PROCUREMENT OF UTILITY SERVICES
1.0 Introduction
1.1 Since the day of organized society the provision, maintenance and supply of utilities has been the responsibility of rulers and governments. Initially, the main utility was water and available free of charge as it was God given and essential for sustenance of life. Users had only to collect it from rivers, lakes, rain or extract from wells. Water was joined by electrical power and electronic communications when these were invented. In urban societies it was necessary for raw water to be treated before it could be distributed for human consumption and for other purposes where the need for clean water is critical. Governments of the day established agencies to produce electricity, provide telecommunication services and installation of water treatment and distribution facilities. Minimal charges were imposed on consumers to recover costs associated with the supply of these utilities.
2.0 Costs of Utilities
2.1 The costs of these utilities were minimal due to limited demand or supply that was in excess of demand resulting in low rates of production. Thus the users could enjoy these utilities at cheap rates. Further the element of ‘profitability’ or ‘greed’ did not exist as it was governments’ objective to just recover costs of production, distribution and maintenance. This led to waste and excess usage with absence of any reason to economize or seek alternative economical sources. However increase in population, increased urbanization, manufacturing, industries, commercialization of food sources, etc, the demand for utilities increased beyond the available resources and capabilities of the government agencies to satisfy demands at cheap rates.
3.0 Management and Responsibilities of Utilities
[A] Telecommunication Services
[a] Government Initiatives
3.1 A common solution in some of the developed and developing countries is to outsource management of the utilities to private companies. It has been assumed that the corporate sector, being profit orientated, would take appropriate remedial steps to recover arrears whereas Government Authorities would assist in providing financial assistance in the form of grants and loans for infrastructure renewals. This method worked in the case of telecommunication services. Subsequent entry of other players of communications services increased efficiencies and competition that gave the consumers varied services at competitive rates. Governments limited itself to a regulatory role.
[b] Initiatives by the Management of Commercial & Industrial Users
3.2 The private and public sector users of communications have several available options to reduce the cost of these services. In addition to the traditional fixed line phone/fax services other methods were introduced such as mobile services, further enhanced by broadband and 3G services. The best mode could be a combination of fixed line, mobile communication and Internet services; use of the many available e-mail services providers could be the main option for communications as it is free. The usage of fixed line service is best where the parties are fixed and hand phone services are most convenient and effective if the subject needs to be discussed and the users are away from office, unless in possession of a laptop and hand phone with broadband services. Hand phones can also be used to send short messages [SMS] but these again may be slow if the other party does not respond promptly and are subject to varying rates that may be high in some cases. It is up to management to compare the needs of the company vis-à-vis the varied variety of modes and schemes that are provided by the many telecoms before making a decision on the type of scheme to be subscribed. The best option may be a combination of all three modes. This will ensure that the most cost-effective and cost-efficient service is selected and used for minimizing of costs that would maximize profits.
[c] Methodology and Benefits Achieved – Case Study
3.3 An internal auditor of a construction company suggested to the finance professional to compare the cost of the various communications services provided by the many telecoms. The suggestion was referred to the procurement professional who obtained the expertise of the company’s IT professional to make the comparison and provide a report with recommendations that should be substantiated by evidence. The IT professional received the input from the user departments and then obtained the scope of services and terms levied by the relevant telecoms. The IT professional prepared and discussed his initial report with the user departments before finalizing it and submitting to the management. The report detailed the initial financial outlays and the expected annual savings of communication costs. The initial financial outlay was estimated to be RM100,000.00 that would be recovered within two years based on projected annual savings estimated at RM50,000.00 or higher in the event of any subsequent increase in rates by the telecoms.
[B] Electrical Power and Water Supplies
[a] Government Initiatives
3.4 Malaysian Government initiated the same solution to solve the problem of shortages of electrical power and water and power by increasing supplies and simultaneously raising the charges imposed on users. Another measure was to reduce losses in supplies caused by leakage due obsolete infrastructure, theft of supplies and wastage due to excessive usage by consumers. The social responsibility was satisfied by using low rates for domestic/religious/charitable consumers and higher rates for large, commercial and industrial users. This method appears to have not succeeded as expected. Government funds are provided as grants or low cost funds for renewal of infrastructure to reduce losses due to leaks. In addition laws were amended to increase penalties for theft.
[b] Initiatives by the Management of Commercial & Industrial Users
3.5 Several types of users in the corporate sector consume large quantities of electrical power and water. The costs of these two utilities constitute a substantial part of the cost in the manufacture, production, operation or maintenance of their products and facilities. Thus it is important that management take appropriate measures to reduce the usage of these two utilities by innovation and/or looking for alternatives. The main responsibility rests with management from all disciplines including professionals from procurement, finance, internal auditors, human resources, legal, secretarial, on-line operatives and should be a common responsibility of all those who are employed by the company. The company should also have a reward system for suggestions that can assist in reduction of costs as it would contribute to company’s profitability.
Electrical Power
3.6 Costs of electrical power can be reduced by several methods, the more common of these are already known to management. These include the following:
[a] Use of low power consumption electrical fittings and air-conditioning systems
[b] Automatic on/off systems
[c] Sectional lighting switch systems
[d] Use of clear glass windows/panels for free sunlight and minimal use of curtains
[e] Company policy of lights/air-con usage on need basis.
3.7 The effectiveness of the above methods is substantially dependent on two main aspects listed below. These are
[a] The provision of usage of the above methods was incorporated in the electrical designs prior to the installation of the electrical infrastructure prior to the construction of the building
[b] The staff is disciplined to ensure compliance of the above methods.
3.8 It has been noted that in most cases the electrical consultants appointed to design the systems may not have taken into account the above methods and the management could not have observed this due to their total trust in the expertise of the appointed electrical consultant coupled with their being unaware of the importance of these methods. Another possible reason could be the management’s intention to reduce costs or budgetary constraints as the initial cost of installation of the system to enable taking advantage of the economy measures. Thus it is important that management should involve all its professionals in procurement and not just some selected disciplines.
Water Supplies
3.8 Water is available in unlimited supply in the sea and it is free except that sea water needs to be desalinated before it can be used for human/livestock consumption or for commercial/industrial purposes. Thus this alternative is not economic due to the high cost of construction of infrastructure facilities that are required to purify the sea water.
3.9 Another alternative source is rain water that is available free of cost. The rain water is not used for human/livestock consumption or industrial/commercial purposes in urban areas due to availability of treated water that is provided by utility companies and piped directly to consumers. However the cost levied is high and expected to escalate further in future. Thus it is important that the use of treated water be minimized to reduce cost and used only for purposes where rain water cannot be used and rain water used where it is suitable. The financial implication of managing rain water for use would be the provision of its storage and distribution systems. Examples of areas where the rain can be used include the following:
[a] Open areas with lawns, plants and other greeneries
[b] High-rise luxurious condominiums with landscaped areas
[c] Golf courses
[d] Cemented areas
[e] Commercial vehicles, buses, railway coaches and the like
[f] Exteriors of buildings and structures
3.10 Maximum benefit is dependent on the availability of storage and distribution infrastructure of the water which is to be collected during the rainy season. Thus it is important that sufficient storage and distribution facilities are constructed. The benefit can be enjoyed by all including individual households where the rain water passing through the gutter can be channeled to storage areas and later used for the intended purposes. The quantum of financial benefit that can be enjoyed is directly related to the quantum of water that is available to satisfy the needs.
[c] Methodology and Benefits Achieved– Case Study – Electrical Power
3.11 A public listed company operating a five-star hotel had over 10,000 electrical bulbs to light up the hotel where the company held its Annual General Meeting. A shareholder who attended the AGM observed that a worker was changing the defective bulbs. On closer observation it was noted that the bulbs were of 100 watt power. The matter was raised during the AGM and enquiry made why the management did not use 18W bulbs that provided the same amount of light and help to reduce the power consumption bill by 82%. The total cost of replacing all the existing 100W bulbs with 18W energy saving bulb would total RM2.5 million. However, the electrical engineer estimated that the total initial outlay could be recovered in less than two years with substantial annual savings thereafter. The management could not provide any reason for not using the energy saving bulbs when the hotel was first constructed about ten years ago.
3.12 The quantum of savings is expected to increase in future as the tariff rate charged by the privatized utility company is being increased periodically due to rising demand for power by higher standard of living due to rising incomes, expanding economies. Further the cost of production of power is also rising due to escalating fuel costs which is a depleting resource, depleting water resources required for construction of hydro projects that are essential for production of power and the dangers associated with nuclear power facilities. Other modes of production of power on large scale are not deemed economical at the present time. Examples of such alternative methods are wind power, sea wave power, solar power or gases produced from vegetables,
[c] Methodology and Benefits Achieved– Case Study – Water Supply
3.13 A property developer had constructed high-rise commercial buildings and luxury condominiums with extensive landscapes. The developer’s architect was directed to incorporate in his design the collection of rain water that was to be stored and piping system for its subsequent usage for watering the landscape as a first option. This was to be an addition to the plumbing system of treated water that was to be used as a last resort in the event of dry season when there may not be any rain fall during long periods. The design provided for a total of over 200,000 liters of rain water that was collected and stored in 30 tanks that were so placed at different levels of each of the buildings constructed to ensure that the water could be delivered to the landscape areas by gravitational pull and hidden from sight by surrounding the storage tanks with potted plants. The total cost of the system per building was estimated at RM250,000.00 which was recovered within the first three years of installation as the estimated annual savings were computed as RM80,000.00. The quantum of savings have since increased as the utility company has increased water rates by over 60% and are escalated periodically in the future resulting in higher saving quantum.
4.0 Conclusion
4.1 Substantial savings can be achieved in procurement of utilities by government, commercial, industrial, manufacturing, construction, NGOs and other corporate enterprises including individuals. All that’s needed is a little ingenuity, some capital investment in the infrastructure and management of utilities. The writer managed monthly savings in utilities bills estimated to be 15% to 30% in respect to his two-story terrace house by effective usage of communication services, energy savings economy bulbs and use of rain water for watering potted plants and cleaning the driveway and personal car.
Savings are all around
All that is Necessary is to identify them and take Appropriate Action
All have a Role to Play in Reducing Cost of Procurement
Auditors have an important role to play due to their intimate knowledge of the client
GSK/0ct 07
E-mail: gursharan38@gmail.com sharwant38@yahoo.com
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