The Dutch Drinking Water Sector

Second Annual Conference on
Competition and Regulation in Network Industries 20 November 2009 Centre for European Policy Studies, Brussels, Belgium Rejuvenating a Veteran Benchmarking Scheme: Benchmarking in the Dutch
Drinking Water Sector Maarten Blokland, Marco Schouten and Klaas Schwartz Department of Management and Institutions
UNESCO-IHE Institute for Water Education
P.O. Box 3015
2601 DA Delft
The Netherlands
Tel.: +31-15-2151715 - email: m.blokland@unesco-ihe.org; m.schouten@unesco-
ihe.org; k.schwartz@unesco-ihe.org Abstract
The voluntary benchmarking system of the Dutch drinking water sector has
matured over time. Nowadays it is Europe's most veteran benchmarking scheme
of drinking water companies. The system has been praised by many; although
also critical notes are heard on whether the system is still as appropriate
and effective as it once was. With the recent legislative change from a
voluntary to a mandatory system, there may be a momentum for reflection and
change. Now may be the time to see whether the scheme can be rejuvenated.
This paper assesses the lessons learnt from the existing system through a
360° analysis of stakeholder's perspectives, in order to identify ways for
enhancement. Keywords
Benchmarking, regulation, performance, drinking water, the Netherlands Introduction
"I can only conclude that benchmarking works!"; a statement voiced by the
Dutch minister of Housing, Spatial Planning and the Environment (VROM) at a
speech for the International Water Association, referring to the
benchmarking scheme of the Dutch drinking water companies (Cramer, 2007).
And she is not the only one exemplifying the Dutch success in this field.
Also an organization like the Public Services International Research Unit
(PSIRU) from the UK compliments the responsible actor in the Netherlands of
the benchmarking scheme, VEWIN (The Association of Water Companies in the
Netherlands), by finding it to: "... provide a way of exchanging
information and mutual benchmarking at low cost in collaborative effort to
strengthen operational performance" (Hall et al., 2009:5). However, the praise given to the Dutch benchmarking exercise appears to be
somewhat at odds with existing literature on benchmarking schemes. This
literature, which does acknowledge that benchmarking as a tool has become
more important in the infrastructure sectors over the past decades,
highlights that it appears difficult to utilize the full expected potential
of the tool. Especially now, with a legislative shift from a voluntary to a
mandatory benchmarking system, the time seems right to reflect on whether
the benchmarking scheme is as effective as it is intended. What are key
lessons learnt from the existing system by the involved stakeholders? Is it
still effective or are there signs of erosion? And importantly, can the
system be rejuvenated with the legislative changes at hand? We address
these questions through an analysis of available literature and a 360°
analysis incorporating the responses from interviews with key
stakeholders[1]. We structured our contribution in the following order. First, we derive
five key qualifications from literature on the use of benchmarking as a
regulatory tool in the public sector. Then we introduce shortly the Dutch
drinking water sector. Background data on the sector, how benchmarking
evolved in the Dutch water sector, and some key notions related to the new
drinking water law are provided, to illuminate the context in which the
benchmarking scheme takes place. The main research results section follows,
consisting of an assessment of the existing voluntary benchmarking system
through an analysis of the perspectives of the key stakeholders. These
elements provide the building blocks for our conclusion and
recommendations, e.g. the ways to enhance the Dutch benchmarking scheme for
the drinking water sector given the context of the new drinking water law.
Benchmarking as a Regulatory Tool in the Public Sector
Benchmarking denotes the process of comparing the current performance of a
utility with a reference performance. It finds its origin as an internal
management tool, yet over the past decades it has increasingly been
promoted as a regulatory tool by way of which competitive pressures can be
exerted on a monopolistic industry (Antonioli and Filippini 2002; Dassler
et al. 2006). Benchmarking[2] is a relatively 'light-handed' regulatory
tool as no direct consequences are attached to benchmarking. A true
benchmarking system, like in the Dutch drinking water sector is based on
naming and shaming the inefficient companies, and hence promoting
productivity. It is sometimes called regulation by 'embarrassment' (CPB,
2000) or 'sunshine' regulation (Walter et al., 2009). If managers care
about reputation effects, publication of benchmarking results can be seen
as some kind of reward. According to Van Helden and Tillema (2005) both
economic and institutional reasoning explain benchmarking in the public
sector. Economic reasoning focuses on effectiveness and efficiency of the
sector, viewing benchmarking as a substitute for market forces.
Participants in the benchmark will feel pressure to act in case negative
performance gaps surface in comparison to their peers; therefore shifting
towards a more result-oriented corporate culture. Institutional reasoning
is derived from neo-institutional and resource dependence theories and
focuses on transparency and social legitimacy. As pointed out by many authors (Love et al., 1998; Bowerman et al., 2002),
there has been a lack of research on benchmarking in the public sector.
Folz (2004:218) finds that: "Benchmarking ... is in a nascent stage of both
theoretical and practical application in the public sector". Yet, although
the available literature may be limited, it is largely of the same tenor on
some key qualifications regarding the use of benchmarking as a regulatory
tool in the public sector. Below, we list five key qualifications derived
from literature as they may bring impetus for reflection on the Dutch
drinking water sector benchmarking scheme. The Diminishing Marginal Value Several authors argue that a veteran benchmarking scheme, like in the
Netherlands, may be subject to erosion and in need to evolve further.
Cabrera (2008) points towards the diminishing marginal value of
benchmarking results over time. Because the same participants are compared
to one another every year, each new round provides less and less valuable
information. The validity of diminishing marginal value is shared by Van
Helden and Tillema (2005:343) stating: "a current benchmarking study may
reduce the usefulness of future benchmarking studies". A second reason for
change is that participants are continuously required to use a significant
amount of resources (human and economic) while the benefits of it may be
perceived as disappointing. Continuously top ranked companies may feel that
this money can be better spent elsewhere since there is nothing for them to
learn from the others, while managers of low ranking companies may not want
to damage their egos over and over again. De Witte (2007) finds that the
longer the system is in place, the higher the risk of manipulation. Over
the years utilities will be able to find the weaknesses and exploit these
for their own benefit (higher ranking). Benchmark participants will try to
increase virtually the performance through strategic behaviour, instead of
the actual performance. Specifically for the Dutch drinking water sector,
De Witte notes that a proper functioning of the benchmarking scheme is
threatened by the concentration trend in the sector. Over the years a
steady decrease in the number of drinking water providers can be observed
due to mergers and acquisitions, implicating fewer companies in the
benchmark and issues of scale since the largest company is a factor 10
bigger compared to the smallest one. This concern is echoed by Dassler et
al. (2006) who argue that the number of companies is important in order to
be able to make comparisons between utilities. Although Dassler et al. find
the 22 water companies in the United Kingdom to be sufficient for
benchmarking, the 10 sewerage companies are considered too few. Benchmarking as a stepping-stone Corton (2003), in analyzing the Peruvian water sector benchmarking scheme,
argues that the benchmarking exercise which was initiated in 1999
represents a 'first step' to introducing competitive pressures. The message
being that, although for a first step the exercise may have been
successful, additional steps are required before the full potential of the
tool is realized. Jamasb and Pollitt (2001:128) also signal a need for
especially new regulators to develop the use of benchmarking as a
regulatory tool over time. In particular they suggest that regulators need
to pay ample attention to developing good data collection and reporting
systems. The idea being that the regulator needs to build capacity over
time in order to better utilize benchmarking as a regulatory instrument. The contextual character Nemec et al. (2008:674) studied benchmarking in the public sector in
Central and Eastern Europe and arrived at the conclusion that success of