Transport Colloquium 2005Tomorrow’s Transport Infrastructure18-19 May 2005

Championing Innovation & Value Creation for Price Regulated Infrastructure

Presented by Garry BowditchEmail: garry@vmax.com.au Ph: 0414 977 683

Web: www.vmax.com.au All rights reserved, © vmax Consulting 2005

Innovation Value Creation Price-Quality

SpectrumProductivity

Introduction

Simple (static)

Complex (dynamic)

Policy responses to infrastructure challenges…

Use price adjustment to create right

incentive

Systemic market failures demanding

comprehensive response

Infrastructure Dilemma

…suggests that the problem requires a dynamic solution?

Innovation & Value Creation …there is more than one way of

getting there

QualityInnovation Value Creation (productivity growth)

lower unit costs

higher unit prices

Efficiency

Customer Responsiveness

Targeting the right competitive model

ImitationPrice

Discounting

Strategic Differentiation

From… To…

Innovation (dynamic efficiency)

Value Build (static

productivity)Profit / Rate of

Return (allocative efficiency)

Preferred regulatory emphasis

Cost Focus

Valu

e

Cre

ati

on

Evolution Regulatory System

Productivity Growth Centric

70%

20%

10%

Stakeholder Motives

Asset Owners

Customers

Operators

Regulator

Government

P& L centric

Value Seeker

Value Build

Business (asset) Level Initiatives

Market Wide Shaping

Cost efficiency (dominant)

Differentiation (emergent)

Customer Centric

Bundle complementary

services

Asset Synergy (interoperability)

Interdependence (whole of supply chain

driven)

Externality Rich

Funds Managers

Max. Risk (adj.) Return

MotivationsStakeholder

Generic Value Creation Strategies

Monitoring, Redress market failure

Productivity Growth centric

Market Wide Shaping

Externality Rich InitiativesThe market conduct of owners / operators of infrastructure may pose challenges for competition regulators

Legacy of government ownership; low starting point

Poor interoperability of infrastructure

Fragmented supply chains

Poor work practices

Context

Behaviour

ObjectiveAsset value re-rating + seamless value propositions

Whole of supply chain shaping

Better inter-link infrastructure assets road, rail, ports etc

Seek harmonisation & standardisation to enhance efficiency

Work beyond firm boundaries to achieve:

Optimising efficiency through scale economies and standardisation

Process leadership ( in at least few critical areas such as supply chain management, marketing & acquisitions

Acute cost control Market dominance in order

to set uniform & propriety standards

Establish intensely competitive complementors within supply chain

Watch Points for RegulatorsVertical separation requirementsLimiting price flexibility (also limits entrepreneurial action)

Misinterpret market conduct (where joint ventures / alliances

are required to establish competitive supply chains)

Asset value build initiatives

Command andControl

Act on assumption of guilt ; Regulators take operational role ; Denial & resistance prevails; Compliance driven regulations viewed as cost

Hybrid Approaches

Strategic and tactical planing to improve conduct

Life cycle approach

Prevention and control

Voluntary agreements

Productivity approach & triple bottom line reporting

Market Conduct & Regulation What are we looking for …

Valu

e C

reati

on

Evolution Regulatory System

Market Instruments

Anticipation and prevention

Regulatory reformpricing policy

Cost reduction imposed as best route to lower prices

Partnership &Collaboration

Strategic and long-term plans fully integrative between customer & industry

Limited regulatory intervention

Corporate citizenship

principles

prescription

• Differential (higher) pricing of commercial water usage yielded competition in water storage & distribution.

• Disproved assumptions of natural monopoly and homogeneity of water. New entrant challenged & exploited ‘fit for purpose’ water usage.

• Regulatory system needs to accommodate technology disruptors as a cornerstone to value creation and community welfare.

Source: Stormwater Harvesting and Utilisation in the City of Salisbury

Cross Industry, competitive lessons from a water monopoly

High regulated

price invited competition

Incumbent assumed customer

preferences

Government mandated

incumbent water utility

inappropriately (i.e. consistent

quality + supply)

Shadow Pricing grey water

‘highly profitable’

New entrant reduced water from Murray

River + damage to wetlands

☑ Positive Externalities

☑ Contestability☑ Fulfilled

customer need☑ Profitable ☑ Improved customer

engagement

Cost LeadershipDominant

Rate of Return, Price Cap

DifferentiationEmergent

Price / Quality spectrum

Customer Engagement

Time, experience, effort

Sell what is

required

Sell what is made

Sell what you know

Sell who

you are

Valu

e

Cre

ati

on

Partnerships with customer

towards solutions

Anticipate & shape future & latent customer

needs

React to customer need

Day to day service

Indexed return

benchmark

Cross over from ‘cost leadership’ to ‘differentiation’ for infrastructure

providers will enable above average returns, a high level of customer

satisfaction reflecting better long term strategic planning, embed a culture of consultation & collaboration and rely

less on regulators as umpire with customers

Leadership Lessons

The Goal

The Key

The Means

Over Done

Commercial & Policy Lessons

Regulatory Lessons

Innovation / Value Creation

Whole of Supply Chain

Customer Engagement

Cost Leadership

Accommodate all sources of value

creationPrinciples based

approach

Joint Ventures & AlliancesVertical Integration

Avoid simplistic customer

assumptionsDiminishing benefit

to customers & economy

Transport Colloquium 2005Tomorrow’s Transport Infrastructure

Thank you

Any further questions please refer to our contact details below.Garry Bowditch

garry@vmax.com.au Ph: 0414 977 683

All rights reserved, © vmax Consulting 2005

Patricia Pascuzzo

patricia@vmax.com.au Ph: 0400 292 441