Detroit

If the numbers provided in recent articles (here & here) are to be believed, the Detroit Water & Sewerage Department (DWSD) is in dire financial straits. 

This is completely understandable as the population of the city has been dropping, leaving ever fewer people to pay the fixed depreciation and increasing maintenance costs of past capital investments. Over-sized infrastructure is a major drain on any utility, and it is one of the most legitimate reasons to aggressively price water services in order to encourage conservation.

Another major issue appears to be delinquent accounts (150,806 out of 323,900 - 48,4%), with an average debt of roughly US$780, for a total of US$118M. Shockingly, this represents only a fraction of the total US$5 billion in debt that the utility has accrued. 

The average monthly water bill is US$75, which means that the utility is grossing US$24.3M per month, US$11.3M of which is going straight into accounts receivables. With the US$13M left over, DWSD has to pay salaries, other operational costs, etc. not to mention the US$5 billion (!) in debt. Looked at it another way, the debt represents 32 years' worth of collected sales.

This calls into question activists' accusations that DWSD is undertaking this campaign to ready itself for privatization. It is hard to imagine a private utility that would take a second look at the DWSD without significant public assistance in cleaning up the debt situation - even with 100% collection rate. Given Detroit's otherwise disastrous debt situation, this is very unlikely.

Whether the disconnection strategy will yield results remains to be seen. While the utility is right to seek redress from bad payers, outright disconnection effectively reduces the customer base, without providing a solution to sponge up the accounts receivables mess. Disconnecting customers is also costly, to wit:

3000 disconnections per week are 600 disconnections per day, 5 days a week. Depending on the efficiency of technicians, the opposition of residents, the distance between disconnections, etc., we can conservatively assume that this will require 75 technicians (1 disconnection per hour per technician, 8 hr/d). Assuming that a technician's yearly salary is about US$35,000, the monthly cost of the disconnection program is at least US$218K, or about 2% of uncollected monthly sales, not including management costs, gas, depreciation of vehicles, etc...

In other words, this disconnection operations makes sense only if it results in at least a 2% monthly improvement in collected sales. If customers are not paying their bills for lack of money, this seems like an unattainably ambitious goal. If they are failing to pay for lack of discipline or any other non-financial reason, this program might just work.

Innovation in a conservative industry

Water and sanitation is the ultimate conservative industry. In the Western world, where 24/7/365 water is taken for granted, the human, financial, and political consequences of failure are dire.

Utilities, both public and private, understandably spend significant time planning for service breakdowns and make repairs as fast as possible. In fact, it is with a sense of rightful pride that technicians regale with tales of burst pipes fixed in the dead of night under whipping rain and howling winds.

Sadly, the overwhelming importance and focus on sustained services negatively impacts the speed an scope of innovation. The "if it ain't broke, don't fix it" principle, as one might call it, radically discourages innovation, and nowhere is it more prevalent than in the water and sanitation industry. Interestingly, other industries with equally high safety requirements (airplanes come to mind) still manage to innovate over time. To be fair, there have been innovations in the watsan sector, particularly for water and wastewater treatment, but industry-transforming innovation, such as is currently underway at SAUR with the advent of the CPOs, has been rare and limited.

A few causes can be identified, not all of which apply in every case, of course :

• systems that work - the advent of widespread (in rich countries) home-based water and sanitation services is one of the truly great achievements of the last 100 years
• an emphasis on investment over operations - it is much more satisfying to build new (and safely well-tested) infrastructure than to look for ways to optimize operations.
• a fractured market, with few industry leaders with the wherewithal to embark on transformative innovation - most single-city utilities have trouble benchmarking their performance with others, in part because local conditions are so important.
• a few very large players with a history of self-satisfaction and complacency - funding agencies, private firms, consultants, etc. (disclaimer : I worked in this world for several years and participated in the enforcement of the status quo)
• extremely profitable markets - in some countries, water utilities have historically enjoyed very comfortable monopolistic financial positions, reducing the incentive to innovate to reduce costs and protect margins.
• extremely unprofitable markets - in other countries, water utilities barely survive financially and have neither the human nor financial resources to innovate.
• strict regulatory environment and/or labor laws that discourage risk-taking and restrict labor engagement in tranformative change
• political pressure - avoid technical failure at all costs and preserve social peace with labor unions
• long operations contracts - while contract durations are getting shorter, contracts with >5 year duration that do not explicitly require innovative solutions effectively stifle it.
• limited public sector desire for innovation - civil servants who either award private contracts and/or regulate public utilities seldom require technological or organizational breakthroughs from service providers (contractors, consultants, utilities, etc...) with the notable exception of treatment facilities
• self-selection of people who favor safety over risk : because of the conservative nature of the industry, the people drawn to water/sanitation are not typically the free-thinkers and innovators drawn to other, historically more dynamic, industries.

To further that last point, it is worth noting that some of the most innovative solutions currently 'shaking up' the industry come from people who are not watsan engineers, but rather data scientists, software engineer, etc.

The status quo is being challenged, and rightly so, by the advent of Big Data and the Internet of Things, and by new entrants in the various markets. Whether the current players (equipment providers, operators, consultants, finance players, etc.) are best suited to rise to the challenge remains to be seen, even though some are clearly trying to.

The determining factors will be whether (a) their diagnosis of the changing landscape around them is accurate, and (b) they can share this diagnosis and rally their staff behind a common, desirable target that 'makes sense' from the human and technical points of view.