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INCORPORATING SUSTAINABILITY IN INVESTMENT DECISION MAKING FOR
INFRASTRUCTURE PROJECTS
Angela Reidy B Eng (Civil), MBA (Technology Management)
Submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy
School of Engineering and Built Environment
Faculty of Science and Engineering
Queensland University of Technology
2018
Incorporating sustainability in investment decision making for infrastructure projects i
Keywords
Benefit
Business case
Cost Benefit Analysis
Decision making
Decision-making process
Investment appraisal
Investment logic
Policy
Sustainable
Sustainability
Value
Values
ii Incorporating sustainability in investment decision making for infrastructure projects
Abstract
The United Nations Sustainable Development Goals (SDGs), adopted in 2015,
present a refreshed international commitment to sustainability. In order to respond to
the SDGs, infrastructure providers must review and revitalise efforts that address
sustainable development in their operations. Sustainability continues to be embedded
in government policy, and many infrastructure providers publicly state organisational
commitments to sustainability practice. Sustainability captures systems thinking and
requires an integrated approach to analysis across the social, environmental and
economic domains.
Sustainability practice for infrastructure is largely focused on the incorporation
of sustainability initiatives in design solutions. Hence, project designs may be
optimised through a range of sustainability features such as managing resource use and
emissions, designing for resilience and incorporating initiatives to improve health and
safety. The sustainability initiatives would apply to a predetermined solution assessed
in a project business case.
However, in project management practice, strategic decision making at the front
end of projects, centred on the findings of a business case, has the greatest opportunity
to influence sustainability outcomes. The business case is underpinned by economic
analysis that would typically consider a range of solutions, from ‘do nothing’ to both
infrastructure and non-infrastructure interventions. Current practice requires that
decisions on major investments are typically contained within a narrow frame of
analysis involving the comparison of costs with benefits or value, and where a point
value is used as part of a pass/fail rule. In current practice, the consideration of value
often neglects the broader values of infrastructure that may be positive (of recreational,
aesthetic, environmental and community value) or negative (the impacts on local
cultural values). This narrow framing of economic analysis does not support
sustainability and may preclude innovative project solutions and opportunities to
address emerging challenges such as climate change. Integrated water cycle
management (IWCM) presents an example of a sustainable approach to managing
water resources, providing a range of values that are often difficult to fully represent.
Incorporating sustainability in investment decision making for infrastructure projects iii
A mixed methods design approach involving both quantitative and qualitative
research phases was adopted for this research. Using a literature review, a conceptual
model was initially developed for the investment decision-making process. This model
was firstly tested through a quantitative study, the results of which were used to inform
the design of a further qualitative study. The focus of this research was to propose an
optimal system approach to support project selection and decision making for
infrastructure projects within a strong sustainability framework. The interviews with
expert practitioners that were conducted as part of the qualitative study, informed
analysis based on an iterative process of coding into themes using the NVivo software
package.
Using an infrastructure business-model framework, this research proposes a new
model that moves analysis away from point-value assessment, to considerations of
both outcomes (benefits) and outputs (values) This research presents a sustainability
investment logic that considers outcomes in terms of benefits that are measureable
indicators, and outputs in terms of values that may be both qualitative and quantitative.
Benefits assessment for infrastructure investments align with broader policy directions
and should include considerations of benefit for the wider community, beyond the
boundaries of the infrastructure provider. This research challenges the premise that
better analysis should be based on assigning monetary value to a broader array of
economic, environmental and social items within a cost-benefit framework. Cultural
values provide an example of a social dimension that is increasingly being
acknowledged in importance through government policy, but would be highly
contestable if assigned monetary value.
In current practice, the institutional settings also influence how economic
analysis is developed, interpreted and used in decision making. In this research, a
model has been developed that builds on the concept of sustainability investment logic
and broadens the framework to take into account the institutional factors that influence
the rules and norms for the appraisal process. Within this model, participation by
stakeholders, including end-users, informs the identification of values and benefits,
and is integral to the considerations of trade-offs between competing value dimensions.
This research has addressed a single infrastructure sector, the water sector, but
the findings apply across infrastructure sectors, taking account of infrastructure as a
public good.
iv Incorporating sustainability in investment decision making for infrastructure projects
Table of Contents
Keywords ............................................................................................................................. i Abstract ............................................................................................................................... ii Table of Contents ................................................................................................................ iv List of Figures ................................................................................................................... viii List of Tables ....................................................................................................................... x List of Papers from this Thesis ............................................................................................ xi List of Abbreviations ......................................................................................................... xii Statement of Original Authorship ...................................................................................... xiii Acknowledgements ........................................................................................................... xiv
Chapter 1: Introduction ................................................................................... 1
1.1 Background ................................................................................................................ 1 1.2 Context ...................................................................................................................... 6 1.3 Purposes..................................................................................................................... 9 1.4 Significance and Scope ............................................................................................ 10 1.5 Thesis Outline .......................................................................................................... 11
Chapter 2: Literature Review ........................................................................ 13 2.1 Sustainability ........................................................................................................... 13
2.1.1 Background and meaning ............................................................................... 13 2.1.2 Sustainability challenges– a sectoral review .................................................... 17 2.1.3 Sustainability guidance and practical applications ........................................... 19 2.1.4 The role of infrastructure in sustainability value ............................................. 21
2.2 Investment Decision Making .................................................................................... 23 2.2.1 The role of the Business Case ......................................................................... 23 2.2.2 Project Benefits .............................................................................................. 26
2.3 Appraisal Tools ........................................................................................................ 28 2.3.1 Financial Analysis .......................................................................................... 29 2.3.2 Economic Analysis ......................................................................................... 29 2.3.3 Extended (or Advanced) Cost Benefit Analysis .............................................. 31 2.3.4 Multi- Criteria Decision Analysis (MCDA) .................................................... 31 2.3.5 Other .............................................................................................................. 33
2.4 Critiques of Current appraisal models (CBA & MCA) .............................................. 34 2.4.1 CBA ............................................................................................................... 34 2.4.2 MCDA/MCA ................................................................................................. 42
2.5 The role of the private sector .................................................................................... 44 2.6 Participation ............................................................................................................. 45 2.7 Calls for a new approach .......................................................................................... 48
2.7.1 The multiple values of infrastructure .............................................................. 49
Incorporating sustainability in investment decision making for infrastructure projects v
2.7.2 Incorporating sustainability in investment appraisal ........................................ 50 2.7.3 Value Capture and Public Value ..................................................................... 53
2.8 Institutional framework ............................................................................................ 56 2.8.1 Policy Context ................................................................................................ 57 2.8.2 Boundaries ..................................................................................................... 58 2.8.3 Governance and regulation ............................................................................. 60
2.9 The research questions.............................................................................................. 61 2.10 Summary and Implications ....................................................................................... 62
Chapter 3: Theoretical Framework ............................................................... 65 3.1 Introduction .............................................................................................................. 65 3.2 Theoretical Framework- constructs ........................................................................... 66
3.2.1 Rationality and public management/ decision making ..................................... 67 3.2.2 Complexity ..................................................................................................... 69 3.2.3 Complex Adaptive Systems ............................................................................ 70 3.2.4 Rationality, Complexity and Value ................................................................. 71
Chapter 4: Water Management in Australia ................................................. 75
4.1 Introduction .............................................................................................................. 75 4.2 Water Industry in Australia ....................................................................................... 76 4.3 Water Sector Advocacy and Support......................................................................... 81 4.4 Integrated Water Cycle Management ........................................................................ 82 4.5 Summary .................................................................................................................. 85
Chapter 5: Research Design ........................................................................... 87 5.1 Introduction .............................................................................................................. 87 5.2 Methodology and Research Design ........................................................................... 87
5.2.1 Methodology .................................................................................................. 87 5.2.2 Research Design ............................................................................................. 90
5.3 Instruments/ framework ............................................................................................ 92 5.4 Procedure and Timeline ............................................................................................ 93
5.4.1 Initial Quantitative Study (Stage One) ............................................................. 93 5.4.2 Review and Hold Point ................................................................................... 99 5.4.3 Qualitative study (Stage Two)....................................................................... 100
5.5 Ethics ..................................................................................................................... 105 5.6 Conclusion ............................................................................................................. 105
Chapter 6: Results ........................................................................................ 107
6.1 Introduction ............................................................................................................ 107 6.2 Outcomes of initial research stage........................................................................... 107
6.2.1 Outcomes and use of Quantitative Study (Stage One).................................... 115 6.3 Outcomes of Stage Two Qualitative Research (Interviews) ..................................... 117
6.3.1 Participants and process ................................................................................ 117 6.3.2 Interview Responses- First stage of coding ................................................... 122 6.3.3 Second stage coding ..................................................................................... 136 6.3.4 Final stage coding ......................................................................................... 145
6.4 Summary of Results ............................................................................................... 159
vi Incorporating sustainability in investment decision making for infrastructure projects
Chapter 7: A Model for Sustainability Investment Appraisal .................... 161
7.1 Introduction ........................................................................................................... 161 7.2 Synthesis of the two research phases ...................................................................... 162 7.3 Sustainability- a refreshed commitment .................................................................. 166 7.4 Participation ........................................................................................................... 171 7.5 The Role of Benefits and Value- A Sustainability Investment Logic ....................... 176
7.5.1 From infrastructure business models to a sustainability investment logic ....... 176 7.5.2 Benefits ........................................................................................................ 180 7.5.3 Value ........................................................................................................... 183
7.6 A new model for decision making .......................................................................... 195 7.6.1 CBA- an extended approach? ....................................................................... 196 7.6.2 A new model ................................................................................................ 200 7.6.3 Enablers ....................................................................................................... 203 7.6.4 Inputs ........................................................................................................... 211 7.6.5 From Trade-offs to Negotiation and Optimisation ......................................... 216 7.6.6 Decision Making .......................................................................................... 219 7.6.7 Performance assessment and reporting .......................................................... 220 7.6.8 Implementation- the use of pilot projects ...................................................... 223
7.7 Application of Sustainability Investment Logic and Appraisal Model ..................... 224 7.8 The research questions ........................................................................................... 226 7.9 Summary ............................................................................................................... 227
Chapter 8: Conclusions ................................................................................ 230 8.1 Summary of research .............................................................................................. 231 8.2 Implications for practice ......................................................................................... 234 8.3 Implications for theory ........................................................................................... 236 8.4 Limitations of research ........................................................................................... 236 8.5 Recommendations .................................................................................................. 237
8.5.1 Recommendations for further research .......................................................... 237 8.5.2 Recommendations for Industry ..................................................................... 239
Bibliography ....................................................................................................... 240
Appendices .......................................................................................................... 261
Appendix A Key Survey Questionnaire ............................................................................ 261 Appendix B Interview Schedule- Agency Representatives ................................................ 266 Appendix C Interview Schedule- Independents (consultants) ............................................ 268 Appendix D Interview Schedule- Central Agencies .......................................................... 270 Appendix E Key Survey Results ...................................................................................... 272 Appendix F NVivo Tree Map showing coding weight associated with key themes ........... 273 Appendix G Results: Selected responses on approaches to analysis .................................. 274 Appendix H Results: Selected responses on approaches to Decision Making .................... 275 Appendix I Results: Selected responses on definitions of sustainability ............................ 276 Appendix J Explanatory results table: participation .......................................................... 277
Incorporating sustainability in investment decision making for infrastructure projects vii
Appendix K Results: Selected responses on the impacts of boundaries .............................. 282 Appendix L Results: Selected responses on policy and organisation goals ........................ 283 Appendix M Explanatory results table: enablers ............................................................... 284 Appendix N Explanatory results table: inputs ................................................................... 287 Appendix O Explanatory results table: benefit assessment ................................................ 291 Appendix P Explanatory results table: value assessment ................................................... 295 Appendix Q Explanatory results table: trade-offs .............................................................. 300
viii Incorporating sustainability in investment decision making for infrastructure projects
List of Figures
Figure 2.1. Project Management Process Groups from PMBoK (PMI, 2008) ......... 24
Figure 2.2. Assurance Review Process adapted from Australian Government Guidelines (Department of Finance, 2017) ................................................ 26
Figure 2.3. Spectrum of Evaluation Methods (modified from Reidy et al. (2014) ....................................................................................................... 53
Figure 2.4. Conceptual framework for this research ............................................... 64
Figure 3.1. Theoretical Framework ........................................................................ 67
Figure 3.2. CAS framework (Rhodes et al., 2010, p.11) ......................................... 71
Figure 3.3. The evolution of environmental economics (based on Pirgmaier (2017))...................................................................................................... 73
Figure 5.1. Three questions for research design (adapted from Creswell, 2003) ...... 87
Figure 5.2. Summary graphic of Research Design .................................................. 91
Figure 5.3. Selection of interview participants for research .................................. 104
Figure 6.1. Interview participant roles .................................................................. 118
Figure 6.2. The Three Stages of NVivo Coding .................................................... 121
Figure 6.3. Key themes from interviews addressing the Business Case ................. 122
Figure 6.4. Key themes from interviews addressing decision making ................... 126
Figure 6.5. Key themes from interviews addressing sustainability ........................ 129
Figure 6.6. Participation ....................................................................................... 131
Figure 6.7. Boundaries ......................................................................................... 133
Figure 6.8. Enablers ............................................................................................. 136
Figure 6.9. Inputs ................................................................................................. 143
Figure 6.10. Benefits ............................................................................................ 147
Figure 6.11. Value Creation ................................................................................. 149
Figure 6.12. DEFRA’s Total Economic Value Framework (from DEFRA (2007)).................................................................................................... 151
Figure 6.13. Trade-offs ........................................................................................ 156
Figure 6.14. Implementation ................................................................................ 158
Figure 7.1. Aspects of current participatory processes that may influence new approaches to participation in investment decision making ..................... 173
Figure 7.2. Infrastructure business model hierarchy (adapted from Bryson et al., 2014) ................................................................................................ 177
Figure 7.3. Typical elements of ILM (adapted from review of Victorian and Queensland Government guidance) ......................................................... 179
Incorporating sustainability in investment decision making for infrastructure projects ix
Figure 7.4. A Sustainability Investment Logic model ........................................... 180
Figure 7.5. Value Creation- the dimensions of value ............................................. 185
Figure 7.6. A model for Incorporating Sustainability in Investment Decision Making ................................................................................................... 202
Figure 7.7. The role of policy in urban water management in the state of Victoria ................................................................................................... 206
Figure 7.8. Strategic and Policy context of Projects (adapted from Young & Grant (2015)) .......................................................................................... 207
Figure 7.9. Trade-offs and Negotiation ................................................................. 218
Figure 7.10. Performance Assessment Framework for projects ............................. 221
Figure 7.11. Application of Sustainability Investment Logic ................................. 224
x Incorporating sustainability in investment decision making for infrastructure projects
List of Tables
Table 2.1 Valuation techniques commonly adopted in environmental economics ................................................................................................. 38
Table 4.1 A history of water management in Australia from Mackay (2007).......... 77
Table 4.2 Water Service Providers by State in Australia ........................................ 79
Table 4.3. Benefits associated with IWCM or 'green infrastructure ........................ 83
Table 5.1 Three Methods of Analysis using Content Validity Analysis .................. 96
Table 5.2 Guidance for use of modified kappa values in determining item relevance .................................................................................................. 97
Table 5.3 Organisations with membership of the HLCC in WSAA ........................ 99
Table 6.1 Roles of participants in survey ............................................................. 108
Table 6.2 Survey responses reflecting how sustainability is incorporated in current practice ....................................................................................... 109
Table 6.3 Survey responses on analysis techniques that are used in current practice ................................................................................................... 110
Table 6.4 Effectiveness of analysis techniques within a sustainability framework .............................................................................................. 111
Table 6.5 Benefits of a Sustainable approach to decision making ......................... 113
Table 6.6 Barriers to a sustainable approach ......................................................... 114
Table 6.7 Quantitative study outcomes and impacts on second stage of research .................................................................................................. 116
Table 6.8 Interview participant details ................................................................. 119
Table 6.9 Business case guidance referenced in interviews ................................... 125
Table 6.10 Sustainability statements by Australian water utilities ........................ 139
Table 6.11 Selected social aspects and means for valuation (from Hardisty (2010)).................................................................................................... 154
Table 7.1 Comparison of Quantitative and Qualitative results .............................. 165
Table 7.2 Participatory design instruments(source: National Research Council, 2008) ...................................................................................................... 176
Table 7.3 Common valuation techniques .............................................................. 191
Table 7.4 Capability shift for sustainability (adapted from Kemp and Martens (2007)).................................................................................................... 210
Table 7.5 Financing mechanisms for climate change infrastructure in Scotland (from Roelich (2015)) ............................................................................. 214
Table 7.6 Key Considerations for Sustainability Model ........................................ 226
Incorporating sustainability in investment decision making for infrastructure projects xi
List of Papers from this Thesis
Peer Reviewed Conference Papers
Reidy, A., Kumar, A., Kajewski, S. (2014) Sustainability in Infrastructure
Investment- Building the Business Case. In Engineers Australia Convention 2014
(Practical responses to Climate Change), 25-27 November 2014, Melbourne,
Australia.
Reidy, A., Kumar, A., Kajewski, S, (2015) Sustainability in Road Projects-
Building the Business Case. In AAPA 16th International Flexible Pavements
Conference 2015, 13-16 October 2015, Gold Coast, Australia.
Reidy, A., Kumar, A., Kajewski, S. (2016) Front End Decision Making for
Infrastructure Projects- A Sustainability Framework. In 8th International
Conference on Maintenance and Rehabilitation of Pavements (MAIREPAV8), 27–
29 July 2016, Singapore.
Reidy, A., Kumar, A., Kajewski, S, (2016) Sustainability and decision making in
infrastructure projects- the institutional settings. In Sustainability in Public Works
Conference, 24 – 26 August 2016, Melbourne, Australia.
Reidy, A., Kumar, A., Kajewski, S., Lamari, F. (2018) From point value to
sustainability investment logic- infrastructure appraisal and the challenges of
climate change. In Climate Adaptation 2018 Conference Papers, NCCARF,
Melbourne.
Other
Reidy, A., Kumar, A., Kajewski, S, (2016) Front end decision making for water
projects. Poster presentation In OzWater ‘16, 10- 12 May 2016, Melbourne,
Australia.
Reidy, A., Kumar, A., Kajewski, S., Lamari, F. (2018) Value and valuation- why
public infrastructure requires a business model approach for sustainability
appraisal. In Sustainability in Public Works Conference, 14-15 May 2018, Sydney,
Australia.
xii Incorporating sustainability in investment decision making for infrastructure projects
List of Abbreviations
BCR Benefit Cost Ratio
BRM Benefits Realisation Management
CBA Cost Benefit Analysis (also referred to as BCA or Benefit Cost
Analysis)
GRI Global Reporting Initiative
ILM Investment Logic Management/ Map
ISCA Infrastructure Sustainability Council of Australia
IWCM Integrated Urban Water Management
MBI Market Based Instruments
MCA Multi-Criteria Analysis
MCDA Multi- Criteria Decision Analysis
NPV Net Present Value
PPP Public Private Partnership
ROA Real Options Analysis
ROI Return on Investment
SDGs Sustainable Development Goals
VfM Value for Money
WTP Willingness to Pay
WTA Willingness to Accept
Incorporating sustainability in investment decision making for infrastructure projects xiii
Statement of Original Authorship
The work contained in this thesis has not been previously submitted to meet
requirements for an award at this or any other higher education institution. To the best
of my knowledge and belief, the thesis contains no material previously published or
written by another person except where due reference is made.
Signature:
Date: 12 June 2018
xiv Incorporating sustainability in investment decision making for infrastructure projects
Acknowledgements
This research was initiated through a number of conversations with Prof Arun
Kumar, who agreed to be my supervisor through my PhD candidature. I would like to
acknowledge Prof Kumar’s support and guidance throughout my PhD journey. His
sage advice has helped keep me to continue in the face of uncertainty. I would also
like to acknowledge and thank Prof Stephen Kajewski for his support as a supervisor
throughout my research, together with Dr. Fiona Lamari who has stepped in more
recently as a supervisor taking over the role of Assoc Prof Karen Manley.
Professional editor, Diane Kolomeitz, provided copyediting and proofreading
services, according to the guidelines laid out in the university-endorsed national
‘Guidelines for editing research theses’.
Incorporating sustainability in investment decision making for infrastructure projects 1
Chapter 1: Introduction
In Australia, public infrastructure plays a critical role in shaping urban
environments and supporting thriving communities. From nation-defining initiatives
such as the Snowy Mountains Scheme in post-war Australia, to the water fountains
placed in the local park, decisions on infrastructure affect communities every day. How
effective are these decisions in meeting the needs of communities for which they are
provided? Are the commitments to sustainability by infrastructure providers reflected
in decision making? Can sustainability provide a framework to guide better decision
making?
This chapter introduces the thesis topic and provides background and context to
the research problem. In parallel with the academic discourse, a broader discussion is
emerging in the public domain on the relevance and application of economic models
that form the basis of major decisions. These broader questions are canvassed, prior to
setting out the overall structure of this thesis.
1.1 BACKGROUND
As the settlement of Brisbane emerged, grand civic buildings such as Parliament
House, the Land Administration Building and the Treasury Building emerged on a
planned grid of streets, marking confidence in the future prosperity of the new
township. A triangular footprint for the township was bounded by its eponymous river,
a source of transport, trade and severe floods since colonisation and settlement. By the
1960s, a regular outing for Brisbane residents might be a trip into the city centre using
the public tramway system and a picnic lunch on the river slopes at North Quay. Now,
the trams are long gone, and the grassy slopes of the river bank have been overtaken
by the brutalist modernism design of Brisbane’s Riverside Expressway, conceived by
American consultants Wilbur Smith and Associates. The expressway, and the removal
of trams, formed part of the Brisbane Transportation Study that sought to transform
Brisbane to a modern city characterised through efficient movement of motor vehicles.
In implementing the Brisbane Transportation Study, the decisions of the Queensland
Department of Main Roads, supported by Brisbane City Council, had a significant
influence on land planning, landscape design and urban amenity of Brisbane, but these
2 Incorporating sustainability in investment decision making for infrastructure projects
factors were subordinate to a ‘system of automobility’ (Butler, 2008, p.473). The
expressway marked the start of city development that turned its back to the river. The
decision to proceed with the expressway gave little regard to the concerns voiced by
members of the Brisbane Freeway Protest and Compensation Committee, representing
residents that were either affected or dispossessed by the works, and no regard to the
views of the local Turrbal people with their spiritual connections to the river over
centuries.
Moving forward to the current era, investment decisions are largely based on a
prescribed, rational approach built upon the findings of a project Business Case. For
significant projects of national importance, the business case is submitted to
Infrastructure Australia for review and approval. Such projects have a high level of
public interest, and the outcomes of decisions are widely reported in the local media.
Using the example of the business case proposed by the Queensland Government for
the Brisbane Cross Rail project (a north-south rail connection across the Brisbane
River), media reports were focused on the Benefit Cost Ratio (BCR) derived in
economic analysis. Whilst the Queensland Government’s assessment suggested a BCR
that was greater than one, Infrastructure Australia rejected the project on the basis of
its own analysis whereby costs were greater than benefits (Marszalek, 2017).
It is argued that project decision-making has evolved from the top-down
processes of the 1960s, but has not necessarily improved. At a political level, recent
projects such as the East West Link in Melbourne have been aborted with arguments
around the deficiencies in analyses associated with the value of benefits relative to
costs. For smaller scale, local projects, similar problems emerge in representing the
benefits in relation to project costs. The costs incurred through these decisions are
often significant, sometimes with millions of dollars invested in planning, design, site
works and contractual commitments, and may impact on the ability of governments to
allocate funds to competing community priorities.
Renewed international commitments to sustainable development, through the
UN Sustainable Development Goals, provide an additional frame to guide decision
making. As infrastructure agencies seek new solutions to emerging problems around
climate change, resource depletion and social and societal priorities, prescribed
analysis techniques often fail to justify investments in new and innovative approaches
to infrastructure solutions. Whilst the difficulties in justifying sustainable
Incorporating sustainability in investment decision making for infrastructure projects 3
infrastructure investments are documented across infrastructure sectors, this research
uses the example of the water sector taking account of the specific structural and
legislative framework that applies to the sector. Whether addressing water
management challenges in an integrated and systematic way, or looking at new models
for service provision, the rules and processes for business case development often act
as barriers to opportunities that deliver sustainable and long term community benefits.
In this research, a sustainability framework refers to the complex inter-relationships
between the social, cultural, ecological and economic dimensions that should be
considered for infrastructure that supports the urbanisation of regions.
In translating sustainable development objectives to a practical urban
development context, industry membership organisations such as the Green Building
Council of Australia (GBCA) and, more recently, the Infrastructure Council of
Australia (ISCA) have been established. These organisations respond to the need for
uniformity in the approach and understanding of sustainability and seek to improve
sustainability performance with a focus on guiding planning, design and operation of
building and infrastructure assets. The World Green Building Council concluded that
there is a strong imperative for developing ‘green buildings’ in view of considerations
of demonstrated benefits that include increased asset value, lower operating costs, and
improved workplace productivity and health (World Green Building Council, 2013).
Property markets respond to commercial forces and increasingly, property developers
are recognising ‘value’ in terms of the returns on investment. Hence, the incorporation
of sustainability features is now widely adopted across the building sector.
On the other hand, the public good aspect of infrastructure works and the long
life-spans of public assets, mean that a financial metric of ‘return on investment’ does
not fully represent the multiple values of infrastructure that may change over time. As
an example, a water reservoir may be the primary source of water supply for a local
community and the business case for such an initiative may have been initially valued
on this basis. But, over time, the water body may also be used for recreational uses
such as boating or rowing, the surrounding areas may be used as community parklands,
local fauna and flora may be regenerated in the surrounding catchment, and cultural
artefacts may be identified and interpreted to enable greater awareness of local
heritage. Furthermore, infrastructure is traditionally viewed from a single-sector
approach, often ignoring the wider interdependencies within infrastructure networks.
4 Incorporating sustainability in investment decision making for infrastructure projects
Taking the example of the water reservoir and dam, the works also include potential
relationships with energy generation and distribution networks, flood and drainage
infrastructure, and pipeline corridors that may potentially support other linear
networks. In contrast, poor decision making may result in the value of infrastructure
declining over time, and the impacts being viewed as negative. Projects such as the
Elwha Ecosystem Restoration project in the state of Washington, USA, involved the
removal of a dam wall in 2012 to restore river flows, rehabilitate river beds, and once
again allow the movement of migratory salmon within the watershed. There are
growing calls to remove the much larger Glen Canyon Dam that was completed in
1963, holding back flows on the Colorado River with subsequent impacts on
ecosystems and fisheries.
Concepts of ‘green infrastructure’ and ‘green transport’ are pursued as
alternative solutions to infrastructure design, to address perceived benefits around
resilience, liveability, environmental management and health and well-being. Often
these initiatives represent non-traditional approaches to business-as-usual approaches.
An example that is explored in more depth in this research is the case of integrated
water cycle management (IWCM), where stormwater and waste water are viewed as a
resource for recovery and reuse, thereby challenging the traditional solution of
concrete pipes and centralised systems of treatment and disposal. As a public good, it
can be difficult to ascribe financial or economic value around the wider benefits of
these new approaches, and as such, the business case may not be able to present a
favourable recommendation for such initiatives to proceed.
Various tools have been developed to guide the incorporation of sustainability
into the design, procurement and commissioning phases of projects. However, there
remains a gap in an acceptable industry approach to incorporating sustainability into
the initial business case for projects. At present, much of the guidance for the Business
Need/ Business Case phases of project development focuses on financial and economic
analysis of options, with limited, if any, consideration of sustainability considerations.
This research seeks to understand how organisations with strong sustainability
aspirations address sustainability in decision making.
It is difficult to foresee how infrastructure assets will perform and adapt into the
future, to meet challenges that include climate change and resource depletion; changes
in the global economy and energy prices; an increasingly complex regulatory
Incorporating sustainability in investment decision making for infrastructure projects 5
environment and community; and social issues (Marlow & Humphries, 2009).
Infrastructure has unique characteristics including complex and multiple values with
direct economic returns, but also wider environmental and social values and impacts.
And yet, decision making in the public sector favours formal rationality, whereby
financial or economic analysis forms the basis of decision rules. Within this paradigm,
market mechanisms form the benchmark for analysis where benefits that can be
attributable to elements of the infrastructure service are measured and monetised.
The uncertainty and difficulties in front-end decision making has been subject to
criticism across various sectors. In the transport sector, the Victorian Auditor
General’s Office considered that the decision-making process around the now
abandoned East West Link project was based on ‘flawed advice’, whereby ‘the likely
net benefits of the project were not sufficiently demonstrated and the failure to
properly resolve project risks before entering contracts exposed the state to additional
financial risk’ (Victorian Auditor General’s Office, 2015, p.vii). In the water sector,
the Australian Academy of Technological Sciences and Engineering (ATSE)
identified a need for new governance models to better manage urban stormwater in
Australia and proposed more ‘robust’ appraisal models that acknowledge the
complexity of integrated water management systems. According to ATSE, the ‘present
models are too narrow in scope and cannot assess the true value of investments made
into green stormwater systems that provide high amenity value to our cities while
delivering on basic water services’ (Australian Academy of Technological Sciences
and Engineering (ATSE), 2015, p. 4).
With over thirty years of professional experience as an engineer and project
manager in infrastructure development, covering areas of coastal works, transport,
water supply and civil works, my early understanding of sustainability was grounded
in incorporating ‘triple bottom line’ assessments in major project proposals for local
government. My subsequent professional work and training has had a strong emphasis
and inclination in ‘front end’ project management processes based around the former
UK Office of Government and Commerce (OGC)’s proprietary systems for better
managing projects, including Managing Successful Programmes (MSP) and the
Gateway Review process, together with the Project Management Institute’s Project
Management Book of Knowledge (PMBoK). Through my professional work, I have
observed the gaps in knowledge and capability in applying sustainability principles to
6 Incorporating sustainability in investment decision making for infrastructure projects
business case development. Whilst the topic and content of this research is based on
sustainability, an inter-related question is how business cases for infrastructure
projects more generally can be more effective and appropriate.
1.2 CONTEXT
At the start of this research in 2014, an underlying question was whether
sustainability as a word was still relevant to infrastructure providers. In some sectors,
anecdotal comments suggested that sustainability groups within organisations were
being disbanded. This research reinforces the importance of sustainability based on a
broader understanding that captures systems-thinking and integrated analysis across
the social, environmental and economic domains. The importance and relevance of
sustainability is based on its ability to better frame responses to complex problems
such as climate change, resource depletion, population growth and social changes.
Public sector infrastructure providers at national, state and local levels continue to
commit to sustainability principles. In the private sector, the ownership and operation
of infrastructure assets is also a growing part of investment portfolios. A sustainable
investment approach, that takes account of environmental, social and governance
factors, is becoming a business imperative for investment banks, as the Global
Sustainable Investment Alliance (GSIA) stated in its 2016 report:
Responsible investment assets managed by asset managers, asset owners,
banks and advisors in Australia and New Zealand grew substantially, both at
retail levels and institutional levels, across all responsible investment
strategies. In both countries combined, responsible investment assets have
grown from 2014 to 2016 to reach $515.7 billion, and to a point where in
Australia, sustainable investments now account for 50 percent of all
professionally managed assets. (Global Sustainable Invetment Alliance, 2016,
p. 4).
For this research, the term ‘decision-making’ refers to considerations that are
typically presented in Business Need/ Business Case stages for a given project
initiative, whereby various options for delivery and operations are analysed to address
an identified problem and a proposed solution is defined. For a public transport
initiative, this may involve the consideration of options such as improved bus services,
light rail services and heavy rail options. For water supply projects, options may
include traditional reticulated/‘piped’ potable water supply options (‘centralised’
Incorporating sustainability in investment decision making for infrastructure projects 7
solutions) versus water harvesting and treatment from local catchments
(‘decentralised’ solutions) or policy initiatives based on demand management. Such
options would be expected to have different benefits, disbenefits and outcomes, when
assessed within a sustainability framework.
Building on the Australian Government’s assurance processes, various state
governments in Australia have developed guidance for investment decision making.
Victoria’s Investment Management Standard (IMS) is considered ‘best practice’ for
managing major projects (Young et al., 2012, p.891). The literature review highlights
the guidance and rules supporting business case development. However, in practice,
approaches to decision making adopted by infrastructure agencies varies based on a
range of institutional factors. These include organisational boundaries, legislative
requirements and governance arrangements. This research also refers to international
practice, as many of the issues and potential solutions are topical across the world. Of
note, the UK Government’s “Green Book” published by HM Treasury, providing
guidance on appraising proposals for public sector works in the UK, remains a seminal
reference for practice in Australia. In addition, the work by two research facilities in
the United Kingdom is drawn upon, namely the IBUILD Research Centre based at the
University of Newcastle (UK) and International Centre for Infrastructure Futures
(ICIF) (University of Bristol/ UCL). Both research facilities have been established as
part of the National Infrastructure Plan to inform public debate on the future of
infrastructure in the UK.
Decision making typically involves numerous agents performing a variety of
roles ranging from project promoter, analyst, central agency reviewer, stakeholder,
user, advocate, board member and political representative, and each perspective
provides a different viewpoint and skill-set in the development of the final adopted
solution. More recently, there have been criticisms in the media of political influence
in the decision-making processes. In response, governments at both national and state
levels have established specialist infrastructure agencies (Building Queensland,
Infrastructure NSW, Infrastructure Victoria amongst others) that are charged with
providing independent advice on infrastructure priorities within each state.
The complexity of investment decision making, for which the business case
provides supporting analysis, has been recognised in various reports, studies and
guidance material. Traditional approaches to organisational management and practice
8 Incorporating sustainability in investment decision making for infrastructure projects
favour formal rationality and seek to simplify the presentation and analysis of facts
and data, often reducing problems to a linear model within boundaries that may be
defined by jurisdictional boundaries. Market-based valuation techniques, such as Cost
Benefit Analysis (CBA), are commonly prescribed to form the basis of decision
making. CBA draws on elements of environmental economics and applies standard
economic thinking to monetise both costs and benefits that can be attributed a market
value. In 2014, a report by the Productivity Commission (the Australian Government’s
peak advisory body on economic, social and environmental policy and regulatory
matters) confirmed a preference for infrastructure agencies to adopt ‘properly made’
CBA as part of investment analysis, despite the shortcomings of CBA outlined in the
report.
On the other hand, a range of critiques recognise that complex problems require
a multi-faceted approach to assessment that broadens assessment beyond using
financial analysis as a ‘Go/No Go’ decision rule. One analogy claims that complex
policy problems require the use of an appropriate set of tools from a toolbox, rather
than using a single tool to inform decision making (Walker, 2000). In line with this
thinking, an evolution in approaches to economic analysis is in development. Starting
with environmental economics, ecological economics has emerged, and now new
models are proposed, which have been described by various authors as socio-
ecological economics or complexity economics. These new models seek to take a
trans-disciplinary view within analysis that recognises there are factors to be
considered that are both within and beyond the market, and that these need to come
together in an integrated manner. These new approaches align with sustainability
considerations in relation to intergenerational equity and systems thinking.
Given the historical failures of financial markets, most recently observed in the
Global Financial Crisis of August 2007, some critics question the current public
management framework that relies on abstract versions of competition to emulate
market mechanisms in government. The social licence of government requires the
consideration of more complex social relationships across society, rather than
consideration of point-value economic transactions (Bowman et al., 2014).
The emerging consideration of private sector involvement in the delivery and
operation of infrastructure services remains relevant based on considerations of
perceived efficiency gains, performance improvements and capacity for innovation.
Incorporating sustainability in investment decision making for infrastructure projects 9
Regardless of whether the public or private sectors are responsible for delivery and
ownership, infrastructure assets are significant long-term investments that are
provided for community good, and therefore government continues to maintain
regulatory oversight in the provision of these services.
1.3 PURPOSES
The aim of this research is to understand how the sustainability aspirations of
infrastructure providers are translated into the decision-making processes in the pre-
investment stages of the project life cycle. Furthermore, the research seeks to develop
a model for applying a sustainability framework to decision making.
Formal rationality continues to guide investment decision making that is subject
to review by central treasuries and economic regulators, both in Australia and
internationally. As such, alternative project solutions that present positive outcomes in
terms of wider community and environmental benefits over time may be difficult to
justify within standard economic models. Current practice presents a challenge when
new technologies or approaches, such as green infrastructure or integrated water
management, are proposed and the full range of project benefits cannot be fully
identified, quantified or accepted. Guidance for investment decision-making may
support the inclusion of certain sustainability initiatives, but requirements that
emphasise a need for financial/economic analysis limit the ability to apply an
integrated sustainable approach. As a result, the following problems have been
identified:
• Whilst investment decision-making is complex with long term impacts and
a range of stakeholders and political inputs, regulatory guidance shows a
preference to apply economic analysis to inform decision making based on
formal rationality models;
• Within economic models, the environmental and social dimensions of
sustainability are not well understood and attempts to monetise these
elements do not fully capture all costs and benefits for infrastructure
projects; and
• Economic models are built upon assumptions and approximations that are
critical to analysis outcomes but these often discount core community values
and cannot address deep and complex problems.
10 Incorporating sustainability in investment decision making for infrastructure projects
This research uses an empirical approach to assess business case practice within
the water sector, where sustainability is a key driver for organisational activities.
Underpinning this research are the following objectives:
• To understand industry responses and approaches to incorporating
sustainability in investment decision making;
• To understand the wider institutional factors that influence decision making
and that may impact on sustainability outcomes;
• To understand how value may be most effectively assessed within a
sustainability framework.
With the adoption of the United Nations Sustainable Development Goals in
2015, government agencies, businesses and the community all have a role to play in
advancing sustainability in their daily activities. As such, infrastructure agencies
typically adopt sustainability commitments as part of their corporate plans and
strategies. To date, much of the focus on sustainability relates to the sustainability
initiatives that may be applied to pre-defined project solutions resulting from a
business case. There is a need to understand how sustainability may apply to the
decision making that forms part of business case development and the shaping of a
project solution. In an institutional setting, decision making may be complex and
involve a range of actors from across the infrastructure system. Hence, the following
two questions underpin this research:
(1) Do corporate sustainability goals stated by infrastructure agencies translate to
project level decision-making in the pre-investment stage for infrastructure
projects?
(2) What is an optimal system approach to support project selection and decision
making for infrastructure projects within a strong sustainability framework?
1.4 SIGNIFICANCE AND SCOPE
This research contributes to knowledge through linking sustainability with
investment decision making. Whilst Cost Benefit Analysis (CBA) has been the default
assessment tool that has been mandated for investment decision making over several
Incorporating sustainability in investment decision making for infrastructure projects 11
decades, there have been on-going questions regarding its legitimacy and
thoroughness, particularly in assessing the social and environmental impacts of major
infrastructure projects. At the same time, the level of complexity in decision making
has increased, whereby issues such as climate change impacts, resource depletion and
local community concerns add to the mix of considerations in developing project
solutions. Sustainability provides a framework to deal with such complexity. Whilst
sustainability initiatives have been proposed and considered in investment decision
making, a sustainable approach is not fully understood and the development of a
framework and guidelines would assist this process.
1.5 THESIS OUTLINE
This research builds on studies endorsing a sustainable approach to support
optimal investment decisions for public sector infrastructure projects. The research
seeks to understand how sustainability may most effectively be incorporated into
decision making and the institutional factors that continue to impede alternative
approaches to CBA. The literature review (Chapter 2) considers the broader
sustainability aspirations of public sector infrastructure providers and the translation
of these aspirations to project-level decision making at the initial planning/ business
case stage. The literature review has been undertaken from an international
perspective, whereby guidelines for business case development universally propose
the use of cost benefit analysis and numerous commentaries either endorse or question
its application. The research has focused on the application of theory to practice within
an Australian context, taking account of the regulatory environment at national, state
and local levels for infrastructure providers. The literature review presents a
conceptual framework, forming the basis of the subsequent research design and
empirical research.
The theoretical framework for this research (Chapter 3) looks at the concept of
public value based on the linkages between aspects of rational/public choice theory
and complexity theory. Given the influence of economic theory within the decision-
making process, Chapter 3 also briefly discusses the role of economics and the
evolution in thinking on market-based mechanisms specifically for public goods such
as infrastructure.
12 Incorporating sustainability in investment decision making for infrastructure projects
This research has centred on the water sector given the institutional, structural
and operational distinctions that define the sector. Chapter 4 provides a brief
description of the water industry within Australia. Chapter 4 also provides an outline
of a key sustainability challenge for the water industry around integrated water
resource management, noting submissions and findings from the 2015 Senate Inquiry
into Stormwater Management in Australia. Whilst a single infrastructure sector has
been studied, a sustainable approach should address the interconnections and
interdependencies that emerge between sectors such as water/ transport, energy/ water,
and water/ waste.
Chapter 5 describes the research design using an integrated inductive/ deductive
approach (also referred to as a hypothetico-deductive approach) in order to progress
from an abstract logical relationship toward theory based on concrete empirical
evidence. A mixed methods approach was adopted to address the two research
questions, whereby quantitative approaches are suited to the first question, and
qualitative approaches are more applicable to the second research question.
The results of each stage of the research are provided in Chapter 6. Stage One
involved a survey distributed to sustainability professionals in the water sector, with
results subject to Content Validity analysis. Stage Two interviews were analysed,
through a staged coding process using NVivo software.
Chapter 7 provides a detailed analysis of the research results, including a further
integration of literature and theory within the concepts that emerged through both
interviews and the survey. A model is presented for the incorporation of sustainability
in investment decision making.
Chapter 8 provides a summary and concluding statements and Chapter 9
provides recommendations for further research.
Incorporating sustainability in investment decision making for infrastructure projects 13
Chapter 2: Literature Review
2.1 SUSTAINABILITY
2.1.1 Background and meaning
The concept of sustainability emerged in 1972 with both the publication of the
book Limits to Growth by the Club of Rome and the United Nations Conference on
Human Development in Stockholm, however the term emerged in 1980 with the
publication of World Conservation Strategy: Living Resource Conservation for
Sustainable Development (Sachs, 2012). More formal understandings of sustainability
developed following the release of Our Common Future, or the Brundtland Report, in
1987 whereby a commitment to sustainable development was defined at meeting ‘the
needs of the present generation without compromising the ability of future generations
to meet their own needs’ (World Commission on Environment and Development,
1987). The Brundtland Report sought to respond to emerging global issues such as
poverty, resource depletion, climate change scenarios and considerations of inter-
generational equity. The Future We Want, the outcome document from the United
Nations Conference on Sustainable Development held in Rio de Janeiro, Brazil in 2012
(also known as Rio+20), promoted the need to achieve sustainable development
through ‘economic, social and human development while facilitating ecosystem
conservation, regeneration and restoration and resilience in the face of new and
emerging challenges’ (United Nations General Assembly, 2012, p. 2). A key theme of
Rio+20 was the consideration of how to build a green economy, with the outcome
report reinforcing ‘the importance of the evaluation of the range of social,
environmental and economic factors… and their integration into decision making’
(United Nations General Assembly, 2012, p. 12). The challenge of achieving
sustainable development requires concerted policy efforts and direction at the
international level, whilst translating these to meaningful outcomes at the local
community level.
As evidence of changes to global environmental conditions continues to be
gathered, reference to a new geological epoch in Earth’s history- the Anthropocene-
has been informally adopted within the research community. The term Anthropocene
is based on an understanding that human activity has influenced an exit from the
14 Incorporating sustainability in investment decision making for infrastructure projects
Holocene age, and that human activity has the capacity to influence the global
environment (Steffen et al., 2011). A new definition of sustainable development has
emerged in the Anthropocene as ‘development that meets the needs of the present
while safeguarding Earth’s life-support system, on which the welfare of current and
future generations depends’ (Griggs et al., 2013, p. 306). In response to the problems
emerging from the Anthropocene Age, a planetary boundaries approach seeks to return
the earth’s system to that of the Holocene age. A planetary boundaries approach
considers the earth as a single integrated system that requires a ‘safe operating space’
for nine processes identified by Rockström et al. (2009) as:
• Climate change;
• Biodiversity loss;
• Nitrogen cycle;
• Phosphorous cycle;
• Stratospheric Ozone depletion;
• Ocean acidification;
• Global freshwater use;
• Change in land use;
• Atmospheric aerosol loading; and
• Chemical pollution.
With understandings of the Anthropocene becoming more formalised, sustainability
provides a framework to respond to the need to the challenges of addressing planetary
boundaries.
Sustainability continues to be a focus of governments across the world as part of
on-going dialogue between United Nations member states. In parallel with
considerations of planetary boundaries, a growing list of companies across the world
have committed to the United Nations Global Compact, forming the world’s largest
corporate sustainability initiative. The UN Global Compact requires companies to
commit to ten universal sustainability principles, together with supporting the UN
Sustainable Development Goals (SDGs). Introduced in 2015 when the 194 nations
constituting the UN General Assembly adopted the 2030 Agenda for Sustainable
Incorporating sustainability in investment decision making for infrastructure projects 15
Development, the UN SDGs present a refreshed focus to move the world on a
sustainable trajectory (Sachs, 2012). The 17 SDGs aim to address poverty, protect the
environment and create opportunities for all through promoting sustainable, inclusive
and equitable growth, whilst also tackling climate change. The global goals set a
framework at global, national and local levels for sustainability to remain valid into
the future and that sustainability remains a key consideration in the public arena. The
international treaties committing to sustainable development continue to reflect on
government policy in Australia, and world-wide.
In replacing the previously adopted Millennium Development Goals (MDGs),
the SDGs provide a network of goals and targets that provide a basis for moving from
siloed thinking on sustainability to integrated thinking using a systems approach (Hall
et al., 2016). The SDGs aim to provide an integrated approach across sectors in
developing policies, strategies and guidance, addressing a shortcoming in the previous
MDGs (Le Blanc, 2015). In addition, sustainability efforts need to shift from the
advancement of developing nations (MDGs), to all nations. The SDGs provide an
opportunity to re-frame sustainability with a stronger focus on the social systems that
are required to underpin sustainable development.
The SDGs provide an integrated framework that reflects the interdependence of
the economic, social, and ecological domains of sustainability and the complexity in
managing these domains in a systematic way (Haas et al., 2017). The SDGs also
present the opportunity for governance systems to respond through both goal setting
at an aspirational level, and rule making that provides the behavioural prescriptions to
allow goals to be achieved (Young, 2017). Commitments by infrastructure providers
to the SDGs demonstrate the renewed focus on sustainability and its role in addressing
global problems. The challenge for infrastructure providers is to translate these
commitments to project-level decision making.
The related concept of sustainability, however, has numerous meanings1. Over
time, understandings of sustainability have been adapted to a range of perspectives and
frames, hence considerations of environmental sustainability, business sustainability,
1 The University of Reading ECIFM notes the difficulties in defining the term ‘sustainability’ whereby Wilson (1992) describes the term as ‘a fragile theoretical construct’. On the University of Reading’s website, ten definitions for sustainability are provided based on work by Brundtland, Harwood, Pearce, Daly, Holgate, Conway & Barbier and others see http://www.ecifm.rdg.ac.uk/definitions.htm
16 Incorporating sustainability in investment decision making for infrastructure projects
sustainable growth, social sustainability and various other extensions. According to
Adams (2006, p.3), the concept of sustainability ‘is holistic, attractive, elastic but
imprecise’. In discussing the SDGs, the discourse around sustainability often provides
a narrow framing of the ‘trinity’ of interlinking aspects comprising economic, social
and environmental (Gupta & Vegelin, 2016, p. 435). Sustainable development is more
often considered in terms of dualities including considerations of ‘green economy’,
‘green society’ or ‘inclusive growth’. Interpretations of sustainability and sustainable
development are based on varying world views and context. These range from weak
sustainability, where values are strongly anthropocentric and technocentric, to strong
sustainability, with a focus on community values whilst recognising ecological
modernisation (Huckle & Martin, 2001; Santillo, 2007).
When applied to decision making, sustainability assessment aligns with concepts
of ‘Triple Bottom Line’, ‘Integrated Assessment’, and variations of these based on a
holistic assessment of economic, social and environmental dimensions, where the
boundaries between these dimensions are often ‘fuzzy’ (O’Connor, 2006, p.288).
Sustainability assessment has the potential to go beyond Triple Bottom Line or
integrated assessment when fully exploring a spectrum of ‘comprehensiveness’,
‘strategicness’ and ‘integratedness’ (Hacking & Guthrie, 2008, p. 75). Sustainability
assessment should incorporate a temporal scale, in thinking that considers
consequences of actions for future generations, underpinned by principles of ethical
reasoning that focus on systemic impacts. Sustainability provides the opportunity to
incorporate considerations of resilience, taking account of the impacts of climate
change and human disturbance on complex systems and the need for adaptation (Xu
& Marinova, 2013). In the face of new and emerging challenges centred on resource
scarcity and depletion, sustainability provides an operating paradigm that allows
infrastructure providers to respond to complexity and uncertainty (Marlow &
Humphries, 2009).
The ambiguity of sustainability, with no single agreed meaning, has resulted in
the terms sustainability and sustainable development being used interchangeably, and
the concept being exploited to make it compatible with dominant political frameworks,
more recently aligned with a world view that relies on reductionist assessments and
the use of market mechanisms as the basis to value outcomes (Paiva Duarte, 2015;
Kambites, 2014).
Incorporating sustainability in investment decision making for infrastructure projects 17
2.1.2 Sustainability challenges– a sectoral review
Public infrastructure plays a crucial role in transitioning to a more sustainable
society, however the existing business models for infrastructure present challenges to
achieving sustainability aspirations (Loorbachet al., 2010). Significant transitions are
required in order to address key sustainability issues including climate change, impacts
to biodiversity and resource depletion, but also to unlock the inherent value that
infrastructure contributes to the welfare of society. Infrastructure serves as a complex
‘system of systems’ with cross-sectoral interdependencies and multiple values that
may change over time (Rosenberg et al., 2014, p.3).
Sustainability considerations in investment decision-making respond to various
drivers and challenges faced by each industry sector. With leadership and direction
provided by membership associations (Engineers Australia, Consult Australia, Water
Service Association of Australia), government departments and industry leaders, best
practice responses are being pursued through ongoing research, advocacy and
knowledge sharing within various fields of practice. Across all sectors, a common
theme is the need to consider the full range of project options within the initial planning
phase, including ‘do nothing’, ‘non-infrastructure’ solutions (policy interventions such
as demand management), ‘green infrastructure’ solutions, and ‘hard’ engineered
responses, and to analyse these in a rigorous way that encompasses sustainability
principles.
In the energy sector, sustainable outcomes require the consideration of a wider
array of supply side solutions including the use of renewable technologies, together
with demand-side considerations. The current institutional settings that prioritise short
term efficiencies in solutions to energy provision come at the expense of longer term
thinking that takes account of the complex social interactions and impacts of energy
networks, together with the possibilities that innovations in technology may achieve
(Bolton & Foxon, 2015).
In the transport sector, the most pressing sustainability issues are resource
depletion and air pollution, and these risks are often ignored in conventional planning
(Litman & Burwell, 2006). Other transport impacts include congestion, accident
damages, facility costs, mobility impacts, human health impacts, community
interactions, mobility, aesthetics, habitat loss, water pollution and hydrological
impacts. To address these impacts, a more effective decision-making process should
18 Incorporating sustainability in investment decision making for infrastructure projects
involve comprehensive analysis of impacts, the consideration of a broader range of
solutions, and greater involvement from the public to accurately reflect community
values (Bratzel, 1999). Solutions proffered include a full range of technical solutions,
demand management, economic reform (e.g. congestion charging), alternative modes
of transport and land use/ community design changes. In a UK context, Spackman
(2013) outlined a number of investment analysis techniques and favoured the
Appraisal Summary Table (AST) that assesses projects against criteria that align with
wider organisational goals. Whilst developed by the Department for Transport in the
United Kingdom for the transport sector as an alternative to the commonly used CBA,
Spackman noted that it is now being used to assess coastal and flood initiatives
(Spackman, 2013).
In the coastal sector, challenges arise from inundation and erosion due to sea
level rise and changing wind and wave patterns. Traditional responses to these
problems have focused on ‘hard’ engineered solutions based on sea walls, groynes and
breakwater protection. Alternative responses are emerging in academic discourse,
ranging from a retreat/ do nothing option (Niven & Bardsley, 2013) to the use of
coastal reefs as coastal protection schemes (Christie & Colman, 2006). In seeking to
assess solutions to changes to coastlines emanating from sea level rise, storms and sea
surges, the use of resource valuations and the monetisation of ecosystem services are
commonly included in evaluations, but these have provided only a partial analysis of
the potential impacts of climate change stresses (Turner et al., 1996). With coastal
policy including the concept of Integrated Coastal Zone Management (ICZM), the use
of Social Impact Assessment in decision making is advocated, taking account of sense-
of-place and considerations of cumulative impacts, social carrying capacity, resilience
and vulnerability (Vanclay, 2012).
In the water sector, transitioning to sustainable water management needs to take
account of the wider value of water beyond economic value and utility pricing, and
should include consideration of ecological value in sustaining ecosystems and social
functions including cultural values (Brugge & Rotmans, 2007). In response to
changing rainfall patterns leading to both water shortages associated with drought, and
subsequent flood conditions with more intense rainfall, the concept of Integrated
Urban Water Management (IWCM) has been widely embraced in the water sector,
resulting in identifying opportunities to harness, store and re-use rainwater runoff. As
Incorporating sustainability in investment decision making for infrastructure projects 19
a result, water supply authorities and municipal authorities are increasingly working
together to harness stormwater that was traditionally managed as ‘runoff’, and other
water sources treated as ‘waste’. A key issue for decision making is the assessment of
traditional ‘hard’ grey infrastructure (often with lower capital costs) against new (and
often untested) ‘green infrastructure’ alternatives. In Australia, there are calls for a
‘commonly agreed, robust assessment tool or framework’ that may support the
evaluation of IWCM options within a sustainability framework (Mitchell, 2006). A
range of responses have been proposed (Schulz, Short, & Peters, 2012), however an
Australian Government Senate Enquiry in 2015 highlighted on-going issues in being
able to justify alternative solutions to infrastructure problems through standard
evaluation methods2. Further work is needed to build capacity to allow greater
participation of the community in decision making for sustainable water management
(Brown & Farrelly, 2009).
For other sectors of economic infrastructure, initiatives such as green ports
(Abood, 2007), green airports (Shen et al., 2010), and the consideration of renewable
or passive sources for energy supply and heating (Hannon et al., 2013; Masini &
Menichetti, 2012; Busch et al., 2017), have been proposed. Each of these sectors is
subject to unique planning and regulatory arrangements, however the principles
discussed in this paper are applicable to all infrastructure sectors.
2.1.3 Sustainability guidance and practical applications
Sustainability considerations are increasingly being incorporated into the design,
construction and operation phases of project lifecycle. Various rating tools have been
developed for use in Australia, New Zealand, United Kingdom, United States, Canada,
Sweden and Hong Kong to guide sustainability practice and to provide a framework
to assess performance and benchmark across the infrastructure industry (Griffiths et
al., 2015). These tools include CEEQUAL, Envision, Greenroads, and the
Infrastructure Sustainability tool developed by the Infrastructure Sustainability
Council of Australia (ISCA).
In addition to formal rating tools, sustainability guidance is also available in
various jurisdictions for public infrastructure works. The Commissioner for
2 The 2015 Stormwater Management Inquiry conducted by the Australian Government’s Environment and Communications References Committee is discussed in more detail in Chapter 4.
20 Incorporating sustainability in investment decision making for infrastructure projects
Environmental Sustainability in Victoria identified nine investment streams for
consideration in developing public infrastructure assets, each linking to project
specific opportunities (Commissioner for Environmental Sustainability Victoria,
2014). These are:
• Energy reduction;
• Water efficiency;
• Climate resilience;
• Materials resource efficiency;
• Transport and travel;
• Health, wellbeing and productivity;
• Community, amenity and built form;
• Emissions and environmental protection; and
• Ecosystem services.
Such guidance is focused on tactical performance responses, and is typically
incorporated into an already agreed, functional design. The ability to apply
sustainability initiatives in the design and operations phases is reliant on front-end
decision making that determines project scope, budget and timing parameters that
effectively control subsequent project phases (Samset & Volden, 2015, p. 5). However,
the ‘front end’ decision making processes involving the selection of a design solution
and the definition of scope for infrastructure projects may present a range of
sustainability outcomes.
The application of sustainable concepts at the operational or tactical level is
important and useful, however, such approaches do not necessarily lead to sustainable
outcomes such as improvements to economic development at the strategic level. There
is a need to differentiate between doing the projects more sustainably which is the
current focus of sustainability rating schemes, and ‘choosing the more sustainable
projects’, which is based on front-end decision making linked to the business case
(Haavaldsen et al., 2014, p. 5).
Incorporating sustainability in investment decision making for infrastructure projects 21
2.1.4 The role of infrastructure in sustainability value
Infrastructure services (water, transport, energy and communications) are critical
to well-functioning communities across the globe. Infrastructure is central to
sustainable development through its ability to bring benefits across the economic,
social, and environmental dimensions of society, providing benefits in areas such as
connectivity and mobility, health outcomes and climate change mitigation and
adaption (Shen et al., 2010; Foxon et al., 2015). The benefits of infrastructure are wide
and complex, and the application of economic models that simply assess value in terms
of materials and labour inputs in construction do not fully represent the diversity of
benefits such as “increased productivity, improved communication, efficient transport
systems, access to affordable energy and avoidance of natural catastrophes and
systematic disruptions” (Hall et al., 2016, p. 8). At the same time, infrastructure
projects may contribute to sustainability challenges including resource depletion and
air pollution, congestion, mobility impacts, human health impacts, community
interactions, urban amenity and environmental impacts.
Real or perceived notions of the failure of government to provide efficient and
effective services, has led to a growing role of the private sector involvement in public
infrastructure, through:
• The introduction of private sector management practices
(commercialisation);
• Charging developers for infrastructure and/or requiring them to provide
infrastructure;
• Contracting out (outsourcing) services;
• Contracting out construction and operations; and
• Full privatisation (Cannadi & Dollery, 2005).
Ownership models enable greater involvement by the private sector in delivery,
operation and maintenance, however, infrastructure services are considered public
assets that are provided for common good and are subject to government oversight in
planning and operation (Reidy, Kumar, & Kajewski, 2014).
Many public sector organisations adopt sustainability objectives at a corporate
level and incorporate sustainability targets and indicators as part of corporate reporting
22 Incorporating sustainability in investment decision making for infrastructure projects
processes. In an Australian context, the corporate plans and reports of infrastructure
agencies illustrate the range of interpretations and commitments to sustainability by
organisations that deliver services across the infrastructure sector (Reidy et al., 2014).
Definitions of sustainability vary widely, suggesting that public sector entities require
further guidance on sustainability reporting (Guthrie & Farneti, 2008). In order to
provide clarity for the water industry, Marlow and Humphries (2009, p. 120) proposed
the following operational definition of sustainability:
For a water utility, sustainability is practically achieved when all its activities,
both internal to the business and across its supply chain, achieve net added
value when assessed across each of the triple bottom line outcomes (financial,
social and environmental) over the medium-to-long timescales, considering
all costs and benefits, including externalities.
The Australian Government’s procurement guidelines include the principle of
sustainable procurement through ‘measuring and improving sustainability throughout
the life of the procurement’. The guidelines state that a sustainability approach should
allow for ‘a capacity for development that can be sustained into the future’
(Department of Finance, 2013).
The public sector provides public good that is beyond monetary value and
incorporates natural, social, human, manufactured and financial capital (Birney et al.,
2010). The value assigned to infrastructure assets varies according to the agents who
form part of the infrastructure business model. According to Bryson et al. (2014, p.11):
A publicly-listed investment bank, for example, prioritises the interests of its
shareholders. It is focused upon the economic value of return on investment
over a specific time period at a certain level of risk…At the other end of the
spectrum, a community association, for example, is focused upon the needs of
its local community. It is concerned with not just economic but wider social
and environmental values.
The Global Reporting Initiative (GRI) released its first sustainability reporting
guidelines in 2000, and the guidelines are widely used for sustainability reporting
across the globe by various industry sectors. GRI’s Sector Supplement for Public
Agencies stated that ‘given their size and influence, public sector agencies are
expected to lead by example in reporting publicly and transparently on their activities
to promote sustainability’ (GRI, 2005, pp7-8). Other commentaries highlight the
Incorporating sustainability in investment decision making for infrastructure projects 23
unique value created by public sector entities and propose that sustainability reporting
for the public sector should be tailored to each organisation’s specific activities rather
than being based on generic guidelines (Dumay, Guthrie, & Farneti, 2010).
2.2 INVESTMENT DECISION MAKING
The following sections explore the processes that form part of the decision-
making framework for infrastructure initiative in a public sector setting. The rules and
processes around decision making form part of a wider institutional settings and this
research seeks to understand how sustainability is framed within this decision-making
setting.
2.2.1 The role of the Business Case
As a prelude to discussion on incorporating sustainability within decision
making, this section describes the role of the business case within the project lifecycle.
The processes and guidance that are discussed have a genesis in the project
management profession and particularly the Project Management Book of Knowledge
(PMBOK) (Project Management Institute (PMI), 2008). PMBOK is an internationally
recognised guideline on project management and identifies the initiating stage as
incorporating early decision-making around project selection that may include benefit
measurement methods. The focus of this research is the initiating stage in the project
and program management (see Figure 2.1).
24 Incorporating sustainability in investment decision making for infrastructure projects
Figure 2.1. Project Management Process Groups from PMBOK (PMI, 2008)
Public sector projects are ‘a temporary endeavour, undertaken, managed or
overseen by one or more publicly funded organisations to create a unique product of
public value’ (Kassel, 2010, p.3) Recognising the unique characteristics of public
sector projects, as well as the need for greater transparency, government agencies
across the world have developed guidance material for project management
professionals with many Australian guidelines being built around industry guides, such
as the UK Government’s (Office of Government and Commerce) PRINCE2TM and
Gateway TM processes3.
3 The former UK Office of Government and Commerce (OGC) developed a suite of best practice guidance for project, programme and service management in the public sector that include Managing Successful Projects with PRINCE2TM, Managing Successful Programmes (MSP), Management of Risk: Guidance for Practitioners and OGC Gateway TM Review Process. In 2010, the Best Practice Management functions moved to the Office of Cabinet in the UK Government.
Monitoring and
controlling
Initiating
Planning
Executing
Closing
Incorporating sustainability in investment decision making for infrastructure projects 25
Regulatory oversight processes vary between infrastructure sectors, but the
formulation of business cases to support project proposals is clearly mandated. In
Australia, central agencies within state governments (such as the Department of
Treasury & Finance in Victoria) are responsible for approving and allocating funds for
infrastructure projects in the initiating stage. In the water sector, economic regulators
provide oversight of capital works programs that are linked to pricing decisions. Given
the value and significance of public infrastructure investments, major projects are
subject to governance and regulatory checks within the initiating phase.
In accord with government investment management guidelines, business cases
are developed in the initiating/ pre-investment stage for projects using economic
analysis as a supporting tool. A key focus from a stakeholder’s perspective is seen to
be the need to achieve ‘value for money’ which the Victorian Government defines as
a balance between costs of a good or service and ‘a range of attributes including
quality, performance standards, suitability, risk exposure, policy alignment,
timeliness, convenience, resource use and social and environmental impacts’
(Department of Treasury and Finance, 2013b, p. 18). The Investment Management
Standard used in Victoria provides guidance around problem definition, solution
definition, benefit definition, business case development, project management and
asset management.
The Australian Government’s Assurance Review Process for major projects and
programmes, outlines the key milestones or ‘gates’ within the project delivery
lifecycle, where reviews are expected to be carried out to support government approval
processes. Such assurance processes are also applied to state infrastructure projects.
The development of the Business Case is a major milestone which, when finalised,
forms the basis of final budget allocation or endorsement by government. The Business
Need/ Business Case document for a given project initiative describes delivery and
operating options together with non-asset proposals, and a final solution is developed
in detail. This approach aligns with the Australian Government’s Assurance Review
Process outlined in Figure 2.2.
26 Incorporating sustainability in investment decision making for infrastructure projects
Figure 2.2. Assurance Review Process adapted from Australian Government Guidelines (Department
of Finance, 2017)
Decision making at the front-end of projects is critical to ensuring long-term
project success through delivering benefits and creating value. Front-end decision
making refers to planning and analysis undertaken prior to the scope of the project
being defined and the budget being allocated. Options identified would be expected to
have different benefits, disbenefits and outcomes when assessed within a sustainability
framework. The strategic failure of projects has been linked to the inadequacy of
analysis and initial decision making in the initiating stage, where there is limited focus
on strategic performance (relevance, effectiveness and sustainability) and greater
focus on tactical performance (time, cost and quality performance) (Samset & Volden,
2015).
2.2.2 Project Benefits
The discipline of project management continues to concentrate efforts on the
‘iron triangle’ of performance metrics relating to time, cost and quality (Badewi,
2016). This singular focus on project outputs may ignore the broader organisational
context to which projects contribute, and the broader outcomes that align with
organisation objectives and stakeholder needs. In order to create a link between an
organisation’s business strategy and the projects that support strategy, investment
management or benefits realisation management (BRM) has been introduced (Too &
Weaver, 2014). Benefits mapping, undertaken as part of BRM, provides a mechanism
to provide a clear linkage between organisational strategy and the investment initiative,
and subsequently to performance measurement (Jenner, 2010). Benefits co-creation is
Business Need
Scope and purpose defined
Business Case
Confirm project
approach
Delivery Strategy
Clear definition of project (design)
Investment Decision
Supplier selection
for delivery
Readiness for Service
Services commence
Benefits Realisation
Review project success
Consider remedial actions
Incorporating sustainability in investment decision making for infrastructure projects 27
a process where sustainable development outcomes may be realised through working
with stakeholders in identifying and assigning benefits (Keeys & Huemann, 2017).
In a study addressing the link between overall strategy and project
implementation, Young et al. (2012) found that the project management and
investment management practices adopted in the state of Victoria, Australia in the
initiating stage are ‘best practice’ in comparison to other jurisdictions. Victoria’s
Investment Management Standard4 outlines a process for shaping or prioritising new
investments by firstly identifying the evidence-based ‘problems’ that must address the
benefits that are projected to be delivered, whereby benefits have key performance
indicators that are measurable and attributable (State of Victoria (Department of
Treasury and Finance), 2017). Used at the portfolio, programme and project level,
BRM is an area of practice within project management that is still in development, and
worthy of further research. A key criticism of BRM is that identified benefits can be
ambiguous or uncertain, however this should be a cause to increase focus on the
assumptions and risks around realising those benefits (Breese, 2012). Within an
infrastructure business model, outcomes and ultimately impacts of infrastructure
investments become more difficult to measure, are long term and may have a number
of influences (Bryson et al., 2014).
It should be noted that the concept of ‘benefits’ outlined above differs from the
term commonly understood in cost benefit analysis. Concepts of value and benefit can
be used interchangeably in the literature, and as these concepts are integral to this
research, it is necessary to define the meanings of these terms in the emerging results.
In the context above, ‘benefits’ are understood to be ‘the measurable improvement
attributable to an outcome’ presenting an opportunity to assess effectiveness (Morris,
2011, p.13). Furthermore, the term ‘value’ can be understood to relate more to
efficiency, with measures based on quotients such as function/cost, quality/cost or
performance/ resources, whilst ‘values’ may represent a much wider context with
4 According to DTF: ‘The investment management standard (IMS) is a process for applying simple, common-sense ideas and practices that help organisations to direct their resources and achieve the best outcomes from their investments’ (http://www.dtf.vic.gov.au/Investment-Planning-and-Evaluation/Understanding-investment-planning-and-review/What-is-the-investment-management-standard)
28 Incorporating sustainability in investment decision making for infrastructure projects
deeper meanings. Furthermore, studies of value management are linked with strategic
assessment of value. A further section of this literature review discusses additional
extensions relating to both value capture and public value, again adopting the broader
meanings of ‘value’.
2.3 APPRAISAL TOOLS
Government entities typically publish guidance materials that set out the
requirements around business case submissions linked to allocating government
funding. The Australian Government’s Handbook of Cost Benefit Analysis remains
relevant for commonwealth funded projects (Commonwealth of Australia, 2006). At
the state level, guidance is also available, often developed by central treasury agencies.
For the state of Victoria, the Economic Evaluation for Business Cases Technical
Guideline has been developed, and this may be supplemented by particular
requirements of each delivery agency (Department of Treasury and Finance, 2013a).
Cost Benefit Analysis generally forms the basis of analysis within Australia and
internationally, however there are a range of analysis techniques that are commonly
used and referenced in public discourse and these are further described below. Despite
these tools, the complexity of the initiating stage continues to contain various sources
of uncertainty which, according to Gosling & Pearman (2014), include:
• Uncertainty around inputs such as sampling, investigations;
• The quality of design inputs and reporting;
• Inconsistent analysis in supporting reports;
• Data irregularities;
• Questions over expert judgements;
• The use of assumptions;
• Uncertainties in valuations and use of models; and
• Dependencies between variables in models.
Following is an introduction to commonly used appraisal tools, preceding a more
detailed critique of the strengths and weaknesses of these methodologies.
Incorporating sustainability in investment decision making for infrastructure projects 29
2.3.1 Financial Analysis
Financial analysis is driven by an understanding that the efficient use of limited
financial resources is paramount. Under this paradigm, project evaluation should align
with market processes and the investment should yield a positive return to the
infrastructure provider (Templin, 2010). Financial evaluations include considerations
of discounting and calculating the net present value and internal rate of return,
considerations of payback period and break-even analysis and may incorporate
sensitivity testing. Financial analysis would typically include considerations of cost
savings and impacts, and revenue generated (Jenner, 2010). Environmental economics
may be used to inform analysis, with an example being market values associated with
loss of productive farming land.
2.3.2 Economic Analysis
A key tool that has emerged in the assessment of project options and selection
of a delivery strategy is Cost Benefit Analysis (CBA). According to the United States
Environmental Protection Agency, CBA evaluates ‘the favourable effects of policy
actions and the associated opportunity costs of those actions’ and it is desirable that ‘a
policy’s net benefits to society be positive’ (US EPA, 2010, p. xi). Whereas financial
analysis considers costs and benefits in terms of firms or shareholders only, the
monetary valuation of CBA relates to marginal societal impact. A key concept for
economists in the practice of CBA is utility, which is difficult to translate to
measureable changes (Hanley & Barbier, 2009).
CBA builds on financial analysis, taking account of wider economic benefits that
accrue from public projects, generally through the inclusion of externalities.
Externalities result from both costs and benefits that may accrue from a service, which
impact on groups other than those involved in the transaction (Cannadi & Dollery,
2005). Valuations of externalities may be derived by a range of modelling techniques
such as market pricing, revealed preferences techniques, stated preference techniques
and value transfer based on previous studies.
Infrastructure Australia was created to drive the development of a long-term,
coordinated national approach to infrastructure planning and investment. In outlining
national infrastructure priorities, Infrastructure Australia promotes the use of cost
benefit analysis in the assessment of generated project options, noting that Benefit Cost
30 Incorporating sustainability in investment decision making for infrastructure projects
Ratios (BCRs) ‘provide the best available objective evidence as to how well solutions
will impact on goals- but not the whole story’ (Infrastructure Australia, 2009, p. 5).
Infrastructure Australia stated that CBA should be “comprehensive” and include
‘wider economic, environmental and social impacts’.
The Productivity Commission is the Australian Government’s peak advisory
body on economic, social and environmental policy and regulatory matters. The
Productivity Commission’s Report on Public Infrastructure stated that all governments
in Australia should include ‘rigorous and transparent use of cost–benefit analysis and
evaluations, public consultation, and public reporting of the decision’ (Productivity
Commission, 2014, p. 39). The Productivity Commission report was critical of the
decision-making process around the Canberra Light Rail project proposal, whereby a
Cost Benefit Analysis favoured an alternative option, but then a Triple Bottom Line
assessment supported the (now) preferred option of Light Rail. The benefits in CBA
represent increase in human well-being (utility), costs in CBA represent reductions in
human well-being, and a project qualifies on cost-benefit grounds when its social
benefits exceed its social costs (OECD, 2006).
Spackman (2013, p. 11) noted that ‘any expenditure or regulatory decision
implies that the net monetary value of the benefits, in aggregate, is expected to exceed
that of the costs.’ The Victorian Government’s guidelines for business case
development state that ‘a cost-benefit analysis should capture all welfare costs and
benefits to society’, and that a preferred option should provide a ‘net public benefit’
(Department of Treasury and Finance, 2013a, p. 3). Using a ‘value for money’ or VfM
framework used by the UK government, the BCR produced from a CBA (adjusted for
wider economic impacts) may be used to categorise alternative investment options
(Australian Government, 2012). Using the VfM approach, projects with BCR of less
than one should not be considered, projects with a BCR greater than one may be
acceptable, and if several options are being assessed, the project with the highest BCR
should be favoured.
Cost Effectiveness Analysis (CEA) is a complementary analysis tool where the
overall costs for implementation are compared with the outcomes that are projected.
Best practice CEA incorporates sensitivity analysis that takes account of the
uncertainties in quantifying identified outcomes. Even so, the outcome of analysis is
seen to be limited in applying single dimension measures for outcomes that may
Incorporating sustainability in investment decision making for infrastructure projects 31
discount wider impacts and benefits (Robinson, 1993). Applied generally to health
projects, CEA is also used more broadly across infrastructure sectors, including the
transport and water sectors.
2.3.3 Extended (or Advanced) Cost Benefit Analysis
Extended Cost Benefit Analysis seeks to better align with sustainable principles
through acknowledging trade-offs between economic efficiency, equity and
environmental constraints (Turner et al., 1996). Investment appraisal under this
methodology incorporates economic modelling used in CBA, but seeks to broaden
monetary valuation to incorporate a wider array of environmental and social factors as
externalities. These may include private costs and benefits such as increases to
property value. Another feature of this methodology is to apply sensitivity analysis to
the monetised values of costs and benefits taking account of the assumptions adopted
in undertaking the analysis. Extended CBA ‘aims to optimise financial, environmental
and societal (or ‘triple bottom line’) costs and benefits and allows sustainability risks
and opportunities to be quantified in hard, monetary terms’ (Hardisty et al., 2013, p.
286). Using this methodology, the Water Corporation in Western Australia has
developed a Social Environment Tool (SET) that forms the basis of a dataset of values
that may be applied across a range of project scenarios within Advanced Cost Benefit
Analysis (Atkins, et al., 2010)
2.3.4 Multi- Criteria Decision Analysis (MCDA)
Multi-Criteria Decision Analysis (MCDA) (often referred to as Multi- Criteria
Analysis or MCA) provides a means to incorporate a wider array of factors into
decision making over and above financial and economic factors. Huang et al. (2011,
p. 3579) described MCDA as
a systematic methodology to combine these inputs with cost/benefit
information and stakeholder views to rank project alternatives. MCDA is used
to discover and quantify decision maker and stakeholder considerations about
various (mostly) non-monetary factors in order to compare alternative courses
of action.
Spackman (2013) differentiated MCA from MCDA whereby MCA assesses a policy,
programme or project against multiple criteria, whereas MCDA further incorporates
the discipline and rigour of ‘decision analysis’. MCDA is an analysis framework, in
32 Incorporating sustainability in investment decision making for infrastructure projects
which a number of criteria that are considered important to the investment decision are
outlined and allocated a weighting. The following steps would typically form part of
the MCDA process:
• Agree on project objectives;
• Identify context and key decision constraints;
• Identify a list of alternative options;
• Allocate weightings to each criteria;
• Combine the weights and scores for each option;
• Evaluate options for individual objectives or attributes; and
• Undertake a sensitivity analysis (Zavadskas, Liias, & Turskis, 2008).
MCDA is also viewed as a holistic approach that may take account of complex
interactions between individual components. Approaches to MCDA vary from simple
to highly sophisticated depending on the skills and number of analysts, the form of
data and information used (deterministic, stochastic, fuzzy set theory methods) and use
of analysis software (Huang et al., 2011). MCDA is seen as a tool that may assist in
‘the process of identifying and agreeing the investment criteria and their weightings’,
and ‘can help build consensus and commitment to the portfolio management process’
(Jenner, 2010, pp. 57-58). The decision context may be categorised by a model
(Cynefin model) that recognises the four domains of knowledge, being, known (the
cause and effect is known and understood); knowable (the cause and effect can be
predicted); complex (the cause and effect can be determined after the event); and
chaotic (the cause and effect is not apparent) (Stewart, French, & Rios, 2013). The
range of uncertainty relating to numerous criteria combined with numerous actions
across the four decision domains, requires MCDA to incorporate an understanding of
the range of perceptions from all stakeholders (Stewart et al., 2013).
Closely aligned with MCDA are Triple Bottom Line (TBL) assessment
processes, based on the work of John Elkington, who saw a need to expand the
environmental agenda to a wider sustainability agenda (Elkington, 2004). TBL was
originally applied to corporate level planning and reporting, but its use has expanded
to policy and operational (project level) decision making (ACT Government, 2011).
The common understanding of TBL is that it applies an integrated assessment of the
Incorporating sustainability in investment decision making for infrastructure projects 33
conflicting goals of economic/ financial factors, environmental factors and social
impacts and opportunities, and so it aligns with sustainability considerations. The TBL
framework is used to form the basis of assessment criteria, allowing options to be
ranked according to how options address weighted criteria (Taylor et al., 2006).
2.3.5 Other
The literature review has identified that a wide array of assessment tools and
techniques have been developed over time to support decision making at the front end
of infrastructure projects. It is impractical to discuss all available techniques,
particularly where some are bespoke models and may have limited application across
industry. For completeness, the following discussion addresses three further
approaches that are addressed in the literature, namely Appraisal Summary Tables,
Real Options Analysis (ROA) and Life Cycle Analysis (LCA).
Appraisal Summary Tables (AST) have been adopted for infrastructure projects
in the United Kingdom, and are used by the transport sector in some jurisdictions in
Australia. Guidance material describes AST as ‘a simple spreadsheet template that can
assist in describing the qualitative and quantitative impacts of your project/
programme’. The 2015 National Guidelines for Transport System Management in
Australia (NGTMSA) recommend the development of ASTs as part of business case
development. Spackman (2013, p. 23) stated that this technique has some promise to
be applied more widely across infrastructure sectors but ‘is best suited to long running
investment programmes, where successive project proposals need to be assessed
against criteria that change only slowly over time’.
Real Options Analysis (ROA) is categorised as a financial analysis tool that deals
with uncertainty and allows flexibility to respond to events in the future through
assigning value to the ability for managers to react to new information or change the
course of a project to respond to new environmental conditions (Brown & Robertson,
2014). ROA incorporates decision-tree analysis to assess risks and changes that may
emerge over time. The application of ROA to infrastructure projects is subject to
debate, with questions arising of the ability to apply theory to real life practice,
accuracies in valuation models and allocating value across multiple agencies (Garvin
& Ford, 2012).
34 Incorporating sustainability in investment decision making for infrastructure projects
The International Standard: Environmental management - Life Cycle
Assessment – Principles and Framework, 2006 (ISO 14040) defines life cycle as the
‘consecutive and interrelated stages of a product system, from the acquisition of raw
materials or the generation of natural resources until its final elimination’’ (Giudice et
al., 2006, p.88). LCA provides a framework for evaluating whole-of-life costs and
impacts for an infrastructure asset with considerations of sources of material inputs
and subsequent extraction, through to extraction and processing of raw materials,
through to end-of-life considerations such as landfilling, recycling, and reuse. LCA
does not provide a sustainability assessment alone, however the incorporation of LCA
may support broader analysis within investment decision making that considers
environmental, economic and social costs and impacts (Parrish & Chester, 2013).
2.4 CRITIQUES OF CURRENT APPRAISAL MODELS (CBA & MCA)
Foxon et al. (2015) noted that the public good aspects of infrastructure, whereby
works may contribute to wider social and environment aims, do not reconcile with
standard economic appraisal approaches. There remains a preference to frame complex
policy problems around simple models and Walker (2000) called for an optimal
decision-making approach that uses an appropriate set of tools from a ‘toolbox’ rather
than using a single tool to inform decision making.
As discussed earlier, CBA remains the key tool that is mandated to underpin
analysis in project appraisal and business case development. In view of some of the
acknowledged shortcomings of CBA, MCA/MCDA is used as an alternative to CBA,
or used in combination with CBA. The following sections further explore the literature
critiques of both CBA (section 2.4.1) and MCA (Section 2.4.2).
2.4.1 CBA
No discussion on investment decision making can be complete without a full and
detailed examination of the use of CBA. As noted previously, CBA is the tool that is
generally applied and often mandated to be used in business case development. Given
that CBA may be used as a ‘political weapon’ whereby favourable (or unfavourable)
results can be used to justify politically favoured projects (Sudiana, 2010, p. 10) , CBA
is also well understood in the wider community as the go/no go test for significant
projects. Political pressure and expert practice often reduce decision making to simple
Incorporating sustainability in investment decision making for infrastructure projects 35
singular representations to deal with incomplete knowledge (Stirling, 2010; Walker,
2000).
The Productivity Commission (2014) discussed the need for governments to
improve practice in ‘scoping and developing transparent cost- benefit analyses’ with
subsequent impacts on coherent decision making. The Productivity Commission
favoured the use of CBA to evaluate infrastructure options, however it also identified
problems in the use of CBA including:
• Optimism bias;
• Treatment of risk and uncertainty; and
• Treatment of wider economic benefits.
Furthermore, a report by the House of Representatives Standing Committee on
Infrastructure and Communications in 20145 described cost-benefit analysis as ‘a
mechanism for providing a logical and consistent consideration of all costs and
benefits associated with a project’. The Committee supported the Productivity
Commission’s comments in relation to endorsement of cost-benefit analysis but noted
‘serious deficiencies’ around procurement processes that included cost benefit
analyses. The report also outlined criticisms in submissions to the inquiry on the use
of CBA including:
• Infrastructure Partnerships Australia’s view that CBA is a powerful but
simplistic tool that is applied as a pass/fail test.
• Consult Australia’s view that a ‘wider economic benefits model’ of
assessment would be superior to CBA (Productivity Commission, 2014)
Guidance and critiques on CBA provide definitions that range from a pure
economic focus considering resource allocation and use (Hanley & Spash, 1993) to
the consideration of net social benefits (Commonwealth of Australia, 2006). Such an
5 The 2014 report by the House of Representatives Standing Committee on Infrastructure and Communications and the subsequent government response (14 June, 2017) can be accessed at http://www.aph.gov.au/Parliamentary_Business/Committees/House/Infrastructure_and_Communications/completed_inquiries. The Australian Government’s response provided in-principle agreement to ensuring greater consistency in CBA assessments across Australian governments and to include the evaluation of wider economic benefits through new guidance to be launched as part of the Australian Transport and Planning (ATAP) guidelines.
36 Incorporating sustainability in investment decision making for infrastructure projects
array of interpretations will reflect in the application of CBA across organisations and
industry sectors. Mouter et al. (2015) stated key limitations of CBA as:
• CBA studies are incomplete- there are intangible factors that can’t be
measured;
• Outcomes of welfare considerations are uncertain, particularly when
forecasting the future; and
• Some effects are difficult to measure and monetise.
Further, more specific critiques deal with questions on the ability of CBA to
appropriately represent value (including cultural values), the use of discount rates and
cost models, and the wider interpretations of CBA analysis. The following discussion
addresses some key criticisms of CBA around general limitations, use of valuations,
the use of discount rates, cost estimates and the overall application of CBA in decision
making and these topics are presented below.
Valuation
Where benefits relate to environmental systems, the valuation of benefits within
CBA draws on the discipline of environmental economics. The concept of Total
Economic Value (TEV) recognises that there is a quantifiable, market-based value that
can be applied to environmental goods and services, together with non-market,
intangible values that can be approximated by revealed or stated preference methods
(Markantonis et al., 2012). The assignment of a monetary value to ecosystem services
(that have no market value), has been successfully applied to policy formation and
broader understandings of the contribution of natural assets to the overall economy. In
an urban planning context, economic valuations have been applied in a range of uses
including awareness raising, accounting, priority setting, instrument design and
litigation (Gómez-Baggethun & Barton, 2013). However, the reliability and accuracy
requirements for valuations varies across these contexts, with a lower level of accuracy
required for application in awareness raising or policy setting, and a greater degree
required for decision support around land-use planning. Work led by the US
Environmental Protection Agency has provided case studies on how various
authorities have incorporated ecosystems valuation techniques within option analysis
(US Environmental Protection Agency, 2013). The case studies include examples of
Incorporating sustainability in investment decision making for infrastructure projects 37
monetising benefits associated with green infrastructure that are not traditionally
included in CBA, such as costs for habitat creation and some social benefits.
Approaches to valuations are based on one of two philosophical positions: the
anthropocentric approach, based on value to human society and the biocentric
approach that takes account of impacts to society as well as to all other species
(Goulder & Kennedy, 2011). Valuation techniques commonly adapted in
environmental economics are based on an anthropocentric approach and are
summarised in Table 2.1, together with brief commentary on the relevant applications
and limitations.
38 Incorporating sustainability in investment decision making for infrastructure projects
Table 2.1
Valuation techniques commonly adopted in environmental economics
Technique Description Application Limitations
Hedonic Pricing
(Turner, Morse-Jones, & Fisher, 2010)
Use of marketed value of goods to measure the implicit price of non-market good
Increase in house prices due to proximity to wetlands
Large data requirements
Sensitive to place, context
Travel Cost
(Turner et al., 2010)
(Hanley & Barbier, 2009)
Use of travel surveys based on observed travel and time expenditure
Assessing recreational benefits
Limited contexts
Large data requirements
Value of time
Complex when trips are multipurpose
Productive Function
(National Research Council, 2008)
Assessing the productive value of ecosystems
Fisheries
Wetlands
Values single elements that have market value rather than overall ecosystem habitat
Replacement Cost
(Turner et al., 2010)
Using the cost of a man-made substitute of an environmental asset
Seed dispersal in lieu of natural pollinators
Non-use values not included
Benefit Transfer
(Richardson et al., 2014)
Use of values associated with previous studies to assign value to new case
Broad use- valuing ecosystems
Misuse of guidelines
Low level of precision
Contingent Valuation Method
(Turner et al., 2010)
(Hanley & Barbier, 2009)
Use of surveys to determine what people are Willing to Pay (WTP), or Accept (WTA) for a given good or service
Flood protection Time and cost of surveys
Sources of bias- survey design, hypothetical responses on value, strategic responses
Inconsistent preferences
Choice Modelling Method
(Turner et al., 2010)
Use of surveys where respondents choose a preferred option from a range of alternatives
Preservation of wetlands, endangered species
Potential biases by respondents
Difficulties in data design and modelling responses
Life Satisfaction Analysis
(Welsch, 2006) (Carroll, Frijters, & Shields, 2009)
Use of surveys on life satisfaction as an econometric measure of environmental conditions
Impacts of pollution
Impacts of drought
Data integrity and limitations
Incorporating sustainability in investment decision making for infrastructure projects 39
Of the valuation methodologies, ‘Willingness to Pay’ (WTP) is commonly
applied and understood. Some key challenges in using economic assessments of WTP
are seen to include that (from Hanley & Barbier, 2009; Gómez-Baggethun & Barton,
2013):
• Variations in population density will affect WTP;
• Distance from services will influence WTP;
• Recreation substitution alternatives will influence WTP;
• Higher populations can provide a greater array of perspectives;
• Socio-economic circumstances will affect WTP;
• There are few studies on the economics of connectivity;
• Over time, values are likely to change; and
• The boundaries adopted will influence both costs and benefits.
Cultural Values
The social dimension of sustainability presents a higher degree of complexity in
analysis for infrastructure projects. The application of valuation techniques to social
and cultural values presents as an area for further development and understanding.
Various studies (Williams et al., 2012; Shamai, 1991) have sought to quantify cultural
values and sense of place, however others contend that cultural values reflect a
complex range of ‘emotional, affective and symbolic views’ that are difficult to
capture within a single monetary value (Gómez-Baggethun & Barton, 2013, p. 239).
More broadly, measures of social cultural values are difficult to construct, particularly
in developing understandings of the full range of social dimensions, and hence may
have limited meaning. In urban areas, the ability to assign value to social and cultural
aspects is particularly challenging due to the high level of cultural and social diversity
of residents. The application of ecosystem services valuation methodologies to cultural
values is widely questioned, and further research is proposed to more fully examine
how cultural values may be presented in economic analysis (Chan et al., 2012).
In Australia, policy development at the national level (the National Water
Initiative) and state level (as an example, Water for Victoria) seek to encourage the
consideration of indigenous values in planning and development activities. Cultural
values of water from an indigenous perspective may incorporate the following beliefs:
40 Incorporating sustainability in investment decision making for infrastructure projects
• Water bodies are ‘living’ with different personalities and powers;
• Water is life-giving;
• Land and water are part of a whole and all waterbodies are inter-related;
• Indigenous people have a special responsibility to safeguard the water
bodies to maintain physical and spiritual well-being; and
• Water bodies provide a sense of identity to those living in proximity
(Jiménez et al., 2014).
These values continue to form the basis of conflict resulting from development
works impacting on the rights and wellbeing of indigenous communities. The conflict
with cultural values has resulted in the cancellation or suspension of projects, or for
some, the operation of infrastructure within an environment of indigenous opposition
(Jiménez et al., 2015). In contrast, the works associated with the City Rail Link (CRL)
in Auckland New Zealand, incorporated input from the local Maori Mana Whenua into
the project design to reflect a sense of place 6. In the water sector, collaborations with
New Zealand Maori in developing water schemes has led to unique design solutions
that acknowledge the guardianship and environmental protection role of local tangata
whenua people, but also respect beliefs around the treatment of human waste,
discharges into water bodies and changes to existing land formations (Bradley, 2013).
A key consideration for this research is how to best represent social/ cultural values in
an integrated and full sense within the appraisal process.
Discount Rates
The application of a discount rate is central to financial and economic analysis
and reflects the time value of money. Long term discount rates need to reflect
projections of growth which become difficult to forecast into the distant future. The
choice of discount rate is then central to CBA, and becomes further problematic when
applied to environmental assets or considerations of the long term impacts of climate
change in the face of uncertainty. The discounting of environmental factors into the
future means that issues such as habitat loss, biodiversity impacts or environmental
6 Details of the CRL are on the ISCA website: https://isca.org.au/index.php?option=com_content&view=article&id=987
Incorporating sustainability in investment decision making for infrastructure projects 41
degradation have a disproportionally lower weighting over time. On this basis, there
are calls for a social rate of return that is lower than the private rate of return and that
should steadily decline over time (Weitzman, 1994). According to some, project
proponents are taking an ethical view about the claims of future generations, hence a
zero value (which places greater value on the future) or a value less than market value
should be applied in economic analysis (Hanley & Barbier, 2009)).
Cost Estimates
Within the Cost- Benefit equation, the cost side for major infrastructure projects
also presents a degree of uncertainty. Well publicised projects with cost over-runs
include the Sydney Opera House, the Channel Tunnel and locally, the Gold Coast
Light Rail and Logan Motorway projects (Coultan, 2016). Studies on both cost and
benefits of infrastructure projects ex-post show both cost over-runs and benefit
shortfalls when compared with ex-ante studies (Flyvbjerg, 2009). Flyvbjerg’s study
of actual project costs in the transport sector, covering 20 nations and 258 projects,
indicated over-runs of between 20.4 percent (roads) and 44.7 percent (rail). If applying
the rule that only projects with a positive BCR should proceed, it then follows than
numerous projects that have been approved and constructed were based on flawed
analysis with a high degree of uncertainty. Considerations of information limitations,
strategic misrepresentation and optimism bias within the initial planning studies,
combined with scope changes during construction, are some of the factors contributing
to cost over-runs (Love et al., 2014) A study by the Grattan Institute referenced
Flyvbjerg’s work and, using 51 transport projects in Australia valued over $100
million, found average cost overruns of 20 percent after contracts were awarded
(Terrill, et al., 2016). Studies of water sector projects in Australia indicate that the
introduction of Risk-Based Cost Estimation (RBE) has significantly improved
estimation accuracy and the occurrence of cost over-runs. In addition, new
technologies have the potential to improve cost estimating accuracy (Love et al.,
2014).
Broader use of CBA
Commentaries on the use of CBA identify that it may be used either as a
‘decision rule’ or a ‘heuristic aid’ (Turner, 2006, pp. 1-2). Despite CBA being a
requirement of business-case development across jurisdictions, the use of analysis has
been shown to vary widely. A study of guidance manuals for transport appraisal
42 Incorporating sustainability in investment decision making for infrastructure projects
practice and project prioritisation across seven countries (England, The Netherlands,
Germany, Sweden, the United States, Australia and New Zealand) showed that CBA
formed part of transport appraisal manuals that are mandated for the use of public
funds, and particularly for projects funded at a national level (Mackie & Worsley,
2013). However, the application and use of CBA varies. For transport projects in the
Netherlands, CBA was found to be incomplete in addressing environmental effects,
and non-monetised effects were often not addressed in CBA reports (Annema &
Koopmans, 2014). Haezendonck (2008) investigated investment decision making for
transport infrastructure in Germany, Denmark and the Netherlands and found a range
of approaches in the use and application of CBA across jurisdictions. The use of CBA
was either ‘informative’, ‘advisory’ or ‘decisive’ in supporting decision making within
each jurisdiction. Haezenonck’s study sought to compare approaches in current
practice and to gain insights from experts on an optimal model for future decision
making. The experts indicated a preference to rely less on CBA in decision making
(whereby CBA should be ‘advisory” only), together with enhanced engagement of
community groups who should act as partners in the decision-making process. Further
studies have discussed the trade-offs between environmental, social and economic
factors that are made outside the formal appraisal process (Samset & Volden, 2015).
Studies of decision making for transport projects highlight the ‘melting pot’ of decision
making, whereby analysis is subject to judgements that are affected by intuition and
visions, together with both internal and external pressures that influence outcomes
(Mackie et al., 2014, p. 4).
In the water sector in Australia, cost benefit analysis is generally required ‘in
principle’, however in practice, ‘there are no universal standards or clear guidelines on
option evaluation for water supply augmentation’ (Ananda, 2014, p.130). Ananda also
noted the limitations of current economic analysis whereby CBA is not capable of
effectively dealing with climate change uncertainty.
2.4.2 MCDA/MCA
Approaches to MCDA vary, with numerous interpretations in structure,
protocols for producing inputs, and processes for interpretation and reporting.
Variations of MCDA/ MCA include:
• Social-science-based deliberative MCA;
Incorporating sustainability in investment decision making for infrastructure projects 43
• Facilitated MCDA; and
• Non-facilitated MCDA.
For some, MCDA is ‘the most powerful technique for establishing criteria and
comparing options on the basis of monetised and non-monetised information’
(Spackman, 2013, p. 25). A key benefit of MCDA is the ability to demonstrate the
trade-offs that are required to be made with competing project objectives, when
comparing alternatives that may produce differing outcomes (Linkov et al., 2006).
Attributes of MCDA include its ability to deal with a range of diverging data and
criteria that are both quantitative and qualitative, its ability to provide structure to a
specific problem, and its ability to address uncertainty and gaps in knowledge
(Mendoza & Prabhu, 2005). By involving an array of social actors representing various
positions in decision making, MCDA provides a mechanism to identify values and
preferences when options include non-traditional infrastructure responses (Domènech,
March, & Saurí, 2013). In a review of trends and applications of MCDA over ten
years, Huang et al. (2011) found that the application of MCDA methods improved
decision-making processes and led to greater public acceptance of suggested
initiatives, however the use of MCDA would be improved through the development of
common language and better integration of tools.
A multi-criteria decision analysis may provide a holistic approach incorporating
inter-generational considerations (Bond & Morrison-Saunders, 2011). However, the
effective application of MCDA requires the input of senior staff representing a range
of disciplines and, even when such experts are available, it is demanding of their time.
MCDA may also require a senior and powerful sponsor. On this basis, the scope for
the application of MCDA in central government is often limited (Spackman, 2013).
Critics of MCDA see this methodology as highly subjective when compared to
CBA, and potentially lacking transparency, as it does not provide a conclusive
outcome. The process of assigning weights and scores can be manipulated, and when
applying assumptions that are not clearly articulated, MCA is potentially subject to
misuse (Turner, 2006). With no single approach, and each particular problem subject
to more tailored MCA techniques, the choice of approach may draw different
conclusions in different contexts, reflecting the preferences of those conducting the
analysis (Zavadskas et al., 2008).
44 Incorporating sustainability in investment decision making for infrastructure projects
As a decision support tool, MCA/MCDA on its own may not necessarily
produce a definitive answer, but rather a framework to assess and prioritise a range of
factors based on relative merits. Some commentaries support the incorporation of
MCA with CBA to handle items that cannot be accurately quantified or monetised
(Spackman, 2013).
2.5 THE ROLE OF THE PRIVATE SECTOR
As a public good, infrastructure provision has traditionally been a responsibility
of the public sector. The public sector’s focus on long term outcomes, taking account
of the need to equitably allocate services across communities, supports its role as a
provider of infrastructure services. However, in seeking a broader array of mechanisms
to meet infrastructure backlogs, new delivery models are being initiated. Legislation
has been introduced in some jurisdictions to allow competition to what were
traditionally government-owned monopolies. Using the private sector, with a focus on
short-term financial returns on its investments, to fund the provision of public
infrastructure, offers potential benefits that address perceived government failure in
infrastructure provision, particularly around efficiency, technical ability and ability to
innovate (Koppenjan & Enserink, 2009).
Contracting arrangements such as Public Private Partnerships (PPPs) are
increasingly being used to implement major projects. PPPs represent long-term
contractual agreements between a private operator/company (or a consortium) and a
public entity, under which a service is provided, generally with related investments
(Saussier et al., 2009). PPPs may be initiated through government planning processes
or unsolicited and proposed by private sector entities (Merk et al., 2012). Models for
PPPs vary from privatisation of assets to full public ownership, depending on specific
circumstances of the project. In Australia, PPPs are treated as operating lease
arrangements, meaning that all risks and benefits associated with ownership are treated
as being retained by the private sector (Chan et al., 2009). In a sustainability context,
such arrangements can mean that the financial burden of PPP infrastructure
investments is effectively shifted not to the private providers, but to future users of the
service. In addition, rather than shifting delivery from a monopolistic public sector
provider to a competitive market place, the net effect of a PPP arrangement may, in
fact, be long-term concessions and legal monopolies. In order to better manage such
Incorporating sustainability in investment decision making for infrastructure projects 45
adverse outcomes, sustainable contract design should incorporate competitive
processes, transparency and accountability (Koppenjan & Enserink, 2009).
2.6 PARTICIPATION
Within an urban planning context, deliberative participation techniques,
involving all stakeholders and affected citizens, have been proposed to integrate
broader concerns, values and preferences within the decision-making process, thus
addressing concerns that many consultative processes are not fully inclusive (Bond &
Morrison-Saunders, 2011). In its purist form, decision making for infrastructure
projects may be based on referenda providing a clear political mandate to proceed with
defined initiatives. Various examples of referenda on public transport initiatives may
be found in Basle, Zurich and other cities in Europe, whilst in the United States, a
significant proportion of state and local capital investment has been based on
referendum voting (Bratzel, 1999; Gramlich, 1994).
Building on the strengths of deliberation, and merging these within a
sustainability framework, Raphael (2011) proposed an alternative approach that is
referred to as collaborative sustainability assessment. Bos et al. (2014) discussed a
similar collaborative approach applicable to the urban water sector that is built upon
transition management processes. Using an empirical case study, a multi-arena
structure involving participants from the technical arena (engineers, landscape
architects etc), executive arena (managers and senior executives from local
government) and the local arena (residents, municipal representatives, community
groups, representatives of state agencies) all contributed to formulating project options
and solutions. The social coalition of community representatives was important in the
development of a broad vision and in communicating community values. The key
design considerations in a collaborative change process should include:
• Front running actors to identify like-minded individuals or existing
networks to create dedicated time/space for interaction amongst diverse
actors.
• Deliberate effort on building themed networks and coalitions in design,
structure and organisation of change programme.
• Development of localised visions related to overall vision to guide and
motivate local action.
46 Incorporating sustainability in investment decision making for infrastructure projects
• Developing agendas for change at different levels of a socio-technical
system through a range of processes and activities.
• Investment in a dedicated project team that is able to cope with complexity
and uncertainty (Bos et al., 2014).
At the same time, a study on policy networks forming part of climate change
planning in South East Queensland has shown that the establishment of formal
institutional networks do not, alone, foster strong collaboration. The engagement
process with key institutional stakeholders needs to be appropriately designed to take
account of issues of contestation, vested interests, factions and cooperatives, taking
into account that some stakeholders will seek to advocate singular interests
(McAllister, McCrea, & Lubell, 2014).
Stakeholder input into project evaluations may be captured through deliberative
participation processes that involve wider institutional stakeholders and/or community
end users to frame the final solution to a given infrastructure problem. Collaborative
processes are built on an understanding that problems may be best solved through
partnerships, and that government agencies alone cannot fully understand the problem
definition, optimal design responses and implementation solutions (Weber &
Khademian, 2008). The need for greater input from the ultimate users of infrastructure
assets is advocated in many studies. Spash (2009) contested that ecological economics,
based on the valuation of environmental services, should be broadened to social
ecological economics to capture notions of public participation and empowerment.
Others advocate broader public participation in addressing deep and complex
problems, however ‘community engagement’ and ‘partnership’ involving real power
sharing is yet to be widely evidenced due to reluctance of government institutions to
devolve control, together with the capacity of citizens to participate effectively (Head,
2007). The input of active citizenry provides transparency and integrity in decision
making, however collaborative forms of civic engagement are not adopted in the
investment decision-making process as they are costly and resource intensive (Head,
2007).
The Water Services Association of Australia (WSAA) identified stakeholder
involvement as a critical component of developing more sustainable options for the
water industry. The International Association for Public Participation identifies five
types of participatory relationships as part of the widely adopted IAP2 Spectrum
Incorporating sustainability in investment decision making for infrastructure projects 47
(IAP2, 2007). These are informing, consulting, involving, collaborating and
empowering, with each level providing a progressively greater level of public impact.
IAP2 advocates that the level of participation should be determined on the basis of
goals, time frames and resources. WSAA stated that the IAP2 spectrum provides a
range of participation options that may be adapted to different requirements in a
decision-making process. Public participation remains a challenge for both decision
makers and practitioners, particularly in relation to equity issues and inclusion of
vulnerable groups (Serrao-Neumann et al., 2014). Some commentaries contend that
public participation may not only translate into better outcomes, but that involvement
of the public may translate to greater legitimacy of decisions. As such, the
implementation of participatory processes based on IAP2 requires careful design, and
the use of experienced, professional facilitators who may assist administrators to
identify and understand public values and ensure that participation bias is avoided
(Nabatchi, 2012).
The adoption of public participation processes varies across and within
infrastructure sectors. The non-homogenous nature of cities and urban areas presents
additional challenges for deliberative processes, in identifying meaningful metrics to
represent social and cultural values (ErikE. Gómez-Baggethun & Barton, 2013). The
choice and design of participation methods needs to be carefully crafted to address the
matter under consideration. Fung (2015) formulated a three-dimensional model (the
democracy cube) with the three variables in the construction of participation approach
being:
• Who participates?
• How do they communicate and make decisions?
• What influence do they have over the resulting public decisions and actions?
The incorporation of participative processes that capture community values
within decision-making processes allows end users and those potentially affected by
projects to provide input on local community values (historical, aesthetic and other
social values). According to Gibson (2006, p. 173), ‘in sustainability assessment, all
policy and development objectives are considered together and the trade-offs are
addressed directly’. Given that investment decision making incorporates value
judgements, the inclusion of broader analysis that includes public participation may
48 Incorporating sustainability in investment decision making for infrastructure projects
more effectively assist in addressing deep and complex problems. A key challenge in
designing participation approaches into the future is the question on the level of
empowerment given to citizens involved in participatory processes and the balance of
power remaining with elected politicians (Fung, 2015). At the same time, the
emergence of digital technology and the availability of greater amounts of information
are likely to result in greater demand by citizens to contribute to decision making.
Projects can often be politicised and subject to media scrutiny, ‘making cool,
dispassionate assessment of such projects problematic’ (Mackie et al., 2014, p. 5).
Political commitments may be based on incomplete analysis, and provide a level of
detail that negates the ability to investigate a broader array of options. The Victorian
Desalination Plant and North-South Pipeline projects provide examples, which,
according to Ananda (2014) indicate the politicisation of decision making in relation
to water supply augmentation, and illustrate an ‘institutional vacuum’ that has led to
political decisions. The primacy of democratic processes requires elected
representatives to consider and resolve issues around value choices and welfare, and
this may not be in accord with participative processes involving a broad array of
stakeholders (Skelcher et al., 2005). At the same time, politicians are required to
communicate outcomes of decision making processes, and there is a preference by
politicians for simple messages supported by easily understood analysis rather than
complex and nuanced analysis (Mouter et al., 2015).
2.7 CALLS FOR A NEW APPROACH
The iBUILD Centre at Newcastle University (UK) ( Brown & Robertson, 2014)
released a research report in October, 2014, that noted the difficulties to achieve
defensible decision making for infrastructure initiatives in the face of uncertainty. The
report presented the need for improved, iterative processes to support decision making
for infrastructure in light of its ‘peculiar’ characteristics, in that infrastructure services
provide a public good, with multiple complex values and numerous stakeholders.
Taking account of these challenges, Brown & Robinson (2014) discussed the need for
further research focused on infrastructure valuation and appraisal that incorporates a
multidisciplinary approach in improving the technical and socio-economic policy-
making systems. The use of financial models to assess the value of infrastructure
continues to be questioned and it has been proposed that new business models take
account of the wider values of public infrastructure (Bryson et al., 2014).
Incorporating sustainability in investment decision making for infrastructure projects 49
2.7.1 The multiple values of infrastructure
Despite the range of tools to evaluate the impacts and benefits of infrastructure
works, there remain numerous unknowns relating to how infrastructure assets will
perform and adapt into the future to meet challenges that include climate change and
resource depletion; changes in the global economy and energy prices; an increasingly
complex regulatory environment and community; and social issues (Marlow &
Humphries, 2009). Infrastructure has unique characteristics including complex and
multiple values with direct economic returns, but also wider environmental and social
implications (Bryson et al., 2014).
Traditional economic analysis uses models that assess outcomes in terms of
equilibria and considerations of efficiency. Aspects of value that do not form the basis
of traditional economic analysis include:
• The range of values associated with resilience to climate change impacts in
urban areas such as balancing water flows and reducing flood impacts, together
with supporting localised food production (Demuzere et al., 2014);
• The cumulative value of a project’s contribution to infrastructure networks
(Wellman & Pretorius, 2012);
• Economic development opportunities and linkages to investment in new
‘smart’ jobs that provide new taxation revenue (Foxon et al., 2015);
• Practical elements of market transactions such as agent behaviours and
transaction costs (Harou et al., 2009);
• The value of cost reductions, efficiency, or improved value associated with
interdependencies between different forms of infrastructure (such as a railway
embankment acting as a flood defence barrier) using a ‘systems of systems’
approach (Bouch et al., 2015; Rosenberg et al., 2014); and
• Opportunities to improve the intellectual capital of the water sector to learn and
innovate (Farrelly & Brown, 2011).
The uncertainty and difficulties in front-end decision making as evidenced in
industry practice have been subject to criticism across various sectors. Initiating
processes for projects may also form part of broader decision-making processes across
a program of works or portfolio of initiatives. A review of empirical research literature
50 Incorporating sustainability in investment decision making for infrastructure projects
(focused on private companies) indicated that actual practice often does not align with
rules and models for decision making that have been developed (Martinsuo, 2013). In
the transport sector, the Victorian Auditor General’s Office considered that the
decision-making process around the now abandoned East West Link project was based
on ‘flawed advice’ whereby ‘the likely net benefits of the project were not sufficiently
demonstrated and the failure to properly resolve project risks before entering contracts
exposed the state to additional financial risk (VAGO, 2015, p. vii). In the water sector,
the Australian Academy of Technological Sciences and Engineering (ATSE) has
identified a need for new governance models to better manage urban stormwater in
Australia and proposed more ‘robust’ appraisal models that acknowledge the
complexity of integrated water management systems. According to ATSE, the ‘present
models are too narrow in scope and cannot assess the true value of investments made
into green stormwater systems that provide high amenity value to our cities while
delivering on basic water services’ (ATSE, 2015, p. 6).
The following section addresses the role of sustainability in investment decision
as part of a new model in investment appraisal.
2.7.2 Incorporating sustainability in investment appraisal
Sustainability provides an operating paradigm that may allow infrastructure
providers to respond to complexity and uncertainty in the face of new and emerging
challenges centred on resource scarcity and depletion (Marlow & Humphries, 2009).
Sustainability appraisal has been effectively incorporated into design and operation of
infrastructure developments, however there is less developed practice in incorporating
sustainability in investment decision-making processes.
Empirical studies have shown that, in practice, attempts to identify project-level
benefits within the investment decision-making phase often do not align with higher
level strategic goals ( Young et al., 2012). Furthermore, the business case development
stage for projects is generally focused on short-term, economic factors, rather than the
longer-term perspective that sustainability requires. There is a conflict between the
temporary nature of projects and the longer-term view that sustainability requires
(Silvius et al., 2013). Project managers work within guidelines developed through the
project management discipline, and, for the investment decision-making phase, have
limited guidance in incorporating organisational sustainability objectives.
Incorporating sustainability in investment decision making for infrastructure projects 51
Haavaldsen et al. (2014) discussed the range of ‘front end’ investment appraisal
options that may address sustainability and noted that the number of tools reflect
different understandings of sustainability. These analysis tools each address various
levels of analysis (strategic, tactical and operational) and present alternative
approaches in whether, or how, each of the three sustainability aspects are assessed.
Sustainability evaluations should incorporate a ‘multiple bottom line of systems
integrity and ethical engagement explored across economic, social and environmental
spheres that are coevolving through time’ (O’Connor, 2006, p. 7). Whilst substantial
analysis is being undertaken to address gaps in knowledge around the monetisation of
environmental and cultural factors(Pearce et al., 2006), numerous studies highlight the
perceived shortcomings of CBA in the context of sustainable infrastructure decision
making and dealing with complexity (O’Connor, 2006). For sustainability assessment,
Haavaldsen et al. (2014) considered that CBA has the potential to impact on the three
pillars of sustainability at the operational level, but not at the strategic level. MCDA is
presented as a framework that better aligns with sustainability considerations (Cinelli
et al., 2014; Azapagic & Perdan, 2005; Clemen & Reilly, 2001; Munda, 2008). MCDA
employs a broad range of criteria, both quantitative and quantitative, that are important
to the investment decision and in addressing sustainability targets, including
considerations of intergenerational impacts (Maheepala et al. , 2003; Spackman,
2013). For complex decisions, various critiques have suggested the incorporation of
MCA with CBA and other analysis techniques to more fully assess options, and
address the perceived shortcomings of using MCDA alone (Jenner, 2010; Eales et al.,
2005; Beria, Maltese, & Mariotti, 2012). An integrated approach, using a combination
of methodologies and viewpoints, including CBA, may provide the most appropriate
response to address sustainability where government guidelines require CBA (Jenner,
2010).
Sustainability assessment involves comparing and ranking of options using both
‘hard’ and ‘soft’ appraisal methodologies that recognise the complexity in decision
making and the trade-offs that are required between a range of values (Gibson, 2006).
An effective method that combines quantitative and qualitative and that incorporates
stakeholder views, has not yet been fully developed for decision-making (Linkov et
al., 2006). Gibson (2006) asserted that a sustainable approach in decision making for
infrastructure projects incorporates involvement of all stakeholders, as a means to
52 Incorporating sustainability in investment decision making for infrastructure projects
address complexity. A holistic approach ‘understands systems as having complex
interactions which can't (currently) be fully understood in terms of the sub-components
which make up the full system’ (Bond & Morrison-Saunders, 2011, p. 2). A clear
definition of sustainability is important as some authors discuss the concepts of weak
and strong sustainability that will drive different outcomes and approaches (Saez &
Requena, 2007; Ness, et al., 2007).
Figure 2.3 presents the key appraisal methodologies in terms of ability to deal
with complexity and, hence, to apply an integrated sustainability lens (from Reidy et
al., 2014). Regulatory processes favour analysis based on a financial or economic
parameters using cost benefit analysis (and potentially Extended CBA), whilst
sustainability considerations favour multi-dimension analysis. In a regulatory sense,
the preference remains to adopt formal rationality rather than a ‘soft science,
participative focus’ that, according to Walker (2000, p. 15), may better address
complex problems. A key challenge is for decision making to effectively incorporate
sustainable development principles whilst addressing regulatory review requirements
within current institutional settings.
Incorporating sustainability in investment decision making for infrastructure projects 53
Abi
lity
to d
eal w
ith in
crea
sing
com
plex
ity
Figure 2.3. Spectrum of Evaluation Methods (modified from Reidy et al. (2014)
2.7.3 Value Capture and Public Value
The work by iBUILD research centre in the UK advocates the need for new
business models that capture the full value that public infrastructure provides. These
values relate to the direct use of infrastructure and the indirect values that infrastructure
provides (Foxon et al., 2015). A business model for infrastructure relates to ‘the system
of physical artefacts, agents, inputs, activities and outcomes that aim to create, deliver
and fully represent economic, social and environmental values over the whole
infrastructure life cycle’ (Bryson et al., 2014, p. 7). As part of an infrastructure business
model approach, value capture includes social value capture. An example of social
value is provided in heat network infrastructure involving a combined heat and power
system; this would place a value proposition on the alleviation of fuel poverty, which
has no direct revenue stream, hence a case could be made for funding by general
Financial Analysis•Profitability criteria•Costs and revenues•Monetary valuation
Economic Cost-Benefit Analysis•Economic efficiency•Monetary valuation
Extended Cost – Benefit Analysis•Economic theory and equity trade-off•Partial monetary evaluation
Multi Criteria Decision Analysis•Qualitative and quantitative analysis
Stakeholder Analysis•Qualitative assessment
Meets Regulatory Review
54 Incorporating sustainability in investment decision making for infrastructure projects
taxation. Ecological value capture from investments into smart grids may be based on
the avoided costs in infrastructure upgrades and maintenance savings, together with
providing support for further investments in renewable energy schemes (Foxon et al.
2015).
Just as interpretations of sustainability vary, notions of value capture also vary.
According to the report, Harnessing Value, Delivering Infrastructure7 by the
Australian government, value capture (also referred to as ‘land value uplift capture’)
is defined as ‘a means by which governments can recoup some of the costs of transport
infrastructure’ (Commonwealth of Australia, 2016a, p. 153). For transportation
projects, value capture encapsulates the increases in private property values, and may
be realised through direct mechanisms (taxes or rates) or indirect means through the
recovery of ‘a share of the actual cost of the public works, regardless of the property
value increase’, and may also be seen ‘as an opposite to compensation for negative
externalities' (Heeres et al., 2016, p. 3). According to the Victorian Government8, the
direct benefits associated with value capture include improved services for users of
social and economic infrastructure and increased land and business value for owners
and occupiers of rezoned land, and indirect benefits are associated with owners and
occupiers of properties near transport infrastructure, commercial benefits from
unlocking untapped opportunities, and lower business costs due to reduced congestion
of infrastructure. These interpretations place ‘value capture’ as a transactional and
financial valuation term.
7 This report from the Australian Government’s Standing Committee for Infrastructure, Transport and Cities responded to the Inquiry into the role of transport connectivity on stimulating development and economic activity. Hence the focus of “value capture” relates to the transport sector. The report may be accessed at
http://parlinfo.aph.gov.au/parlInfo/download/committees/reportrep/024018/toc_pdf/HarnessingValue,DeliveringInfrastructure.pdf;fileType=application%2Fpdf
8 The Victorian Government’s Value Creation and Capture Framework that seeks to “get better value from all Victorian taxpayer’s money from all future infrastructure projects” was released in 2016. See: http://www.dpc.vic.gov.au/index.php/news-publications/value-creation-and-capture-framework
Incorporating sustainability in investment decision making for infrastructure projects 55
On the other hand, the concept of public value is a broader term, but again subject
to a range of understandings (Bryson et al., 2015). Benington (2009, p. 237) provided
the following definition of public value:
… (it) extends beyond market economic considerations, and also
encompasses ecological, political, social, and cultural dimensions of value- all
that adds value to the public sphere.
• ecological value—adding value to the public realm by actively
promoting sustainable development and reducing public ‘bads’ like
pollution, waste, global warming.
• political value—adding value to the public realm by stimulating and
supporting democratic dialogue and active public participation and
citizen engagement
• economic value—adding value to the public realm through the
generation of economic activity and employment
• social and cultural value—adding value to the public realm by
contributing to social capital, social cohesion, social relationships,
social meaning and cultural identity, individual and community well-
being.
Moore’s model of public value9 states that the components of ‘legitimacy and support’
and ‘operational capacity’ must work together for organisations to create public value
(Moore & Khagram, 2004). In this context, the creators of public value- that is the
government agencies that provide infrastructure services- need to build social and
political legitimacy, which requires looking beyond simply addressing legal
obligations, and rather, working with stakeholders to understand the organisations’
wider responsibilities.
Moore’s work has also broached the application of Public Value to the use of
Cost Benefit Analysis (CBA). According to Moore, CBA emerged through the work
of Jeremy Bentham (1890) whose work on utilitarianism determined that only laws
with net positive utility should pass, based on the price each individual would be
willing to pay for ‘imagined’ benefits (Moore, 2014). Moore noted that an alternative
9 Also known as Moore’s Strategic Triangle, the model is focussed on what public managers should do in creating public value as part of corporate strategy, and is often cited in management texts. See: https://sites.hks.harvard.edu/m-rcbg/CSRI/publications/workingpaper_3_moore_khagram.pdf
56 Incorporating sustainability in investment decision making for infrastructure projects
approach based on policy and program evaluation was developed by Wholey et al.,
(2010) and takes evaluation away from the perspective of individuals involved in the
appraisal to the collective. Moore considered that a collective approach for measuring
public value is preferable to the individual in order to take account of the institutions,
processes of politics, public policy and government that exist in democratic processes
(Moore, 2014).
A further significant contributor to discourse on public value is Barry Bozeman,
whose work on public value has advocated looking beyond organisational public
management processes, and instead looks at the broader network of analysts, citizens
and policy makers to define public value (Bryson et al., 2015). Bozeman’s work
indicates that public values can be contestable, and that there is a need to find ways to
seek agreement on what public values are in practice.
Considerations of Public Value are embedded in value theory as part of the
theoretical framework for this research (and discussed in Chapter 3). The work on
Public Value outlined above provides a useful introduction to a discussion of the
broader role of institutions within the decision-making framework of public sector
works. Indeed, project appraisal does not sit alone- it sits in a broader system that
includes policy framework, guidelines, governance and political dimensions.
2.8 INSTITUTIONAL FRAMEWORK
The on-going criticisms around the use and appropriateness of economic
appraisal highlight the broader institutional context of decision making. Many
agencies responsible for infrastructure adopt sustainability objectives at a corporate
level and incorporate sustainability targets and indicators as part of corporate reporting
processes. Early planning and decision making has the greatest opportunity to
influence sustainability outcomes, however the consideration of trade-offs between
environmental, social and economic factors is made outside the formal assessment
(Samset & Volden, 2015). According to Vatn (2009), the choice of methods for
environmental appraisal forms part of an institutional structure that determines who
participates in the appraisal, the choice of data used, and the rules for choosing between
alternatives. Institutional structures recognise that policy considerations about the
common good require the perspective of citizens to support trust and engagement
(Vatn, 2005)
Incorporating sustainability in investment decision making for infrastructure projects 57
2.8.1 Policy Context
Infrastructure agencies operate within a wider system framed within an
economic and political context, based on enabling legislation and government policy.
A study that assessed the translation of broader government sustainability objectives
into decision-making practices for specific infrastructure projects in Western
Australia, showed a clear misalignment between stated government strategy and actual
practice (Bond & Morrison-Saunders, 2011). Institutional design, framed in an
economic and political context, is integral to achieving sustainability objectives that
incorporate participative processes in decision making (Ostrom, 2005; Ostrom, 1990;
Ostrom, 2010).
Policy making involves a range of policy actors operating within a rule-governed
policy institution that exists at a particular time and place (Lubell, 2013). The
application of a complexity lens to decision making aligns with social rationality and
provides a broader context to organisational analysis, recognising the dynamic
relationships and interactions that may exist between various actors with different
world views (Djuric & Filipovic, 2015). A systems model incorporates governance
systems, comprising the institutional framework and rules applying to the system, for
the analysis of government policy to address maters of complexity (Brondizio et al.,
2009). A multilevel representation to analyse the dynamics of governance systems has
been developed by Dillard et al. (2004) using the following layers:
• organisational policy level- the processes and rules within the organisational
policy arena
• organisational field level- organisational social networks and external
interactions, and
• economic and political level- overarching political interface providing
organisational oversight including legislators and regulators.
Applying a systems model, the policy level response needs to be supported
within an institutional framework that takes account of the networks and interactions
of the infrastructure agency and overarching political and economic oversight provided
by legislators and regulators. Whereas sustainability goals are articulated by various
levels of government, and infrastructure agencies adopt these goals in their own
58 Incorporating sustainability in investment decision making for infrastructure projects
strategic commitments, the organisational framework must also be considered when
addressing investment decision making.
The outcomes of analysis are dependent on the particular options chosen for
analysis and their sequencing, the information provided on various options under
consideration, and the rewards and punishments within an institutional game structure
(Ostrom, 1990). Taking account of the complexity inherent in problems around
environmental management and climate change, the multi-scale nature of decision
choices based around various boundaries should be considered to address decision
making challenges within a sustainability framework.
2.8.2 Boundaries
A further dimension in decision making for infrastructure services are the
(sometimes) artificial boundaries that have been established within and across sectors
to govern and deliver infrastructure works. Institutional boundaries are complex
arrangements that ‘demarcate the socially constructed and negotiated borders between
science and policy, between disciplines, across nations, and across multiple levels’
(Cash et al., 2002). Such boundaries are of fundamental importance in organising
citizens and providing authority, however they can also act as barriers to integrated
outcomes, and may discount values assigned by the wider community. Infrastructure
services, whilst often “owned” by sector-specific delivery or service agencies, exist in
open complex systems that require interactions with other jurisdictions, with other
infrastructure sectors (water-energy, road-drainage, etc) and other layers of
government (state-local). The delivery of infrastructure projects in a system with open
boundaries and a multi-agency context may be hampered where individual
organisations have limited scope to contribute to overall goals and broader community
outcomes envisaged by the delivery entity (MacAskill & Guthrie, 2017).
Three key boundary challenges are the mismatch between institutional
boundaries and bio-geographical system; scale discordance; and cross-scale dynamics
(Cash & Moser, 2000). These boundary issues may be applied to appraisal in front-
end decision making for infrastructure projects and are further described as follows.
Incorporating sustainability in investment decision making for infrastructure projects 59
1. Institutional fit and bio-geographical system mismatch: A number of
research studies show that institutional boundaries, and the authority of
institutions, do not align with the geographical scale of a particular
environmental problem (Cash & Moser, 2000). As such, institutional
jurisdiction, based on formal legal and regulatory requirements, has no
ability to manage flows and impacts across boundaries that form part of a
wider environmental system. In addition, mitigation works in one part of the
landscape may not be sufficient to address environmental problems that cross
property, institutional or regional boundaries (Saunders & Briggs, 2002).
These inconsistencies create inefficiencies when not appropriately managed.
2. Scale discordance: Scale discordance refers to the mismatch between
problem analysis and the scale required to inform management. Using the
example of climate change models, Cash described the difficulties in
applying global level climate models to local-scale climate assessments.
Fisher (2008) provided an example of this institutional imbalance for water
sector projects in Wales and England that were subject to national-level
decision rules but were locally funded, thus requiring rigorous economic
analysis that would normally apply at the national level. A further mismatch
occurs when the reach of the infrastructure provider does not meet the
requirements at a local level. Hall & Roelic (2015) described the national
energy supply model for the UK that disincentivises the generation of energy
by small-to-medium-scale local energy sources, negating the potential to
achieve greater efficiency and value for local communities. Whilst scale may
be seen as an issue, it also presents an opportunity to utilise expertise from
various scales that may enhance decision making (Cash & Moser, 2000).
60 Incorporating sustainability in investment decision making for infrastructure projects
3. Cross-scale dynamics: Cross-scale dynamics in environmental systems
refers to the linkages in bio geophysical and social systems recognising that
complex systems involve interacting processes and structures operating at
different scales. Such interactions and dependency also occur in social
(institutional) systems involving various actors in hierarchical political and
decision making systems. When applied to broader decision making in the
public domain, these cross-scale challenges may be considered as ‘wicked
problems’ requiring collaborative network settings, combined with the
appropriate set of tools, strategies, and capabilities (Weber & Khademian,
2008). At the same time, these interdependencies provide opportunities to
generate greater value and improved outcomes in terms of sustainability and
resilience (Rosenberg & Carhart, 2013).
In order to effectively apply sustainability considerations in decision making, the
boundary challenges associated with social and physical networks need to be
addressed. As infrastructure solutions are developed to meet emerging challenges
around climate change and other complexity issues, considerations of boundary
dynamics need to be incorporated into analysis.
2.8.3 Governance and regulation
Regulatory agencies provide input to decision making based on legislative
requirements in areas such as environment, health and or economics. Regulatory
oversight provides a strong governance framework for decision making by public
sector infrastructure providers, taking account of monopoly powers. However, in
practice, the role of the regulator may be based on incomplete understanding of the
key issues and risks. Regulators may not be aware of the full array of alternative
investment opportunities available and regulatory decisions may not be cognisant of
the interests of key user groups (Ananda, 2014). In addition, the time frames that
regulators adopt to assess proposals is limited, and does not take account of
considerations of long-term intergenerational equity that strong sustainability
assessment would require (Bond & Morrison-Saunders, 2011).
In the UK, Helm (2015) identified the need for broader institutional reform in
the water sector, based on current inefficiencies and backlog in investment by various
institutions operating across the water cycle. A system approach, recognising the inter-
relationships between water supply, catchment management, flood defence, land use
Incorporating sustainability in investment decision making for infrastructure projects 61
planning, discharge controls and agricultural management would require a review of
the institutional framework including the boundaries of water companies and
legislative review. In Australia, Ananda (2014, p. 134) stated that ‘current settings in
the urban water sector are ill-equipped to tackle climate uncertainty and it is important
to reconfigure the institutional settings – regulatory and planning frameworks – to
embed flexibility and to support efficient infrastructure provision in the urban water
sector’.
Using the example of the energy sector, Bolton & Foxon (2015) identified the
need to transition to new models of governance and regulation to adapt to low carbon
solutions using renewable technologies in order to address anthropological climate
change. Industry regulation plays a significant role in maintaining quality standards
and maintaining price affordability, but a key challenge for regulators in transitioning
to new models is the need to take account of wider public interest and the benefits that
are conveyed in adopting new systems.
2.9 THE RESEARCH QUESTIONS
The literature review clarified two key research questions. The first research
question (and associated sub-questions) sought to initially understand the linkage
between the sustainability commitments of infrastructure providers and actual practice
in investment decision making. The literature review highlighted that, across industry
and government, there is a renewed commitment to sustainability based on the UN
Sustainability Development Goals. However, CBA continues to be advocated in
industry guidance through regulatory activities and CBA remains integral to the
development of business cases and the justification of infrastructure projects. There is
substantial commentary, and indeed division, as to whether CBA aligns with
sustainability practice and takes account of the wider community and environmental
benefits that infrastructure has the potential to provide. Hence, the first Research
Question (RQ1) addresses this matter:
RQ1 Do corporate sustainability goals stated by infrastructure agencies
translate to project level decision-making in the pre-investment stage for
infrastructure projects?
• Do infrastructure agencies have corporate sustainability goals/ targets;
62 Incorporating sustainability in investment decision making for infrastructure projects
• What are the processes and guidelines adopted in investment decision
making;
• Are corporate sustainability goals captured in investment decision making;
• Is sustainability value captured (weak or strong sustainability);
• What factors support a sustainability framework; and
• What are the barriers to incorporating sustainability in decision making?
Following on from the first Research Question, the research also addressed the
need for a sustainability approach to provide an integrated, systematic assessment to
fully capture the environmental and social dimensions of sustainability. Many
infrastructure decisions are complex, involving multiple dimensions of value, and the
decisions made may potentially impact on a range of community members over long
time frames. However regulatory requirements and institutional requirements have the
potential to discount opportunities for sustainable outcomes. A sustainable approach
seeks to leave a positive legacy for future generations. The second research question
sought to discover the optimal approach to sustainability assessment, given the
institutional factors that govern decision making:
RQ2 What is an optimal system approach to support project selection and
decision making for infrastructure projects within a strong sustainability
framework?
• How does the regulatory environment impact on sustainability
considerations;
• What are the tools used to support sustainability goals and how effective are
these;
• What other system elements (guidelines, training, resources) are required to
support analysis processes;
• How are public participation models used and how effective are these?
2.10 SUMMARY AND IMPLICATIONS
The literature highlights on-going questions, together with suggested remedies
that address current appraisal models forming the basis of decisions on whether or not
infrastructure projects proceed, and the form that they take. In Australia, the failures
Incorporating sustainability in investment decision making for infrastructure projects 63
in decision-making processes have been well documented in the media, with recent
examples including the proposed East West Link project in Victoria (now abandoned),
Brisbane’s Western Corridor pipeline project in Queensland (abandoned), the
Traveston Crossing Dam project in Queensland (abandoned) and numerous other
major public works.
The literature review forms the basis of a preliminary conceptual model that
addresses the topics outlined in the research questions and provides the first step to
this research, using an integrated inductive/ deductive research approach. The
conceptual model is useful in framing the research design outlined in Chapter 5
(Research Design). As such, the following elements with the investment decision-
making process require further examination through the next stages of the research:
• The application of sustainability goals stated by infrastructure providers;
• Problem definition and option generation using investment management
guidelines as evidenced by “best practice” investment management
processes;
• Analysis tools that may broaden current use of Cost Benefit Analysis,
including the potential to incorporate Multi-Criteria Analysis and other
analysis methods;
• The political and institutional systems that impact on the decision-making
process;
• The impact of regulatory approval and governance requirements in
achieving sustainable outcomes;
• Consideration of boundaries (such as jurisdictional or geographical) in order
to achieve optimal sustainability outcomes;
• Participation processes incorporating community and institutional
stakeholders.
Figure 2.4 provides the initial concept model forming the basis of the research
design.
64 Incorporating sustainability in investment decision making for infrastructure projects
Figure 2.4. Conceptual framework for this research
The literature review reveals that despite the shortcomings of CBA, it continues
to be mandated in public sector practice for investment decision making. Hence, the
conceptual framework for the research has adopted a practical response that
acknowledges the on-going use of CBA, but also takes account of the on-going
questions that arise on the ability of CBA to address sustainability. The literature
review, and the conceptual framework that has been developed form the basis of the
research design that is described more fully in Chapter 5. The research design has used
a staged, mixed methods approach based on empirical evidence of current practice.
Whilst the conceptual framework shown in Figure 2.4 has been useful in informing the
research design, the formulation of the model for incorporating sustainability in
investment decision making that is presented in Chapters 7 and 8 provides a markedly
different framework. The following chapter (Chapter 3) provides the theoretical
framework for this research, with further discussion on the topic of public value as it
applies to this research.
Institutional framework and sustainability commitments
Participative Model
Problem Definition and Benefit Identification
Organisational factors
Rules and process
Boundary challenges
BUSINESS CASE
CBA Broader Assessment
Incorporating sustainability in investment decision making for infrastructure projects 65
Chapter 3: Theoretical Framework
3.1 INTRODUCTION
The previous chapter has set out some of the key issues and inconsistencies that
emerge for infrastructure decision making in that:
• Infrastructure is a public good with some known, but many unknown/
intangible values that may contribute to a sustainable future;
• In line with the UN Sustainable Development Goals, and statutory
requirements, infrastructure agencies continue to adopt sustainability
commitments at a corporate level;
• Much work in being done to incorporate sustainability in the design and
construction processes for infrastructure delivery using infrastructure
sustainability rating tools such as ISCA; and yet
• In the critical stage of business case development, standard financial
analysis tools continue to be mandated and applied, leading to significant
impediments to sustainability outcomes.
The previous chapter contains a strong emphasis on the tools that are applied
within the decision process, however the literature also suggests that adopting a
systems approach broadens the decision context to the consideration of the
organizational framework that supports decision making. A systems approach draws
on complex systems theory, and it will be seen that sustainability aligns with complex
systems theory thinking. A sustainable approach understands that infrastructure forms
part of open systems that are inter-related with other systems and that these are not
well understood when applying simplistic market-based models for analysis. At the
same time, public management processes involve decisions around expenditures of
public money, and so high degrees of transparency, accountability and good
governance by public sector officials is expected by citizens. Taking account of these
aspects, this section outlines the theoretical framework that underpins this research.
66 Incorporating sustainability in investment decision making for infrastructure projects
3.2 THEORETICAL FRAMEWORK- CONSTRUCTS
The role of the theoretical framework is to define the constructs relating to the
research area together with the relationship between those constructs (Kerlinger,
1973). Theory provides guidance on what information to present, and ultimately, how
to interpret the information. Maxwell (2012, p. 54) proposed that the theoretical
framework, and the ‘systems of concepts, assumptions, expectations, beliefs and
theories’ for a given study, may be represented by a concept map that, in turn, informs
the research design. Using Maxwell’s approach, I have developed a concept map to
illustrate the theories that form the basis of this research, and further discussion of
these theories, and their inter-relationship follows.
In philosophy, value theory considers two basis positions: the monist position
would assert that value can be viewed as a single, instrumental value whereas the
pluralist position would argue that intrinsic value incorporates multiple values
(Schroeder, 2016). Value theory considers questions of how to value happiness, or
how to value knowledge. On the question of which option is better: murdering one
person or allowing two people to be killed, Schroeder introduced the concept of Agent-
Relative Value, where decisions are relativised to the agents involved in the decision
in terms of what is best for the agents involved. Public value theory takes these
considerations away from individual responsibility to a collective responsibility.
On the question of ‘what do we mean by value’, Benington (2009) referred to
classical economics, which distinguishes between exchange value, labour value and
use value. Rational/public choice theory typically focuses on exchange value. At the
core of the decision-making process addressed by this research, is the concept of
assigning value within a framework that seeks to apply rationality to problems that
also have a high level of complexity. Using the concept map approach proposed by
Maxwell, Figure 3.1 provides the theoretical framework for this research. In the
following discussion, the topics of rationality and complexity theory are firstly
presented, and then a further discussion around public value shows how these two
theoretical aspects tie together.
Incorporating sustainability in investment decision making for infrastructure projects 67
Figure 3.1. Theoretical Framework
3.2.1 Rationality and public management/ decision making
Traditional approaches to organisational management and practice favour formal
rationality and seek to simplify the presentation and analysis of facts and data, often
reducing problems to a linear model within boundaries that may be defined by
jurisdictional borders and not the wider environment impacted by works. The public
nature of infrastructure projects requires decision making for investment appraisal to
align with considerations of rationality.
Organisations are open systems, operating beyond organisation boundaries in a
wider social and cultural context that shapes operational practices and procedures
(Silverman, 1970). Within the context of organisations, organisation and management
theory further seeks to respond to real-world situations and explores decision theory
in the context of the need for a systematic approach to analyse facts and data. Indeed,
Gabor (1976, p.280) stated that the inclination to apply a mechanistic approach in
management theory, and to ensure a perception of rigor and verifiability, means that
‘in practice decision makers will not admit to the existence of emotional or intuitive
Sustainability in Investment
Decision Making
Systems theory
Sustainability theory
Complexity theory
Rational Choice Theory
Stakeholder Theory
Organisation and
Management Theory
Decision Theory Public
Administration Theory
68 Incorporating sustainability in investment decision making for infrastructure projects
factors in their decision calculus, preferring to justify their choice on narrow grounds
associated with logic and science.’ As an extension of management theory, public
administration theory builds upon the history of civilisations that have been shaped
through collective management undertaken in a public setting. Frederickson et al.
(2012) presented eight areas of study within public administration: political control;
bureaucratic politics; institutional theory; public management; post-modern theory;
decision theory; rational choice; and governance. Of these, decision theory and rational
choice theory deal with complexity whereby decision making is often based on limited
or imperfect information and uncertainty, with decision making being guided by rules
and cues that ensure that past considerations influence decision processes. Gabor
(1976) discussed the reliance on ‘rationality’ in public sector decision making,
whereby there is a focus on measurable facts (that includes cost-benefit analysis). This
often excludes non-factual elements, such as ethical (value) statements that may be
deemed as ‘unscientific’ and ‘irrational’.
Stakeholder theory acknowledges the ‘multiplicity’ of groups that have an
interest in organisational operations and seek consideration of broader interests in
managerial decisions. The theory also includes consideration of the balance between
stakeholder and shareholder interests in decision making, whereby shareholder
interests often predominate and favour reliance on management accounting systems
(Rausch, 2011). Gladwin et al. (1995) proposed the need for a transformational shift
in management theory and practice from embedded thinking based on ‘technocentric’
or ‘ecocentric’ factors to a new ‘sustaincentic’ approach that shifts thinking away from
considerations of growth and efficiency to limitation and equity as part of
sustainability theory.
According to Dillard et al. (2004), formal rationality favours economic
efficiency and is value-free. Formal rationality is characterised by a focus on
calculations and financial accounting, and seeks to limit inputs from actors. Social or
substantive rationality provides an alternative approach that places greater weight on
alignment with the substance of values and acknowledgement that decisions need to
consider the social institutions that promote various values. A ‘tension’ exists between
the two approaches to rationality and, given that decision making involves both fact
and value, Gabor (1976) identified that (formal) rationality approaches consider the
existence of broader values as irrational, and unverifiable. Rationality is ‘bounded’ by
Incorporating sustainability in investment decision making for infrastructure projects 69
uncertainty and imperfect information that is found in real world situations, and this
may lead to decision making founded on selective information and satisficing
behaviour (Simon, 1979). As such, rational decision-making approaches are
appropriate where clear supporting information may be sourced to evaluate
alternatives, however, ‘in decision situations affected by uncertainty, ambiguity and
the absence of prior objectives, rational approaches might not be appropriate’
(Gutiérrez & Magnusson, 2014).
A key theoretical concept is the need to apply a rationality frame to any emerging
model for infrastructure decision making. However, within a rationality frame,
sustainability problems involve an array of actors addressing complex systems
whereby decisions have long-term consequences.
3.2.2 Complexity
Complexity theory, and the consideration of complex systems, is also proposed
as a lens that may effectively capture sustainability considerations and challenge
conventional economic thinking. A complexity approach takes account of the dynamic
connections and interactions between economic, social and ecological systems.
According to Foxon et al. (2013, p. 202):
The key insights from complex systems thinking are that economies are open,
dynamic systems, not in equilibrium, and are made up of diverse agents who
lack perfect foresight, but who are able to learn and adapt over time.
Checkland (1994) recognised that problem solving in both industry and the public
sector may be assisted by models developed for hard systems thinking to achieve
organisational goals as part of complexity theory. This approach is useful where ‘goals
and measures of performance were clear cut, communications between people were
limited and prescribed, and in which people in question were deferential to authority
that laid down goals and the ways in which they were to be achieved’ Checkland (1994,
p. 80). Checkland contended, however, that this model cannot effectively reflect real
life in 'richer' models of organisation and management and for more complex
problems. In this case, Soft Systems Methodology (SSM) theory enhances systems
theory by acknowledging the complexity of a given situation and recognising the
broader system context with considerations of the values and beliefs of various players
within the system. Zexian & Xuhui (2010) acknowledged the contribution of
Checkland’s system thinking model (initially developed in the 1970s) and built upon
70 Incorporating sustainability in investment decision making for infrastructure projects
the theory to include notions of the objectivity of social reality through the concepts
of ‘self-organisation’ and ‘adaptive evolution’.
3.2.3 Complex Adaptive Systems
Complexity theory and rationality/ public administration theory have been
brought together through the Complex Adaptive Systems (CAS) framework discussed
by Rhodes et al. (2010, p. 9) in the book Public Management and Complexity Theory.
CAS models provide a means to ‘identify those agents in a system that act and interact
in the pursuit of their individual or collective objectives, and to study how agent
behaviour and the interdependencies among agents result in systemic outcomes’. The
CAS framework provides a basis for description and analysis of decision making in
public sector cases and the adaptive capacity of these complex systems. A researchable
‘6+4’ analytical framework developed by Rhodes et al. builds on work by various
researchers in organisational complexity and was further developed in the course of
cross-case empirical research work discussed in the book. Rhodes et al. (2011)
identified the four unique CAS dynamics that are integral to self-organisation and
adaption as path dependency adaptation bifurcation and emergence. The six core
components of the CAS model (as illustrated in Figure 3.2) are:
• System (consideration of the boundaries that separate the system from its
environment);
• Environmental factors;
• Environmental rules;
• Agents;
• Processes; and
• Outcomes.
Incorporating sustainability in investment decision making for infrastructure projects 71
Figure 3.2. CAS framework (Rhodes et al., 2010, p.11)
The CAS framework acknowledges the interactions between elements in a
system and the path dependencies. The CAS framework provides a theoretical model
for research focused on the incorporation of sustainability in investment decision
making by infrastructure agencies. It acknowledges that processes/tools and rules
alone do not offer the full solution to complex problems. Using the CAS framework,
research inquiry may be broadened to consider the political and governance
dimensions of decision making, and the roles of various agents in the decision-making
process including stakeholders and community users.
3.2.4 Rationality, Complexity and Value
Herbert Simon (1916-2001) is known for his work on bounded rationality, and
was awarded a Nobel Prize in economics in 1978. Noting an understanding of decision
making within the economics profession that was based on perfect information, Simon
(1979) sought an acceptance of behavioural aspects that emerge in real world practice
within the ‘bounded rationalism’ theory. This consideration of relationship between
rationality and economics remains relevant to current discourse as investment decision
making is also referred to as economic evaluation. Critiques on the use of market
approaches may be traced backed to Aristotle10. More current research advocates a
need for critical reflection on the current preference to base the governance of natural
10 Aristotle discussed concepts of oikonomike (use or consumption) and chrematistike (acquisition or production).
72 Incorporating sustainability in investment decision making for infrastructure projects
systems on market-based instruments (MBIs) (Gómez-Baggethun & Muradian, 2015).
Whilst MBIs were initially used to successfully support conservation efforts, their
legitimacy in a wider decision-making context is questioned, particularly in
consideration in the alignment of market and ecosystem boundaries, and in
understanding the broader ideological and socio- political processes.
In exploring the evolution of value theory, Miller (2017) pointed to the teachings
of Aristotle and Adam Smith. Both Aristotle and Smith expressed similar views on
value in terms of value in exchange and value in use. Whereas Aristotle’s approach
and methods formed the foundations of social economic value theory, Smith’s work,
developed in the industrial age with limited understanding of the scarcity of resources,
focused on empirical calculations and scientific method. Smith’s theory, based on his
most famous work, Wealth of Nations, continues to inform current practice, and the
concept of the ‘invisible hand’ influences political thought that favours market–led
processes over government intervention and regulation. However, ‘classical economic
value theory accounts for the material aspect of value (value in exchange) and the
choice aspect of value (value in use) but falls short in accounting for the intangible
aspect of value’ (Miller, 2017, p. 177). Emerging theory on value proposes the need
for value co-creation, referencing the model of the ancient Greek agora (public sphere),
where value is determined through collaborative processes that go beyond measures
of maximum utilisation, and instead explore deeper understandings of value.
According to the Institute for New Economic Thinking, ‘traditional economics
is failing us’.11 In the book, The Econocracy- the perils of leaving economics to the
experts, Earle et al. (2016) asserted that economics as a discipline has evolved into a
technocratic process, ignoring the complex political and social processes that
accompany decisions. By applying the ‘blackbox’ approach to economic decision
making, the fundamental assumptions and judgements that underpin the technical are
hidden. This view was previously put forward by Spash (2009), who advocated that
economic thinking should be broadened to capture notions of public participation and
empowerment.
Pirgmaier (2017) challenged the application of the ‘old paradigm’ of
environmental economics that forms the basis of benefits modelling within economic
11 Refer to https://www.ineteconomics.org/about/our-purpose)
Incorporating sustainability in investment decision making for infrastructure projects 73
appraisals, and called for new approaches to economics that support social systems
and sustainability transitions. Pirgmaier’s paper provided a comprehensive review of
how economics applies to interrelated ecological and economic systems, and
consequently the following diagram (Figure 3.3) has been produced to summarise the
concepts put forward by Pirgmaier.
Figure 3.3. The evolution of environmental economics (based on Pirgmaier (2017))
These criticisms, and the call for new models, align with an on-going
philosophical debate that challenges the more ‘mainstream’ practice of environmental
economics that forms the basis of analysis within CBA. Environmental economics is
grounded in considerations of market failure, whereby the economic valuation of
externalities accounts for environmental costs and benefits within an economically
efficient boundary. On the other hand, ecological economics and socio-ecological
economics incorporate a systems view of the environment and take account of impacts
to future generations, recognising that some actions may be irreversible and that wider
community values are difficult to monetise. According to Foxon et al. (2013),
economic analysis based on marginal costs and marginal benefits is inadequate to fully
New Models
Models acknowledge complexity of
problemsOpen systems with
imperfect knowledgeEconomic, natural and social systems have equal weight
Social/ bounded rationality
Ecological Economics
Models based on steady state economics
Assumes exchanges across system
boundariesEconomics remains
dominant Formal rationality
Environmental Economics
Models based on neoclassical economics
Assumes closed systems
Economics is the dominant frame Formal rationality
74 Incorporating sustainability in investment decision making for infrastructure projects
address current challenges, such as climate change and loss of biodiversity. Ecological
economics continues to be aligned with sustainability assessment, however an
emerging body of work is critical of the limitations of ecological economics to
incorporate a wider spectrum of social values and, critically, to model the integrated
aspects that a true sustainability assessment seeks to interrogate. The emerging field
of complexity economics is being presented as an opportunity to better understand
these ‘wicked problems’ by acknowledging that economies are not perfect or static,
and that they continue to evolve and are ‘organic, and full of messy vitality’ (Arthur,
2013, p. 19).
For this research, the concept of public value, discussed in the previous chapter,
has been adopted as the over-riding lens for addressing the research questions.
Benington (2009, p.246) noted that public value:
is beginning to emerge as an alternative to both rational/public choice theory
and theories of public goods in providing a conceptual framework to inform
and inspire not only reform and improvement of public services, but also a
deepening of the democratic and deliberative process.
Public value presents the opportunity to assess projects beyond a reconciliation of costs
with a mathematically derived exchange value, and rather, provide a means to assess
the wider value that infrastructure services create.
Incorporating sustainability in investment decision making for infrastructure projects 75
Chapter 4: Water Management in Australia
4.1 INTRODUCTION
In addressing the current problems and potential solutions that form the basis of
the research questions, greater clarity and focus can be achieved through the
investigation of a single sector- the water sector- taking account of the specific
structural and governance models that are in place for that sector. Furthermore, the
water sector in Australia is subject to policy, legislative and regulatory frameworks
that set it apart from other infrastructure sectors. Of note, the economic regulatory
processes that dictate the planning and pricing decisions of water service providers has
significant implications for sustainability outcomes. An Australian context was
adopted for this research, taking account of the broader policy settings that apply
within a single national jurisdiction, whilst also acknowledging that state based
legislative and regulatory processes also apply. The literature review highlighted that
these institutional factors are an important dimension of the decision-making at a
project level.
A key opportunity for the water sector is the transition to water sensitive cities
through practices such as integrated water cycle management (IWCM) or ‘green
infrastructure’. These concepts present opportunities to meet sustainability challenges
around climate change and extreme weather events particularly drought and flooding.
Integrated water projects present opportunities to provide a range of benefits including
water quality improvements, flood protection, and the provision of alternative water
sources. The opportunities and issues relating to IWCM are addressed further in this
chapter.
The literature and theory supporting this research applies more broadly across
all infrastructure sectors, as the concepts and processes associated with both
sustainability and business case development have been shown to be common across
all sectors (Section 2.1.2). Furthermore, a ‘systems of systems’ model for
infrastructure recognises the interdependencies that exist across infrastructure sectors
that, where acknowledged, may contribute to enhanced performance and outcomes to
76 Incorporating sustainability in investment decision making for infrastructure projects
meet the challenges of an uncertain future (Hall et al., 2016, p. 8). Key interconnections
are evident between sectors such as energy and transport, energy and water, energy
and waste, and increasing, ICT and water/ transport. However, governance and
management of infrastructure remains a function of sector-specific organisations, and
in the case of water management, specific functions such as water supply and water
treatment may be further segregated through organisational responsibilities.
Following is a brief description of the water industry within Australia. This
chapter also presents an outline of a key sustainability challenge for the water industry
around integrated water resource management.
4.2 WATER INDUSTRY IN AUSTRALIA
Prior to 1788, indigenous use and management of water was based on complex
social arrangements founded on ecological uses. In the book Dark Emu, Bruce Pascoe
described the water management practices of aboriginal Australians whereby dams
and irrigation trenches were built, and well systems were used to support agricultural
practices and water supply (Pascoe, 2014). Access to water was ‘regulated through
social convention and rules differed across the continent in response to abundance and
reliability of resources’ (Jackson et al., 2012, p. 58). According to Pascoe, the story of
aboriginal water management practices is only now emerging, and more
archaeological surveys and research is required to better understand aboriginal water
management systems.
The history of water management following European settlement may be
categorised into four paradigms that are briefly summarised in Table 4.1 (from McKay,
2007).
Incorporating sustainability in investment decision making for infrastructure projects 77
Table 4.1
A history of water management in Australia from Mackay (2007)
Paradigm 1 From 1788, Terra Nullius meant that the law of England applied
to the colony and riparian laws allowing access by landowners
adjacent to rivers and unrestricted access to groundwater. With
growth and increasing demand for water, each state became
responsible for allocating surface water.
Paradigm 2 In this paradigm, the role of the states was significant in bringing
forward large water schemes and, following federation, the
Australian government provided funding to many of these
schemes. Growth in dam storages occurred over the 1900s with
the greatest increase occurring in the period 1960-1979. The role
of the Australian government was unstructured and issue-
driven.
Paradigm 3 Paradigm 3, from 1994, represents the increased role of the
Australian government in seeking structured reform in water
management. National competition policy allowed the full or
partial sale of public entities. During this period,
Environmentally Sustainable Development (ESD) principles
were introduced to water management through state legislation.
Paradigm 4 The current paradigm, beginning in 2004, with the introduction
of the National Water Initiative (NWI) is marked by a drive for
more efficient, productive use of water.
The Intergovernmental Agreement on a National Water Initiative (NWI) sets out
to achieve a nationally compatible market, regulatory and planning based system that
manages surface and groundwater resources for rural and urban use and states that:
‘governments have a responsibility to ensure that water is allocated and used to achieve
socially and economically beneficial outcomes in a manner that is environmentally
sustainable’ (Council of Australian Governments (COAG), 2004). The NWI seeks to
establish a common set of principles for managing water across Australia, and includes
78 Incorporating sustainability in investment decision making for infrastructure projects
provisions for urban water reform and the principles of integrated urban water cycle
planning and management (Clause 92 (iv)).
The governance framework for the water sector in Australia is complex, with
over 14 types of legal forms of business and different structures in each state. Some
states have numerous water authorities including Queensland (76), Victoria (21) and
New South Wales (96), Western Australia has three authorities and South Australia,
Northern Territory and ACT each have one. Hence water entities range from large
corporations with state–wide responsibilities (SA Water) to smaller divisions within
local councils (such as Toowoomba Regional Council). Table 4.2 presents a
breakdown of the number of types of water entities across Australia.
Incorporating sustainability in investment decision making for infrastructure projects 79
Table 4.2
Water Service Providers by State in Australia
State/Territory Number of Service Providers
Details
Queensland 7612 Providers include bulk water service providers (Seqwater and SunWater) and drinking water service providers (Queensland Urban Utilities in the wider Brisbane areas with the remainder largely managed by local governments). Overall, these comprise:
• 2 State Owned statutory authorities • 2 Council owned statutory authorities • 52 Council Service providers • 17 Aboriginal and Torres Strait Island
council service providers • 3 Other (eg private providers, state entity)
New South Wales
9613 Across the state, there are: • 4 Metropolitan Utilities (Sydney Water,
Hunter Water, Water NSW and Hawkesbury Council)
• 92 Local water utilities in non-metropolitan NSW (reduced from 105 in 2016 due to local government amalgamations).14
Australian Capital Territory
1 Icon Water Ltd is an unlisted public company owned by the ACT Government, and manages the water and sewerage assets of the ACT.
Victoria 21 Melbourne Water provides bulk water and bulk sewerage services to three water corporations in the greater Melbourne Metropolitan Area. These are City West Water, South East Water and Yarra Valley Water. Thirteen water corporations provide services to urban areas of regional Victoria. A further four water corporations provide rural water services.
South Australia 1 SAWater is the state’s single water service provider
Western Australia
3 Water Corporation (WaterCorp) Busselton Water Aqwest/ Bunbury Water Corporation
Northern Territory
1 Power and Water is the Territory’s water service provider
12 From DEWS’ Queensland water and sewerage provider performance comparative report: Financial Year 2015-2016 https://www.dews.qld.gov.au/__data/assets/pdf_file/0009/389448/service-provider-comparative-report-2015-16.pdf 13 Note that on-going industry reviews and amalgamations mean that this figure is often changing. 14 From http://www.water.nsw.gov.au/__data/assets/pdf_file/0007/716146/2015-16-nsw-water-supply-and-sewerage-performance-monitoring-report.pdf
80 Incorporating sustainability in investment decision making for infrastructure projects
The role of the private sector in providing water services is also growing. In New
South Wales, the Water Industry Competition Act 2006 enables private companies to
enter the urban water market and provide services in areas of reticulated water,
recycled water and sewerage services.
Separate legislation applies to each state and territory and the legislative
instruments define different arrangements and obligations. Despite commentary
calling for change since the 1990s, the urban water industry’s institutional framework
has changed little (Brown & Farrelly, 2009). State water legislation provides
commitments to environmental sustainability, with each state adopting different
definitions of environmentally sustainable development. At the organizational level,
broader cultural factors guide the understanding of sustainability and the practices that
are adopted to incorporate sustainability (McKay, 2007).
The regulatory and planning framework for the water industry in Australia is a
key determinant for decision making in relation to infrastructure projects. With a range
of government agencies and water authorities involved in decision making, there is
little coordination between agencies and regulators, with implications for
infrastructure projects and the ability to achieve efficient decisions (Ananda, 2014). In
the state of Victoria, regulatory governance is provided by:
• Department of Environment, Land, Water and Planning (DEWLP)- water
resource planning;
• Department of Treasury and Finance (DTF) – financial management;
• Department of Health- safe drinking water;
• Essential Services Commission (ESC)- pricing and performance;
• Environmental Protection Agency (EPA)- environmental protection; and
• Energy and Water Ombudsman – dispute resolution.
Regulatory approvals may be required for significant projects, in addition to a
requirement for water businesses to submit water plans to the ESC covering a five year
regulatory period as part of the price determination that sets tariffs and revenue
streams. According to Ananda (2014) the regulatory process provides the advantage
of cost certainty, but is an impediment to allowing some flexibility in the delivery of
Incorporating sustainability in investment decision making for infrastructure projects 81
capital works, and to adapt to changes such as climate and weather events. Project
decisions may also be made outside of the regulatory process and rigorous evaluation
processes, as witnessed by the Victorian Desalination Plant and the North-South
pipeline which were initiated at the political level in response to a period of drought
and low dam levels.
Internationally, water management practices are determined by the institutional
framework of each jurisdiction. In the UK, economic regulation is provided by a
single regulator (OfWat) whose functions may act as a model for reform of regulatory
functions in Australia (Frontier Economics, 2014). Even so, Helm (2015) identified
the need for broader institutional reform in the water sector in the UK, based on
inefficiencies and backlogs in investment around the current functions and obligations
of various institutions operating across the water cycle. A system approach,
recognising the inter-relationships between water supply, catchment management,
flood defence, land use planning, discharge controls and agricultural management
would require a review of the institutional framework including greater ability to work
across the boundaries that apply to water companies together with legislative review
(Helm, 2015).
4.3 WATER SECTOR ADVOCACY AND SUPPORT
The Water Services Association of Australia (WSAA) is the peak body of the
Australian urban water industry representing 31 members and 34 associate members
that provide water and waste water services to approximately 16 million Australians
together with industrial and commercial enterprises. In order to achieve its vision to
for Australia’s water utilities to be:
‘leaders in innovative, sustainable and cost effective delivery of water
services, WSAA promotes knowledge sharing, networking and cooperation
amongst members. WSAA identifies emerging issues and develops industry-
wide responses. WSAA is the national voice of the urban water industry,
speaking to government, the broader water sector and the Australian
community.’15
15 Refer to https://www.wsaa.asn.au
82 Incorporating sustainability in investment decision making for infrastructure projects
The Australian Water Association (AWA) represents some 4,500 individual and
over 600 corporate members including water utilities, contractors, consulting firms,
researchers and suppliers. Through its annual conference Ozwater, together with a
range of publications, training and workshops, AWA sees its role as providing ‘the
platform for our water experts, practitioners and businesses to share information, grow
expertise and collaborate effectively’16.
4.4 INTEGRATED WATER CYCLE MANAGEMENT
Integrated Water Cycle Management (IWCM) emerged in the 1990s as model to
challenge conventional water management practices for water supply, sewerage and
drainage and incorporates both demand and supply management with the consideration
of non-traditional water resources, and a focus on fit-for-purpose use (Mitchell, 2006).
More recently, the concept of Water Sensitive Cities supports a transition to new
modes of managing water including the adoption of decentralised systems and
recognising water as a key resource within the water-food-energy nexus (Floyd et al.,
2014). These models present opportunities to meet sustainability challenges around
climate change and extreme weather events particularly drought and flooding, and
respond to the limitations of traditional forms of urban water management to meet
these challenges. IWCM also incorporates initiatives to better manage stormwater,
considering it as a resource providing a range of benefits as an alternative water source
rather than traditional approaches based on conveyance and centralised disposal
(Mitchell, 2006). A range of benefits associated with IWCM or ‘green infrastructure’
are listed in Table 4.2 (from Symons et al., 2015).
16 Refer to https://awa.asn.au/AWA_MBRR/About_Us/AWA_MBRR/About_AWA/About.aspx?hkey=7dbb8cb0-9b64-44fb-9ea8-85942692802c
Incorporating sustainability in investment decision making for infrastructure projects 83
Table 4.3
Benefits associated with IWCM or 'green infrastructure (from Symons et al., 2015)
Social Environmental Economic
Human health and well-being
• Physical • Social and psychological
Community Cultural Visual and aesthetic
Climatic modification • Temperature reduction • Shading • Wind speed modification • Evapotranspiration
Climate Change mitigation
• Carbon sequestration and storage
• Avoided emissions (reduced energy use)
Air quality improvement
• Pollutant removal • Avoided emissions
Water cycle modification
• Flow control and flood reduction
• Canopy interception • Soil infiltration and
storage • Water quality
improvement Soil improvements
• Soil stabilization • Increased permeability • Waste decomposition
and nutrient cycling Biodiversity
• Species diversity • Habitat and corridors
Food production
• Productive agricultural land
• Urban agriculture
Commercial vitality Increased property values Value of ecosystem services
The difficulty in broadening assessment to take account of wider benefits beyond
institutional boundaries may, in part, be linked to the rules and regulatory processes
applying to the water entities that play a key role in IWCM. Whilst regulatory
oversight provides a strong governance framework for decision making, in practice,
the role of the regulator may be based on incomplete understanding of the key issues
and risks, and regulators may not be aware of the full array of alternative investment
opportunities available and regulatory decisions may not be cognisant of the interests
of local user groups (Ananda, 2014).
84 Incorporating sustainability in investment decision making for infrastructure projects
In order to address these boundary challenges, institutional governance
structures need to acknowledge that water resource management operates within an
environment that may be characterised by a multi-layered organisational framework
(operational, managerial and political) working within a broader system that extends
beyond organisational boundaries, creating value and impacting on the wider
community (Reidy et al., 2016; Dillard et al., 2004). A systems approach considers
infrastructure as more than sector-specific assets, and instead considers system
components and the relationship between them and recognises the dynamic
relationships and interactions that may exist between various actors within the urban
context with different world views. The opportunity to advance water projects that
align with broader sustainability objectives requires that decision making processes,
decision rules and institutional frameworks are better aligned, requiring concerted
efforts across the many physical and social boundaries that apply to these infrastructure
systems.
Across Australia, stormwater management typically resides with local
government. In March 2015, the Australian Government, through the Senate
Environment and Communications References Committee held an inquiry into
stormwater management. The inquiry attracted numerous submissions that
acknowledged the importance of stormwater in its contribution to achieving IWCM
outcomes and the involvement of institutions beyond local government. A key
recommendation from the Senate Committee was the need for all states and territories
to work together to develop a national policy around stormwater (a National
Stormwater Initiative). The Committee found that ‘the current approach to stormwater
management has various apparent weaknesses’, and that better planning and well-
targeted investment is required to avoid costs associated with flood impacts and
recovery, increased insurance premiums, and riparian management (Commonwealth
of Australia, The Senate, 2015).
Several submissions to the inquiry highlighted the need for improved guidance
in investment decision making to support alternative water management systems. The
Australian Academy of Technological Sciences and Engineering (ATSE) (2015)
stated:
Australia needs to develop robust economic evaluation models that can assess
the total community costs and benefits of complex stormwater systems. The
Incorporating sustainability in investment decision making for infrastructure projects 85
present models are too narrow in scope and cannot assess the true value of
investments made into green stormwater systems that provide high amenity
value to our cities while delivering on basic water services.
A number of submissions to the inquiry also addressed the weaknesses in current
institutional arrangements for managing various aspects of the water cycle. The
Committee found that the primary responsibility for stormwater often falls to local
governments, which are limited in their ability to make decisions that are outside their
immediate area of responsibility and can be affected by actions, or inaction, in
neighbouring local government areas. On the basis that integrated water management
projects have wider benefits, beyond institutional boundaries, and benefits are not
easily quantified, investment in stormwater harvesting is problematic. The Australian
Water Association (AWA) submitted that management of stormwater should be
integrated into the role of all water authorities noting that ‘the skill sets involved in
management and maintaining water and wastewater assets are very similar to those
required to manage and maintain stormwater assets’ (Australian Water Association,
2015).
According to ATSCE, ‘Australia needs more sophisticated governance
frameworks for managing multi-functional stormwater assets to transition its cities to
more liveable places’ (ATSE, 2015). Integrated approaches to water basin planning
are also hindered by the separation of management functions across and within various
institutions responsible for functions such as water supply, wastewater, stormwater,
groundwater, catchment management, and aquatic ecosystems (CSIRO, 2015).
The Senate Committee found that ‘the regulation of water monopolies by state
governments prevents those entities from considering how better stormwater
management outcomes could be achieved’. The Committee identified a need for water
agencies to have ‘broader objectives’ to support best practice in integrated water
management (Commonwealth of Australia, The Senate, 2015).
4.5 SUMMARY
This chapter has provided a brief outline of the background and statutory
framework for the water industry in Australia. The structure of the water industry and
the role of regulation are significant factors in this research as the literature review has
identified the barriers that institutional arrangements may present in achieving more
86 Incorporating sustainability in investment decision making for infrastructure projects
sustainable outcomes. In order to ground the academic discourse into real practice, the
2015 Stormwater Inquiry has highlighted the issues around investment decision-
making, and the barriers to bringing forward innovative new and emerging practices
in IWCM. As IWCM seeks to deliver more sustainable outcomes based on making
cities more liveable and resilient, the challenges to effectively build and defend a
business case for IWCM initiatives remains a challenge. The following chapters
present the research design, results and outcomes of the research based on an in-depth
study of practice of water industry experts.
Incorporating sustainability in investment decision making for infrastructure projects 87
Chapter 5: Research Design
5.1 INTRODUCTION
This chapter sets out the design for the research based on the research questions.
The preliminary model developed through the literature review was used as the starting
point to further understand what methods are used in current practice, and how practice
may better incorporate sustainability A mixed methods (quantitative plus qualitative)
study using an integrated inductive/ deductive research approach was identified as the
most appropriate method to address the two research questions. In doing so, a
sequential approach allowed the inclusion of a ‘hold point’ between the quantitative
and qualitative stages to assess whether the proposed research design remained
appropriate, and whether adjustments were required in the design of the more
substantive qualitative study. This chapter presents the research design and the
theoretical considerations that underpin the design including the methodology, choice
of participants and approach to analysis of research data. The following chapter
(Chapter 6) presents the outcomes and results of the research process.
5.2 METHODOLOGY AND RESEARCH DESIGN
5.2.1 Methodology
Creswell (2003) provided a framework for research design based on three main
steps as presented in Figure 5.1 (below).
Figure 5.1. Three questions for research design (adapted from Creswell, 2003)
The knowledge claim may guide the research methodology, which then may
inform the detailed research plan and methods employed in the research. According to
Creswell, one of four alternative knowledge claims (postpositivism, constructivism,
Question 1What is researcher's
knowledge claim
Step 2What strategies/ methodologies
inform procedures
Step 3What methods for
data collection/ analysis will be
used
88 Incorporating sustainability in investment decision making for infrastructure projects
advocacy/participatory, and pragmatism) should be adopted by the researcher to guide
the inquiry. By stating knowledge claims, the researcher acknowledges the
assumptions and perspectives they bring to the research based on their backgrounds
and experience. For this research, a pragmatic oriented approach, as defined by
Creswell, was adopted. The pragmatic approach is centred on ‘what works’ in
addressing the research problem. A pragmatist approach accepts that there is not
necessarily unity in approach and thinking, reinforcing a method that seeks multiple
ways to collect and analyse data. Hence pragmatism “opens the door to multiple
methods, different world views, and different assumptions, as well as different forms
of data collection and analysis in the mixed methods study” (Creswell, 2003, p12).
Using the pragmatist approach, the research question is central to understanding the
problem (Mackenzie & Knipe, 2006).
In determining methodology, Creswell further stated that a mixed methods study
would support the pragmatic approach. Mixed methods, most often incorporating both
quantitative and qualitative research components, acknowledges the limitations of
purely quantitative approaches to hypothesis testing, in that quantitative approaches
do not help in identifying new or unanticipated factors or constructs. Within mixed
methods research, quantitative approaches assist in providing prior knowledge to the
qualitative component as part of an integrated inductive/ deductive approach (also
referred to as a hypothetico-deductive approach) (Ali & Birley, 1999).
Furthermore, the rationale for a mixed methods approach allows for an
‘expansion’ intent that ‘seeks to extend the breadth and range of inquiry’ (Greene et
al., 1989). Creswell (2003) stated that a sequential mixed methods approach using a
quantitative method to test theories or concepts, followed by qualitative methods
involving more detailed exploration is a typical application of a pragmatic research
approach.
A preliminary conceptual model for incorporating sustainability into investment
decision making was developed through the literature review and is outlined in Figure
2.4. The components of the model include:
• The application of sustainability goals stated by infrastructure providers;
Incorporating sustainability in investment decision making for infrastructure projects 89
• Problem definition and option generation using investment management
guidelines as evidenced by “best practice” investment management
processes;
• Analysis tools that may broaden the current use of Cost Benefit Analysis,
including the potential to incorporate Multi-Criteria Analysis and other
analysis methods;
• The political and institutional systems that impact on the decision making
process;
• The impact of regulatory approval and governance requirements in
achieving sustainable outcomes;
• Consideration of boundaries (such as jurisdictional or geographical) in order
to achieve optimal sustainability outcomes;
• Participation processes incorporating community and institutional
stakeholders.
Bansal & Roth (2000) claimed that the development of such a model provides an
important starting point for research, but has limitations in that:
• the data that ground such a model are inadequate; and
• the model is not fully specified- ‘the constructs and their underlying
relationships require greater precision in order to be predictive’(Bansal &
Roth, 2000, p.719)
In their research (which sought to explain ‘why companies go green’), Bansal &
Roth used analytic induction and empirical data to challenge their emerging
hypotheses and develop theory that was empirically grounded (Bansal & Roth, 2000).
Theory building requires the research process to link the research question/s and may
be based on a quantitative or qualitative evidence, or both (Eisenhardt, 1989).
An integrated inductive/ deductive approach (also referred to as a hypothetico-
deductive approach) has been adopted for this study in order to progress from an
abstract logical relationship toward theory based on concrete empirical evidence (Ali
& Birley, 1999).
90 Incorporating sustainability in investment decision making for infrastructure projects
5.2.2 Research Design
The following core questions form the basis of this research:
1. Do corporate sustainability goals stated by infrastructure agencies translate
to project level decision-making in the pre-investment stage for
infrastructure projects?
2. What is an optimal system approach to support project selection and
decision making for infrastructure projects within a strong sustainability
framework?
Using a mixed methods approach, data collection can be done in various ways in terms
of both sequence and emphasis in relation to qualitative and quantitative aspects.
Quantitative approaches are suited to the first question, and qualitative approaches may
address both research questions. A sequential, staged approach to the research, was
adopted to allow an explanatory model to be built. The quantitative study formed an
initial stage to firstly test and refine the conceptual model, prior to more detailed
enquiries of the problem within the qualitative study. This approach used the first stage
of research as an effective pilot or test study to assess the preliminary conceptual
model. Pilot studies are appropriate for small sample sizes as a means to provide
insights without adding to theory in its own right. A pilot study may form part of an
ongoing process of research design, providing insights into participant samples and
recruitment strategies, assessing the adequacy of the quantitative approach, and
assisting in the finalisation of the following component of the study (Johnson,
Onwuegbuzie, & Turner, 2007).
The main focus of the research was the qualitative study seeking to explain in
greater depth the results from the initial pilot study. In terms of research emphasis, the
approach may be described as quant à QUAL, with the emphasis on the qualitative
aspects (DeCuir–Gunby, 2008).
The research design forming part of this Mixed Methods research was developed
with reference to further guidance provided by Piper (2006), Mackenzie & Knipe
(2006) and Onwuegbuzie & Leech (2006) and comprised the following elements that
are discussed more fully in the following sections.
1. Literature Review and model framework
2. Selection of proposition testing criteria
Incorporating sustainability in investment decision making for infrastructure projects 91
3. An initial small-scale study comprising a structured cross-sectional survey
of water agencies, data collection and analysis (quantitative)
4. Data analysis and proposition modification
5. Semi-structured interviews of selected industry specialists
6. Coding, analysis and iterative modification of proposition (qualitative)
7. Adapting/ synthesising findings in respect to model
8. Report findings
Figure 5.2 provides a summary of the research design.
Figure 5.2. Summary graphic of research design
Owen (2014, p. 11) noted that research focused on evaluating programs should
‘seek copies of the law, rules, regulations, guidelines, and legal interpretations’, as
well as other program documents such as annual reports, financial statements,
newsletters, budget justifications, and more organisation charts. These documents,
together with other relevant strategic and operational documents produced by
infrastructure providers and regulating agencies, were collated and reviewed to
provide background to topics raised.
Final model and findingsModel building and refinement Incorporate literature
Results and analysisCoding using NVivo Synthesis of results
Qualitative Study (Stage Two)Semi- structured interviews Assess the overall decision making domain
Results and analysisInitial hypothesis testing Review qualitative research design
Initial Quantitative Study (Stage One)Structured Survey Subject Matter Experts in the water
industry
Preliminary ModelDeveloped from literature review Reference to research questions
92 Incorporating sustainability in investment decision making for infrastructure projects
A further element of the research approach, based on methodologies espoused
for combined inductive/ deductive approaches, incorporated an iterative loop, whereby
new concepts emerging as the research progressed may be further developed and tested
through the literature review. In generating theory, it is often not possible to fully
review all the literature beforehand, and hence a further step in the research
methodology included a ‘combining’ step that brought together the new and emerging
concepts with the existing underpinning technical literature (Dubois & Gadde, 2002).
5.3 INSTRUMENTS/ FRAMEWORK
The concepts and model developed in the literature review apply across all
sectors of the infrastructure industry. The literature has been sourced from
international research that more broadly addresses problems in decision making for
infrastructure projects, but also within specific sectors such as water, transportation,
coastal infrastructure and energy. For this research, the focus has narrowed to the water
industry in Australia taking account of the specific institutional settings for water
management at national, state and local levels. Chapter 4 outlined the particular
attributes of the water industry and a brief description of the political, legal, and
structural frameworks for the water sector in Australia. In addition, the challenges
relating to aspirations to advance practice in integrated water cycle management
(IWCM) have been outlined, and highlighted in submissions to a recent Australian
Senate Inquiry. The narrowing of the research to a single case (the water sector in
Australia) is not seen to diminish the outcome of this research, but instead provides a
higher degree of focus on an industry which, in itself, is multi-dimensional and
responsible for a range of public services.
As noted in the discussion on the theoretical framework, the CAS (Complex
Adaptive Systems) Framework has been used to guide questioning in both surveys and
interviews throughout the research. Whilst the literature review has focused on the
analysis ‘processes’ such as the use of CBA and MCA, the CAS framework
acknowledges that decision making exists in a wider system, and all of the elements
in the system should be investigated (Rhodes et al., 2010). Proposition testing has been
developed in consideration of the wider system dynamics, namely:
• The system boundaries;
• Environmental factors;
Incorporating sustainability in investment decision making for infrastructure projects 93
• Environmental rules;
• Agents;
• Processes; and
• Outcomes.
5.4 PROCEDURE AND TIMELINE
Following is a description of each of the two stages of the research process. Full
details of the survey forms and questions are provided in Appendix A to D. This
section outlines the research design processes, the approach to the identification of
participants, and the analysis techniques that were adopted across the research stages.
5.4.1 Initial Quantitative Study (Stage One)
As part of a sequential mixed methods study, the first stage was designed as an
initial quantitative study seeking to validate the findings from the literature review in
the context of water industry practitioners in Australia. The research questions and the
theoretical model formed the basis of the analysis approach, which, in turn, guided the
design of the questionnaire and the consideration of participants in the initial study.
A cross-sectional survey was proposed to focus on understanding general
industry practice:- what practitioners are doing, and the system dynamics for
incorporating sustainability in decision making. The design of the survey referenced
the conceptual framework to address the first research question, namely:
Do corporate sustainability goals stated by infrastructure agencies translate to
project level decision-making in the pre-investment stage for infrastructure
projects?
This question was broadened to incorporate the following sub-questions:
• Do infrastructure agencies have corporate sustainability goals/ targets;
• What are the processes and guidelines adopted in investment decision
making;
• Are corporate sustainability goals captured in investment decision making;
• Is sustainability value captured (weak or strong sustainability);
• What factors support a sustainability framework; and
94 Incorporating sustainability in investment decision making for infrastructure projects
• What are the barriers to incorporating sustainability in decision making.
The key objectives of the survey sought to assess the validity of the preliminary
concept model that was developed from the literature review and to identify any key
issues that may influence the final design of interview process forming the next stage
of research.
Questionnaire
A copy of the survey is provided in Appendix A (Key Survey Questionnaire).
The survey, comprising 21 questions, included a mix of nominal, ordinal, interval and
ratio scale measurement variables that will be designed to address these questions. In
addition, the survey was constructed to test the validity of the conceptual framework
developed through the literature review. This was done through questions addressing
the effectiveness of various tools and processes in their ability to support sustainability
assessment within decision making using questions based on a four grade (r=4) Likert
scale described by Göbet al. (2007) as follows:
Value Assessment
1 Not relevant
2 Somewhat relevant
3 Relevant
4 Highly relevant
The survey was designed to allow further assessment of any gaps that may exist
in the processes currently adopted by organisations for investment decision making,
and the views of industry practitioners on processes that may incorporate
sustainability.
In assessing outcomes of Likert surveys, there are a range of interpretative views
across academic discourse in assessing ordinal (ranked) data, and interpretation
through parametric statistics may be problematic (Allen & Seaman, 2007). Göb et al.
(2007) stated that, using an ordinal interpretation, analysis should focus on the ratios
of respondents choosing values on the Likert scale. The analysis has, therefore,
focused on overall thematic trends, rather than individual responses. The survey was
Incorporating sustainability in investment decision making for infrastructure projects 95
designed to allow further analysis of the issues raised from the literature review as
previously discussed, namely:
• Whilst public sector decision-making is complex with a range of
stakeholders and political inputs, there is a preference to utilise technical/
‘black box’ methodologies to inform decision making;
• The environmental and social dimensions of sustainability are not well
understood and attempts to monetise these elements do not fully capture all
costs and benefits for infrastructure projects; and
• Given that investment decision making incorporates value judgements, the
inclusion of broader analysis that includes public participation may more
effectively assist in addressing deep and complex problems.
QUT’s Key Survey software provided the capability to collate and store survey
responses, and could be used to initially analyse responses and develop reports.
Approach to Analysis
There are a range of approaches that may be used to assess content validity to
examine the agreement or consistency in a construct as result of ratings from a panel
of experts. Content validity is ‘the degree to which elements of an assessment
instrument are relevant to, and representative of, the targeted construct for a particular
assessment purpose’ (Haynes et al., 1995). Content validity assesses ‘the ability of the
instrument to measure the attributes of the construct under study’ (DeVon et al, 2007).
Content Validity Analysis is commonly attributable to Martuza, an education
specialist, but is also commonly applied to fields such as health and information
systems, as well as management systems (Polit & Beck, 2006). Table 5.1 summarises
three key methods of analysis that are referenced in research that uses Content Validity
Analysis (derived from DeVon et al. (2007) and Polit & Beck (2006).
96 Incorporating sustainability in investment decision making for infrastructure projects
Table 5.1
Three Methods of Analysis using Content Validity Analysis
Method for analysis by author:
(1) Lawshe
(1975)
(2) Lynn (1986) (3) Wynd et al.
(2003)
Rating Scale Use of 3 point scale:
-Essential
-Useful but not
essential
-Not necessary
Use of 4 point scale:
-Extremely relevant
-Relevant
-Somewhat relevant
-Not relevant
Use of 4 point scale:
-Extremely relevant
-Relevant
-Somewhat relevant
-Not relevant
Basis of
Calculations
CVR (based on the
number of experts who
rate an item as
‘essential’
The CVI for each
scale item is the
proportion of experts
that rate an item as 3
or 4 on a four point
scale.
The scale item CVI
is adjusted using a
kappa statistic to
take account of
agreement beyond
chance.
Basis of content
validity
Proportional
agreement
Proportional
agreement
Proportion of
agreement after
chance agreement is
removed
Polit and Beck (2006) noted that there has been some criticism of content validity
assessments that are based on proportional agreement. More recent research work
advocates the use of Wynd’s methodology, which adjusts the CVI for chance
agreement (Polit et al., 2007). The kappa statistic used in Wynd’s approach is derived
from the work of Cohen (1960) (based on two raters), but modified using the work of
Fleiss (1971) that applies to more than two raters. In this research, the methodology
proposed by Wynde has been adopted, using the modified kappa statistic k*. On this
basis, survey questions should be constructed in relation to individual items that form
part of the conceptual model construct. An item Content Validity Index (i-CVI) can be
calculated based on the responses to survey questions, using the four-point rating scale.
Incorporating sustainability in investment decision making for infrastructure projects 97
The i-CVI value reflects the number of experts agreeing that an item is ‘relevant’ or
‘extremely relevant’. The i-CVI values may then be converted using the modified
kappa value (k*) that adjusts the i-CVI to take account of the probability of chance
agreements using the formula:
Equation 5.1 Modified kappa using the proportion of agreements on relevance (from Polit et al., 2007)
Where:
Equation 5.2 The probability of chance agreement based on the formula for a binomial random variable (Polit et al., 2007)
And where:
N= Number of experts,
A= The number of experts agreeing on good relevance, and
i-CVI refers to the calculated item relevance based on proportional agreement.
Table 5.2 provides guidelines for the use of modified Kappa (k*) in determining
the level of agreement between raters (from Polit & Beck (2006) and Fleiss, Levin, &
Paik (2013)).
Table 5.2
Guidance for use of modified kappa values in determining item relevance
Kappa (k*) Evaluation
>0.75 Excellent
0.6-0.75 Good
0.4-0.59 Fair
<0.4 Poor/ no relevance
CVI ratings may be used to firstly assess the validity of the preliminary
theoretical construct with a focus on sustainability practice.
98 Incorporating sustainability in investment decision making for infrastructure projects
Participants
In identifying survey participants, a key consideration was the need to recruit
subject matter experts who could provide informed and reliable advice on current
sustainability practice. The number of experts required to determine content validity
has been subject to numerous interpretations. Content Validity Analysis recognises
that the availability of subject matter specialists may be difficult and considerations of
accessibility and agreement to participate may limit the number of participants (Lynn,
1986a). According to Tojib & Sugianto (2006), a minimum of three responses are
required to analyse data using the Content Validity Index (CVI). Other researchers
recommend sample sizes of five experts (Lynn, 1986) or seven experts or more (n>=7),
in order to evaluate content validity (DeVon et al., 2007; Polit et al. , 2007).
The identification of participants within the water industry with expertise in
sustainability presents significant challenges. Sustainability practice varies across
water providers and not all water service providers have strong commitments to
sustainability. This issue may be illustrated by the findings of a report on the
performance of 76 water service providers across Queensland that stated:
There are varying factors and challenges that influence the services offered by
providers, including location, climate, weather patterns, access to skilled and
experienced staff, population growth and contraction, constrained capital and,
in some cases, limited opportunities for economies of scale. These challenges
can significantly influence provider performance across a range of indicators.
For example, the provision of reasonably priced good quality drinking water
is the aim for all providers; however, this can be more difficult and costly for
small and/or remote providers or providers with constrained water sources
(Department of Energy and Water Supply, 2017, p. 8).
A further issue in recruiting participants for such a study is the consideration that
project appraisal and business case development is often a politically sensitive activity
and often is subject to confidentiality arrangements. In order to recruit participants that
could contribute to knowledge on leading sustainability practice applied to business
cases, a targeted group with expertise in sustainability practice and project planning
was required. For this survey, cluster random sampling was proposed, which DeCuir-
Gunby described as a ‘random sample of groups that occur in a setting’ (DeCuir–
Gunby, 2008). In this case, the Water Services Association of Australia (WSAA) - the
Incorporating sustainability in investment decision making for infrastructure projects 99
peak membership body for the 42 leading water authorities operating in Australia-
provides a more defined group of organisations largely focused on sustainability
outcomes. Within WSAA, the Healthy and Living Communities Committee (HLCC)
has been established to ‘influence’ and advocate for the creation of communities
(founded on the sound principles of water supply and sanitation) where resources are
utilised sustainably and the water environment is managed to enhance quality of life’
(Water Services Association of Australia, 2016). HLCC membership represents
twenty of the Australian water industry key experts on sustainability. Membership of
the HLCC covers all states and territories, with the exception of the Northern Territory.
Therefore, the HLCC represents leading sustainability practice in the water industry
across Australia. For the purpose of seeking input from subject matter experts, all
members of the HLCC were invited to complete the questionnaire. Table 5.3 outlines
the HLCC member organisations:
Table 5.3
Organisations with membership of the HLCC in WSAA
Yarra Valley Water (Vic) Water Corporation (WA) SEQ Water (QLD) Coliban Water (Vic) Aqwest (WA) Gladstone Water Board
(QLD) Barwon Water (Vic) Icon Water (ACT) Toowoomba RC (QLD) City West Water (Vic) South Australia Water (SA) Logan Water (QLD) Melbourne Water (Vic) Hunter Water (NSW) Unity Water (QLD) South East Water (Vic) Byron Shire Council (NSW) Western Water (Vic) City West Water (Vic) Sydney Water (NSW)
All participants were informed that their responses would be confidential and
individual responses would not be attributable. Chapter 6 provides the results of the
research process, including the responses to the questionnaire.
5.4.2 Review and Hold Point
Using a sequential, staged approach, the research design included provision for
the assessment of the outcomes of the initial quantitative study and an effective ‘hold
point’. This would allow the review and refinement of the design for the following
stage of research that was focused on developing a deeper understanding of practice
through interviews. The intent of the initial quantitative study was not necessarily to
provide statistically valid, stand-alone data, but to inform the development of the
model construct and provide insights into the finalisation of the details and process for
the following stage of research. Key outcomes sought from the initial study were:
100 Incorporating sustainability in investment decision making for infrastructure projects
• To clarify the identification of participants in the next round of research;
• To inform the most appropriate method of recruiting relevant participants
in the next round of research;
• To validate the continuation of the proposed research design; and
• To provide insights into the conceptual model, to identify any gaps in
knowledge and identify any areas for inclusion or further interrogation
within the next stage of research.
5.4.3 Qualitative study (Stage Two)
The focus of this stage of research was to continue to address the first research
question, but to fully explore the second research question, namely:
What is an optimal system approach to support project selection and decision
making for infrastructure projects within a strong sustainability framework?
This research question included the following addition sub-questions:
• How does the regulatory environment impact on sustainability
considerations?
• What are the tools used to support sustainability goals and how effective are
these?
• What other system elements (guidelines, training, resources) are required to
support tools?
• How are public participation models used and how effective are these?
Design
The design for the qualitative study was based on the use of semi-structured
interviews for data collection with a continued focus on experts with a strong
understanding of practice in a real-world setting. Using a social constructionist
epistemology, the focus was not only on how experts describe their practice, but also
on developing an understanding of why they construct their work in a particular way
(Dick, 2004). The interview questions were based on the themes that were identified
in the conceptual framework, however the emphasis of questioning was tailored to the
knowledge claim and industry perspective provided by each interviewee. For example,
Incorporating sustainability in investment decision making for infrastructure projects 101
for practitioners who develop business cases, questioning would have greater focus on
analysis techniques, whereas government decision makers, with knowledge in the
political and governance spheres, would be better placed to address questions around
the institutional factors in decision making.
As noted previously, a social constructivist approach was assumed for this
research. Social constructivist interviews tend to be loose in structure, with broad
questions allowing participants to construct meaning from the situation. The aim was
to develop more open-ended questions and allow responses that reflect the
participant’s life setting (Creswell, 2003). In qualitative research, the interview
questions do not need to comprise a formal schedule to be asked in a set order, but
rather be based on an interview guide listing topics that should potentially be covered,
together with follow-up questions and probes (King, 2004). Follow-up and probing
questions seek to develop greater insight and depth to the research.
Thus, the research design included three types of questions:
1) main questions (reflecting the research problem)
2) follow up questions and
3) probes.
The following Appendices provide details of the interview questions that were used
for this research:
Appendix B: Interview Questions- Industry Practitioners
Appendix C: Interview Questions- Independent Stakeholders
Appendix D: Interview Questions – Central Agencies
All interviews were recorded, allowing all audio files produced to be imported into the
NVivo qualitative data software programme. Interview transcripts would then form
the basis on further analysis and review. The written representation of interviews
proposed a standard orthography approach, in that the norms of written language were
adopted (Kowal & O’Connell, 2004).
Analysis
The approach to analysis of interview transcripts was based on the knowledge
claim of pragmatism, seeking to understand real world practice focused on the ‘what’
102 Incorporating sustainability in investment decision making for infrastructure projects
and the ‘how’ of current practice and the intended consequences of actions (Creswell,
2003). The analysis of data was proposed to involve a process of describing concepts,
classifying them and assessing how concepts inter-relate (Broadhurst et al., 2001). The
NVivo data analysis software package, available through QUT licensing
arrangements, was procured to analyse records of interview transcripts. Using NVivo,
interview data can be analysed as part of an iterative process with the systematic
reduction of data through the grouping of data into broad ideas or codes based on
interview questions and emerging themes (Creswell et al., 2007).
Coding relates to words or phrases that represent some form of phenomenon-
whether these be ‘a concept, belief, action, theme, cultural practice or relationship’
(Tracy, 2012, p.189). Coding may be approached as an iterative process, with initial
coding based on the primary data provided in interviews and documents. Owen (2014)
discussed coding options using NVivo and suggested a combination of descriptive
coding (focused largely on document analysis) and evaluation coding (derived from
interviews and appropriate for a policy and organisational setting). Constant
comparison allows the modification of code descriptors to suit new data. The aim of
coding is to build knowledge around the broad research concepts that have been
identified in the literature review, and to apply an on-going process of reflection and
evaluation in order to either:
• Verify the model construct developed in the literature review; or
• Develop a new construct model.
NVivo capability was also used to record memos that collate ideas, observations,
thoughts and progress throughout the research process.
A further synthesis task in the research design included the integration of the
results of both quantitative and qualitative survey outcomes, to ensure data validity
and trustworthiness. In order to address trustworthiness, the process of reflexivity
requires the researcher to acknowledge their beliefs, subjectivities and biases, thus
allowing less subjectivity when analysing data (DeCuir-Gunby, 2008). Integration
processes also allow cross-checking of data provided from responses across studies.
This may also require a reconciliation of any differences in outcomes across the
quantitative and qualitative stages (Greene et al., 1989).
Incorporating sustainability in investment decision making for infrastructure projects 103
Through analysis from both an industry-wide perspective, and subsequent
deeper investigation at a practitioner level, this research design has sought to provide
a deeper insight into current practice, and to identify opportunities for enhancing
practice across infrastructure industry sectors. The process of synthesis and cross
checking provides the ‘expansion’ feature of a mixed-methods research approach. The
research design has been based on the goal to provide an explanatory model that builds
on the conceptual framework model developed from the literature review. Industry
surveys, which may be subject to quantitative analysis, form the basis of identifying
key problems and gaps in current practice. Qualitative analysis, based on interviews,
seeks to develop solutions to these identified problems. A key objective of this research
was to better understand industry practice and to develop a model for practice that
addresses the identified shortcomings in current approaches to decision making.
Participants
The water industry is an open system and is represented by numerous individuals
and numerous organisations, both public and private, across Australia. In a broad
empirical case study, it is important to firstly define the boundaries associated with the
research work (Dubois & Gadde, 2002). For this research, the choice of participants is
related to boundaries associated with expertise in the process of business case
development. The research has focused on water practitioners with an understanding
of “strong” sustainability practice. Decisions on sampling and participation need to
align with theoretical foundations of the research design. DeCuir-Gunby (2008)
outlined several sampling approaches that are used in mixed methods research, such
as random, convenience, purposive, snowball sampling. For each stage of this
research, a different sampling approach was assumed and the reasons for the approach
adopted are outlined further below.
For the qualitative study, a purposive sample (which DeCuir-Gunby defines as
‘sampling predefined groups that are not always representative of the overall
population’) was adopted. Using purposeful sampling, it is necessary to identify
participants who are ‘knowledgeable, are able to provide balanced perspectives, and
will contribute to the proposed theory’ (DeCuir–Gunby, 2008). For this research stage,
the objective was to interview a spectrum of industry specialists who participate in, or
have strong insights into decision making for infrastructure projects across the
decision-making process. The initial identification of participants was based on a
104 Incorporating sustainability in investment decision making for infrastructure projects
review of organisations and individuals who made presentations at the water industry’s
Ozwater conferences in 2015 and 2016. Those who spoke on the development of
business cases, the challenges that they encountered and lessons learned, were seen to
be well qualified to provide insights in relation to the research questions. This led to
the identification of three key interviewees, all of whom agreed to participate in the
research. From that point, the further identification of participants was based on the
consideration of the decision-making loop for projects. This decision loop comprises
experts in: policy making; project management and business case development;
organisational management; economic analysis; and political level decision making
which, in the water industry, is often delegated to government appointed boards.
Figure 5.5 below provides a diagrammatic representation of the decision-making
process.
Figure 5.3. Selection of interview participants for research
In total, 14 individuals were identified from across the decision-making process for
participation in the interviews. No organisation or individual who has participated in
Central Government, industry associations
Water Utilities- project “owners”
Specialist consultants providing advice to water utilities
Water Utilities- senior management reviewers
Water Utilities- Board level
Incorporating sustainability in investment decision making for infrastructure projects 105
the interviews will be identified by name in view of the political sensitivities and
confidential nature of business case development. However, where some participants
have spoken publicly at conferences or other industry events, these details or
quotations will be attributed.
5.5 ETHICS
The key ethical consideration for this research was the need to ensure that
responses to surveys and interviews are not attributable to individuals, unless those
individuals specifically give consent. The processes of data management and reporting
have complied with this requirement. Ethical clearance was sought using relevant
consent forms. Based on the iterative, staged approach to the research, approvals were
sought in two stages to cover both the initial quantitative survey and the second stage
qualitative interview components of the research.
Health and Safety approval was not applicable for this research.
5.6 CONCLUSION
This section outlines the research design that addresses the two research
questions. The goal of the research is to understand how the sustainability objectives
of infrastructure agencies translate to decision making around project delivery
processes, including project selection, and to understand the system dynamics that may
support decision making that may best deal with complexity and uncertainty. This
research is focused on the development of an investment decision-making framework
and guidelines, which will effectively translate the corporate sustainability objectives
of infrastructure agencies into the processes and systems that are used to evaluate
project options within the business case for major infrastructure investments.
Incorporating sustainability in investment decision making for infrastructure projects 107
Chapter 6: Results
6.1 INTRODUCTION
In this chapter, the results of the two phases of the sequential mixed-methods
approach research are presented and addressed separately. The research incorporated
an initial survey of industry practitioners, followed by a more substantive research
phase based on interviews with industry practitioners. As noted in the previous chapter,
the emphasis of the research approach may be described as quant à QUAL, with the
emphasis on the qualitative aspects. The first research question addressed the ‘how’ of
current industry practice, but the emphasis of the research was to explore more deeply
the ‘why’ around current industry practice, and this is most effectively addressed
through qualitative processes. This chapter presents the results of the two phases of
research.
6.2 OUTCOMES OF INITIAL RESEARCH STAGE
The initial phase of research was formulated to firstly address the research
question:
Do corporate sustainability goals stated by infrastructure agencies translate to project
level decision-making in the pre-investment stage for infrastructure projects?
A questionnaire, formulated using Key Survey Enterprise software, was sent to
members of the Healthy and Living Communities Committee (HLCC), formed by the
Water Services Association of Australia (WSAA). The committee comprises 20
members from water authorities of various sizes from across Australia. The
committee’s focus is to ensure ‘resources are utilised sustainably and the water
environment is managed to enhance quality of life’. Hence the committee’s members
are water industry experts on sustainability.
A request to participate in the survey, together with details of the link to the
survey, was issued to members of the HLCC group via email in December, 2015. A
further request to complete the survey was sent in January, 2016. Responses to the
survey were reviewed in February 2016. At that time, seven responses had been
received. The timing of the survey (released just prior to the Christmas holiday season)
108
may have contributed to the low response rate of 35 percent. Also, as noted earlier,
business cases, and business case development, is often subject to confidentiality in
the public domain. The low level of participation in this survey may, in part, be
attributed to a desire by some potential participants to maintain confidentiality around
the process.
Even so, the participants provide an expert panel from within the water industry
that may facilitate the analysis of responses, using the content validity. As outlined in
Chapter 5, a minimum of three responses is recommended to analyse data using the
Content Validity Index (CVI) and a sample size of five to seven experts is considered
adequate to evaluate content validity (Lynn, 1986; Tojib & Sugianto, 2006; DeVon et
al., 2007). Content Validity Analysis recognises that finding available subject matter
specialists may be difficult, and considerations of accessibility and agreement to
participate may limit the number of participants (Lynn, 1986a).
Based on the question, ‘what is your position in your organisation?’, the
responses provided the following roles of participants (Table 6.1).
Table 6.1
Roles of participants in survey
Position No
CEO/ General manager 1
Senior managers 3
Project manager 1
Middle Management 1
Environmental Strategy Officer 1
In consideration of the confidential nature of corporate practice in this field, the
identities of respondents were not linked with responses. This approach also complied
with the approach proposed as part of the ethics approval. Three responders provided
names and contact details and most of the respondents provided additional comments
on various questions; these comments are provided in the following discussion.
An initial question asked, ‘does your organisation have sustainability goals or
commitments?’. All respondents answered ‘yes’, indicating that all participants work
Incorporating sustainability in investment decision making for infrastructure projects 109
in organisations with strong sustainability commitments. These results show that there
is uniform adoption of sustainability goals within corporate strategies in the participant
organisations. This is not surprising, given that the participants work for organisations
with a strong commitment to sustainability. It should be noted that this outcome should
not be seen to reflect practice across the water industry in Australia, but rather reflects
the commitment to sustainability by the organisations represented by this expert group
of practitioners. However, one respondent commented that there is ‘not a commonly
shared view of what sustainability/liveability means’.
A group of questions sought details on how sustainability is applied to current
practice in design and construction and in investment decision making (the business
case). Questions on whether sustainability is applied in practice required responses
using a four-point scale of never, sometimes, often or always. The responses from
these questions providing general agreement to the statements (within the categories
of ‘often’ and ‘always’) are presented in Table 6.2 below. (Appendix E provides a
more detailed breakdown of responses).
Table 6.2
Survey responses reflecting how sustainability is incorporated in current practice
Survey Item Generally applied (often or always) Percentage
(3) In your organisation, would you consider that sustainability initiatives are incorporated into project solutions at design, construction and/or operations phases of project delivery?
3
43%
(4) In your organisation, are sustainability considerations applied to investment decision making for projects?
4 57%
(6) Investment decision making in my organisation is informed by corporate sustainability strategies or goals.
3 43%
Note: Numbers in parentheses indicate the survey question number.
Notably, one respondent indicated that, in their organisation, sustainability is
always incorporated both in investment decision making and that corporate strategies
and goals guide investment decision making. However, across the organisations
represented, the respondents indicated that sustainability goals and targets are not
110
uniformly adopted, within either the investment decision-making process or in design
and construction phases. This result provides an initial response to the first research
question and indicates that, even where strong sustainability commitments are stated
by organisations, there is not necessarily follow-through in decision making or in
delivery processes to ensure that sustainability commitments are achieved.
A further series of questions sought details on the tools that are currently used in
investment decision making. Table 6.3 provides the responses to Questions 7, 9 and
11, seeking details on the analysis techniques that are employed. (Appendix E provides
a more detailed breakdown of responses).
Table 6.3
Survey responses on analysis techniques that are used in current practice
Survey question Generally applied (often or always) Percentage
(7) Economic analysis utilising Cost Benefit Analysis (CBA) is used to support investment decision making in my organisation.
5
71%
(9) Multi Criteria Analysis techniques are used to support investment decision making in my organisation
4
57%
(11) Participation by stakeholders (including end users) is used to support investment decision making in my organisation
5
71%
Note: Numbers in parentheses indicate the survey question number.
CBA is typically used in investment analysis although one respondent indicated
that their organisation does not use CBA (and that Multi Criteria Analysis (MCA) was
used instead). This result, showing a high level of usage of CBA, reflects that much of
the guidance on business case development typically proposes the use of CBA. One of
the survey respondents added a comment that CBA is ‘part of governance process’. In
addition, a majority of responders also indicated that MCA is used as part of decision
making. From the results, the use of CBA and MCA appears to be interchangeable, as
several respondents indicated that both techniques are used. One comment noted that
it ‘depends on the project - best tool for the job’. A further comment noted that there
are ‘varying opinions about the suitability of MCA/CBA as decision making tools’.
Incorporating sustainability in investment decision making for infrastructure projects 111
In order to gain insights on the relevance of various tools and techniques, a series
of questions sought to assess the effectiveness of analysis techniques using a four-point
rating scale (with items rated from irrelevant to extremely relevant). The survey asked,
‘How would you rank the effectiveness of (CBA, MCA etc) in supporting investment
decision making within a sustainability framework?’. As described in Chapter 5, item
Content Validity Index (i-CVI) was used to assess responses, whereby the i-CVI value
is based on the number of experts agreeing that an item is ‘relevant’ or ‘extremely
relevant’. The i-CVI values were then converted to a kappa value (k*) that adjusts the
i-CVI to take account of the probability of chance agreement. Table 6.4 presents the
overall responses, together with kappa values for the survey questions addressing
analysis techniques and their relevance to sustainability assessment.
Table 6.4
Effectiveness of analysis techniques within a sustainability framework
Analysis technique Respondents
in agreement
i-CVI
Kappa K* Evaluation
(8) Cost Benefit Analysis
4
0.57
0.41
Fair
(10) Multi Criteria Analysis 5 0.71 0.66 Good
(12) Participation by
stakeholders (including end
users)
7 1 1 Excellent
(14a) Life Cycle Assessment 6 0.86 0.85 Excellent
(14b) Real Options Analysis 2 0.14 0.09 Poor
(14c) The incorporation of
sustainability initiatives
7 1 1 Excellent
(14d) Investment management
standards and benefits
assessment
7 1 1 Excellent
Notes to table: Numbers in parentheses indicate the survey question number. i-CVI – item Content Validity Index
Evaluation criteria for kappa, using guidelines from Polit et al,. (2007): Poor/ no relevance- k*<0.4;
Fair-.k* of 0 .40 to 0.59; Good-.k* of 0.60–0.74; and Excellent.k* >0 .74.
112
Of the techniques that were assessed, the respondents largely rejected the relevance of
Real Option Analysis (described in Section 2.3.5). Of all other techniques, there was
fair to excellent agreement. The results show that there is strong agreement that a
sustainability approach involves participation of stakeholders (including end users),
the incorporation of sustainability initiatives (as an example providing measures to
achieve reductions in greenhouse gas emissions), and the use of investment
management/ benefits assessment approaches (discussed in Section 2.2.2). In
clarifying a response relating to participation, one respondent noted that ‘the support
is determined by the capability of the stakeholders consulted as well as the breadth of
consultation. Stakeholders can be very good at problem identification, however not as
useful in proposing alternatives and solutions.’
MCA is seen to have ‘good’ relevance to sustainability practice, and CBA is seen
to have a ‘fair’ level of relevance to sustainability. Two respondents provided
comments on the use of CBA. One noted that CBA ‘provides support where the
sustainability benefits are easily quantifiable, for example increases in surrounding
property values’. Another respondent commented that:
financial considerations are still dominant in any business case. Other
sustainability aspects (social, environmental) are seen as providing additional
value, but the financial analysis is what gets the project over the line. There
(are) still the issues of who pays for the community social and environmental
benefits.
The survey sought responses (Question 17) on the benefits of adopting
sustainability considerations investment decision making for infrastructure projects.
Table 6.5 provides overall responses that have been assessed using the item CVI
parameter.
Incorporating sustainability in investment decision making for infrastructure projects 113
Table 6.5
Benefits of a Sustainable approach to decision making
Respondents in
agreement
i-CVI
Kappa K* Evaluation
Benefits:
Short-term cost savings
based on capital costs
4 0.43 0.21 Poor
Long-term cost savings
taking account of operating
and maintenance costs
7 1.00 1.00 Excellent
Increased asset value 5 0.71 0.66 Good
Reputational benefits for
client organisation
6 0.86 0.85 Excellent
Enhanced amenity 5 0.71 0.66 Good
Enhanced environmental
outcomes
6 0.86 0.85 Excellent
Consideration of climate
change impacts
7 1.00 1.00 Excellent
Ability to deal with
complexity and risk
5 0.71 0.66 Good
Notes to table: i-CVI – item Content Validity Index
Evaluation criteria for kappa, using guidelines from Polit et al,. (2007): Poor/ no relevance- k*<0.4;
Fair-.k* of 0 .40 to 0.59; Good-.k* of 0.60–0.74; and Excellent.k* >0 .74.
Based on the survey results, the following benefits are identified from adopting
a sustainability approach in investment decision making:
• Sustainability provides long-term cost savings;
• Sustainability provides reputational benefits for organisations;
• Sustainability provides environmental benefits;
114
• Sustainability provides a means to manage climate change impacts; and
• Sustainability incorporates community values.
Survey responses previously identified that sustainability commitments of
organisations do not always translate to either decision making or project delivery
processes. A range of barriers to incorporating sustainability in investment decision
making were identified in the survey for evaluation. Table 6.6 provides responses on
what are the barriers to a sustainable approach.
Table 6.6
Barriers to a sustainable approach
Respondents in
agreement
i-CVI
Kappa K* Evaluation
Barriers:
Sustainability is not a high priority 3 0.43 0.21 Poor
Short term cost impacts 4 0.57 0.41 Fair
Long term cost impacts
6 0.86 0.85 Excellent
Time impacts
3 0.43 0.21 Poor
Capability limitations
5 0.71 0.61 Good
Resource/ materials limitations
4 0.57 0.41 Fair
Regulatory approvals processes
4 0.57 0.41 Fair
Insufficient guidance
6 0.86 0.85 Excellent
Current practice is effective
1 0.14 0.09 Poor
Notes to table: i-CVI – item Content Validity Index
Evaluation criteria for kappa, using guidelines from Polit et al,. (2007): Poor/ no relevance- k*<0.4;
Fair-.k* of 0 .40 to 0.59; Good-.k* of 0.60–0.74; and Excellent.k* >0 .74.
Incorporating sustainability in investment decision making for infrastructure projects 115
The responses on “barriers” indicate that there is insufficient guidance on how
to incorporate sustainability in decision making. Other key barriers are seen to be:
• The cost impacts of incorporating sustainability;
• Capability limitations;
• Resource limitations (including budget); and
• Regulatory approval processes
The negative response to the statement ‘current practice is effective’ supports
earlier responses that show that sustainability objectives are not uniformly translated
into investment decision making. Through the responses to the statement
‘Sustainability is not a high priority’, the respondents also indicated that, in their
organisations, sustainability is largely a priority.
6.2.1 Outcomes and use of Quantitative Study (Stage One)
As noted in Chapter 5, the completion of the survey, and review of results
provided a hold point in the research, allowing the finalisation of the research design
for the following phase of research.
Table 6.7, below, outlines the factors that were clarified and addressed based on
the outcomes of the initial survey.
116
Table 6.7
Quantitative study outcomes and impacts on second stage of research
Outcomes sought from Quantitative Study
(Stage One)
Considerations for the next stage of research (Stage Two)
To clarify the identification of
participants in the next round of
research
The industry practitioners who responded in the initial survey
were well placed to provide assessments of current practice
focused on analysis techniques. For the next stage of research,
a wider array of participants was seen to be required to provide
insights into the institutional factors that influence decision
making.
To inform the most appropriate
method of recruiting relevant
participants in the next round of
research
The recruitment of participants who may provide insights on
business case development is difficult, as business cases are
typically confidential. For the next stage, participants would
need to be engaged more directly by using contacts within the
water industry.
To validate the continuation of
the proposed research design
The survey and quantitative analysis provided some insights
into current practice and the techniques employed. However, a
qualitative approach based on interviews would more likely
provide a deeper understanding of current practice and the
wider factors that guide decision making.
To provide insights into the
conceptual model, to identify
any gaps in knowledge and
identify any areas for inclusion
or further interrogation within
the next stage of research
The preliminary conceptual model appeared to remain valid. Of
interest was the variation in practice across the industry,
particularly in relation to the use of CBA and MCA. This
would best be explored through the proposed interview design.
Incorporating sustainability in investment decision making for infrastructure projects 117
6.3 OUTCOMES OF STAGE TWO QUALITATIVE RESEARCH (INTERVIEWS)
As noted previously, the first stage of research showed that, for organisations
with strong sustainability commitments, sustainability is not uniformly integrated in
decision making for infrastructure projects. In addition, the first stage of research
showed that infrastructure delivery organisations adopt a range of approaches to
investment analysis that support decision making. A further stage of research
continued to address the first research question regarding current practice, but sought
to more fully explore the second research question, namely:
“What is an optimal system approach to support project selection and decision making
for infrastructure projects within a strong sustainability framework?”
The aim of this stage of research was to elicit a wide range of views on the
analysis processes and broader institutional factors that apply when addressing
sustainability in decision making for infrastructure projects. Through a series of
interviews, this stage of research sought to identify the factors that support sustainable
practice, and the issues that may act as barriers to achieving sustainable outcomes in
decision making. This data could then be evaluated using qualitative analysis
techniques to develop a model for an optimal system approach to decision making.
6.3.1 Participants and process
Expert participants were identified and invited to be interviewed. In total,
thirteen interviews were conducted with interviewees from across Australia, and over
14 hours of interviews recorded. The interviews were conducted from November 2016
to June 2017. Of those 14 approached, all but one practitioner (being a local
government representative) responded to requests and agreed to be interviewed. It was
determined that the lack of representation from local government was not detrimental
to this research and that those who agreed to be interviewed represent a wide range of
sectoral functions.
Twelve interviews were face-to face and one was conducted by telephone. All
interviews were recorded17. The majority of participants work, or have worked, within
17At about the half way point of one interview, the participant asked that a portion of the interview not be recorded and so that interview, recorded in two parts, contains a significant gap of unrecorded interview.
118
water authorities, and additional participants were identified through their role in the
broader decision-making framework. Figure 6.1 provides a diagrammatic
representation of the areas within the decision-making process and the number of
interview participants associated with each stage.
Figure 6.1. Interview participant roles
The range of areas that were represented within the decision-making process has
ensured that a broad understanding of perspectives and drivers could be elicited. The
choice of water industry participants ensured that the research captured the views of
experts who are actively working to develop solutions to problems that relate to the
research question. The interviewees reside across Australia, and more than half of
those interviewed have substantial experience in the operations of the Victorian water
industry, through direct employment or through consulting work. This has meant that
much of the context from a governance and statutory perspective could be assessed at
both a state and national level, taking account of the legislative settings at each
governance level. The following table (Table 6.8) provides a summary of the
backgrounds of participants, whereby each participant is identified by a reference
number.
Central Government, industry associations
Water Utilities- project “owners”
Specialist consultants advising utilities
Water Utilities- senior management reviewers
Water Utilities- Board level
Three interviews
Five interviews
Three interviews
One interview
One interview
Incorporating sustainability in investment decision making for infrastructure projects 119
Table 6.8
Interview participant details
Interviewee Ref Interviewee role Background Interview
Duration INT-1 Industry Consultant Engineering training with over 30
years experience in project strategy to the water industry
1 hr 56min
INT-2 Water Industry Executive (Retired)
Background in environmental management and sustainability (over 30 years) with focus on delivering sustainable outcomes
1hr 27mins
INT-3 Water Industry Executive
Engineering and business management background- over 30 years experience (reviews business cases)
1hr 17 mins
INT-4 Consultant Economist Over ten years experience in business case development for water and transport industries
1hr 14mins
INT-5 Policy Advisor – Customer focus
Around 20 years experience in water industry policy role
46 mins
INT-6 Policy Advisor- Regulatory focus
Economist with over 30 years experience with current focus on regulatory policy
54 mins
INT-7 Consultant Economist Over 20 years experience, training in environmental economics and sustainability
51 mins
INT-8 Water Industry Executive
Over 30 years experience in project management (business case development)
1hr 12 mins
INT-9 Government Executive- Policy
Background in sustainability policy 1 hr
INT-10 Water Industry Executive
Engineering background- over 30 years water industry experience with focus on sustainability
1 hr 2mins
INT-11 Water Industry Board Member (retired)
Significant experience across the water industry
45 mins recorded (some recording lost)
INT-12 Water Industry Executive
Engineering background with responsibility for business case development
45 mins
INT-13 Water Industry Executive
Engineering background – focus on sustainability, liveability and strategy
1 hr
120
Interviewees were asked to reflect on their experiences with and/or observations
on business case development and investment decision making; the ‘rules’ under
which they operate; perceptions about constraints to alternative approaches that
incorporate sustainability assessment; the perceived consequences of current practices;
what system elements are necessary to support current or proposed new practices; and
the effectiveness of public participation models that are used by infrastructure
agencies. This enquiry sought to build a deeper understanding of the context and policy
setting of current practice and opportunities to improve current practice.
Audio files produced from recorded interviews were transcribed into written
files immediately following the interviews. An initial stage of assessing the results was
to read, and re-read interview transcripts to ensure an understanding of the data that
was produced. Coding refers to the sorting and categorisation of data derived from the
interviews. The software package NVivo was used to store audio files and to organise
and code interview data and to identify and organise key themes and their inter-
relationships in the data. Coding refers to the sorting and categorisation of data derived
from the interviews. The coding process involved three distinct stages, and periods of
review and reflection that sought to interrogate emerging themes with reference to the
research questions. Figure 6.2 provides a representation of this staged approach to
coding, the results of which are provided in the following sections.
Incorporating sustainability in investment decision making for infrastructure projects 121
Figure 6.2. The Three Stages of NVivo Coding
A reconciliation and review of coding themes led to the development of a
hierarchy of themes and sub-themes and comparison with the original theoretical
construct. Building on Creswell’s pragmatist approach, Lenzholzer et al. (2013)
described pragmatic/ constructivist ‘research by designing’ that translates specialist
knowledge into guidelines and models. In research activities, there is a need to
maintain authenticity through systematic and unbiased evaluations of research data,
whilst maintaining a degree of flexibility to explore new ideas or propositions. The
approach to coding sought to maintain authenticity through constant referencing to the
initial conceptual model and exploration of the literature as new concepts emerged.
Using the ‘tree map’ functionality in NVivo, a visual representation of coded
items and the subsequent organisation into key themes and nested sub-themes was
produced. The tree map covers the three stages of coding, whereby the relative size of
Stage 1 coding (Descriptive)•Organisation of raw data into codes based on the a priori model construct
• Organisation from/ into themes and sub-themes
Stage 2 Coding (Analytical)•Coaxial coding based on patterns in data•What are the key issues around current analysis?•How is analysis enhanced?•Additional themes- inputs and enablers
Stage 3 Coding (Refinement)•Review and reflection•Refinement of themes•New framing of themes- benefits, value•Integration- connections between themes
122
rectangles represents the weight of coding associated with topics discussed in the
interviews. The tree map of interview themes is reproduced in Appendix F.
6.3.2 Interview Responses- First stage of coding
Initial coding (referred to as open coding by Eriksson & Kovalainen (2008)) was
largely based on the a priori theoretical construct and included themes of business case
(analysis techniques), decision making, sustainability, participation, boundaries and
organisational goals/ policy link. Broader themes that emerged in interviews included
the use of guidance material, public good, and institutional boundaries.
A brief summary of participant responses to the interview themes is provided
below. The interview guide was not used as a formal script in the conduct of
interviews, but rather acted as a frame and checklist to ensure that relevant topics were
covered. In some instances, the interviewee’s background was not relevant to certain
topics, and hence no firm response was recorded.
Business case development
A key theme of discussion in the interviews was aspects of business case
development. Figure 6.3 provides a mind-map representation of the main topics that
emerged from discussions around the ‘business case’.
Figure 6.3. Key themes from interviews addressing the Business Case
Business Case
Analysistechniques
Complexity
Quality
Interpretationand guidance
Economicanalysis (BCA/
MCA/ ROA)
Use of valuation
Double counting
Sensitivityanalysis
Incorporating sustainability in investment decision making for infrastructure projects 123
Some participants distinguished between what they considered business-as-usual
(BAU) business cases that apply to ‘simple’ or routine capital works programmes and
more complex and difficult projects that may be typified by aspects such as having:
• High capital costs;
• Long time frames associated for approvals and/or implementation;
• Involvement by a number of stakeholders;
• Strong community interest;
• Impacts to environmental systems;
• Impacts to social or cultural groups;
• New technologies or approaches to servicing;
• The ability to shape urban form and city planning; and
• Input from a range of disciplines.
Some organisations assign specific staff or departments to manage non-routine/
complex projects. Most often, these special projects align with strong sustainability
outcomes, such as integrated water cycle management, use of alternative water,
recycled water schemes, waste-to-energy initiatives or renewable energy projects, and
rehabilitation and re-purposing of ageing infrastructure. Some interviewees were
critical of current practice in some organisations, and considered that the assessment
process can be open to manipulation to achieve a pre-determined outcome.
In responses addressing analysis techniques, the interviews revealed that a wide
range of approaches are used in the analysis that underpins business cases for
infrastructure projects. This result is in accord with the findings from the industry
survey distributed in the initial stage of research. Methodologies employed include
CBA (also referred to as Net Present Value (NPV) analysis), Advanced CBA, MCA
and Triple Bottom Line Assessments. Some interviewees had experience across
numerous organisations and confirmed that approaches to analysis vary across the
industry. Of those working within water entities, one participant described the use of
MCA, whilst others indicated that they had previously used MCA but no longer
favoured that approach. In relation to CBA/NPV analysis, some interviewees
described a number of issues around the interpretation of results, particularly around
124
the acceptance of ‘benefits’ (both monetised and intangible). In order to better capture
a wider degree of values, Advanced CBA was favoured by some who were interviewed
as a more effective approach to incorporate environmental and social factors.
Advanced CBA refers to ‘monetising external costs and benefits as much as possible
and appropriate, and adding these to the private costs and benefits of a proposed project
or action, across the asset life-cycle’ (Hardisty et al., 2012, p. 285). Another
interviewee likened analysis within a business case as more aligned with ‘story telling’
that captures a number of decisions over time, and noted that the use of BCRs may be
useful in prioritising options but should be used with caution when applied as the
ultimate decision of whether a project proceeds or not. In the discussions on economic
evaluation, a key topic emerged around both assigning value and monetary valuation
associated with benefits and impacts of infrastructure works. This topic is further
explored in the following section relating to secondary NVivo coding.
A range of guidance materials or directions that apply to ‘economic analysis’ are
available internationally, and across jurisdictions in Australia. Table 6.9 outlines the
government agencies and guidance documents that were referenced during the
interviews, together with an explanation of the application of those guides and
preferred analysis methodology. Column 3 in Table 6.9 provides the analysis
methodology required by the guidance documents applicable to various agencies. It
may be noted that CBA is promoted by all agencies, but that a range of interpretative
approaches are adopted, whereby qualitative explanations together with quantitative
evaluations are allowed by some, and others prefer broader monetary valuations of
projected benefits. According to one of the interview participants ‘every jurisdiction
does have a preferred methodology for analysis. I think you can construct any outcome
you want’.
Incorporating sustainability in investment decision making for infrastructure projects 125
Table 6.9
Business case guidance referenced in interviews
1 2 3
Agency Publication Application & Methodology UK Government HM Treasury Green Book Government guidance on the appraisal of
public investments in the UK
Cost Benefit Analysis is recommended
Australian
Government
Handbook of Cost Benefit
Analysis (2006)
Commonwealth government initiatives
Financial analysis and cost effectiveness
analysis favoured
Infrastructure
Australia
Assessment Framework
(2017)
Submissions for the National Infrastructure
Priority List (IPL)
‘A robust CBA’ is to be undertaken
Infrastructure
Victoria
Moving from Evaluation to
Valuation (2016)
Applies to Victorian Government agencies
CBA- with wider scope to value benefits in
monetary terms
Infrastructure NSW
(NSW Government)
Better Value Infrastructure
Plan 2012
High level planning framework for
infrastructure ‘pipeline’
Application of ‘consistent CBA’
Building
Queensland
(Queensland
Government)
Cost Benefit Analysis
Guide 2016
BQ to play a role in Business Cases for projects
>$50m
Economic CBA may include quantitative and
qualitative impacts, required to generate NPV
analysis and a BCR.
Dept of Treasury
and Finance
Victorian
Government
Economic Evaluation
for Business Cases
Technical guidelines
August 2013
Applicable to High Value/High Risk projects in
Victoria
CBA to include all welfare costs and benefits
to society.
Regulatory Impact
Statements (RIS)
Victoria
Victorian Guide to
Regulation 2016
Applicable to policy proposals or changes to
current regulation or legislation
Accompanied by CBA (with qualitative
explanation where quantitative assessments are
not practical)
126
Decision making
Decision making for infrastructure projects occurs within an institutional setting
that is influenced by a range of factors that include the formal processes such as
legislative and regulatory settings, together with the more informal cultural factors
within infrastructure organisations. The analysis that forms part of the business case is
subject to review, commentary, and either approval or rejection through a wider
network of interactions within the organisation and across other key stakeholder
entities. Figure 6.4 outlines the key themes identified in the wider decision making
context.
Figure 6.4. Key themes from interviews addressing decision making
In some cases, business cases are not initiated or undertaken within the
responsible delivery agency, but are, instead, initiated and developed by elected
government representatives or through special purpose agencies within government.
The desalination plant in Western Australia, the desalination plant in Victoria, and the
North-South pipeline project in Victoria were all cited as examples of projects that
were initiated and developed through the political arm of government in response to
the need to develop immediate water supply solutions due to drought.
Within the governance theme, the role of the economic regulator for the water
industry was highlighted by several interviewees. It was stated that often ‘policy is
out of step with the regulatory’, in that broader community benefits are often sought
Decisionmaking
Organisationalcontext
Governancecontext
Politicalinterface
Prioritisation
Participation
Incorporating sustainability in investment decision making for infrastructure projects 127
through government-led policy, but regulation often seeks efficiency or standard/ low
risk solutions, which discount new approaches with more sustainable outcomes. In
addition, health regulation has played a major role in the provision of water services,
but a risk-adverse position from a health regulation perspective can stifle proposals
such as re-use of wastewater that may present a range of sustainability benefits.
Environmental regulation, applied on the basis of rules and not broader outcomes, may
also be used as a ‘trump card’ to stop proposals that may have wider community
benefits.
One interviewee claimed that a further (under-recognised) aspect of decision
making involves the balance of power and operating dynamics in some organisations.
In this case, there is a propensity for some managers to actively compete to obtain a
significant amount of the capital and operating budgets of infrastructure agencies,
leading to prioritisation decisions with little regard to any level of analysis and project
justification that was undertaken.
A further aspect of the organisational context is the participation by either
stakeholder organisations or community participation in decision processes. Given the
weight of this topic in interview responses, a further section in this chapter discusses
this aspect more fully. Appendix H provides selected responses from interviewees on
the decision-making process.
128
Sustainability
Interviewees confirmed that the release of the UN Sustainability Development
Goals (SDGs) in 2015 was a major step in revitalising the efforts of water businesses
to address sustainable development in their operations. Prior to the release of the
SDGs, interviewees indicated that sustainability as a term was losing prominence, but
the concept remained alive and, in some cases, a shift in focus to liveability and
resilience was seen to complement sustainability efforts. It was noted that both Yarra
Valley Water and Melbourne Water have signed the UN Global Compact,
demonstrating leadership and commitment to sustainability. Organisations that sign
the Compact must commit to:
• Operate responsibly, in alignment with the UN Global Compact’s ten
universal sustainability principles;
• Take actions that support the society around it;
• Commit to the effort from the organisation’s highest level, pushing
sustainability deep into its DNA;
• Report annually on the organisation’s ongoing efforts; and
• Engage locally where the organisation has a presence.
Furthermore, Yarra Valley Water, as part of its Restorative Strategy, has
introduced an Integrated Profit and Loss Statement to measure and report on the value
of its environmental, social, employee and financial costs for both understanding the
benefits it provides as well as understanding the impacts of its operations.
Initial coding identified four sub-topics in relation to sustainability, as shown in
Figure 6.5.
Incorporating sustainability in investment decision making for infrastructure projects 129
Figure 6.5. Key themes from interviews addressing sustainability
Interviewees highlighted that a common misconception of sustainability is that
it is founded on a single concept, such as a ‘deep green’ (environmental) focus. Some
of those interviewed also stated that wider sustainable outcomes could not be achieved
unless good financial management and governance structures were in place. Aspects
of social responsibility that are seen to be important to water businesses include the
role of water in public health, considerations of customer hardship and the ability to
pay bills, and the wider role of the water sector in promoting indigenous heritage and
values.
The difficulties in defining and understanding sustainability have led to new
concepts being introduced. Resilience, particularly when applied to managing the
impacts of climate change, is seen as a more tangible, relatable concept. More recently,
the notion of liveability has been popular in the water industry, and, for some,
liveability is the new ‘buzzword’ that has taken over from sustainability. One
interviewee differentiated between liveability and sustainability in that:
• Sustainability is about intergenerational equity: ‘basically we leave the
resources and environment in a better place for future generations’
• Liveability, for a water utility, is about ‘looking beyond the regulated
services it is required to provide’ and meeting the needs of the
community that it services. Hence, for some communities, liveability
considerations may be centred on the affordability of water bills, but for
Sustainability
Trade-offs
Relationshipwith
liveability,resilience
Terminologyand
understanding
Supportingfactors
130
others, liveability may be about improved amenity such as providing
drinking fountains in parks.
A complex aspect of sustainability practice is the need to consider the trade-offs
that are required between different benefits and dis-benefits. This involves value
judgements and often challenges the thinking of those involved in decision making.
Again, a common belief is that environmental matters should dominate, however
interviewees highlighted the broader social and economic matters that need to be
considered in a transparent and integrated way.
A number of strong sustainability outcomes were cited in the interviews. One
example includes the shift in thinking around water use that has occurred in the
Melbourne metropolitan area. Through concerted efforts to introduce tariffs, invest in
water efficiency works and education programs, the water use in Melbourne is now
similar to water usage figures of around 1978. Moving forward, one key sustainability
challenge for the water industry is the ability to justify investments in integrated water
cycle management (IWCM). In order to progress initiatives such as IWCM, a number
of supporting factors are required. Using the experience of previous sustainability
successes, the following factors were identified as enabling factors that may support
sustainability practice:
• Ensuring that broader government policy is in place that may align with
sustainability practice;
• Working with regulatory bodies to build an understanding of the
sustainability challenges and opportunities that are emerging;
• Ensuring that long time frames are allowed to work with communities on
solutions that address sustainability challenges; and
• Providing leadership at an organisational level and ensuring that there is
a common understanding and commitment to sustainability in the water
utility.
Appendix I presents a summary of responses on understandings of sustainability
provided from the interviews.
Incorporating sustainability in investment decision making for infrastructure projects 131
Participation
Participation refers to processes of engaging with those with a strong interest in
the outcomes of a given service including customers or end users of the services, or
identified stakeholders from government, business and communities who may
represent the interest of future users. From the interviews, there is uniform agreement
that participation frameworks are critical in the water industry to support decision
making. One interviewee stated:
We understand that it is probably a greater benefit to the business to spend
money and time in engagement up front in the process- how much is that worth
in dollar terms in not stuffing up and having to go back and change your design
somewhere along the line and do works that you never planned to do.
The key themes discussed are shown in Figure 6.6, and these concepts are
expanded upon below.
Figure 6.6. Participation
Understanding community values According to interviewees, not all water authorities engage with their customers
or the general community, but those organisations that choose to engage or collaborate
see this as integral to a sustainable approach. Engagement and partnerships are based
on an understanding that ultimately, water authorities exist to serve communities, and
that it is the community that cares most deeply about the outcomes of infrastructure
projects. As an example, through working with the community in South Australia, SA
Water has responded with a strong focus on recycled water initiatives. In some
jurisdictions, regulators are now expecting water authorities to engage with their
customers as part of pricing submissions, with the understanding that customer needs
and values are central to business operations. The Essential Services Commission
Participation
UnderstandingCommunity values
Processes andmethods
Communityeducation and
inputDefining thecommunity
Stakeholders
Customers
Broadercommunity
132
(ESC) in Victoria has introduced requirements for water entities to develop pricing
submissions that respond to customer engagement. Community values can also be
evaluated through formal economic evaluation methodologies that seek to gauge
Willingness to Pay (WTP) or Willingness to Accept (WTA) specific initiatives. Some
interviewees indicated that such surveys often provide useful insights into community
values but do not necessarily reflect what a customer is actually prepared to pay for
certain initiatives.
Community education and input
Engagement with communities in the implementation stage of projects, that is,
when projects are in construction, is increasingly seen as an industry norm.
Communications activities in construction are largely built around the framework
provided by the International Institute of Public Participation (IAP2) spectrum of
inform, consult, involve, collaborate, empower. However, at the front end/ decision
making phase, engagement with communities is not commonly adopted across
industry. For those organisations that choose to engage with their communities,
working with community groups is seen to provide a two-way understanding for both
the water provider and the community on the role of the organisation in providing
services that meet community needs. By building understanding of the products and
services that are delivered, infrastructure providers can effectively build trust with their
customers and communities, which, for some, is seen as an essential feature of the
licence to operate for a monopoly service provider.
Defining the community For some, the “community” was seen to comprise all of those people who engage
with the services provided. This may include direct users of water services –the
customers, but also a range of other users including developers who are undertaking
works or visitors who use waterways or water services. For water projects that service
new areas of urban development, questions arise as to what constitutes the community
where it doesn’t exist. In this case, one interviewee spoke of the need to engage with
a range of stakeholders such as local councils, government departments, elected
representatives and representative community groups to understand the key drivers
and issues facing those areas.
Incorporating sustainability in investment decision making for infrastructure projects 133
Processes and methods
Deliberative models that enable wider participation in decision making comprise
an emerging area of practice. Some interviewees spoke of highly successful models of
engagement through community advisory groups and stakeholder committees. The
Gold Coast Water Futures project, managed by Gold Coast Water, was cited by several
participants, as an example of effective communication with citizens that led the
industry in establishing collaborative processes. More recently, Yarra Valley Water
has established a Citizens Jury to assist in decisions around servicing and pricing, and
some interviewees indicated that they were interested to see the outcome of this
process.
Appendix J provides further detail on the responses provided in relation to
participation, sorted by key themes that emerged in the interviews.
Boundaries
The literature review highlighted that sustainability outcomes are influenced by
the institutional settings of infrastructure agencies. Boundaries may define the breadth
and scope of institutional responsibilities. The responsibilities of infrastructure
agencies are determined by a range of boundaries that may be based on physical or
geographic boundaries, political/ jurisdictional boundaries, and legislative boundaries
impacting on the scope of services that a service provider may deliver. Figure 6.7
summarises the main responses to the question of boundary impacts.
Figure 6.7. Boundaries
A key sustainability challenge for an infrastructure provider concerns how the
activities for which it is authorised to provide, contribute to wider sustainability
challenges such as climate change mitigation and the limitations of planetary
boundaries. For some, the planetary boundaries concept provides guidance to manage
Boundaries
AcrossOrganisations
WithinOrganisations
Authorisingactivities
134
activities within organisational boundaries, and organisational boundaries may be used
to measure the impacts of activities within the broader planetary system.
Organisational boundaries may also act as a barrier to sustainable outcomes.
Integrated Water Cycle Management (IWCM) initiatives were cited as an example of
where organisational boundaries may prevent a whole-of system response to manage
water resources more effectively. Optimal project solutions within water catchments
do not necessary reflect organisation boundaries, and hence require various
organisations such as water authorities, government, councils and private land owners,
to work together to achieve a project solution. This is challenging and resource
intensive. According to one interviewee, ‘it is not routine for people to think outside
boundaries’. At the same time, organisations such as Sydney Water, were cited as
having successfully navigated difficult boundaries involving a range of jurisdictions
to achieve integrated (whole of system) outcomes in water resource management.
The boundaries for authorising activities of infrastructure providers were
discussed by several interviewees. Initiatives such as assisting with soil improvements
in catchments, managing water storages for recreational use, and using water
infrastructure to generate power were cited as potential opportunities for a water
authority to think beyond its core duty to be a provider of water. However, efforts to
advance such initiatives can often be thwarted through resistance, both internal and
external to the responsible agency.
In regional or rural areas, the role and importance of government service
providers such as water utilities can be elevated through the impacts of their activities
in areas such as local economic development, environmental management and
preservation and community development. In the interviews, it was noted that the
decisions made in a regional or rural context need to carefully consider the
implications on local pressure points, and hence purely financial considerations in
decision making cannot fully cover the local context.
Policy Nexus
The influences of higher level policy, organisational strategy and goals for
decision making were discussed by several interviewees. Appendix L provides
selected responses from interviewees on the role of policy and organisation goals in
the decision-making process. Across the water industry, it was noted that there is some
Incorporating sustainability in investment decision making for infrastructure projects 135
variability in how water authorities articulate their strategies and goals. In the State of
Victoria, Water for Victoria, introduced in 2016, forms the policy platform that sets
the direction for water authorities to prioritise service planning. New requirements to
incorporate recreation and liveability, together with planning for aboriginal values,
were identified as areas that present new challenges for water authorities to address.
One interviewee asserted that, over time, the formulation of policy has shifted from
being generated within the executive arm of government or by service providers, to
now being generated at the political level with policy directions depending on the
position of the government at any one time. Whilst state-run water utilities typically
have more defined planning and reporting regimes, those utilities that are incorporated
into broader local government functions may not necessarily define goals
independently of the councils. Where goals are articulated, the interviews indicated
that there is no uniform approach across industry to incorporating organisational goals/
targets/ strategies into decision making processes. For some organisations, there is no
systematic linkage to corporate goals. For others, initiatives that addressed specific
targets, such as requirements to reduce greenhouse gas emissions, are more readily
factored into decision making. On the other hand, some organisations seek to embed
broader policies and strategies within decision making processes, and it was seen that
the culture of organisations can be critical to how broader policies are translated to
day-to-day work activities.
136
6.3.3 Second stage coding
A second level of coding (referred to as axial coding by Eriksson & Kovalainen
(2008)) followed on from initial data coding. At this stage, coding was based on the
patterns within the data with further consideration of themes, explanations,
relationships and emerging constructs. The categories and groups also formed the basis
of analytical memo writing within the NVivo functionality. Memo writing allows
linkages to be made with other relevant documentation, including documents provided
or referred to by participants, and the capture of new ideas and insights. Some further
themes that emerged through more detailed examination of the data were based on the
topics of enablers and inputs. These two themes emerged through further exploration
of responses addressing institutional settings and analysis techniques. These concepts
are discussed in the following sections.
Enablers
Based on questioning relating to the institutional framework in decision making,
interviewees provided a range of responses based on the unique perspective and
expertise that each interviewee provided. Key areas that support decision making
within a strong sustainability framework are seen to be governance systems,
leadership, organisational strategy, the regulatory setting and considerations of the
capability and skills of analysts (refer Figure 6.8). These are further discussed below
and further details from interviews are outlined in the explanatory effects matrix as
Appendix M.
Figure 6.8. Enablers
Enablers
Governance
Leadership
Organisationalstrategy
Regulatoryenvironment
Training andskills ofanalysts
Incorporating sustainability in investment decision making for infrastructure projects 137
Governance
Governance involves both formal systems, based on laws and regulations, and
informal systems, including interactions, customs and social norms, operating across
all levels of society (McKay, 2007). Criticisms of governance processes relating to
major project decisions have emerged in the media over recent years with calls for
greater transparency in the decision-making process and the publication of business
cases that are treated as confidential. It was noted by one interviewee that governance
failings are evident with the increasing complexity and scope of infrastructure
programs. This was attributed to a perceived lack of clear accountability when many
different parties from a range of disciplines have a vested interest in the outcome of
major projects.
The formal governance framework for the water sector is based on the legislation
of each state and territory, and varies across Australia. In the state of Queensland,
water utilities may be government-owned statutory authorities, local government-
owned statutory authorities, or may be service providers within local government. In
South Australia, a single statutory body, SA Water, has responsibility for water supply
and treatment. Those authorities that fall under state government responsibility
typically have government appointed boards whose members typically have skills
relevant to the water sector. Commentary on the role of boards in the decision-making
process was mixed. Some interviewees considered that Boards have a positive role to
play in translating broader government directions to the operations of the water
authority and can provide a different and fresh perspective when addressing major
problems. Others noted that board members often do not have the appropriate
knowledge or background to understand the content of (often complex) proposals
being put forward. Instead, the primary focus of many board members is to achieve
efficiency, which may negate the consideration of innovative and sustainable
solutions. In terms of performance, one interviewee noted that boards ‘don’t get
measured on environmental performance over and above meeting the regulated
standards’. An example of an effective approach was raised in the interviews relating
to work done by executive staff in one organisation to educate board members on
sustainability and environmental processes. This was seen to enable more effective
decision making. In the domain of local government water providers, one interviewee
noted that governance arrangements mean that the water providers are ‘one notch
138
down’ in the organisational hierarchy, providing a range of different challenges. On
the one hand, the local government water providers may have less accountability and
transparency in decision making, but on the other hand, these providers tend to be more
responsive to local issues and the directions of the local government.
Organisational structure forms part of the governance arrangements of water
utilities and may also be a key enabler of sustainability practice. It was noted that a
corporate re-structure in one water utility effectively removed entrenched silos that
previously existed within the organisation, and that the new structure allowed greater
networking and collaboration across multidisciplinary teams. The role of senior
managers within the executive arm of water entities was acknowledged by some in
terms of their ability to provide clear organisational direction. In one organisation, it
was noted that senior management had actively initiated, pursued and led the
development of a strong response to sustainability challenges, with agreement from
the board.
Governance processes also include reviews and approvals that may be required
from relevant state government departments, including treasury, for significant
infrastructure investments. Some interviewees spoke of the challenges of gaining
approvals from central government agencies where project estimates were above the
threshold dollar limits that dictate the need for formal central government project
reviews. Again, central government reviews present a risk that more blunt financial
considerations are used to assess projects, and that wider community benefits are
discounted in analysis.
Organisational Strategy and Commitment Organisational strategy is the expression of an organisation’s intentions in
achieving its core objectives over time. As a public document, an organisational
strategy has the potential to clearly state the organisation’s intentions and
commitments around sustainability to its stakeholders, employees and the wider
community. These commitments may be further developed in specific policies,
charters, statements or plans, with supporting objectives or targets that may form the
basis of regular review and reporting. Table 6.10 outlines the sustainability
commitments that are publicly stated by major water authorities in each state or
territory of Australia.
Incorporating sustainability in investment decision making for infrastructure projects 139
Table 6.10
Sustainability statements by Australian water utilities
Organisation Document Statement
Melbourne
Water Corporate Sustainability
statement on website ‘We consider the long term interests of the community and future generations, and our solutions seek to balance environmental, social and financial outcomes.’
South Australia
Water SA Water Sustainability
Scorecard (to 2015) ‘Sustainability is part of the way we do business. We consider the long term interest of customers, the South Australian community and future generations in our operations and solutions.
Icon Water
(ACT) (formerly
ACTEW)
Sustainability Report 2014 Sustainability at ACTEW is about delivering water and sewerage services that contribute to the health of our customers, the liveability of the region and minimise our impact on the environment. We achieve this by continually improving our processes and the quality of our services, protecting the environment and investing in the capability of our people.
Water
Corporation
(WA)
Statement of Corporate
Intent (2016/17) ‘Our purpose: Sustainable management of water services to make WA a great place to live and invest.’
Power & Water
(NT) Power and Water
website- Sustainability
and Environment
‘At Power and Water, we are always extending our efforts to minimise our impact on the environment. Most of your electricity is generated from natural gas and we continue to focus on renewable energy – primarily solar.’
Queensland
Urban Utilities 2016-2021 Corporate
Plan ‘In planning for and delivering services to our customers, we have identified a number of opportunities to embrace and challenges to overcome. These include: identifying sustainable solutions that address economic development, population growth, service delivery and economic drivers and enable our shareholders to realise their community outcomes.’
Sydney Water Sydney Water website ‘Sydney Water applies sustainability principles to its
planning and operations processes, and capital investment decision-making.’ ‘Sydney Water’s corporate goals integrate the social, economic and environmental aspects of our commitment to deliver sustainable water services.’
Some water authorities have strengthened commitments to sustainability
practice by signing the global sustainability initiative United Nations Global Compact
(UNGC) and including UN Sustainable Development Goals (SDGs) as part of
strategies and daily operations. Such commitments include a responsibility to
continuously measure progress against targets and report these publicly. The Global
140
Reporting Initiative (GRI) provides a framework for reporting, and it was noted in the
interviews that Yarra Valley Water’s Integrated Profit and Loss report presents an
alternative sustainability reporting mechanism.
Leadership
The role of those in formal leadership roles was acknowledged as an important
enabler of sustainable approaches. For one interviewee, sustainability leadership is
embedded in the culture of their organisation, and thus was seen to influence the
attraction of new staff who actively seek roles in organisations that commit to
sustainability practice. In this case, sustainability is entrenched in long term,
intergenerational practices regardless of personnel changes. For some organisations,
sustainability practice was seen to be initiated by new leaders who sought to drive
sustainability commitments that are subsequently embraced and translated to activities
across the organisation. Leadership may also be provided by key staff, who act as
sustainability champions within the organisation. Often, these sustainability
champions are seen to be driving specific sustainability initiatives rather than a
concerted organisational approach to sustainability. The leadership role of industry
organisations such as the Water Services Association of Australia was also
acknowledged by interviewees, through its advocacy role with government and
decision makers, through educating the industry and the wider community on
sustainability issues and through acting as a central hub for industry practitioners to
collaborate and share knowledge.
Regulation The regulatory setting for water providers, forms part of the governance
framework, and regulation was acknowledged by many interviewees as being a
significant sustainability challenge for water authorities. Regulation may involve
numerous government legislative and regulatory requirements such as health and
environment controls, however much of the commentary in interviews related to the
role of the economic regulator.
It was noted that economic regulation is not uniform across Australia- different
states have different models and approaches to regulation. Those interviewees who
work across jurisdictions in Australia saw a need for a uniform approach to regulation
across the country, citing the United Kingdom model with a single economic regulator
(OfWat). Examples of regulatory practice in each state were discussed in the
Incorporating sustainability in investment decision making for infrastructure projects 141
interviews. In the state of Victoria, the Essential Services Commission (ESC), as the
economic regulator, is moving to a more customer focused model of regulation, which
is yet to be tested. It was noted that the economic regulator in Western Australia has
an advisory role to government in relation to water pricing, in comparison to other
states where the regulatory role has greater powers. In that state, environmental
regulation is seen to provide a positive impact on practice by requiring strong
community engagement before proposals are presented to government. Reflecting on
practice in New South Wales (NSW), one interviewee noted that the role of the
environmental regulator had moved from a risk management and mitigation approach
to a more conservative, ‘no-risk’ approach requiring a much higher level of
intervention and costly works. This was in contrast to the role of the economic
regulator in NSW (IPART), which was seen to drive practice that provides the most
efficient outcome. Hence, in that jurisdiction, there is seen to be a tension in meeting
the needs of each of the various regulatory bodies.
Economic regulators typically require water authorities to submit a short-term
(usually five year) water plan that sets out a servicing strategy over that period,
together with the price impact to customers. Commentary generally indicated that the
easiest path to take is for water authorities to submit servicing strategies that purely
address efficiency requirements. This would potentially negate any opportunities to
seeker broader sustainable outcomes. On the other hand, some water utilities recognise
the disconnect between regulatory requirements and government policy that supports
sustainable outcomes. In this case, there is a need for water utilities to actively work
with regulators to negotiate preferred solutions that deliver broader community value.
At the same time, some interviewees saw that there is a role for government to provide
greater support and, potentially, funding for those projects where benefits extend
beyond the boundaries of the water provider and deliver wider community outcomes.
Training and skills of analysts Complex, non-routine projects require practitioners with broad skill sets. Across
the interviews these skills were revealed as: critical thinking and the ability to identify
the wider context of problems; the ability to lead and direct a multi-disciplinary team
or work with multiple agencies; negotiation capabilities; and the ability and drive to
develop concepts through to implementation. Others noted that those with technical
training do not necessarily deal with non-routine problems and subjective analysis.
142
According to one interviewee, a project with a ‘good’ business case could not be
implemented largely due to inability of assigned project staff to deal with complex
negotiations that were required following initial planning work. In order to improve
skills and capability in business case development, one interviewee referred to a UK
model whereby the Major Projects Authority, working with HM Treasury, has been
established to build capability of practitioners working in the public sector. This
includes the identification of project leaders within infrastructure delivery agencies
and providing support to agency staff working on major projects. It was suggested that
such a model could be developed in Australia.
Consultants play a significant part in undertaking decision-making process, most
often in a supporting role providing analysis and reports to project managers within
the water utilities. Consultants effectively provide expert skills that do not reside in the
organisation or may fill resourcing gaps when organisational works loads exceed the
capacity of available staff. In some cases, expert consultants may effectively provide
an independent voice that prevents perceived optimism bias of the agency proposing a
project. Some criticisms of the use of consultants were based on the misalignment of
consultant skills with the specific task being undertaken, or a tendency by large
consulting firms to pass work down to junior staff with limited project or analysis
experience. Some interviewees spoke of the need for water agencies to improve
processes around procurement of consultants. In particular, some organisations with
central procurement offices approve tenders for consultancy services that are bid at the
lowest price, without regard for the assessment of the relevant experience and track
record of the consultants to ensure that the best-for-project consultant is employed.
Inputs
‘Inputs’ refers to the broad analysis that underpins investment appraisal and that
is critical to robust analysis. Key inputs to analysis that were identified in interviews
include cost and funding models, risk assessment, delivery capability and asset
management (refer Figure 6.9). An explanatory effects matrix providing interview
comments relating to these themes is provided as Appendix N.
Incorporating sustainability in investment decision making for infrastructure projects 143
Figure 6.9. Inputs
Cost and funding models
Cost and funding models were acknowledged as an important element of
business case analysis. One interviewee noted that ‘you need to bring it back to the
dollars and cents- because that’s how other people understand it’. Cost estimates
provide the basis of financial and funding models and it was noted that there is a
tendency for cost estimates to be inflated- presumably to ensure greater buffer to allow
for uncertainties that may arise. This area was seen as being much more straight-
forward, presumably based on the ability to draw on cost data from previous projects.
Of note, projects such as the Victorian Desalination plant and the North-South pipeline
that were identified as being undertaken by separate newly formed delivery agencies
have been criticised in the media for cost over-runs. However, the need to accurately
develop cost estimates for both capital works and operating works components of an
infrastructure project is central to considerations of affordability and budget processes.
For water businesses, compensatory funding for works is provided through both
general pricing tariffs and special fees and charges. Some interviewees noted that,
where projects deliver wider community benefit or overall network improvements,
there is a strong case for allocating funding from general government revenue towards
some component of works.
In developing funding models, several interviewees noted that consideration of
avoided costs associated with sustainable initiatives should also be considered. As an
example, a recycled water initiative may be proposed within a short-term
planning/pricing period and may effectively negate or defer the need for future
Inputs
Cost andfunding model
Risk
Deliverycapability
Assetmanagement
144
upgrading works of infrastructure. However, the regulator, in assessing the servicing
strategy, would not recognise the long-term funding impacts of avoided costs beyond
the five-year price submission period.
Several interviewees referred to NPV analysis, whereby the time cost of money
is reflected in a discount rate applied to future costs and revenues. One interviewee
identified that the discount rates required by governments often negate any
consideration of long-term avoided works. In sustainability assessment, the use of a
lower (or zero) social discount rate has been proposed when assessing natural systems
to take account of intergenerational equity. Scenario modelling was identified as a
highly effective technique that could take account of an array of assumptions and
possibilities within analysis, including choice of the discount rate.
Cost modelling also needs to acknowledge any potential for ‘double counting’-
an example provided was based on financial analysis that included the cost of carbon,
but with an additional qualitative framing of benefits that also indicated reductions in
greenhouse gas emissions. One interviewee indicated that double counting can occur
in analysis based on an understanding of the need to maximise the benefits attributable
to an initiative, in order to gain endorsement and approvals.
Risk Risk assessment was put forward as a necessary and integral part of project
analysis. One interviewee discussed the propensity for some engineers or project
managers to misinterpret the process and outputs of risk assessment, which was
likened to the misuse of (numerical) outcomes of CBA. In this case, it was argued that
some judgements that are used to assess risk levels are subjective, but that numerical
outcomes from the risk assessment can be interpreted more definitively in decision
making. Others spoke of an inclination of decision makers and regulators (particularly
environmental and health) to adopt a risk-free approach, which may either result in
additional costs that make projects unviable or stifle opportunities for innovation. In
some instances, one item of risk may be used to obstruct a project. In projects that
involve numerous organisations, there may be one organisation that is willing to take
on the risk, whilst others are not willing to proceed on the basis of the risks presented.
If the project proceeds, all the risk is then assumed by that one organisation. Several
interviewees spoke of initiating pilot projects as a response to managing risk and
testing project viability.
Incorporating sustainability in investment decision making for infrastructure projects 145
Delivery Capability and resourcing
Some interviewees noted that, despite thorough analysis that justified a project,
implementation may fall over if the right skills and capability is not procured. Whilst
this may apply to technical capability, more often the problems emerge through ‘soft’
skills in negotiation and managing stakeholders and community expectations. Several
interviewees noted that their organisations were now well resourced in the area of
stakeholder and community management as part of project implementation.
Asset Management
Investment appraisal also needs to incorporate consideration of long-term
operating and maintenance requirements and include costing as part of Life Cycle
Assessment (LCA). Long term thinking should incorporate considerations of climate
change impacts. One interviewee noted the difficulties in predicting costs over the long
term (35-50 years), given the on-going debates by governments on matters such as
energy policy.
6.3.4 Final stage coding
The interview responses highlighted several key concepts that warranted further
exploration as part of a third and final stage of coding. In relation to analysis methods,
the interviews (reinforcing the results from the quantitative survey) revealed that no
uniform approach is used across industry. Hence, the research question asking, ‘what
is an optimal system approach to support project selection and decision making for
infrastructure projects?’ cannot be addressed simply through a consensus analysis of
responses. At the heart of this issue are suggestions that, where CBA is used, there
remains a level of modification and adaptation in analysis to support a preferred
direction. One approach that is gaining favour is to include a broader array of
valuations to capture environmental and social aspects. However, most interviewees
acknowledged that the valuation of environmental and social factors remains
incomplete and that values may be seen as relative rather than absolute. In addition,
interviewees generally agreed that values for ecosystem services derived for one
location do not readily translate to a different location.
A final stage of selective coding allowed for the integration of the analysis and
further refinement of the theoretical scheme. The aim of this review was to allow a
clearer picture to be built in theory building. In addition, explanatory effects matrices
were developed in line with the conceptual terms to further explore the relevance and
146
strengths of identified concepts, together with new emerging themes around benefits,
value and trade-offs. The rationale for considering value and benefits separately was
based on an understanding that responses relating to ‘benefits’ appeared to relate to
two differing concepts. On the one hand, benefits were described in terms of ‘KPIs’ or
broader strategic outcomes of projects and programs in line with project management
methodologies, such as PRINCE2 and Managing Successful Programmes (MSP)18. On
the other hand, benefits were also described in terms of monetised or non-monetised
values forming part of the CBA equation for Benefit Cost Ratio (BCR) as described in
Equation 6.1:
BCR = ∑"#%&'&()*+∑"#,-+*+
where
PV benefits = present value of benefits
PV costs = present value of costs
Equation 6.1 The Benefit Cost Ratio (BCR) used in CBA (from Pearce et al. , 2006)
The third stage of coding sought to understand the basis and meaning of these
concepts. Furthermore, the final stage of coding also sought to further explore the
concept of ‘trade-offs’ as discussed by several interviewees but not previously
identified in the initial concept model.
Benefits
Benefits were identified in terms of developing project-level KPIs that linked
with organisation strategies or objectives. Examples included assessing a project’s
contribution to meeting greenhouse gas emission reduction targets, contributions to
urban cooling, or addressing aspects of vulnerability for representative areas of the
local population. The Victorian Government’s Investment Logic Mapping (ILM)
process for benefits mapping was suggested as an effective methodology to link
desired project outcomes (KPIs) with organisational objectives. Some interviewees
indicated that this process was also being introduced, to some extent, to other
18 PRINCE2 (Projects in Controlled Environments) is a project management methodology adopted for projects delivered by UK government agencies, and is also used in public sector works in Australia. MSP (Managing Successful Programmes) applies similar practices at a programme level.
Incorporating sustainability in investment decision making for infrastructure projects 147
jurisdictions across Australia, although other interviewees indicated that it was less
likely to be used in the water industry. (This view conflicts with the findings from the
survey conducted in the first phase of the research, where there was overall agreement
that investment management/ logic was generally used and considered to align with
sustainability practice). One interviewee also noted that project KPIs may change over
time, particularly when projects are moved between organisations (such as when the
Gold Coast Desalination project moved from local to state government), when
circumstances change such as the onset of drought, or when organisations restructure,
reflecting a change in organisation priorities. Figure 6.10 outlines the categories of
benefits that were identified by interviewees, and Appendix O provides further details
on responses within a results explanation table.
Figure 6.10. Benefits
Community benefit refers to the widest dimension of benefit that goes beyond
organisational boundaries and considers the broad context of projects in terms of the
networks with which they interact, and the contribution of a project to societal
improvement. Examples of community benefits that were discussed, included
contributions to liveability, contributions to wider environmental outcomes such as
providing habitats for protected species, urban greening, improving health outcomes
and quality of life. Of these, liveability was presented as a key area of current focus
for the water industry. One interviewee noted the difference between liveability and
sustainability, in that ‘liveability is defined by the community’, whereas ‘sustainability
is about intergenerational equity and resources’. In this case, several interviewees
spoke about the challenges in developing water projects that contributed to an area’s
liveability aspirations. As an example, for central Melbourne, liveability may be about
Benefits
Community
Customer
Business
Drivers Objectives
148
increasing urban greening, but for other areas, liveability aspirations may be more
focused on reducing bill stress.
Customers for a water business may include direct customers- both residents and
businesses- for whom water services are provided, developers seeking to connect to
water services or anyone interacting with the business. One interviewee stated that
their organisation regarded customers and the community as one. Aspects of customer
benefit that were raised by interviewees include providing a diversity of supply
options/ contingency supplies, contributions to peri-urban land aggregation and
agricultural productivity, and consolidation or bringing forward of servicing for
greater efficiency and to prevent duplication or redundant works.
Water businesses are public entities with monopoly powers which, for some,
require a social licence to operate, particularly in that some operations or activities
may have negative impacts on community segments. Such a licence is cultivated
through efforts to build legitimacy and trust with the community and requires on-going
efforts to develop and manage. Projects may contribute to business benefits and the
social licence to operate through responding to local community priorities, and
providing leadership on issues of wider community concern. Yarra Valley Water’s
Choose Tap program was cited as an example of a water authority looking more
broadly in promoting environmental and health benefits, but at the same time building
legitimacy of its operations and services with its community. (This program seeks to
educate the community on the benefits of tap water when compared to packaged sugar
drinks.) Interviews revealed various contributions to business benefits from
infrastructure projects, including building capability and knowledge of staff to
undertaking innovative and transformational initiatives that position water businesses
as industry leaders.
Value
The concept of value, together with extensions such as value capture, value
proposition and valuation, was a central theme in all interviews conducted. The ability
to fully represent the value created from infrastructure initiatives continues to be a
critical challenge of the investment appraisal process. In response to this challenge,
some interviewees promoted the need to convert value into monetary terms across
economic, environmental and social domains as a central platform for analysis. Others
indicated a level of comfort in analysis that combined monetary valuation with
Incorporating sustainability in investment decision making for infrastructure projects 149
qualitative analysis on aspects that were considered difficult or impractical to measure
or monetise. Indeed, some interviewees noted that before economic regulation was
introduced in the water industry, decision making was based largely on both qualitative
and quantitative considerations, underpinned by an understanding of the need to
address community values. Such an approach would appear to align with Triple
Bottom Line (TBL) assessment.
One interviewee noted that the Victorian Government had recently introduced a
Value Creation and Capture Framework that states that the government is
‘systematically harnessing the potential of its investment to create additional value for
the community’ (State of Victoria, 2016). Furthermore, the framework identifies value
creation as
• Economic- though increased growth and job opportunities and improved
workforce participation;
• Social- through provision of public housing, safety and recreational
infrastructure; and
• Environmental- through greening and enhancement of natural
catchments, water or energy efficiency, climate adaptation and decreased
greenhouse gas emissions.
Figure 6.11 outlines the key themes around ‘value’ from the interviews that are
explained in more detail in the following discussion; Appendix P provides further
details from interviews collated in an explanatory results matrix.
Figure 6.11. Value Creation
ValueCreation
EconomicValue
DevelopmentValue
EnvironmentalValue
Social Value
Public Value
150
Economic Value
Economic value relates to the direct and indirect financial revenue streams
associated with an infrastructure investment. For a water business, these may include
billing revenue from users (residents and businesses), together with developer charges
and any further revenue streams from use of facilities and services. Sectors such as
transport, that have no direct revenue stream, use ‘benefits’ that are based on traffic
modelling for improvements for transport network users including aspects such as
travel time savings, vehicle operating cost savings and travel time reliability
improvements. Some jurisdictions develop guidelines for CBA that outline what may
be assessed within CBA assessments. Other items that may be incorporated as values
in CBA include cost information and modelling around greenhouse gas emissions,
energy use, water quality improvements, air quality improvements nutrient treatment
and the like.
In the case of recycled water, it was noted that the significant effort and cost
involved in developing the product of an alternative water source needs to be matched
by efforts to develop a market for that product. In one example cited, no market could
be found, and in another example, a highly regarded agricultural ‘food bowl’ was
created through working with local land owners.
One interviewee also referred to work that incorporates the Total Economic
Value (TEV) of water, which refers to ‘the sum of the value provided by a variety of
uses (direct and indirect) and from the other ways in which a good provides value to
us without being used or consumed (non-use values)’ (Hardisty, 2010, p. 88). Direct
use values in TEV link to consumptive use associated with market values such as
potable use, agriculture or industrial use, together with non-consumptive use attributed
to aspects such as recreational uses (fishing, swimming etc). Indirect use value
associated with TEV is attributable to regulating functions such as flood management,
and non-use values relate to existence, altruistic and bequest values that include values
placed on knowing that a water resource exists, or that it will be preserved for future
generations. Values for direct non-consumptive uses have been derived in various
studies across the world, often using market use value estimates, and the range of
values that have been derived shows that water scarcity can affect water valuation
(Hardisty, 2010). DEFRA’s Total Economic Value Framework, which is consistent
for use in a CBA context, is provided in Figure 6.12.
Incorporating sustainability in investment decision making for infrastructure projects 151
Figure 6.12. DEFRA’s Total Economic Value Framework (from DEFRA (2007))
Several interviewees stated that their organisations had carried out economic
analysis using Willingness to Pay (WTP) studies of customers. According to the
Department for Environment Food and Rural Affairs (DEFRA) (2007), the net sum of
WTP or Willingness to Accept (WTA) provides a measure of the Total Economic
Value (TEV), which represents the total gain in well-being, or the value of the
marginal change associated with a policy or initiative. Most often, these assessments
of value are used as part of pricing submissions to the regulator. It was noted that, in
one instance, where customers had indicated a preference for tree planting to address
urban cooling through a WTP study, the regulator had not accepted a proposal for
urban greening works as it was not seen to be part of core business obligations. Using
WTP studies is seen to require a degree of critical review and caution. According to
one interviewee:
And regulators, just like we all do, struggle with how we quantify these
amounts, not only the environmental stuff. But how do you quantify the
customer’s or community’s willingness to pay? What those studies show is
that yes, you can get willingness to pay but Willingness to Pay is different to
whether I am happy to ... I am physically going to pay.
Development value In economics, the hedonic pricing method links value with market pricing, and
most commonly with the property market. Studies invariably show that proximity and
152
accessibility to infrastructure services has an impact on property values. This ‘uplift’
in property value has the potential to provide additional revenue sources to various
levels of government through property taxes, special charges and rating mechanisms
based on property value. Interviewees spoke of using hedonic pricing methods to
determine the premium that property owners may pay to enjoy the benefits of a specific
infrastructure investment.
Interviews revealed that, for one project, the consideration of increases in
property value could not be used alone to justify a significant project, due to the limited
number of properties identified as directly benefiting from the infrastructure works,
and considerations of the low base value of properties in the area. For another project
in a ‘brownfield’ inner-urban area, uplift in property value, together with the increase
in customer base created by new development, were seen as factors that contributed to
the justification of works associated with sourcing alternative water. In this example,
it was also noted that a tension existed whereby infrastructure investment was creating
value for private developers (who are short-term owners and not the end user of the
service), and that water authorities, and indeed government in general, did not
necessarily have revenue mechanisms to capture the value created.
A further aspect of development value is the land and asset holdings that have
been retained by infrastructure providers, which are located in high-demand growth
corridors, and so may be seen as having the potential for urban development. In this
case, a further tension arises whereby governments may seek to realise short term
revenues through property sales in lieu of setting aside those land assets for future
planned or unforeseen public uses. The need for a long-term land use plan for the site,
taking account of local community values, was considered to be essential where
property rationalisation plans were being pursued.
Ecological value
The interviews revealed various approaches to the development of quantitative
models to effectively manage environmental systems. In contemporary waste water
treatment practice, nutrient removal (nitrogen and phosphorous) provides a good
example of the use of market-based pricing mechanisms in decision making. Through
the understanding of nutrient treatment costs, together with the need to limit discharges
into natural water bodies, developer charges have been effectively applied to
development that impacts on the water quality of receiving water bodies. According
Incorporating sustainability in investment decision making for infrastructure projects 153
to one interviewee, SA Water’s focus on recycling is driven by this understanding of
the impacts of nutrients on the gulf ecosystem. Yarra Valley Water’s Integrated Profit
and Loss (IPL) report was also provided as an example whereby a quantified model
has been developed for natural, social, human and financial capital of the business in
order to influence decision making and support efforts for a ‘restorative’
environmental approach. As noted previously, the Social and Environmental Tool
(SET) is available and used within the water industry to apply monetary value to
environmental and social features. It was also noted that the City of Melbourne has
completed a study that assigns monetary value to its trees.
Whilst there was broad agreement that monetary valuations applied to
environmental assets can be useful in various forms of analysis, many interviewees
noted the limitations of valuations, particularly when applied as an absolute value in
the context of CBA. These limitations included
• The application of values derived from one region (for example, items such as
seagrass) to another geographical area is not always relevant or useful;
• Data availability may be limited – for example, census data is released much
later than when data is collected. The use of old census data may not reflect
current trends;
• Survey results (with inputs into assessments such as WTP) may not reflect
actual attitudes that are gauged through direct communications with local
communities;
• Some assets cannot be valued- as an example, the Western Treatment Plant has
the second highest bird density in the country after Kakadu- one interviewee
questioned how this could be valued accurately;
• The attribution of value is difficult to assess – as an example, there is on-going
research looking at the contribution of rain water tanks to waterway health; and
• The treatment of values associated with spill-over effects beyond the project
boundaries is often neglected.
Social value Some interviewees noted that selected aspects of social value relating to
infrastructure investments may be identified and assigned a value. As an example,
154
health improvements are readily measured by health departments, and hence projects
that provide value around health and wellbeing can draw on that data. The Social and
Environment Tool (SET) developed initially by Water Corporation (WA) has been
made available across the water industry and includes an Excel spreadsheet of values
based on a literature review to cover social values that are relevant in water-cycle
planning decisions. Table 6.11 shows social externalities and the bases for evaluation
that are identified in Hardisty (2010).
Table 6.11
Selected social aspects and means for valuation (from Hardisty (2010))
Social Externality Cost Evaluation
Health impacts from air emissions Medical costs, lost production and earnings
Health impacts from emissions to land Medical costs, lost productivity and defensive
expenditures
Displacement and inconvenience Displacement from homes or loss of traditional
or spiritual lands
Loss of recreational value Cost of use and enjoyment
Noise Amenity impacts, health costs
Odour Amenity impacts assessed through property
prices
Aesthetic Value Property and recreational values
In relation to the wider values provided by water businesses, one interviewee
stated:
.. if we want to think of ourselves as water authorities providing more than
water- drinking water, taking away sewage and treating it, flooding services,
and waterway services and we want to think about in terms of how we actually
contribute to the urban form, and how we use water for parks and recreation
and how we work with councils so we start thinking about it. I think about in
terms of Maslow’s hierarchy in that we have done some of the basics, we need
to move into more complex areas where it is cross-organisational and we are
delivering desires more than basic needs.
Incorporating sustainability in investment decision making for infrastructure projects 155
From the interviews, key areas in the social domain where water authorities may
add value were identified in the areas of:
• Liveability;
• Contribution to urban form and planning intent;
• Community amenity;
• Health outcomes;
• Crime outcomes (in priority policy areas such as domestic violence);
• Visual amenity;
• Customer service;
• Parks and recreational amenities;
• Indigenous cultural values.
On these matters, there has been some consideration across the water industry
about how to ascribe monetary value, however there was overall agreement from
interviewees that these values are difficult to translate between locations. On aspects
such as urban form, it was considered that the city of Melbourne values this highly,
whereas other areas in Australia would place less value on urban form. In relation to
liveability, several interviewees noted that different communities, and indeed different
people, will ascribe value differently. In addition, values change over time. As an
example, it was noted that thirty years ago in Brisbane, there was community
resistance to excessive road signage, but now electronic signage proliferates along
major motorways.
In relation to cultural values, several of those interviewed spoke about the
recently released Water for Victoria policy that elevates the importance of managing
water resources with regard to aboriginal cultural, spiritual and economic values. At
the time of interviews, there was little clarity on how this would translate to project-
level decision making for water authorities. It was, however, noted by several
interviewees that New Zealand is an exemplar in including indigenous values in water
infrastructure works. An example was given of a sewerage treatment project, where
designs reflected New Zealand Maori values in areas such as discharge channels that
incorporated rocks for spiritual cleansing, and where discharges were modified to take
156
account of impacts on local shellfish that were of high importance to the local
indigenous people.
Trade-offs
The topic of trade-offs was discussed in several contexts. Some interviewees saw
trade-offs in terms of cross-organisational transactions based on aspects of cost
shifting, negotiations and considerations of who ultimately takes responsibility for
leading projects. Trade-offs are also considered within project analysis, whereby the
analyst assesses and prioritises a range of impacts and benefits associated with the
infrastructure initiative. Figure 6.13 outlines the key themes on trade-offs, and
Appendix Q provides more detail on responses.
\
Figure 6.13. Trade-offs
Several examples of projects were highlighted, whereby responsibility and
leadership changed over time. In these instances, the key problem and subsequent
solutions were defined and developed by the initiating organisation, but over time
when benefits were more clearly defined, it became apparent that these projects
aligned more closely with other organisations. An example that was provided is the
Gold Coast Desalination project, initiated by Gold Coast City Council. In this case, as
the millennium drought in South East Queensland became more serious, and the state
government saw the need to address drought security at a broader, regional level, and
took over responsibility for the project. In another, the Bunyip Food Bowl in Victoria,
it became apparent that the project was more aligned with urban land planning around
peri-urban agricultural land, and hence responsibility moved from the water authority
to local government. In these cases, leadership was required to manage the complex
Trade Offs
Who leads
What are theboundaries
What valuesare non-
negotiable
What valuesare negotiable
Incorporating sustainability in investment decision making for infrastructure projects 157
trade-offs required for the transition of the works from the initiating organisation to
the organisation taking responsibility for delivery.
Where projects cross organisational boundaries, negotiations may involve
stakeholders, community representatives, businesses and elected representatives. In
the case of recycled water initiatives, the viability of projects may be based on certain
businesses with high water demands agreeing to utilise alternative water sources. In
this case, where agreements cannot be negotiated, projects fall over. ‘Cost shifting’
refers to a practice where the governing entity that is responsible for a particular
service (such as a state government) defers its responsibilities to another entity (such
as local government) effectively moving the responsibility for funding and
maintaining that service to the other entity. In integrated water management, where
numerous organisations may support, and benefit from, an infrastructure initiative, the
cost shifting impact may fall onto a water utility that is most willing to progress the
initiative, despite the benefits accruing across organisational boundaries. Interviewees
spoke of the impacts and inequities of cost shifting, and noted the opportunity for better
practice whereby funding is apportioned to those who benefit. A more equitable
outcome would involve all those who benefit from a service contributing to its costs,
however most interviewees considered that, in practice, organisations that initiate
projects often bear the full costs. In addition, it was noted that where a project delivers
wider community benefits, there is a strong case for government to contribute to a
proportion of works that reflect those benefits.
As part of project analysis, several interviewees spoke about the trade-offs that
are required when assessing the extent of impacts and benefits associated with an
infrastructure initiative. In this case, various components of project scope need to be
assessed against each other, such that some features may either be retained or omitted.
As an example, projects may be opposed by interest groups on the basis one
environmental ‘trump card’ when, otherwise, a range of highly significant positive
benefits are to be realised. Consequently, there is a need for the analysis to carefully
address key priorities, and linkages to wider benefits. It was asserted that trade-offs
are made between certain items that are ‘non-negotiable’ and not able to be omitted or
substituted and other items or values that may be negotiated away.
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Implementation and reporting
Across the project life cycle, different project teams are typically responsible for
managing each stage such as planning and approvals, business case development,
capital works delivery and management of operations. Each stage requires different
skills and attributes , and organisational structures reflect this. The interviews revealed
that robust analysis at the planning stage needs to be supported by concerted efforts in
implementation, project monitoring and reporting that aligns with corporate
objectives. The need for planning and business case assumptions to translate to those
managing the delivery and operations stages is an important feature of the transition
between project stages. Key themes that emerged are outlined in Figure 6.14.
Figure 6.14. Implementation
Corporate reporting in the form of Annual Reports may be supplemented by
sustainability reporting, either using Global Reporting Initiative (GRI) guidelines or
bespoke processes such as Yarra Valley Water’s Integrated Profit and Loss (IPL)
report. Sustainability reporting is seen as an effective mechanism to understand how
an organisation is performing against targets or goals, and to inform future priorities
in investments. As sustainability reporting continues to evolve, the inclusion of
reporting that addresses the effectiveness of projects and programmes in addressing
corporate objectives was identified in the interviews as an area that could be addressed
in future reporting.
Where costs and benefits are projected in the early stages of project
development, there is no systematic process for assessing costs and benefits at the
completion of projects. Processes such as post-implementation workshops and reports
Implementation
SustainabilityReporting
Ex-PostAssessment
Proof ofConcept
(Pilot)
Incorporating sustainability in investment decision making for infrastructure projects 159
on ‘lessons learned’ may be used, and these may guide the development of future
business cases. However, one interviewee noted that the benefits that are initially
projected to be attributable to a project (such as reduction in pollutants) are not
generally assessed or measured after the project is completed.
Some interviewees identified the opportunity to undertake pilot projects, as a
means to better assess the benefits and value provided by new and untested approaches
to infrastructure design or delivery.
6.4 SUMMARY OF RESULTS
The mixed methods approach to this research has provided a broader
understanding of current practice in relation to investment decision making. The initial
survey provided insights into current practice to build on the conceptual model that
was developed through the literature review and to inform the interview process. The
participants in the first stage of research were well qualified to comment on current
practice relating to analysis techniques that support business case development. In
order to address the two research questions, the second stage of research provided
greater clarity on the elements of a decision-making model. The interviewees that were
recruited for the second stage represented a range of views and perspectives in the
broader investment decision-making environment, allowing a deeper understanding of
the issues around current practice.
The results of both the surveys and interviews provided rich data for analysis
and the development of a model for integrating sustainability in investment decision
making. Some aspects of the results align with the findings from the literature review.
Of note, the variety of methods applied in practice and the use and interpretation of
CBA are findings that align with international research. The adoption of participative
methods as part of front-end decision making has been widely supported and embraced
by those interviewed from the water industry. At the same time, it was acknowledged
that implementing participative processes is extremely difficult and time consuming,
but contributes to making the right decisions. This appears to reflect a level of maturity
within the water industry in understanding the need to engage with customers, and the
wider community, on matters that other infrastructure sectors would consider to be
confidential and hence not suitable for input by end users. The extensive discussions
160
in interviews on ‘trade-offs’ led to further reflection on practice and referral back to
literature on that topic.
In summary, the concept model that was developed through the literature review
provided a useful starting point for the research design. As the research progressed
through both the initial survey and subsequent interviews, new concepts emerged and
greater clarity was provided on relationships between themes. The next chapter
introduces these concepts and presents a new model for integrating sustainability in
investment decision making.
Incorporating sustainability in investment decision making for infrastructure projects 161
Chapter 7: A Model for Sustainability Investment Appraisal
7.1 INTRODUCTION
This research was initiated to critically examine current practice in investment
appraisal and to assess how investment decision making may be framed to incorporate
sustainability. The literature review highlighted shortcomings in current practice
whereby infrastructure providers make formal commitments to address sustainability
challenges, and yet investment appraisal is informed by mandated guidance with an
emphasis on financial or economic outcomes. As such, new or emerging infrastructure
solutions that address sustainability challenges may be difficult to justify, as the wider
values of sustainable infrastructure solutions cannot be fully quantified.
Building on the results of the research, this chapter outlines an alternative
approach to the application and interpretation of the concepts of benefits, value and
trade-offs within the appraisal process. In addition, a sustainable approach incorporates
a high level of participation throughout the appraisal process. Current practice
conflates aspects of benefits and value, in that monetised values are addressed as
benefits in standard CBA practice. It is proffered that, in sustainability practice,
• benefits relate to wider outcomes that align with sustainability objectives;
• values are plural with economic, ecological and social/ cultural dimensions
that are often conflicting. These cannot be captured by a point measure; and
• trade-offs recognise that decision making is complex, and should not be
allocated to a single decision maker. Instead, deliberative processes should
be employed with considerations of shared value of benefits accruing to the
community, customers and the infrastructure provider.
The model developed through this research acknowledges that methodology
alone is not enough, but that there are supporting institutional factors that need to be
in place. Using the findings of both the survey and interviews, a model has been
developed that also incorporates the elements of enablers and inputs to the decision-
162
making process. The outcome of this research is a model that builds on concepts of
public value, business models for infrastructure and the importance of the integrating
aspects of sustainability across the economic, ecological and social domains.
This research has focused on the water sector based on the unique governance
framework and regulatory processes that frame investment practises in that sector. The
problems in justifying new approaches to managing water resources through initiatives
such as integrated water cycle management (IWCM) has previously been discussed in
Chapter 4. The model is intended to also apply to other infrastructure sectors such as
the transport sector, energy sector, coastal infrastructure and others.
In this chapter, a summary and comparison of the results from the two phases of
research is briefly presented, showing how these results complement each other. The
discussion then addresses the concepts of benefits and value, and presents a new
approach termed Sustainability Investment Logic. An overall sustainability appraisal
model is then outlined and the elements of the model are described in greater detail.
This research contributes to knowledge by addressing ongoing calls for new
approaches to investment appraisal. New approaches are needed in providing
sustainable solutions to infrastructure challenges. These need to take account of long-
term issues such as the impacts of climate change, recognise the need to more
effectively manage natural resources in urban environments and respond to community
concerns and aspirations.
7.2 SYNTHESIS OF THE TWO RESEARCH PHASES
The staged approach to the research sought to separately address the two
research questions:
1) Do corporate sustainability goals stated by infrastructure agencies translate
to project level decision-making in the pre-investment stage for
infrastructure projects?
2) What is an optimal system approach to support project selection and decision
making for infrastructure projects within a strong sustainability framework?
The survey forming part of the initial research phase illustrated that, although
many organisations have adopted corporate sustainability goals and targets, these were
Incorporating sustainability in investment decision making for infrastructure projects 163
not always reflected in investment decision making. This understanding was
beneficial for the second phase of research:
• A broader group of interviewees were purposefully selected in order to
represent organisations with strong sustainability commitments AND
where the individuals were actively seeking to reflect these commitments
in decision making and project outcomes; and
• Additional interviewees were selected to reflect on general industry
practice through their knowledge of practice across many water
businesses.
The benefits of a sustainability approach were reinforced through both phases of
research. The societal benefits of sustainability are well documented, and are
addressed later in this chapter. Many research participants also acknowledged that
infrastructure businesses benefit from committing to sustainability outcomes, in that
legitimacy and trust can be developed through stronger relationships with local
communities. Both the survey and the interviews provided universal agreement that a
sustainability approach involves participation by stakeholders, including the wider
community, throughout the decision-making process.
The survey provided a mixed response on whether sustainability goals of
organisations are translated into the analysis that supports investment decision making.
Less than half of those surveyed stated that corporate sustainability commitments are
integrated into investment decision making. Hence, there is currently no systematic
approach to sustainability assessment as part of the business case. The survey and
interviews revealed that, across the industry, there is no uniform approach to
investment analysis. In terms of analysis techniques, the survey in the first phase of
research showed that a range of techniques are employed to undertake analysis. Some
organisations use either CBA or MCA and others use both techniques. Hence, some
organisations adopt methodologies that are seen as more subjective (Triple Bottom
Line and MCA), whereas others seek to adopt approaches aligned with formal
rationality (CBA or variants such as Advanced CBA). One respondent to the survey
indicated that the choice of technique was dependent on the problem being addressed.
The interviews also confirmed that the analysis techniques vary more widely, and that
some organisations use different techniques at different stages of project analysis. In
164
one case, MCA is used in the early planning and options analysis stage, and then CBA
is used to support decision making when a project advances into the capital works
programme for delivery. The choice of methodology is based on a range of institutional
factors, including governance frameworks and regulatory settings. For projects
identified to have strategic importance to an organisation, the interviews revealed some
common approaches to analysis and enablers for success.
In comparing responses from each phase of the research, one theme provided
markedly different responses. Questioning regarding the use of investment
management standards (such as those aligned with methods prescribed through the
Victorian Government’s Investment Management Standard framework) provided
different outcomes from each stage of research. Responses from the survey in the first
stage revealed that Investment Management techniques (including problem definition
and benefits assessment) are uniformly used to support analysis in investment decision
making (with 100% agreement from respondents). The interviews, however, revealed
that no formal guidance to Investment Management was used or adopted in practice
within the water sector. Instead, interviewees spoke of any overall intent to align
investment decision-making practices with corporate objectives. Some interviewees
noted that the state governments typically require that the Investment Management
Standard guidance only applies to High Value/ High Risk projects (that are over
$100m in value) and that the majority of projects delivered by water utilities came
under that threshold. On this basis, there appears to be a growing awareness and intent
to use investment management techniques, but that the actual application of investment
management techniques is still evolving in the water sector.
Table 7.1 summarises the responses from both phases of research in relation to
questions of the benefits of a sustainability approach and analysis techniques employed
to incorporate sustainability.
Incorporating sustainability in investment decision making for infrastructure projects 165
Table 7.1
Comparison of Quantitative and Qualitative results
Survey results Interview results (broad themes)
Why Sustainability
Sustainability provides long-term cost savings
Sustainability provides reputational benefits for
organisations
Sustainability provides environmental benefits
Sustainability provides a means to manage
climate change impacts
Sustainability incorporates community values
Sustainability builds value for the business in
managing resources more effectively
Some organisations see sustainability as part of
their branding
Sustainability is linked to liveability, an
important focus in the water industry
A sustainability focus aligns with resilience
Sustainability provides a long-term view and is
about leaving a legacy/ intergenerational equity
Sustainability is linked to environmental
enhancement and restoration
How important is the role of participation (by stakeholders, community etc) in decision making
Important/ critical Critical- organisations are looking at engaging
better
How relevant is the role of “Investment Logic” in decision making?
Relevant/ highly relevant No real understanding of formal investment logic
methodologies although there is strong
agreement that decision making needs to link to
corporate objectives.
What constitutes a sustainable approach in analysis techniques?
Various responses, but no uniform agreement:
• MCA
• CBA
• Life Cycle Assessment
• Incorporation of sustainability initiatives
Various responses:
• MCA (by some)
• TBL (by some)
• Advanced CBA (by some)
• LCA (generally agreed)
The literature review revealed that front-end decision making for projects, where
the business case provides supporting analysis, is critical to the strategic success of
projects. For those organisations that clearly commit to sustainability goals, achieving
166
sustainability outcomes through an organisation’s portfolio of projects is linked to
strategic success. In addressing the first research question, the responses to both the
survey and interviews revealed a spectrum of approaches to incorporating
sustainability in decision making. For some, the sustainability goals articulated by
organisations translate systematically to investment decision making. For others (more
than half of those surveyed), corporate sustainability goals only sometimes translate to
investment decision making. In addressing the first research question, it is clear that a
gap remains in practice to systematically translate sustainability commitments, goals
and targets to decision making at the front end of projects. With no universal approach,
the challenge remains to provide clear direction and guidance to infrastructure
providers on how sustainability may be incorporated into project selection and
decision making for infrastructure projects within a strong sustainability framework.
The sections that follow address this second research question.
Both phases of research highlighted some of the barriers that exist to stifle
considerations of sustainability in investment decision making. Many of the barriers
that were identified relate to resourcing- that is, having sufficient people with
appropriate capabilities to do the analysis and having sufficient budget to allow for
implementation. In addition, a key concern for water industry practitioners is the
regulatory oversight that often determines the methods of analysis that may be
employed. It is not within the scope of this research to explore these barriers in any
further detail, and this could be a matter for further research. Instead, this research
focuses on those factors that contribute to sustainability practice.
7.3 SUSTAINABILITY- A REFRESHED COMMITMENT
History provides numerous examples of civilisations that have emerged and
ultimately failed due to complex socio-political processes combined with the need to
manage limited resources effectively. Whether framed in terms of traditional beliefs,
philosophy or science, considerations of societies living in a balanced co-existence
both with nature and each other are compatible with models of sustainability. Since
the emergence of sustainability as a concept in the 1970s, with both the publication of
the book Limits to Growth by the Club of Rome and the United Nations Conference
on Human Development in Stockholm, commitments to sustainability continue to
evolve in the public sphere. With no single definition that is applied universally,
Incorporating sustainability in investment decision making for infrastructure projects 167
sustainability continues to be subject to a range of interpretations that may align with
the dominant stance or culture of an organisation at a point of time.
The interviews conducted through this research identified a ‘waxing and waning’
trend in terms of organisational commitments to sustainability over recent years. For
some, the term ‘sustainability’ is seen to be losing prominence, but the concept remains
alive. An initial scaling down of sustainability roles or titles in organisations has been
observed more recently, with new roles being created in areas such as liveability and
resilience. Infrastructure providers typically employ staff from a range of disciplines
and with various levels of training. For those staff members who do not see their
positions as relevant to sustainability, the concept may be difficult to understand, hence
breaking it down into components that include resilience, disaster management, risk
management, resource management (circular economy), liveability and community, is
seen to make the understanding of sustainability more tangible. On the other hand, for
some organisations, sustainability will always be integral to operations, regardless of
overall industry trends. In the case of one water utility described in the interviews,
leadership and management practices form part of an organisational culture that drives
a commitment to sustainability, and practices such as recruitment ensure that people
with a passion for sustainability are attracted to work in that organisation.
The release of the United Nations Sustainability Development Goals (SDGs) in
2015 has provided a major step for infrastructure providers to revitalise efforts that
address sustainable development in their operations. The SDGs form part of the UN
General Assembly’s 2030 Agenda for Sustainable Development, and the 17 SDGs aim
to address poverty, protect the environment and create opportunities for all, through
promoting sustainable, inclusive and equitable growth, whilst also tackling climate
change. These global goals set a framework at global, national and local levels for
sustainability and are now reflecting on government policy in Australia. Hence,
infrastructure providers have joined a growing list of companies across the world who
have committed to the United Nations Global Compact forming the world’s largest
corporate sustainability initiative. The UN Global Compact requires organisations to
commit to ten universal sustainability principles, together with supporting the UN
SDGs. For the water sector, SDG 6 (Clean Water and Sanitation) is a key priority, but
other goals also remain relevant, particularly SDG 11 (Sustainable Cities), SDG 13
(Climate Action) and SDG 17 (Partnerships). Of note, SDG 6.5 sets a goal to
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universally adopt integrated water resources management by 2030. A further feature
of the SDGs is an acknowledgement of the linkages that exist between various goals
and targets, and this may drive efforts to ensure better integration in sustainability
practice across sectors.
The SDGs also present the opportunity for governance frameworks to respond
through both goal setting in statutory instruments and policy formation. At a national
level, the Australian Government has committed to present its first Voluntary National
Review (VNR) at the UN High Level Political Forum (HLPF) in July 2018 and detail
Australia’s progress in achieving the 2030 Agenda. This reporting will require
concerted efforts to coordinate across commonwealth, state and local government
levels, to assess how public sector agencies are addressing SDGs. A key focus of the
Australian Government’s reporting are the public and private sector organisations that
have signed the UN Global Compact, demonstrating commitment and leadership to
sustainability. In the Australian water sector, both Yarra Valley Water and Melbourne
Water are signatories to the UN Global Compact. The SDGs provide a renewed focus
on sustainability and its role in addressing global problems. The challenge for
infrastructure providers is to translate these commitments to project level decision
making.
For infrastructure providers, strategic planning and goal setting for sustainability
may be expressed through a framework of corporate plans, policies and targets,
together with reporting on progress on a regular basis. The articulation of a clear
framework for sustainability aspirations provides an essential starting point for guiding
the operational sustainability responses for organisations. For example, Melbourne
Water state:
We consider the long term interests of the community and future generations,
and our solutions seek to balance environmental, social and financial
outcomes.
However, corporate plans and reports illustrate a wide range of responses to
sustainability, and individual organisations may reflect unique priorities and
viewpoints that relate to local issues. For some, sustainability is associated with
singular dimensions such as financial sustainability or ‘green’/ environmental matters,
whereas other organisations may consider sustainability in terms of dualities such as
green economy. A broader understanding of sustainability aligns with ‘triple bottom
Incorporating sustainability in investment decision making for infrastructure projects 169
line’ thinking that incorporates social, environmental and economic dimensions. Even
so, notions of weak and strong sustainability prevail. Strong sustainability is
characterised by a fully integrated assessment of the three dimensions at both a
strategic and an operational level. On the other hand, weak sustainability may be
characterised by considering only selected items within the three dimensions of
sustainability where selection is based on ease of assessment or measurability.
As organisations make commitments to sustainability, there is an expectation
that they will follow through and implement sustainable practices. Projects and
programs of work are key mechanisms for infrastructure providers to realise
aspirations outlined in corporate plans. In project management, it is widely understood
that decision making at the front-end of projects is critical to ensuring long-term
project success through delivering benefits and creating value. Hence, decision making
that is based on the findings of the business case for infrastructure investments is
critical to optimising sustainability outcomes. A sustainable approach requires the
assessment of a broad range of solutions ranging from ‘do nothing’ to policy initiatives
(such as demand management or charging mechanisms) to ‘hard’ infrastructure
solutions.
Some sustainability initiatives may involve new or non-traditional approaches to
design or delivery or may involve the re-purposing of redundant assets. The New York
High Line is a notable international example, where a disused rail line was converted
into a linear park that has been embraced by the local community and visitors alike.
In Australia, the Greening the Pipeline project in Melbourne has been initiated to
transform an outfall sewer reserve into a parkland, where efficient water management
practices can be showcased. In the short term, investments in such initiatives may
require significant investments with no real returns through direct revenue. Over the
long term, multiple benefits may be realised. These may include
• Long-term cost savings in terms of operations and maintenance, or
removal of ageing assets;
• Environmental benefits such as the reintroduction of indigenous species
of flora and fauna and improved biodiversity outcomes;
• Increasing the vegetation coverage in urban areas and hence addressing
urban heat island effects that will increase with climate change impacts;
170
• Opportunities for local communities to come together through the
provision of community gardens and other communal activities; and
• Enhancing the reputation of infrastructure providers with increased
levels of trust in the local community.
Despite the benefits that are increasingly being realised through sustainable
projects, an integrated approach to sustainability assessment remains elusive. The
importance and relevance of sustainability is based on its ability to better frame
responses to complex problems such as climate change, resource depletion, population
growth and social changes. Sustainability practice involves an understanding that both
analysis and decisions occur in complex, open systems. For investment analysis,
infrastructure projects contribute to a wider network with linkages and inter-
relationships between the elements of the system under assessment. However, current
approaches to investment analysis often favour approaches that focus on a singular
dimension of financial prudence. In decision making, a range of stakeholders,
including community users, have strong interests in the outcome of major investment
decisions. And yet, institutional factors, such as regulatory oversight, continue to
favour efficiency and short-term thinking over the inter-generational considerations
that sustainability requires.
The literature has revealed various analysis approaches that have been proposed
over time to frame sustainability assessment. Many approaches fail to address the
‘integratedness’ of sustainability. Sustainability assessment that uses selected
indicators within the economic, environmental and social domains based on
convenience and measurability present a ‘weak’ approach to sustainability analysis.
Alternatively, a ‘strong’ sustainability approach to sustainability assessment, proposed
in this research, seeks to identify the full range of values across all three sustainability
domains, and takes account of the connections and inter-relationships between these
values. Notions of amenity, place-making, social cohesion, liveability, community
values and the like, all contribute to the sustainability outcomes of infrastructure
investments and these can only be explored and analysed through deep engagement
with a range of stakeholders, including end-users, before investment decisions are
made. The following sections discuss the role of participation, benefits identification
and assessment, value assessment and trade-offs, within a sustainability appraisal
model.
Incorporating sustainability in investment decision making for infrastructure projects 171
7.4 PARTICIPATION
The economist and Nobel Economics Laureate, Elinor Ostrom (1933-2012),
wrote extensively on ‘governing the commons’ with an understanding that there is no
‘one size fits all’ solution to governing resources for the common good. If all
individuals involved in decision making were considered rational, they would be
characterised to know
1. All possible strategies available for a situation;
2. Which outcomes are linked to each strategy; and
3. A rank order for preference of outcomes based on individual preference
measured by utility (Ostrom, 2010).
However, Ostrom noted that rational individuals are also invested in social
dilemmas involving matters of trust and reciprocity. In order to deal with matters of
complexity involving the common good, Ostrom’s later writings acknowledged the
need for institutions that bring out the best in people and the need for participation and
cooperation by individuals affected by decisions.
Participation refers to collaborative processes of working with multiple
stakeholders, including end users, to build knowledge, to develop trust and
understanding and to manage uncertainty in decision making. Participation in
infrastructure decision making looks beyond participation models within political
systems such as voting, lobbying and protesting, and instead looks at deliberative
processes that allow the considered examination of the technical, environmental and
social aspects of a given initiative. This takes planning and analysis outside the domain
of engineers, technical specialists or economists employed by infrastructure providers,
and broadens the assessment to take account of local knowledge that may not be
formally documented. For infrastructure providers, participation activities are aligned
with a sustainability approach in the delivery of major initiatives, and address Goal 17
of the UN SDGs.
In the interviews, it was stated that ‘we understand that it is probably a greater
benefit to the business to spend money and time in engagement up front in the process-
how much is that worth in dollar terms in not stuffing up and having to go back and
change your design somewhere along the line and do works that you never planned to
do?” Other benefits of participation in decision making include:
172
• Helping to define complex problems and find non-traditional pathways that
may not be apparent through top-down approaches;
• Drawing on a wider range of expertise and practical experience of those
working in the field;
• Improving the quality of assessment based on the understanding of values,
interests and concerns of participants. This may include a greater
understanding of indigenous knowledge and indigenous concepts of
‘country’;
• Creating greater legitimacy of decisions where those who are interested and
involved understand the trade-offs that need to be made, see decisions as
fair and competent and abiding with laws and regulations;
• Building the capacity of those involved in decision making in areas of
communication, technical information and mediation, as well as future
decision making;
• Building trust between participants; and
• Mobilising potential project champions, sponsors, donors and funders.
(from National Research Council, 2008; Jackson et al., 2012; Head, 2011)
However, decision making for infrastructure projects in Australia remains
expert-driven and technocratic or is captured by closed networks. This may, in part, be
due to the political nature of decisions, supported by the inflexibility of institutional
configurations to engage more widely. Whereas infrastructure providers report
publicly on a range of activities such as planning and operational activities, business
case documents remain confidential, or when released are heavily redacted to remove
aspects that may be challenged or seen to be politically sensitive.
Participation in front-end decision making need not be a new or challenging
process for infrastructure providers. Increasingly, legislation requires water authorities
to engage with communities in planning or pricing decisions. At the same time,
community expectations have grown to ensure that across industry, infrastructure
providers typically engage with the community in the construction phase of project
delivery. In addition, broader engagement activities may be employed by other areas
of government such as local government, whose activities typically address local
Incorporating sustainability in investment decision making for infrastructure projects 173
community priorities through mechanisms such as community indicators. Taking
account of these related engagement activities, new approaches to participation in
investment decision making for projects may also be formalised as outlined in Figure
7.1.
Figure 7.1. Aspects of current participatory processes that may influence new approaches to participation in investment decision making
As part of corporate planning and priority setting, water authorities are
encouraged to employ participation processes involving the community and customers
and provide ‘shared value’ that looks beyond core services to address social and
community values (WSAA, 2017)19. The Essential Services Commission (ESC), the
economic regulator in Victoria, now requires that price submissions from water
19 “Shared Value” is put forward by WSAA as the next generation of focus for the water industry following on from previous efforts to address public health, efficiency and water security. A shared value model puts customers and the community at the centre of decision making, and takes water businesses providing services that may go beyond the provision of water and sewerage services.
Participation in investment
decision making for
projects
Regulatory or statutory
engagement requirements
Engagement activities at a
local or regional
level
Project delivery communications
activities
174
authorities demonstrate meaningful engagement with customers and identify their
concerns, interests and priorities (Essential Services Commission, 2016). The
interviews revealed a range of engagement techniques that are employed to understand
customer priorities. No uniform technique is applied to participatory processes, but
rather the design of engagement activities should be appropriate to the goals of the
situation under review. From a regulatory viewpoint, the requirement to engage with
customers is new and untested, and currently only applies to the state of Victoria.
However, over time, the learning from this approach may potentially be transferred to
investment decision making and applied more widely across all jurisdictions.
Through the interviews, it was identified that communications teams are
typically established in water utilities to manage engagement with local communities
when projects are in construction. It was noted that the introduction of stakeholder
engagement teams is a relatively new area of practice within water utilities, as
infrastructure providers were initially established with a core technology focus. Such
practices are in accord with guidance provided by the sustainability rating tool
developed by the Infrastructure Sustainability Council of Australia (ISCA) that
rewards projects that incorporate stakeholder participation. A commonly used
approach to support communications activities is the International Association of
Public Participation (IAP2)’s public participation spectrum20 that identifies different
levels of engagement that may apply to different circumstances in project delivery as
informing, consulting, involving, collaborating or empowering public participants. For
the water industry, the shift over time to participative processes within the delivery
phase of projects provides a strong model to shift to more collaborative processes in
business case development in the future.
At local and regional levels, government and local government authorities
continue to engage with local communities on a range of issues from health initiatives
to local planning provisions. The ability of local governments to engage widely and
deeply with local communities was noted in the interviews, and those water authorities
that sit within local government structures may benefit from this relative strength. The
Gold Coast Water Futures project undertaken by Gold Coast Water (within Gold Coast
20 Details of the spectrum are available on the IAP2 website: https://www.iap2.org.au/About-Us/About-IAP2-Australasia-/Spectrum
Incorporating sustainability in investment decision making for infrastructure projects 175
City Council) in response to the millennial drought was cited widely as an exemplar
of community engagement in planning and priority setting. More recently, the City of
Melbourne has formed citizens’ juries to provide input into the Future Melbourne
Strategy and the development of a ten-year financial plan. The levels of trust and
goodwill required by all parties involved in these collaborative planning processes
provide a template that may be applied to investment appraisal and decision making
for infrastructure projects.
The evidence provided in both stages of this research identified an understanding
that participation involving representatives of the wider community or stakeholder
groups is critical in a sustainable framework. In practice, it was also acknowledged
that participation processes are difficult, and that some projects have not had a high
level of success in attempts to collaborate more widely with stakeholders and the
community. The research revealed two key questions that are critical to the design of
participatory processes:
• Who should participate in decision making?
• How should the process be conducted?
A collaborative approach to decision making acknowledges the limitations of
political representatives or executive staff to fully explore the issues and opportunities
available in infrastructure appraisal. Stakeholder engagement typically involves those
with more formal roles in government or representative organisations, and community
engagement refers to broader engagement with the general public. Recruitment
methodologies may vary and the selection of participants and their degree of influence
are critical issues in participatory design.
The choice of participants must be complemented by considerations of how the
participants come together and how they make decisions. The design of collaborative
processes requires the consideration of a range of factors including the nature of the
organisation that is conducting the process and the attributes of the group that is being
engaged. The collaborative design process may involve co-design of the approach with
citizens that may also address the variety of goals and expectations of the process.
Table 7.2 provides an outline of concepts and corresponding participatory instruments
or methods for participation.
176
Table 7.2
Participatory design instruments (source: National Research Council, 2008)
Concept Goal Typical Instrument
Functionalist Improve quality of decision Delphi workshops, citizen
advisory committees
Neoliberal Representation of values
proportional to impact
Referendum, focus groups,
polling, negotiated rule making,
mediation
Deliberative Considerations of truth and validity Discourse orientated models,
round tables, forums, deliberative
juries
Anthropological Use of common sense in disputes Consensus, conference, citizen
juries, planning cells
Emancipatory Empowerment of less advantaged
groups
Action groups, town meetings,
tribunals
Postmodern/ reflexive Demonstration of plurality and
legitimacy
Forums, conference, panel
discussions
The choice of participatory design should address the specific objectives of the
engagement. Participation is central to a sustainability model and should be integrated
through all stages of the decision process. The role of participation will be explored in
the following sections, and particularly in activities involving the identification of
values and the consideration of trade-offs.
7.5 THE ROLE OF BENEFITS AND VALUE- A SUSTAINABILITY INVESTMENT LOGIC
7.5.1 From infrastructure business models to a sustainability investment logic
Through the interviews, it became evident that the term benefit within the CBA
paradigm denotes a range of meanings that include both benefit and value. Hence, the
benefits of CBA are most often described in terms of monetary value. In addressing
this apparent conflation of benefit and value, the following distinction may be applied
for the two terms (based on Chan et al. (2012) and Sagoff (2000)):
• Benefits result from the production of services to society (net welfare
gains)
Incorporating sustainability in investment decision making for infrastructure projects 177
• Value represents the relative worth of services based on human
preferences.
The distinction between benefits and value may also be illustrated within the
framework of an infrastructure business model hierarchy shown in Figure 7.2.
Figure 7.2. Infrastructure business model hierarchy (adapted from Bryson et al., 2014)
At the top of the infrastructure business model hierarchy are the impacts
associated with investments. Impacts relate to contributions of projects or initiatives
to broader goals such Gross Regional Product or pollution targets and often are the
result of the cumulative impact of a portfolio of projects and policy initiatives.
The benefits, or outcomes, relate to the economic, social and environmental
impacts, which may include increased productivity in business, enhanced personal
mobility and reductions in waste. These are measurable targets that are directly
attributable to a project and may be monitored at relevant stages of a project lifecycle.
Value relates to the outputs of the investment decision, and the tangible and intangible
value created by an investment. Value may be realised by individuals or groups
impacted by an investment. The Infrastructure Business Model is underpinned by the
inputs and activities associated with the infrastructure investment that include costing,
financing and funding infrastructure investments. These aspects will be discussed
further in the development of an overall investment model.
Impact
Outcomes (Benefits)
Outputs (Value)
Inputs and activities (Cost and Funding)
178
Infrastructure investments provide both benefits and value, and these should be
captured in investment appraisal. The relationship between benefits and value is
proposed in this research through a new concept that, in this research, is termed as
Sustainability Investment Logic. Sustainability Investment Logic builds on existing
guidance for investment logic mapping (ILM) that is promoted by various
governments across Australia including Victoria (Department of Treasury and Finance
or DTF) and Queensland (Building Queensland). According to DTF guidance, ILM is
a tool to ‘tell the investment story’ whereby every investment should be able to
‘describe how it is contributing to the benefits the organisation is seeking’ (State of
Victoria, 2017). Benefits identification and management is an analysis technique that
is growing in significance across the disciplines of project and program management
with the aim of linking project activities to strategic goals. In project management
theory, benefits management moves the focus of projects from achieving efficiency in
outputs (within the time, cost, quality triangle) to effectiveness in outcomes through
addressing business objectives. ILM allows a ‘clear line of sight from strategy to
initiative’ (Jenner, 2010, p. 66). Guidance on ILM varies across jurisdictions, however,
the key principles include linking an infrastructure problem (or opportunity) with
benefits and subsequent solutions. ILM also requires that non-asset interventions, such
as policy initiatives, be assessed as part of the solution. Hence, the solution may be a
fully non-asset solution (an example being the introduction of charges and other
mechanisms to manage demand) or a mix of asset and non-asset solutions. Figure 7.3
illustrates the typical elements of an ILM.
Incorporating sustainability in investment decision making for infrastructure projects 179
Figure 7.3. Typical elements of ILM (adapted from review of Victorian and Queensland Government guidance)
The Sustainability Investment Logic approach proposed by this research adds
the further dimension of value to the logic map. Using the dimensions of value derived
from the results of the qualitative research phase, Figure 7.4 has been developed to
capture four ‘building blocks’ of value described in the interviews.
Benefit2
Benefits Solution
Benefit3
Benefit1 AssetSolution
Non-Assetinterventions
Driver
Objective#1
Objective#2
ProblemorOpportunity
180
Figure 7.4. A Sustainability Investment Logic model
The following sections describe more fully the aspects of benefits and values within
this sustainability investment logic model.
7.5.2 Benefits
The interviews identified three key dimensions of sustainability benefits
associated with infrastructure investments. These are community benefits, customer
benefits and business benefits.
Community benefits that are attributable to a project relate to the wider benefits
that are generated beyond the boundaries of the initiating organisation. For a water
authority, community benefits may accrue through investments in integrated water
management that recognise the broader benefits that extend beyond jurisdictional
boundaries in areas such as upstream flood mitigation effects or downstream water
quality improvements. One interviewee noted that:
when the rubber hits the road to invest, no one has got a way to work around
the different boundaries and finances of different organisations, whether it’s
councils or government, because often people putting up the cash are not the
ones who necessarily benefit.
CustomerBenefits
Benefits Solution Value
BusinessBenefits
CommunityBenefits AssetSolution
Non-Assetinterventions
EconomicValue
EcologicalValue
SocialValue
DevelopmentValue
Driver
Objective#1
Objective#2
ProblemorOpportunity
Incorporating sustainability in investment decision making for infrastructure projects 181
On the other hand, trans-boundary issues have the potential to have negative
impacts on surrounding areas. In large cities, ‘patchy’ approaches to infrastructure
solutions have the potential to compromise amenity, as optimal solutions for water
resource management do not necessarily fit neatly within bounded governance
arrangements (Floyd et al., 2014). In discussing the recovery efforts in post-
earthquake Christchurch, MacAskill & Guthrie (2017) described misaligned remits
across organisations that had the potential to limit efforts to fix land drainage issues.
In this case, community benefits were realised by recognising the wider context of the
problem around stormwater assets, and implementing new institutional models that
allowed greater collaboration across pre-existing boundaries.
For water authorities, customers may include all those interacting with the
organisation. This may include direct customers for services such as businesses and
residents, but also developers requiring approvals and other local service providers
(including local government, power and communications providers, water retailers,
catchment management groups and the like). In the interviews, it was stated that:
a particular person can be a different type of customer at any point of time.
They can be someone who is doing a development on their house so they go
through our development line- development services. They can also be
someone who on the weekend goes to the creek so they are a different
customer then. So at the highest level, everyone is a customer. If we want to
think about the particular services that we deliver, we might think about them
in different segments about how we interact with them.
In recognising the importance of customers, water utilities are typically required
to adopt a Customer Charter that outlines the organisation’s commitments to standards
of service delivery and the rights and responsibilities of customers. In moving beyond
compliance with regulatory requirements, some water utilities also recognise the
importance of understanding the preferences and needs of customers through working
with customer groups and through undertaking regular customer surveys. As part of
price submissions to the economic regulator in Victoria, water businesses are now
182
expected to undertake a higher level of engagement with customers.21 Through
effective customer engagement, infrastructure providers may be better placed to
understand customer needs and to direct investments that deliver optimal customer
benefits.
A focus on customer benefits may also lead to business benefits. As monopoly
businesses, water entities place high importance on building legitimacy and trust with
customers. Whilst self-promotion through mechanisms such as annual reporting
contributes to customers’ understanding the role of water businesses, water business
may also adopt principled positions in areas as environmental stewardship, social
welfare or local economic development (Ogden & Clarke, 2005). In the interviews, it
was stated that:
people will respect their water corporation- they know who they are – they
have a social licence to do things in their communities as well- through their
definition of responsibilities and what they do gives them a certain amount of
kudos to go out and do certain things…
In adopting a principled position on key issues, water utilities may gain support
and trust from customers and the wider community. Yarra Valley Water’s ‘Choose
Tap’ initiative, seeks to promote the choice of tap water over bottled water and other
hydration products in seeking improved health and environmental outcomes for the
wider community. In adopting a public education role on this issue, Yarra Valley
Water can be seen as a leader and innovator in effecting societal change. This may
lead to reputational benefits for that organisation. For a water utility, the shaping of
infrastructure investments may take account of the wider societal issues that the
organisation seeks to support though its operations.
Benefits are performance measures represented by Key Performance Indicators
(KPIs) that may be developed through a logic mapping approach to explicitly link
goals to outcomes and outputs. Using this approach, goals should align with best
practice in developing indicators using SMART criteria (goals should be specific,
measurable, achievable, relevant and have a timeframe for completion). A structured
21 As noted previously, the Essential Services Commission (ESC)-economic regulator in Victoria- has introduced new requirements for pricing submissions from water businesses to demonstrate meaningful engagement with customers. Other states (with economic regulators) have no similar requirements at the time of writing.
Incorporating sustainability in investment decision making for infrastructure projects 183
approach to formulating target benefits should be employed through the involvement
of relevant stakeholders and the inclusion of benchmarking as part of quality assurance
(Chih & Zwikael, 2015).
As an extension of benefits assessment, benefits realisation ensures that planned
benefits are reviewed and evaluated following execution and that new benefits may be
identified in an investment cycle. Benefits realisation is compatible with notions of
sustainable development (incorporating a holistic management approach that
integrates economic, social and environmental considerations). It is recommended that
• Project benefits should be determined before the outputs are defined;
• Benefits should be determined through co-creation involving multiple,
independent stakeholders;
• Benefits co-creation requires continual alignment with project goals and
objectives; and
• A lifecycle approach to benefits management is required, whereby benefits
are continually reviewed and assessed, including at project completion
(Keeys & Huemann, 2017).
7.5.3 Value
Across Australia, government departments that are responsible for water
planning typically formulate policy documents that direct water businesses on
government priorities and aim to achieve a uniform and coordinated approach to water
management. As an example, Water for Victoria represents the key policy position of
the Victorian Government on water resource management and sets out the priorities
for water authorities in that state. For Victoria, new areas of government focus that are
outlined in Water for Victoria relate to aboriginal values of water and recreational
values. For water authorities, a key challenge is for operational activities to respond
to these new policy directions that deal with values.
This research does not seek to dispute the application of economic valuation
techniques that are used in planning studies. The interviews revealed several instances
where robust economic evaluations were successfully undertaken as part of water
business decision making. However, the interviews also revealed instances when the
assignment of value to projects using market-based methods such as hedonic pricing
184
or willingness to pay (WTP) yielded results that simply could not justify projects that
were seen to have strategic value.
This research has highlighted the questions that continue to be raised on the
ability of traditional economic approaches (based on maximising utility or usefulness
from scarce resources) to align with the economics of sustainability that have different
boundaries, goals and rules. As discussed previously in Chapter 3, neo-classical
approaches to value are founded on considerations of both exchange value and utility
value, and are represented in financial accounting terms. This narrow approach
disregards the intangible dimensions that are increasingly recognised as contributing
to value. In assessing values using the measurement unit of money, only part of the
true or total value of a service can be captured. Whilst research efforts continue to
address the broadening of monetary valuations on ecosystem services, an integrated
approach to assessing the full range of economic, social and environmental factors
remains a challenge. By broadening the understanding of value to include ‘underlying
ideals’ that form the basis of intangible dimensions, decision making may better
respond to ‘hidden aspects’ of more complex problems (Chan et al., 2012). Economic
valuations in CBA fail to fully represent the systemic values of infrastructure and the
inter-relationships between those values.
Responses from the interviews highlighted the importance of fully investigating
and understanding the range of values attributable to infrastructure investments. These
include
• The assessment of value and an understanding of attribution of the gains that
have been delivered from an investment may inform who should contribute
to funding infrastructure (including where there may be a case for
government contributions through general revenue);
• A clear understanding of value may allow the trade-offs between value
dimensions to be fully transparent; and
• The articulation of value created may support the justification of preferred
solutions, particularly in dialogue with regulators and broader stakeholders.
A challenge for infrastructure provision is to achieve ‘a better balance between
quantitative and qualitative appraisal, and enable a balanced, multidimensional
assessment of value (Brown & Robertson, 2014, p.86). Recognising that infrastructure
Incorporating sustainability in investment decision making for infrastructure projects 185
has the potential to contribute to social, economic and environmental improvements,
four value propositions have been adopted as building blocks for infrastructure
investments. These are economic value; development value; ecological value and
social value. These categories have been integrated into the coded results from
interview responses, and hence Figure 7.5 illustrates the value creation stream that
forms part of a Sustainability Investment Logic.
Figure 7.5. Value Creation- the dimensions of value
Value assessment should avoid the simplistic, but often used, approach of
compartmentalising values into the sustainability domains, and creating a sense of
equity between each domain. Instead, the assessment of value must recognise the
linkages between value domains. As an example, indigenous values relating to hunting
and fishing in water bodies may be considered economic, social and cultural (Jackson,
2006). In the case of waste water treatment works, treated effluent may provide a range
of economic, ecological and social values, whereby resources are extracted and re-
used. In the case of the Western Treatment Plant in Victoria, the established wetlands
provide ecological value in harbouring migratory birds, economic value through
visitation by the ornithological community and eco-tourism, and social value though
education and community development activities. These and other values derived from
the facility are interlinked across the value domains.
Ecological Value
EconomicValue
Development Value
Social value
186
The assessment of value should involve the participation by a range of interest
groups to ensure deliberation, negotiation and debate, providing an integrated
understanding across the value domains. Participation in the identification and
monitoring of value creation provides a level of transparency and accountability for
infrastructure providers in ensuring that the values that are identified are real and
appropriate. A participatory process also provides a forum that enables the effective
trade-off between values.
The four dimensions of value that were addressed in interviews are discussed in
more detail below.
Economic value
The Dublin Principles22 remain a key standard for water resource management,
and one of the four principles states that ‘water has an economic value in all its
competing uses and should be recognised as an economic good.’
Investments in water resource projects, such as urban and rural water supply,
irrigation, wastewater treatment, flood control or drainage management support
economic development and public welfare. Infrastructure contributes to economic
growth through direct investment stimulus, generating economic efficiency and
facilitating endogenous growth. Infrastructure contributes to regional competitiveness,
job creation and productivity gains. Externalities refer to the impacts of projects on
wider economic activity. Also referred to as Wider Economic Benefits (WEBs), there
remains some debate as to whether these WEBs may be included in standard CBA.
For example, any submissions to Infrastructure Australia (specifically relating to
projects of national interest) must firstly provide CBAs without WEBs, and then with
WEBs, as a sensitivity test (Infrastructure Australia, 2009). WEB analysis may include
production functions, business impacts and labour impacts. Water services are
associated with public value externalities that may include (from Solanes & Gonzalez-
Villarreal, 1999)
• the impacts on economic activity;
22 The Dublin Principles are based on the Dublin Statement on Water and Sustainable Development of 1992 when water experts met at the International Conference on Water and the Environment to discuss water issues including water scarcity and water-based conflict.
Incorporating sustainability in investment decision making for infrastructure projects 187
• the impacts on environmental systems;
• the impacts on aquatic life and resources;
• the impacts on public recreation and access;
• the effects on public health;
• the risk of harm to the public or service providers;
• the impacts on water conservation; and
• other relevant local matters.
Integrated water cycle management (IWCM) initiatives, also referred to as
green infrastructure, present the opportunity to create multiple values that include
climate change mitigation, flooding and water quality improvements, thermal comfort
and reduced energy use. In a submission to the Australian Senate’s Stormwater
Inquiry, the Australia Academy of Technological Sciences and Engineering (ATSE)
called for economic evaluation models to be broadened to assess the true value of
investments made into green infrastructure (ATSCE, 2015). The difficulties in
articulating the full range of values associated with alternative infrastructure delivery
models were confirmed in the interviews. Specific issues raised in relation to
limitations in modelling economic values included
• The base data (such as demographics) used in economic analysis is critical,
requiring cross-checking and validation. Often, the available sources of data
(such as government census data) are obsolete and not ‘fit for purpose’;
• The assumptions that underpin any economic analysis are critical, and are
based on the knowledge and expertise of the analyst. Often there is no ability
for wider input into the formulation of assumptions. These assumptions
would benefit from being rigorously interrogated and debated; and
• Economic value calculations typically yield higher impacts in areas of
higher population density, hence there are issues of equity if modelled
economic value alone is the determinant of infrastructure investment.
Development value
Through the centuries, infrastructure has played a key role in facilitating urban
development and shaping the urban domain. Melbourne’s Maroondah Reservoir
188
provides one example of how the Melbourne and Metropolitan Board of Works
(MMBW) provided not only a functional water storage to supply the city of Melbourne
in the 1920s and beyond, but a dam wall and walkway with decorative balustrading,
an outlet tower with classical design elements. The parkland surrounds, with waterfall
features, comprised the first public landscape that was incorporated into a reservoir
design in the state of Victoria (Andrews, 2015). This exercise in monument building
was a public relations success, and the dam surrounds are part of the tourism mix for
visitors to the nearby township of Healesville. To the west of Melbourne, the Western
Treatment Plant was initiated for the primary purpose of treating effluent and
improving discharges to Port Phillip Bay. Now, recycled water from the treatment
plant is used for irrigation, supporting vegetable production on agricultural land
development within the Werribee Irrigation District. The Western Treatment Plant site
is also a declared Ramsar site and regarded as a prime area for birdwatching, hosting
visitors from across the world to witness a range of waterbirds, as well as threatened
and vagrant species23.
Development value represents the impacts to property value or ‘uplift’ resulting
from infrastructure investments. Mechanisms such as value capture may provide
guidance in identifying directs and indirect revenue streams through such uplift. Value
capture has been adopted by governments across Australia through policies and
planning activities, based on an understanding of the wider value that infrastructure
provides to the urban environment. The Australian Government’s Smart Cities Plan24
refers to value capture as ‘the development and sale of land above or adjacent to
transport interchanges or government owned land’. Furthermore, value capture ‘uses
a share of this increased value to help finance the infrastructure responsible for the
uplift’ (Commonwealth of Australia, 2016b). Governments are now looking at value
23 A history of the site can be found on the Melbourne Water website, together with a link to further details on bird watching activities: https://www.melbournewater.com.au/aboutus/historyandheritage/historyofsewerage/pages/history-of-the-western-treatment-plant.aspx 24 Released in 2016, the Smart Cities Plan is the federal-level policy for metropolitan and regional cities, residing in the Department of Prime Minister and Cabinet. The plan can be accessed at https://cities.dpmc.gov.au/smart-cities-plan
Incorporating sustainability in investment decision making for infrastructure projects 189
capture as a potential revenue stream for infrastructure projects to offset the funding
required from general government revenue.
The commercial nature of water businesses requires that pricing mechanisms be
established and that these form the basis for funding new infrastructure investments
(subject to regulatory reviews). For water businesses, development value may be
realised through new infrastructure generating new customers and income streams, or
through realising the value of land and assets.
The interviews highlighted the need for caution in embracing the financial
opportunities that value capture may provide. Some water utilities traditionally own
large land parcels set aside for future activities to service growing population bases.
With urban encroachment, these properties typically increase in value and have the
potential for wealth-creating, private development. The opportunity to raise revenue
through asset sales is a tempting prospect for infrastructure agencies. However, before
contemplating land or asset sales, utilities need to better understand the potential of
these assets from both a business perspective and a whole-of-government perspective,
and this may be done through long-term planning activities for asset portfolios.
Ecological Value
The understanding of value in relation to ecological systems provides a starting
point for organisations to develop policies and responses to the UN Sustainable
Development Goals. Yarra Valley Water has developed an Integrated Profit and Loss
(IPL) report to measure both the impacts of its operations and value created across the
four capitals: natural, social, human, financial25. The City of Melbourne has estimated
the worth of its trees as $650 million, thus informing efforts to manage its urban forest
in response to climate change and general decline through ageing. The City of
Melbourne26 states that the benefits of an urban forest
• Provide shade and cool our cities;
25 Yarra Valley Water’s first Integrated Profit and Loss Statement was released in 2016. The report states that the water business provides $72.4 billion of benefits for the environment, its employees and society in 2014/15. Details are on the YVW website: https://www.yvw.com.au/about-us/news-room/yarra-valley-water-provides-au724-million-benefits-environment-and-society 26 From the City of Melbourne website: http://www.melbourne.vic.gov.au/SiteCollectionDocuments/urban-forest-strategy.pdf
190
• Reduce stormwater flows and nutrient loads;
• Reduce air pollution, air-borne particulates and greenhouse gas emissions;
and
• Provide habitat and enhance levels of biodiversity (City of Melbourne,
2012).
As noted earlier, Total Economic Value (TEV) is used to describe the broad
categories of ‘ecosystem services’ associated with water resources that, according to
the OECD (2006), may include:
• Provisioning services- including products obtained such as food and crops;
• Regulating services- improvements such as air quality from the regulation
of ecosystem processes;
• Cultural services-including spiritual enrichment, cognitive development or
recreational use; and
• Supporting services necessary for the production of all other ecosystem
services.
The interviews revealed that elements of ecological value or impact could be
derived through modelling and analysis. Previous government policy that set a pricing
mechanism for carbon, and subsequent policies that establish greenhouse gas emission
reduction targets, have also provided a basis to quantify and evaluate opportunities to
reduce greenhouse gas emissions. Similarly, the costs of other air pollutants can be
modelled and assessed. In addressing water quality impacts, pricing mechanisms
already exist, whereby any new development is subject to offset charges based on
modelling of nitrogen load into local water bodies. These charges are derived through
knowledge of the treatment costs associated with pollutants.
The interviews also revealed issues of scalability in extrapolating broad regional
level analysis to a local, project level. Various studies have assigned values to
environmental assets, including the Great Barrier Reef (with estimated economic,
social and icon asset value of $56 billion) and the City of Melbourne’s urban forest/
council tree cover (with estimated amenity value of $650 million). Using the example
of trees, one interviewee considered that the translation of overall tree values for the
City of Melbourne to a local scale appeared to allow investment in urban improvement
Incorporating sustainability in investment decision making for infrastructure projects 191
works that would be difficult to justify for a regulated water provider. On the other
hand, broader values (such as unwritten heritage significance or location-specific
amenity values) emerge at a local level when a project requires the removal of trees.
The application of marginal values, derived from broader studies, is difficult to transfer
in the absence of local, site-specific knowledge and analysis.
The literature review identified key methodologies used in economic appraisal
associated with ecosystem services as below. This list provided below in Table 7.3 is
not exhaustive27, but represents common methods in ecosystem evaluation.
Table 7.3
Common valuation techniques
Valuation Technique Description
Hedonic Pricing Use of marketed value of goods to measure the implicit price of non-
market good
Travel Cost Use of travel surveys based on observed travel and time expenditure
Productive Function Assessing the productive value of ecosystems
Replacement Cost Using the cost of a man-made substitute of an environmental asset
Benefit Transfer Use of values associated with previous studies to assign value to new
case
Contingent Valuation
Method
Use of surveys to determine what people are Willing to Pay, or Accept
for a given good or service
Choice Modelling Method Use of surveys where respondents choose a preferred option from a
range of alternatives
Life Satisfaction Analysis Use of surveys on life satisfaction as an econometric measure of
environmental conditions
27 Guidance also promotes further methods such as proxy valuing and defensive expenditure.
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Of these techniques, the use of Willingness to Pay (WTP) studies was discussed
by several interviewees as an analysis tool in both project specific work, and in overall
price submissions to the regulator. WTP studies are useful in building the value profile
of an infrastructure investment, however the interviews revealed that
• A WTP study alone does not represent the full value of ecological values
associated with infrastructure investments; and
• WTP studies are useful in gauging acceptability of a proposal but the
quantum figure derived does not necessarily represent what people would
actually pay for a service. In this case, it was stated that there needed to be
a form of “reality check” applied to the outcomes of WTP studies associated
with ecosystem services.
Hedonic pricing methods are also commonly used to assess value creation
associated with infrastructure investments. The term is attributed to the 1939 work of
Andrew Court, who used the term in applying statistical techniques to economics. The
hedonic pricing method seeks to estimate the value of non-market goods through
observations on the real choices made in actual markets. In practical application,
hedonic pricing is largely used to derive a value associated with marginal increases in
property valuations realised through proximity to an environmental asset, such as a
waterway or park. Critiques of hedonic pricing methods suggest that property pricing
may be influenced by a range of factors such as structural attributes, locational
attributes, neighbourhood attributes and environmental attributes, whereby attribution
and causality is difficult to ascribe.
A growing body of work is focused on collating and managing values derived
from detailed studies to establish and maintain databases of ecosystem values. Benefits
transfer is used when budgets or timeframes do not warrant value analysis that is
specific to the problem at hand. Techniques for value transfer may include meta-
regression of existing studies, development of a transfer function or more simplistic
point value transfers, whereby point transfers are most commonly used (Mekala, et al.,
2015). One interviewee noted,
But it isn't always easy to find the off the shelf study… are you ever going to
be able to get to a position where you can pick a simple off-the-shelf number
Incorporating sustainability in investment decision making for infrastructure projects 193
or do you have to accept that that you might want to proceed from the other
way up?
A range of tools are available that provide quantitative and qualitative
assessment of values attributable to ecosystem services. These tools provide ‘a
promising way to communicate resource management trade-offs’ in development or
extractive resource use (Bagstad et al., 2013, p. e35). However, the development of
place-specific tools (applicable at a project level), have long lead times and require
specialist resources from consultants and/or universities. Even so, the values that are
derived for a given ecosystem assessment may vary depending on the position of the
analyst, prompting calls for valuation studies to adopt a ‘value pluralism’ approach
rather than the use of a singular unit value, which may more effectively inform
decisions in the urban domain (Gómez-Baggethun & Barton, 2013).
Social Value
The interviews revealed that, in the social domain, considerations of the positive
health impacts associated with water initiatives are reasonably well documented.
Examples of health impacts include air quality, water quality and health improvements
associated with green spaces that are enabled by water investments. Amenity value is
seen by some to be directly attributable to property valuations gauged through hedonic
pricing studies. (This view is also challenged with questions arising from the use of
house pricing increases as a measure of amenity, when at the same time housing
affordability is also raised as a growing societal issue to be addressed).
Other social dimensions are less clear to define, in terms of value. Of note, the
current area of focus on linking water initiatives to liveability value is more difficult
to assess. Just as understandings and framings of sustainability vary, concepts of
liveability may also vary, according to what is important to any single individual or
community. Hence, the first step in assessing the value of liveability is to develop an
understanding of what liveability means to any identified group. As an example, for
some communities, liveability may mean having access to parks with shade cover, and
for others, liveability may be about addressing bill affordability. In some areas,
Community Indicators have been developed to provide greater insight into the
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priorities and wellbeing of local communities.28 Local priorities may be best
understood through referencing community indicators, and through consultation with
local community groups.
Australia’s National Water Initiative places indigenous rights, values and
interests as a national priority that requires greater attention. Water for Victoria and,
corresponding policies in other jurisdictions, have requirements to incorporate
aboriginal values in decision making. Several water utilities have also developed
Reconciliation Action Plans (RAPs) that recognise Aboriginal and Torres Strait
Islander connections to land and water, however the challenge in this case is to develop
project level benefits that respond to the aspiration of RAPs and government policy.
This matter is seen as any area of greater complexity and uncertainty. Those
interviewed had no clear view on how cultural values would be addressed in project
appraisal, although it was noted that the concept of ‘cultural flows’ is emerging and
that these are additional to more widely understood, environmental flows in
waterways. In Australia, cultural heritage practice has traditionally considered value
in terms of elements or objects (Jackson, 2006). Cultural values have no common unit
of measurement and multi-dimensional aspects include spiritual, aesthetic, social,
historic, symbolic and authenticity value (Throsby, 2001). Values and perspectives of
water in indigenous cultures include
• Water is a living being and water bodies have specific powers;
• Water is a life source;
• Land and water are an integrated whole;
• Physical and spiritual well-being of humans is connected with water and
land; and
• Water forms part of identity (from Jimenez (2014).
Interviewees stated that there was much to learn from New Zealand, where an
understanding of cultural values has informed the design outcomes for waste water
treatment facilities. In developing technological solutions for wastewater treatment
28 In the state of Victoria, Community Indicators Victoria (CIV) has developed Wellbeing Indicators to guide evidence-based planning around the health and wellbeing of communities. Further details are available on the CIV website: http://www.communityindicators.net.au
Incorporating sustainability in investment decision making for infrastructure projects 195
processes, Maori/ tangata whenua cultural views regarding human waste have
informed decision making. In this case, rock-lined channels or other forms of land
contact (Papatuanuku or earth mother) are used to spiritually cleanse human waste
prior to disposal in receiving waters. In addition, design and operational solutions seek
to ensure that the transportation of sludge does not pass Maori meeting houses,
cemeteries and sacred land (Bradley, 2013).
In discussing indigenous water values in Australia, Jackson et al. (2012) stated
that indigenous people have a variety of interests, and different groups do not
necessarily have the same priorities. On this basis, the need to understand indigenous
knowledge and to address diverse interests may best be approached through a high
level of engagement with indigenous people at all stages of the water planning cycle.
A sustainability approach incorporates a multi-dimensional and integrated assessment
of all relevant factors including cultural and intrinsic beliefs. It is argued that it would
be meaningless to derive quantified singular values to represent fully cultural values
associated with infrastructure investments.
According to the economist, Frank Knight (1947), ‘values are established or
validated and recognized through discussion, an activity which is at once social,
intellectual, and creative’.
7.6 A NEW MODEL FOR DECISION MAKING
The literature review provided a starting point for the development of a
conceptual model taking into account that real world practice sets a variety of rules
around the methodology for analysis. At the same time, questions continue to be raised
more broadly on methodology, and how this may align with sustainability practice. It
is not possible to develop a model without reference to the often mandated requirement
to apply CBA. Now embedded in public discourse on major project proposals, CBA
is widely understood as a pass/fail test for proposals. However, in sustainability
practice, CBA cannot fully represent the wider values that may be delivered by
infrastructure investments. According to Infrastructure Victoria (2016),
CBA is not new and it is not perfect. It does not capture all impacts of an
investment. However, we think improving and extending the use of CBA will
help government make more informed investment decisions and spend more
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wisely… we recognise that it will not be possible to put a ‘dollar value’ on all
the economic, social and environmental impacts for all investment decisions.
This statement highlights the issue that the CBA methodology, with origins in the
nineteenth century, is sub-optimal, but also continues to be supported in investment
appraisal. The research has also confirmed that there is no common approach when
applying CBA, and that various techniques are employed to broaden analysis to
legitimately capture the wider sustainability values that projects provide.
For this research, two main options appeared to provide a way forward. These
were
1. Taking account of both the strengths and weaknesses of CBA, a new
approach could adapt and improve CBA practice to better align with
sustainability practice; or
2. Taking account of key aspects of current practice that contribute to
sustainability outcomes, a new, alternative approach to practice could be
hypothesised.
The second option has been pursued. However, in doing so, it is necessary to
first address the first consideration of ‘doing CBA better’. In following the second
option (a new approach) it is not the intention of this research to replicate the
methodologies that have been described by interviewees, but rather to construct a
model based on the attributes that have been identified to successfully incorporate
sustainability in decision making. The results from this research have been integrated
with emerging literature that calls for the development of new business models that
take account of the multiple values that infrastructure provides.
7.6.1 CBA- an extended approach?
Initially, the research focused on how CBA may more effectively integrate
sustainability appraisal. An understanding that CBA is prescribed in guidance material
and often mandated as part of business-case submissions in the public sector
influenced this approach. Hence, the initial consideration was focused on how CBA
could be improved, better developed or interpreted in order to meet the test of
rationality that is applied in a public sector review process. An initial model,
incorporating CBA, was developed from the literature review, forming the basis of the
research design.
Incorporating sustainability in investment decision making for infrastructure projects 197
This practical response took account of the shortcomings of CBA, particularly
in a sustainability context, but acknowledged that there continue to be substantial
efforts being directed to the improvement of CBA practice with a focus on broader
quantification of benefits, largely in the environmental and social domains. This
position is based on notions of formal rationality and an understanding that alignment
with market mechanisms may best describe the value created by infrastructure
investments. Taking account of the multiple values of public infrastructure, the
question arises as to whether the use of a market mechanism approach may fully
represent complex systems and achieve strong sustainability outcomes.
The interviews conducted as part of this research provided a range of
perspectives and approaches to investment decision-making for sustainability. In terms
of the use and application of CBA, four broad positions were put forward. These were
• CBA (or Advanced CBA) is a sound, rational approach for investment
decision-making where the outcomes of analysis should inform whether or
not a project proceeds (‘I'm still on the side of cost benefit analysis broadly
applied…I guess I’m a rationalist in that way’);
• CBA is a process underpinning a broader investment story and needs to
incorporate qualitative analysis with discussion of the ‘intangibles’ or
qualitative aspects (‘CBA is like a framework for evaluation. Whenever you
do evaluation, the more information that you can put into it the better’);
• CBA can be manipulated to achieve a desired outcome (‘At the end of the
day, these are subjective judgements by and large, and you are applying
numerals to them. And often I disagree with that… There are bright people
who are into the power thing and understand how to manipulate the process
to get the outcome they want’); and
• CBA is not applicable to sustainability assessment (‘when they think they
think about sustainability and use that lens to look at their projects, they will
use the Triple Bottom Line approach and multi-criteria analysis’).
Some interviews reflected the sentiments of Martin Wachs, who stated:
‘The most effective planner is sometimes the one who can cloak advocacy in
the guise of scientific or technical rationality...we adjust data and assumptions
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until we can say that the data clearly show the preferred option is best’ (Wachs,
1989, p. 477).
Taking account of the limitations of conventional CBA, ‘Advanced CBA’ was
strongly endorsed by some of those interviewed. The choice of approach appears to
be, in part, driven by expectations of the audience for the analysis. The preference for
CBA or Advanced CBA responds to an audience that it is seeking projects that are
‘BCR-positive’. In order to build a case around a preferred project solution, the analyst
is required to monetise positive impacts more fully, so as to capture as much value (or
benefit) as possible and exceed the cost side of the BCR equation. On the other hand,
the analyst of a project solution who represents value in both quantitative and
qualitative terms, is more likely to be telling the ‘story’ around justifying an
investment. The audience for this approach is likely to accept that value has broader
meaning and this includes aspects of strategic value and linkages with broader policy
and strategy imperatives.
Advanced CBA, featuring a broader array of valuations as well as a capability
to model scenarios and potentially work through options with community
stakeholders, offers substantial improvement on more conventional practice in CBA.
In addition, the principles of Advanced CBA appear to generally satisfy regulatory
review processes.
The interviews revealed the limitations of CBA/ Advanced CBA, including:
• The ability to model ‘benefits’ is often limited to items that can be easily
measured. As an example, a proxy for ‘social’ dimensions may be health
impacts measured by impacts of air pollution;
• The ability to value cultural artefacts, natural and cultural systems (such as
waterways) or impacts is questioned;
• Social dimensions such as ‘liveability’ or amenity are subjective, even
within communities or localities. The use of economic instruments, such as
Willingness to Pay and Hedonic pricing studies, can be useful but do not
necessarily provide a true representation of ‘value’;
• The use of ‘benefits transfer’ provides an alternative to undertaking detailed
and costly studies to provide valuations of ecosystem services, however
Incorporating sustainability in investment decision making for infrastructure projects 199
there are difficulties in transferring values applicable to one geographical
location, to another;
• The monetised values associated with new responses to infrastructure
problems such as alternative water projects or IWCM projects may not be
widely understood and often means that these forms of projects do not ‘stack
up’;
• Where projects are contained within a limited geographical area, but address
problems beyond those boundaries, CBA may also not support investment.
To solve this problem, analysis may require an approach that considers
wider benefits to communities, or programme level responses, however
these approaches can be challenged in regulatory reviews; and
• Many of the assumptions underpinning any form of CBA are subjective, and
this is not widely understood or communicated when results are presented
in the form of a definitive, point value, Benefit Cost Ratio.
The news media is now well versed in reporting on major project proposals that
are proposed by local or state governments. In mid-2017, the national press reported
on the business case developed by the Queensland State Government for the proposed
Cross River Rail project in Brisbane, providing new rail services to a city that
continues to grow in population (reported in the Courier Mail by Marszalek, 2017).
The Queensland Government’s analysis derived Benefit Cost Ratio of 1.21
(purportedly updated to 1.4 in November 2016), thus passing the threshold whereby
benefits exceed costs. However, Infrastructure Australia (IA), the national body
reviewing the submission, rejected the analysis, stating:
Infrastructure Australia has not included the current proposal for Cross River
Rail as a Project on the Infrastructure Priority List at this time. Infrastructure
Australia considers that the benefits of the proposed project, as set out in the
business case, are significantly overstated, and that the costs of the project as
currently presented are likely to exceed its benefits. (Infrastructure Australia,
2017, p.1)
In response, the Queensland Government claimed that the IA review was flawed,
noting incorrect references to place names as one example of the problems with the
review (Marszalek, 2017). Without fully analysing the merits or otherwise of both the
200
submission and IA response, the arguments put forward in the media on both sides of
what appears to be a political debate illuminate the issues around the subjectivity that
is applied to CBA. And yet, CBA is considered to be a rational approach to analysis.
Over time, various alternative approaches to investment analysis have been
proposed to address the limitations of CBA. Of these, multi-criteria analysis (MCA) is
most often used, and the results of this research confirm that many organisations
continue to use MCA for decision making. Equally, many experts are highly critical
of MCA for a perceived lack of transparency or rigour, and so a uniform view on what
constitutes optimal practice for using MCA remains elusive.
The results of the research also show that the use of CBA in decision making
can vary in that, for some, the results of CBA provide a decision rule as to whether or
not a project proceeds, but for others, CBA forms part of wider analysis that informs
decision making. This observation aligns with findings from international studies.
Considerations of investment appraisal cannot be limited to methodology alone.
Often, the responsibility for analysis is given to technical practitioners (engineers,
economists or project managers), whose training and expertise often lies in following
rigid rules and/or developing mathematical models. This research has shown that there
are broader factors involved in the investment decision making processes beyond rules
and models. The previous discussions on participation, benefits and value, require the
analysis to move beyond the technical domain to a wider analysis domain involving a
range of disciplines. The research also shows that analysis is influenced by governance
and institutional factors, leadership, and the capability of practitioners. In order to
bring all these factors together, this research suggests that a new approach is needed.
7.6.2 A new model
At this point, it is appropriate to refer to the theoretical framework for this
research, with considerations of both rationality and complexity. Fully rational choice
in economics assumes an act of optimisation for maximum utility to individuals. But
laboratory studies show that humans do not always act out of self-interest. As an
alternative, the political scientist Herbert Simon proposed a model of bounded
rationality, taking account of human limitations in cognitive ability and the structure
of environments. Simon stated,
Incorporating sustainability in investment decision making for infrastructure projects 201
we are under no illusion that we can find a single formula, or even a
moderately complex one. We are committed to a strategy of successive
approximations, and when we find discrepancies between theory and data, our
first impulse is to patch rather than rebuild from the foundations (Simon, 1979,
p. 510).
A bounded rationality approach provides a means to move forward in developing
a model that recognises human preferences for goal orientation, incorporates
adaptability, deals with uncertainty and recognises the need to make trade-offs (Jones,
2003). Bounded rationality provides permission to look beyond the current approach
of ‘point value’ assessments to a broader approach that incorporates both quantitative
and qualitative analysis.
Figure 7.6 brings together the concepts that emerged through a staged process of
coding of transcripts from interviews with expert practitioners. Building on the
Sustainability Investment Logic that was previously discussed, key aspects of the
model are
• The incorporation of a participation approach through all stages of analysis;
• Enabling factors (governance, leadership and capability);
• Sustainability Investment Logic;
• An inputs stream (cost and funding, risk, delivery capability and asset
management systems);
• Negotiation and trade-offs;
• Decision making; and
• Implementation, review and monitoring.
202
Figure 7.6. A model for Incorporating Sustainability in Investment Decision Making
The additional components of the model are discussed in the following sections.
SustainabilityInvestmentLogic
Enablingfactors
BenefitsStream ValueCreationStream
SustainabilityCommitment
ParticipationFramework
BusinessBenefit
CustomerBenefit
CommunityBenefit
EconomicValue
DevelopmentValue
SocialValue
EcologicalValue
RegulationandGovernance
OrganisationLeadership
Capabilityandskills
NegotiationandTradeOffs
Decision
Implementation,ReviewandReporting
InputStream
CostModel
RiskAssessment
AssetManagementcapability
Deliverycapability
Incorporating sustainability in investment decision making for infrastructure projects 203
7.6.3 Enablers
The interviews revealed themes that are deemed to have a strong influence on
the outcomes of decision making in a sustainability context. These have been classified
as ‘Enablers’, as depicted previously in Figure 6.8. Whilst participation by a broader
array of actors was also highlighted as an enabler, the significance of the role of
participation throughout the decision-making process has resulted in a separate
examination of that topic.
Governance
Governance refers to the process of a mode of government coordination and
decision making to solve problems of collective action involving the community at all
levels (Howlett & Ramesh, 2014; McKay, 2007). ‘Good’ governance is linked to the
need for transparency and accountability in decision making, in accordance with clear
rules and processes. Models of governance have shifted from a ‘state-centric’ approach
to a ‘society-centric (new governance) approach and this was reflected in interviews
whereby water businesses seek to be ‘customer focused’. A customer-centred
approach aligns with sustainability. In governing for sustainable development, three
interdependent dimensions of collective action are proposed as:
• Polity- the institutions and norms;
• Politics- the actors and resources; and
• Policy- policy objectives and instruments (from Lange et al., 2013).
These dimensions provide a framework for governance and are addressed in further
detail below.
Polity
In Australia, water sector governance remains in the domain of the public sector,
with commercialised operations in place. As each jurisdiction has separate Acts of
parliament relating to water, there are various types of legal forms of water business,
each requiring different formal and informal reporting requirements. Legislation
typically includes provisions for sustainability, but coverage of sustainability varies
between legislation within states and between states (McKay, 2007). The evidence
provided through the interviews in this research confirmed that, at an operational level,
commitments to sustainability vary between organisations in both formalised
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institutions and more informal organisational ‘culture’. However, with the Australia
government’s commitment to the implementation of the UN SDGs, there is now an
opportunity for infrastructure agencies to refresh commitments and approaches to
sustainability. This may be done through:
• Institutional design that breaks down formal barriers between divisions and
work groups with provision for multi-level coordination;
• The articulation of a clear vision supported by publication of formal
statements and commitments to sustainability and outlining long term, pro-
active goals on how commitments may be achieved; and
• Monitoring progress towards goals and regular reporting on progress,
together with circles of learning and adaption.
Regulation, whether economic, environmental or health, provides an important
role in the governance framework for water. For the water industry, economic
regulation provides a higher level of accountability in areas such as price-setting. In
discussing the positives and negatives of regulation, Samset (2008, p.181) stated.
‘Regulations can be either prescriptive and provide rules to be followed, or
proscriptive, specifying what is not allowed’. One interviewee noted that ‘policy is out
of step with the regulatory’. The economic regulatory process seeks to serve the public
interest, taking into account that water businesses are monopolies and provides the
advantage of cost certainty. However, economic regulation is typically focused on
price efficiency and short-term planning horizons. This can present an obstacle to those
seeking to initiate new approaches to sustainable water management where benefits
may accrue over longer time spans. Questions also emerge as to whether a focus on
efficiency alone fully serves the public interest.
With state-based regulation across Australia, different jurisdictions have
different approaches to regulation. In addition, different regulatory regimes within one
jurisdiction may act at cross purposes in terms of economic and environmental
outcomes. The Water Service Association of Australia (WSAA) issued a position
statement on improving economic regulation in Australia in 2014, noting the
shortcomings of current regulatory practices, and included a priority for reform of the
regulatory process to ‘better understand customer needs and what drives customer
value’ (Water Services Association of Australia, 2014). In contrast, the economic
Incorporating sustainability in investment decision making for infrastructure projects 205
regulator for the water sector in England and Wales (Ofwat) has duties that include
‘contributing to the achievement of sustainable development’ and requires water
companies to develop price submissions that are based on customer priorities (Frontier
Economics, 2014). More recently, in the state of Victoria, the Essential Services
Commission (ESC), as the economic regulator, has introduced a new water pricing
approach that seeks to provide better customer value through requirements to engage
with stakeholders, however these requirements are yet to be tested.
The need for regulation in the water industry is not disputed, however the
regulatory approach across Australia is disjointed and WSAA, the peak water industry
association, has called for reform. The customer-based approach to regulation that has
been introduced in Victoria represents an initial step in regulatory processes
acknowledging broader community values in decision making. If realised in actual
practice, regulatory review processes may better support a sustainability model.
Politics: actors and resources Project decisions may also be made outside of the regulatory process and
rigorous evaluation processes. In the interviews, it was noted that the role of the
political arm of government in project-level decision making has expanded in recent
years. This was witnessed by the Victorian Desalination Plant (completed in 2012) and
the North-South pipeline in Victoria (completed in 2010), which were initiated at the
political level in response to a period of drought and low dam levels. Crawford & Helm
(2009) noted that
Politics are a significant factor in the operating environment of the
government sector, which is subject to ministerial appointment processes with
a resulting impact in the form of changes in government and political
direction. Ministers act as highly influential and often unpredictable
stakeholders and sponsors to whom it is necessary to respond as a priority.
This requires the flexibility as well as a degree of redundancy to be able to
provide instant turnaround in response to requests.
Across Australia, decision making in the water sector involves an array of actors that
includes members of statutory boards that are appointed by government to provide
oversight to water authorities, and local government councillors with responsibilities
for water providers that reside within the local government sector. The need for greater
understanding of sustainability at the political level, including by members of water
206
boards and councillors, is critical to the decision-making process. This requires
educating all participants within the governance process on sustainability issues and
opportunities.
Policy
For the water industry, policy sits within a framework of legislation and
directives (such as Statements of Obligations) from government, and leads to
subsequent requirements for water utilities and other water agencies to develop water
strategies and plans. Water for Victoria, issued by the Department of Environment,
Water, Land and Planning (DEWLP) in 2016, addresses key issues for the state of
Victoria around managing for climate change and population growth, as well as
emerging priorities around Aboriginal values of water and recreational values of water.
In addition, Water for Victoria includes requirements for water utilities to address a
key government concern around domestic violence. Figure 7.7 has been developed to
show the relationships between legislation, directives, policy and the requirement for
water utilities to develop urban water strategies.
Figure 7.7. The role of policy in urban water management in the state of Victoria
LegislationStatement of Obligations
Policy
Urban Water Strategies
• Water Act 1989• Water Industry Act 1994• Other (Health, Environment, Regulation)
• Issued by the Minister outlining the obligations of Victoria's water corporations in relation to the performance of their functions and the exercise of their powers.
• Water for Victoria (developed by DEWLP)
• Water utilities to develop plans for securing water supplies over the following 50 years given uncertainty with population growth, climate change and climate variability.
Incorporating sustainability in investment decision making for infrastructure projects 207
In the state of Victoria, the role of policy reinforces the government’s vision to
‘manage water to support a healthy environment, a prosperous economy and thriving
communities now and into the future’ (Victoria State Government, 2016). Policy
documents such as Water for Victoria frame goal setting and work priorities across
government departments, and across jurisdictions, and play a key role in ensuring that
policy objectives relating to sustainable outcomes are understood and shared.
For service providers, projects are the vehicle for the realisation of higher level
policy and strategy. Figure 7.8 shows the linkages from policy through to projects
within organisations.
Figure 7.8. Strategic and Policy context of Projects (adapted from Young & Grant (2015))
WholeofGovernment
Strategicgoals
Agencies Agencies Agencies
Strategy StrategyStrategy
Projectoutputsandoutcomes
Policyissue
Projects
Affects
Feedback
208
Despite the theoretical link between policy and strategy, studies across state
jurisdictions in Australia show that projects do not necessarily contribute to stated
corporate goals, strategies and policies. In this research, it was found that the
sustainability goals of water utilities do not necessarily translate to project level
decision making. The alignment of project outcomes with stated policy positions
requires concerted efforts to provide the right environment, characterised by adopting
collaborative processes and the presence of central government oversight in
contributing to policy alignment.
Leadership
Anyone who takes responsibility for understanding and acting upon complex
sustainability challenges qualifies as a ‘sustainability leader’ whether or not
they hold formal leadership position or acknowledged political and socio-
economic influence (Ferdig, 2007, p. 32).
Leadership encompasses sharing a vision, building consensus among disparate
groups, guiding and directing, and encouraging change aligned with new goals. The
interviews revealed sustainability leadership is provided from various levels,
including:
• Government, or representative Boards, that set strategic directions for water
entities;
• Senior executive officers responsible for strategy development and
execution in the organisation;
• Individuals (at any level) with commitment and passion within water
corporations;
• Other levels of government such as local government;
• Consultants and other collaborators working with water organisations; and
• Community leadership through formal roles such as advisory committees,
or informal roles (such as lobbying).
The challenge is to for those in formal positions of power to allow sustainability
leaders to emerge and be supported, and for leaders themselves to acknowledge their
position and collaborate widely to co-create sustainability responses.
Incorporating sustainability in investment decision making for infrastructure projects 209
A further enabling feature for sustainability that emerged from this study is the
role of some organisations in providing leadership across the water industry. Corporate
sustainability leadership may be characterised by:
• An organisation that actively pursues strategies to deliver societal needs as
an integral part of its operations (and where these are not ‘tacked on’ to
existing operations);
• An organisation that embraces innovation and new approaches to addressing
challenges;
• An organisation that actively develops relationships with stakeholders and
communities to effect change; and
• An organisation that celebrates its successes and shares information across
the industry sector.
Capability
Capability refers to the skill sets of practitioners developing business cases. In
infrastructure agencies, business case development is typically managed by staff with
training in engineering, project management, planning or the like, supported by
specialist analysis provided by consultants. One interviewee stated:
Management systems are not enough. This requires social insight, negotiating
skills, broad environmental knowledge and other knowledge- knowledge of
social options other than infrastructure.
The interviews revealed key competencies required for business case
development that is focused on sustainable outcomes. These include: critical thinking
and the ability to identify the wider context of problems; the ability to lead and direct
a multi-disciplinary team or work with multiple agencies; negotiation capabilities; and
the ability and drive to develop complex concepts through to implementation. Further
characteristics identified in other studies include: systems understanding, emotional
intelligence, values orientation, compelling vision, inclusive style, innovative
approach and a long term perspective (Visser & Courtice, 2011). These competencies
are not typically learnt through tertiary studies, and it may be argued that technical
training alone does not provide the skills to deal non-routine problems and subjective
analysis. In addressing sustainability in business case development, new approaches
are needed to incorporate concepts of integrated assessment, participative processes
210
and dealing with values and trade-offs. Table 7.4 illustrates the shift that is required to
move from a technocratic approach to a sustainability approach in investment
appraisal.
Table 7.4
Capability shift for sustainability (adapted from Kemp and Martens (2007))
Traditional scientific approach to
investment appraisal
A sustainability approach to
investment appraisal
Academic Academic and social
Mono-disciplinary Trans and inter-disciplinary
Technocratic Participative
Certain Uncertain
Predictive Exploratory
In discussing the tendency for ‘optimism bias’ and ‘strategic misrepresentation
in the appraisal of infrastructure projects, Flyvbjerg (2013) promoted the need for
greater quality control and due diligence to be applied to practitioners in business case
development. In Australia, the discipline of business case development has no specific
training or qualification requirements. Hence, practitioners in business case
development may emerge from a variety of disciplines (such as engineering, business
studies, project management, or economics), and may have previously had no prior
experience or training in business case development. This also applies to the
consultants that are engaged to provide support to investment appraisal. Whereas
various disciplines contain colleges, societies or special interest groups for technical
areas of practice, there is no specialist group focused on business case development.
Such groups provide peer support and on-going professional development
opportunities. Whereas many technical areas of professional practice follow fixed
conventions and protocols, this research has shown that there is no consistency in
practice in relation to business case development in the water industry. This finding
would indicate the need for institutions that may support the development of capability
of practitioners and consistency in practice in both infrastructure agencies and in
consulting firms providing resource support. In the United Kingdom, this issue has
Incorporating sustainability in investment decision making for infrastructure projects 211
been addressed through the establishment of the Major Projects Leadership Academy,
which provides systematic, industry-wide training and development of practitioners
and assists in developing capability and skills across industry. The establishment of
such an academy in Australia was highlighted through the interviews as a key
opportunity to improve practice in both the public and private sectors across
infrastructure sectors, and ensure greater consistency in practice.
7.6.4 Inputs
The inputs to investment appraisal (Figure 6.9) are fundamental components of
business case development. Across the interviews, there was general agreement that
sustainability outcomes are dependent on transparent analysis that addresses financial
surety, risk and operational readiness. Cost and funding models are required as part
of budgeting processes and funding allocations, risk management is critical to effective
overall project management, and considerations of resource capability and long term
operational and maintenance matters are vital inputs to investment analysis. In a
sustainability framework, a broader perspective on these analysis inputs is required.
Cost and Funding Models
A lifecycle approach to cost models includes the capital costs associated with
planning, design and implementation, together with considerations of operations with
on-going maintenance and system monitoring. Numerous studies show that public
infrastructure projects are routinely subject to cost over-runs attributed to ‘optimism
bias’ and ‘strategic misrepresentation’ resulting in the underestimation of costs in the
business case (Flyvbjerg, 2005 ; Flyvbjerg, 2006; Flyvbjerg, 2009). In an Australian
context, a further element that contributes to cost overruns is changes in scope, which
can also be problematic, as ex-ante analysis involving project selection may be
distorted (Terrill et al., 2016). The misrepresentation of project costs does not support
a sustainability model based on principles of equitable and transparent outcomes in
decision making. Traditional approaches to cost estimating have relied on the addition
of a fixed contingency amount as part of the overall cost model. More recent studies
show that greater accuracy in cost estimation may be achieved through a risk-based
estimating (RBE). The RBE approach uses probabilistic modelling to incorporate costs
associated with both inherent risk (the uncertainty in pricing) and contingent risk (the
uncertainty in unforeseen events occurring during the life of the project).
212
In addition, the incorporation of quality assurance systems may improve outcomes in
cost estimation. This may be achieved through independent cost reviews, or through
processes such as gateway reviews for high value/ high risk projects.
The selection and use of the discount rate when applied to both costs and
revenues is the subject of debate and on-going research in sustainability theory. The
choice of discount rate is a critical element of analysis, and it is usually linked to
market rates reflecting the opportunity cost of investing in public works. The
importance of the choice in discount rates has been highlighted in reporting on the
Wollongong to Sydney rail project. This project was shown to have limited benefits
based on government analysis that used a discount rate of 7.7%, and this compared
with a 2013 study that used a discount rate of 4% and projected a ‘strong’ case to
proceed (Martin, 2017). In traditional analysis, the discount rate reflects a ‘minimum
rate of return required from a safe investment project to make it socially desirable to
implement’ (Gollier, 2011). Put simply, the discount rate reflects the interest rates
applied in financial markets and the opportunity to invest otherwise in risk free
investments. For the water sector in Australia, a declared Weighted Average Cost of
Capital (WACC) is applied to capital expenditure as part a regulatory practice for
pricing decisions. The WACC varies according to market conditions. When applied
over time frames that are far into the future, the discount rate is problematic, due to
both uncertainty in using the past to forecast the future, and more pointedly for
sustainability, the implication that events in the distant future are of little consequence.
As such, some commentaries seek a discount rate of zero (Davidson, 2014), and others
call for the application of a ‘social discount rate’ (Gollier, 2011; Arrow et al., 2014) or
a time-declining discount rate (Weitzman, 1994). The ultimate choice of discount rate
should be based on rigorous analysis and scenario modelling and may form the basis
of negotiation with regulatory bodies.
The issue of identifying and confirming funding streams associated with
infrastructure investments is a core consideration for providers. When relying solely
on a fiscal revenue stream to cover the cost of investment, the broader financial, social
and ecological values associated with such investments are discounted. In the case of
demand management projects, revenues to infrastructure providers may actually be
reduced in terms of fiscal flow, but value is created in deferring the need for capital
Incorporating sustainability in investment decision making for infrastructure projects 213
investment. In the case where wider community value is created through an
investment, the use of revenues from general taxation should be considered.
As part of the sustainability investment logic proposed in this research, the value
assessment may inform the analysis and justification of alternative funding
contributions. These may be in the form of government grants (such as Community
Service Obligations29), funding allocations or considerations of ‘shadow pricing’
where, for example, health improvements associated with an infrastructure initiative
may be linked to funding associated with a government’s health budget. In addition,
the prospect of co-funding by other agencies or organisations was identified as
receiving value from the investment, whereby organisations such as local governments
have specific revenue raising opportunities through special rates and charges. Noting
that government funding for projects is increasingly difficult to obtain, the possibility
of identifying alternative financing mechanisms has emerged for governments and
infrastructure providers alike. The notion of value capture (discussed in Section 6.5.3)
has parallels with tax incremental financing that has more recently been promoted in
the water industry. Drawing on the challenges that apply to sectors such as start-up
businesses and charities, alternative financing mechanisms may be explored more
widely by infrastructure providers. Table 7.5 identifies a range of infrastructure
financing opportunities that have been identified to fund infrastructure, specifically for
climate change adaptation in Scotland. Based on this work, there is an opportunity to
undertake further research that identifies alternative financing opportunities for
sustainable infrastructure in an Australian setting.
29 Community Service Obligations are defined by Australia’s Productivity Commission as non-commercial requirements of government business enterprises for identified social purposes.
214
Table 7.5
Financing mechanisms for climate change infrastructure in Scotland (from Roelich (2015))
Financing Option Brief Description
Tax incremental
financing
Applicable to local authorities through mechanisms such as Special
Charges, this concept is also being explored more broadly in Australia
through government policies on Value Capture.
Public Private
Partnerships PPPs
(Private Finance
Initiative)
PPPs involve a host government organisation purchasing a stream of
services, which entails the granting of a licence or concession to a
private provider based on specific terms and conditions to finance,
design, build operate and maintain an infrastructure service.
Climate Bonds Established to specifically address climate change mitigation or
adaptation, these bonds may be established by national governments,
corporations or international funding bodies and require full payment
of debt and interest, albeit at a lower interest rate.
Municipal Bonds Used in the United States, and increasingly in the United Kingdom,
this option requires the establishment of a central bond agency with
sufficient credit rating to both attract investors and to issue bonds to
worthy projects.
Social Impact Bonds Again emerging, these bonds require investors to provide funding for
projects with social outcomes with funding repaid when the required
outcomes are realised.
Crowd Source Funding Crowd sourcing is similar to a traditional loan, but instead involves
multiple lenders contributing to the same loan. This may be used for
projects where an income or savings can be generated to pay back
investors.
Equity based crowd
sourced funding
Similar to debt-based schemes, this option instead involves investors
taking ownership of the business. In this case, co-operatives and
community benefit societies may issue shares to fund the investment.
Investment funds Some investment funds have specific aims to fund sustainable
investments. An initial fund may be invested in projects, with repaid
capital used to fund further projects.
Incorporating sustainability in investment decision making for infrastructure projects 215
Risk
A seemingly conservative means of managing works in the public domain is to
adopt a ‘no risk’ approach whereby any areas of potential risk are used as ‘trump cards’
that are grounds for either rejection of proposals or reconfiguration to a less than
optimal solution. Typically, such considerations may apply to areas of health risk or
environmental risk. As an alternative, the discipline of risk management provides a
well understood approach within project management practice to consider risks more
systematically and identify means to potentially accept, mitigate or manage significant
risks. Risk management aligns with quality assurance processes, and risk management
practice should conform to international standard, ISO 31000. As noted previously,
risk management also informs cost models based on quantified values developed for
contingent and inherent risk.
Climate change science and the subsequent climate change risks have been well
documented based on on-going work by the Intergovernmental Panel for Climate
Change (IPCC). Key risks for urban environments include those associated with sea
level rise, extreme events, health (e.g. heat stress), energy availability and effects on
water resources and availability. Climate change risk assessment has added
complexity, in that identified risks have interdependencies across sectors and climate
risks have impacts across geographical and temporal scales (Dawson, 2015). The need
to incorporate climate change risk assessment forms part of sustainability assessment.
The importance of risk management was highlighted in interviews. However, it
was also noted that risk assessment incorporates a level of subjectivity. The layers of
uncertainty based on assumptions and inputs into investment appraisal may also apply
to risk assessment. Hence, quantitative approaches to risk assessment are useful in
informing the relative importance of risk items, but using scores as a determinant of
actions or infrastructure interventions should be approached with a level of caution.
Risk management processes are most effective when a collaborative, multi-
disciplinary approach is adopted. Using the water industry as an example, practitioners
are trained in a range of fields that include engineering, planning and natural resource
management and each of these professions provide a unique perspective and
contribution to risk assessment, and the consideration of climate change risks.
216
Delivery Capability
New and sustainable design solutions to problems addressing areas such as
climate change or resource depletion require new methods or approaches to project
delivery. The delivery of new and innovative designs or approaches requires the
appropriate knowledge and skills base that is not only technically orientated, but also
brings skills from a broader perspective within a multi-disciplinary team. For complex
projects, the skills required may not be readily available within the infrastructure
agency. As an example, in developing products such as alternative (recycled) water
sources, delivery capabilities need to incorporate commercial, marketing and
diplomacy skills that support negotiations with business operators as potential
customers for products. The challenges in marketing recycled water products and
developing new markets, requires an understanding of customer needs and potential
barriers to uptake. Establishing project teams with the appropriate mix of capabilities
is critical to sustainable outcomes.
Asset Management and Life Cycle Analysis
A lifecycle approach to asset planning involves an understanding of the full
range of project benefits, key risks and the real costs associated with sourcing and
extraction of raw material, supply chains, construction processes and operation of an
infrastructure asset through to end-of-life. Life cycle assessment (LCA) supports
sustainability assessment as part of a holistic approach to analysis. LCA provides an
understanding of whole-of life costs associated with infrastructure investments and
should ensure that there is an appropriate allocation of resources to the operation and
maintenance of assets over their lifespan. In operation, asset management capability is
critical to the effective operation of infrastructure assets. The difficulties with LCA are
based on the uncertainties in predicting costs into the future, particularly in areas of
policy uncertainty. A recent example of uncertainty was the introduction of carbon
pricing, which was subsequently abandoned with a change of government.
7.6.5 From Trade-offs to Negotiation and Optimisation
Complex decision making often involves ‘trade-offs’ relating across the multiple
dimensions of economic, ecological and social goals and values. In economic analysis,
these trade-offs may be approached through aggregating techniques that reflect the
values and preferences of the decision maker (Walker, 2000). Trade-offs are not a
simple cognitive balancing of costs and benefits, but rather these often involve
Incorporating sustainability in investment decision making for infrastructure projects 217
emotional, moral or ethical issues. When applied to public goods, trade-offs are often
characterised by difficulties in measurement and comparison, raising issues of fairness
and equity. The interviews highlighted key aspects of trade-offs, or negotiation, as
• Project leadership- sometimes the organisation that initiates a project is not
necessarily best placed to take it forward. As an example, projects that
incorporate a strong planning focus may be best managed by local
government. Negotiation and agreement should determine who is best to
lead projects and take them forward;
• Project participation- projects do not necessarily reside in a single
jurisdiction or sector. The need to gain support from the institutions and
stakeholders, and to potentially contribute to projects either in direct
financial terms or in-kind, forms part of complex negotiations that are
required;
• Negotiable matters are significant trade-offs, in which impacts may be
substituted in time or place. Such substitutions raise issues of equity due to
difficulties in providing like-for-like substitutions or alternatives; and
• Non-negotiable matters are core criteria which, for economic, social or
environmental reasons, are not considered to be substitutable. A strong case
needs to be built on why these matters need to be respected and retained.
Figure 7.13 outlines the factors in the process for dealing with trade-offs, with
further discussion following.
218
Figure 7.9. Trade-offs and Negotiation
Key principles and rules for activities relating to trade-offs in sustainability
decision making include:
• Ensuring an open and transparent process;
• Acknowledging the complexity of the systems in the assessment;
• Ensuring appropriate time and recourses are allocated to the process; and
• Enabling a clear approach to addressing trade-offs.
A sustainable approach moves the consideration of trade-offs from a singular
decision making domain to a forum for open negotiation. A participative approach
ensures transparency and seeks fair and equitable outcomes. A structured approach is
required, using the community and key stakeholders to identify and assess values.
Criticisms of the use of participative processes in the consideration of trade-offs
include a failure of participants to fully understand the range of issues that need to be
assessed. Hence, participative design needs to ensure that that community values may
be best represented, that the right expertise is engaged to inform and lead the process
and that appropriate processes are used to educate participants.
The discipline of dealing with trade-offs allows greater clarity in disaggregating
problems to understand the underlying benefits and values and the choices that can be
made between these. This inevitably involves moral, social, cultural and
environmental conflicts when values are simultaneously valued in multiple ways
(Trainor, 2006).
Principles
Participation
Values
Benefits
Who leadsWho participatesNegotiable values
Non-negotiable values
Incorporating sustainability in investment decision making for infrastructure projects 219
7.6.6 Decision Making
Decision-making for infrastructure projects is embedded in a wider institutional
and political environment that may determine priorities and the form of infrastructure
solutions. These additional considerations go beyond the formal analysis undertaken
by infrastructure agencies.
Project management theory distinguishes between decision making that is
tactical (based on time cost and quality dimensions), and decisions focused on strategic
performance. Strategic performance aligns with considerations of ‘doing the right
project’ (rather than ‘doing projects right’) and ensuring that projects are relevant,
effective, have the desired impact and are sustainable. In addressing strategic
performance, project initiators must recognise the complexity of projects and the range
of contexts such as the institutional setting, market demands, stakeholder needs, as
well as technological and environmental opportunities and issues.
The increasing role of the private sector in projects through Public Private
Partnerships (PPPs) and increasingly, as Market Led Proposals30, introduces additional
levels of risk and the need to balance commercial confidentiality with public interest
and accountability. In some cases, analysis can be deceptive, leaving scrutiny by law
makers and the general public at bay until it is too late and costs have already been
incurred (Flyvbjerg, 2009). On this basis, there is a need for accountability through
governance practices and critical review by independent specialists and organisations.
The political dimension of decision making is both accepted and criticised. For
some, it is the prerogative of elected government officials to make decisions that are
beyond the scope of analysis undertaken by the executive arm. Some key priorities of
government are built upon an understanding of community concerns and pressure
points. However, political priorities evolve over time and the influence and pressure
from stakeholders will also change. Some notable examples of political intervention
to initiate specific projects in the water sector, include decisions to build various
desalination plants across Australia and the North-South pipeline (or Sugarloaf
30 A Market-Led Proposal (MLP) is a proposal from the private sector seeking an exclusive commercial arrangement with government to provide a service or infrastructure to meet a community need. (From Queensland Treasury https://www.treasury.qld.gov.au/growing-queensland/market-led-proposals/)
220
pipeline) in Victoria. These projects were effectively fast-tracked, to address depleted
water supplies due to the millennium drought. In some cases, the perceived need to
expedite an infrastructure solution may overtake long term planning and analysis for
an alternative, more effective solution. Where political commitments to a specific
project solution are made prior to full analysis, agencies remain responsible for fully
informing decision makers of the full range of viable options, the risks of the preferred
direction and the opportunities foregone in pursuing a preferred direction. In reporting
on issues around the aborted East West Link (EWL) road project, the Victorian Auditor
General stated
I concluded that the EWL business case did not provide a sound basis for the
government’s decision to commit to the investment and that key decisions
during the project planning, development and procurement phases were driven
by an overriding sense of urgency to sign the contract before the November
2014 state election. Over the life of this costly and complex project, advice to
government did not always meet the expected standard of being frank and
fearless (Victorian Auditor General’s Office, 2015, p. iii).
As the lines between the public sector and private sector service providers
becomes more blurred, the need for strong and transparent processes to manage the
organisational and political systems involved in decision making grows in importance.
Within a sustainability model, the analysis provided by infrastructure agencies to the
political arm of government needs to be independent, and meet the standard of being
‘frank and fearless’.
7.6.7 Performance assessment and reporting
The need to align projects with stated policy positions and corporate goals has
been previously stated. Monitoring and reporting plays an important role in assessing
whether project-level outputs and outcomes (benefits) have been realised and that
broader policy intent has been addressed.
Assessing project performance is an important step in understanding how a
project contributes to government policy, whether projected benefits were achieved,
how assessed values were incorporated in the works, and whether costs were managed
effectively. Young et al. (2012) identified the role of independent arms of government
(as an example, Audit Offices operate in some jurisdictions) to provide oversight of
stated claims made in business cases. The literature has identified a clear gap in
Incorporating sustainability in investment decision making for infrastructure projects 221
industry practice concerning reviews of project performance on completion. Where
project reviews are carried out, the emphasis is on the ‘iron triangle’ of project
management (time, cost and quality), with little regard to the benefits realised. In
studies on major public sector projects in both New South Wales and Victoria, research
has shown that there is no systematic reporting, or any clear concerted effort to ensure
that projects are achieving strategic goals ( Young & Grant, 2015;Young et al., 2012)
In Section 7.5, the hierarchy of an infrastructure business model for projects
from inputs to impact was introduced prior to the explanation of a sustainability
investment logic. Building upon the infrastructure business model, Figure 7.10
presents a hierarchy of ex-post project reviews that would be expected as part of the
sustainability investment framework. Performance assessment needs to take account
of the timeframes required for the impact of project investments to be realised. A
further discussion of the components of the proposed performance assessment
framework follows.
Figure 7.10. Performance Assessment Framework for projects
Contribution to policy goals
Projects contribute to policy goals, however the contribution of individual
projects to broader policy goals may be difficult to attribute. An example of a policy
document is Water for Victoria, the Victorian Government’s long term plan for
managing water resources across the state (previously discussed in Section 7.6.3). It is
the responsibility of the central agency (in this case the Department of Environment
Water Land and Planning) to set goals, develop an action plan and monitor progress
Cost review
Value created
Benefits realisation
Contribution to policy goals
222
against goals. As an example, Water for Victoria sets out priorities for addressing
waterway and catchment health and this involves setting water quality indicators and
objectives. Whilst the government agency is responsible for measuring performance
against policy goals, the activities of water utilities, as infrastructure providers, may
directly impact on these goals. Water for Victoria provides an example whereby an
alternative to upgrading a waste water treatment plant (with resulting increased
nutrient loads into waterways) could involve water utilities working with landowners
to improve on-farm nutrient management practices.
Benefits Assessment and Realisation
The process of Benefits Management includes the initial stage of benefits
assessment, and when projects are implemented, benefits realisation assessment
ensures that benefits associated with the investment are actually achieved. In studies
focused on the nexus between project benefits assessment and benefits realisation
across government departments in both Victoria and New South Wales, it was noted
that in Victoria,
Monitoring is also narrowly focused on asset investments and mainly on
project management concerns e.g. funds spent on the specified project within
the specified timeframe. There appears to be no monitoring of delivery of
programmes of work (that include complementary soft projects) or the
realisation of strategic goals ( Young et al., 2012, p. 896).
Formal reporting processes provide a disciplined approach to monitoring and
reviewing performance against benefits envisaged. Studies of current practice indicate
that infrastructure providers have yet to effectively implement benefits realisation
processes.
Value Created
The ex post assessment of value created needs to assess actual outputs in terms
of value against the dimensions of value that were projected in investment appraisal.
This assessment assesses economic, development, ecological and cultural outputs of
projects- that is, were the projected values achieved through the investment? The
assessment of value created would include both quantitative and qualitative
assessments against the value dimensions identified in ex-ante analysis.
Incorporating sustainability in investment decision making for infrastructure projects 223
The Global Reporting Initiative (GRI) provides an example of an organisation-
level sustainability reporting framework. Alternatively, Yarra Valley Water’s
Integrated Profit and Loss report provides an example of a bespoke sustainability
reporting framework that may be used in the future to assess the value of infrastructure
investments. Sustainability reporting initiatives present an opportunity for
infrastructure providers to assess and report on the value that project level investments
contribute to the overall value provided by those organisations.
Cost Review
A review of international projects has shown that there is little consideration to
ex-post reviews that compare projected and actual costs and benefits forming the basis
of initial CBA submissions (Flyvbjerg, 2006). A review of project management
practice in the state of Victoria by the Victorian Auditor General’s Office noted:
.. for the public, knowing the status, progress and outcomes of capital projects
is currently difficult as there is limited information made publicly available.
The public must search various information sources and even then is only
likely to gain a limited understanding of progress against cost and time
targets (Victorian Auditor General’s Office (VAGO)b, 2016,p. 5)
At the inputs level of the performance assessment, data on costs that are actually
incurred may form the basis of industry-wide database repositories and information
systems, providing valuable insights for lessons learned and estimating for future
projects.
7.6.8 Implementation- the use of pilot projects
Previous discussions have noted the levels of uncertainty in ex-ante assessments
of the benefits and value that may be created through an infrastructure investment. The
research also revealed that an effective mechanism to assess the potential benefits and
value created from a project is through the development of pilot schemes or small-
scale initial stages of projects. These may be useful in assessing new and untested
approaches in integrated water management, in that they may mobilise new actors, and
generate new rules and knowledge at a local scale that can be applied to a broader scale
(Brown & Farrelly, 2009).
224
7.7 APPLICATION OF SUSTAINABILITY INVESTMENT LOGIC AND APPRAISAL MODEL
In order to illustrate the practical application of sustainability investment logic,
Figure 7.11 has been developed for a hypothetical scenario around more effective
management of water resources. The derived solution, in this case, is a storm water
harvesting scheme generated from existing piped systems, creating a storage/
balancing pond, and installing reticulated pipes to allow irrigation of surrounding
parklands. In this case, the project drivers are based on corporate goals and strategies,
the benefits or outcomes may be represented as measurable targets or KPIs, and the
values accrued from the infrastructure solutions include a range of quantifiable and
intangible values with multiple dimensions. As an example, ‘recreational value’ may
relate to health improvements due to enhancing open spaces for active sport, and may
also describe the value of increased visitation for bird watching activities. Community
values may relate to passive social networking activities or active opportunities to
develop community gardens.
Figure 7.11. Application of Sustainability Investment Logic
Reducedemandforpotablewaterforirrigationinparks
Benefits Solution Value
Enhancereputationofserviceprovider
Decreasednitrogenflowstoreceivingwaterbodies
Stormwaterharvestingscheme,waterstorageand
reticulation
Agreementswithcouncilstoacceptharvestedwaterfor
irrigation
Offsetcostsofcapitalworksupgrade(treatmentofpollutants)
Nativevegetationprovidinghabitatand
addressingbiodiversitylosses
Recreationalspace
valueCommunityspace
value
Newbusinessopportunitiesforinvestmentnear
enhancedopenspace
Driver
Contributetocity’sliveability
Buildresiliencetodrought
ProblemorOpportunity
Increase%ofshadetrees/canopyinthe
city
Agreementswithbusinessestoacceptharvestedwaterfornon-potableuses
Providesustainabilityleadership
Incorporating sustainability in investment decision making for infrastructure projects 225
As noted previously, the overall appraisal model developed in this research is
not intended for the water sector alone, but may apply to other infrastructure sectors,
or indeed across infrastructure sectors taking account of the interdependencies of
infrastructure. A key consideration for any investment is the initial framing of the
sustainability goals and benefits that are envisaged, and the range of solutions that may
ensure that these be achieved. This contrasts with a common ‘output-focused’
approach that firstly identifies a preferred infrastructure solution, followed by framing
an economic justification around that solution and the allocated budget (Chih and
Zwikael 2015).
In relation to the overall model presented in Figure 7.6, the following table
(Table 7.6) has been constructed to summarise the list of the key considerations for
each component of the model.
226
Table 7.6
Key Considerations for Sustainability Model
Model Component Key Considerations SUSTAINABILITY COMMITMENT Align with SDGs, government policy and
organisation strategies and plans Establish a reporting framework
PARTICIPATION Identify a participation model – instruments may be designed and adapted throughout the decision-making life cycle
ENABLERS: Regulation and Governance
Establish a governance structure and framework Consult with regulatory bodies throughout
Leadership Organisational leadership Individual leadership
Capability and skills Selection of practitioners and teams Training and development of practitioners Institutional support for capacity building
BENEFITS ASSESSMENT:
(Part of a Sustainability Investment Logic)
Work with stakeholders (including end users) to identify benefits that align with policy priorities in the following domains:
• Community development • Customer • Business
VALUE ASSESSMENT:
(Part of a Sustainability Investment Logic)
Work with stakeholders (including end users) to identify potential value linked to project scope in the following value domains:
• Economic • Development • Ecological • Social
INPUTS: Cost and Funding Identification of financing streams Life cycle approach Costing based on risk- based evaluation Choice of discount rate
Risk Employ a risk management approach Incorporate climate change risks
Delivery capability Ensure appropriate project resourcing Asset management Life cycle assessment
Provision for operations and maintenance TRADE OFFS Negotiations within business
Negotiations with external parties Community input
DECISION Political context Organisational context Priority setting
IMPLEMENTATION Benefits realisation Reporting Pilot studies
7.8 THE RESEARCH QUESTIONS
This study was initiated to further explore current practice in infrastructure
investment appraisal and address the following research questions:
Incorporating sustainability in investment decision making for infrastructure projects 227
(1) Do corporate sustainability goals stated by infrastructure agencies translate to
project level decision-making in the pre-investment stage for infrastructure
projects?
(2) What is an optimal system approach to support project selection and decision
making for infrastructure projects within a strong sustainability framework?
The first research question was addressed by an initial survey, and was explored
further in subsequent interviews. The outcomes of the research indicate that appraisal
practice varies across industry with no uniform procedures or approaches to project
level decision making. The research has shown that many organisations with strong
commitments to sustainability continue to be challenged in systematically translating
these commitments to decision making.
In addressing the second research question, a model has been developed, taking
account of the elements that were identified through the research as contributing to a
sustainability framework. As part of the model, a sustainability investment logic has
been proposed to align the benefits projected for an investment, the tangible and
intangible value dimensions that are proposed from the investment and the framing of
the investment solution that is proposed. This model challenges current practice that
continues to favour CBA, or adaptations and interpretations of the CBA methodology,
whereby analysis is applied to a pre-determined project solution.
7.9 SUMMARY
In initiating this research, a preliminary conceptual model framed the design of
a survey that was distributed to industry experts (Stage 1), together with interview
questions for industry practitioners (Stage 2). The initial model was constructed with
the view that a practical approach should incorporate CBA, given that it is often
mandated for use, and that a broader approach would better adapt its use for
sustainability practice. Whilst only a small sample of experts participated in the Stage
1 research, the results, when analysed with Stage 2 research results, reinforced findings
on current practice in investment decision making. In summary, current practice
employs a range of analysis techniques, but CBA is commonly applied, particularly
when business cases are subject to review and oversight in a regulatory setting.
228
The limitations of CBA are well understood by practitioners, and yet across the
decision-making domain, and in wider public discourse, it continues to be a
determinant of whether projects proceed or not. Through both stages of the research,
it has been found that CBA is not well placed to support sustainability practice.
Adaptions of CBA including Advanced or Extended CBA seek to better align with
sustainability assessment. However, the ability to develop an integrated assessment of
the full range of economic, social and ecological values associated with infrastructure
initiatives remains a challenge. CBA can be an effective analysis tool when it is used
as a framework to incorporate both monetary and intangible values provided by an
investment and when this is understood by the audience. It is least effective when used
as a point-value, go/no go decision tool.
This research proposes an alternative approach. Firstly, using the sustainability
investment logic process that has been developed, benefits and values associated with
an infrastructure investment may be fully explored with a range of stakeholders
including community end-users. The sustainability investment logic seeks to link the
problem definition and the identification of solutions with the strategies and policies
of government, particularly where these align with sustainable future outcomes.
Values are plural, interconnected and can only be fully understood by working with a
range of community members, end users, representatives of business interests, and
stakeholders from across government and industry. Benefits relate to project outcomes
and represent the long term contributions of a project to society.
Building on the sustainable investment logic, an overall model has been
developed that identifies inputs and enabling factors to the decision-making process.
The inputs represent a formal rationality approach within the model and acknowledge
that sustainable outcomes are built on financial prudence, an understanding of risk,
and the ability to develop capability and capacity for project execution, service
operations and maintenance. The enablers recognise the organisational context of a
decision-making process, and the need to ensure that an appropriate institutional
setting is in place. The model recognises the need for collaboration in the
considerations of trade-offs across value domains within the constraints of the project
scope and budget. Across the model, the participation of stakeholders is critical. A
sustainable approach recognises that decision making is a collective activity and
Incorporating sustainability in investment decision making for infrastructure projects 229
should not be based on the preferences of a few technocrats within an infrastructure
agency.
This work responds to calls for new approaches in applying economic analysis
to decisions that are complex and value-laden. In doing so, the research traverses
various disciplines that include sustainability, engineering, planning, project
management, business management and economics. The results and findings of this
research reflect an understanding of how elements from various disciplines need to be
brought together, and integrated. New ways at looking at complex, multidimensional
problems, involve a multi-disciplinary approach that draws on a range of perspectives.
230
Chapter 8: Conclusions
For cities and towns to thrive and advance, decision makers must respond to on-
going pressures such as changes in demographics (growth or de-growth), ageing
services and, increasing, climate change impacts. The provision of appropriate and
timely supporting infrastructure is an essential factor in supporting urban development.
Public infrastructure has the potential to provide a range of positive outcomes, such as
providing environmental services, shaping urban environments and supporting
cohesive and safe communities. On the other hand, poor decisions may leave a legacy
of unwanted, redundant or inappropriate infrastructure. Across the world, there are
examples of freeways that have been removed, rail lines that have been re-purposed
and dams that have been decommissioned, allowing greater value to be realised in the
restoration of natural systems. The decisions of today will have far-reaching impacts
into the future.
In the introduction, it was noted that decisions of public authorities in the 1960s
led to the construction of the Brisbane Riverside expressway seeking to improve the
‘automobility’ of a growing city. Those planning decisions played a significant part in
shaping the urban fabric of Brisbane, as the former central civic area effectively turned
its back to the waterfront. In contrast, plans for an elevated expressway that would
separate the Vancouver waterfront from its central business district were thwarted,
largely due to government officials heeding the vocal protests of affected citizens also
in the 1960s. As a result, Vancouver has retained a thriving Chinatown district, and
has maintained an active linkage with its waterfront, all contributing to declarations of
Vancouver being one of the most liveable cities in the world.
Those decisions, and many that have shaped cities and towns, were from an era
when decision making was top-down, and when communities placed a level of trust in
public sector bureaucrats on the basis of their expertise and position. This research
focuses on decision making in the era of sustainable development, as notions of
sustainability were advanced in the 1970s. As such, the participants in this research
have practised in the period since the term ‘triple bottom line’ was introduced and
applied widely across the public sector. Within this era of sustainability, there has been
a growing acceptance that sustainability initiatives should be incorporated into design
Incorporating sustainability in investment decision making for infrastructure projects 231
solutions, and an understanding of the need to manage resources more effectively.
However, this research shows that decision making at the front end of projects, when
the greatest contribution to sustainability outcomes may be achieved, is often hindered
by attempts to apply a lens of formal rationality to analysis.
Decisions on major investments continue to be contained within a narrow frame
of costs and benefits/value as part of a pass/fail rule. As institutions seek to improve
decision making by introducing economic, and seemingly rational approaches to
investment analysis, the incorporation of sustainability assessment has either been
forgotten or applied in an ad-hoc way.
The decisions of today have the potential to provide future generations with a
rich legacy of efficient, connected and relevant infrastructure that will meet the
challenges and opportunities of society. Conversely, if decisions of today lead to sub-
optimal infrastructure outcomes, future generations may be subject to cost and
resource commitments to either fix or replace those investments. This research seeks
to contribute to better decision making.
8.1 SUMMARY OF RESEARCH
This research has developed a greater understanding how the sustainability
aspirations of infrastructure providers are translated into the decision-making
processes in the pre-investment stages of the project life cycle. In doing so, a model
has been developed for applying a sustainability framework to decision making,
providing a new perspective on decision making for public infrastructure investments
The research questions have been integral to the design, implementation and
analysis of the results. The first research question asked
Do corporate sustainability goals stated by infrastructure agencies translate to
project level decision-making in the pre-investment stage for infrastructure
projects?
The first phase of research, reinforced by the second stage, provided clarity in
addressing this question. The initial survey showed that sustainability goals are not
systematically applied in the analysis that supports investment decision making.
Across the organisations represented in the survey, there is general agreement that a
232
sustainability approach is supported by participation by stakeholders (including end
users), lifecycle analysis and investment management standards. However, the choice
of analysis technique is dependent on the problem being addressed and there is no
overall agreement on whether either CBA or MCA support sustainability practice. The
survey also showed that there is a lack of industry guidance on incorporating
sustainability in investment decision making.
The second research question continued to search more deeply, and asked,
What is an optimal system approach to support project selection and decision
making for infrastructure projects within a strong sustainability framework?
The second phase of research involved a series of semi-structured interviews
with practitioners across the water industry. Again, the interviews revealed a range of
techniques that are employed in investment analysis. A qualitative approach to this
stage of research provided a greater understanding of why certain techniques were
employed and the challenges that are faced in analysis.
In order to propose an optimal system approach, the starting point for this
research was to accept that CBA is often mandated for investment analysis, and that a
practical approach would be to assess how it could be ‘patched’ to better address
sustainability. The use of CBA satisfies a need to apply a lens of rationality to decision
making. However, this proposition was rejected in view of the limitations of CBA
when applied to sustainability practice.
In rejecting the first position, the research sought to develop an alternative model
for practice. Through a process of descriptive and evaluation coding, together with an
on-going process of reflection and evaluation, the research achieved a narrowing of
research concepts to formulate a conceptual model. The model construct aligns with
concepts of bounded rationality. As such, there is recognition of human preferences
for goal orientation, provision for adaptability and uncertainty, and the need to make
trade-offs. Aspects of formal rationality form part of the ‘inputs’ stream of analysis,
based on the understanding that sustainable outcomes are built on financial prudence,
an understanding of risk, and the ability to develop capability and capacity for project
execution, service operations and maintenance. Figure 7.8 presents the model
developed through this research. The components of the model include
Incorporating sustainability in investment decision making for infrastructure projects 233
• A sustainability commitment;
• Participation by stakeholders including end-users throughout the decision-
making process;
• Enablers: regulation and governance, leadership, capability, and skills;
• Benefits assessment: community, customer, business;
• Value assessment: economic, development, ecological, social;
• Inputs: cost and funding, risk delivery, capability, asset management;
• Trade-offs and negotiation;
• A decision; and
• Implementation.
At the core of the model is the need to establish sustainability investment logic,
based on aligning potential benefits with higher order policy and strategies, and linking
these to an array of values that may be achieved through the investment.
Participation by community members, end users, representatives of business
interest, and stakeholders from across government, is required across all steps of the
model. The instruments for a participation framework may vary across various steps
of analysis, however it is critical that a broad representation by interested parties is
involved in establishing project benefits and identifying project values, and in
informing the process of trading off aspects of priorities or scope as part of ultimate
decision-making.
The initial research objectives were addressed in that:
• Both stages of the research showed that there is no uniform approach to
incorporating sustainability in investment decision making across the water
industry;
• The research showed that wider institutional factors including system
boundaries are a critical consideration to sustainability outcomes; and
• The research highlighted that the framing of value is a complex but critical
component of analysis and the sustainability investment logic that is
proposed through this research provides a framework to assess value.
234
8.2 IMPLICATIONS FOR PRACTICE
This research has sought to develop a deeper understanding of analysis processes
for infrastructure investment appraisal in a strong sustainability framework. A
sustainability framework recognises that there is greater complexity in decision
making, and that there are multiple dimensions to both problems and solutions
associated with infrastructure challenges. Across infrastructure sectors, new
approaches for infrastructure have been proposed to address sustainability challenges.
In the water sector, Integrated Water Cycle Management provides an example of an
alternative solution to business-as-usual approaches in water resource management
that may generate benefits at a community scale, and generate values across social,
ecological and economic dimensions. And yet, current approaches to appraisal fail to
fully represent these benefits and dimensions of value.
The review of literature that underpins this research has required a practical
understanding of the processes involved in investment decision making, informing a
process of sourcing critiques from across a range of disciplines. The topic of Benefits
Management is an emerging subject within the project management domain
(originating for information technology projects), and an understanding of the
importance of strategic success in addition to tactical success of projects. The
literature on Benefits Management and Benefits Realisation is limited, but points to a
growing use of these methods in public administration, and the opportunity to develop
more case studies to demonstrate best practice.
On the other hand, the literature on ‘value’ has been derived from a range of
topic areas including environmental management, ecological economics, economics,
planning, engineering and sustainability. There is a clear research gap relating to the
application of the concept of the multiple values of infrastructure when viewed in an
Australian context. As an outcome of the interviews, examples of projects in New
Zealand that incorporate cultural values were identified, and it was seen that such
approaches would need to be adopted in Australia, particularly in response to new
policies relating to Aboriginal and Torres Strait Islander values, and their application
to works in the public domain. The case study research and practice in relation to
cultural values in an Australian context is still emerging.
In addition, the research has identified the on-going conflation of the disparate
concepts of benefits and value. This conflation occurs as the benefits of CBA are
Incorporating sustainability in investment decision making for infrastructure projects 235
represented as a dollar value. The literature review revealed only limited coverage of
this issue, and the infrastructure business model approach that differentiates between
impacts, outcomes (benefits), outputs (value) and inputs (considerations of cost,
funding and risk) provides a useful model to understand the different layers of analysis
that form part of the investment appraisal process. In practice, a greater understanding
of the need to address benefit and value separately may provide greater clarity to
business case development.
The literature on alternative funding models for infrastructure in Australia is
limited, with the focus currently on the mechanism of Public Private Partnerships
(PPPs). Public discourse also has presented the opportunity of funding works through
infrastructure bonds, and current policies are promoting the concept of value capture.
From UK research (Roelich 2015), new forms of infrastructure delivery may present
new funding mechanisms, such as more localised, community schemes financed
through crowd funding. A recent US study has identified a need to remove barriers to
allow private capital to provide innovative financing solutions for water infrastructure
investments (Patterson, Doyle, & Buckley, 2016). The opportunity to explore the full
range of potential infrastructure funding mechanisms in an Australian context is
apparent, with consideration of the legal and financial instruments that may enable
infrastructure delivery.
The need to improve practice in investment decision making is evident, but the
institutional settings for decision making, continue to ensure that only incremental
change is possible. Hence, the focus continues to address how to improve the rational
approach of CBA. The theory of bounded rationalism, espoused by Herbert Simon,
presents an alternative lens on rationality taking account that decision making is based
on incomplete information and uncertainty. This uncertainty is linked to the ability to
identify the multiple values that may be attributable to an infrastructure investment,
and a sustainability framework presents a way forward to better frame investment
appraisal. The sustainability investment logic proposed in this research seeks to
reconcile the sustainability goals that are stated by infrastructure providers and the
decision-making process that determines which projects are delivered, and in what
form.
Although this research has been based on practice in the water sector, the model
that has been developed is intended to apply across all infrastructure sectors. For the
236
road transport sector, values that are currently applied in CBA, largely addressing
modelled improvements for road users, would be broadened to address wider
community values and outcomes. In addition, the model could apply to the energy
sector, noting that UK research is looking to develop decision-making models that
account for the wider values of localised responses to develop heat networks, including
issues of energy poverty (Foxon et al., 2015).
8.3 IMPLICATIONS FOR THEORY
This research contributes to theory by using empirical research to identify
attributes and features of investment appraisal that incorporates a sustainability
approach. Such an approach is critical in justifying new responses to emerging
problems in areas such as climate change adaptation, and opportunities to better
capture societal values.
A key implication for theory is the decoupling of benefits and value in
investment appraisal. The benefits of traditional CBA involves a conflation of benefits
and value, and hence a combination of higher level outcomes and outputs of
infrastructure investments. The separation of benefits management and values
assessment, proposed as part of the sustainability investment logic in this research,
presents a new theoretical approach. In doing so, the sustainability investment logic
that is proposed presents a new theoretical approach to infrastructure investment
appraisal.
A feature of the model developed from this research is the ability to provide an
integrated approach that more appropriately takes account of social aspects and notions
of community development and cultural values. A sustainability approach to decision
making adopts a participatory approach through all stages of the decision-making
process.
8.4 LIMITATIONS OF RESEARCH
In Section 7.6.1, it was noted that research participants espoused four broad
positions on how investment appraisal may most effectively align with sustainability.
Across the research, the merits and issues associated with various approaches were
also articulated. The model developed as part of this research represents a consolidated
and optimal approach based on the responses from various research participants. The
Incorporating sustainability in investment decision making for infrastructure projects 237
model draws on a range of approaches and does not represent any one single view
regarding a sustainability framework. The model that has been developed has yet to be
validated or tested with industry practitioners. This next step is provided as a
recommendation for further research.
8.5 RECOMMENDATIONS
The findings of the research revealed areas for further research and areas for
improvement by industry as a whole these recommendations are outlined below.
8.5.1 Recommendations for further research
The scope of the model developed for sustainability investment appraisal is
broad. As such, more research is recommended to build upon the overall model,
together with more detailed analysis of components. The following recommendations
relate to further research in relation to the model that has been developed as part of
this research.
Recommendation 1:
The core intent of this research is the application of the model to water resource
management and particularly, opportunities for IWCM or ‘green infrastructure’. Other
applications may include transportation, coastal infrastructure, energy and
communications infrastructure.
It is recommended that case studies should be identified to test and further develop and
refine the model, using examples in a range of infrastructure sectors.
Recommendation 2:
The sustainability investment logic proposed by this research builds on the principles
of investment management and is yet to be tested.
It is recommended that further research be undertaken to develop case studies that
apply the sustainability investment logic to infrastructure projects across sectors.
Recommendation 3:
238
This research has considered value that relates to the tangible and intangible outputs
from infrastructure investments. In building a greater understanding of these values,
investment appraisal may be improved.
It is recommended that further research address the multiple and interlinking values of
infrastructure, with a focus on the social domain.
Recommendation 4:
The literature and research has identified a clear gap in industry practice concerning
reviews of project performance on completion. Where project reviews are carried out,
the emphasis is on the ‘iron triangle’ of project management (time, cost and quality),
with little regard to the benefits realised. As the discipline of benefits management
evolves and becomes further entrenched in public sector management, the need to
assess actual benefits realised through projects, and the alignment of projects with
government policy positions, requires further development.
It is recommended that further research address the benefits management practices of
public sector infrastructure providers to assess alignment of benefits proposed against
actual benefits realised.
Recommendation 5:
As public sector budgets become more constrained, the need to develop broader
financing and funding mechanisms for infrastructure is gaining importance. Drawing
on international studies, new ways of financing infrastructure are being identified.
These are subject to the institutional and legal settings of specific jurisdictions.
It is recommended that further research is initiated to identify new and innovative
funding mechanisms for sustainable projects in an Australian context.
Recommendation 6:
This research has focused on the components and enablers for incorporating
sustainability in decision making.
It is recommended that further research also address the barriers that may ensure that
the status quo remains, and sub-optimal approaches continue to be employed.
Incorporating sustainability in investment decision making for infrastructure projects 239
8.5.2 Recommendations for Industry
The research findings also identified improvement that may be made across the
infrastructure industry. Capability improvements may be achieved through
recognising the complexity of decision making, and the need to apply knowledge
across a range of disciplines and work with a range of stakeholder and community
interest groups. This broad skill set, together with experience-based capability
development, is seen to be an important contributor to successful business case
development. The Major Projects Leadership Academy run by the UK government in
conjunction with Oxford University’s Said Business School provides an example of
capability development models for the public sector and practitioners in business case
development that have emerged in the United Kingdom. The opportunity to establish
a community of practice in business case development through either academic,
government or industry membership bodies may potentially allow greater consistency
in practice and improve the capability of practitioners.
Recommendation 7:
Business case development is complex and requires a range of skills from critical
thinking and analytical ability, financial skills, to understanding and explaining highly
technical engineering schemes. Building capability and capacity of practitioners may
contribute to more effective decision making in relation to infrastructure priorities,
with wider impacts for the economy.
It is recommended that opportunities to develop industry capability in business case
development be identified through collaboration between government, academic
institutions and industry associations.
240
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Appendices
Appendix A
Key Survey Questionnaire
1. Does your organisation have corporate sustainability goals? (These may be in the form of publicly statedstrategies, objectives or targets)
If you answered "yes" to Question 1, please answer Question 2, otherwise proceed to Question 3.2. Please provide details your organisation's sustainability statements, objectives or targets. If relevant, includethe name of the relevant document and/or a URL link to the relevant document.
3. Are sustainability initiatives incorporated into project solutions at design, construction and/or operationsphases of project delivery?
4. Are sustainability considerations applied to investment decision making for projects? For this research, thismeans the consideration and selection of project options, and the initial definition of project scope.
5. What guidance material is used to inform investment decision making for major infrastructure initiatives? (Examples may include central agency/ treasury guidelines, in-house processes, guidance from industry associations)
Incorporating Sustainability Assessment inInvestment Decision Making for InfrastructureThis survey is being conducted as part of a PhD research at the QueenslandUniversity of Technology on the topic "Incorporating sustainability in theinvestment decision making process for infrastructure projects". As part of thisfirst stage of the research, a cross-sectoral study will assess how sustainabilityconsiderations are incorporated into decision making processes by infrastructureproviders. Whilst there are a range of definitions and interpretations ofsustainability, this research is seeking to relate how various organisationalcommitments to sustainability (generally including economic, social andenvironmental dimensions) are translated into decision making processes. Thesurvey will be analysed and reported from an industry-wide viewpoint and it is notintended to report any individual results from the survey. Thank you forundertaking to complete this survey.
Yes
No
...........................................................................................................................................................................................
...........................................................................................................................................................................................
...........................................................................................................................................................................................
...........................................................................................................................................................................................
Yes
No
If yes, are any specific tools used (e.g. the Infrastructure Sustainability Council of Australia (ISCA) tool, in-house tools or other proprietary tools)
...........................................................................................................................................................................................
Yes
No
Page 1 of 5
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Appendix B
Interview Schedule- Agency Representatives
Topic Introduction
Provide my background Give overview of the research project Confirm expected length of time for interview Confirm that it will be recorded and that interviewee has consented to recording of interview Define terms that will be used – “decision making”, “infrastructure” and “business case”, “ institution”, “boundaries”.
Background Could you tell me a little about your professional background? Background Could you tell me about your current role in the organisation? Background Could you give me an overview of your role in business case
development? Sustainability- general General Question How would you define sustainability? Probes Can you tell me how sustainability is viewed in your organisation? Are you aware of your organisation’s sustainability commitments? In what ways does your organisation demonstrate sustainability
commitments? What are the benefits or dis-benefits of adopting sustainability in
organisational activities? Current practice- analysis
General Question Can you describe the analysis processes that are typically used to identify and bring forward major project proposals?
Probes How do emerging projects outside of medium to long–term capital works plans/ programs (to address new priorities or issues) get advanced?
What assessment processes are used- eg CBA, MCA, ROA, LCA How are the requirements of analysis process documented? (What are
the key reference documents?) How are the outcomes of the analysis process documented? Current practice- decisions
General Question Can you describe the decision making process that leads to the approval of projects (from option analysis to implementation).
Probes How does community participation inform decision making- if at all? What is the role of central agencies in government and regulatory
bodies? What is the role of project board, government stakeholders, other levels
of government If applicable, what is the role of any statutory board providing
oversight of your organisation? Assessment of process General Question What does your organisation do to incorporate sustainability in
decision making processes Probe Questions Would you describe the processes used as systematic or opportunistic? Do you think that other organisations apply the same processes as your
organisation? What are the barriers to incorporating sustainability in practice? System Considerations General Question Current practice is subject to a number of boundary
considerations that may include: governance/ institutional
Incorporating sustainability in investment decision making for infrastructure projects 267
responsibilities; scale of analysis ;and interactions with other infrastructure sectors. In your experience, how do boundary considerations impact on the ability to apportion costs and benefits of infrastructure works?
Probe Questions Are there any other system considerations that impact on the effectiveness of decision making to incorporate broader sustainability considerations.
Outcomes General Question Can you give examples of good sustainability outcomes, and the
factors that supported project success? Probe Questions How is sustainability actively promoted- across industry and with
communities? What is the role of industry advocacy organisations in promoting
sustainability? Reflections General Question What, if any, changes do you think should be made to ensure
sustainability is incorporated in investment decision making? Are there broader changes required across industry? Conclusion General Question Is there anything else that you would like to say about any of the
things we’ve covered today? Or anything else that might be relevant to this research?
Do you have any questions for me?
268
Appendix C
Interview Schedule- Independents (consultants)
Topic Introduction
Provide my background Give overview of the research project Confirm expected length of time for interview Confirm that it will be recorded and that interviewee has consented to recording of interview Define terms that will be used – “decision making”, “infrastructure” and “business case”, “ institution”, “boundaries”.
Background Could you tell me a little about your professional background? Background Could you tell me about your current role in the industry? Background Could you give me an overview of your role in investment decision
making? Background At what point of the project lifecycle are you engaged by project
proponents? Background What experience/ expertise do you provide to the assessment process? Sustainability- general General Question How would you define sustainability? Probes Can you tell me how sustainability is viewed in organisations that you
work with? What are the benefits or dis-benefits of adopting sustainability in
organisational activities? Current practice- analysis
General Question Can you describe the processes that are typically used to identify and bring forward major project proposals?
Probes How do emerging projects outside of medium to long–term capital works plans/ programs (to address new priorities or issues) get advanced?
What assessment processes are typically used- eg CBA, MCA, ROA, LCA
How are the requirements of analysis process documented? (What are the key reference documents?)
How are the outcomes of the analysis process documented? Current practice- decisions
General Question Can you describe the decision making process that leads to the approval of projects (from option analysis to implementation).
Probes How does community participation inform decision making- if at all? What is the role of central agencies in government and regulatory
bodies? What is the role of project board, government stakeholders, other levels
of government If applicable, what is the role of statutory board providing oversight of
organisations? Assessment of process General Question How do you consider that sustainability is incorporated in decision
making processes Probe Questions What are the barriers to incorporating sustainability in practice? What is the role of industry advocacy organisations? System Considerations General Question Current practice is subject to a number of boundary
considerations that may include: governance/ institutional
Incorporating sustainability in investment decision making for infrastructure projects 269
responsibilities; scale of analysis ;and interactions with other infrastructure sectors. In your experience, how do boundary considerations impact on the ability to apportion costs and benefits of infrastructure works?
Probe Questions Are there any other system considerations that impact on the effectiveness of decision making to incorporate broader sustainability considerations.
Reflections General Question Can you give examples of good sustainability outcomes, and the
factors that supported project success? At an industry level, how can consultants best contribute to project
decision making? What do you think needs to be done to improve industry practice? Conclusion General Question Is there anything else that you would like to say about any of the
things we’ve covered today? Or anything else that might be relevant to this research?
Do you have any questions for me?
270
Appendix D
Interview Schedule- Central Agencies
Topic Introduction
Provide my background Give overview of the research project Confirm expected length of time for interview Confirm that it will be recorded and that interviewee has consented to recording of interview Define terms that will be used – “decision making”, “infrastructure” and “business case”, “ institution”, “boundaries”.
Background Could you tell me a little about your professional background? Background Could you tell me about your current role in the organisation? Background Could you give me an overview of your role in business case development? Background At what point of the project lifecycle are you typically involved in project
analysis? Sustainability- general
General Question
How would you define sustainability?
Probes Can you tell me how sustainability is viewed in your organisation? How do you see sustainability applied in infrastructure agencies? What are the benefits or dis-benefits of adopting sustainability in organisational
activities? Current practice- analysis
General Question
Can you describe the processes that are typically used to identify and bring forward major project proposals?
Probes How do emerging projects outside of medium to long–term capital works plans/ programs (to address new priorities or issues) get advanced?
What assessment processes are used- eg CBA, MCA, ROA, LCA How are the requirements of analysis process documented? (What are the key
reference documents?) How are the outcomes of the analysis process documented? Current practice- decisions
General Question
Can you describe the decision making process that leads to the approval of projects (from option analysis to implementation).
Probes How does community participation inform decision making- if at all? Can you explain how your inputs are incorporated into the decision making
process? Can you discuss the role of the project board, government stakeholders, and
other levels of government Can you discuss the role of statutory boards, if applicable, in the decision
making process? Assessment of process
General Question
How do you consider that sustainability is incorporated in decision making processes
Probe Questions
Can you give examples of good sustainability outcomes, and the factors that supported project success?
How are sustainability actively promoted- across industry and with communities What are the barriers to incorporating sustainability in practice?
Incorporating sustainability in investment decision making for infrastructure projects 271
What is the role of industry advocacy organisations? System Considerations
General Question
Current practice is subject to a number of boundary considerations that may include: governance/ institutional responsibilities; scale of analysis ;and interactions with other infrastructure sectors. In your experience, how do boundary considerations impact on the ability to apportion costs and benefits of infrastructure works?
What is the role of the political arm of government and elected representatives in influencing sustainable outcomes?
Probe Questions
Are there any other system considerations that impact on the effectiveness of decision making to incorporate broader sustainability considerations.
Reflections General Question What, if any, changes do you think should be made to ensure sustainability
is incorporated in investment decision making? Are there broader changes required across industry? Conclusion General Question Is there anything else that you would like to say about any of the things
we’ve covered today? Or anything else that might be relevant to this research?
Do you have any questions for me?
272
Appendix E
Key Survey Results
Table E1
Kappa evaluations- evaluation techniques and sustainability
Table E2
Kappa evaluations- evaluation techniques and sustainability
Expert 1 Expert 2 Expert 3 Expert 4 Expert 5 Expert 6 Expert 7 i-CVI Kappa K*
Evaluation
Relevance of CBA x x x x .57 .41 Fair Relevance of MCA x x x x x .71 .66 Good Relevance of participation
x x x x x x x 1 1 Excellent
Relevance of LCA x x x x x x .86 .85 Excellent Relevance of ROA x x .14 0.09 Poor Relevance of sust initiatives
x x x x x x x 1 1 Excellent
Relevance of ILM x x x x x x x 1 1 Excellent
Expert 1 Expert 2 Expert 3 Expert 4 Expert 5 Expert 6 Expert 7 i-CVI Kappa K*
Evaluation
Relevance of CBA x x x x .57 .41 Fair Relevance of MCA x x x x x .71 .66 Good Relevance of participation
x x x x x x x 1 1 Excellent
Relevance of LCA x x x x x x .86 .85 Excellent Relevance of ROA x x .14 0.09 Poor Relevance of sust initiatives
x x x x x x x 1 1 Excellent
Relevance of ILM x x x x x x x 1 1 Excellent
Incorporating sustainability in investment decision making for infrastructure projects 273
Appendix F
NVivo Tree Map showing coding weight associated with key themes
Benefitsassessment
Boundaries
Enviro...
Infras... Soc...
BusinessCase
Analysistechniques
Met...
Methods
Solu=on-...
Val...
Co...
Inte...
Corporategoals
DecisionMaking
Organisa=ona...
Poli=calcontext
Poli=cal...
Priori=sa...
Who...
Enablers
Consultantscapabi...
GovernanceRoleofRe...Training...
Implemen...
Pro...
Inputs
Asse...
Avo...Costes=ma=ona...
Cost
Del...
Risk
Interviewees
Par=cipa=on
Communityinput
colla...
Stakeholderinput
Policy
Planni...
Problems
Problem-... Probl...
Problem-sustainabi...
Solu=ons
Solu=... Sol...
Sustainability
Liveabi...
Sustainableoutcomes
Terminology
Tradeoffs
ValueCapture
Devel...
Environmentalvalue
Financialanalysis
Fundingandfin...
PublicValue
Socialvalue
274
Appendix G
Results: Selected responses on approaches to analysis
Can you describe the analysis processes that are typically used to identify and bring forward major project proposals?
INT- 1
Using a monetised approach in decision making is often self-defeating. When applied in practice, the engineers often use numerical judgements (like multiplying numbers to frame what is often a pre-conceived result) to make decisions without consideration that these are more often human calls.
INT- 2
Advanced cost benefit analysis helps quite a lot in that pursuit of optimum- you could use Multi-Criteria Analysis as well but I don’t like that as much because it’s harder to replicate – the weightings that people give various variables in an options comparison analysis- it is very peculiar to that group of people doing the assessment. If you monetise them in economic analysis then the substance is transparent and you can redo them if people think a value proposition is outside the range – it objective and repeatable- that said, you are greatly simplifying the complexity of economic decision making.
INT- 3 You then start looking at the incremental costs and the benefits of those options compared with BAU with a view to find the best community outcome, and then it starts getting a bit tougher- who are the beneficiaries of that and how are they going to pay.
INT- 4
I think, its partly lazy and its partly out of necessity, but every jurisdiction does have a preferred methodology for analysis. I think you can construct any outcome you want
INT- 5 The SET sought to provide a data base of values for inclusion in economic analysis (CBA)- there has not been much take up of this work- the most common feedback was that the values weren’t transferable.
INT- 6 A good economist has a rigorous framework. It shouldn't just be about measuring the measurable and then saying it falls down on the financial analysis therefore it shouldn’t pass.
INT- 7
The easiest way forward is to bring it in through monetising it, then being very careful about how you discuss the assumptions and show how sensitive they (dollars) are to the assumptions around monetising.
INT- 8 The BAU type business case is done on a NPV (Net Present Value) to (the business) with some discussion of qualitative benefits on top. In my work, I usually look at multiple stakeholders.
INT- 9 ..but either they don't do cost benefit analysis well enough, or, they don't understand where to assign those benefits and costs to all the people that they say they assigned to or they don't have the money..
INT- 10 We ended up to the point of recognizing that our multi-criteria assessment, for all its strengths, also has a very big Achilles heel being weakness. It's who's going to participate in your process, who's going to invest enough time to generally have a large interest in a certain area and they were skewered to their own views.
INT- 11 I can categorically say to you that economic models are part of a framework but only PART of a framework – there is no doubt of that.
INT- 12 if you back to what we did, which was to take a straight NPV, financial model, financial analysis of expected revenue, NPV, should we invest in this or not and so that’s was the straight NPV. And then what we did was to look at other value that we create, or costs and benefits that we should take into account instead of a straight NPV
INT- 13 So through that process, they try an monetise environmental and social, but where its not monetised they just go to MCA.. .. we have the same problem with the social and liveability things using cost benefit analysis as well. Because it further away, if you can’t quantify it financially, … its harder.
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Appendix H
Results: Selected responses on approaches to Decision Making
Can you describe the decision making process that leads to the approval of projects (from option analysis to implementation).
INT- 1
There are bright people who are into the power thing and understand how to manipulate the process to get the outcome they want. However, there are only a limited amount of people with the power and the influence and ability to make it happen.
INT- 2
the environmental regulator is EPA- they insist that engagement happen-they often won’t accept final environmental documentation unless there is evidence of engagement. EPA encourages proponents to get majority community support before they submit their projects.
INT- 3 We then have to argue with the regulator that it is robust, or say that it is a community obligation. And so if there is a clear obligation imposed on us by government, then the regulator looks for cost efficiency- have you got the most efficient way of achieving that outcome as opposed to any other approach
INT- 4
Australia has under-invested in infrastructure. A lot of projects come about by critical need and they need to be championed- whether a bureaucrat or politician. That makes many major investments very political.
INT- 5 Community’s input is required in setting priorities- this is often done in workshops that are mandated as part of pricing submissions.
INT- 6 Community participation is critical. ... If you consult, you figure out what is important, and either design it away, or pay compensation or another way of factoring it in. Whereas the flip side is that BAU you put a value on it.
INT- 7
After writing it, you see the politics or bureaucratic process play out. Sometimes it grinds to a halt or gets trump-carded. The politics comes in and can overturn…the last ten years has seen quite a bit of change.
INT- 8 And the Board and the Execs are still struggling with that because the whole thing that that the development is generating value for the business was actually being taken out of the analysis in the business case.
INT- 9 Well, I think Treasury has a role to prioritise to look at the merits of different projects.
INT- 10 It is getting more tighter now because we actually will have to price determination that is very specific on outcomes and output and we will have to deliver that. We won't be able to deviate from that. That will have a tighter framework on how we make our decisions.
INT- 11 So they could hear and take it into their decision taking- so the boards were very good about that. …
INT- 12 We started from a principle point of view, we don’t want to cost shift , we want to make sure that we make the right decision that takes account of the environmental impacts. So it wasn’t to justify projects, it was to make sure we were making the right decision in total. So where you get to with, we have come up in principle but not in practice an economic regulation regime that goes back to a financial view of the world,
INT- 13 going back to the thinking within the bounds of our organisation how do we justify that with the regulator so at the moment,
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Appendix I
Results: Selected responses on definitions of sustainability
How would you define sustainability?
INT- 1
I see two contexts of sustainability. In a water business context, sustainability has to be across the board. It has to be commercial sustainability, environmental sustainability and community sustainability – at least those three- and they have to be in sync. You have to make those trade off discussions- this is one of the things that we struggle with, is the trade off stuff. When people get locked in to one particular aspect, they can't understand, the reality is for everything, there are trade offs.
INT- 2
I have a pragmatic view of how sustainability should be framed and applied in organisations and it needs to be practical and pragmatic to works with time frames and capacity of organisations to deal with it. At the higher level, measuring progress towards sustainability can be done through the ecological footprint work as a performance measure. There isn’t such a thing as absolute sustainability- the planet is changing all the time one day the planet will snuff out- in the short term, there is no single solution but need to look at maximizing the positive values of technical social environmental and financial elements of a choice between options to deal with a particular problem is the best way forward.
INT- 3 I struggle with the word “Sustainability… its about economics, customer, efficiency, its about the environment.
INT- 4
The environmental outcomes almost follow on from the financial outcomes- I know it’s not a popular opinion- if sustainability and doing good by the environment was easy or popular, we would have solved the problems that still exist.
INT- 5 It’s about ensuring there is intergenerational equity so that the things we do in running a business or running a water utility, we preserve the environment- basically we leave the resources and environment in a better place for future generations- it’s about how we leave things for future generations for me.
INT- 6 ..the decisions and investments and resources we used today don't preclude future generations from having the same level of access to those resources and those resources. I think there is a strong sustainability drive within the water industry
INT- 7
I come across people’s interpretation of sustainability which is dark green- environmental focus. I think sustainability is more complex and means taking into account environmental, social and economic elements but they are not trump cards.
INT- 8 My perspective of sustainability is where we are looking at solutions with minimal impact to deliver value to the community- that may be about enhancing of liveability, enhancing of environment of which water is a very small part of.
INT- 9 It waxed and waned…so with the sustainable development goals. So sustainability might have dropped off but sustainable development is back (in).
INT- 10 And so not only is the science there, but collectively as a planet through the United Nations Environmental ... UNEP, we have sustainable goals and then compact for the business, it's been measured on country scales and we see Australia's results…It's just suddenly seeing that all these things, it's not outside of normal business. It's linked to our purpose so we showed all that connectivity, so yes, it's linked to that.
INT- 11 N/A INT- 12 I’d like to think we are in the industry.. at the forefront of that recognising the problem
and thinking. I think that’s ultimate problem with sustainability- who shares the cost. INT- 13 so I see sustainability being aligned to triple bottom line, so across environmental,
social and economic side of things but often .. it is skewed towards the environmental...
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Appendix J
Explanatory results table: participation
Theme Supporting Respondent Quotes
Defining the Community: Where the community doesn’t exist
So Councils… they have water efficiency policies, sustainability policies so representing the community perspective, so the planners who are planning those communities- in this case the government and two councils about what they aspire to for that community- so they are looking for a six star, green star community. A more sustainable, thriving diverse community- I thinks that’s in the vision a key issue with engaging with the community is “who is it”- they are not there yet.
Understanding community values
Yes it is also a valuable technique for holding dialogue with stakeholders at the scoping stage. For example, we have to solve the under capacity of the wastewater issue for a town, you can actually involve the community of people who care about that thing by firstly identifying what is important to those stakeholders, ie the social and environmental variables as well as the conventional cost and technical elements and also get people to propose what the range of values should be. Ultimately, we have come to the position that we as an organisation are here to serve the community. If we do that and partner with our customer groups then that’s how we do it. .. The other issue for us is that a particular person can be a different type of customer at any point of time. They can be some one is doing a development on their house so they go through our development line- development services. They can also be someone who on the weekend goes to the creek so they are a different customer then. So at the highest level, everyone is a customer. If we want to think about the particular services that we deliver, we might think about them in different segments about how we interact with them. Because we have a direct customer for some of our services, the general public or anyone in Melbourne is a customer. …. So yes they are a customer, but they are also a partner to provide a service to the community. it is still very much customer driven rather than community driven. And regulators, just like we all do, struggle with how we quantify these amounts, not only the environmental stuff but how do you quantify the customer’s or community’s willingness to pay. What those studies show is that yes, you can get willingness to pay but WTP is different to whether I am happy to put my, at the time am I physically going to pay. And there is a big gap between the two and so we all struggle with “is that right?” we said water utilities need to open themselves up and have conversations with key stakeholders – treasuries, government agencies, the ministry to look at what climate change threats – how much are people willing to pay- so it is a more broad based decision rather than an
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internal one- I am not sure if the water industry is emotionally mature enough to do this. the Board was thinking about impacts to the community- there was no doubt they were thinking about employment in the community- we had some major employers in the community.. I think in local communities, they are very tuned to their local community anyway- the boards could not just make economic decisions alone and they were very conscious of their pricing impacts so economics was important. What we find is when we do that customer engagement and talk about renewables and sustainability, they say yes its important but we don’t want to pay any extra for it. That’s generalising, but a lot of the utilities ask that in their engagement and that’s what comes back. They just want them to do it. My honest opinion is to get it in there through government policy and regulation obviously, but you can’t put it in policy and regulation unless the community want it as well. So everything comes down to that customer and community group. So if you have data, and engagement and they see that its important.. Community participation is critical. I don't mind liveability even though it is another buzzword. Liveability I think is sustainability plus the views of the community and I like the community because we can deliver things that are grey, but somebody has got to want them so there's got to be value there somewhere. we talk with them about what is important to them- is sustainability, is liveability, what do they think about carbon, so we try and get a picture of where their values are and how does that drive our outcomes, our operating programs- every five years. This is absolutely critical to our water plan pricing submission
Working with ther community- community education
one of the the inputs into our spreadsheet was one of how much does the community support it? How much do other people pay? So, yes, it has to be totally with the community If you work with the stakeholders, both internal and external, you get much better social outcomes because people understand the logic and they understand the financial limits of what you are able to spend on something. Working out what the community's role in the project is particularly important- that you decide what it is.. Qld Main Roads were not very good at this a while back when they allowed the community to decide where the road went- not a good idea as you split the community between those who are advantaged and disadvantaged by the solution. You need to have a robust way of assessing how to best benefit the community or least disadvantage them as a whole- a third party needs to make those decisions. The way to involve the community is in mitigation and it must be clear what the range is that you are giving them permission to decide things. It's a managed process There was then a long period of social engagement that brought the community around but it took 18 months. People were not fully happy but they found through good consultation and transparency that many of their fears would not be realized.
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For people who see these things as negatively affecting their lives and amenity, there is no choice but to take your time and properly engaging with the community- if you fail to get approval. When we major capital projects, well we have learnt over time that you have to get the community on board with whatever you are doing and show that you have considered their views. At that level, we are absolutely committed to it and it works really. At the end of the day, the community have been involved- they got the right group, the right community sampling, the right level of engagement so that by the time they came to building (it), it was a non-event. It started early enough and managed their expectations. Through a series of consultative processes (starting with examples of community anger which was a disaster), but this set them up well… Community engagement may be done professional PR companies- that’s not engagement When they do it well they put out their draft approach, they will say what is their potential approach and the costs. The consultation can completely change their mind, or identify something that they haven’t taken into account, or that this is a small thing or a big thing, and so that happened with the heavy vehicale programme where they found halfway point between point between two options- it was a best of both worlds approach based on how the consultation guided them. Its not a lip service thing. The first round of consultation is very important to understand people’s views To take that example and put it into a capital works project. We have learnt that you can’t just go ahead where you have to negotiate with the community about what is acceptable and what is not- can you live with this outcome. And I think water utilities could make far more use of voluntary expertise that is out there in the community by being more transparent and more consultative. There would have to be consistent transparent ethical behaviour and that waxes and wanes. This is project advisory groups or the like for things like desal plants- they may be attached to the project for 12/18 months. This was used in the Gold Coast Water Futures- debating issues, educating people , they can ask questions, have answers and debate the outcomes.
Engagement processes/ models
Yeah, so we are increasingly trying to think about different methods. There’s the whole project around how we could broaden and strengthen our ability to engage and bringing a stronger level of engagement up the value chain. So a lot of our engagement at the moment is done around a particular project and how its going to impact you as a community member and some of the work we are doing in the strategy is how we can get the community involved further up the process and we think about the projects and the planning, or if and how and to what extent we can involve them as sometimes there are very specific technical things we have to do around a retarding basis for instance but we might still be able to involve them in the re-establishment of the site and what that looks like- for them the amenity and social value that they can get out of that.
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I think it (referenda) is an interesting model. I would be interested in what the base level of understanding is by the constituency. The idea is putting something out to the people , there would be difficulties in implementation given the complexity of projects. I like the model as it would increase the level of public debate, but I don’t like the idea (as an industry professional,I have an interest) there are real issues of equity. It would be easier to do it in somewhere like Zurich as it is more homogenous- and that is something that Europe has going for it. European cities are so long established and have long term communities and so are relatively homogenous. Maybe you could put that to a referendum here but I don’t know how you could invest in any projects here in Australia equitably. I have been watching has been Yarra Valley and their citizens jury for their pricing submission because we have co-design things going on with particular strategies but their approach to writing up the pricing submission. So there are pockets where we are watching people who experiment and try and hopefully share the learnings. In valuation the customer engagement customer and community engagement - probably piloting some of these wider things just because it had to even see the value or to describe the value maybe you've just got to do some pilots. You don’t have to pretend to do the economic. You just say this is what can be done, you do it and in the end people see the results and then you can ask them do you want some of that. And they say hey yeah whatever that's great. they ask questions about what is important to them and what a water utility needs to part of- that’s where they get that I think the water utility needs to be part of the community or environmental needs- and if that becomes an important thing for customers they might dive into that a bit deeper and find out what aspects they should be doing- for example in South Australia that whole concept of reuse is important so recycling became a massive thing for water utilities –so much so that the customers were willing to pay quite a lot of money as part of the engagement to have recycled water- and that’s part of that concept of having reuse and sustainability and also where the nitrogen goes out to the Gulf in South Australia So what we expect out of the citizens jury is that they prioritise…But on an ongoing basis, we will go back to using a customer advisory group rather than a citizens jury… .. The only thing we say is we need an answer on what is the priority service levels they want, what is the rebates- so we have said to the consultants you have to get these answers out of them but beyond that, how they answer it is completely beyond our control. Which is frightening but interesting at the same time. We have two people permanently on staff who deal solely with the community on projects. They wheel out the engineers as well, but absolutely and that’s through harsh experience. .. And that’s not a skill that an economist or engineer has naturally, some people can.. Everyone is saying recycling is a good thing to do and we should be doing more of it, here’s the example, but it’s the classic NIMBY – I don’t want recycling if it impacts on my backyard, because it will smell…So we are trying to get four people from the community to sit on an expert panel, not as experts but to represent the community, notable people who would come with a different point of view so again it’s recognising that you can’t go ahead without a certain level of community support. It’s not a financial thing- there’s the business case sitting over there- it’s a
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pragmatic thing and in fact the business case may be negative but that’s not the problem- the problem is getting the community to support it. At that level, that’s where we are at- back it the day of Metropolitan Board of Works, it would have just gone through.
Benefits of participation
so there’s definitely people who interact, who feel affinity with the land that get involved. In terms of general engagement with customers on general projects up-front.. on our reputation survey we get a fairly high scoring on environmental stewardship. There’s a general sense in the community that we would do the right thing And when we haven’t engaged, it has gone astray. We have plenty of examples where we have made a decision that we have put up saying well we are the technical experts therefore this is how its going to be done and we will tell you what the results are. And it just goes, people just start writing to the minister. And then you get this big community outrage and then you to have to back-track and change plans and then spend more money and I think as a business we are still struggling in understanding the business case. We understand that it is probably a greater benefit to the business to spend money and time in engagement up front in the process- how much is that worth in dollar terms in not stuffing up and having to go back and change your design somewhere along the line and do works that you never planned to do. If you consult, you figure out what is important, and either design it away, or pay compensation or another way of factoring it in. Whereas the flip side is that in BAU you put a value on it. The alternative, more likely, you re-route things At the moment we can't build projects because people and community are saying no, we don't like them. We don't want you to build in my backyard. I think this is actually going to be an enabler to give get a solution of some form.
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Appendix K
Results: Selected responses on the impacts of boundaries
In your experience, how do boundary considerations impact on the ability to apportion costs and benefits of infrastructure works?
INT- 1
Most people work within their boundaries. It is not routine for people to think outside boundaries….As a reviewer of business cases, I often see that the analysis does not look broadly enough or deeply enough.
INT- 2
Another aspect of boundaries is boundary of the business- what’s our business and what’s not.
INT- 3 That’s really by a shared vision, understanding to work together… So for me the value of having a shared vision and going back to what I said before- understanding the need for trade-offs between authorities, or understanding my commitment to pay is front and centre and we have all agreed on this particular outcome.
INT- 4
The wider public/ community benefits (eg downstream water improvements) are incidental.
INT- 5 The role of the regulators is problematic – communities may value certain things that utilities manage/ provide (an example is recreational facilities on water storages), but regulators would not necessarily support utilities funding works on non-core activities. The Boards can also be problematic- they often just want the cheapest option.
INT- 6 What’s the boundary of things we should just unilaterally do and what should we can leave. We can lead by doing some pilots but we can also lead by trying to convince government yet that it's a good idea. But its up to government to reflect - the water plan may be a really good idea.
INT- 7
Those boundaries will often determine where you have a significant effect you have to do something to quantify or you know you there will be a spillover effect and you have to make a discussion. When you have those issues you always have to discuss, even qualitatively what might spill over a boundary and whether its important or not.
INT- 8 if we took our mandate, we should only be looking at water and sewage. We are willing to go beyond those boundaries. … Other water utilities aren’t comfortable with going outside their paradigm- … It’s a level of maturity..
INT- 9 You do work upstream and then people benefit downstream …
INT- 10 Then it was the recognition that on a global scale there's limits to growth and we use the concept of planetary boundaries concept. Well, that's on a global scale. Well, how does it come down to a local scale? How does it come down to a business scale?
INT- 11 So the Boards were very conscious of the whole community economics not just the economics of the Board.
INT- 12 In the end it’s this issue of in the real world you have to negotiate and that’s what the industry is not really good at.
INT- 13 that’s where IWM has extra complexity as everyone can plan to their heart’s content but when the rubber hits the road to invest, no one has got a way to work around the different boundaries and finances of different organisations whether its councils or government because often people putting up the cash are not the ones who necessarily benefit
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Appendix L
Results: Selected responses on policy and organisation goals
What is the role of policy and organisation goals in the decision making process? INT-1
Some organisations articulate their goals quite well. There is a significant difference between state government owned organisations and local government owned. State owned organisations have the luxury of being able to define their goals- sustainability being one of them, themselves. Local government businesses are one notch down from the council’s direction and then there is an enormous degree of variability as to how they develop their goals- including sustainability.
INT-2
..to get thinking and decision making to align with that is critically dependant on the dominant culture of the organization, and having the right people in the right place at the right time. Management systems are not enough..
INT-3 There might be conscious corporate strategy- eg there might be renewables or look at GHG emissions- so across everything that we do, how can we do something?
INT-4
And so the benefits seen by investors or the community are not necessarily the ones that were explored in the business case. It’s a two way street- all of the players have to work together.
INT-5 to get it in there through government policy and regulation obviously, but you can’t put it in policy and regulation unless the community want it as well. So everything comes down to that customer and community group. So if you have data, and engagement and they see that its important..
INT-6 we need clear directions and planning from government and strategies that work-that say as the elected representative, we think action in this area is a good idea and that utilities should be actively looking at this and that's our desire to see more of this and utilities are evolving
INT-7
The politics comes in and can overturn…the last ten years has seen quite a bit of change. (Going back,) the departments would put up good ideas to Ministers to consider, and it seems to have turned on its head- now ministers have ideas and departments implement them
INT-8 Well, Water for Victoria is saying that you have to work better. They have brought into that and they expect the water industry to do that. But haven’t actually set up the tools to enable us to do it. They are trying to come in with decision frameworks to empower people to take it on- the cultural change is up to the businesses….you turn your strategy into a concrete target that you can measure yourself against- that worked really well in the early recycled days.
INT-9 Water for Victoria talks about family violence, that is a centre piece for government. So, what is the role of the water sector in addressing that? Around hardship and how water retailers recover money when people can't afford to pay their bills or it's making sure that you have work place policies within the water corporation and catchment management authorities that have family violence leave . So they do cascade down and implement them in different ways depending on the sector.
INT-10 Well, that's on a global scale. Well, how does it come down to a local scale? How does it come down to a business scale?
INT-11 They would always remember their base charter and they would always remember their five year plan as well. So, they have to balance that.
INT-12 that is the over-riding scene setter for a government owned water utility. What it makes it easy- and I don’t necessarily endorse this- is where they put it in some legislation and statement of obligations. Whatever. Like you will put in an environmental pledge what you are going to do in the environment- like our greenhouse gas targets by 2020/2030
INT-13 But then in Water for Victoria you have references to Liveable Cities and things, and so Water for Victoria started to push water authorities to that way of thinking.
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Appendix M
Explanatory results table: enablers
Topic Supporting Respondent Quotes Leadership & Organisational factors
“so when he took over as MD, one of the first things he did was, "Okay, we're going to work out what sustainability means and we're going to measure it and how we're going to implement it." but I think in terms of the change, it does drive the need for leadership, that champion to be brave, to put something out there and have a go and be prepared to fail. And I think as water authorities, and this is true for a lot of traditional infrastructure organisations, that ability to fail fast and furious and to take more risk, so that tension that we can’t take risk because we have public health at stake, and yet we need to take risk to do things differently what we have done has been driven not by boards but by management .. who had a vision about this and the Board bought into it as well Leadership will take it this far so that the company is thinking about it and being able to when it is not material in an overall cost basis to get away with it What I have seen is one player -a water utility taking the lead saying this is the solution I am meant to do according to my environmental regulator or economic regulator, but I think I can get a better outcome if I take this other solution then its up to them if it costs more to go to the other parties and negotiate a cost share – but no one likes doing that- its too much effort to do it- the only incentive to do it is when it costs a lot less.
Organisational factors It is a partnership. Where we are at the moment, I think utilities and councils are often partners and I think one of the impediments is ability of council and utility to split responsibility in a sense- it's not exclusively your job is not exclusively our job- I think that is an impediment to good outcomes. Let's build bridges and institutions to allow that. You've got something like a Greater Sydney Commission in Sydney that that's one way of doing that or there are other way So we we are over here, but for those companies what’s their mandate- is it just to maximise the profits and meet government regulation or is it something more so I think that ultimately what’s probably happened in the restructure is that they have kept their old networks under the siloed one and they have formed new ones under the people who provide different technical expertise and that has probably strengthened the organisation- yes that was a rough patch but it has probably strengthened it as this is a different type of network and people were like- its based on relationships right- people are staying within their relationship network but they have kept those old ones and have built new ones. But I think people genuinely do- there are definitely technical experts that stand out- that people go to and defer to. However, to get thinking and decision making to align with that is critically dependant on the dominant culture of the organization,
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Capability and skills And then you have a group of enabling people behind you who work through all the details, complexities, of how to make it happen, deal with the challenges and roadblocks…but the business has to work out how to do it. And its often where strategies fall down- yeah we have this strategy, its all approved, it been costed, but then you get into the implementation phase and you get a whole lot of people who don’t want to do it. Or they don’t know how to- it’s a bit harder to do. There has been an appalling expertise loss- decision making is getting worse…Organisations in such a complex business gets rid of its coprporate knowledge at own peril. My suggested remedy to that is to broaden the base of knowledge and expertise by mentoring young people into these approaches and developing them. The point is to have the intellectual discussions as a base- in fact the technique is the least important part- it is how to think about problems and how to be ethical about what is important or not- and don’t cut corners. However, to get thinking and decision making to align with that is critically dependant on the dominant culture of the organization, and having the right people in the right place at the right time. Management systems are not enough/ techniques . This requires social insight, negotiating skills, broad environmental knowledge and other knowledge- eg knowledge of social options other than infrastructure… If just engineers wanting to build stuff, you get the same result again and again. The reason people with a technical background struggle with that is that they can’t deal with subjectivity well. So when you start transferring all these values – the values are subjective- they are about you. You can’t deliver anything without people. .. You had to make something from what you were given with the resources available. I have also have learnt from making mistakes. From all that, one of the key things for engineers is to understand when they don’t know something and they need to be comfortable in going to ask for help. The greatest library for an engineer is the people in the room. And that’s where you gain an understanding of the qualitative issues. They are not going to say the answer is 23- they will tell you why, the qualitative and subjective assessments. No one is going to teach how to do a job by filling in a spreadsheet. So when I came to the team, it had been viewed as a technical project about water recovery and we couldn’t as an organisation switch to the opportunity that might be provided.. so it did take someone to go, this isn’t just a water project, we have to think more broadly.. Capability is very important in being able to negotiate and achieve outcomes identified in the business case. One thing regionals do is to stay in touch with their community- it is not going to be your analysts that say yes or no (for projects). The executive should be onside or not and oif they are a progressive executive they will be in touch with their community and say we need we need to really investigate this.. We need to burrow in rather than expecting there be in-house expertise and they’ll get this fully formed business case with everything costed. So I think it will always start at the top in a way and it's mostly I think regionals are in touch with the community. I think consultants can help if an organization is intellectually capable of using them and if the right people are appointed. Its up to consultants to find their role and for the client to agree. Some organisations need assistance. The consultancy community need to help the client understand what sustainability means to them. A good project manager tells the client what they need to know- not what they are asked to tell them. Some clients haven't thought of these things. I believe as a consultant I am there to provide counsel- not what you have been told to do. (But, I am different to many
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consultants in approach). People wont take us on just to get something done. We will only take on jobs where we know we will add value. Go you can get a consultant to have a look at it. If a government expresses a support it will makes resources available. The water industry isn’t a small industry projects I think there's a will there I think the skills can follow. It doesn't have to all be held in house because if you say they're out they're out economists or consultants some economists that specialize in finding out what those the values might be either through engagement or measurement tools or various techniques. The other challenge is to get unbiased experts to prepare the material in a certain way – the water utility is not necessarily involved- they get an external party to do it- that could be to with things like dredging… the most difficult thing is getting a customer to understand what is done to run a water utility- you need to prepare plans, these are the things you need to think about – environmental requirements, - most people don’t think about that.
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Appendix N
Explanatory results table: inputs
Topic Supporting Respondent Quotes
Costs and Funding Models
Once I have done that, then I embark on what is the cost of everything, and value the things we see and try and build a whole- of –community costed business case separate from who owns it The other part that I go through is that I always compare that to Business As Usual and actively challenging what the real BAU is, because often there are often a bunch of hidden future costs that are not being counted. Its one of the reasons I started the Avoided Costs Project- which was ok, if Melbourne is going to be 8 million in 2050, we have a system that is designed for 3.5/ 4 million people. So if you ask “what is the future cost?”, Melbourne Water spends $200million a year, and has for the last ten years on drainage augmentation, and they have $2billion worth of backlog- just on existing problems. And we estimated there was a further $6 billion, as a consequence for them and another $3-4 billion for councils. And that is a real weakness in our business case because we can’t see the future avoidable costs that our alternative solution would mitigate. We talk about it a bit but we don’t do it. .. long term planning isn’t being done- because we are being driven by a regulatory period. The maximum outlook is five to ten years We have all these models, we have a long term population projection- lets lay it on, look at it, see where it falls over, do a quick cut of the costs that you are eventually going to do that gives you a basis to start your business casing, it also gives a basis to drive your thinking. And get it separated from the regulatory pricing games- which are five to ten years. This is the ten years plus…so we are starting to see that happen, but there is still a lot of “head in the sand” thinking- like well I can avoid this in this pricing period. Ultimately we are going to hit some major constraints where you can’t just keep deferring. And any of the works that are part of the regime of progressive avoidance really need to have been started twenty years prior. It’s the 20 year plus stuff that you really want to identify and the problem is the government discount rates kill you in a business case sense- anything over ten years is so discounted where in fact the real cost of those works is about CPI or for some you would even think about a negative discount rate. and they would make assumptions about the asset life and operating cost and the capital cost and they just wanted numbers for that which is completely insane as there is no chance of predicting the whole of life asset cost over 35/ 50 years. I reviewed their capital works program and identified that it could be halved based on the costs allocated to some projects- you can't do that without content knowledge And so if there is a clear obligation imposed on us by government, then the regulator looks for cost efficiency but I don’t think in sewage backlog the benefit outweighs the cost. The costs outweigh the benefit. But it is government policy, the decision has been around for 20 years
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they want to know what’s the least cost because it usually comes down to finding efficiency One of things we haven't covered here is funding. So you and you can identify in a business case- if you do it well. Say if you take recycled water schemes may defer the need for capital elsewhere in your network. Yet so by really doing your recycled water scheme you may avoid a treatment plant upgrade that you knew you going to have to in ten years time. And that treatment plant might be worth a hundred million dollars. But nobody's given you that hundred million dollars for the treatment plant. So you cost that into your business case. This has got a value, say of five million dollars a year and it gets a business case over the line. You need an actual mechanism to monetize that saving because that saving is ten years in the future. It’s like when you say if I get a motorbike we might not have to buy that a fifty thousand dollars car in two years' time- but you don't have that fifty thousand dollars. That's so that that future price rises or future value come in. So there's got to be a mechanism for that. You've got to that's when the regulator comes in and they're going to some price rises today. (This forms part of the five year planning horizon). There is still work to do in funding intangibles because because they don't necessarily plan themselves. And that's where going to the regulator - that's where that sort of friction could come in. Measuring something accurately doesn't mean it's going to fund itself. Even where it's purely rational even though even by doing something today deferring something in ten years' time, that hundred million dollars for the treatment plant isn't in your prices yet. Nobody's paying for that treatment plant so you've got to actually find a mechanism to pay an extra five million dollars now to save that hundred million dollars So that is a mechanistic way of doing Nobody's arguing is not a good idea but you need the funding mechanisms to actually get you that revenue. You've got to have a mechanism for actually funding deferred and avoided capital costs today because they're not in yet- they don't magically appear. Because you didn't build it means, doesn't actually mean the cost was never there. So that’s when you need to go to the regulator and they've got to recognise that you would have had to do that. Then they may be able to allow you to put up prices today knowing we are going to be better off. These things don’t fund themselves.. Well they still there's probably a little bit of work waiting a little bit of a way to get there. it needs to consider how do we actually fund this thing as it doesn't and doesn't always funded self and that's we've also got a back to the get more creative pricing solutions where rather than everybody pays exactly the same. We know the community values it, know they're prepared to pay so lets charge that group that suburb another ten dollars but we can't really do that yet. These is sorts of mechanisms- should we be charging developors the should we be having a higher rate should be having all those sorts of funding mechanisms need to be ironed out to support the sort of the underlying business case. you need to bring it back to the dollars and cents- because that’s how other people understand it
Risk So we had to do further into the ideas and mechanisms. So for our water resource plans, we had to conduct big risk assessments. We did risk assessments all the time and really it's the first time that we considered aboriginal values as a use of water. Some people just see environmental uses. And then that formed part of the risk assessment. Now everything in that risk assessment with regard to Aboriginal values came out as high risk, because we don't understand them. They present the plans to us and talk about the risk but its not just risk its what is happening like the works and developments and things like that, so there are always adjustments to priorities every year done I’m just playing devil’s advocate on how politicians work and how they react and work and how risk averse are politicians
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One of the risks is double counting I’ve seen business cases They have also got a fundamental role in the financial viability of the business, and inherent risks, so they should be taking a look at what are the engineering solutions, what’s in the business case, what are the risks…sometimes the board has required a rework/ start again on projects to take more risk, so that tension that we can’t take risk because we have public health at stake, and yet we need to take risk to do things differently- that tension is really prevalent in some of those decision making processes as ultimately you can put the card on the table, and say you are risking an outbreak of whatever, and that can dampen something that is innovative and new One example was that a while ago some consultants showed you could get better outcomes form PPPs as it shifted the apportionment of risk Often in environmental risk assessment you can see that a (say) orange bellied parrot can be a trump card and I don’t think that’s a sustainable policy either. So to be able to bring congestion costs in or the risk of death or things like that- the easiest way forward is to bring it in through monetizing it, then being very careful about how you discuss the assumptions and show how sensitive they (dollars) are to the assumptions around monetising (they) went back to the EPA and said if we have a risk based approach to managing wet water overflows, we can achieve this for $500m rather than $5b and then we can keep on going This same approach (using numerical factors) is used in risk assessment. Risk assessments often involve putting numbers in boxes to rank from low to extreme It is forgotten that this is a construct- but the numbers often take precedence to rank risks. People with an engineering or accounting background just can’t help themselves. So I’ve seen a number of projects where people start ranking projects based on whether they got 23 or 24- come on…Because the calls are so subjective. I see risk rankings as important - you get an automatic value assumption…I try to get clients to use the business risk ranking for anything they do What’s a far more critical disruptor to a functioning utility is the loss of critical support services- electricity, road access and in the case of treatment plants chemical delivery ie the transport access. In many cases, the past does not predict the future and so you need a probability risk analysis/ you have to do a thorough scenario analyses of your business vulnerability as well as the vulnerability of your key suppliers and assess how sensitive your business operations are to various disruptions. Often it’s that stakeholder- one stakeholder- who wants to takes the risk – we talk about who takes the risk. You work out the system, here’s the best community cost, ok you are the proponent, you take all the risk. I have no control over the catchment, I will put in some more engineering and the costs blow out. (41.55) The allocation of risk and the willingness to take risk is a real challenge especially in the water industry and no one wants the risk and they try and push it on to every one else. The bunny at the bottom ends up with all the risk, so ok what are you going to do. Well, I’ll build engineering solutions and they cost you more and they blow out your business case.
Delivery Capability
And its often where strategies fall down- yeah we have this strategy, its all approved, it been costed, but then you get into the implementation phase and you get a whole lot of people who don’t want to do it. Or they don’t know how to- it’s a
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bit harder to do. (“Well I really don’t have to do it”). The water industry is really good at finding reasons not to do something unless you are continuing to drive it, it won’t.
Asset management
I think, material but also environmental amenity and in a very wide ranging sense so we don't want to be running down our environmental assets, our financial assets, our social assets, so we want to be maintaining if we can each of those so what I'm probably bringing in is that there is a financial and material component along with the social and environmental. And its also about managing your assets around climate change or changing world or NGERS. A lifecycle view is most useful, the useful life of the asset or the relevant timescale as the key measure. and they would make assumptions about the asset life and operating cost and the capital cost and they just wanted numbers for that which is completely insane as there is no chance of predicting the whole of life asset coast over 35/ 50 years.
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Appendix O
Explanatory results table: benefit assessment
Benefits assessment
Supporting Respondent Quotes
Approaches – translating organisational aspirations to benefits
One thing I will pull out is the Investment Logic mapping here in Victoria is good in setting up your project KPIs. It tells you up front before you start crunching the numbers what’s in and what’s out. So as an example, the ACT Light Rail- again I’m an independent observer and not involved- you do all the analysis and you come up with a BCR of (say) 0.6. So then you say, how do I get it up to one- so you find some environmental outcomes. It wasn’t set up as an environmental project in the first place, if it was, then you would have investigated those variables. So for that reason, the ILM is incredibly valuable in setting up the indicators/ performance requirements of the project and then you are in a whole other space after when you have to evaluate it. Sometimes in NSW, we were pulling together the project KPIs after the CBA was done. Some of the things we are working with as part of the development of integrated water is what’s the value proposition that water brings to the community and supporting the green landscape and providing urban cooling- which aren’t direct measureable benefits and its one of the things we struggle with in trying to talk through these things and develop business cases as internally business cases are about what does it save us in the delivery cost of water . One of the things from our greenhouse strategy that I proposed was if the Board makes a decision that we want to achieve this much reduction and value it at that say $200 per tonne, then that sets a benchmark that I can achieve for the next five years- if I can come up with a project that is less than that then I have a viable business case. So you turn your strategy into a concrete target that you can measure yourself against- that worked really well in the early recycled days. So, that's spilled over in terms of if we're doing something for environmental benefit, and let's say a recycling plant, the community may agree to the environmental objectives, but they may not want it built near their place, so like the art on the freeway. That actually crosses multiple domains of value creation and so the integrated profit and loss account allowed us to go down to that depth. so we have a vulnerability program, we have an education program where we go to schools providing drinking water, teaching kids about the role of water. When we build our treatment plants, they can be built differently. When they get into their business case development, you then, there is a need to translate what the value set is now. This is important as the values sets change and the value proposition changes- s an example, desal (desalination) had a particular value equation that had existed when the council had set it up. When it was taken over by the state, it had a different value proposition- so the KPIs changed, a whole lot of things changed- you need to make sure that the project stays in touch with the value proposition What we learnt when the water industries were restructured, the projects that they were delivering changed- clients changed - needed to go back and re-tap into their value set. There can be a change in personnel- senior managers do their own interpretation of the value proposition, and commonly do for their own benefit. Also, there can also be a contextual change (eg drought). Change can come from
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a whole range of areas- context, ownership of entities (client side or provider) , personnel, people. You need to be aware of the changes and go back and check. This has to follow the value proposition- for example, if a key community sustainability consideration is unemployment, then this needs to translate into the types of contracts that are let. What does it mean for the people I employ- that is an interesting discussion I have had with a number of clients to find out what that reality is- many are wedded to the high level goal but many aren’t so much into the detail I think every state looks at that differently- from my experience. Some are better than others- I think Victoria is the best state because, in their planning and development, they have bring all the players together. And they look at the least cost to the community overall and they develop an affordable cost based on that. But that kind of planning doesn’t happen as far as I know in NSW, or any other state for that matter, unless one of the players takes a lead and decides to bring everyone together. SO that’s what I see as one of the problems- no one is …there is no rules or regulations or process around this. And there is no incentive to look at the greater good because everyone is looking for the least possible for their own area. Whoever gets in first- usually the government makes that decision. I see that it being done differently in each state.
Aspects of Community Benefits
Yeah, exactly, so what are the things that you can do to actually bring people in? Ultimately, the Western Treatment Plant has the second highest density of bird life next to Kakadu, so there is actually value there, but how do you capitalize that value? A buzz word I think, if there is one now, is livability and so we've been prompted by what is our role and what's the magnitude of it? Is it big? What's our role? How do we measure it and should we be doing anything different next year? And it's just suddenly realizing that actually this social domain can be measured in some sense of materiality. We can get different outcomes if we actually reframe our objectives along that line. I've taken the business along the lines of health and wellbeing under the umbrella of livability and in our strategic language is thriving communities our relationship with communities, I've said, "Look, health and wellbeing in outside ... While there's a lot of debate and a lot of literature in the water industry, in the health industry it actually is measured. Health is measured in terms of longevity, how long you live, and wellbeing is measured by your quality of life. Then we looked at the variation of that across municipal areas and what's avoidable and what's not and then sort of came back to say that the determinants of health and wellbeing are… Well, firstly, the number of deaths, 1,500 a year is avoidable is highly correlatable to a hundred years ago when the water industry was set up and that was set up because we had 400 deaths in a year in Melbourne because of typhoid and people [inaudible 00:28:37] were avoidable by simply building the sewers, so we're then saying the challenge is facing a quality of life and livability in the state quite high. If someone was to look back in a hundred years time and suddenly see well you got 1,500 avoidable deaths ... If we can help those people, we're helping ourselves, we're helping health and wellbeing, because ultimately that contributes to the end quality of life, so it's suddenly saying what is our interface with what we do in terms of water industry provision, but all those things that actually impact socioeconomic behavior, behavioral change, so that's drinking water, because we're drinking too much, as a society, too much sugared ugly water, so what role do we have there and what's the value? How does that compare to the vulnerability?
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We're beautifying assets as well, so we've got a few of those on the go. We're using community art. We've restructured, actually, to address I guess our role in terms of Aboriginal communities. We've signed up a RAP, a Reconciliation Action Plan. I've got a draft you'd probably call a social strategy, but we're calling it a thriving community, so what is our role in the community? How can we measure our impact and what should we be doing? (we have) gone through a period that was very compliance based- its based on our compliance with legislative requirements…but when you think about it at a more aspirational level in terms of thinking about indigenous values and communities right through the whole spectrum- right from planning and how we actually think about it in infrastructure and managing our natural assets not just we need to make these modifications to build this thing – we’ll engage you at that point From a water sense, you can look at projects from a water, sewerage or waterway point of view, but there is this broad church of benefits around liveability, sustainability, public health etc and build them into the business case and look and say how from a whole does it works but then it becomes a funding issue and a decision making issue when you realise you have these benefits over and above what I normally do, but someone else has to pay for it. No doubt for transport you can say the same thing- eg update the open space in the city of Glen Eira by raising the railway lines- but who is going to pay for that, unless its mandated. That is a challenge facing us now. Water for Victoria commits to involving indigenous Australians in planning… What is now required is to bring indigenous values into what we do and servicing strategies Now everything in that risk assessment with regard to Aboriginal values came out as high risk, because we don't understand them. So it's a lack of information on the risk so then that's all communicated back to all our documents to support the work program is coming out of the Aboriginal program. I look at a utility as a bit of a service delivery model -why don't a water utility decide to run fifty childcare centers? Because that's not what I was set up to do, where a utility generate electricity ? Yeah well that’s where it gets in the eyes gray area because there's things that they clearly shouldn't do. So I think utilities are in a good place to think about what value or are we creating and what could we do for the community but I don't think they're the place to unilaterally decide on all issues clearly if it's water or waste water and even if it's a waste to energy or some all but if it was hey let's go to now a gas fired power plant on that vacant block of land, then that’s not on. So I say it's the utility is a great place to know what public value they can deliver and what what capacity it has to deliver it but I don't think it's its own authorizing environment and so that's where you bring the regulator and government in. I’m still struggling how you capture that in Melbourne the Worlds Most Liveable City in the values for protecting a reliable water supply to protect the green – I am left with arbitrary ways of calculating it if we took our mandate, we should only be looking at water and sewage. We are willing to go beyond those boundaries. Whether its land development, whether its looking at some of our technology ideas that look into areas of the water cycle that are beyond our responsibility- we are actively trying to do that.
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Other water utilities aren’t comfortable with going outside their paradigm- ie we provide water and sewage. We are an organisation that should be engaging across the broader water cycle – that’s another part of my role is to make people aware of the broader context and the value proposition of the services that we provided. That is a challenge. It’s a level of maturity we can make decisions as a business, but we're taking the money from our community to pay for something in an area where the benefits go to other people, so we've got all those things we're still to face though.
Customer Benefits (Dis-benefits)
So, what the IP&L opened up to us is probably simplistically the social domain, but it is one of everything we do has an impact so when we build a treatment plant it has good, but it also can smell, it can be noisy. We have a buffer distance so people don't queue up to buy land around it, so we've got to actually see that there is negative impacts and then asking the questions what's the magnitude of the positive and what's the magnitude of the negative? As a result, we get caught in these traps of “we have a desal plant, we don’t need water” but its still of value to the customer. We talk about diversity to meet customer needs but in practice, we struggle with that. In the end this was a planning issue - land planning guidelines did not encourage aggregating land to the required size. The land planning process works against aggregation, and instead encourages hobby farmers…We worked through all the factors- what do you need for a market, how would the trucks move. In the end, this was a Council project as they had control over these matters. We met with Councils and one mayor was willing to take it forward where the water authority would act as the service provider. We identified that Council needed to take it forward- there were plans at the time to change the urban boundaries. Other considerations were the need to reconsider the urban boundary (of Melbourne) taking account of the need to preserve viable agricultural land. The costs outweigh the benefit. But it is government policy, the decision has been around for 20 years or whatever it is so our customers are paying this cost for this environmental benefit
Business Benefits
people will respect their water corporation- they know who they are – they have a social licence to do things in their communities as well- through their definition of responsibilities and what they do gives them a certain amount of kudos to go out and do certain things It might be a level of trust then- so people who know who (us) are in the community – its low it’s something like 20/25%- who can actually describe what we do- there’s a very high trust level. So when we do approach the community, maybe its, I don’t know. And when we haven’t engaged, it has gone astray. We understand that it is probably a greater benefit to the business to spend money and time in engagement up front in the process- how much is that worth in dollar terms in not stuffing up and having to go back and change your design somewhere along the line and do works that you never planned to do.
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Appendix P
Explanatory results table: value assessment
Topic Supporting Respondent Quotes
Economic Value So let’s find the best value solution- I deliberately use the word “value” – not least cost solution because in many cases the best value solution may be more expensive than the least cost solution, but the customer or the community value that greater. And going through that process, where you identify value propositions such as we want to use recycled water for our gardens etc- testing that I want to know if that is real, and quantifying it or if not quantitatively challenging it, so I build what that value proposition is. The other part that I go through is that I always compare that to Business As Usual and actively challenging what the real BAU is, because often there are often a bunch of hidden future costs that are not being counted. You can look at the impact on charges of offset charges and tariffs and those sorts of things and whether it fits within your core business or not. But for this, largely user pays and metered, then the sector funds itself through its governance model. So there's an augmentation that needs to be done and it should be funded through its existing customer base and go through the ESC process and impact on tariff in the end. Whereas roads don’t get funded through registrations. Or new train lines can't built through public transport fees. It’s the 20 year plus stuff that you really want to identify and the problem is the government discount rates kill you in a business case sense- anything over ten years is so discounted where in fact the real cost of those works is about CPI or for some you would even think about a negative discount rate. but most large organisations from governments to public utilities apply a financial lens to the final decision and in the case of the Water Corporation, they had what they called FIS (financial impact statements) and they would make assumptions about the asset life and operating cost and the capital cost and they just wanted numbers for that which is completely insane as there is no chance of predicting the whole of life asset coast over 35/ 50 years. we only succeeded in getting that going at the level of planning but it reverts to financial analysis in final decision making, with some consideration of social concerns and environmental constraints, but they weren’t integrated- for example they would say we can’t do this option because we won’t get environmental approvals for it rather than valuing the environmental components. It's a journey that we're on, and so internally we have to convince ourselves first that it is core to our business and that it actually delivers collective value and then what is the cost and what is the benefit? Who pays? Generally, it's cost shifting is the question and then we can make decisions as a business, but we're taking the money from our community to pay for something in an area where the
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benefits go to other people, so we've got all those things we're still to face though. it's all delivering a better outcome for us, so it a financially better model. When we're looking at our energy case, again, it's all built around the financial model and if we're going to generate all our energy my 2025, we're going to be lowering our bills. We're paying 3.7 million now, that's only going to go up, so if we can actually generate our own energy, it's a very good business model. The emerging issue for me is the funding of those things rather than identification in Business Case, and the second part is getting realistic values for some of those externalities to what SEW might deliver- whether they are market or non-market- getting something that is realistic. Previously when there was a carbon price carbon was included as an externality, but now its not there. What we do is say here is the economic analysis and then look at additional lens such as a multi- criteria.which picks up that this is really energy conscious or something that I’d like to get into the economics. One of the risks is double counting I’ve seen business cases that have priced energy, probably added a carbon price in and then says that it is energy intensive- yes I know that because its over in the (quantified) economic The concept of looking at the long term was good- that’s why I initiated the long term avoided cost model. We have all these models, we have a long term population projection- lets lay it on, look at it, see where it falls over, do a quick cut of the costs that you are eventually going to do that gives you a basis to start your business casing, it also gives a basis to drive your thinking. And get it separated from the regulatory pricing games- which are five to ten years. This is the ten years plus…so we are starting to see that happen, but there is still a lot of “head in the sand” thinking- like well I can avoid this in this pricing period. Ultimately we are going to hit some major constraints where you can’t just keep deferring. And any of the works that are part of the regime of progressive avoidance really need to have been started twenty years prior. It’s the 20 year plus stuff that you really want to identify and the problem is the government discount rates kill you in a business case sense- anything over ten years is so discounted where in fact the real cost of those works is about CPI or for some you would even think about a negative discount rate. We are willing to go beyond those boundaries. Whether its land development, whether its looking at some of our technology ideas that look into areas of the water cycle that are beyond our responsibility- we are actively trying to do that.
Development Value But so that project so we cost it at $300 million or something and said that 600 people would benefit, looked at the life cycle period, assessment period. And then that was obviously never gonna get up They just did the work of creating this big volume of water without developing a market place for- which I think it’s not so good.
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an acceptable externality is the increase in land value by the community that is being created- and so most economists would include that in the economic argument and say by doing this particular solution, the land is worth 100 units more, but it’s a benefit to the developer whereas the investment is by the utility or the householder- so for me, there is a disconnect. Someone might come along and say I’ll buy ETP, I'll give you $4 billion you guarantee to provide sewage for 50 years and I do whatever pay me to provide that service. Government's going to have a hard time saying I’ll forgo $4b. And for the WTP, this is about protecting this asset so that we don’t want to sell. It's about backing itself as an organisation and saying we don’t want to sell this. It has been tagged as the site of the new port .. it's going to be with the new juvenile facilities, right? ] So they don’t have a comprehensive view of its use- they have a land use plan but not a master plan I think we do have to get better evaluation there is some work to do there. One of things we haven't covered here is funding. So you and you can identify in a business case- if you do it well. Say if you take recycled water schemes may defer the need for capital elsewhere in your network. Yet so by really doing your recycled water scheme you may avoid a treatment plant upgrade that you knew you going to have to in ten years time. And that treatment plant might be worth a hundred million dollars. But nobody's given you that hundred million dollars for the treatment plant. So you cost that into your business case. This has got a value, say of five million dollars a year and it gets a business case over the line. You need an actual mechanism to monetize that saving because that saving is ten years in the future. It’s like when you say if I get a motorbike we might not have to buy that a fifty thousand dollars car in two years' time- but you don't have that fifty thousand dollars. That's so that that future price rises or future value come in. So there's got to be a mechanism for that Nobody's paying for that treatment plant so you've got to actually find a mechanism to pay an extra five million dollars now to save that hundred million dollars So that is a mechanistic way of doing Nobody's arguing is not a good idea but you need the funding mechanisms to actually get you that revenue. You've got to have a mechanism for actually funding deferred and avoided capital costs today because they're not in yet- they don't magically appear. We did a benefit cost analysis to demonstrate…the interesting thing we found was the revenue we earned as a function of the growth was greater than the cost of the project. It was just a little bit more expensive than business as usual. I would love to have it (liveability) quantified- someone may have done it- but to bring it down to water its really hard to find quantified data so we end up with avoided costs and the quantification of the value of property- there are the two things I use. The development generated in the business case identified that there was significant uplift in property value. The ability to collect it off developers was very minimal. The business case could demonstrate that we could actually receive revenue as a consequence of the development that could more than offset the costs that we expend. And the Board and the Execs are still struggling with that because the whole thing that that the development is generating value for the
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business was actually being taken out of the analysis in the business case. So the value proposition of the development – I had to build that argument- the acceleration of the rate of the development as a consequence of the works probably would have offset more than the extra cost as I get additional revenue earlier because it is an attractive place to live with all the green stuff. The process to do all that linking is really really hard, and having clarity in building the business cases – clarity in what is the value propositions- is a really important part. And then going to try and work out we agree this has value, what do we value it at? So yes we would have talked to them about the hedonic pricing, you would expect the rates to increase and that when we used that material and that material about how it might benefit the broader community to form those partnerships and create that coalition you actually if you look at the before and after photos of and you look at the houses that are on either side of that that now have a park which before was a massive sewer with a fence. All open sewer. You can easily say that the property value has increased by 10% or whatever, easily say the most houses you just look at it and know those houses are worth more now than before that path w
Social Value There is still work to do in funding intangibles because they don't necessarily plan themselves. It was about throughout the life of the project, it constantly taps in to the corporate value equation and value proposition- I have done work with some organisations on this. The best example I saw/ used was where Sydney Council had a requirement for affordable housing and it was clear how they brought in the sustainability component (the community side), but it also needs to be financial sustainable as well- eg if the business goes bust, then you can’t deliver community sustainability But what I’m saying is that there is a huge difference in each town and city as to what they react to. Its trying to derive what that value proposition is for the city. Because if we want to think of ourselves as water authorities providing more than water- drinking water, staking away sewage and treating it, flooding services, and waterway services and we want to think about in terms of how we actually contribute to the urban form, and how we use water for parks and recreation and how we work with councils so we start thinking about it. I think about in terms of Maslow’s hierarchy in that we have done some of the basics, we need to move into more complex areas where it is cross organisational and we are delivering desires more than basic needs. One of the more interesting talks at OzWater for me was where the guys from New Zealand – how they had involved Moari people into specific water treatment and sewerage treatment projects in terms of bringing their values into the design of a project- and some of the aspects were , and I was sitting next to someone who plans our sewerage treatment work and she was saying “but there’s no backup in terms of public health” and I think this is part of the conversation, the community and indigenous groups were happy with that outcome,
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is that acceptable. What I found fascinating about that was not only had they involved them in the planning in the treatment plants and you got things like discharge channels that looked like concrete channels with rocks cemented to it but there was some form of spiritual cleaning that was important to the moari tribe of that area- which based on them being involved in that design process. Or the example where they had them involved in the performance of the treatment plant through cultural values around shellfish and picking up fish in the food chain to analysis the performance of the treatment plant discharge based on the impacts to the shellfish in the bay was. So I listened to that talk and thought we have miles to go.
Ecological Value
until very recently, there has been little effort to include a wide range of externalities in decision-making analysis in business and industry. They felt that the values- this was when we asked them in a workshop- they felt that they didn’t feel that a lot of the quantitative values could be applied to their geographic area. So they had to then redo it all again. So it didn’t suit their needs when they had to put in values for projects or business cases- so that was the main issue for them. Melbourne being the worlds most liveable city does result in it being more attractive to international industries setting up in Melbourne rather than other cities because they can say this is the best city in the world for their key employees to move there. So that’s creating a whole lot of economic value for Melbourne. What’s the role of water in that liveability, well its helping to support the green. You have to break it down and say what’s the value of that fantastic environment there, well its pretty high and water is an underlying support for that and if you didn’t have it, the trees would brown and die. So you pour a whole lot of water on there- but why can’t you use desal? Well you can, but from the perspective of the best use of your water resource, is that the best answer? Or should you be opportunist and take opportunities as they arise to decrease your environmental footprint. How do you value that? You may want to pay less than potable water but you may value it higher. Ultimately, the Western Treatment Plant has the second highest density of bird life next to Kakadu, so there is actually value there, but how do you capitalize that value?
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Appendix Q
Explanatory results table: trade-offs
Topic Supporting Respondent Quotes
Negotiation that gets really in your business cases and what ends up happening is that the beneficiaries keeps discounting their benefit so they have to pay less. One of the ways of getting over that is to say we are a whole-of-government – we are all owned by government – if the government agrees, well yes we are willing sacrifice this year to achieve a best for community solution. So there’s that grid oversight function that’s looking at, which is still being worked out around how it works, how water is traded within the southern sector. So the retailers really wanted to see some kind of grid oversight option, transparency around where Melbourne Water is spending their money and then it comes to avoided system costs which is one of these benefits of green infrastructure- you don’t have to upgrade your grid network. Revealing those costs so you can build them into a business case saying…like what Yarra Valley Water has done in their northern growth areas- they are not hooking into the western treatment plant and not build a $300m trunk sewer , they are building small scale recycled water plants and then they will put a pipe in there and sell recycled water as well And so Sydney Water went back to the EPA and said if we have a risk based approach to managing wet water overflows, we can achieve this for $500m rather than $5b and then we can keep on going. If a site is important for amenity value, then we are only going to do this solution. So some people in Park Orchards don’t want it because they fear development, others want it as there will be development, others want to contain their waste on site if they can and so we have been consulting worth that community on an individual basis for months, years by now and we will continue until we get a solution. When we major capital projects, well we have learnt over time that you have to get the community on board with whatever you are doing and show that you have considered their views. At that level, we are absolutely committed to it and it works really. We have learnt that you can’t just go ahead where you have to negotiate with the community about what is acceptable and what is not- can you live with this outcome. My simple answer is that that if you solve that problem we have cracked the chestnut. That’s the one that, I don’t know if there is in any way, If you can get them to sit down and agree to agree upfront regardless of what this says, if this says that it is positive to you then you pay what this says, if it says its negative then you get that value. In the end its this issue of in the real world you have to negotiate and that’s what the industry is not really good at. So apart from you get an agreement up front and live with the consequences or you get better at negotiating- hopefully we are getting better at negotiating with the community and we have to get better at negotiating with stakeholders.
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Some people would say that that’s not fair but actually to get the ultimate community outcome, may be you do have to horse-trade and as we know that’s what happens in the real world. But governments are always, I have seen so many papers over the years, economists can’t answer that question. It’s about negotiation in the end and as I said I don’t think that our industry is all that good at it.
Who pays that gets really in your business cases and what ends up happening is that the beneficiaries keeps discounting their benefit so they have to pay less. One of the ways of getting over that is to say we are a whole-of-government – we are all owned by government – if the government agrees, well yes we are willing sacrifice this year to achieve a best for community solution. So for those pricing impacts, they were having to think of financing decisions so they could modify the pricing impact on their communities and that pricing impact was a much more important thing. They were very often trying to think- back in those days- they could possibly get some money out of government so it wasn’t just the economic model – it was thinking about that pricing impact. So the economic model might have been important but it was, even if it was a more expensive economic model because it serviced reuse or something like that- they were then looking to governments to help them.
Evaluation I think Multi-criteria analysis has a lot to answer for as well… because you are not going to get any one proposal that beats another proposal on every aspect of the multiple criterian. So you have two ideas- one is more expensive but has better environmental outcomes, so you go how do we judge the relative merits of those. Well say that you had three options- one might be dominated by the other one – dominance would mean that you have one metric CBA or multiple metrics – if its better on every aspect.. if you have two different ones that perform differently, you can then assess the different trade offs that makes one better than the other. (eg We can do the underground tunnel v the surface rail link- different characteristics and costs- so the benefits of the rail link are achieved no matter what but we have some very different costs and neighbourhood benefits- they are the differences that we can compare them in pricing- if you value this, then this is better, if you value that, then that is better- its something you can do without throwing all the information and assuming the trade off at the start of the analysis One of the key decisions for us is how much alternative water do we provide- then we can think through where we get that alternative water from- from sustainability and environment- do we get it from stormwater which has its consequences or do we get it from wastewater which has different consequences- you are trading off two different sets of environmental outcomes and some of those things can play out over time- 50,000 lots could happen over thirty years.So you have some time to get the right answer..