estimated investment has been developed in-house with assistance from a SAP lead analyst from

a leading IT market specialist. At this stage, there is little in the way of documentary evidence to support

the estimates. Sydney Water had requested two providers quote for formal review and benchmarking of

finalised 4+4 roadmap including costings. Both organisations advised they were unable to undertake the

activity citing lack of comparable data in the Australian context. However we believe other avenues could

have been pursued to provide a stronger evidence base to support the investment. In the UK recently

Thames Water was challenged by the regulator that the SAP costs contained in its 2015-20 Business Plan

had not been market tested and therefore not shown to be robust. Thames responded to the challenge by

obtaining cost estimates from another supplier in addition to those obtained from Accenture with whom it

had been working as well as commissioning assurance of its case by an independent expert.

The robustness of the cost estimates is therefore open to challenge, in particular for Stage 2 of the ERP

program which Sydney Water describes as “a top down apportionment of the IPART budget which has

been previously submitted. The estimates do not include CPI increases, Capital uplift and contingency”.

Program Sydney Water has explained in its Business Case that the ERP Program is being implemented in stages to

minimise risks that would be incurred because of the significant resource requirements that will be placed

upon the business in undertaking ERP/T2020 and other projects. We would concur with this approach.

While we note that the timeframes for SAP implementation across T2020 and ERP Stage 1 and Stage 2

have reduced from initial estimates, the timetable still appears to be on the conservative side when

compared with other SAP implementations. We have seen timeframes of half the time for water utilities in



the UK and longer timetables tend to be associated with companies operating in multiple markets (e.g. a

pharmaceutical giant implemented SAP in 35 markets in four years, a food and beverage conglomerate

implemented SAP in 120 markets in 7 years). There is therefore a risk that a longer implementation

timetable incurs additional costs and that phasing could also require interim interfaces which again which

have the effect of driving up costs. This may result in some expenditure which is not prudent or efficient.

Procurement Sydney Water’s approach to procurement suggests the Corporation should drive best value. Approximately

70% to 80% of costs in 2016-20 will be determined by open tender for systems integration, data migration

and data cleansing. Sydney Water’s approach to de-risk the implementation is to break down packages of

work to attract specialist Systems Integrator providers with the relevant niche expertise rather than appoint

one Systems Integrator to manage and implement the whole project. This is likely to result in open tender

of the selection of qualified providers.

The Corporation also benefits from pre-negotiated NSW State Government contracts at favourable rates

and permits existing licences to be leveraged with SAP which is a material reduction in overall program risk

and promotes best value. Furthermore, most of the Systems Integrators (SI) assessed by Sydney Water’s

consultant are available under the NSW Government ICT Services Scheme, which will be used to tender

for SI services as well as utilising the NSW Government Standard Business Processes to develop the

project scope.

Replacement of existing assets A key consideration from a prudence and efficiency perspective is the remaining asset life in the systems

that ERP will be replacing in the next or subsequent price paths. Based on the information made available,

we have not identified any assets which have not been fully depreciated. There may be other assets which

fall into this category and this will need to be considered at the time of the review for the subsequent price

path.

We also believe good practice would suggest that all other existing and future IT Business Cases should

consider as a standing item the implications of how the selected investment aligns with the ERP

implementation (even if it is just to confirm that there is no crossover). This has not happened to date and

there is a risk that other IT investments may not align, could become obsolete and/or another option may

be more appropriate to integrate with SAP. The Corporation agreed with this recommendation and

confirmed that it would amend its Business Case templates.

Benefits and efficiencies

Sydney Water has provided the following details on benefits and efficiencies across the two stages. We

have not had sight about how these benefits have been identified and quantified. Also, as highlighted above,

we note that the benefits are realised much sooner that for T2020.

Source: ERP Project Summary, November 2015

ERP Stage 1: Annual savings of $2.1m in 2017/18 growing to $10.3 million in 2019/20. The savings are a mix of operating and capital cost reductions, avoided costs (both opex and capex) and productivity improvements.

ERP Stage 2: Benefits from Stage 1 plus a further $17.7 million a year achieved by 2020/21. The savings are a mix of operating and capital cost reductions, avoided costs (both opex and capex) and productivity improvements.

Other

We also noted some other minor issues in relation to Sydney Water’s submission. Firstly, the “Overview of

major capital projects forecast for 2016–17 to 2019–20” did not identify ERP. The aim of this section is to

provide visibility on a major areas of investment in the future price path and collectively the components

which collectively form the ERP program would constitute a major project so it should have been included.



There is also a reference to the ERP which is incorrect as it states that Sydney Water will start implementing

a standard ERP system over 2016-2020; as acknowledged elsewhere in the submission, work commenced

in 2015/16 ($29m).

7.8.2. Meter Replacement Program

Current and Future Price Path

Replacement of damaged, faulty and broken meters is an essential activity in order for Sydney Water to

correctly bill customers and maximise revenue. The accuracy of billing is also the biggest source of

customer complaints and Sydney Water has an obligation to comply with the National Measurement Act

(accuracy of +/-4% required).

The meter program includes for the provision of new meters, reactive meter replacement on failure and a

proactive program to comply with reading accuracy. The total meter asset stock is some 1.3m of which 92%

are 20mm. The age profile shows a relatively small number of meters pre-1997 and an age profile of 60K/a

from 1998 to 2001 increasing to an average 90k/a from 2002 to 2007 then dropping to an average 60k/a

from 2008.

Current Price Path Period

In the current price path, Sydney Water is forecasting 309,500 meters against a target of 384,400, a

variance of 75,000 meters (-24%) under output target. In the previous price path the shortfall against target

was 35%. The shortfall in the current price path was attributed in part to the contractor having difficulty in

retaining staff. New contracts were in place from July 2015 with two meter suppliers and meter field service

contractor.

The gross unit rate is $104 per meter which is similar to the 2012 Determination.

There is a continuing meter program assuming new meters, reactive replacement meters and proactive replacement.

New meters are assumed to continue at the current rate of 24,000 per annum which is consistent with new property forecasts. Reactive replacement where meters fail in service is assumed to continue at a similar historic rate of 17,000 per annum.

Proactive replacement is driven by meter volume throughput and life, whichever is the shorter. For the future price path, the criteria for the 20mm replacement program has been extended from 3,600 Kl or 15 years combined criteria to 4100 Kl, which is normally equivalent to 20 years. This is based on results from a recent meter testing program An upper limit of 25 years is assumed. Larger meters assume 10 years in the current price path. The number of meters for replacement against this criterion has been estimated from a model which takes volume throughput into account for all meters.

The gross unit rate for all meters reduces from $93 to $86 over the period.

We have accepted the need for new meters and reactive replacement continuing at historic rates. We

challenge the basis of the proactive replacement as it was not consistent with the age profile of the current

asset stock and the extended life measured as volume or years. We have taken into account the under

delivery of meter replacement in the previous and current price path periods. We have assumed that the

increase in proactive meter replacement compared with current levels is half that proposed. This

adjustment is shown in Table 7-6 below.



Table 7-5 Meter Replacement Activity and Cost Adjustments

Source: SWC

Sydney Water commented that the adjusted rate of reactive meter replacement was not consistent with the

modelling process and provided a profile of meter numbers by consumption. It also stated that the 4100kl

threshold volume for replacement only applied to one type of 20mm meter and that other 20mm meters had

a threshold of 3600 Kl. Assuming an average annual consumption of 210kll/a, the profile indicated an

average replacement rate of less than 50,000 per annum. We have therefore made no change to our

proposed level of meter replacement.

These activity and cost adjustments are reflected in the level of efficient capital expenditure presented in

Section 7.10

7.8.3. Property

Current Price Path and Future Price Path

Similar to our observations on IT, Sydney Water’s property personnel, strategy, governance and approach

to delivering projects has undergone a major overhaul since our last review. We witnessed a significant

improvement with clear objectives and rigour in the approach to managing the property portfolio. There

were robust business cases, what appears to be effective project management on an individual project

basis and the Corporation was able to demonstrate best value in its procurement at a program level. The

area where we believe there is still scope for improvement is in the identification and tracking of benefits

realisation, especially more robustly setting out and capturing delivery of capex and opex efficiencies.

The investment in the current price path aligned with the plans we reviewed in 2011, with the focus on the

Treatment Plants Office Upgrade. We concur that there were some variations for unforeseen costs which

it was reasonable and appropriate to fund. There is an underspend of $4.25m compared to the Submission

which is a deferral into 2015-16 and is not reflected in the 2015-16 forecast contained in the Pricing

Submission or the September 2015 SIR.

SYDNEY WATER METER REPLACEMENT ACTIVITY AND COST

$M at 2015/16 price base 2017 2018 2019 2020 Total

SWC expenditure $M 10.0 10.6 10.4 10.5 41.571

SWC expenditure $K 10022 10590 10439 10520 41571

meter numbers 107500 119500 122500 122000 471500

unit cost $/m 93.2 88.6 85.2 86.2

new meters 24000 24000 24000 24000 96000

reactive replacement 17000 17000 17000 17000 68000

proactive replacement 66500 78500 81500 81000 307500

METER ACTIVITY AND COST ADJUSTMENTS

adjust proactive replacement 51441 57441 58941 58691

revised meter total 92441 98441 99941 99691

adjusted expenditure $M 8.6 8.7 8.5 8.6

Cost adjustment $M -1.4 -1.9 -1.9 -1.9 -7.1



The Corporation has taken a conservative approach to identifying investment needs in the future price path

by rolling forward the 2015/16 capex spending across next four years which we concur is a reasonable

proxy for future spend

Overall, we are satisfied with the prudence and efficiency of expenditure in the current and that proposed in the future price paths.

7.9. Prudence and Efficiency in Current Price Path

The IPART brief requires us to comment on the efficiency and prudence of capital expenditure in the current

price path. The prudence test relates to how decisions are made on the basis of information available at

that time and how the investment was executed.

We have considered the efficiency and prudence of capital investments during the 2012-16 price path and comment under key headings.

Strategy

The water and wastewater growth projects reviewed appeared to have investigated a number of options

and carried out comprehensive multi-criteria analysis. In the examples audited, the chosen options were

almost always the least cost options, as well as the options which scored well in non-financial categories.

Economic or financial criteria appear to be given an approximate weighting of 30% in the multi-criteria

analysis, which would be the minimum we would recommend, especially given the subjectivity of other

criteria. A large majority of projects have little community engagement (because either the communities do

not yet exist (as in Growth projects) or because Sydney Water is still developing a formal customer

engagement framework) and their preferences are assumed by Sydney Water in internal workshops. Given

that the project costs are not born by the stakeholders involved in the workshops, but by Sydney Water’s

wider ratepayer base, no parties except Sydney Water have an interest in minimising capital or operational

expenditure. For this reason, it may be appropriate to increase the weighting of the financial component

and to place a stronger emphasis on cost-benefit analysis where projects are carried out for environmental

reasons.

There was an increasing focus on the use of Strategic System Integrated Planning (SSIP) to assess and

prioritise projects. SSIP involves the development of medium term five year strategic plans around 3-4

years in advance of detailed planning to highlight intersection points for projects and drivers and therefore

provide an opportunity for optimisation. The savings made from improved investment decisions made

under the SSIP framework might include maximising existing system capacity rather than building new,

using operational solutions in lieu of capital options, and better targeting of asset renewals given a clear

picture of future work.

Continuing recommendations to ensure prudent expenditure in future expenditure include:

Accelerated development and implementation of the customer engagement framework to ensure the future assessment of projects and programs is consistent with the corporate vision regarding customers

compulsory cost benefit analysis which goes beyond multi-criteria scoring to estimate financial and economic benefits of major investments, including for all projects which are mandatory;

establishment of an environmental and or social baseline prior to project implementation and monitoring of project impacts and results;

the need for community / government financial contributions for projects which are not cost-beneficial for Sydney Water.

Heightened focus on completing the various aspects of the SSIP framework including Facility Blueprints, Strategic Network Integrated Plans (SNIP), and System Blueprints



There has also been a shifting focus on longer term planning with the introduction of regional strategies to

identify broader objectives, and infrastructure requirements and timing. Whilst still requiring significant

work, these longer term plans, combined with the SSIP framework appear to be resulting in more effective

project and program assessments.

We have not made any adjustments to prior spend to allow for inappropriate choice of water, wastewater,

stormwater or recycled infrastructure options.

Timing

Sydney Water demonstrated examples of using interim solutions to delay capital investment, which appear

to have been applied in a number of instances and represent a welcome development and approach to

delivering “just in time” infrastructure where possible. In the audits we were not able to identify projects

which had been delivered unnecessarily early. We also observed a step approach to matching supply and

demand and noted that long-term reductions in demand are resulting in infrastructure life extension and

use of headroom in treatment and networks. We note that it would be useful for Sydney Water to clearly

quantify these savings (the results of delaying investment, and additional headroom due to reduced

demand), as customers may feel that water efficiency measures are not translating to savings on their bill.

While this is a partly a public relations exercise, it could be important in maintaining water efficient

behaviour.

We have not made any adjustments to prior capital spend to allow for timing/premature investments.

Procurement

The procurement methods used by Sydney Water for the 2012-16 infrastructure investments appear to be

reasonable and some effort has gone into developing consistent and standard procurement guidelines and

strategy. In the instances of competitive tender which were studied at audit, due process had been followed

with appropriate independent scrutiny and advice. This resulted in an effective tender process.

Sydney Water has responded actively to previous recommendations regarding Alliance procurement which has seen these models transition into more effective models. These are focussed on partnering and collaborative delivery of projects. The Integrated Project Team (IPT), a joint venture Contractor/Sydney Water arrangement, is now delivering around 80% of the capital expenditure program.

We have not made any adjustments to prior capital spend to allow for procurement inefficiency or

imprudence. We have however set some challenging efficiency targets for future expenditure as discussed

below.

2014-15 Expenditure

The outturn expenditure in 2014-15 as reported in the September SIR Capex 2 submission was significantly

less than expected in the June 15 submission as summarised below:

Table 7-6 Comparison of projected and outturn spend in 2014-15 (15-16M)



Most of the variance, in absolute terms, between the June and September submissions, is in the wastewater

service, where spend was $36.6M lower than anticipated in the June submission. Overall, however, the

level of expenditure in the September submission is only 1% below the average spend in the current price

path period.

With the exception of Rouse Hill stormwater, which mainly affects 15-16 spend and is discussed below,

SWC did not make us aware of any significant impacts of this underspend for the expenditure requirements

in the next price path. As such we have not made any adjustment to account for the lower expenditure.

Recommended level of efficient and prudent capital expenditure in the current price path

As outlined above, we have not made any specific adjustments to the capital expenditure in the current

price path on the basis of inefficiency or imprudence.

As discussed in Section 7.6 we have made an adjustment to the expenditure in 2015-16 and in the next

price path to take account of a material change in projected expenditure on the Rouse Hill Trunk Drainage

project.

The resulting recommended level of annual efficient and prudent capital expenditure are summarised

below:

Table 7-7 Summary of Efficient Capital Expenditure in the Current Price Path

7.10. Prudence and Efficiency in Future Price Path

We are proposing adjustments to capital expenditure in the SIR submission to reflect our view of prudent

and efficient expenditure for the future price path. Our views are based on our review of the Information

Return (particularly the analysis of historical delivery performance), discussions with Sydney Water, our

assessment of asset management and long term strategic planning processes, the review of sample

projects and the assessment of capital expenditure processes. We discuss our methodology below.

Our assessment of the level of capital efficiency able to be achieved by Sydney Water in the future price

path is a progression of the methodology which we applied to our 2004 review of the New South Wales

metropolitan water companies, Hunter Water in 2008, State Water in 2010 and Sydney Water in 2012. This

approach is based on a methodology developed by Ofwat and applied to water companies in England and

Wales for over 15 years. This methodology applies the concepts of continuing and catch-up efficiency.

Continuing efficiency is the scope for a top performing or Frontier Company to continue to improve its

efficiency. It reflects the continuing efficiencies being gained across all major sectors through innovation

and new technologies. Catch-up efficiency is the scope for all other utilities to reach the performance of a



Frontier utility. This concept was developed and applied by the Water Services Regulatory Authority

(Ofwat) in England and Wales for the 1999 Periodic Review and also used in the 2004 and 2009 Periodic

Reviews. It has been subject to independent scrutiny by the UK Competition Commission.

As can be seen when comparing Figures 6-5 and 6-6 with Figure 6-4, SWC has a relatively high capex per

property when compared with water utilities in England & Wales, despite not including for the capex of new

water supplies. SWC appears to perform better when comparing capex per volume supplied because of

the higher average water use per connection in Sydney. This high level benchmarking is supportive of

further efficiency in SWC’s capital program.

In 2008, Sydney Water was set capital efficiency targets13 of 0.5% per annum continuing and 1.0% per

annum catch up as applied to non-contracted expenditure. Hunter Water (2009) was set capital efficiency

targets14 of 0.5% per annum continuing and catch-up efficiency of 1% to 4.5% over the price control period.

For both agencies the cumulative efficiencies increased from, in general, 1.5% per annum in year 1 to 6%

or 6.5% per annum in year 4. State Water in 2009 was set a continuing efficiency of 0.4% per annum and

catch-up efficiency from 1% to 4.5%.

In 2012, Sydney Water was set the following efficiency targets as part of the calculation of efficient

expenditure levels.

Application of capital efficiency targets 2013 2014 2015 2016

Catch-up efficiency 0.4% 0.8% 1.2% 1.6%

Continuing Efficiency 0.9% 3.6% 8.4% 10.4%

We have made adjustments to specific programs or projects which we have reviewed. We have commented

in Sections 7.4 and 7.5 on specific projects and relate to the re-phasing of the proposed expenditure

increases. These projects were representative of the program as a whole so we have re-phased other

expenditure on a similar basis. Our adjustments relate generally to a slower rate of increase of expenditure

above the current price period.

We then arrived at an adjusted expenditure profile against each driver. To this adjusted expenditure profile

we have applied the efficiency targets that we assess later in this Section. The derivation of our proposed

expenditure for Sydney Water for the future price path following adjustments and application of efficiencies

as set out below.

7.10.1. Continuing Efficiency

We have assumed a continuing capital efficiency of 0.25% per annum over the period 2012 to 2016 to

reflect the impact of new technology and innovation which all agencies, including a frontier agency, should

achieve. This value is lower than the previous efficiency targets set for Sydney Water, Hunter Water and

State Water but consistent with the efficiency target set by Ofwat in 2009 for continuing efficiency targets

for water utilities in England and Wales from 2015-25. We suggest that any significant differences between

the forecast and outturn continuing efficiency should be considered from a retrospective analysis of prudent

expenditure at the next price path review.

13 Review of prices for Sydney Water Corporation’s water, sewerage, stormwater and other assets, IPART June 2008 14 Review of Capital and Operating Expenditure of Hunter Water Corporation (2009 Determination), Atkins Cardno

December 2008



7.10.2. Catch-up Efficiency

We have applied our judgement to determine the level of catch-up efficiency that could be achieved by

Sydney Water based on our assessments of the capital processes and the review and analysis of sample

projects representative of the program as a whole. We have identified four areas where Sydney Water

should be able to make material improvement to its processes to frontier level over time and deliver material

efficiencies over the price control period. These are:

1. Improvements to capital program management and optimisation, 2. Improvements to value engineering 3. improvements in cost estimating and the management of contingencies, 4. the impact of new procurement processes and the likely savings from more effective program

management.

Each of these areas is defined and briefly discussed in the following sections.

Capital Program Management and Optimisation

Effective program management helps to identify synergies, to challenge expenditure and to optimise capital

programs by improved targeting of expenditure to areas where it is most required. It usually involves a

mixture of culture, incentives, systems and processes. It reflects our view that SWC can improve the way it

manages expenditure at a program level.

The efficiency has been applied in a uniform incremental approach over the 2017-21 period, recognising

that change can take time and the capital program in the early years is already partially committed.

Value engineering

Moving from the program level to the scheme-specific level, value engineering looks to reduce the cost of

delivering a given scheme by challenging scope and methods and looking for alternative ways to achieve

the outcome required.

We have seen that SWC has carried out value engineering for a number of its major schemes, particularly

where costs have exceeded initial expectations. This efficiency allows for value engineering to become

more widespread to ensure that schemes are delivered at an efficient cost for customers.

Cost estimation

SWC’s approach to cost estimation is at an early stage of maturity. The cost estimation tool is infrequently

updated rather than continually updated with outturn costs, making it difficult to reflect recent efficiency

improvements. An example of this is outturn pipe-laying rates which SWC staff reported to be significantly

below the cost database estimates. Many significant project cost estimates rely on bottom-up analysis,

often by external consultants who may be conservative, with little reference to (or explanation of variance

from) outturn costs for similar schemes.

We have applied a catch-up efficiency to reflect the potential for recent cost estimates to fail to capture

efficiency improvements and for estimates to routinely include conservative assumptions. This has been

phased in so that it does not apply to spend in 2017 & 2018 where the program is generally already

reasonably well advanced.

Procurement

Procurement efficiency involves finding better ways to purchase capitalised goods and services. It can

involve packaging of works, incentivisation and contractual arrangements, such as alliancing and

partnering. An example of how procurement efficiency may be achieved is by the establishment of an



application of specific initiatives such as establishing a schedule of rates for elements of Developer

Operations expenditure.

SWC is putting significant efforts into procurement efficiency and has quoted plans to deliver 4% capital

efficiency early within the next price path period. It is not clear that this efficiency saving has been applied

to the capital program SWC has proposed.

We have therefore applied an additional procurement efficiency adjustment equal to 4% from 2018

onwards. The efficiency is phased in in 2017 reflecting the fact that a significant proportion of capital

expenditure in the first year of the next price path may already be procured.

Our assessment of the level of continuing and catch-up efficiencies achievable in the future price path is shown in Table 7-21 below.

Table 7-8 Future Price Path – Proposed Capital Efficiencies % (Source: SWC SIR and Atkins/Cardno analysis)

7.10.3. Efficient Level of Expenditure

We have derived an efficient level of capital expenditure for each service taking the SIR submission and

adjusting for any inconsistencies in investment driver. We have re-profiled some program outputs and

hence expenditure for defined programs and projects. We then apply the continuing and catch-up

efficiencies to reflect the catch-up potential in investment planning, cost estimating and contingency

management and procurement. There is a summary of capital expenditure adjustments included below.

Water Service

We summarise our proposals for prudent and efficient capital expenditure in Table 7-9 below.

Wastewater Service


Stormwater Service


Corporate Service


In each table we have provided an indicative asset category breakdown for the recommended expenditure. This is based on the “SIR CEMELEND” sheet provided by SWC, amended based on our estimate of the asset category breakdown of the specific adjustments made and then pro-rated for the capital efficiency targets.

2017 2018 2019 2020

Continuing efficiency at the Frontier 0.25 0.5 0.75 1

Catch-up: capital program management and optimisation 0.5 1 1.5 2

Catch-up: value engineering 0.4 0.8 1.2 1.6

Catch-up: cost-estimating 0 0 0.5 1

Catch-up: procurement 2 4 4 4

Catch-up efficiency 2.9 5.8 7.2 8.6

Total efficiency 3.15 6.3 7.95 9.6

Cumulative efficiency challenge (%)



Table 7-9 Water Service: Summary of Efficient Capital Expenditure



Table 7-10 Wastewater Service: Summary of Efficient Capital Expenditure



Table 7-11 Stormwater Service: Summary of Efficient Capital Expenditure



Table 7-12 Corporate Service: Summary of Efficient Capital Expenditure



7.11. Conclusions

We have reviewed Sydney Water’s processes for delivering capital projects and we have examined specific

projects to confirm how these processes are applied. We have proposed adjustments to the Submission

expenditure to reflect phasing of outputs in specific programs or projects. We have applied continuing

efficiencies and catch-up efficiencies to reflect business planning, the cost estimating process and

procurement.

We have formed the opinion that Sydney Water has the resources and ability to realise these capital

efficiencies through the asset management processes, systems and strategies in place or being developed.

We have quantified the adjustments and efficiencies that we believe Sydney Water will be able to make

over the coming price path and we will apply these to our recommendations to derive the efficient

expenditure for the future price path.

We show in Table 7-8 and Figure 7-9 below the capital expenditure proposed by Sydney Water, the

adjustment we have made and our findings on the level of efficient capital expenditure for the future price

path. The efficient levels of capital expenditure by product and by driver are shown in Figure 7-39 and 7-

40.



Table 7-13 Efficient Level of Capital Expenditure

SYDNEY WATER CORPORATION PROPOSAL - CAPEX - COMPANY LEVEL


Water 194.8 189.4 185.4 161.2 174.4 730.8 905.1

Wastewater 371.9 404.5 386.7 337.0 347.2 1500.2 1847.4

Stormwater 49.3 42.4 42.3 25.4 51.8 159.4 211.2

Corporate 99.3 96.2 93.6 93.5 93.0 382.6 475.6

Total 715.3 732.5 708.0 617.1 666.4 2772.9 3439.4

Atkins/Cardno recommended adjustments for specific programs or projects

"Critical Watermain Renewals" -2.0 -2.0 -2.0 -2.0 -3.8 -8.0 -11.8

" Reticulation Watermain Renewals" -6.5 -6.5 -6.5 -6.5 -7.5 -26.1 -33.6

" Reservoir Renewal and Reliability" -5.8 -5.0 -4.9 -4.9 3.6 -20.5 -16.9

" WPS Renewals" -4.0 -5.7 -2.0 -1.4 -1.1 -13.1 -14.2

Reprofiled NWGC spend 0.0 -11.9 0.7 5.6 5.6 -5.6 0.0

Adjusted Meter Investment Program -1.4 -1.9 -1.9 -1.9 -2.5 -7.1 -9.6

"Avoid Fail Sewer Renewals" -8.1 -6.7 -8.4 -11.0 -4.4 -34.3 -38.6

"WWPT Renewals" -22.6 -22.6 -26.1 -30.1 -79.5 -101.5 -180.9

Reprofiled NWGC spend 0.0 -7.1 -7.9 7.3 7.8 -7.8 0.0

Energy management -1.2 -3.8 1.4 1.4 0.0 -2.2 -2.2

North Head Biosolids 0.0 -13.3 0.0 0.0 0.0 -13.3 -13.3

Minor Stormwater Renewals 0.0 -3.5 -1.2 -0.6 -34.1 -5.3 -39.3

Adjustment for updated Rouse Hill projections -1.6 0.0 0.0 0.0 0.0 -1.6 -1.6

Elizabeth Macarthur reprofiling -1.2 -5.6 -2.9 2.2 3.7 -7.5 -3.7

Field Management 0.0 0.0 -1.5 -1.5 0.0 -3.0 -3.0

Specific adjustment for ERP Stage 2 0.0 0.0 -4.0 -4.0 -4.0 -8.0 -12.0

Total -54.4 -95.5 -67.3 -47.5 -116.0 -264.7 -380.7


Water 175.1 156.4 168.7 150.1 168.8 650.3 819.1

Wastewater 340.0 351.1 345.6 304.5 271.2 1341.2 1612.3

Stormwater 46.5 33.3 38.3 27.0 21.4 145.1 166.6

Corporate 99.3 96.2 88.1 88.0 89.0 371.6 460.6

Total 660.9 637.0 640.7 569.6 550.4 2508.2 3058.6

Atkins/Cardno recommended additional capital efficiency targets (beyond those applied by the company)

Continuing Efficicency (%) 0.25% 0.50% 0.75% 1.00% 1.25%

Catch-up efficiency (%) 2.90% 5.80% 7.20% 8.60% 9.50%



Water 169.8 147.2 156.3 136.9 152.4 610.2 762.5

Wastewater 329.6 330.2 320.1 277.9 244.8 1257.8 1502.7

Stormwater 45.1 31.4 35.4 24.6 19.4 136.6 155.9

Corporate 96.2 90.5 81.6 80.3 80.4 348.6 429.0

Total Efficient Expenditure 640.7 599.3 593.5 519.7 497.0 2353.2 2850.2



Figure 7-40 Assessment of Efficient Capex versus the Proposed Level by Product



8. Asset Classification

8.1. Methodology and Assumptions

IPART requested us to audit and assess the accuracy with which Sydney Water has classified its existing

assets and planned capital expenditure into the following asset classification classes: Civil, Electrical,

Mechanical, Electronic and Non-depreciating assets (or ‘CEMELND’).

Our approach to this task focused on a discussion and analysis of the Corporation’s methodology and

assumptions. We discussed the changes in asset life assumptions from 2012 and inspected documents in

support of asset life assumptions and analysis by service area to identify and assess in the various

classification classes:

the value of all existing assets

the efficient expenditure on new assets

the average remaining life of existing assets

the expected life of new assets

Confirmation that the values entered against each asset are accurate is outside of the scope of this audit.

It is our understanding that this exercise is carried out internally and subject to audit by the financial auditors.

8.2. Findings and Recommendations

Assumed Life of New Assets

Sydney Water has not formally documented the processes it has in place to derive its asset classification,

however, overall the Corporation was able to demonstrate the processes in place and that the classification

is applied as described.

The Corporation assigns the CEMELND classification to current and planned expenditure in the capital

program for each asset class to a point when a new asset is completed, applying standardised percentages

depending on the asset based on technical sheets provided by asset management. Assets with a very high

value of investment are reviewed on a case by case basis and their percentage split against CEMELND is

customised rather than applying the standard percentage splits. When assets are commissioned they are

added to the financial asset register where a more detailed analysis of asset lives is carried out.

Sydney Water provided a schedule of asset lives for each fixed asset category. These are dated January

2014 although there have been few changes from the 2012 Determination. These changes relate to

IT assets: the asset life has been extended from 10 to 15 years related to the payback period

expected from new systems;

Water meters 20mm to 40mm: asset lives have been extended from 15 to 20 years;

Stormwater drains: the life of drains subject to tidal intrusion are reduced to 80 years; the life of

other drains are reduced from 150 to 130 years;

Chemical dosing units: new additions for civil, electrical, mechanical and land;

Sewage treatment plants: a different dissection of plants by process including civil concrete, civil

metal, mechanical, power and control systems. The main difference is to split civil concrete 100

years and civil metal 50 years.



On inspection these changes are appropriate and consistent with life assumptions we see in other water

agencies and companies. Sydney Water applies a detailed and structured approach to asset classification

for each new asset added to the register.

Residual Life of Existing Assets

Sydney Water has demonstrated how the asset values for water, wastewater, stormwater and corporate

are rolled forward through the current price path from 2012 to 2016 taking opening asset values, adding

new capital expenditure and subtracting depreciation. The analysis allows for asset disposals although

these are shown only for non-depreciable assets. An adjustment is made for a change in price base each

year.

We are aware that there were some asset disposals, pumping stations and water mains, during the current

price path which are not taken into account in the asset and depreciation analysis.

The weighted remaining life of existing assets show marginal changes between the opening and closing

years of the price path as new assets are added during the current price path. For example water civil

assets shows an increase from 89.9 to 93.2 years as a result of asset additions. The water electrical assets

reduce from 21.7 to 20.5 years and wastewater mechanical assets from 18.3 to 16.9 years. All asset groups

are generally within the range of 62% to 75% of new asset lives.

There is an increase in depreciation over the period of 27%. While civils and mechanical assets increase

by 20%, electronic assets have increase by 45%. The latter is due to the increase in these shorter life

assets over the period. We discuss electronic assets below.

On inspection of the worksheets, the methodology and assumptions used are clear and appropriate. The

one question we raise is whether full account is taken of asset disposals where none are shown for the

current price path.

Electronic (IT assets)

The electronic asset lives associated with existing and new IT systems has a material impact on

depreciation and the total cost to be recovered through charges.

A detailed analysis of total IT assets including existing and planned assets over the future price path shows

a weighted asset life of 9.6 years and consistent with the 10 year asset life assumed for new Corporate IT

assets. This analysis was in response to our challenge in the 2011 efficiency review. Our view is that some

of the hardware asset lives appear to be short and lower than the tax assumptions. We tested the sensitivity

of increasing the base expenditure asset lives by one and two years. This increased the weighted average

life to 10 and 10.4 years respectively. This confirmed that the 10 year asset life assumption is appropriate.

For the future price path, Sydney Water has provided a schedule of new IT systems to be developed in the

future price path. Each system has been allocated a life of 5 or 15 years. For example most of the new

billing system and ERP have assumed lives of 15 years consistent with the payback period assumed for

these systems. Other systems have five year asset lives. This gives a weighted life of 11.2 years.

Sydney Water has carried out a detailed analysis of the impact of new IT expenditure and derived a

weighted average life to reflect the varying asset life of the new systems and hardware being acquired. Our

sensitivity analysis showed that increasing the life of some hardware assets where we thought they were

under-stated had a marginal impact on the weighted life and confirmed that the 10 year assumption is

appropriate.


Sydney Water Corporation - Expenditure Review | Version 1.6 | 21 December 2015 | 5142678

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9. Specific Issues We were requested by IPART to look at some other areas as part of our review and which are covered below.

9.1. Finance Leases

In the 2016 review, IPART intends to include the value of any major asset subject to a finance lease in the Regulatory Asset Base. Only the operating expenditure cost of delivering the service of the asset will be included in the operating expenditure allowance.

We are asked to

i. Review the asset lives used to calculate regulatory depreciation in Sydney Water’s submission;

ii. For each asset, review the asset lives proposed in Sydney Water’s submission and the allocation of those lives to the CENELND asset class;

iii. For each asset, review the non-financial costs associated with operating the asset and recommend the annual efficient non-financial operating expenditure for each asset between 2017 and 2021.

Finance Leases are in place for the Blue Mountains sewage transfer tunnel and three water filtration plants at Macarthur, Woronora and Illawarra. There is a service agreement for Prospect WFA.

Blue Mountains Tunnel

There are two sections of the tunnel constructed between 1985 and 1996. The first part of the tunnel is owned by Sydney Water; the second length is leased from a third party. Sydney Water stated that the lease contract was awarded through a competitive tender process. The leased part of the tunnel was constructed in 1996. The leased tunnel section comprises 18km of 2.4 to 2.7m diameter tunnel has a lined invert and shotcrete walls and soffit on some sections. The tunnel is inspected every two years and is reported to be in good condition.

Sydney Water assumes that the tunnel lining has an asset life of 70 years which after 20 years life will have an asset life of 50 years by July 2016. This asset life is applied to the invert and lining components of the tunnel. The tunnel itself is assumed to be a ‘hole in the ground’ and is not depreciated. The value of the replacement is taken as the pipe relining costs based on similar work in large diameter tunnels. The value of the ‘hole in the ground’ is from tunnelling costs. Sydney Water commented that

‘ A dissection of the tunnel between the lining and the hole has been carried out by Sydney Water by examining the works executed drawings of the tunnel to determine the length of the tunnel that has been lined (2km of the 18km). Data from Sydney Water’s last valuation of sewer main assets was used to dissect the lining and hole components. The resulting dissection of the total amount recommended for inclusion in the RAB ($155.7 million) is:

Lining - $2.5M (2%)

Hole cavity - $153.2 million (98%)’

We support the approach to separate the lining asset and the ‘hole in the ground’ for depreciation purposes. The 50 year remaining asset life for the invert and lining is appropriate. There is insufficient information to take a view on the asset values. The methodology is appropriate and, an appropriate balance of cost between the lining and the hole has been demonstrated.

Operating expenditure relates to bi-annual inspections and operation and maintenance costs. Average annual costs were $0.62m per annum. In the future price path, costs follow a similar profile, averaging $0.52m per annum. These costs are appropriate.



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Water Filtration Plants

There are three Build, Own Operate (BOO) contracts for the four treatment plants at Prospect, Macarthur, Woronora and Illawarra plants. All plants were built and commissioned in the mid-1990s. Sydney Water stated that the BOO contracts were awarded through a rigorous competitive procurement process. Performance measures within the contracts relate to available capacity and water quality. The Macarthur plant contract was extended by ten years to 2030. The Wyuna lease was recently extended by 15 years to 2036. The original WFAs were treated for tax accounting purposes as operating ‘service agreements’. The change in accounting and tax treatment as finance leases resulted from the contract amendments which were part of the extensions.

The plants provide about 95% of Sydney Water’s supply; the Prospect works alone supplies 80 to 85% of supply. As such the plants are critical to Sydney Water’s supply. The Macarthur plant includes a significant length of large diameter water main. Some plants have been upgraded to meet operational, water quality and safety requirements. The assets are reported in good condition with some mechanical plant in fair condition. The contracts require the operators to maintain the assets following good operations and maintenance contracts.

Further plant upgrades at Prospect and Macarthur plants are planned to meet Australian drinking water quality guidelines with specific reference to turbidity and disinfection. The Prospect plant upgrade comprises works to address turbidity and disinfection - new inlet works, filter controls, disinfection improvements and large storage tanks. Cost estimates have been prepared.

The asset lives proposed by Sydney Water with and without upgrades are shown in Table 8-1. Asset values have been estimated for these works although these are outside the brief for the efficiency review.

Table 9-1 Proposed Asset Lives for Finance Lease Assets

Source: SWC

The asset life assumptions are based on detailed assessment of each plant. Where asset lives are shorted than the current leases, the duration of the lease is assumed. While the asset leases have defined durations, the strategic importance of the treatment plants implies that these assets and their operation will be a continuing long term business.

We compared these asset life assumptions with Sydney Water’s fixed asset assumptions and compared values with similar water agencies. We found that

i. The civil assets at the Prospect, Macarthur and Wyuna plants are relatively low when compared with Sydney Water’s similar assets and other company assumptions. These assets are generally large structures and storage reservoirs. Civil assets form the greater part of the total assets and will have

SYDNEY WATER FINANCE LEASES

($k 2015/16) year ending June

Asset Li fe Proportion Asset Li fe Proportion Asset Li fe Proportion

Civil 51 70% 70 73% 51 78%

Electrical 21 15% 14 7% 21 6%

Mechanical 21 13% 19 4% 21 12%

Electronic 21 3% 14 16% 21 4%

Civil 49 80% 70 100% - -

Electrical 25 6% - 0 - -

Mechanical 20 13% - 0 - -

Electronic 17 2% - 0 - -

ASSET LIFE ASSUMPTIONS - without upgrade

ASSET LIFE ASSUMPTIONS - with upgrade

Prospect Macarthur Wyuna (Woronora

and Illawara)



169

the largest impact on depreciation. We suggest a 100 year asset life from the date of commissioning would be appropriate;

ii. The electrical and mechanical assets at the Prospect and Wyuna plants are consistent with Sydney Water’s similar assets. At Macarthur, the asset lives appear to be low and, unless driven by poor asset condition, should be similar to the other plants;

iii. The electronic asset lives at Prospect and Wyuna are low in comparison with similar assets although this may be driven by the duration of the lease. We would normally expect to apply an asset life of 15 years.

Operating expenditure for the four plants is reported as $89m in 2017 reducing to $88m in 2020. The costs are derived from current contract rates for plant availability and usage. Supporting information was provided to show the basis of these costs. Sydney Water commented that

‘…there is a small opex provision for the Prospect upgrade. This provision has no impact on finance lease charges but instead on the ‘operating service charge components’ of the charges. We have also made provision for the increase of the ‘finance lease’ charges for the upgrades of the Prospect and Macarthur water filtration plants.

There is no allowance for the likely increase in lease costs for quality improvements.

The costs assume average water quality conditions within normal operation of the plant. Where there is a deterioration of raw water quality additional costs would be applied to cover increasing consumption of chemicals. The level of costs is similar to the current price path when additional quality costs are excluded.

We confirmed that the forecast operating costs are soundly based and are appropriate.

9.2. Sydney Water IT Expenditure

Refer to discussions in section 7.8.1

9.3. Projects subject to Government Directions

Under section 6(A) of the IPART Act 1992, the Premier may direct IPART to include the efficient costs of complying with certain specified requirements when setting prices. For the 2016 review of Sydney Water’s prices, there are directions related to three programs, namely

the Rosehill-Camellia recycled water scheme

the Replacement Flows project at St Mary’s STP

Expenditure on stormwater drainage at the Green Square urban development

For each of the schemes we are asked to

Review the efficient costs associated with delivering the required services and outcomes;

Recommend the efficient level of operating expenditure for each year between 2017 and 2020;

Recommend the efficient level of capital expenditure for each year between 2017 and 2020.

Rosehill-Camellia recycled water scheme

The scheme comprises a tertiary water treatment plant receiving secondary effluent from Sydney Water. The

plant is in private ownership to provide recycled water to commercial customers in the Parramatta area. The

treatment process is a combination of ultra-filtration and reverse osmosis membranes. Sydney Water

purchases a fixed volume of 10.5 Ml/d at a defined rate which it then retails to customers. The agreement with

the plant operator is for 20 years from August 2011.



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Operating expenditure in the current price path averages $17.8m compared with an $18.3m per annum. The

saving of $0.5m per annum is due mainly to escalation differences. The fixed volume charge is linked to the

contract and there is no evident scope for efficiency savings. A similar level of expenditure is forecast for the

future price path although we question why costs should increase above the current costs at the 2016 price

base. We found that efficient costs should be based on the actual $17.8m per annum cost in 2015. The impact

would reduce operating costs by $0.9m over the period.

We noted that revenue has reduced from $7.4m in 2013 to $4.1m in 2016. Future revenue projections show

revenue to reduce to $3.1m in 2017 and $1.7m in 2018 and subsequent years. There are currently five

commercial customers and one large user is forecast to cease taking recycled water after 2017. Sydney Water

has advised us that it is very unlikely that there will be new customers within the current supply area to make

up demand from the network. We note that Sydney Water is investigating options including looking at ways to

increase demand.

There is no capital expenditure related to this scheme.

Replacement Flows project at St Mary’s STP

This is a scheme to discharge recycled water into the Boundary Creek to enhance base river flows and reduce

the extent of compensation flows from the Warragamba reservoir. The advanced water treatment plant and

the transfer system is owned by Sydney Water. The plant was completed in 2010 and has an output up to 50

Ml/d but normally operated at 45 Ml/d.

An operating and maintenance contract is in place for the ten years to August 2020. Costs comprise an

availability charge, volume-based usage charge, electricity, renewal and maintenance charges plus contract

management costs. These costs

Expenditure in the current price path is an average $7.4m per annum compared with an IPART target of $9.1m

per annum giving an annual variance of $1.7m. This is explained by a reduction in energy costs of $4m and

other costs. The variance on availability and usage charges is not material.

For the future price path, the availability, usage and energy charges continue at a similar rate as 2015. The

increase in ‘other’ relates to the replacement of membranes. The timing and costs are consistent with the

maintenance schedule in the contract. This is an efficient level of operating expenditure.

There is no capital expenditure related to this scheme.

Green Square Urban Development

Green Square was Australia’s largest urban renewal project, involving 60,000 dwellings, 120,000 residents

and permanent workforce of 20,000. The site had a wide range of flood problems having previously been the

site of Waterloo Dam.

The development wasn’t envisaged at the time of the 2011 Submission. So SWC applied for Housing

Acceleration Funding (HAF) before implementation started. SWC applied for $36m and obtained about $10m.

The current preferred option was derived by qualitative options appraisal in the Concept Design Report (May

2013). Procurement was through a Competitive Alliance model. However, the project has seen a significant

cost increase, as summarised below:



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Source: “P_08-10-15_5. GJ IPART_Green Square Oct 2015_Final”

SWC has identified the following reasons for the costs increases:

Land and legal costs

Building demolition

Waste disposal legislation

Escalation and insurance

A set of value engineering initiatives is in place to mitigate these costs pressures, including use of micro

tunnelling instead of cut and cover. Construction is underway and completion is expected in 2017/18.

9.4. Environmental Protection Licences (EPLs)

IPART has asked us to examine the efficient costs of delivering the required services and outcomes associated

with EPLs.

EPLs are issued in perpetuity but are reviewed every 5 years and can be varied at any time. SWC and the

EPA have a Memorandum of Understanding in place which sets out liaison and cooperation arrangements

including the following groups:

Strategic Liaison Group (SLG) which facilitates strategic discussions at a senior (MD/CEO) level;

Joint Operations Group (JOG) which is the forum for tactical discussions

These groups meet regularly and have apparently created good dialogue between the two organisations.

Expenditure related to EPL changes is largely focused on the wastewater service with two notable projects:

the Wet Weather Overflow Abatement Program, discussed in Section 7 above and Winmalee WWTP - nutrient

upgrade discussed below.

Our view, having reviewed these projects and SWC’s approach to liaison with the EPA, is that SWC is putting

reasonable effort into ensuring that EPL changes do not result in excessive expenditure. However, we

consider that it would be useful for SWC to develop a better understanding of customers’ willingness to pay

(WTP) for EPL improvements to enable more robust decision-making which reflects customer priorities and

ensures that their views are adequately represented in the discussions about the needs and potential solutions

agreed on by the EPA and SWC. We understand that SWC is starting to develop an economic approach to

benefits assessment. We therefore recommend that WTP be adopted for the formulation of the price path

submission in 2019 and for any major schemes driven by EPL changes which emerge in the next price path

period.

9.4.1. Winmalee WWTP Nutrient Upgrade

Winmalee WWTP replaced eight older WWTPs discharging into a sensitive environment and has therefore

provided significant environmental benefit.



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It discharges into Winmalee Lagoon and the plant is performing well, well within current EPL limits. Limited

growth is expected in the catchment so there is no current need to amplify the plant. However, the EPA is

concerned as the WWTP represents a large proportion of nutrient load discharged to the river (e.g. 42% of

total phosphorus load).

In 2010 the EPA issued Pollution Reduction Program (PRP) 500, requiring SWC to undertake a study. This

study was completed in October 2011. It recommended no action because the effluent quality matched

instream conditions. In subsequent correspondence SWC set out its option that that there is nonetheless a

case for improvement to phosphorus and ammonia performance. SWC were looking to make these

improvements anyway because (1) the charges associated with phosphorus discharges, meaning that process

optimisation for phosphorus might be cost neutral and (2) concerns over level of ammonia toxicity.

A Winmallee Improvement Plan was prepared in 2013. The EPA’s response in 2014 suggested a focus on

total nitrogen rather than ammonia and phosphorus. SWC responded in March & June 2014 with their opinion

total nitrogen shouldn’t be the focus. In 2015, the EPA issued PRP 800, which requires SWC to design

proposals for a number of solutions for different licence limits, indicating that the solution needs to be

constructed by end 2020. The resulting EPL specifies that SWC must use Multi-Criteria Analysis (MCA) and

economic analysis.

The licence levels to be considered include (A) levels achievable through relatively low capex optimisation and

dosing (opex) to improve phosphorus (B) low nutrient levels through denitrification filters and methanol dosing

at the plant in a new reactor (C) extremely low nutrient levels, using high capex solutions such as ozone/BAC

($50M+).

In its IPART submission, SWC is assuming that the EPA will accept Design Level B. However, there is no

indication from EPA that this is what they will accept. The Options Analysis Report is due by 2 January 2017.

Implementation is to be complete by 2020.

We consider that SWC has demonstrated that so far it has been challenging the EPA to ensure that the scheme

definition reflects environmental outcomes and customer priorities and that it is planning to integrate an

assessment of economic benefits into the options analysis. We consider that it would be useful to strengthen

this further by integration of customer WTP into decision-making.

Appendices



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Appendix A. Project review summary sheets - Capex

A.1. North West Growth Centre PROJECT DETAILS

Project Name North West Growth Centre

Project Number

Water: WGO015, WGO020, WGO021, WGO022

Wastewater: SGO025, SGO030, SGO031, SGO036, SGO037,

Status Current and Future Price Path

NEED FOR SCHEME / SCOPE OF WORKS / OPTIONS APPRAISAL

This project is in response to, and in anticipation of, new development occurring in the North West Growth Centre (NWGC). The NWGC was established in 2005 by the NSW Government to plan Sydney's growth on its urban edge and better coordinate infrastructure.

The level and speed of development is uncertain, but NSW Government anticipates development in NWGC to accommodate 200,000 people in 70,000 new dwellings over the next 25-30 years (DOP-0064_Guide_to_Sydneys_GC_v13-web).

Sydney Water’s plans are based largely on DPE forecasts, the most recent of which for NWGC are from 2014. These were shown to us in a SWC presentation (P_07-10-15_1. DF Major Growth Areas Infrastructure Staging.pdf) but we understand that they are not in the public domain.

SWC developed an Area Plan in 2008, followed by Drinking Water and Wastewater Servicing Strategy Reviews in August 2014 & March 2015 and an Options Study Report for Riverstone WWTP amplification.

SWC propose to use a Primary Sedimentation process at Riverstone, with 4-Stage Bardenpho Biological Nutrient Removal and, Anaerobic Digestion with future optional Co-digestion. This is not the lowest cost NPV option but has been selected on the basis of multicriteria analysis (MCA).

We are not convinced about the robustness of the MCA undertaken as many of the non-cost elements (e.g. plant robustness, resource recovery, future compliance and stageability) would appear to be monetisable and therefore best addressed as a part of an expected value NPV. However, we note that the impact of the preferred technology appears to be relatively minor ($5.7M) compared to the extent of apparent cost underestimation (covered below).

$92.8M of the NWGC investment has been funded through the Housing Acceleration Funding (HAF).



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Optioneering

Development of “Long-list” and “Short-list” of options. All of the preferred options in the Strategy Reviews represented lowest NPV.

Other factors are: operational risks, environmental impact, customer issues, such as resilient security of supply.

SWC has had to pay for a Package 1 trunk main ($7m cost since 2011-12) to be moved from where it was originally constructed. This is because the laying of the main preceded the finalisation of the road layout and SWC had to agree to move it at a later date if required.

Funding Approval – Business Case Process

There is a standard format for business cases (BCs). BCs provided include:

Package 3: Initiation BC. July 2014

Riverstone wastewater lead-ins (Housing Acceleration Fund): Initiation BC. October 2013.

Package 2: Delivery BC. November 2011

Cost Estimates

Cost estimates come from a number of different sources depending on the stage. Most of the pre-detailed planning cost estimates are planning cost estimates based on SWC’s cost estimating tool and a preliminary design. At a later, detailed planning stage, independent estimators are engaged to provide risk-based cost estimates. P80 estimate generally used in business case approval. In Package 3 Initiation BC, the P80 project development costs are based on P50 + 15%.

The cost allowance in the SIR Capex 2 for Riverstone WWTP amplification is $78.2M (including the current

price path expenditure). This compares with the October 2014 Options Analysis estimate of $86.1M and the

Risk Based Cost Estimate (RBCE) dated August 2015, which suggests a P50 of $109.9M and P80 of

$115.2M. Both sets of estimates are in excess of the SIR submission. Apparently SWC carried out a

similar capacity upgrade at Rouse Hill (c$63M let in 2006, completed in 2008) which is supportive of the SIR

estimate. The RBCE does not appear to provide an explanation for the increase in cost relative to the

options analysis or the degree of variance from Rouse Hill outturn cost. However, SWC has indicated that

the increase between the options analysis and RBCE was largely due to original underestimates for

electrical and SCADA works, revised costs for bioreactors and odour control.

FINANCIALS AND PROGRAM (costs in $ 2015/16)

Budget in SWC 2011 Submission for Current Price Path

$71.7m Water

$134.5m Wastewater

Initial Delivery Date Ongoing

Outturn cost / Forecast outturn cost in Submission

$66.4m Water

$48.5m Wastewater

Actual / Forecast Delivery Date

Ongoing

Note: the outturn/projected costs quoted are based on 2015 “SIR Capex 2” and include the following lines:



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Water: "North West Growth Centre - Package 3", "North West Growth Centre Servicing Package 2", "North West Growth Centre Servicing Package 1".

Wastewater: "Growth - Minor Northwest Growth Centre Projects <$10m", "North West Growth Centre - Package 3", "North West Growth Centre - HAF", "Riverstone STP Amplification", "Riverstone WW Lead Ins (HAF 2)".

KEY DATA

Investment Driver Growth

Output Measure Current price path:

Provision of water related services to the second release precincts of the North West Growth Centre. Including a 6.2 km wastewater main in North Kellyville servicing 2,000 dwellings, and a 4.1 km wastewater main in Riverstone East servicing 1,500 dwellings

None defined for next price path.

Stage in Planning Process Package 3: Initiation

Package 1 & 2: Delivery/Completion

Procurement Process For Package 2 & 3A: D&C contract let by Sydney Water and managed by Australian Water Holdings under a long term agreement for project managing trunk infrastructure projects in the designated NWGC. Subsequent small packages of work for lead-ins have been awarded as D&C contracts on a selective tender basis.

For Riverstone Amplification, the procurement process has not been decided yet, but SWC are considering a delivery partner model, potentially bundling it with two other WWTP upgrades: St Mary’s and Quaker’s Hill.

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

30,302 57,984 70,227 47,658 27,233

Outturn/projection ($k)

14,073 62,554 28,491 9,809 31,264 73,810 53,637 513

Source: SIR Capex 2 2015 & 2011.

PROJECT DELIVERY PROCESS – OBSERVATIONS

There has been significant underspend compared with the 2011 projections. Spend in the current price path is $90.8m below what SWC asked for in 2011, noting that IPART’s Determination also assumed that some of the growth would be deferred. The underspend appears to be due to deferral of investment/development and savings resulting from the Strategy Reviews undertaken.



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Examples of current price path savings quoted by SWC include (GJ_68-01_ 141204_2012-16 performance - NWGC.pdf):

Change to cost estimation & scope refinement: c$59.6M.

Better (lower) wastewater flow projections and use of low infiltration sewers: c$6M.

Staging of water infrastructure: c$2.5M.

Deferral of Riverstone amplification: c$2.7M.

One of the main challenges facing SWC is that rates of development are inherently uncertain. At the previous review, projections were based on the MDP. The MDP has not been updated recently and is no longer considered up to date. SWC now bases its projections primarily on figures provided by the Department of Planning and Environment (DPE), which are confidential and unpublished.

SWC’s general approach is to carry out the detailed planning at an early stage but to defer the decision to start construction until demand is demonstrated and there is a low risk of delay. This approach is summarised in their Growth Servicing Plan as follows:

Some of SWC’s investment in NWGC was funded by the HAF. The process was that SWC put forward proposals having spoken with the council about where the HAF investment would be most useful, also taking into account developer demand. The investment funded by HAF was originally included in Package 3 (as defined in 2008). The chosen area was put forward as it was considered to be the part of Package 3 most likely to help to enable development.

NSW government assessed the proposals and selected NWGC HAF and Green Square. One of the criteria used was that housing had to be in the ground within 2 years. SWC’s submission for the next price path includes for a smaller HAF funded investment: “'Riverstone WW Lead Ins (HAF 2)” $8.8M.

PROGRAM

Package 1 had been considered completed. However, SWC has incurred more than $7million of costs (delivered by RMS) since 2011-12 on moving a Package 1 trunk water main to fit with the amended road layout. There has been significant underspend against the 2011 submission, particularly in wastewater, due to strategy refinement, deferral of development and delaying investment accordingly.

CONTRIBUTION TO OUTCOMES AND DRIVER



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The NWGC program is required to meet SWC’s obligations for servicing growth.

KEY DOCUMENTS REVIEWED

Section 8.4 Sydney Water Price Review Submission

NWGC BCs listed above

NWGC Drinking Water Strategy Review

NWGC WW Strategy Review

“2012-16 Performance – North West Growth Centre”

SIR Capex 2- September 2015

SIR Capex 2- 2011



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A.2. South West Growth Centre

PROJECT DETAILS

Project Name South West Growth Centre (SWGC)

Project Number Water: WGO017, WGO025, WGO027, WGO031

Wastewater: SGO027, SGO041, SGO043, SGO044, SGO052, SGO053, SGO054, SGO022, SGO056, SGO049, SGO050



This project is in response to, and in anticipation of, new development occurring in the South West Growth Centre (SWGC). The SWGC was established in 2005 by the NSW Government to plan Sydney's growth on its urban edge and better coordinate infrastructure.

The level and speed of development is uncertain, but NSW Government anticipates development in SWGC to accommodate 300,000 people in 110,000 new dwellings over the next 25-30 years (DOP-0064_Guide_to_Sydneys_GC_v13-web).

Sydney Water’s plans are based largely on DPE forecasts, the most recent of which for SWGC are from 2013. These were shown to us in a SWC presentation (P_07-10-15_1. DF Major Growth Areas Infrastructure Staging.pdf) but we understand that they are not in the public domain.

Development in SWGC is projected to lag behind NWGC. A skeleton water network exists but there is very little wastewater infrastructure.

SWC is envisaging the construction of three WWTPs to service SWGC. However, in the next price path no WWTP construction is expected, just detailed planning. Development has started in the south of the SWGC and is serviced by existing adjacent wastewater systems (West Camden and Liverpool). However, as development is scheduled to progress north the topography suggests that the best location (lowest area) for WWTP is in the north. SWC envisage that one of the three WWTPs will serve another adjacent growth area too. Some transfer from newly developing areas is understood to be on an interim basis until the permanent WWTP is constructed.

SWC carried out an options assessment in the 2008 Area Plan. The 2012 & 2014 Strategy Reviews just looked at options in the local area, not strategic wider area options. In 2016 SWC expect to set out their Strategic Approach when there is more information available about the development on the western side of the SWGC. Final options will also be determined in concertation with EPA.



$98.6m Water

$33.4m Wastewater




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$29.0m Water

$108.2m Wastewater

(2015 “SIR Capex 2”)


Ongoing

KEY DATA


Output Measure Current price path:

12.2 km of trunk water mains to service growth in the areas of Oran Park, Turner Road, Spring Farm and Elderslie.

Forecast to complete wastewater infrastructure to service growth in the South West Growth Centre precincts of East Leppington, Leppington North, Leppington and the adjoining area of Emerald Hills

None defined for next price path.

Stage in Planning Process Second Release Precincts: Detailed Planning & Delivery

First Release Precincts: Delivery/Completion

Procurement Process D&C contracts with the NFRP and subsequently the integrated Delivery Management team at SWC overseeing those contracts

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

34,567 21,109 24,623 51,629 73,756


35,795 13,406 28,784 59,168 49,036 21,976 17,845 25,615

Note: the outturn/projected costs quoted are based on 2015 “SIR Capex 2” and include the following lines:

Water: “Growth - Other Minor Southwest Growth Centre Projects <$10m”, “South West Growth Centre - First Release Precincts Spring Farm trunk mains (oran park and turner rd)”, “South West Growth Centre - First Release Precincts Turner Road Water”, “SWGC - Second Release Precincts Water Austral Leppington”

Wastewater: “Growth - Other Minor Southwest Growth Centre Projects <$10m”, “South West Growth Centre - Austral Precinct”, “South West Growth Centre - Leppington Wastwewater (ELLaNL)”, “South West Growth Centre - First Release Precincts Spring Farm”, “SWGC - First Release Oran Park Stage 2 – Wastewater”, “SWGC - Second Release Stage 2 - Leppington North, Austral”, “SWGC - Second Release Wastewater Stage 2 Leppington”, “SPS 614 & Rising Main Amplification”, “West Camden WWTP - Biosolids Upgrade and Amplification”, “Edmondson Park Wastewater Servicing”, “SPS 484 Narellan Augmentation”



181


Overall spending on SWGC in the current price path is projected to be $5.2M more than forecast in the 2011 Submission. This is made up of significant underspend ($69.6M) on water and overspend ($74.8M) on wastewater.

According to SWC’s document “2012-16 Performance – South West growth centre” (GJ_68-02_ 141204_2012-16 performance - SWGCC) the variances from the Determination are caused by:

Underspend of approximately : o $20.8M on SWGC/Spring Farm Trunk Water Mains (to Oran Park and Turner Rd) o $18.0M on SWGC - First Release Precincts (Turner Road reservoir, pump and mains) o $9.7M on SPS484 Narellan Upgd-W.Camden (2nd RM) o $9.0M on Edmondson Park wastewater amplification o $6.9M due to no spend on South West Growth Centre – Land Acquisition, compared to an

assumed spend of c$6.9M. o $4.6M on South West Growth Centre - Second Releases (stage 1) o $2.7M on SWGC – Second release precincts Austral wastewater o $0.5M on SPS 614 & Rising Main Amplification

Overspend of approximately: o $44.0M on 8,600 lots which weren’t foreseen in the 2011 submission in Second release

precincts Leppington, Leppington east, and Leppington north WW o $5.9M on West Camden bio-solids amplification o $4.3M on SWGC - First Release Precincts (Oran Park stage 2)

The source of the costs above is dated June 2014, so may be superseded, and were provided by SWC as “for guidance” only. They do not fully match the SIR Capex 2 spend and need to be treated with some caution as there may be overlaps between some of the projects quoted. They are also being compared with IPART Determination figures inferred by SWC, noting that IPART did not provide project level Determinations.

PROGRAM

For the water product area, the “'South West Growth Centre - First Release Precincts Spring Farm trunk mains (oran park and turner rd)” project is complete. The other three projects are ongoing/entering delivery phase.



182

For the wastewater product, a number of projects have completed or are projected to increase in 15-16, including:

• “West Camden WWTP - Biosolids Upgrade and Amplification” • “SPS 614 & Rising Main Amplification” • “Edmondson Park Wastewater Servicing” • “South West Growth Centre - First Release Precincts Spring Farm”



183

The following projects are due to commence in the next price path:

• “SWGC - Second Release Wastewater Stage 2 Leppington” • “SWGC - Second Release Stage 2 - Leppington North, Austral”

The other projects are ongoing.


The SWGC program is required to meet SWC’s obligations for servicing growth.


2012-16 Performance – South West growth centre

IPART Audit Presentation- Growth

DF_42-04_SWGC Second Release Precincts Water Strategy Final Report Aug 14


SIR Capex 2- 2011



184

A.3. Developer Operations PROJECT DETAILS

Project Name Developer Operations

Project Number WGO012

SGO021



Water and wastewater growth investments are carried out under three main models:

1. SWC provides and funds trunk mains and facility capacity. This is the general case except where (3) applies.

2. Developers are responsible for putting in place the reticulation network and must supply these assets free of charge to SWC. They must procure this using SWC standards, approved suppliers and protocols (e.g. tendering rules). SWC is responsible for funding the additional costs if mains greater than 100mm/150mm dia (water/wastewater) are required.

3. Commercial agreements are put in place, where investments are required in advance of SWC’s plans. In this case developers fund and develop infrastructure development. SWC then refund this cost on the basis of proportion of lots connected up to either a third (if investment simply earlier than envisaged by SWC) or half (if classified as ‘no cost to government’ area) at which point SWC refund the remaining cost as a single balloon payment.

Developer-delivered infrastructure is captured as a separate project line called “Developer Operation” in the SIR submission. This category also includes External Authorities (deemed to be Developers) works (including for road, rail and council authorities), which are not necessarily driven by growth, but may apply to projects which are required to deal with other-agency investments which affect SWC assets. The treatment of these assets is covered by a mixture of MoUs and formal Agreements.

SWC’s process for ensuring that developer-delivered infrastructure is reasonable and efficient includes the following:

Approved suppliers: Designers, constructors, testers, Water Service Coordinators, as listed on SWC’s web page for public access. Developers must pay for Water Service Coordinators who are contracted to SWC

Technical standards. These are published on SWC’s website.

Competitive procurement processes based on scale.

o <$100k single tender acceptable

o $100k to $500k minimum of 3 conforming tenders

o >$500k minimum of 5 conforming tenders

SWC treat concept work as opex. From ‘Application to Notice of requirement’ the cost is covered by the regulated SWC application fee. Costs are treated as capex from the point when a developer receives a SWC issued Notice of Requirement identifying the need for works.



185


Forecast cost in SWC 2011 submission for 2012-16 price path (before efficiencies and scope reductions)

$80.7m Water

$121.1m Wastewater


Outturn cost / Forecast outturn cost in Sept. 2015 SIR

$107.5m Water

$163.1m Wastewater



Ongoing

KEY DATA


Output Measure No output measure indicated.

Stage in Planning Process N/A

Procurement Process Delivered by developers using approved external service providers – eg designers, constructors

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

52,991 49,587 49,587 49,587 49,927


Sept. 2015 SIR

65,028 75,292 60,157 70,151 61,439 46,925 54,745 44,834

Note: the outturn/projected costs quoted are based on 2015 “SIR Capex 2”


The new development management process is summarised by SWC as follows:



186

There are four main “hold points” in the process of approving developer-led growth costs:

1. Funding Approval. Between the ‘define’ and ‘design’ phases. Internal funding allocation approval.

2. Procurement Approval: prior to delivery. Once the developer has undertaken tender process under SWS tender process, SWC checks the tender costs.

3. Variation Approvals, during the construction phase, all variations need to be approved by a Level 4 Manager.

4. Payment: a final review is undertaken, involving a comparison against the tender and agreed variations and a completion check.

SWC is not currently carrying out benchmarking. It is planning to move to a schedule of rates for projects costing less than $350k, which it is hoped will provide some cost and process time efficiencies. On average 89% of projects fall in the $350k and under category (SWC document ‘GJ_73-01_Developer Operations question 73’), so this would affect a significant proportion of developer operations spend.

PROGRAM

SWC has projected a generally reducing trend in expenditure as summarised below:



187

Source: SIR Capex 2

Expenditure projections have been built up for each of the main sub-components, as summarised below. The reducing trend appears to be driven by reducing developer operations spend (as opposed to commercial agreements which are projected to be relatively stable) and a reduction in external authority spend.

Source: SWC spreadsheet ‘GJ_69-01_ Private Sector delivery background Cashflow data’


This program is required to meet SWC’s obligations for servicing growth and also for cooperation with External Authorities.


P_07-10-15_3. DF IPART developer operations Final

SWC spreadsheet ‘GJ_69-01_ Private Sector delivery background Cashflow data’


SIR Capex 2- 2011



188

A.4. North Head Biosolids Amplification PROJECT DETAILS

Project Name North Head WWTP - Biosolids Amplification

Project Number SGO029 Status Current and Future Price Path


North Head WWTP is SWC’s second biggest WWTP. It served an estimated 1.1million people in 2011.

This project is in response to, and in anticipation of growth in the North Head catchment area, see below SWC’s projections:

Source: SWC presentation ‘P_07-10-15_2. DF North Head wastewater system’

The focus of the proposed project is to increase the digester capacity to cope with growth and to help with existing performance concerns.

There are currently three digesters on site and the project costings are based on an additional two units, adding approximately 65% to digester capacity. This compares to c30% growth projections by 2036.

The project is still at a very early stage of planning and the project initiation business case is still being prepared. The investment rationale is complex and is not purely driven by growth. SWC’s view is that one additional digester is required due to growth and one digester is required to overcome the reliability issues of the existing digesters.

As a consequence of the current plant’s poor performance, numerous odour complaints have been received about odour from the plant directly and because of trucking the biosolids out of the plant. The issue has been reported in the media. The biosolids are also of poor quality and cannot be directly applied to land so are composted rather than sold as fertiliser. This has apparently increased operating costs.

The disposal route for biosolids is to a private contractor who disposes of it direct to land and/or composting. It is anticipated that the next biosolids contract will involve biosolid-quality based pricing, meaning that higher quality biosolids may reduce disposal costs.




189


No specific line item in SIR Capex 2- 2011

Initial Delivery Date n/a


$35.1M (2015 “SIR Capex 2”)


2017-18

KEY DATA



Stage in Planning Process Needs approval business case prepared but not yet approved.

Procurement Process TBD

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


Sept. 2015 SIR

- - - 4,818 12,505 22,550 - -

Note: the outturn costs/projected quoted are based on 2015 “SIR Capex 2


Currently finalised needs approval business case. Not yet approved.

PROGRAM

The SIR envisages a three year program starting from 15-16 with completion by 17/18.




190

The project is required to meet SWC’s obligations for servicing growth.


SWC spreadsheet “GJ_97-01_North Head WWTP Biosolds Capacity Story Board_Oct 2015”

SWC presentation “P_07-10-15_2. DF North Head wastewater system”

SIR Capex 2 September 2015



191

A.5. Winmalee WWTP - nutrient upgrade PROJECT DETAILS

Project Name Winmalee WWTP - nutrient upgrade

Project Number SNM018 Status Spend commencing in 2015-16


Winmalee WWTP has provided significant environmental benefit as it has replaced eight older WWTPs discharging into a sensitive environment. Effluent discharges into Winmalee Lagoon (part of river).

The plant is performing well, well within licence limits and limited growth is expected so there is no current need to amplify the plant.

However, the EPA is concerned as the WWTP represents a large proportion of nutrients discharged to the river (e.g. 42% of total phosphorus load, 17% of total nitrogen load). The timelines are approximately as follows.

In 2010 the EPA issued Pollution Reduction Program (PRP) 500, requiring SWC to undertake a study. This study was completed in October 2011. It recommended no action because the effluent quality matched instream conditions. In subsequent correspondence SWC set out its option that that there is nonetheless a case for improvement to phosphorus and ammonia performance. SWC were looking to make these improvements anyway because (1) the charges associated with phosphorus discharges, meaning that process optimisation for phosphorus might be cost neutral and (2) concerns over level of ammonia toxicity.

A Winmalee Improvement Plan was prepared in 2013. The EPA’s response in 2014 suggested a focus on total nitrogen rather than ammonia and phosphorus. SWC responded in March & June 2014 with their opinion total nitrogen shouldn’t be the focus. In 2015, the EPA issued PRP 800, which requires SWC to design proposals for a number of solutions for different licence limits, indicating that the solution needs to be constructed by end 2020. The resulting EPL specifies that SWC must use Multi-Criteria Analysis (MCA) and economic analysis

The licence levels to be considered include (A) levels achievable through relatively low capex optimisation and dosing (opex) to improve phosphorus (B) low nutrient levels through denitrification filters and methanol dosing at the plant in a new reactor (C) extremely low nutrient levels, using high capex solutions such as ozone/BAC ($50M+).

In its IPART submission, SWC is assuming that the EPA will accept Design Level B. However, there is no indication from EPA that this is what they will accept.



Not included Initial Delivery Date n/a


$26.4M



2020



192

KEY DATA

Investment Driver New Mandatory Standard


Stage in Planning Process Options analysis

Procurement Process TBD

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


308 513 1,025 10,250 14,350



The project is at an early stage of definition, awaiting completion of the options analysis and agreement of scope with the EPA.

PROGRAM

The Options Analysis Report is due by 2 January 2017. Implementation is to be complete by 2020.


This PRP is a mandatory requirement of the Winmalee Sewerage Treatment System Environment Protection Licence.


SWC Presentation “P_09-10-15_1. GJ EPLs Winmalee”

Facilities Blueprint ‘GJ_64-01_Signed Blueprint – Winmalee’

SIR Capex 2



193

A.6. Wet Weather Overflow Abatement PROJECT DETAILS

Project Name Wet Weather Overflow Abatement Program

Project Number SNM016 Status Ongoing


This program is driven by Environment Protection Licence requirements (issued by the EPA) and corporate standards for overflows to property and drainage interruption. It relates to interventions on the network to abate wet weather overflows and to correct deterioration in performance (other than due to growth). To date, Environment Protection Licence requirements have been based on long term (2021) wet weather overflow frequency targets proposed by SWC in 1998.

In the current price path, SWC has put significant effort into preparing a proposal to change the EPA requirements to a risk-based focus, rather than based simply overflow frequency. This will increase program efficiency by allowing solutions other than overflow containment (specifically using large storages) to be used. SWC estimates that continuing with requirements to achieve the original frequency targets using large storages would have required >$5.5bn for the four coastal systems (Malabar, North Head, Bondi and Cronulla).

SWC’s proposal for the next Price Path is based on reducing the number of Category 1 (highest risk) discharges from 28 to 18 and the number of Category 2 discharges from 71 to 49 by 2021. The EPA has expressed support of the approach, but has not yet approved the proposed program.

The budget assumes that the proposal for a risk-based approach to regulation is approved by the EPA. It allows for overflows that cause aesthetic impacts to be screened/ treated and discharged i.e. rather than construction of large storage solutions as has previously been the case.



$203.5M Initial Delivery Date n/a


$88.7M this price path

$127.1M next price path



2021



194

KEY DATA

Investment Driver New Mandatory Standard

Output Measure Number of overflow points where risk of impact to the environment and community has been reduced.

Stage in Planning Process For next Price Path: at Strategic Planning stage.

Procurement Process Delivered by SewerFix Wet Weather Alliance and then through Delivery Management

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

80,337 89,075 17,021 17,021 - - - -


Sept. 2015 SIR

47,021 11,465 13,805 16,400 27,675 32,800 37,925 28,700



Spend in the current price path has been less than foreseen in SWC’s 2011 Submission because some of the spend was brought forward into 11/12, significant expenditure has been deferred awaiting clarification of regulatory requirements and alternative solutions have been sought in order to reduce costs. An example of an alternative solution applied was the implementation of an operational solution (increase in frequency of desilting of the Coogee Grit Pits) rather than capital works for Southern Beaches.

There are also a number of areas where expenditure was significantly in excess of expectations, for example $14.3M spent on the Hotspots 3 program which was not envisaged at the time of the 2011 price submission. The program was apparently developed by SWC in response to concerns from the EPA that SWC was not investing in improving the wet weather overflows in the period before improvement works were generated by the strategic framework for wet weather overflow management. There was also more expenditure in the “discharges to property” element of the program due to a significant increase in customer complaint brought on by the large number of rainfall induced spills to property within the price path.

Outturn spend against SWC’s interpretation of the 2012 Determination is summarised below:



195

Source: GJ_92-01_Wet weather overflow responses 92, 93, 94

PROGRAM

The spend is projected to be a fairly even spread in the next Price Path (rather than back-loaded awaiting investigations and EPA approvals). This is because SWC is quite close to being able to deliver a number of the larger screens already and because the Hot Spots III program is well developed. The spend is projected to continue for one year beyond the next Price Path, with total expenditure from 16/17 to 20/21 estimated to be $160.9M.

The biggest projects expected to continue into 20/21 are Upper Parramatta River and Prospect Creek. The “discharges to property” spend is projected to be less than in the current price path assuming that there are fewer significant rainfall events. SWC’s proposed program of spend by project is summarised below:



196

Source: GJ_92-01_Wet weather overflow responses 92, 93, 94


The program is required to meet SWC’s obligations under PRPs issued by the EPA and the associated 2021 long term targets.


SWC Presentation “P_09-10-15_2. GJ Wet weather overflow abatement”

Selection of SWC-EPA correspondence and minutes

SWC document “GJ_92-01_Wet weather overflow responses 92, 93, 94”

Hot Spots III Initiation Business Case “GJ_93-01_Wet Weather OAP Hot Spots lll”

SIR Capex 2



197

A.7. Rouse Hill Trunk Drainage PROJECT DETAILS

Project Name Rouse Hill Trunk Drainage Including projects in SIR Capex 2 called:

Rouse Hill Trunk Drainage Construction

Rouse Hill Trunk Drainage Land Acquisition

Elizabeth Macarthur Creek Trunk Drainage

Strangers Creek Trunk Drainage

Project Number DGO004, DGO005, DGO006, DGO007

Status Ongoing


Sydney Water is the Trunk Drainage Authority for the Rouse Hill Development Area (RHDA). Local Environment Plans for the Rouse Hill area identify SWC as the land acquisition authority for all land in the 1:100 floodplain to allow conveyance. Historically this meant that SWC had an obligation to purchase any land which was offered for sale, making it difficult to foresee and manage expenditure. SWC has therefore been acquiring land progressively since the early 1990s. Legislative changes such as the Just Terms Compensation Act and EP&A Act enabled SWC to decline to purchase land, except in the case of hardship on the part of the vendor.

SWC’s policy for acquisition of land in RHDA sets out a number of criteria for determining whether acquisition

of (non-hardship) land is appropriate:

SWC RHDA Land Acquisition Policy Criteria:

1. The land provides flood conveyance and/or floodplain storage based on up to date modelling of

flood behaviour within the catchment.

2. The land contains Sydney Water Trunk Drainage Infrastructure.

3. Sydney Water has plans to undertake Trunk Drainage Works on the land within the next 2 to 3

years.

4. Sydney Water is likely to need to undertake Trunk Drainage Works on the land to address

unacceptable flood risks to public areas or infrastructure.

5. Acquisition of the land would significantly improve access by Sydney Water to and along the Trunk

Drainage Land for maintenance purposes.

6. Sydney Water may include small areas of land ancillary to that required for flood storage or flood

conveyance in the area to be acquired if it assists in the orderly roll out of infrastructure and

development of lots.

7. The land is close to land already owned, or to be owned, by Sydney Water and its acquisition

would enable more effective and efficient debris management, weed control, fire risk reduction and

bush regeneration.

8. Any other matters that are relevant to achieving the outcomes that Sydney Water is obliged to

deliver as Trunk Drainage Authority.



198

In addition to land purchase, SWC has in the past undertaken civil works, mainly involving clearance, reprofiling and armouring of river banks and bed, converting unmanaged rural creeks into safe urban drainage.

Land has been purchased in the current price path in the Second Ponds area to allow SWC to own the land

where it carried out civil works some time ago, made up of basins and channel modifications. For Strangers

Creek land purchase is accompanying civil works and SWC has identified that the purchase meets criteria 1,

3, 4 & 5 above. The civil works undertaken by SWC this price path mainly involve clearance, reprofiling and

armouring of river banks and bed, converting unmanaged rural creeks into safe urban drainage.

The expenditure in the next price path in Strangers Creek is in support of the Strangers Creek Rehabilitation Trunk Drainage Strategy. This is a very detailed document which sets out the need (existing flood corridor is insufficient to contain 1:100 year flood) and proposed approach to improving the flood risk in the Strangers Creek area.

The level of definition and justification provided for Elizabeth Macarthur Creek Trunk Drainage appears to be significantly less advanced than for Strangers Creek.



n/a Initial Delivery Date n/a


$12.2m this price path

$33.m next price path


But see comments below.


2020

KEY DATA



Stage in Planning Process Mix of delivery and initiation.

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


6,232 1,354 883 3,752 11,460 13,428 6,601 1,538



199

Note: the outturn/projected costs quoted are based on 2015 “SIR Capex 2”. See comments below.


In the current price path, SWC has purchased 4.2ha of land in Strangers Creek, 6.2ha in Second Ponds (+4

ha of easement) and 3.6ha as part of its hardship obligation. It has also spent c$2.6M on capex.

SWC has provided an update spreadsheet (‘GJ_A112-03_Rouse Hill Stormwater Capex v3’) as its current

view of capital expenditure. There is significant variances between the September 2015 SIR Capex 2

projections and SWC’s update, as shown in the Figure below.

This variance appears to be a result of the way in which SWC was required to complete the September 2015

submission. In the September 2015 submission SWC was required to update the 14/15 figures but was not

permitted to amend the forecast expenditure in 15/16 or afterwards. The costs of some land purchase in

Second Ponds and Strangers Creek were delayed from 14-15 to 15-16, leading to an underspend of c$11.4M

in 14-15 relative to the June 15 submission. As the forecast for 15-16 and afterwards could not be updated

this then led to an $11.4M under-reporting of expected expenditure.



200

PROGRAM

The Strangers Creek strategy has been completed. The development of the Elizabeth Macarthur Creek strategy is ongoing. The proposed civil works are projected to be complete in 18-19 and SWC has stated that no trunk drainage land purchase is forecast beyond 2019-2015.


The NWGC program is required to meet SWC’s obligations for growth as the Trunk Drainage Authority for the Rouse Hill Development Area.


Strangers Creek Trunk Drainage Construction: Initiation Business Case (Jan 10)

Strangers Creek property acquisition: Acquisition Approval Business Case (July 13)

SWC Policy: Acquisition of Trunk Drainage Land within Rouse Hill Development Area, Stages 1 to 4

Strangers Creek Rehabilitation Trunk Drainage Strategy, March 2015

GJ_87-01_ BC Strangers Creek Trunk Drainage Reconstruction _GW2 - complete document

SWC Presentation “P_08-10-15_4. GJ Rouse Hill IPART presentation”

SWC spreadsheet: ‘GJ_A112-03_Rouse Hill Stormwater Capex v3’

SIR Capex 2

15 SWC email 2 November 2015



201

A.8. Stormwater Renewals PROJECT DETAILS

Project Name “Stormwater renewals” (2011 Submission project name) including 2015 SIR Capex 2 projects:

Stormwater - Astrolabe Park Renewal

Stormwater - Johnstons Creek Renewal

Cooks River Bank Renewal

Stormwater Minor Renewals

Powells Creek Naturalisation (included in SIR Capex 2, but originally missing from list in this table)

Project Number DEM003

DEM004

DEM010

DEM011



The Operating Licence requires SWC to “provide, operate, manage and maintain a Stormwater Drainage System”. Most of SWC’s stormwater assets were constructed before or during the Great Depression, see figure (source: SWC Presentation “P_08-10-15_3. GJ Stormwater Capex against determination”).

SWC has established a rolling 10 year program of asset inspection, which is currently about.75% complete. The inspections have been used to define a condition-based program of renewals for the next four years. The basis of the “stormwater minor renewals” program is that most of the known Condition Grade 5 assets (“imminent failure”) and some Condition Grade 4 assets (“0-2 years to end of service life”) will be renewed or rehabilitated in the period to 2019/20. No allowance has been made for further Condition Grade 5 & 4 assets emerging as a result of the inspection survey.

The program also includes completion of a number of significant defined projects as summarised under “Program” below. “Astrolabe Park Renewal” is the largest individual project. It is driven by Condition 5 assets assessed to be a high collapse risk. The project has a long history of options appraisals. The current preferred option was derived by qualitative options appraisal, informed by costings, in the Concept Design Report (October 2013).



202

From 2020/21 SWC anticipates renewal expenditure increasing significantly as shown below:

Source: SWC Presentation “P_08-10-15_3. GJ Stormwater Capex against determination”

The expenditure projections from 2020/21 onwards are based on condition assessment findings for specific assets (where available) and the assumption that assets are replaced when they are at the end of asset life (which ranges between 80 and 150 years depending on material and environmental factors).



$29.7m under “stormwater renewals”.



$38.1m


For “Stormwater - Astrolabe Park Renewal”, “Stormwater - Johnstons Creek Renewal”, “Cooks River Bank Renewal”, “Powells Creek Naturalisation” and “Stormwater Minor Renewals”


Ongoing

KEY DATA



203

Investment Driver Existing mandatory standards

Output Measure Output target for 2012-16: 3.5km of pipe/channel renewal and rehabilitation. SWC Pricing Submission projects output forecast of 3.6km.

SWC proposed Output 2017->2020 Target:

Renewal of 7km of open channels, culverts and pipes

Relining of 2km of pipes

Renewing of 5km of fencing

Undertake 160km of condition assessment (SW pricing submission did not include condition assessment as an output measure even though the $ in the submission has budgeted for this work)

Stage in Planning Process Mix of defined schemes under delivery and planning estimates

Procurement Process Astrolabe: under Design Development and Construct Contract

Green Square: competitive alliance

Cooks River: open tender General Conditions of Contract

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

9,220 10,790 5,674 3,971 2,837


4,333 7,370 9,190 17,233 18,809 15,182 24,420 12,710



Elements of the program are at varied stages of definition.

The largest individual project, Astrolabe Park Renewals has seen a significant cost increase, as summarised below:



204

Source: “P_08-10-15_6. GJ IPART_Astrolabe Park Oct 2015”

The Astrolabe site is contaminated, flood prone and stormwater from the site flows into a State Heritage listed waterway. SWC has identified the following reasons for the costs increases:

The feasibility cost estimate of $6.3M - high level planning estimate at the Initiation BC phase (for noting only) assuming like for like replacement with no allowance for managing (treating or removing) contaminated fill and groundwater.

Detailed field investigations and hydrologic / hydraulic analysis

Additional geotechnical investigations and contamination assessments which revealed the presence of hazardous materials, asbestos, lead and other contaminants

Better understanding of the scope, characteristics and impacts of contaminated material including contaminated land and groundwater

Design development

More accurate cost estimation incorporating potential risks A set of value engineering initiatives is in place to mitigate these costs pressures, including use of vertical sheet piling instead of open cut with trench batters, and maximising the treatment and reuse of excavated contaminated material on-site as clean fill.

PROGRAM

The contract for the largest project, Astrolabe Park renewal, has been awarded and construction is commencing in October 2015 and is due to finish in 2017/18.

Source: SIR Capex 2



205

The Cooks River Bank renewal project is expected to be completed in 2015/16, whilst Johnstons Creek Renewal is due to start preparation in 2016/17 and complete by 2019/20.

The increase in renewals expenditure projected for 2020/21 is understood to be driven by the change in methodology from a set of defined renewals/repairs between 2017->2020 to an asset life projection in 2020/21. It is expected that this will need to be scrutinised in a future review.


This program is required to meet SWC’s obligations for maintaining its stormwater system.


SWC Presentation “P_08-10-15_3. GJ Stormwater Capex against determination”

Astrolabe Park Stormwater Renewal Concept Design Report (October 2013)

SWC Document “GJ_82-01_ Explanation of the Stormwater Renewal Statistical model for IPART auditor 081015”


SIR Capex 2- 2011

A.9. Green Square Trunk Drainage PROJECT DETAILS

Project Name Green Square Trunk Drainage (HAF)

Project Number DGO003 Status Current and Future Price Path


Green Square is Australia’s largest urban renewal project, involving 30,000 dwellings, 60,000 residents and permanent workforce of 20,000. The site has a wide range of flood problems having previously been the site of Waterloo Dam and the confluence of several overland flow paths. Flooding in and around the Green Square Town Centre is predicted to exceed 2.2 metres in depth in the 1% AEP.

A preferred option had not been identified at the time of the 2011 Submission. So SWC applied for Housing Acceleration Funding (HAF) before implementation started. SWC applied for $36M and obtained c$10M.

The current preferred option was derived by qualitative options appraisal following the process described in the NSW Government’s Floodplain Development Manual and is summarised in the Green Square – West Kensington Floodplain Risk Management Study and Plan, and the Concept Design Report (May 2013).




206

Forecast cost in SWC 2011 submission for 2012-16 price path

n/a Initial Delivery Date n/a


Current price path: $25.7m

Next price path: $23.7M



2017/18

KEY DATA


Output Measure Increase network capacity, reduce high hazard flooding to low hazard

Stage in Planning Process Delivery

Procurement Process Competitive TOC and alliance model

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


Sept. 2015 SIR

- 1,529 9,526 14,658 14,965 8,713 - -



The project has seen a significant cost increase, as summarised below:



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Source: “P_08-10-15_5. GJ IPART_Green Square Oct 2015_Final”

SWC has identified the following reasons for the costs increases:

Land and legal costs

Building demolition

Waste disposal legislation

Escalation and insurance A set of value engineering initiatives is in place to mitigate these costs pressures, including use of micro tunnelling instead of cut and cover.

PROGRAM

Construction is underway and completion is expected in 2016/17.


This program is required to meet SWC’s obligations for servicing growth.


SWC Presentation “P_08-10-15_5. GJ IPART_Green Square Oct 2015_Final”

Green Square Trunk Drain Concept Design, May 2013


SIR Capex 2- 2011



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A.10. Bargo Sewerage PROJECT DETAILS

Project Name Bargo Sewerage Scheme

Project Number SGP008 Status Current and Future Price Path




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This project is part of the NSW Government Priority Sewerage Program (PSP), which aims to sewer urban villages in environmentally sensitive areas. Bargo is one of seven villages fast tracked in November 2011.

SWC’s Operating Licence requires it to have sewered Bargo by 30 June 2014.

An Options Report was prepared in December 2012 which looked at ten shortlisted options, nine of which involved treatment in Bargo and one a transfer to Picton WRP. The options appraisal was based on a mixture of NPV, feasibility and the requirement for multiple land holdings. The preferred strategy at this stage was a new WWTP at Bargo. A pressurised sewerage network was selected rather than gravity on the basis of cost ranking.

The strategy was reviewed in 2013 as costs were higher than originally envisaged. This resulted in a revised strategy involving transfer (with sewage from Buxton) to Picton WRP via Tahmoor, which provided the lowest life cycle cost and overall risk.

The combined Bargo & Buxton scheme involves upgrading of the pumping station at Tahmoor including a new chemical dosing unit (for odour and corrosion prevention), and capacity upgrade at Picton WRP, involving land purchase and irrigation capacity increase.

Source: Bargo Development of Preferred Wastewater Servicing Strategy






$51.2M (2015 “SIR Capex 2”)


2017-18

KEY DATA

Investment Driver Government program


Stage in Planning Process Post Delivery (Defects & Liability)



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Procurement Process PSP Alliance (except Picton WRP upgrade)

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


Sept. 2015 SIR

8,199 32,655 8,508 779 - 1,076 - -



Timescales were short for delivery of this scheme. The Board approved the PSP Program budget in September 2012 and the PSP Alliance TOCs for $34.3M for Bargo (plus $26.8M for Buxton) in February 2013.

Overall the combined Bargo & Buxton outturn cost is projected to come in at $15.3M below the approved $102.1M because of reduced land purchase and lower than anticipated contingency use.

PROGRAM

The sewerage network was available for customers to connect in June 2014. However, some works remain to be complete (not affecting ability to connect) in 2017/18.


The project is required to meet SWC’s obligations under its Operating Licence.


Bargo Wastewater Servicing Options Report, December 2012

Bargo Development of Preferred Wastewater Servicing Strategy (dated September 2015, but apparently completed in 2013).

SWC presentation “P_08-10-15_1. GJ Government Program - Priority Sewerage Program”




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A.11. Galston Sewerage PROJECT DETAILS

Project Name Galston Sewerage Scheme

Project Number SGP013 Status Current Price Path




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As with Bargo, this project is part of the NSW Government Priority Sewerage Program (PSP), which aims to sewer urban villages in environmentally sensitive areas. Galston is one of seven villages fast tracked in November 2011. SWC’s Operating Licence requires it to have sewered Galston, and the nearby village of Glenorie, by 30 June 2015.

The Options Report prepared in 2013 looked at a number of options, including separate WWTPs for Galston and Glenorie. The preferred option involves a pressure sewer system, sewage pumping stations, chemical dosing units and a combined transfer for Galston and Glenorie to an existing treatment works at West Hornsby, where no upgrade is required. This option had the lowest NPV.

Source: SWC presentation “P_08-10-15_1. GJ Government Program - Priority Sewerage Program”






$27.8M (2015 “SIR Capex 2”)


2015-16

KEY DATA

Investment Driver Government program


Stage in Planning Process Delivery



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Procurement Process Selective tender from the panel of Networks & Facilities Replacement Program (NFRP) constructors.

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

2011 Submission

n/a


Sept. 2015 SIR 85 2,587 19,955 5,125 - - - -



The Board approved the PSP Program budget in September 2012 and the Stage 3 (Delivery) business case for the combined Galston and Glenorie schemes in September 2013.

The Board approval was for $47.8M (P80), with an estimated P50 of $46.3M for the combined schemes. SWC is expecting to spend less than these allowances, projecting total (nominal) capex in SIR Capex 2 of $44.9m.

PROGRAM

Detailed planning for the schemes was completed in August 2014. Construction commenced in late October 2014. The assets are constructed but pumping stations are being operated with some manual intervention at the moment. They will be fully automated.

One multi-dwelling property in Galston is not yet connected to the network. There is a dispute with the owner of the building which already has on-site pumping. The owner wants SWC to take on its existing pumps. The issue has been referred for political decision-making.


The project is required to meet SWC’s obligations under its Operating Licence.


Galston and Glenorie Wastewater Servicing Options Report, September 2013

SWC presentation “P_08-10-15_1. GJ Government Program - Priority Sewerage Program”



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GJ_18-01_Business case - Galston and Glenorie Signed.pdf




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Appendix B. Project review summary sheets – Capex Renewals

B.1. Critical Water Main Renewals PROJECT DETAILS

Project Name Critical Water Main Renewals

Project Number WEM040 Status Current & Future Price Path


The program covers larger diameter mains (>=300mm) and other diameters which have a higher consequence of failure (e.g. sole source of supply, located under railways etc). Sydney Water has nominated 4,700 km of mains as being critical which equates to 22% of its mains. The length of critical mains in the previous price path was 4,800 km (22% of network). An “Avoid-fail’ maintenance strategy is adopted for these mains.

The approach to renewals is outlined in a Decision Framework with the scope to develop and deploy a decision logic to identify, prioritise and recommend critical water mains for renewal based on a quantified level of risk. Risk is determined using a quantitative model based on risk cost and risk profiling of assets. An economic model ranks all critical water mains by risk. An initial desktop risk estimate of probability is derived from CSIRO’s theoretical formula and a 1 to 4 likelihood of failure assigned with 4 being >20% probability of failure and 3 being 10-20% probability of failure. The consequence rating is a quantified assessment of the impact to both Sydney Water and the community. Risk ratings are assigned, with ‘Very High’ rating initially programmed for renewal in 2 years and a ‘High A’ rating programmed for renewal within 5 years if the probability of failure is confirmed through condition assessment. The remaining risk ratings are identified for investment if the risk cost is greater than the renewals cost. These mains are then prioritised for condition assessment to determine the extent of renewals required.

The median length of pipe scheduled for renewal is 220 metres which provides some economies of scale. Part of the efficiencies achieved in the 2012-16 regulatory period related to optimising the length of mains renewed.

A hydraulic modelling report is then prepared which assesses with the following scenarios:

Decommissioning

Downsizing

Size for size

Amplification

No asset solution

Change system configuration

Reliability issues

Mains renewals are then prioritised based on risk and packaged into projects. The lowest lifecycle option (incorporating customer and community impact in the assessment) is adopted.

The actual (2012-16) and proposed (2016-20) program and outputs for price path includes:

Project 2012-16 Outputs

$m (2011/12 nominal)

2016-20 Outputs

$m (2015/16 nominal)

Critical water main renewals 41 $128.3 38 $89.2



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Critical water main condition assessment

300 $10.3 300 $9.2

Valve inspections 20,000 $4.7 20,000 $4.4

Valve Renewal 102 $17.0 120 $16.2

System Operation Manuals 1,270 $1.2 1,270 $2.3

Framework contract $2.1 $2.1

Total $170.8 $123.4

Ref: Critical Water Mains Program Business Case 2015-20. Note: Figures are nominal only

The SIR has the total for the 2016-20 price path as being $116.03m ($2015/16 real) which is generally consistent with the nominal figure above.

Currently the 10 year average rate of mains breaks for critical mains is in the order of 6 breaks / 100 km / year in comparison with the network rate of around 30 breaks / 100 km / year. Sydney Water states that if the proposed 2016-20 renewals program reduced by 20% then the rate of main breaks will increase, potentially jeopardising performance against the regulatory framework.

The proposed total annual renewal rate (critical and reticulation) represents about 0.3% of the total length of water mains per annum compared to conventional industry standards of 1% per annum.

The proposed renewal program in 2016-20 has assumed a progressively more risk based challenge approach to critical water main renewal focusing on the assessment of individual projects to ensure that the program is efficiently targeted whilst maintaining the current level of service performance.

FINANCIALS AND PROGRAM (costs to 2015/16, $k real 2015/16)

Budget in 2012 Determination

$175,072 Initial Delivery Date Ongoing


$140,416 Actual / Forecast Delivery Date

Ongoing

KEY DATA


Output Measure Length of mains renewed

Stage in Planning Process Planning and delivery

Procurement Process Alliance

2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20



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Planned ($k)

2011-12 Submission

66,835 71,147 72,224 74,381

Allowed ($k)

2012 Determination

43,706 50,800 52,039 58,451

Planned ($k)

2012 Business Case

41,406 43,663 45,203 44,800

Actual ($k)

2015 Submission

52,076 28,753 26,540 29,008

Planned ($k)

2015 AIR/SIR

29,008 29,008 29,008 29,008


Program delivery is currently through a mix of the Integrated Project Team (IPT) (panel of contractors) (80%) and the Thiess Service Delivery team (20%). The IPT model is due to expire during the 2016-20 period with the currently under development Sydney Water wide procurement approach scheduled to take over.

Governance of the program will soon come under the proposed Enterprise Portfolio and Program Management governance model.

PROGRAM

The Program Business Case states that 41 km of critical water mains were renewed in the 2012-16 price path representing 80% performance against the original target of 51km. Sydney Water’s submission states that 49.2 km was renewed including 5.8 km of mains decommissioned.

There is a significant variation from the originally planned spend of $284.6m to the actual delivered spend of $136.4m. Service level performance has been relatively stable over the period.

Sydney Water’s explanations for the variation include:

System Integrated Planning – model analysis and challenge of need for assets given current system

Improved condition assessments leading to deferred and/or optimised renewals

Higher risk appetite resulting from confidence in failure data, mechanisms and effects

Better targeting of renewals and feedback reporting from project close out reports for condition assessment investigations leading to shorter lengths renewed or alternative renewal actions


Maintenance of service levels;

Minimise disruption and other impacts on customers and the community (e.g. traffic disruption)

Minimise lifecycle costs of assets




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DF_10-01_CWM Program BC 12-16.pdf

DF_10-02_Critical Watermain Renewals Program BC 2015-20.pdf

DF_22-01_CWM DF Signed.pdf

DF_22-03_Watermains 2015-2020 AMP Final Version signed.pdf

DF_53-01_ Build value service into decision_AMPEAK_Conference_2014_Paper_1833.pdf

DF_53-02_ News of IWA Awards - Sydney Water CWM Strategy 2012.pdf

DF_53-03_ WAMI - Sydney Waters critical water main strategy.pdf

DF_57-01_WMPB01-Failure-500mm Brunker Rd Yagoona-Sep2011.pdf

DF_57-02_WMPB01-Failure-500mm Ashby Ave Yagoona-Aug2011.pdf

DF_58-01_WMPB02- Failure-Hume Hwy Bankstown 20091026.pdf

DF_59-01_WMPB02-Chullora_M9 (PPS2812b_FinalReport).pdf

DF_59-02_WMPB02 Chullora Main (PPS2812B) Close Out Report Jan 2015.pdf

P_08-10-15_1. DF IPART AUDIT PRESENTATION CWM V10.pdf



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B.2. Reticulation Water Main Renewals PROJECT DETAILS

Project Name Reticulation Water Main Renewals

Project Number

WEM047 Status Current & Future Price Path


Sydney Water has around 16,300 km of reticulation water mains (77% of the network) which are renewed on the basis of failure history and compliance with a number of Operating Licence conditions consistent with Critical Water Mains. Main breaks have reduced from a peak of 50 breaks and leaks / 100 km / year in 2001/02 to around 28 breaks and leaks /100 km / year in 2014/15.

Sydney Water develops a high level estimate of likely renewals expenditure based on KANEW modelling. Intervention is initiated based on failure history with particular emphasis on customers experiencing multiple unplanned interruptions. The two key service level requirements are having less than 40,000 properties experience an unplanned interruption of greater than five hours and secondly, having less than 14,000 properties experiencing three or more repeat events greater than one hour.

Mains that trigger these performance levels are prioritised for further investigation, evaluation and prioritisation for renewal based on failure rate and criticality. Renewals are progressed if the NPV of maintenance costs exceeds the cost of renewal. This process is detailed in the reticulation water main decision framework.

Prior to renewal, a hydraulic modelling report is prepared which assesses the following scenarios:

Decommissioning Downsizing Size for size Amplification No asset solution Change system configuration Reliability issues

The proposed renewal rate for the 2016-20 price path is around 1.1% of the total length of mains. This is similar to the rate in the 2008-12 and 2012-16 price paths.

FINANCIALS AND PROGRAM (costs to 2015/16)


$230.8m (2012-16) Determination

$271.2m (2012-16) Business case



$150.7m (2012-16) Actual / Forecast Delivery Date

Ongoing

KEY DATA



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Investment Driver Renewals

Output Measure km of main

Stage in Planning Process Planning, design, delivery

Procurement Process Schedule of rates contractor panel

2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

66,959 68,208 67,981 68,083 271,230

Allowed ($k)

2012 Determination

63,373 59,795 55,042 52,606 230,817

Planned ($k)

2012 Business Case

55,460 30,438 34,543 39,300 159,741

Actual ($k)

2015 Submission

60,015 28,814 28,307 33,518 150,653

Planned ($k)

2015 AIR/SIR

33,518 33,518 33,518 33,518 134,070


During the current price path 195 km of mains were renewed against a planned renewal of 288 km. It was explained that the variance was due to improvements in economic assessment of individual projects, use of shutdown block assessment to identify mains for renewal, more accurate costing, acceptance of a higher risk appetite, streamlining business processes, changing delivery approach and the use of more trenchless technology.

Delivery of renewals in the 2016-20 period will be through a schedule of rates panel of contractors with a small proportion delivered through Sydney Water’s internal civil projects team. Delivery efficiencies are expected through streamlining business practices, packaging works, promoting trenchless technology and promoting competitive tendering.

PROGRAM

It is planned to renew 180 km of mains during the 2016-20 Determination period. The average unit rate for renewals is $725/m with an average renewal length of 220m and a total number of renewal jobs estimated at around 205 per year.



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The mains renewal program aims to maintain customer service levels while achieving the lowest lifecycle costs. The program also contributes to reducing system leakage to meeting Operating Licence targets.


DF_12-01_Reticulation water main renewal program BC 12-16.pdf

DF_12-02_Water Reticulation Renewals Program BC 2015-20.pdf

DF_22-02_Above Ground Pipeline DF Signed.pdf

DF_22-03_Watermains 2015-2020 AMP Final Version signed.pdf

DF_24-01_Retic DF Signed.pdf

DF_55-01_WSN5013 Taronga Zoo Contingency Plan.pdf

GJ_54-02_Water System Plan Criteria 2012 Final 2-10-12.pdf

P_08-10-15_2. DF IPART AUDIT PRESENTATION Retic V8.pdf



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B.3. Reservoir Reliability Program PROJECT DETAILS

Project Name Reservoir Reliability Program

Project Number



Sydney Water has 265 service reservoirs in its water supply network comprising 192 surface, 46 elevated and 27 in ground reservoirs (including 11 listed under ANCOLD). The majority of these reservoirs are constructed of steel. These reservoirs have an approximate replacement cost of $2.3 billion (with a written down value of half this).

Most of the reservoirs were roofed in the late 1960s / early 1970s to ensure the maintenance of drinking water quality in the network. A number of these roofs are now reaching the end of their remaining life (taken as 50 years).

A number of steel reservoirs still have bitumen linings, which are in poor condition, while some mechanical / electrical equipment including re-chlorination facilities require renewal.

Around 45 reservoirs (17% of total) have roofs in poor or very poor condition, with the latter representing 35 or around 13% of the total. This is a large increase from the previous period which had 1% of assets rated as very poor condition and 14% of civil assets are rated as being in a poor condition.

All reservoirs have now undergone a level 1 condition assessment (using divers doing visual inspections) with reservoirs scheduled for this inspection every 5 years. Where required, this is supplemented by more detailed level 2 inspections which involve structural engineers assessing the reservoir via small boats. Renewals are identified based on factors such as asset condition, business efficiency and poor performance. The assessment process includes an analysis of the current and future operating context, potential efficiency improvements. Sydney Water is looking at alternative designs and materials to reduce lifecycle costs. The selection of candidate renewal projects is based on NPV analysis.

Where renewals are undertaken work include re-lining of the reservoir and roof replacements as well as renewal of mechanical and electrical equipment including re-chlorination plants, instrumentation and valves.

The works undertaken and proposed in both price paths are shown below:

Renewal Number of

(2012-16 Price Path)

Number of

(2016-20 Price Path)

Planned Delivered Planned

Roof 15 12

33

Relining 25 8

Valves 21 ? 10

Re-chlorination 41 ? 18

Safety All facilities All facilities



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$54.2m (2012-16) – Bus Case

$55.5m (2012-16) - Determination




Ongoing

KEY DATA

Investment Driver Existing Mandatory Standards

Output Measure Number of reservoir roof replacement

Number of reservoirs re-lined

Stage in Planning Process Planning, design and delivery


2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

17,701 16,567 15,092 14,524 63,885

Allowed ($k)

2012 Determination

13,112 13,758 14,011 14,613 55,493

Planned ($k)

2012 Business Case

13,405 12,700 13,633 14,500 54,238

Actual ($k)

2015 Submission

5,787 4,923 20,546 24,293 55,548

Planned ($k)

2015 AIR/SIR

24,805 23,985 23,883 23,883 96,555




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Around 80% of the program has typically been delivered through the Integrated Project Team using panel contractors with the remaining roof renewals delivered through the internal Service Delivery team through a series of maintenance contracts, however this depends on the complexity, and value and design needs of each project.

The Integrated Project Team arrangement is scheduled to expire during the 2016-20 period with Sydney Water’s new corporate approach to procurement taking over from this time.

PROGRAM

The proposed expenditure over the 2016-20 price path ($96.7m) is almost double the planned and actual expenditure from the 2012-16 price path ($52-$56m) which in turn was just over double the expenditure over the 2008-12 price path. These increases are generally reflected in the age profile of the reservoir roofs.

The 2016-20 annual renewal expenditure equates to just over 1% of total current replacement cost.


The program’s benefits include reduced breakdowns, worker safety, increased asset lifespan and minimise water quality contamination.


DF_11-01_Reservoir R&R Improvement Program BC 2012-13 to 2015-16.pdf

DF_11-02_Reservoir Renewals and Reliability Program BC 2015-20.pdf

DF_23-01_Reservoir DF Signed.pdf

DF_52-01_ Norther Waters Project - Frenchs Forest Reservoir_FINAL.pdf

P_08-10-15_3. DF IPART AUDIT PRESENTATION RESERVOIR 20151006.pdf



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B.4. Water Pumping Station Renewals PROJECT DETAILS

Project Name Water Pumping Station Renewals

Project Number



Sydney Water owns 161 water pumping stations comprising 120 conventional pumping stations supplying reservoirs, 22 booster stations supplying areas that need additional water pressure, nine hydro pneumatic stations which are being replaced, and ten water recycling pump stations.

The program aims to maintain assets to meet the required condition, performance, efficiency standards. Benefits of the program include:

Maintains continuity of supply;

Reduced safety risk for workers;

Reduced lifecycle costs;

The Program Business Case and Asset Management Plan indicates the number of assets currently (as at 30 June 2014) rated as being in poor and very poor condition. This is summarised in the following table.

% of Total Assets

Asset Category Poor Condition Very Poor Condition

Civil 1.0% 0.4%

Electrical 3.2% 0.5%

Electronics 0.0% 0.0%

Mechanical 4.5% 0.0%

Renewal needs are identified through the Facilities Decision Framework including level 1 condition assessment and development of 5 year plans. This is then followed by the development of 1 year plans that identify assets for renewal based on condition, performance, business efficiency, safety risk and obsolescence using processes such as FMECA and HAZOP.

The assessment process considers options such as operational modifications, need for changes in capacity (increase/ decrease) etc.

Assets are programmed for renewal if the future cost of maintenance exceeds the cost of renewal and then prioritised based on risk. The approach to the risk assessment process is based on the likelihood of a consequence occurring, but no weightings are applied to any of the consequence categories.

The scope of the proposed 2016-20 investment is focussed on the renewal of high voltage electrical assets with additional investment required to replace hydro pneumatic booster style pumping stations which have reached the end of their service life.

The proposed average renewals expenditure as a percentage of MEERA replacement cost is just under 3.0% which is slightly lower than the figure of 3.2% from the 2012-16 price path.




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$44.5m (2012-16) Determination

$37.1m (2012-16) Business Case




Ongoing

KEY DATA


Output Measure Number of pumping station renewals

Stage in Planning Process Planning, design and delivery

Procurement Process External program manager

2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

14,751 12,482 8,511 7,354 43,098

Allowed ($k)

2012 Determination

13,112 11,642 10,008 9,742 44,503

Planned ($k)

2012 Business Case

9,189 9,132 9,328 9,500 37,148

Actual ($k)

2015 Submission

5,975 4,196 9,435 12,095 31,701

Planned ($k)

2015 AIR/SIR

15,170 16,913 13,223 12,608 57,913


Around 80% of the program has typically been delivered through the Integrated Project Team using panel contractors with the remaining renewals delivered through the internal Service Delivery team through a series of maintenance contracts, however this depends on the complexity, value and design needs of each project.



227

The Integrated Project Team arrangement is scheduled to expire during the 2016-20 period with Sydney Water’s new corporate approach to procurement taking over from this time.

PROGRAM

This is an ongoing program. A significant increase in renewals expenditure is proposed for the 2016-20 price path.

2012-16 Price Path 2016-20 Price Path

Planned (number of) Actual (number of) Planned (number of)

Major renewals 8 10

Electrical renewals 12 6

High voltage renewals 6 16

Booster pump station renewals 1 5


Sustainable investments that maintains existing levels of service, meets licence obligations, balanced by acceptable risk to safety, health and the environment.


DF_13-01_WPS Program BC 2012-13 to 2015-16_Final.pdf

DF_13-02_Water Pumping Station Renewals Program BC 2015-20.pdf

DF_52-02_ Booster WPS Final Report WP0242.pdf

DF_52-03_ WPS Final Report No 2 - WP0094 Milperra.pdf

DF_52-04_ HV Asset Condition Assessment Report - Networks.pdf

P_08-10-15_4. DF WPS IPART AUDIT 20151006.pdf



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B.5. Avoid Fail Sewer Rehabilitation Program PROJECT DETAILS

Project Name Avoid Fail Sewer Rehabilitation Program (+ Corrosion & Odour Strategy)

Project Number SEM055 Status Current and future price path

Related projects

SEM039, SEM040, SEM044, SEM047, SEM063, SBE002, SBE005


This program renews high risk sewers before they reach the end of their service life. Sewers have been classified as either “Avoid Fail” or “Run to Fail” based on the consequence of failure. The “Avoid Fail” strategy applies to high risk sewers which have an unacceptable consequence of failure.

Sydney Water has a network of 24 separate sewerage systems comprising over 24,850km of sewer mains. Of these, approximately 2,700km of sewers (including around 330 km of pressure mains) are classified as Avoid Fail. This accounts for around 11% of the network. Avoid fail sewer mains are typically greater than DN375, are located in sensitive areas (National Parks, next to critical infrastructure), and include Sydney Water’s largest sewer mains such as the South Western Suburbs Ocean Outfall Sewer (SWSOOS) and the Northern Suburbs Ocean Outfall Sewer (NSOOS).

The program also includes around 75,000 maintenance holes (with around 620 man holes greater than 15m deep) and associated access assets (including steps, ladders and platforms) and a focus on corrosion and odour control which has been identified as a major source of condition degradation for these sewer mains. Corrosion and odour control assets include around 12,500 vent stacks (to dissipate odours), 60 chemical dosing units (to prevent odour/corrosion) and 65 odour control units (to treat odours).

Avoid Fail sewer mains are routinely inspected to track their deterioration and to estimate their years to end of service life so that they can be rehabilitated before major structural works are required (that is, the end of service life). Typically, structural rehabilitation costs around four times more than non-structural rehabilitation (which includes relining or applying surface coatings).

A comparison of the condition assessment status from 2011 to 2014 is shown in the following table.

2011 Sept 2014

Risk Rating

Remaining Life (yrs)

Length of Mains (km)

Length of Mains (km)

Very high 0 28.1 26.0

High 0-2 18.1 15.0

Medium 1-7 41.2 12.0

Low > 7 ? 1,816.0

Sub total 1,869.0 69.2%

TOTAL Avoid Fail mains 2,700.0

Options being implemented include:



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Installation of pre-treatment facilities by major trade waste generators – expected to be complete for major generators by end of 2012-16 period

Use of a sacrificial alkali gel onto the sewer walls. This is anticipated to provide an extension of asset service life by at least 2 years.

Deferral of scheduled renewals due to better condition assessment information


Budget in 2012 Determination (Planned)

$266.3m (2012-16) Initial Delivery Date Ongoing


$254.1m (2012–16) Actual / Forecast Delivery Date

Ongoing

KEY DATA


Output Measure km of sewers renewed

Stage in Planning Process Ongoing

Procurement Process Refer below

2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

66,565 66,565 66,565 66,565 266,259

Allowed ($k)

2012 Determination

63,373 59,795 55,042 52,606 230,817

Planned ($k)

2012 Business Case

57,622 52,900 48,585 48,600 207,707

Actual ($k)

2015 Submission

61,716 48,279 72,592 71,545 254,131

Planned ($k)

2015 AIR/SIR

79,643 68,316 57,605 64,268 269,831




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Renewals of non-traversable sewers are undertaken using a pre-qualified panel of specialist contractors under schedule of rates arrangements. Pre-qualified contractor panel for approved relining techniques, bundles of renewals and reactive works are issued as scheduled. CCTV inspections are delivered using specialist contractors.

Renewals of the larger diameter / traversable sewers is undertaken through relining contracts, rehabilitation delivery through bundled D&C contracts, specialist investigations via an engineering services panel, and open or selective tenders evaluated on price, experience and capability.

PROGRAM

In the 2012-16 price path Sydney Water were programmed to renew 64km of critical sewers at a planned cost of $266m and will actually renew 54.8 km at a cost of $181m (excludes corrosion and odour control costs). Sydney Water stated that this was because of no condition based structural collapses on gravity sewers, few rising main failures, deferral of $40m on the SWSOOS through the spraying of a sacrificial alkali gel onto the sewer walls, and $20m in pressure main renewal deferrals resulting from the introduction of a ROMA review process which challenged renewal recommendations and included the reliability, operations, and maintenance groups.

The scope of works proposed for 2016-20 includes the following at a cost of $269m:

Condition assessment of 800 km (CCTV) plus 260 km (traverse) of gravity sewers and 40km of pressure mains

Renewal of 34 km of gravity sewers and 4 km of pressure mains

Refurbishment of 80 deep man holes

Renewal of 6.4km of NSOOS tunnels

Construct 17 new corrosion / odour units

Major renewal of 43 corrosion / odour units


Sustainable investment that achieves desired levels of service that are valued by our customers, meet licence obligations, and balances investment by acceptable risk to safety, health and the environment.


DF_15-01_AF Prog BC 12-13 to 15-16_signoff page_with signatures.pdf

DF_15-02_AF Prog BC 12-13 to 15-16 Main body.pdf

DF_15-03_Approved AF Prog Variation BC 1213 to 1516.pdf

DF_15-04_Critical Sewer Program BC 2015-20.pdf

DF_27-01_AF DF Signed.pdf

DF_60-01_Corrosion protection using Sulfalock HiGelTM - Ozwater 2014.pdf

DF_61-01_NSOOS Sec 8 Amp Traverse Report 2011.pdf

DF_61-02_ROMA 004 NSOOS Sec 8 AMP.pdf

P_08-10-15_1. DF Avoid Fail Sewer.pdf



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B.6. Dry Weather Overflow Reduction Program PROJECT DETAILS

Project Name Dry Weather Overflow Reduction Program

Project Number SEM042 Status Current & Future Price Path


This program addresses renewal of “ to Fail” sewers which accounts for around 90% of the sewerage network. The strategy aims to:

Minimise the number of customers experiencing repeat sewer blockages;

Minimise overflows to waterways; and

Renew sewers where breakdown maintenance is no longer cost-effective (3 or more blockages in 5 years).

The process involves:

Identifying sewers which meet certain criteria (blockages (3 in 5years), flooding of homes, overflows to watercourses etc);

Undertaking investigation and condition assessment;

Determining appropriate action using the lifecycle costing and prioritisation tool. Options range from breakdown maintenance, root cutting, dig and repair or re-lining;

Prioritising and packaging projects; and

Implementation

The strategies adopted to individual sewers are based on service and structural grades and these strategies range from breakdown maintenance, root cutting, dig and repair through to re-lining.

Other options being progressed by Sydney Water includes education regarding tree planting and the voluntary private sewer blockage reduction program (around 30% of blockages are from private sewers)

The current rolling 5-year choke frequency is around 55 chokes per 100 km down from around 72 chokes per 100 km prior to 2012 (the operating licence limit is 81 chokes per 100 km.)

The program has been very effective in meeting Operating Licence targets as shown in the Table below. Significant reductions in the number of properties affected, repeat chokes and overflows to waterways have occurred since 2012.

Criteria Target Performance

Choke frequency – 5 yr ave 81 chokes per 100 km 55 (2009-2014 period ave)

Properties affected by overflows 14,000 properties 7,412 (2013/14)

Properties affected by repeat overflows

175 properties 80 (projected 2014/15)

Around 20% of CCTV inspections are capitalised.




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Budget in 2012 Determination (Planned)

$75.5m Initial Delivery Date Ongoing


$51.1m Actual / Forecast Delivery Date

Ongoing

KEY DATA


Output Measure Km of sewers renewed sewers subject to dry weather overflows

Stage in Planning Process Ongoing monitoring, planning and implementation

Procurement Process External contractors

2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

18,865 18,865 18,865 18,865 75,460

Allowed ($k)

2012 Determination

18,356 17,251 15,812 14,905 66,324

Planned ($k)

2012 Business Case

15,351 12,595 11,583 11,500 51,029

Actual ($k)

2015 Submission

15,118 10,976 13,231 11,788 51,113

Planned ($k)

2015 AIR/SIR

11,788 11,788 11,788 11,788 47,150


The service is procured through open tender with two contractors currently on a panel for five years. Payment is based on a schedule of rates. The market is reported to be mature with adequate capabilities. The Integrated Project Team delivery model is due to be replaced with procurement options to be reviewed at this time.

PROGRAM

The output specified in the 2012-16 price path was 137 km of sewers rehabilitated. The actual length rehabilitated was 106 km. The quantity of renewals required based on condition and risk assessment was less than originally planned and patch lining was used more extensively.



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The program is ongoing and it is likely to reduce as much of the backlog high risk sewers is complete. It is difficult to predict the level of sewer blockages as it can be climate dependent and random (60% of chokes are first time chokes).


The program has contributed to the improvement of service levels and compliance with the Operating Licence.


DF_14-01_Dry Weather BC- 2012-2015_Final_BC_with signatures.pdf

DF_14-02_DWOA Business Case Variation 1 Amendment signed-off.pdf

DF_14-03_Sewer Reticulation Renewals Program BC 2015-20.pdf

DF_26-01_Dry Weather Overflow DF Signed.pdf

P_08-10-15_2. DF Dry Weather Overflow Abatement Program.pdf



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B.7. Energy Management PROJECT DETAILS

Project Name Energy Management

Project Number

SBE003 & WBE004 (historical) Status Current & Future Price Path


This program assesses the business case for investment in energy efficiency and renewable energy generation assets to reduce Sydney Water’s energy spend. The program covers a number of strategic themes including:

1. Electricity purchasing – managing rates, sites and usage

2. Lifecycle costs – assessing the balance between capital and operational costs

3. Renewable energy – using biogas, hydro and solar to supply electricity at a lower cost

4. Resource recovery – to provide sustainable reuse alternatives and new revenue streams

5. Energy efficiency – reducing energy use and improving technology

6. Reporting & compliance – reporting operational statistics and ensuring compliance with targets

The aim of the program is to cost effectively maintain non-renewable energy purchases to pre-1998 levels. NPV analyses are undertaken for all projects with payback periods assessed on a whole of life basis.

The current energy management assets include:

Hydro – pressure reduction and gravity flow generating energy – 5.9MW installed capacity

Biogas – generating energy from wastewater treatment process at eight WWTPs – 9.9MW capacity

Solar – PV installations on buildings becoming more cost effective with technological improvements – 90kW installed capacity



$13.7m (2012-16) Initial Delivery Date Ongoing



Ongoing

KEY DATA

Investment Driver Business Efficiency

Output Measure Energy savings

Stage in Planning Process Delivery phase



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2015/16 base 12/13 13/14 14/15 15/16 Total 16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

4,760.2 6,088.7 1,771.3 1,771.3 14,391

Allowed ($k)

2012 Determination

4,698.4 5,820.8 1,601.2 1,558.7 13,679

Planned ($k)

2012 Business Case

- 1,050 1,128 1,100 3,277

Actual ($k)

2015 Submission

917 5,730 36 1,128 7,810

Planned ($k)

2015 AIR/SIR

3,690 6,253 1,128 1,128 12,198


The program is delivered on a project by project basis. Contractors are engaged for installation and commissioning of assets with project management undertaken in house. Engineering support (design) is provided under the Renewable Energy Generation (REG) O&M contract.

PROGRAM

The program proposed for 2012-16 included small scale renewables at Shellharbour and West Hornsby

and a second cogeneration unit at North Head. Business case reviews identified that the small scale

projects were not financially viable and would be deferred while the North Head project would be

reassessed after tendering and a new project at Cronulla could be brought online. The 2012-16 program

had a budget of $6.3 million with a cost of $5.9 million and an annual projected savings of $750k resulting

in an eight year return period.

The program proposed for the 2016-20 period is focussed around the Shellharbour WWTP previously

deferred, Malabar WWTP biogas generation unit and upgrades to existing capacity.


The program contributes to maintaining Sydney Water’s non-renewable energy use at pre-1998 levels, reducing operational costs, increasing energy efficiency, and meeting compliance targets.



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DF_18-01_Renewable Energy Generation business case GW3 (Capital).pdf

DF_18-02_Renewable Energy Generation memo with tender details signatures (Capital).pdf

DF_30-01_EEMP Business Case and Decision Framework (Capital).pdf

DF_30-02_Energy Management Decision Framework (Capital).pdf

P_08-10-15_3. DF Energy Capex Presentation.pdf



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B.8. Wastewater Treatment Plant Renewals Program PROJECT DETAILS

Project Name Wastewater Treatment Plant Renewals Program

Project Number

SEM073 Status Current & Future Price Path


Sydney Water owns 13 wastewater treatment plants (WWTP), 12 water recycling plants (WRP) and 3 storm flow plants with a current replacement cost (MEERA) of $4.26 billion.

The renewals program is designed to assist in meeting all Operating Licence requirements, maintaining performance against Environment Protection Licences and creating positive impacts on community aesthetics by improving waterways and beaches.

Service performance measures include reducing non-compliant discharges, breakdown work orders less than 4%, lost time injuries performance trend improvement, and maintaining satisfactory asset condition profiles.

Renewal needs are initially identified through five year plans and level 1 condition assessment. This is then followed by the development of one year plans that identifies assets for renewal based on condition, performance, business efficiency, safety risk and obsolescence using processes such as FMECA and HAZOP. Assets are programmed for renewal if the future cost of maintenance exceeds the cost of renewal.

Facility Decision Frameworks and Facility Blueprints are used to guide selection and prioritisation of works with active challenge processes such as the ROMA review used. Clear NPV positive projects are action to proceed whilst lower scoring projects are deferred for more regular monitoring.

Sydney Water proposed expenditure of around $129.3m in the 2012-2016 price path however actual expenditure is expected to exceed $188m. The primary reason for the significant variation include the identification of high priority work from detailed condition assessments and safety audits.

The key outputs for 2012-16 were:

$30m works at Cronulla WWTP including upgrading screens, digester, odour and corrosion renewals, sludge dewatering, centrifuge poly dosing, and a HV upgrade

$17m high voltage upgrades including 12 projects across 11 WWTPs to remove obsolete equipment and renew poor condition assets. Three projects will delay into the 2016-20 period however of these; Quakers Hill has been incorporated into planned works and North Richmond will be deferred until the plant is amplified due to growth.

$9m Data Integrity Project

$8m Facility Blueprints



$129.3m (2012-16) Submission

$177.3m (2012-16)

Program Business Case




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Ongoing

KEY DATA


Output Measures Completion of projects as outlined above

Stage in Planning Process Ongoing delivery and preparation of forward program

Procurement Process Integrated Project Team delivery

2015/16 base

12/13 13/14 14/15 15/16 Total

16/17 17/18 18/19 19/20 Total

Planned ($k)

2011-12 Submission

32,325 32,325 32,325 32,325 129,302

Allowed ($k)

2012 Determination

31,905 30,162 28,021 26,790 116,879

Planned ($k)

2012 Business Case

44,865 44,293 44,075 44,100 177,333

Actual ($k)

2015 Submission

53,368 27,932 50,616 56,375 188,290

Planned ($k)

2015 AIR/SIR

69,700 69,700 73,185 77,183 289,768


Currently projects are allocated by the Service Delivery Team to a mix of partners depending on the complexity of the project and the level of design required. Low value projects are bundled for delivery by the current M&E maintenance partner. Slightly larger civil projects including urgent reactive work is carried out by the internal Civil Delivery team.

Larger projects are managed by the Integrated Project Team and are delivered by Panel contractors – this represents around 80% of the projects undertaken.

Major projects are managed by the Major Projects team through open tender or alliance based delivery.

The Integrated Project Team is due to expire in the 2016-20 period and a procurement review will be undertaken to bring this program into the standard procurement model.



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PROGRAM

This is an ongoing program however expenditure has significantly increased in each of the three regulatory periods as outlined below:

2008-12 period = $59.3m

2012-16 period = $188.3m (217% increase)

2016-20 period = $289.8m (54% increase)


The renewals program is designed to assist in meeting all Operating Licence requirements, maintaining performance against Environment Protection Licences and creating positive impacts on community aesthetics by improving waterways and beaches.


DF_17-01_WWTP Prog BC 2012_2016.pdf

DF_17-02_Wastewater Treatment Plant Renewals Program BC 2015-20.pdf

DF_62-01_BI auto generated work orders.pdf

DF_62-02_Networks BI auto generated workorders resolution flowchart.pdf

DF_62-03_BI autogenarted WOs.xlsx

GJ_13-01_131107 North_Head_WWTP_Digester Audit_Report Rev 1 Final.pdf

GJ_13-02_26642_124 (160) Coastal Plants Solid Stream Options Assessment_Final.pdf

P_07-10-15_2. DF North Head wastewater system.pdf

P_09-10-15_1. DF WWTP Renewals Presentation for IPART.pdf



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B.9. Malabar WWTP Improvement Program PROJECT DETAILS

Project Name Malabar WWTP Improvement Program

Project Number SEM062 Status Current Price Path


The Malabar WWTP is Sydney Water’s largest treatment plant and having been constructed in 1975, many items are reaching the end of their service life. A Process and Reliability Renewals Improvement Program is required to increase reliability, improve performance and identify any configuration changes.

The project has undergone a number of financial gateway approvals:

Pre 2009 – Initial planning estimates - $200m

2010 – Initiation Business Case - $160m

2011 – Pricing Submission $49.1m

2012 – Capital Investment Plan - $45m

2013 – Delivery Business Case - $115m

2014 – Contract Approval (P80 estimate) - $106m



$49.1m Initial Delivery Date


$106m (forecast) Actual / Forecast Delivery Date

KEY DATA


Output Measure Compliance

Stage in Planning Process Being Completed

Procurement Process Competitive Alliance Contract delivery

2015/16 base

12/13 13/14 14/15 15/16 Sub

Total 16/17 17/18 18/19 19/20

Sub Total

Total

Planned ($m)

2010 Initiation Business Case

30.9 82.0 42.5 0.0 168.1 - 168.1



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Planned ($m)

2012 Pricing Submission

54.4 - 54.4

Planned ($m)

2013 Delivery Business Case

2.4 13.3 46.9 43.9 106.6 7.6 7.6 114.1

Actual ($m)

2015 Submission

3.9 15.1 42.8 33.7 95.5 11.1 1.3 0.6 13.0 108.5

Planned ($m)

2015 AIR/SIR

0.9 5.1 42.1 38.0 86.1 10.9 1.2 0.6 12.7 98.8


The preferred procurement strategy is to deliver the project under a single delivery contract using a Competitive Contract to be advertised as an Open Tender. A collaborative alliance contract was determined to provide the best strategy to maintain plant operations during the work, manage plant interfaces and the risks with working on a brownfield site.

PROGRAM

This project is part of a program of works, the WWTP Renewals Program however it has been separately identified as a single project.


The objectives of the project are to:

• improve operating and working conditions at the plant, by providing appropriate reliability, availability and capability of equipment and plant processes;

• provide effective screenings and grit collection systems that are able to cater for all wet weather flows, and allow operating licence conditions to be met;

• produce a more stable biosolids product to ensure that existing beneficial reuse markets are maintained, and ensure potential to develop new markets;

• reduce the odour potential of the biosolids product and odour complaints from the surrounding community and at beneficial reuse farm sites; and



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• provide full automation and operational control of the plant to improve efficiency, safety and enable optimisation of processes.


P_09-10-15_2. DF Malabar PARR.pdf

DF_48-03_ Malabar WWTP Odour Reduction Project PIR.pdf

DF_16-13_Malabar WWTP Facility Plan Rev.0a Aug 2012.pdf

DF_16-12_Malabar PARR_approval of TOC and procurement_Board paper signed_11 March 2014.pdf

DF_16-11_Malabar PARR_approval of TOC and procurement_Board paper and Minutes_11 March 2014.pdf

DF_16-10_Malabar Options Report Rev.0_July2012.pdf

DF_16-09_Malabar Concept Report Rev.0a_July2012.pdf

DF_16-08_Cost Analysis 2010 Business Case.pdf

DF_16-07_20140210 Malabar PARR TOC Evaluation Report - Final.pdf

DF_16-06_20120509 24734 Malabar PARR Value Management Report - Final.pdf

DF_16-05_20120509 24665 SWC - Malabar PARR RBCE -Final Report.pdf

DF_16-04_24653 20120509 - Malabar PARR - Procurement Workshop Report - Final.pdf

DF_16-03_Malabar PARR Project Board Approval Extract_Feb2013.pdf

DF_16-02_100913 Malabar STP Improvement project BC approval.pdf

DF_16-01_MAL-01 MalabarWWTP PARR Business Case v8 (signed) - Jan2013.pdf



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B.10. Quakers Hill WWTP Improvement Program PROJECT DETAILS

Project Name Quakers Hill WWTP Improvement Program

Project Number SEM068 Status Current Price Path

Similar Projects St Marys WRP WWTP (renewal / upgrade)

Riverstone WWTP (new)


Biological units at Quakers Hill are at risk of structural failure and need urgent replacement. Lagoon liners have passed their useful service life and lagoon embankments have poor structural integrity.

Biosolids processing assets at St Marys need upgrading to avoid biosolids and effluent compliance breaches. Aerobic digestors are at capacity resulting in excess biosolids in the secondary treatment process leading to additional capacity issues.

Proposed works at St Marys and Quakers Hill were considered as part of a regional treatment strategy with the preferred strategy to transfer Quakers Hill biosolids processing to St Marys and upgrade Quakers Hill liquid stream treatment processes


Budget in 2015 Needs Assessment BC

$187.9m Initial Delivery Date

June 2021



June 2021

KEY DATA


Output Measure Compliance

Stage in Planning Process Commencing Options Assessment

Procurement Process Integrated Project Team with EES Panel

2015/16 base

12/13 13/14 14/15 15/16 Sub

Total 16/17 17/18 18/19 19/20

Sub Total

Total

Planned ($m)

1.8 1.8 3.0 40.3 84.6 58.1 186.0 187.9



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2015 Needs Assessment

Business Case

Planned ($m)

2015 AIR/SIR

1.0 1.0 6.2 20.5 71.8 74.8 173.2 174.3


The preferred procurement approach is to use the Integrated Project Team approach with internal Engineering and Environmental Services (EES) and the EES Panel with supporting specialists as required.

The Integrated Project Team model is due to expire in the 2016-20 period and it is expected that the procurement approach will be finalised at the end of Phase 2 in October 2017.

PROGRAM

This project is part of a program of works, the WWTP Renewals Program however it has been separately identified as a regional project with the St Marys and Riverstone WWTP projects.


This project, along with the St Marys and Riverstone WWTP works respond to multiple drivers including existing mandatory standards and growth.


DF_33-01_08_24 - QH STM PARR _ NABC_23July2015.pdf

DF_51-06_ Quakers Hill WRP - Condition Assessment April 2014.pdf

DF_51-07_ Quakers Hill WRP Strategic Options Study_14Aug2014.pdf

GJ_14-05_Riverstone Lead-ins _RBCE Report r1_Aug 14 HAF2.pdf

GJ_14-06_Riverstone Options report-WordDoc final HAF2.pdf

GJ_14-07_Riverstone Options report-WordDoc signature page HAF2.pdf

GJ_14-08_Riverstone Amplification Memo 28 Aug 2014 - Final Approved.pdf

GJ_15-01_Riverstone WWTP Stage 1 Amplification -Delivery Business Case (18 September 2015)_Final Draft.pdf

GJ_15-02_Riverstone Stage 1 amplification_IABC_with signatures 21 April 13.pdf

GJ_15-03_Riverstone Stage 1 Upgrade - Pre-Planning Study Report Rev 3.pdf

GJ_15-04_Riverstone Value Engineering Report Rev060715.pdf

P_09-10-15_3. DF Quakers Hill.pdf



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Appendix C. Project review summary sheets – Other

C.1. New Billing System PROJECT DETAILS

Project Name Referred to variously as T2020, Customer Information System, ACCESS Replacement Program

Project Number 20027018, 20027944, 20030343, 20030344

Associated Project(s): 20027010, 20028282



ACCESS is the business critical mainframe computer system sitting behind Sydney Water’s meter-to-cash value chain managing approximately $2bn in revenue from the company’s 1.6 million retail customer base annually. The system manages customer and property data and enables billing and payment functions. It also supports meter reading, trade waste charges and a number of other customer service processes.

In 2002, Sydney Water terminated its project for a combined billing and contact management system when the supplier failed to deliver on project commitments. In 2003, the Sydney Water Board became concerned about the sustainability of the billing system, ACCESS, and commissioned a review by Accenture which was then updated in 2005. Accenture supported Sydney Water’s decision to build functionality alongside ACCESS rather than within ACCESS for customer management and to later replace ACCESS with a new billing system.

Accenture put forward other options that could be considered, ie CRM standalone or CRM integrated into billing though it did not make a clear statement of preference for which approach would be more suitable. In Sydney Water’s own words “…Ultimately the organisation's appetite for a big bang CRM and billing replacement simultaneously could not be justified in light of previous failed attempts at doing so. A clear finding from the Auditor General's report on CIBS was to incrementally implement a replacement program in smaller and more manageable chunks”.

The billing system did not have to be replaced immediately for technical reasons:

Accenture’s 2003 report highlighted up to 10 years additional useful life for ACCESS

Accenture’s 2005 report again supported the strategy of progressively migrating off the mainframe over the next 5 to 10 years

the Sustainability Assessments for ACCESS in 2009 indicated that Sydney Water faces unacceptable operational risk by 2019 if no action is taken



Initial Delivery Date N/A



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2018 for billing system, 2020 for full reporting capability

KEY DATA

Investment Driver Existing Mandatory Standards (IT Renewals)

Output Measure N/A

Stage in Planning Process Different work streams are at different stages, some are in planning, some in execution and some completed

Procurement Process Multiple packages and methods of procurement

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k) 4881 9521 3,7141 13,1361 40,0003 43,6003 28,7003 10,8003

Actual ($k) 1,373 3,283 7,140 23,0622

1 2011/12 base

2 Outstanding query with SWC as advised forecast has changed

3 Source: CAPEX Efficiency Review v3


Sydney Water’s submission is not explicit in setting out that its T2020 proposed billing system is inextricably linked with its wider ERP SAP solution as it has selected SAP I-SU to replace ACCESS. While the projects are managed separately and have standalone business cases, the decision to pursue the latter impacts directly on both business cases.

This is an approximately 8 year program (originally 5 years) that will establish the foundation for new business processes and replacing the ACCESS billing system and satellite suite of applications with a new Customer Information System (CIS). Sydney Water’s preferred delivery option is a program of individual projects with the centerpiece being the replacement of ACCESS and its satellites with a SAP billing solution.

Delivery consists of the following projects:

Risk mitigation measures

Implementing a new Meter Reading Collection system

Implementing a property data services

Business readiness initiatives including tariff simplification and data cleansing

Implementing the CIS (SAP ISU is selected solution)

Migrating old data to a ‘History Viewer’ and decommissioning ACCESS

Implementing a ‘Business Intelligence’ and analytics based reporting capability Key milestones in the project delivery process and approval process are set out below:



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November 2009 - Board endorsed the recommendation to replace ACCESS.

January 2011 - Commenced Strategic Planning Project with Accenture with objectives to develop the design, business case and implementation schedule for the replacement of ACCESS and satellite systems.

April 2011 – Sydney Water review of ARP software assessment of potential options considering 19 options and concluding only two products are viable aligning with and in line with the findings in the Gartner Magic Quadrant for Utilities Customer Information Systems that SAP IS-U and Oracle have achieved a leadership position.

January 2012 – Commissioned consultant to undertake an independent assessment of the Planning Estimates developed by Accenture during Strategic Planning Phase of the ARP. DB Results reviewed Accenture costings ($170.9m) and its estimate was nearly $16m higher ($186.2m) and commented “variance is acceptable as it is within 30% that would be considered acceptable for program of this scale at this stage”.

February 2012 - Consultant engaged to assess the short-listed options and presented its final report to the IT Steering Committee which was endorsed on 20 February 2012 again identifying replacing ACCESS as the preferred option compared with sweating the asset and modernising the system.

December 2012 – Range of mitigation measures identified which ensures the business is fully prepared to operate the ACCESS billing system to 2018. Business Case sought funding of $1.26m capex and $4.76m opex to develop, test and put into operation range of measures to ensure business continuity.

ACCESS Business Documentation – Request for tender (3 quotes) basis estimated at $650k to $900k

ACCESS IT Technical Documentation – Funded from Capex budged using existing internal resources to identify and document key elements of changes occurred to ACCESS between 2009 to 2012

Establishing Workforce Plans and Business Continuity Plans – Cost of work plus backfills covered by Opex budget.

December 2012 – Initiation Business Case seeking funding of up to $725K to commence the Define phase of the Meter Read Collection project, which will determine the total project cost as part of scope

March 2013 – Business Case for commencing program of activities including capex funding of $2.1m for program management and $1.9m for CIS procurement to June 2014 approved

Provision of external and highly skilled (contractor) resources to mobilise the PMO out to June 2014 – Selective tendering with three approved Sydney Water agencies used where PMO roles could not be filled by internal candidates

Provision of external (contractor) technical and procurement expertise to complete all procurement planning activities including preparation of all tender documentation for CIS software selection – Existing contracts

August 2013 – Property Data Service targeted to deliver in 2015 key enabling project to lessen delivery risk of CIS implementation project. Seeking funding of $860K to undertake the Define phase including testing and verification of $6.7m total project cost. Preferred approach for resource procurement during define phase is to source internally and supplement with specialist external resources (Systems Analysts) where necessary.

July 2014 – As a result of recommendations made by an External Probity Advisor who provided independent assurance of Sydney Water’s approach, approval sought and received from Board for direct negotiation with vendor for procurement of software and to develop a functioning prototype for customer billing and customer management. Rationale based on de-risking project, achieving best value compared with original budget/original procurement approach and forming a strategic partnership with the software vendor from the outset compared with the open tender process which would likely involve system integrators rather than the software vendor.

October 2014 – Commissioned consultant to undertake a second independent assessment of the Planning Estimates for T2020 based on the costings identified in March 2013 Business Case.

October 2014 to September 2015 – Foundation project including planning to plan prototype, negotiation and award contract to vendor (SAP), development and configuration of product to demonstrate user stories



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and acceptance testing by functional area (billing and invoicing, customer interaction, credit and collections, payments, property data, metering and trade waste). This is a key element of building up the business case, carrying out user acceptance testing and confirming business acceptance of the product. The objectives of the project were to:

Obtain confidence from the stakeholders that the selected package will meet business requirements focusing particularly on SAP’s ability to manage complex tariffs and complex business scenarios

Understand any design implication for requirements and processes that require re-engineering

Obtain metrics for design and build of key user scenarios as input to the final business case

Provide specifications and design information as input to the development of tender documentation for system integrator services

It should be noted that the work done of the Foundation project represents a small component of the overall quantify and complexity of requirements that will need to be documented in the Business Design project (about 5% to 7% of overall scope).

Additional Observations: Sydney Water benefits from pre-negotiated NSW State Government contracts at favourable rates and permits existing licences to be leveraged with SAP which is a material reduction in overall program risk and promotes best value. Furthermore, most of the Systems Integrators (SI) assess by Sydney Water’s consultant are available under the NSW Government ICT Services Scheme, which will be used to tender for SI services.

PROGRAM

Key milestones in the program timeline are set out below:

Meter Reading Collection project completion – December 2013

CIS Package (selection) Procurement planning completion – April 2014

CIS Software Licence Initial Instalment (Development Licence only) – April 2014

Property Data Services project completion – December 2014

CIS Conceptual design (start/completion) – May 2014/May 2015

System Integrator (SI) selection – April 2016

Business Dependencies project completion – April 2016

CIS Software License Final instalment – May 2016

Solution Design (Blueprint) complete - January 2017

Solution Build complete - June 2017

Solution System / Integration Test complete – October 2017

User Acceptance Test complete - January 2018

Solution tested for performance and scalability - February 2018

Solution tested for Disaster Recovery - March 2018

End-user training complete - December 2018

Solution Deployment – Wave 1 complete December 2018

Solution Deployment - Rest March 2019

Surge and Storm management complete - December 2019

Decommissioning complete - October 2019

Program closure is forecast for December 2019.


A modern CIS package will be more cost effective and easier to operate. It will also provide the platform for innovative and online services to improve current levels of customer satisfaction well into the future.

The primary objectives of T2020 are:

1. Operational risk reduction associated with aging assets and declining business and IT support



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2. Rapidly respond to uncertain market or regulatory changes and enable future customer focused capabilities

3. Operational efficiency gains due to streamlining processes and simplifying the application landscape The study by Accenture (2012) indicated that there are likely to be operating efficiencies from the introduction of the CIS. Customer Services has attempted to quantify savings by consulting Hunter Water and Yarra Valley Water who have both recently implemented new CIS packages. Feedback has been mixed. Soon after the systems were implemented both organisations advised that there were few efficiencies achieved immediately post go live. More recently, and with more time after completion, Yarra Valley Water has advised that operating efficiencies are now evident and are planned. Additional benefits will be progressively realized through the delivery of the ARP component projects. However it should be noted that no capital or operating efficiencies are being predicted in the future price path (2016 to 2020). Sydney Water has identified $344m of tangible benefits identified over 10 years as well as $23m of benefits enabled by T2020 implementation. By far the biggest benefit is the avoided cost of a catastrophic IT failure of not implementing a replacement for ACCESS.


2006 IT Strategy

2010 IT Strategy

CMS Presentation 5th October 2011

Review 2003 by external consultant

ACCESS Sustainability Updated Report 2005

ACCESS Sustainability Exec Rpt 2005

Review 2005 (Summary) by external consultant

Access Replacement Presentation

J55 IT Program – Additional Information

JJ_0033_Questions 13 & 14 Response

Letter from Managing Director, October 2011

20027010 Meter Reading Collection System Business Case 1.5 signed

20027018 ARP Risk Mitigation Signed Business Case 4 December 2012

ACCESS Replacement Program Strategy Business Case March 2013

PCR0963 Document Satellite Systems by external consultant

PCR0975 Meter Reading

PCR0984 SevenX Additional Development Effort

PMO CR0957 CMS Review Business Benefits Analysis Framework by external consultant

PMO CR0972 Business Benefits Analysis Framework by external consultant

Meter Reading Collection Business Case December 2012 Approved

PMO CR1046 20030344 T2020 Foundation

PMO PCR1047 20030343 T2020 Enabling Technology

Initiation Business Case Property Data Service 20028282 August 2013

T2020 Foundation System – Evaluation Report (draft under PCG final view 28 September 2015 v0.5)

ARP Program Capex Costs v0.53 20110908 by external consultant

SWC ARP Report January 2012 by external consultant

SWC T2020 Costing Review Final Report October 2014 by external consultant

ARP Transformation Planning – Software Assessment Summary v1.2 110513 April 2011

Sydney Water CMS Fit-gap analysis (SAP IS-U/Oracle CC&B), 2012 by external consultant

Addendum to Sydney Water CMS Fit-gap analysis, August 2013 by external consultant

IT4+4 Roadmap Briefing to Atkins Cardno Review Team, October 2015

T2020 Project Summary, November 2015



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C.2. Enterprise Resource Planning (ERP) Implementation PROJECT DETAILS

Project Name Enterprise Resource Planning (ERP) Implementation

Project Number Status Current, Future and Subsequent Price Paths


A unified and integrated ERP supports the Corporation’s strategic goals to become more efficient and responsive to customers. It includes consolidating and simplifying business applications onto a sustainable, commercial, off-the-shelf Enterprise Resource Planning suite (SAP) to enable better planning and decisions. This will connect all parts of our business by replacing a range of inefficient or inconsistent systems. It will also help transform the business into one that is better equipped to deliver customer value. It will improve the quality of information available and allow the company to be more agile, offering similar customer service as banks, telecommunications providers and energy suppliers. Empowered customers will be heavily influenced by experiences from other sectors and Sydney Water believes that if it fails to meet their expectations around minimum acceptable service levels, it is more likely that some standards will be imposed on the Corporation in the future. By ensuring Sydney Water delivers services valued by customers, they argue it removes the risk of regulatory intervention.

The scope of works includes the following modules/functionality:

Human Capital Management

Governance, Risk & Compliance

Health & Safety Management

Finance

Payroll

Procurement

Enterprise Program, Project Management

Business Intelligence and Analytics

Document Management

Master Data Sources

Data Services Enterprise Asset Management is unconfirmed.



$0 Initial Delivery Date 2021/22


$107m* Actual / Forecast Delivery Date

N/A

* Submission forecasts investment in current and future price path ($107m) but total investment until project completion will continue until 2021/22.

KEY DATA



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Investment Driver Approximately 60% efficiency 40% renewals

Output Measure N/A

Stage in Planning Process Planning

Procurement Process Direct negotiation with vendor and open procurement for Systems Integrators

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k) 0 0 0 0 23,170* 16,750* 14,640* 23,510*

Actual ($k) 0 0 0 28,900

* Source: CAPEX Efficiency Review v3


The ERP estimated investment has been developed in-house with assistance from SAP lead analyst from an IT consultancy based on Sydney Water metrics and mid-point risk/management. At this stage, there is little in the way of documentary evidence to support the estimates. Sydney Water had requested two providers quote for formal review and benchmarking of finalised 4+4 roadmap including costings. Both organisations advised they were unable to undertake the activity citing lack of comparable data in an Australian context.

Sydney Water’s submission is not explicit in setting out that its T2020 proposed billing system is inextricably linked with its wider ERP SAP solution as it is proposing to invest in SAP IS-U to replace ACCESS. While the projects are managed separately and will have standalone business cases, the decision to pursue the latter impacts directly on both business cases.

Approximately 70% to 80% of costs in 2016-20 will be determined by open tender for systems integration, data migration and data cleansing. Sydney Water’s approach to de-risk the implementation is to break down packages of work to attract specialist SI providers with the relevant niche expertise rather than appoint one SI to manage and implement the whole project. This is likely to result in open tender of the selection of qualified providers.

Sydney Water benefits from pre-negotiated NSW State Government contracts at favourable rates and permits existing licences to be leveraged with SAP which is a material reduction in overall program risk and promotes best value. Furthermore, most of the Systems Integrators (SI) assessed by Sydney Water’s consultant are available under the NSW Government ICT Services Scheme, which will be used to tender for SI services as well as utilising the NSW Government Standard Business Processes to develop the project scope.

PROGRAM

Sydney Water started work on implementing a unified ERP system in 2015/16. It will be split into two stages. Stage 1 is intended to provide core SAP functions to enable financial accounting, management accounting, reporting, operational procurement including invoice scanning, procurement cards and basic HR employee data and organisational data management. In addition, Stage 1 scope includes enabling technology for master data management, BW, invoice scanning, enterprise content management,



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enterprise testing tools, enterprise integration, archiving tools, enterprise workflow, technology hardware and educational tools to support the program implementation and ongoing business needs. Stage 1 scope includes the decommissioning of systems such as PeopleSoft, TM1 and ReadSoft.

Stage 2 includes HCM, Payroll, Governance Risk and Compliance (GRC), Health and Safety, Enterprise Portfolio and Program Management (EPPM) and Strategic Procurement.

Stage 1:

Business Case - approval January 2016

Award contract for implementation services - April 2016

Solution Design (Blueprint) complete - August 2016

User Acceptance Test complete - November 2016

Solution Tested for Performance and Scalability - February 2017

Solution Tested for Disaster Recovery - May 2017

End user training complete - June 2017

Solution deployment (Go Live) - June 2017

Post go live support complete - Sept 2017

Stage 2:

Business Case approved - Q3 FY17

HCM/Talent Release 1 Go Live - Q2 FY18

Payroll Release 2 Go Live - Q3 FY18

Talent and Analytics Release 3 Go Live - Q4 FY18

HCM/Talent Support and Rollout complete - Q4 FY18

Health and Safety complete - Q2 FY18

GRC complete - Q2 FY18

Strategic Procurement complete - Q2 FY19

EPPM complete - Q1 FY21


Sydney Water has provided the following details on benefits and efficiencies across the two stages:



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IT4+4 Roadmap Briefing to Atkins Cardno Review Team, October 2015

Roadmap development slides

Systems Depreciation Dates Excel Spreadsheet

Systems Summary ERP T2020 Excel Spreadsheet

20140922 Sydney Water Consultant Analyst Call

Commercial in Confidence SAP implementation learnings

SWC ERP Business Case draft, November 2015

ERP Project Summary, November 2015



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C.3. Meter Replacement Program PROJECT DETAILS

Project Name Meter Replacement Program

Project Number WEM o43 Status Current & Future Price Path


This project includes meter replacement and new meters in the current and future price path. The program is managed by the Customer Service Division. A business case was prepared for the 2015 to 2020 meter replacement program. The scope of work includes reactive replacement of damaged, faulty and broken meters; currently 8000 per annum; also proactive replacement when usage exceeds 4100 kl/a which is an increase on the 3600 Kl/s assumption in 2011. Also the asset life of 20mm meters is now assumed as 20 years compared with 15 in the 2012 Determination.

The objective is for Sydney Water to correctly bill customers for usage charges and maximise revenue. The accuracy of billing including usage charges is the biggest source of customer complaint. Sydney Water has an obligation to comply with the National Measurement Act (accuracy of +/-4% required).

The Corporation installs 20mm mechanical meters for nearly all domestic dwellings which represents 92% of customers and 56% total water delivered; the 25mm and 30mm meters represent a further 5% of customers and 10% of water delivered.

The criteria for the 20mm replacement program has been expended from 3,600 Kl or 15 years combined criteria to 4100 Kl, which is normally equivalent to 20 years. This is based on results from a recent meter testing program An upper limit of 25 years is assumed . Larger meters assume 10 years in the current price path.

The asset base comprises 1.3M meters of which 92% are 20mm. The age profile shows a relatively small number of meters pre-1997with an age profile of 60k/a from 1998 to 2001 increasing to an average 90k/a from 2002 to 2007 then dropping to an average 60k/a from 2008.



$47.6M Initial Delivery Date On-going

Outturn cost / Forecast outturn cost in September SIR

$33.4M Actual / Forecast Delivery Date

On-going

KEY DATA

Investment Driver Existing Mandatory Standards- in ‘Corporate’ expenditure but moved to the water service for the future price path although this move could be reversed and meter data is used for both the water and wastewater service.



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As this expenditure includes new meters we question why the 20% of this cost should be allocated to growth.

Output Measure Units installed:

309,500 meters in current price path compared with 384,400 in the Determination 471,500 meters in future price path

Stage in Planning Process New contract in place from July 2015

Procurement Process Open tendering

2015/16 price base

12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

(2011 Submission)

13,006.

12523 11,270 10,828

Actual ($k) 7.056 8.359 8.583 9,433 10,022 10,590 10,439 10.520


One of the reasons for the delay in delivery of meter replacements in the current price path was that the contractor having difficulty in attracting and retaining skilled staff.

New contracts were in place from July 2015 with two meter suppliers and from 2012 one meter field services contractor. All contracts were awarded after an open tender.

The supply contract covers 11 meter sizes (20mm - 300mm) with two portions of work: meters from 20mm to 50mm light (959) and meters from 50mm to 300mm (1%). The warranty on the meters is 8 years. Delivery of meter stock is direct to maintenance contractor’s site.

The current price path outturn unit cost of A$107 per replacement is similar to the Determination. The future price path assumes an overall $88/meter. Cost estimates provided include for meter supply, approx. $48, normal installation and testing $36, and on-costs.

PROGRAM

The program is on-going. Sydney Water will not meet its output for meter replacement in the current price path. The forecast outturn is for 309,500 meters to be replaced compared with 384,400 assumed in the Determination. Sydney Water attributes this lower outturn to be due to not meeting the preventative target and also a backlog of reactive jobs. The cause was attributed to extending the life of some meters and the contractor having difficulty in attracting and retaining staff. Some unit costs increased where access for meter replacement was difficult.

The forecast new and replacement meters is based on a predictive model. The model uses a number of assumptions and is still being calibrated. The number of meters comprises



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New meters: 95,000 (c20%)

Reactive replacement: 70,000 (c15%)

Proactive replacement: 305,000 (c655) or 76,000 per annum.

The proactive replacement meter numbers is derived from a predictive model which is based on metered volumes with a maximum of 4,100 Kl. Given the extended life assumptions for the future price path, it is surprising that proactive replacement activity increases to 76,000 in the future price path.


The investment driver is meeting existing mandatory standards. The meter replacement program contributes to the effective functioning of the Corporation’s quarterly customer billing cycle and generates over $900m/annum in usage revenue and promotes correct billing of customers.

It is also linked to meeting various indicators in the Corporation’s Operating License and meter replacement can impact either directly or indirectly on the volume of customer complaints.


Meter Assets Program 5-year Business Case

Presentation and supporting sheets 9 Oct 15



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C.4. Field Services Management (includes Sirius) PROJECT DETAILS

Project Name Field Services Management (includes SIRIUS)

Project Number 20027019, 20025910, 20028284, 20029636

Status Current and Future Price Paths


Field Services Management including SIRIUS is a programme of projects to enhance field mobility platforms. Sirius will replace the legacy field mobility platform used by Sydney Water’s workforce to manage day to day operational work. The new platform will deliver a single consolidated mobility platform to support ongoing efficiency improvement programs and provide a foundation for future strategic improvements. A key component is an automated scheduling (Click software) and field based solution which has required investment in hardware, software and services to reduce paper processes in the field and bring efficiencies into office based resource scheduling.

Previously staff have been required to return to depots when needing to interact with corporate applications such as email, Compass, ESS and iConnect which does not promote efficiency or the most effective customer management. The project has therefore also focused on implementing a range of Corporate applications onto the handheld devices deployed in the field to drive improvements in the quality and availability of information and subsequent changes in behaviour. A secondary objective has been activation of Global Positioning System (GPS) for Mechanical Electrical delivery (MED) mobile users to provide management with improved decision-making information.

The reach is also much wider than the previous solution. There was approx. 400 user base for the original Field Resource Management solution. It is intended that it is rolled out to 1,000 users across business functions including to contractors. The project is also aligned with the Modern Mobile Workforce which looks at new handheld devices and how to bring other technology into play.

FINANCIALS AND PROGRAM


$20.64m Initial Delivery Date 2015/16


$14.8m in 2012 to 2016

$6.1m in 2016 to 2020


2016/17 for enhancements then BAU

KEY DATA

Investment Driver Existing Mandatory Standards (IT Renewals) and Business Efficiency

Output Measure No deterioration and enhancement in some areas

Stage in Planning Process About 70%

Procurement Process Phase 1 – Utilising internal resources and contractors



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Phase 2 – Direct negotiation with vendor

Standard panel contracts for awards such as integration and training.

2015/16 base 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k) 1,000 5,780 13,860 3,000 0 1,200* 2,000*

Actual ($k) 601 854 2,044 11,300

* $3.2m relates to money in future years for upgrades to Sirius, potential Mobility refreshes to be determined for future business needs/new versions of software where require functional or operational changes


The initial business case in 2011 highlighted $25.5m with $6.9m benefits per annum. Phase 1 utilised internal resources and contractors. Three vendor solutions were identified and there is a good audit trail relating to procurement documentation setting out consideration of options, including the opex implications of the various solutions.

The Phase 2 business case sought approval for $19.4m expenditure with benefits later sitting at $3.6m per annum cost avoidance identified. This phase has seen direct negotiation with the vendor, with award in 2015 and project completion anticipated for September 2016. The direct negotiation with Click software followed a detailed evaluation of several tenders as part of a selective tender process. The evaluation included an assessment of the proposed solution against business and IT requirements, and a Technical Product Evaluation. This software system is being provided with integration to Sydney Water systems including Maximo. There are also standard panel contracts for awards such as integration and training.

We have also considered alignment with T2020 and ERP projects as part of our review. While the business cases and supporting documentation state that evaluation included an assessment of the proposed solution against business and IT requirements, we saw no evidence that the scope included consideration of interaction and connectivity with SAP. We are aware that the Click product is compatible with SAP and we conclude that it is therefore positive that the selected solution interacts well with SAP (there is no formal relationship but there are many examples of co-existence and integration between SAP and Click). However, this appears to be more by accident than design, or at the very least this was not considered to be a major criteria in the evaluation process.

PROGRAM

We highlight on an exception only basis some of the delays to the program and additional costs incurred:

There were some delays in implementation and there is a possibility that the scope should have been better defined earlier as the Tender Evaluation Panel shortlisted a vendor who offered a cloud only solution and the Steering Committee directed that the risk of a cloud solution was not acceptable and thus the TEP was required to modify the IT requirements to remove cloud as an option and re-assess the two leading tenderers with that change. This caused a delay of 3 months and incurred an additional $115,000 over and above the contingency.

Reporting was initially inadequate as a 60 day functionality was purchased whereas there was a long-term reporting requirement which appeared to have been missed when the Click products were evaluated. This resulted in an additional $40,300 to have the required upgrade in functionality.

There were schedule delays on the BCS Field Mobility project component which had been approved in May 2013 due to inconsistent application of the delivery methodology and the poor execution of the



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agile methodology. Sydney Water decided that the best approach to achieve a successful outcome was to cease the original project and write off $1.2m worth of inefficiencies under IT opex and initiate a new project leveraging “re-usable” components using a different execution methodology and a refreshed overall delivery approach.

There have been delays with the integration development which pushed back the go live date for the project ($30,000 in additional costs).

Deployment of the new SIRIUS solution will be completed in 2016/17, approximately a year behind the original completion date.


The project has led to rationalisation of tools/systems used across business from 5 to 1 and automating up to 50 paper forms. The outcomes that the project has contributed to are:

Improved maintenance practices through field staff access to asset condition information

Reduction in downtime and reduction in estimated duration of each work order by 5%

A culture that supports capture and transfer of work order, asset and safety information to and from the field

Improved resource allocation and planning

While the Sirius benefits realisation plan is a very useful reference document, it is challenging to fully assess the financial impact of the programme as each sub project cites different savings and it is unclear if they are standalone savings or part of the totals quoted elsewhere. Furthermore, there is a distinction between efficiencies which are “bankable” as they lead to real savings and others of which are “not bankable” as they relate to avoided costs rather than tangible benefits that equate to cash savings or FTE reductions.


Approved 20027019 BCS Field Mobility PCR977 Signed

Approved Business Case 20025910

Approved Business Case signed 2013-06-06 105104

Approved PCR CR0987 Signed Cancelled and replaced by PCR0995

Approved PCR0985 20027019 BCS Field Mobility – Additional Customisations

Approved PCR1017 Delays to Sirius Ph2 BC approved

Approved PCR1018 Additional Sandbox CR Signed

Approved PCR1019 Click Vehicle Running Sheet SR Signed

Approved PCR1021 Click Backflow Inspection Form CR Signed

Approved PCR1022 Click Dashboard Implementation

Approved PCR1023 Go Live Date Changed CR Signed

Approved PCR1058 Additional Hours Delayed Go Live CR Signed

Approved PMO CR0952

Approved signed Sirius Phase 2 Business Case v4.8 20028284

Business Case Signed 20029636

Field mobility service (Sirius) Business Case all signatures 27 Nov 2013

PCR995 Approved replaces PCR0987

PMO CR0784 App2FieldPCR (Approved)

Attachment A Detailed Cost Estimate Phase 2 Econ 8.1 Model v1.5

Attachment B – Benefits Register 28112014

Reference 3 – Executive Summary Field Mobility Solution Market Assessment v1

Sirius Program Tender Rec Rpt memo Nov 2014 (v8) approved

Sirius Tender Costings v10



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Sirius Benefits Realisation Plan v0

Sirius Benefits Register approved business case

Additional commentary to Atkins/Cardno team responding to requests for more information



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C.5. Integration Platform Renewal PROJECT DETAILS

Project Name Integration Platform Renewal (IPR)

Project Number

20025860 Status Current Price Path


Sydney Water has been running three integration platforms (ICAN, JCAPS 5 and JCAPS 6), and a number of supplementary applications, to satisfy its integration needs. These platforms enable around 310 services that transfer and share information between applications, including business critical processes. The three historic integration platforms, supplied by Sun, were end of life and hence renewal was required. Modern integration platforms are based on Service Oriented Architecture (SOA) methodologies and processes, delivering re-usable services, and require a new way of working. SOA has the potential to accelerate development of integration software solutions. A major advantage is that Sydney Water is also rationalising multiple platforms into one solution moving forward. There is evidence that other appropriate options were considered (purchasing a new platform versus consolidating the three legacy platforms to the latest version of these products, different approaches to transitioning the existing services, purchasing an integration platform that will also provide extra capability to enable other projects) and there is a robust decision-making process to support the basis on which the chosen option was made. Given the Company’s change in strategy from “best in breed” to an ERP, it is also important to understand the need for the project in the context of the SAP implementation, which does not appear to be explicitly documented by the company. The relevance is that while SAP has its own integrator component and thus the IPR will not be utilised in this context, other services and tools such as Maximo will still require an integration platform capability to enable the delivery of business critical processes.


Budget in 2012 Determination*

$17.6m Initial Delivery Date 2014/15

Outturn cost / Forecast outturn cost in Submission**

$8.5m

- $7.7m (IPR) - $0.8m (EPR – Data Services)


2015/16

* Source: CIP/PoW in: Integration Platform Renewal Business Case v6.1 (September 2012)

** Note Submission funding for this project was i) $7.7m across 12/13 – 14/15 (Integration Platform Renewal) with ii) the balance of funds for 15/16 from ERP – Data Services funding (alignment to 4+4 roadmap capabilities)

KEY DATA



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Investment Driver Existing Mandatory Standards (IT Renewals)

Output Measure No deterioration in operations (enhancement in some cases)

Stage in Planning Process Completion in 2015/16

Procurement Process Selective tendering to procure product and vendor from short list of integration market leaders

Open tender for three stages of service delivery

2015/16 base Prior 12/13 13/14 14/15 15/16 16/17 17/18 18/19

Planned ($k) 448 2,550 6,985 4,892

Actual ($k) 448 843 3,118 3,475 1,101*

Note * Current year forecast to complete


The procurement process has involved:

Selective tendering to procure product and vendor services from one of a short list of integration software market leaders

Open tender for three stages of service delivery: 1. Architecture, analysis and governance 2. Development 3. Support services

Hardware and software purchases were not finalised until after Plan & Design Phase. Along with the staging of the services contract award this procurement approach has allowed for alignment with the Business Case check-point at the end of Plan and Design.

PROGRAM

In September 2012 approval was sought for $14.9m in capital and $3.9m in ongoing operational expenditure over 3 years, with a check-point at the end of services stage 1 to confirm project completion costs and obtain further approval to proceed with stage 2. The work during the first phase resulted in a forecast reduction in project costs ($9.4 m P80 capex estimate, $8.1m P50 estimate) and reduced opex over the first three years to $2.3m. The scope was also increased to include all integration services. Approval received in November 2013 based on revised budget to proceed. The final outturn costs across 2012/13 - 2015/16 are forecast to be $8.5m. (total project cost is forecast to complete is $8.98m) The project has been delivered behind planned schedule, under budget and in line with the original scope. The benefits realisation review has yet to take place, it is scheduled for April 2016.



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The driver for the project has been to reduce the risk associated with operating critical business integration on an out-dated integration platform by replacing it with a fully-supported, highly functional Service Oriented Architecture (SOA) Integration Suite. The approach taken by the company has had the added benefit of reducing complexity by rationalisation of three platforms to one. This is not a business efficiency project however a review of the lifecycle costs demonstrates how avoided capex costs net off opex increases. The avoided future capex costs have been calculated at $5.66m which relate to reduced development effort, lower costs kicking in once bedded down and that IT projects should see more manageable integration. Benefits are due to be fully realised by December 2017.

While the IPR is a critical back office function and customers have no direct visibility of its operations, a major opportunity arising from this asset renewal is the ability to focus integration requirements on customer facing business process rather than on purely data sharing, and transfer of data to and from applications. This extra capability has not been available to Sydney Water but will enable other projects such as “Online Services for Trade Customers” to be realised.


20025860 Business Case v6.1 (final) sign-off page

20025860 Integration Platform Renewal Business Case v6 1 (Full document)

Project Change Request (PCR) for IPR Project

IPA Approved PCR PMO

Econ 8 for BC v4

Integration Platform Renewal Review November 2013

Sydney Water Capital and Operating Expenditure Submission to IPART



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C.6. IICATS / SCADA Renewals PROJECT DETAILS

Project Name IICATS / SCADA Renewals

Project Number SEM060 Status Current and Future Price Paths


IICATS and SCADA comprise Sydney Water’s (SW) operational control and monitoring systems which are an essential business support tool for SW’s asset operations process. IICATS is SW’s telemetry system, broadly consisting of centralised IT and communications equipment, communications networks and Remote Telemetry Units (RTUs) at 2,120 facilities. SCADA systems are installed at 34 water and waste-water treatment works and SW use of the term SCADA includes the site PLCS and communications networks. Instrumentation such as flow and pressure monitors that are exclusively connected to RTUs are also included in the remit of IICATS / SCADA systems.

IICATS is very reliable, with key components of the system meeting or exceeding their performance targets since being commissioned. The majority 95% of IICATS is in fair or better condition. A number of strategic projects have been identified to maintain IICATS system reliability and performance.

SCADA systems monitor and control the operation of the treatment plants. In general, all the SCADA Systems are meeting the required performance standards and about 75% are in fair or better condition. Over the last 10 years a number of SCADA systems have been upgraded to a corporate standard system, either under the Automation and SCADA Upgrade Program or as part of plant amplification projects.

Instrumentation assets are the primary measurement devices at water asset sites, monitoring parameters including flow, level, and pressure and water quality. Reliable flow information is essential for accurate hydraulic modelling to support system planning and leakage reduction initiatives. Around 90% of the instrumentation is in fair or better condition. Critical instruments are regularly maintained and calibrated and non-critical instruments are replaced as they fail.

The need for replacement and / or enhancement of parts of the IICATS / SCADA asset base is driven by renewals and specifically the need to maintain business as usual with the systems providing defined levels of service, reliability and availability to the organisation. The schedule of replacement is reviewed annually and derived from a risk based approach. Technological obsolescence, emerging standards and O&M efficiencies that can be gained by standardisation are also drivers for replacement. Each individual business case within the IICATS / SCADA program is assessed on a benefit / cost basis with the options of do nothing, do part or do all.

The main projects over the next five years will be:

Earth Potential Rise (EPR) issues rectified at 120 IICATS sites;

Obsolete GPRS communications replaced with 3G technology at 2200 IICATS sites;

IICATS functionality updated in line with business and operational requirements;

IICATS sites security upgraded in line with current standards;

Obsolete IICATS RTUs renewed at 650 wastewater sites;

SCADA upgrade and migration completion at Malabar WWTP;

SCADA upgrade completion at Bondi WWTP;

SCADA migration to standard SCX6 systems completion at 12 sites;

SACDA sites security upgraded in line with current standards;

SCADA upgrade completion at 11 treatment plants in conjunction with plant amplifications and/or upgrades.



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SW is trialling Level 5 automation at 2 sites which would qualify as an enhancement to the current service and on the phased basis that the company is proceeding, this could be described as an “incremental step change”.



$63M Initial Delivery Date Ongoing


$73M Actual / Forecast Delivery Date

Ongoing

KEY DATA

Investment Driver Existing Mandatory Standards (Renewals)

Output Measure No deterioration in operations

Stage in Planning Process In delivery

Procurement Process CSA / Tender / Service Agreements

2015/16 base

12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20

Planned ($k)

9,592 18,256 21,026 14,474 14,145 13,633 13,120 9,533

Actual ($k)

10,446 17,723 17,679 27,009


Program delivery is continuous and ongoing with individual projects overlapping the four year funding cycles. The expenditure is anticipated to have exceeded the 2012 -2016 IPART determination by $11M by the end of 2016. Spending broadly followed the determination and business cases. The additional $11M was allocated to four treatment works SCADA replacement projects, each of which had an approved variation business case. The variations were as below:

Warragamba WWTP workplace accommodation scope: $1 million

Cronulla WWTP additional scope: $2 million

St Marys WRP additional electrical scope: $6 million

Bondi WWTP accelerated SCADA upgrade: $2 million The Warragamba and St Mary’s variations consisted of M&E work not automation that would not normally be funded through the IICATS / SCADA program and could not have been foreseen. The Cronulla variation



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resulted from an underestimation of the SCADA assets present on the site, which raises a potential concern as to the accuracy of the asset records that are used for assessing the costs of future projects.

Capital costs are broken down over the 2016- 2020 period into roughly 37% telemetry and 63% SCADA. O&M costs are estimated at $7m per annum with 50% allocated to telemetry assets, 47% to SCADA assets and 3% to instrumentation. These costs are predominantly for service and support charges. The O&M costs for plant and field based SCADA and IICATS equipment are included in the respective site facility plans.

Technologies are procured via open market tendering with pre-qualified vendors. IICATS services are provided via open market tendering with software developed by an in house team. SCADA services are now provided via a Collaborative Services Agreement (CSA). Some of the projects delivered during 2012-2016 were via the CSA and some via the previous open tender process. The move to a CSA with shared gain and pain appears to have had positive outcomes in terms of delivery quality and efficiency.

There are some possible inefficiencies in planning, standards and procurement due a mixture of asset ownership. For example instrumentation monitored by RTUs only and site instrumentation. This situation is currently under review. Other areas of potential improvement, in both procedures and use of technology, have been identified and are under review with a ten year action plan in place.

PROGRAM

The program has a predicted spend of $27M in 2015 – 2016. This is significantly higher than previous and following years and may present a risk of delay. However the program spend is on track for the first quarter of the year which raises confidence in the ability of SW to deliver the full spend over the financial year. Other than the four significant variations which can be considered as “unforeseen” events rather than business as usual, the program from 2012-2016 has been delivered on time. The 2016-2020 program is financially smaller than 2012-2016 and broadly technologically similar. The program should be achievable.


While the company focuses on asset renewal, the key drivers are in reality wider and consist of business efficiency, government program, growth, maintaining existing mandatory standards as well as ensuring that SW has the ability and flexibility to respond to future mandatory standards.

The IICATS / SCADA is mainly focused on maintaining existing standards but also delivers business efficiencies and O&M efficiencies.

The program addresses technological obsolescence with the replacement of GPRS communication equipment at 2200 facilities and is designed to ensure that there is no deterioration of service over the planned period until 2020.

External standards that will be addressed focus on security with all IICATS sites due for upgrade to conform to current standards.

Likely O&M efficiency savings due to increased standardisation delivered under the IICATS / SCADA capital program will hence be realised in the site facility O&M expenditure.

The long term IICATS / SCADA strategy envisions that these systems will increasingly feed into a holistic business intelligence system that will contribute to future business efficiencies.




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Sydney Water Price Plan 2016-2020

Strategic Asset Management Framework Sept 2015

Control & Monitoring Systems Asset Management Plan 2015-2020

IPART Desktop Review (P_09-10-15_2)

Monitoring & Control Strategy 2015-2030 (Draft)

Final 2015-2020 Approved Capital Program

Warragamba SCADA business Case

Cronulla SCADA business case

St Marys SCADA business case

Bondi SCADA business case

Cronulla variation business case

Warragamba variation business case

Query response - Procurement of Services & Technology for Monitoring & Control

Query response - Efficiency review documents: IICATS and SCADA Renewals

Query response - Approach to Building the Business Investment for Monitoring & Control



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Appendix D. Scope of Work

PROJECT NAME: Sydney Water Corporation - Expenditure Review

1. BACKGROUND

IPART seeks the services of a suitably qualified consultant to undertake an expenditure review including

the following tasks:

Task 1: a strategic review of Sydney Water Corporation’s (Sydney Water’s) long term investment

plans and asset management systems and practices

Task 2: a detailed review of the Sydney Water’s past and proposed operating expenditures and

capital expenditures, and

Task 3: a review of performance against past output measures and to propose new output

measures for the next determination period if appropriate.

Once the expenditure review is completed, the consultant is required to undertake an additional task:

Task 4: undertake a preliminary or high level assessment of the feasibility, costs and benefits

of possible alternative approaches or methodologies to undertaking future expenditure

reviews (eg, productivity benchmarking).

2016 Price Review

IPART is conducting a review of Sydney Water’s maximum charges for its water, sewerage, stormwater

drainage and other services, to apply from 1 July 2016. The maximum charges determined by IPART for

the upcoming determination period will cover a period of up to five years from 1 July 2016 (the duration

of which will be determined by IPART during the course of the review).

IPART’s role is to set prices which reflect the efficient costs of delivering Sydney Water’s monopoly

services. Our price reviews seek to protect customers from paying for inefficient or unnecessary

expenditure, while ensuring Sydney Water raises adequate revenue to cover the efficient costs

required to deliver its monopoly services. IPART seeks to set prices which do not reward inefficient

investment and asset management decisions, or inefficient operations and practices.

In setting prices, we are required to consider the matters set out in section 15 of the Independent Pricing

and Regulatory Tribunal Act 1992, which include the standards for quality, reliability, and safety.

Information on IPART’s price review, including a copy of Sydney Water’s pricing proposal, is available

at: http://www.ipart.nsw.gov.au/Home/Industries/Water/Reviews/Metro_Pricing/Review_of_prices_

for_Sydney_Water_Corporation_from_1_July_2016

2. OBJECTIVES

The objectives of this consultancy are:

a strategic review of Sydney Water’s longer term investment plans (minimum of 10 years)

and asset management systems and practices

http://www.ipart.nsw.gov.au/Home/Industries/Water/Reviews/Metro_Pricing/Review_of_prices_

http://www.ipart.nsw.gov.au/Home/Industries/Water/Reviews/Metro_Pricing/Review_of_prices_



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a review Sydney Water’s past and proposed operating expenditures and capital expenditures for

prudency and efficiency

a review of Sydney Water’s performance against past output measures and to propose any new

output measures for the next determination period if appropriate, and

to undertake a preliminary/high level assessment of the feasibility, costs and benefits of possible

alternative approaches or methodologies to undertaking future expenditure reviews (including,

productivity benchmarking).

3. DESCRIPTION OF SERVICES

IPART requires the consultant to provide the following services:

Task 1: Review of long term investment planning and asset management practices and

processes

The consultant must undertake a strategic review of Sydney Water’s long term investment

planning and its asset management systems and practices as specified below.

The consultant is required to review Sydney Water’s long term investment plan (minimum of 10 years)

so that the medium term (ie, proposals for the 5 years of the determination period) can be considered in

the context of its longer term plans.

The consultant must provide advice on:

a) Whether the longer term capital investment strategy is the most efficient, and whether

processes supporting this including procurement processes, whole of life cycle planning and

assessment of capital and operating expenditure trade-offs are best-practice and therefore likely

to result in prudent and efficient investment decisions

b) The key assumptions that are driving expenditure (eg, asset replacements, demand forecasts, growth

assessments, environmental requirements, licensing standards), including comment on the

reasonableness of these assumptions and how they have been considered and tested by Sydney Water

c) The consistency of Sydney Water’s proposed 5 year capital expenditure program with its longer

term program of capital expenditure, and implications and risks associated with the 5 year program

for the longer term program

d) The robustness of systems for linking asset management decisions with current and future levels

of service and performance requirements, including customer service and environmental outcomes

e) The way in which Sydney Water manages the risks associated with asset failure or under performance,

and

f) Any particular concerns or issues relating to Sydney Water’s process for determining and prioritising

future infrastructure expenditure and asset management decisions.

Task 2: Detailed review of operating and capital expenditure

As part of the price review, IPART examines operating and capital expenditure from two perspectives –

actual expenditure incurred since the last price determination (determination) and forecast expenditure

for the next determination period.



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To assist IPART in this task, the consultant is required to assess the adequacy, appropriateness and

efficiency of Sydney Water’s past and proposed levels of operating and capital expenditure.

The consultant must assess and report on Sydney Water’s:

1. Operating expenditure: the efficiency of past and proposed operating expenditure for the period

from 1 July 2012 to 30 June 2021

2. Capital expenditure: the prudence and efficiency of past and proposed capital expenditure for

the period from 1 July 20111

to 30 June 2021, and

3. Output measures: the performance against its output measures from the current

determination and proposed output measures for the next determination.

An explanation of the efficiency and prudence tests that the consultant is required to undertake are

provided below in Box 1.

Box 1: Efficiency test and prudence test

Efficiency test

In reviewing expenditure, the efficiency test is used to determine how much of Sydney Water’s

proposed expenditure (operating and capital) for the upcoming determination period

(commencing on 1 July 2016) will go into IPART’s determination of Sydney Water’s revenue

requirement. The efficiency test should examine whether Sydney Water’s actual and proposed

expenditure represents the best and most cost effective way of delivering the regulated services.

Prudence test

The prudence test assesses whether, in the circumstances existing at the time, the decision

to invest in an asset is one that Sydney Water, acting prudently, would be expected to make. In

assessing prudence, the consultant should assess both how the decision was made, and how the

investment was executed where the asset has been built (ie, the construction or delivery and

operation of the asset), having regard to information available at the time. In examining forecast

expenditure, the prudency test examines the consistency of this expenditure with Sydney Water’s

longer term capital expenditure program.

The prudence test and efficiency test is used to determine how much of Sydney Water’s:

actual capital expenditure in the current determination period (1 July 2011 to 30 June 2016)

should be rolled into Sydney Water’s regulatory asset base for the start of the upcoming

determination period, for the purposes of calculating allowances for return on and return of

capital

forecast capital expenditure in the upcoming determination period (1 July 2016 to 30 June

2021) should be rolled into Sydney Water’s regulatory asset base over the course of the upcoming determination period, for the purposes of calculating allowances for return on and return of capital



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A list of tasks that the consultant must undertake to review Sydney Water’s operating and capital expenditure are outlined below3.3 Detailed review of operating expenditure

The consultant will be required to review Sydney Water’s operating expenditure from 2012-13 to

2020-21, as specified in sections 3.3.1 and 3.3.2 below. The consultant should use any findings from

Task 1 to inform this task.

3.3.1 Efficiency of actual operating expenditure from 2012-13 to 2014-15

The consultant must assess, report and provide recommendations on the efficiency of past

operating expenditure for the period from 1 July 2012 to 30 June 2015.

In undertaking this task the consultant must:

a) Review the variations in operating expenditure from what was allowed in the 2012 price

determination for Sydney Water and, where assessed as material, comment on the reasons for this

variation including the extent to which these variations are justified

b) Assess the extent to which the operating expenditure incurred since the 2012 determination has

delivered the service standards on which the expenditure allowance was based

c) Advise whether the operating expenditure is directly related to the provision of regulated services,

and

d) Comment on whether operational savings have been captured in the operating expenditure as

opposed to shifting costs within the regulated business.

3.3.2 Efficiency of proposed operating expenditure from 2015-16 to 2020-21

The consultant must assess, report and provide recommendations on the efficiency of proposed operating

expenditure for the period from 1 July 2015 to 30 June 2021. In undertaking this task the consultant

must:

a) Provide recommendations as to the efficiency of Sydney Water’s proposed level of operating

expenditure for each year between 2015-162

to 2020-21 and provide for annual estimates of the level of operating expenditure that is required to efficiently supply Sydney Water’s regulated monopoly services

b) Estimate Sydney Water’s potential for cost reductions and make recommendations about efficiency

gains. If proposed expenditure in an area of operations is assessed as inadequate, specification

and quantification of the recommended additional expenditure is required

c) Identify the potential for and recommend efficiency savings to be achieved within the operating

expenditure budget over the period 2016-17 to 2020-21, and provide evidence and reasoning to

support the recommended savings

d) Advise on the appropriateness of direct and allocated operating costs that Sydney Water has ring

fenced from its other operations, associated with recycled water services3

e) Provide an opinion on the cost effectiveness and efficiency of Sydney Water’s procurement processes

in relation to operation services provided by third parties, and



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f) Where appropriate, have regard to productivity benchmarking analysis.

3.4 Detailed review of capital expenditure

The consultant will be required to undertake a detailed review of Sydney Water’s capital

expenditure from 2011-12 to 2020-21 according to sections 3.4.1 to 3.4.3 below. The consultant should

use any findings from Task 1 to inform this task.

3.4.1 Review of Sydney Water’s capital expenditure

a) Assess the reasonableness of Sydney Water’s capital program as a whole, within the context of its

long term plans and the assumptions underlying them, including the scale, scope and planning of the

entire capital expenditure program, from 2011-12 to 2020-2021 and identify any consequential

impacts on operating expenditure (ie, increased or reduced costs) of this capital expenditure.

b) Undertake a detailed investigation into the actual outcomes and project planning for at least

10% of Sydney Water’s capital projects above a $10 million materiality threshold. The 10% is to be

achieved by number and by total value of Sydney Water’s past and proposed capital program and is

to be agreed with IPART.

In addition to these core activities, the consultant must undertake the following:

c) Advise on the appropriateness of the cost allocation method used by Sydney Water to allocate operating

costs to capital projects.

Review the business case for the proposed Information and Communication Technology projects,

and identify any forecast savings of operating expenditure arising from these projects.

e) Review the on-going efficiency of the Sydney Treatment Alliance delivery model under which

works (eg, upgrades to wastewater treatment works) are being procured.

f) Advise on the robustness and effectiveness of Sydney Water’s ring fencing of capital costs associated

with recycled water services from its other operations, and identify opportunities for improvement.

g) Audit and assess the accuracy with which Sydney Water has classified its historical and planned

capital expenditure into the following asset classification classes: Civil, Electrical, Mechanical,

Electronic and Non-depreciating assets (or ‘CEMELND’). The consultant is required to review Sydney

Water’s information return and other relevant information and make recommendations regarding:

– the efficient capital expenditure on new assets in each classification class by business area

– the average remaining life of existing assets by classification class and business area

– the expected life of new assets by classification class and business area.

3.4.2 Prudence and efficiency of past capital expenditure from 2012-13 to 2014-15

The consultant must assess, report and provide recommendations on the prudence and efficiency of

actual capital expenditure for the period from 1 July 2011 to 30 June 2015. In undertaking this task the

consultant must:

a) Report on the historic capital expenditure values (by program) for each year of the past determination

period (ie 2011-12 to 2014-15).



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b) Assess the extent to which the expenditure approved in the 2012 determination has delivered the

service standards and outcomes on which the expenditure was based.

c) Provide a recommendation on the prudence and efficiency of Sydney Water’s capital

expenditure for the period from 2011-12 to 2014-15. Note that prudence should be assessed against

identified drivers and variations from capital expenditure proposals identified at the

2012 determination.

d) Recommend a value for any capital expenditure considered imprudent or inefficient. e)

Review progress against the output measures identified at the 2012 Determination.

f) Where appropriate, have regard to productivity benchmarking analysis.

3.4.3 Prudence and efficiency of proposed capital expenditure from 2015-16 to 2020-21

The consultant must assess, report and provide recommendations on the prudence and efficiency of

proposed capital expenditure for the period from 1 July 2015 to 30 June 2021. In undertaking this task

the consultant must:

Report on the proposed capital expenditure values (by program) for each year for the period

2015-16 to 2020-21.

b) Provide a recommendation on the prudence and efficiency of Sydney Water’s proposed capital

expenditure program for the period from 2015-20164

to 2020-2021 and provide for each year

reasoned estimates of the level of capital expenditure that the consultant considers efficient in order

for Sydney Water to supply its regulated monopoly services.

c) Identify the potential for efficiency savings to be achieved by Sydney Water within its capital expenditure

program over the next determination period of 2016-17 to 2020-21 and provide evidence and

reasoning to support the proposals.

d) Where appropriate, have regard to productivity benchmarking analysis.

3.4.4 Special review items

As part of the detailed review of operating and capital expenditure, the consultant will be required to

undertake an assessment of Sydney Water’s historical and proposed expenditure in targeted programs.

The weight given to each of these special items will be finalised at the inception meeting.

Finance leases

In our 2012 determination of Sydney Water’s prices, we included all payments associated with finance

and operating leases as operating expenditure. This included interest payments, principal payments and

pure operating costs.

In our 2016 review, we intend to include the value of any major asset subject to a finance lease in the

regulatory asset base (RAB). Only operating expenditure costs of delivering the services of the asset

would be included in the operating expenditure allowance.



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For assets subject to finance leases the consultant must:

a) review the asset lives used to calculate regulatory depreciation in Sydney Water’s submission b) for

each asset, review the asset values proposed in Sydney Water’s submission and the

allocation of those values to the CEMELND asset classes

c) for each asset, review the non-financial costs associated with operating the asset and

recommend the annual efficient non-financial operating expenditure for each asset between

2016-17 and 2020-21.

Sydney Water IT expenditure

Part of Sydney Water’s forward capital program is a proposal to invest $328 million in information

technology. Over $160 million is to replace a 28-year old billing system For Sydney Water’s proposed IT

expenditure, the consultant must

review the strategic case for Sydney Water’s IT capital expenditure

b) review any forecast savings in operating expenditure arising from Sydney Water’s proposed

IT capital expenditure program

c) benchmark Sydney Water’s proposed IT expenditure against comparable systems

d) undertake a detailed investigation into the project planning of Sydney Water’s IT capital

expenditure between 2011-12 and 2020-21, including

– assessment of the project procurement approach, outcomes and contribution to Sydney

Water’s capital program drivers

– the planned project budget, program and outputs

– any changes to Sydney Water’s IT operating expenses

– the actual project costs, program and outputs (appropriate to the stage in the project)

– reasons for variations between actual and forecast expenditures

– additional information that identifies any proactive planning by Sydney Water for change

of project scope or process development as a result of the project

– an assessment of the project’s prudence and efficiency

– for each asset, review the asset values proposed in Sydney Water’s submission and the

allocation of those values to the CEMELND asset classes.

Projects subject to Government directions

Under section 16(A) of the Independent Pricing and Regulatory Tribunal Act 1992 (the IPART Act), the

Premier may direct IPART to include the efficient costs of complying with certain specified requirements

when setting prices.

For our 2016 review of Sydney Water’s prices, we have directions relating to three programs,

namely:

Rosehill-Camellia recycled water scheme

The Replacement flows project at St Marys STP



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Expenditure on stormwater drainage at the Green Square urban development

For each of these schemes/projects, the consultant must:

a) review the efficient costs associated with delivering the required services and outcomes

b) recommend the efficient level of operating expenditure for each year between 2016-17 and

2020-21

c) recommend the efficient level of capital expenditure for each year between 2011-12 and

2020-21, where relevant. Environment Protection Licences (EPLs)

Sydney Water has a number of EPLs, which drive capital and operating expenditure on sewerage services

and assets. Some of these EPLs are currently being reviewed by the NSW Environment Protection

Authority (EPA).

For expenditure related to EPLs, the consultant must:

a) review the efficient costs associated with delivering the required services and outcomes

b) recommend the efficient level of operating expenditure for each year between 2016-17 and

2020-21

c) recommend the efficient level of capital expenditure for each year between 2011-12 and

2020-21, where relevant.

Task 3: Review of output measures and propose new output measures

The consultant must:

a) Review Sydney Water’s performance against its output measures from the current

determination period (1 July 2011 to 30 June 2016).5

Where output measures have not been

achieved, provide comment on the reasons for this.

b) Recommend a set of new output measures for Sydney Water’s proposed capital expenditure program

from 2016-17 to 2020-21.

Task 4: Review alternative approaches for assessing expenditure in future price

reviews.

The purpose of this task is to provide a desktop assessment, informed by Tasks 1, 2 and 3, which provides

an assessment of the feasibility of applying alternative approaches to reviewing Sydney Water’s

expenditure in future price reviews.

The consultant must:

a) Undertake a preliminary or high level assessment of the feasibility, costs and benefits of possible

alternative approaches or methodologies to undertaking future expenditure reviews, and



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b) Provide advice on developing productivity benchmarks for metropolitan water utilities and any

specific benchmarking issues for Sydney Water. This advice should include:

– the general applicability of productivity benchmarking to water utilities

– approaches to measuring and comparing productivity across utilities and over time,

– data availability and any other relevant issues specific to Sydney Water uncovered

through the course of the expenditure review.

REQUIRED OUTPUT

The primary output items from the project are set out below.

4.1 Reports

Inception Report

The consultant is required to produce an Inception Report (no more than 5 pages) to be provided shortly

after the inception meeting (exact date to be agreed to by IPART and the consultant at the inception

meeting) that outlines agreed:

methodologies and terminology, including any common approaches across concurrent

expenditure reviews

identification of any interdependencies in the expenditure reviews for the utilities

key issues and/or areas of focus

protocols for interaction with Sydney Water and stakeholders

changes to proposed resourcing and costs by task.

Draft and Final Reports on the expenditure review (Tasks 1, 2 and 3)

The consultant will be required to produce a Draft and Final Report, which address Tasks 1, 2 and 3

above. The reports must include:

a clear explanation of the consultant’s reasons or rationale for each of these

findings/outcomes, including its information sources, approach and any key assumptions used

report values in $2015-16, applying CPI indexes to be provided by IPART.

Furthermore:

all tables and calculations in the reports must also be provided in Excel format to facilitate the

transfer of the consultant’s outputs to IPART’s pricing models (to avoid rounding errors introduced

through text-only formats), and

the consultant must conduct a thorough Quality Assurance check of all outputs to eliminate errors

and inconsistencies.

The Appendix of the Draft and Final Report should contain a one-page summary for each capital project

examined in detail (as per section 3.4.1 (b)). The one-page summaries should include the following:

the planned project budget, program and outputs



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the actual project costs, program and outputs (appropriate to the stage in the project)

reasons for variations between actual and forecast expenditures

additional information that identifies any proactive planning by Sydney Water for change of project

scope or process development as a result of the project

assessment of the project procurement approach, outcomes and contribution to Sydney

Water’s capital program drivers, and

an assessment of the project’s prudence and efficiency.

The Draft and Final Reports should be clearly and logically set out and written in plain English, avoiding

the unnecessary use of technical terms. The reports should incorporate appendices for supporting

information and evidence where necessary.

The Draft Report is required to be a complete document that addresses all tasks, as outlined in this

scope of works, with supporting justification. Its purpose is to provide IPART and Sydney Water with

the opportunity to comment on the consultant’s recommendations. Therefore, it should not be a

‘working draft’ document. The consultant must present clear and well-argued recommendations on

whether expenditure is prudent and efficient.

Sydney Water and IPART will provide comments on the Draft Report directly to the consultant. The Final

Report must take into account these comments on the Draft Report, including an explanation of how the

comments have been addressed.

The consultant should note that the Final Report will be released as a public document and made available

on the IPART website. Sydney Water may identify expenditure projects or other detail that is commercial-

in-confidence. The consultant must provide a version of the Final Report suitable for publication

without commercial-in-confidence information, subject to IPART’s instructions as to whether it agrees that

the identified information is commercial-in-confidence. Therefore, the consultant must provide two

versions of the Final Report:

one confidential version

one public version suitable for publication without confidential information.

The Draft and Final Reports must be provided in four bound copies as well as in PDF format suitable

for web publication (ie, on IPART’s website for stakeholder comment).

Report on alternative approaches for future expenditure reviews (Task 4)

The consultant is required to produce a separate report (no more than 15 pages) on Task 4.

4.2 Additional outputs of the consultancy

Additional required outputs of the consultancy include:

Regular discussions and meetings with Sydney Water, IPART and/or the IPART Secretariat

(as requested by IPART) on progress and any issues arising so that there are ‘no surprises’.

A proposed list of capital projects comprising at least 10% of Sydney Water’s capital projects

above a $10 million threshold. The 10% is to be achieved by number and by total value of Sydney



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Water’s capital program (refer 3.4.1 above). IPART will review the list and agree on it with the

consultant, by 11 September 2015 (or earlier).

An information request to Sydney Water setting out the information required (in addition to currently

available information) to be provided to the consultant to perform the required services, as set out in

this scope of works. This is to be provided in advance of interviews with Sydney Water staff.

Presentations to IPART and/or the IPART Secretariat which outline the major issues and findings

of the Draft Report and the Final Report.

5. SOURCES OF INFORMATION

The list of documents below is provided as a guide only, it should not be considered exhaustive.

Task 1: Strategic asset management review

Sydney Water will provide its long-term strategic business and investment plan (at least 10 years).

Sydney Water 2015-16 Statement of Corporate Intent. This includes a forward capital program.

Sydney Water’s Operating Licence. Each year IPART undertakes an audit of Sydney Water’s

compliance with requirements of its operating licence. Audit reports are available on IPART’s

website.6

Sydney Water’s asset management strategy and system was reviewed by WS Atkins

International Ltd and Cardno for IPART as part of the 2012 price review. A copy of this report is

available on IPART’s website.

Task 2: Detailed review of operating and capital expenditure

Sydney Water’s pricing proposal outlines the full financial details of its past and forecast

operating and capital expenditure. Sydney Water’s submission also includes:

an Annual Information Return (AIR) in Excel format, and

a Special Information Return (SIR) in Excel format and supporting documentation for capital

expenditure projects of $10 million or greater. This will be a business case or other documentation

relevant to the Gateway stage of approval for each project.

In addition to its own analysis of available information provided, the consultant is required to source

and report analysis of other inputs through:

interviews with Sydney Water staff

comparisons with relevant organisations, and

the consultant’s experience in water and wastewater businesses and in undertaking other similar

tasks.

In the event that the consultant identifies gaps in the information, it is the responsibility of the consultant

to take the necessary steps to acquire the required information and to liaise promptly with IPART to

ensure that the consultancy outputs are delivered on time. Should the reliability of the information be

in doubt, the consultant is expected to source ‘second best information’, apply sound judgement and

provide detail and justification for assumptions made.



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Task 3: Review output measures and propose new output measures

The 2012 Determination Report for Sydney Water (Appendix B) lists the physical output

measures for the capital expenditure program.

6. SELECTION CRITERIA

IPART will evaluate each quote based on the following criteria:

the proposed methodology to perform the required Services (this includes understanding of the

Services required) (30%)

demonstrated capacity to perform the required Services (including the proposed team, the

team’s experience and the allocated hours to complete the required Services) (25%)

total cost to IPART of the delivery of the required Services (20%)

experience in strategic review or implementation of major IT projects of similar nature to those

proposed by Sydney Water (see section 8.11 of Sydney Water’s pricing proposal) (5%)

experience in providing Services of a similar nature including any prior work undertaken for

IPART (10%)

timeframe to perform the Services, including guaranteed availability of staff (5%)

proposed quality assurance procedures and risk management procedures (5%).

7. LIAISON/CONSULTATION

The consultant may be required to attend and participate in meetings, have involvement in

consultation, and attend and present at workshops or Tribunal meetings as circumstances dictate.

8. TIMETABLE

The consultant must meet the following work schedule:

Date A

ctivity

1 September 2015 Inception meeting with IPART

early September 2015

(to be agreed by IPART and the

consultant)

Inception Report

By 7 September 2015

(or earlier)

Provide sample list of capital projects to IPART to review

with supporting reasons

By 11 September 2015

(or earlier)

IPART and consultant agree on sample list of capital projects to review

September – October (to be

agreed with Sydney Water by

the consultant)

Interviews with Sydney Water staff



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26 October 2015 Provide Draft Report on the expenditure review (Tasks 1, 2

and 3).

18 November 2015 Present findings of Draft Report on the expenditure review

(Tasks 1, 2 and 3) to the Tribunal

20 November 2015 Sydney Water and IPART comments on Draft Report on the expenditure review (Tasks 1, 2 and 3) due to consultant

7 December 2015 Provide Final Report on the expenditure review (Tasks 1, 2 and 3)

18 December 2015 Provide Report on review of alternative approaches for future expenditure reviews (Task 4)

Possible extension to the consultancy

April 2016 Provide written advice in response to Sydney Water’s

submission to IPART’s Draft Report and Determination

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