The utilities must transform

If you live in Pakistan and have recently received your gas bill, I bet you are fuming (pun intended). Gas consumers have received their latest bill with increases of up to 5 times from last month’s bill – that is 5 times in one month!

Call it crazy, madness and quite unbelievable if you are an ordinary bill-paying consumer. But it is not an unlikely outcome if you have followed the working of governments, policymakers and gas companies in Pakistan, or for that matter in many countries in the developing world.

While the current gas situation in Pakistan is complex with a number of factors such as the cost of the import of liquefied natural gas (LNG) and subsidies thrown into the equation, the basic issues faced by gas companies are common to all utilities and simple to understand.

Utilities are expected to provide one or more of the basic needs for life – water, electricity, gas – without which one cannot imagine living. In trying to fulfil their mission, most have to operate in all kinds of physical areas: densely populated cities, planned suburbs, unplanned outskirts, urban slums and vast tracts of rural and agricultural lands.

Their operations face two basic threats to cash flows. First, the rampant theft in certain areas and/or by consumer categories which means the utility is unable to bill for the complete supply. And second, their inability to collect billed amounts due from consumers.

Both of these added up leave a large gap in cash requirements for the utility which the central regulator (separate from the government in Pakistan) accommodates in the tariff charged by the utility to paying consumers. The regulator provides this relief under the premise that the utility will reduce its losses by improving its operations in the future. Many developing economies in South Asia, Latin America and Africa follow similar models.

So far so good.

However, in reality, most utilities are unable to improve beyond a certain point and lost revenues remain at the same levels for long periods of time. There are two main reasons for this to happen.

Firstly, the writ of the state is ineffective in rural areas as well as city outskirts and slums. Theft remains rampant despite there being laws against it since law enforcement is a challenge and this coupled with weak governance structures leave utilities exposed to potential avenues for corruption.

Secondly, and more importantly since this is under management control, most utilities suffer from a lack of capacity to modernize. They continue to utilize archaic methods to operate with a business model based on large manpower pools, extensive operations driven by reactive maintenance requirements, reliance on mostly manual labour and usage of inferior and outdated technologies.

It is evident that the old business model based on manual/physical solutions is incapable of handling the needs of large and diverse consumer segments which continue to grow and all have their own peculiar requirements.

To take one example, measuring the loss of the energy unit (water, electricity, gas) in today’s world should not be much of a challenge if proper energy accounting processes are used and unit losses are measured at various levels between the source and the end usage.

However, most utilities in Pakistan at best have a single estimated number for energy loss and are unable to provide accurate data at the consumer/area level which could be used to design interventions. They are also unable to respond swiftly to consumer cries for help when their services breakdown. Whereas, simple organisational efficiencies using basic management tools would allow predictive maintenance which follows a disciplined maintenance regime to ensure minimum service downtime.

We see success stories in India and Latin America where some utilities have not only shown significant improvement in their financial performance but also created strong relationships with their customers through improved service levels. This has been achieved mostly via modernization driven by a strong desire of management to change the culture and is supported by the effective use of new technologies.

Management teams have followed the path to digital transformation and changed the traditional utility business model with the use of data analytics, mobility, smart grids, the internet of things (IOT), etc. Even the biggest issue of revenue leakage due to theft has been tackled with some success using data and machine learning software.

Similarly, the use of mobile devices and software by maintenance crews can result in a significant improvement in service levels.

Many industry experts make this success a case for privatization since privatized entities have shown stronger improvements driven by greater incentives.

But they are not the only ones to have initiated organisational and digital transformation. There are many examples of state-owned organizations throughout the world which have taken this path and it would be too simplistic to assume ownership change from state to private is essential to transform. This is a complex issue and merits discussion at another time.

Returning to the current problem in Pakistan, the government and policymakers are at fault and so were those before the current regime since they all followed the same path. Their hands may be tied as far as trying to keep the utilities afloat, but their inability to realize that raising prices without undertaking meaningful reform to modernize is not going to be enough.

They are only kicking the can down the road until a few years later when they will have to burden the consumer again. They must first understand what is required for utilities to become sustainable, find ways to modernize, and embark on the journey of business model change via digital transformation.

It is possible to significantly improve upon the ancient work practices of utilities and only through this change will we be able to transform these organizations making them efficient and consumer-oriented. The key is the management’s willingness to undertake change with the objective of improving consumer service levels and to be able to stick to this formula over the medium to long term.

I am not sure if any of this will translate into lower gas bills for us but at least we will know there is some method to the madness!

 

The writer is a strategy consultant who has previously worked at various C-level positions for national and multinational corporations