30 Years of Yarra Valley Water with Managing Director Pat McCafferty

[00:00:00] Piers Clark: Welcome to the Exec Exchange 15-minute podcast, in which a leader from the water sector shares a story to inspire, educate, and inform other water sector leaders from around the world. My name's Piers Clark and my guest today on this special 25th episode. We've got a brilliant guest today. We've got Pat McCafferty from Yarra Valley Water in Victoria, Australia, and the topic today is actually celebrating a long, illustrious career that Pat's had. 44 years in the sector, 30 years in Yarra Valley, from the very point that Yarra Valley was formed to today when he's in the final weeks of his career in the water sector. Or is he? But we'll come to that. The topics we're going to talk about are amongst other things, the millennium drought, the reform of the water sector in 1990s, and some of the spectacular things that Yarra Valley has done to enhance its environmental footprint. Pat, it is wonderful to be here with you today.
[00:00:58] Pat McCafferty: Thanks for having me.
[00:00:59] Piers Clark: Now I've obviously teased there some of the topics that I'm hoping we're going to cover. And normally we start by talking about you, but as the topic today is you, I want to just start by you telling me about Yarra Valley. Where is it, how many people does it serve? What sorts of things does it do?
[00:01:16] Pat McCafferty: Yarra Valley Water is a retail distribution water utility. We service the eastern and northern suburbs of Melbourne, a population of 2 million with water and sanitation services. We have about $6 billion worth of assets. So reasonably significant. We're one of the larger water utilities in Australia.
[00:01:32] Piers Clark: In the Melbourne area there's quite a few, aren't there?
[00:01:34] Pat McCafferty: I guess the creation of Yarra Water and the backstory is, back in the 1990s the state of Victoria is privatizing its energy and gas assets and restructuring its water utility. We had one water utility at the time, which was Melbourne Water and it was a descendant of the Metropolitan Board of Works, which had been around for a hundred years. And I guess at the time with the reform of the energy sector, it was considered that some structural reform of the water utilities was appropriate primarily to ensure greater accountability, more proximity, and customer focus. And that real geographical responsibility and being closer to customers. And of course, structural reform, which was very similar to what had happened with the structural changes in energy: the creation of a bulk water supplier, Melbourne Water as the wholesaler of bulk water and sewage services. And these three geographic retail distribution monopolies: Yarra Valley Water, City West Water, and Southeast Water. That was the start of it and there was a possibility that we might be sold off given what had been happening with the energy assets. But I think certainly both sides of politics looked at that and decided that water and public ownership was appropriate and should be maintained. It was a really interesting time for us to really get clear around, the distinctions between what we were responsible for and what Melbourne Water was responsible for. And I remember at the time thinking that we used to say back in the days as I had come from Melbourne Water, that, a lot of the big sexy assets were getting all the money but the infrastructure on the ground delivering to customers, particularly the reticulation water mains and local sewage treatment plants and those sorts of things weren't necessarily getting perhaps the love and care that they might have deserved.
[00:03:08] Piers Clark: So, it was 1995 when Yarra Valley was formed out of, as you just described, the changing of the sector. You were, at that stage, in the early part of your career, you'd done 10 years. Talk me through the journey you'd been on. What did you study at university and how did you come into the water sector?
[00:03:24] Pat McCafferty: I've probably got a little bit of a 1950s style of career development because I went straight from high school finishing my year 12 certificate into working in the water sector as a 17-year-old. I went to night school as part of that for several years. Got my degree in accounting from the Royal Melbourne Institute of Technology and then later on did an executive MBA from Monash University. As I started to move into that part of my professional development, I moved into the finance area of the water utility here in Melbourne. At a time when so much was happening in terms of productivity and the board of works in Melbourne Water was a bit overweight, one of my roles was actually to help identify areas that should be outsourced because they just weren't economically viable. And it was hard times in many respects for people because people were very dedicated to the sector. It's just that, those functions, I'm talking about like legal printing. We even had our own hairdresser, believe it or not. There was so many different functions that we were looking at. I was working in that for a while and then a very big one came my way, which was information technology. And waterworks slash Melbourne Water had developed an information technology strategic plan which was pretty extensive and had a pretty strong business case, but what was obvious was that we couldn't pay the people within the organization the sort of money that we needed in order to execute that plan. We actually outsourced the technology function. It was a five-year deal and, believe it or not, it was actually the managers of the function who put their houses on the line to secure that contract. That was a management buyout. It was very groundbreaking. But what was interesting for me, having worked on that deal, was once it happened, Melbourne Water realized it didn't have anyone to manage IT. So, guess what? I ended up the manager of the contract, but also of corporate IT. I came to Yarra Valley Water as my first job as manager of corporate IT.
[00:05:12] Piers Clark: I put at the top of this podcast that there were three topics that I'd like us to talk about, and I'd like you to take us through them from the perspective, obviously of Yarra Valley Water. Let's start with the reform of the Australian water sector in 1990. You've touched a bit on it already. What was that like and what was the big implications that happened there?
[00:05:30] Pat McCafferty: It was really exciting and a lot of it came through from competition reform. There was a national report on competition called the Hilma Report, and then the Council of Australian Governments "COAG", which is all of the state governments together with the federal government, agreed a set of productivity reforms, particularly for monopolies. And that is where some of the privatization and the breakup of the energy sector occurred, but also, a lot of changes for the water sector, such as pursuing cost, reflective pricing, pursuing independent price regulation, those sorts of things. They were pretty significant reforms. When our company was created, we're basically starting from scratch with a whole new brand, new staff and so forth. But a roadmap of reforms that were all designed to improve the productivity of our sector and ultimately to deliver better outcomes for the community.
[00:06:14] Piers Clark: When you look back at the vision of what the reforms were meant to achieve and what they actually achieved, how neatly do they align?
[00:06:21] Pat McCafferty: They align fairly well. There's been some independent reviews of those reforms and how far we've gone by the productivity commission here in Australia. From a national point of view, I think certainly Victoria really led the way because, as part of the COAG agreements for reform, the federal government put money on the table and incentives for the states if they delivered on those reforms, which is why Victoria went pretty hard to deliver those. I think they have because cost reflective pricing and independent price regulation is so important for getting the right outcomes for the community, but also ensuring that we've got financially sustainable businesses that are doing the asset management, doing the planning, doing the engagement. Are held to be accountable for their performance in a very transparent way. Even comparative competition was just such a breakthrough. And I could see that really quickly changing behavior, changing focus of the water utilities. No one wants to be on the bottom and we saw really quickly within the space of three or four years, rapid improvement in things like: how quickly do we answer the phone? What's the customer satisfaction like? How quickly do we repair a burst water main or sewer blockage? Those sorts of real fundamental customer service things.
[00:07:25] Piers Clark: It's great because someone had to be really brave to instigate those changes. You've gotta have a vision and think it through and then follow it through when things aren't going well. You've gotta keep your eye on the prize and it's impressive.
[00:07:36] Pat McCafferty: A couple of bureaucrats in the state behind a lot of these reforms through the treasury, were visionary, to be honest.
[00:07:41] Piers Clark: Let's jump forward a few years. We've got the millennium, you've got the Olympics coming to Australia, and then you've that coinciding with the drought. Let's talk about the millennium drought and how you managed that.
[00:07:52] Pat McCafferty: It was a bit of a shock to the system because, I guess we'd always planned for the future based on the past. I remember it very well September, 2006. We normally get our inflows to our catchments here in Melbourne during spring. And we had a reduction in stream flow, which was 30% lower than the worst on record and a complete fail of the filling season. And to be honest with you, there had been some symptoms nationally. Certainly, Perth and Western Australia had been experiencing this prior to the Eastern Seaboard. But, Brisbane, Sydney, and Melbourne, we all suffered at the same time an extensive collapse in rainfall and stream flow. And, for Melbourne, we went very quickly south in our total storages and had to put in some pretty significant severe water restrictions, implementing targets for community, per person per day water use. Huge amount of water efficiency appliance changeover. We changed over something like 700,000 water efficient shower heads just in Melbourne where people would bring in their old inefficient shower head and they'd get a new efficient shower head. So many activities as part of that, it was very severe. So, there was a bit of a scramble obviously to new augmentation. A lot of recycled water, pursuit of stormwater reuse, and of course desalination. We built one of the largest desal plants in the country for Melbourne. But all of the capital cities now have desal plants.
[00:09:08] Piers Clark: You mentioned specific targets. You said that it's 30% lower. Can you give me some sense as to how low were the reservoirs or what was that per capita target that people were being given and how long did that last for?
[00:09:19] Pat McCafferty: The reservoirs total storage got down to something like 26%. I was chairing an extreme drought task force for Melbourne. No idea was a bad idea. Any gigaliter of water we could get our hands on, we were desperate for, and we had to lower pumps at some of the dams to make sure that we could suck out what was left. The community was really responsive. The big breakthrough that occurred was that we had water restrictions and a drought response plan. We eventually, went through the stages of water restrictions that were getting more and more serious; outdoor watering bans and those sorts of things. But we decided to put in a target for consumption, which was to make a deal with the community to say that we don't think that a complete outdoor watering ban is in the best interest of the community from an economic point of view, from a health and wellbeing point of view. If we can achieve this target, which is commensurate with what we think we would save under this most severe level of water restrictions, then we might be able to avoid that outcome. The target was 155 liters per person, per day. Before the millennium drought, the average was something like 249 liters per person per day. During the drought we actually got down to 140.
[00:10:22] Piers Clark: That percentage drop is phenomenal 'cause it changes, it forces people to change their behaviors. And the funny thing is, on these podcasts, we previously had Doa from Las Vegas talking about what they had to do with the Hoover Dam and lowering the pumps and getting to deadpool in the reservoir and always had Manus from Cape Town talking about day zero. And it's really interesting hearing how the leadership of the utilities that are facing those crises do to mobilize and tell your story. That bit about saying to the public, " we are not going to impose restrictions on use of the water outside, but come with us on the journey." I assume that when you get through the drought, that created a level of respect and community spirit.
[00:11:01] Pat McCafferty: Certainly did. We did have some outdoor watering bans, but not a complete blanket, which just as I said, would've been devastating. What's been interesting is that, out of that drought, if you think about community assets, we were able to leverage that opportunity to convert appliances indoors, but also convert sports grounds to warm season grasses, drought tolerant grasses. They saved two thirds of the water that they would normally use and to be frank, they're actually more resilient, they're more pliable all year round. And the interesting thing too is that we haven't experienced a big bounce back in demand. I mentioned, I think 248, 249 liters per person per day before the drought. We got down to 140 during the drought, but we're only around the 160s now. We haven't seen the bounce back.
[00:11:42] Piers Clark: That's incredible! Now let's come to some of the things that Yarra Valley Water under your leadership has implemented that are groundbreaking. I know this personally because one of the first conversations we had was about 15 years ago. We were talking about some food waste digestion. We thought we were pioneering the way. We had an early conversation with you and you ran with it at a speed that just made me green with envy that I just couldn't mobilize my organization. And I have to say, I think that's down to you personally and your vision. Let's talk about some of those impactful things that you've done, and please, can we start with the food waste digestion one.
[00:12:20] Pat McCafferty: That was, one that was born from a partnership with East Bay Municipal Utility District in the states in California and swapping staff at the time. It was actually one of their engineers who came over who said, "I reckon you guys should consider, waste to energy." We started to think about, at the same time our board was talking about, " what might we do in non-regulated revenue and growing the business?" We did a bit of work. We looked at some international sites. We talked to you as well, and just started collecting intel on the viability for here in Australia. Having, regard to the fact that, it's quite prevalent in other parts of the world. Australia has so much land, landfill costs are cheap and all of those sorts of things. But we also, started to relate to it in the way of " this is very synergistic with our core business. We are already processing most of Melbourne's liquid waste. We use anaerobic digestion for sewage treatment. We have trade waste customers that are producing this waste. And we have a challenge with climate change affecting our security of supply. We also had uncertainty around the cost of energy going forward. We started to build out the business case and we got the board to approve. At the time we also needed to get, the water minister and the treasurer to approve that because it was non-core business, which they did. We started building it in 2014 and started operations in 2017. This one takes about 33,000 ton a year of food waste and it's all organic. We charge a gate fee to the trucks coming in where you generate large scale renewable certificates from it. But more importantly, we only use about 30% of the energy used on site to power our co-located sewage treatment plant, recycled water treatment plant.
But 70% is going back into the grid as renewable energy. On the back of that one, we're actually building our second one which is 50% bigger than the first one, which is gonna be in the east of our patch. This first plant was out in the north and that's been a real contributor to achieving net zero. We're on target to be net zero for scope one and scope two on July the first, the day after I leave as their energy specialist told me. It's been a great thing for the business; looking at our strategy, thinking differently about the role that we can play and how we can make a difference.
[00:14:13] Piers Clark: I know that back in 2012, 2013, when you started, the goal wasn't to get to net zero, but that is an incredible statement that you made, that this organization is going to be net zero on scope one and scope two on the day you leave. That's just a phenomenal record for you to have. This idea that a public utility was able to mobilize and do non-regulated work, carving out those assets in such a short period of time. It was less than five years to go from it being an idea to being an operational facility that's now giving you, not just a net zero position, but also that energy security, all of that extra energy that, in a world that's as volatile as it is right now, is phenomenal. Pat, you must be delighted at that achievement. It does beg me to ask the question what's coming next?
[00:14:59] Pat McCafferty: It's something that I've been contemplating and trying to keep it as open as possible for the time being. Human nature is that once you zero in on something, it happens. Keeping it open. But deputy Chair of WaterAid Australia, which I'll be continuing to do, which I love. I've also just joined the Australian Cancer Research Foundation as a trustee of the board, which is some really inspirational work going on in that organization. I've got a couple of not-for-profits, which will really keep me stimulated. I'll seek to do work, probably not full time, but work that sparks me up that's connected to my purpose. And, work with good people is always the aim. Even though you're being very generous about the waste energy plan, I have to say that I think that the magic in this organization has been creating a constructive culture where people are prepared to take calculated risks to be the best that they can be. Create that environment for them. That's what I'm really proud of.
[00:15:45] Piers Clark: What do you think is going to happen in the water sector over the next few years, and what advice would you give the leaders who have got to deal with that?
[00:15:54] Pat McCafferty: There's always gonna be challenges. I was thinking the other day, "gosh, I'm leaving and there's still challenges and stuff that's not finished yet and I'd like to finish it and I feel a bit guilty, and all of those sorts of things. There will always be challenges in front of us, but my advice is always, to reframe those into opportunities. What is possible from the circumstances that we find ourselves in. Naturally, right across Australia, we're all facing, like in the UK, steep curves in our CapEx investments. How do we get the best bang for buck? How do we start to expand our impact, in particular from a natural environment point of view? We've adopted a honoring and healing country, which is a traditional custodian thinking into our strategy, which is, how do we start to be restorative? How do we start to build less hard assets, more soft assets, be inspired by nature and reestablish biodiversity? We're doing a really special project at a Upper Yarra sewage treatment plant to restore habitat for some endangered species, and we're doing that with the community's permission. That's 30, 40, 50-year legacy type stuff that could make a real difference. Think big and think intergenerational as well, because that's what the water sectors all about.
[00:16:54] Piers Clark: You have been listening to the Exec Exchange with me, Piers Clark, and this 25th celebratory episode has been looking back at the career of Pat McCafferty at Yarra Valley Water. I hope you can join us next time. Thank you.