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How do boards and executives make confident investment decisions when their information is imperfect, resources are limited, and regulatory scrutiny is increasing? Nick Russ, our Lead for Water Services and Network Industries, argues that it’s about recognising uncertainty and being clear on choices and trade-offs.
Water services organisations are being asked to do a lot. Most are inheriting ageing infrastructure and facing compliance challenges, and also need to respond to growth. They’re planning ambitious investment programmes and preparing for economic regulation, all while trying to keep services affordable for customers.
With capital programmes growing relative to recent levels of delivery, boards and executives not only need to be confident that the projects can be delivered, but also that the right investments have been selected, that priorities and trade-offs are clear, and that their programme will create value for customers and communities.
We know less than we'd like to admit
In practice, getting to that kind of confidence is rarely straightforward. Investment decisions are often made with incomplete information (for example, patchy data on the condition of assets), competing priorities, and limited resources.
Right now, multiple water services organisations are simultaneously planning to increase investment programmes, putting pressure on contractors’ capacity, supply chains, and the cost of delivery.
In that difficult environment, the challenge is no longer simply identifying infrastructure needs, it’s making confident investment decisions despite uncertainty.
But imperfect information is inevitable
Many water services organisations are inheriting assets, systems, and information from multiple councils, with different approaches, levels of maturity, and understanding of their networks. Some have detailed asset information and condition data, but many are working with significant knowledge gaps.
For new water organisations making investment decisions with a high degree of uncertainty, the key challenge isn’t eliminating that uncertainty, because in many cases that simply isn't possible. Instead, decision makers need to assess how much confidence they can have in the information available to them, and identify where that uncertainty is material enough to influence investment decisions.
Good investment decisions don’t require perfect information. They require a clear understanding of what’s known, what’s uncertain, and the consequences of getting it wrong.
Too often there is an expectation that capital forecasts represent a high degree of certainty. In reality, they reflect a series of assumptions and judgements made using the best information available at the time.
This is particularly important with large capital programmes, where investment decisions will be influenced by asset condition, growth projections, customer demand, and resilience requirements.
Boards and executives should therefore be asking not only “What is in our capital programme?”, but also “How confident are we in the information and assumptions that sit behind it and in our ability to deliver it?”.
Discussions framed in that way create a much better foundation for setting priorities, making funding decisions, and engaging with future regulatory scrutiny than simply assuming the forecasts are correct.
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Not everything that could be done should be done
Most water organisations are unlikely to be short of worthwhile investment opportunities – the challenge is deciding which investments should happen first.
Historically, capital planning has often been driven from the bottom up. Asset managers identify asset needs, engineers identify potential projects, and those projects are assembled into a capital programme. But that is only part of the picture.
Boards and executives also need to take a top-down view. What outcomes matter most to customers? What levels of service are communities willing to pay for? How much investment can be financed sustainably? What benefits will be realised now, and which investments primarily create value for future generations?
These questions don’t always have straightforward answers. An asset may clearly need replacing, but there may be another investment that would provide more value for customers. A growth project may create long-term benefits, but it may also put short-term pressure on customer charges. A resilience investment may reduce future risk, but it may be difficult to compare that benefit directly with more immediate service improvements.
A strong capital programme involves a series of choices
This is where prioritising becomes a strategic capability. The best capital programmes are not simply lists of projects, but reflect a set of conscious choices about where limited resources will create the greatest value for customers and communities.
Every investment decision involves trade-offs between current and future customers, between levels of service and affordability, and between competing investment priorities. Every dollar committed to an investment is a dollar that can’t be spent somewhere else.
That is why confidence in a capital programme depends on more than understanding what needs to be done, it depends on being confident the right choices have been made.
Funding doesn’t guarantee delivery
Many organisations can identify worthwhile investments and develop a business case for funding them. Far fewer consistently deliver large capital programmes on time, within budget, and in a way that achieves the intended outcomes.
The ability to deliver real-world improvements for communities depends on much more than having the money – it depends also on having the right procurement strategy, strong capability in programme management, contractors having capacity, and the right choice of delivery model.
This challenge is likely to be amplified as multiple water services organisations seek to increase investment simultaneously, competing for contractor capacity, specialist skills, and key inputs, and so potentially putting upward pressure on costs and creating additional delivery risks.
Procurement decisions are particularly important. Choices around contract packaging, allocation of risk, programme structure, and engagement with the delivery market can have a significant influence on whether investment is delivered efficiently and whether organisations receive value for money. Projects can quickly translate into poor value if delivery costs escalate or programmes are repeatedly delayed. In that sense, some capital programmes fail even before construction starts.
Ultimately customers don’t experience capital programmes, they experience the outcomes those programmes deliver. Boards and executives therefore need to be confident not just in the need for the investment, but also that the organisation has the right capability, delivery model, and market approach to convert the programme into completed projects and better outcomes.
Poor forecasts have consequences
Forecasting has traditionally been treated as a planning exercise, but that’s changing. Capital forecasts are often used to justify future funding needs, which in turn influence debt requirements, financial plans, and ultimately the charges customers are expected to pay.
Forecasts are no longer simply an internal management tool, but instead form a critical part of the story that boards and management tell customers, funders, and, increasingly, regulators.
But having told a story that higher prices are necessary to fund a large investment programme, organisations can face an understandable backlash if the programme fails to deliver, through project delays or expected improvements not materialising. And as well as your customers, regulators may also be asking why prices increased when the investment didn’t happen or the promised outcomes were never delivered.
The situation can become even more acute if service performance deteriorates at the same time, with more service interruptions, water restrictions, or asset failures.
In those circumstances, confidence can erode quickly among customers, councils, regulators, and elected representatives, increasing the likelihood of closer scrutiny and calls for intervention.
Under-forecasting can be just as problematic as over-forecasting. Organisations may find themselves responding to deteriorating assets, unexpected growth, or new compliance requirements without adequate financing or delivery capacity in place.
Economic regulation will change the conversation
Economic regulation is built on transparency and accountability. Over time, regulators, customers, elected representatives, and the media are able to compare what organisations said they would do with what they actually did. Information disclosure is the foundation of that approach.
For organisations that consistently make realistic forecasts and deliver on commitments, that transparency should build trust and confidence. But when organisations materially overstate what they intend to invest, fail to deliver planned programmes, or can’t clearly explain variances between forecasts and outcomes, they start to lose the confidence of their customers and communities.
Councils and politicians may then question whether investment plans were realistic in the first place, and regulators may consider further intervention.
The example of Tiaki Wai in Wellington gives an indication of how this can play out. In recommending additional regulation for Tiaki Wai, the Commerce Commission highlighted the importance of increased transparency, scrutiny of investment delivery, and independent assessments of expenditure forecasts and plans.
The Commission said information disclosure would help show whether Tiaki Wai was delivering on its commitments and whether stronger regulatory tools might be needed in future. When the Government later decided to impose performance requirement regulation on Tiaki Wai, Ministers explicitly linked the intervention to restoring confidence that the money being collected is delivering the infrastructure and services that customers have been promised.
The Commission has also pointed to its access to a broader regulatory toolkit, and the option of recommending stronger measures if performance concerns justify it.
A capital programme is no longer just an internal planning document, it’s also a public commitment
When organisations lose the confidence of customers, councils, regulators, and government, the consequences can extend well beyond reputation. Increased scrutiny – additional information-disclosure requirements and performance obligations, and more direct regulatory intervention – becomes more likely.
In the next phase of reform, water services organisations will increasingly be judged on whether their forecasts are realistic, their priorities are clear, their commitments are delivered, and their customers receive the outcomes that were promised. In this context, credibility may be the most important asset a water organisation can have, and rebuilding that credibility once it’s lost is inevitably a long and difficult task.
