Managing and monitoring the franchise
Where a local authority’s assets are maintained under contract, it must manage the contract so as to:
- meet its own service commitment to the ratepayers; and
- ensure that the assets are managed in a suitable manner for the long term.
The authority should allocate adequate resources (either staff or contractors) and establish systems to perform this role.
Public concern over any change in the responsibility for operation and management of the service is likely to persist until considerably more experience with alternative service delivery options has been gained. In particular, allaying public concern will depend upon objective information on the benefits or disadvantages that result from alternative systems of delivery. In this climate, the development of (and systematic reporting against) appropriate performance standards must be a priority for any authority which adopts alternatives to the traditional method of service delivery.
When a local authority is developing options for delivery of services, it should consider carefully what level of control it requires. This would then be reflected in the type of agreement which the authority would set up to deliver the services. Performance measures and monitoring are an effective way of providing the necessary level of assurance to ensure protection of the assets and the long-term public interest.
The more restrictive and specific the agreement is, then the greater will be the level of assurance – but the incentives for innovation and possible cost savings will be less. The less restrictive and specific the agreement is, then the greater will be the possibility for innovation and savings – but the risks inherent in the arrangement will also be greater.
We expected that the Council would have:
- Allocated suitable resources and established the necessary systems to manage and monitor United Water’s performance under the franchise agreement and, in particular, the company’s adherence to the customer service provisions of the customer charter.
- Ensured that it has access to sufficient information from United Water to allow it to assess, validate and audit the company’s performance.
- Put in place procedures and performance specifications to enable it to monitor maintenance and renewal of, and additions to, the assets during the franchise.
- Put in place procedures to enable it to monitor customer service and quality assurance performance during the franchise.
- Created procedures for dealing with poor performance or non-performance by the franchisee.
- Created procedures for assessing the required condition of the assets to be returned to its control at the end of the franchise.
- Put in place procedures for regular communication with the franchisee.
In April 1997, the Council established a Monitoring Committee to monitor all contracts – including the water and wastewater franchise.
In the 1997-98 Annual Plan, objectives have been established for monitoring the
The Monitoring Committee has yet to establish monitoring systems to specify information requirements from United Water.
The Monitoring Committee has met once since it was formed. It did not address any issues to do with the franchise agreement. No minutes were taken and it did not report back to a meeting of the full Council.
The franchise agreement allows the Council to have access to all reports and data produced by United Water which are necessary to monitor the franchise.
We recommend that, when a local authority is determining how to manage and monitor a franchise, it should:
- Establish the necessary systems and allocate suitable resources to manage and monitor the franchise from its commencement.
- Implement a programme of auditing the performance of the franchisee to provide the level of assurance it requires. The programme should incorporate risk-based audits, systematic inspections of work quality, and periodic reviews of the franchisee’s quality control systems. Where possible, the auditing function should be integrated with the monitoring of asset condition, and the results of audits documented to provide a record of contractor performance and a source of data for future retendering.
- Develop an Asset Management Plan which establishes clear benchmarks of
existing asset condition and service levels. This will provide a sound basis to
develop clear procedures for:
- dealing with poor performance or non-performance by the franchisee;
- assessing the required condition of the assets before they are returned to the authority’s control at the end of the franchise;
- dealing with a range of extreme events; and
- communicating with the franchisee as a basis for ongoing administration of the franchise.
We expected that the Council would have allocated suitable resources and established the necessary systems to manage and monitor United Water’s performance under the franchise agreement and, in particular, the company’s adherence to the customer service provisions of the customer charter.
When local authorities contract out services they need to have access to the resources, skills and experience required to manage and monitor the contracts they enter into. The scale of need increases as the scope and complexity of the contract increases.
The Council formally established a Monitoring Committee on 14 April 1997 to monitor all contracts – including the water and wastewater franchise.
The Council’s former Director of Works is currently under contract to chair the Monitoring Committee and to supply engineering consultancy services to the Council.
We were told that the Monitoring Committee had met once (in August 1997), but had yet to meet to discuss the water and wastewater franchise issues. No evidence could be produced to us of the committee having met or reported back to a meeting of the full Council.
The Council’s Chief Executive is in the process of establishing with United Water the monitoring procedures required under the franchise agreement. At the time of carrying out the audit the exact requirements had yet to be established.
Annual Plan objectives have been established for monitoring the franchise agreement. Monitoring procedures must be in place by 30 June 1998.
We expected that the Council would have ensured that it has access to sufficient information from United Water to allow it to assess, validate and audit the company’s performance.
Local authorities need to have access to information on the management and operation of the service in order to: protect the long-term interests of ratepayers; monitor the level of customer service; and reduce the risk of a franchisee exploiting the agreement or the assets.
Local authorities also need to have access to information that will enable them, in due course, to retender the service – either in the event of default during the term of a franchise agreement or at the renewal date.
Local authorities should also be able to assure themselves that the performance of franchisees is acceptable in relation to both the standards set in the franchise agreement and relevant industry standards.
Information for monitoring purposes needs to be accurate and relevant, and should be based upon the Asset Management Plan and specific service requirements specified in the franchise agreement.
The franchise agreement allows the Council to have access to all of United Water’s data and records which enable the Council to meet its monitoring requirements.
The franchise agreement requires United Water to produce to the Council:
- monthly water quality reports;
- as-built plans of upgrades or modifications to the assets;
- an annual report on water costs12;
- an annual report on solvency; and
- a five-yearly report on the condition of the assets.
At the time of the audit the Council had not specified the full range of the information which it requires from United Water to conform to these requirements.
The Council has yet to develop a technical process to audit or analyse any information it receives from United Water.
The ability of the Council to meet its monitoring requirements relies largely on United Water producing the data and reports required by the franchise agreement.
As procedures for the supply, collection, analysis and storage of information are central to the ability of local authorities to manage and monitor franchise agreements, requirements and procedures should be established for:
- timely provision of relevant information; and
- independent verification of information to assess the “true” picture at any time.
We expected that the Council would have put in place procedures and performance specifications to enable it to monitor maintenance and renewal of, and additions to, the assets during the franchise.
It is essential that the assets belonging to services contracted out are maintained to a suitable standard and capacity throughout the term of the contract. In the case of water and wastewater services, particularly, the long-term health and financial effects on the public could be significant if the assets are allowed to deteriorate. Consequently, local authorities need to monitor and audit the quality of maintenance to ensure that the condition of the assets is maintained.
Asset inspections enable a local authority to review the contractor’s work schedules against the maintenance needs of the assets and the priorities of the authority. As such, condition monitoring provides an empirical basis for ongoing maintenance. Monitoring changes in the condition of the assets also provides a basis for measuring the performance of the contractor.
An auditing programme might consist of:
- inspection of work quality against standards and specifications;
- targeting audits to address identified risks; and periodic reviews of the contractor’s quality systems against standard specifications.
Where an authority has entered into a “performance”, “output” or “total maintenance management” contract – whereby the contractor’s performance is judged by the assessed condition of the authority’s assets – regular inspections are an indispensable part of contract supervision.
Procedures and performance specifications for the Council to monitor maintenance of the assets are set out in the franchise agreement.
The Council’s monitoring will take place through:
- monthly water quality reports and as-built plans (see paragraph 525);
- the 5-yearly report on asset condition; and customer complaints.
The Council may choose to audit United Water’s five-yearly report on the condition of the assets.
The Council has yet to determine these monitoring arrangements. It plans to do so by June 1998.
The general asset management strategy as detailed by the agreement will be adequate only if what is proposed to be done is in fact done. Ideally, the monitoring arrangements should have been in place from 1 July 1997.
If the Council is to have confidence in the integrity of the maintenance procedures, it will need to develop sound audit mechanisms to validate the accuracy of the asset condition and performance indicators, and will need to commit continuous resources to monitoring. Given the importance and duration of the franchise, monitoring arrangements need to be sound enough to ensure their consistency and effectiveness throughout the term of the franchise.
Local authorities should be aware (from very early in the planning process) that the level of assurance which can be provided by monitoring is related to the accuracy of, and relationship between:
- the Asset Management Plan;
- the objectives of the franchise agreement;
- the specific service delivery and technical standards expected of the franchisee; and
- the information required and provided by the franchisee.
Monitoring Customer Service
We expected that the Council would have put in place procedures to enable it to monitor customer service and quality assurance performance during the franchise.
Local authorities need to be able to assess the quality of customer service throughout the contract to ensure that the level of service provided is satisfactory.
Authorities can also expect a contractor to have in place management systems for tracking jobs, scheduling work and ensuring that quality assurance procedures are followed. Being able to rely upon the quality assurance systems of the contractor is a key feature of any long-term partnership between an authority and a contractor, and of the effort required to supervise the contract.
The Council has no procedures enabling it to monitor, or to require United Water to report on, customer service and quality assurance standards.
Council officers told us that they have the capacity to monitor customer service performance through the Council’s regular customer satisfaction survey.
While use of a customer satisfaction survey can assist accountability, it should not be relied on to the exclusion of other forms of accountability.
Poor Performance and Non-performance Procedures
We expected that the Council would have created procedures for dealing with poor performance or non-performance by the franchisee.
Local authorities will be responsible for ensuring that the public interest is protected in the event of poor performance or non-performance by a franchisee. Authorities should have guidelines and procedures for dealing with a variety of poor performance or non-performance – ranging from failure to meet minor quality standards through to total business failure.
The provisions of the franchise agreement for redress in the event of poor performance or non-performance by United Water are the express obligations on the company, in combination with the dispute resolution procedures, arbitration, and finally the termination procedure (if necessary).
The Council has set out a series of definitions that it believes are broad and comprehensive, and yet also directive and capable of reflecting standards existing from time to time.
The mechanism for monitoring performance – and therefore identifying poor performance or non-performance – had yet to be established at the time of our audit. The monitoring processes are to be agreed by July 1998.
Based on appropriate provisions in the franchise agreement and (if relevant) the customer charter, a local authority will need to develop appropriate audit systems which will enable it to establish how the franchisee is performing against the terms and conditions of the agreement and specific performance standards.
Asset Condition on Return
We expected that the Council would have created procedures for assessing the required condition of the assets to be returned to its control at the end of the franchise.
Local authorities will need to ensure that, at the end of a period of contracting out, the assets are returned in the required condition. They should have established how this will be done before that time arrives.
The franchise agreement specifies reporting requirements covering the asset condition in each of the final five years of the term of the franchise (that is, years 26 to 30 of the initial term and – if the franchise is renewed – years 46-50 of the extended term).
The Council has yet to establish procedures to ensure that the condition of the assets is assessed at the appropriate time. Given that the first report for this purpose is not due from United Water for another 25 years, the main issue for the Council seems to be to ensure that a record is kept of that fact and of exactly what the report should cover.
We emphasise that the ability of local authorities to assess the final condition of the assets on their return will be directly related to: the quality and accuracy of the Asset Management Plan; and the information received and auditing which has taken place throughout the duration of the franchise.
Liaison with the Franchisee
We expected that the Council would have put in place procedures for regular communication with the franchisee.
Effective communications foster a close and productive working relationship between an authority and the franchisee.
A successful communications package would include: a programme for regular communications between the authority and the franchisee; and provision for each communication to be properly documented, as an agreed basis for ongoing administration of the franchise agreement.
The Council has not established any formal procedures for regular communication between itself and United Water. However, Council officers told us that since the agreement began they have developed informal procedures for regular communication, such as: exchange of letters; meetings on key issues; and day-to-day oral contact with staff and senior management on various issues.
12: To establish that the unit prices for water and wastewater charges do not exceed the Auckland Average Price, and that bulk water costs are being fairly passed on to the customers.