Despite the economic importance of infrastructure services like electricity, water supply, sanitation and transportation, little management research has been done into the capability gaps that exist inside utility firms. Surprising, since according to new information from a UCT Graduate School of Business and Harvard study, a lack of adequate organisational structure, skills and specialised managerial know-how is the number one challenge for utilities worldwide – but especially so in emerging market economies like India, Brazil and South Africa.
The research was conducted in part by Mundia Kabinga of UCT’s Graduate School of Business’s Management Programme in Infrastructure Reform & Regulation with the support of the Swiss Federal Institute for Acquatic Science and Technology (EAWAG)’s Department for Innovation Research in the Utility Sectors (Cirus).
Kabinga says, “In contrast to conventional explanations which suggest that appropriate incentives and regulatory structures increase the performance of public utilities, insights from the new study show that capability gaps – inadequate availability of competences, expertise and experience – have long-lasting performance effects because building and applying capabilities to resolve a capability gap involves learning processes that take time to develop.”
Too little, too late
It’s no secret that infrastructure sectors in especially emerging market countries such as India grapple with declining service quality and a failure to secure funding for their massive investment needs. Utilities are confronted with substantial challenges in operating and managing built infrastructure and the strategic planning necessary to maintain, renew and expand infrastructure assets to meet future demands. As a result, they face enormous pressure from customers, policy-makers and tax payers to increase efficiency.
“Too often,” Kabinga says, “infrastructure sector reforms are incomplete, have been implemented much slower than expected, experienced resistance from sector players and even caused the reversal of the reform process. In the meantime, the performance of utilities declines still further and in some cases substantially fails to provide infrastructure services, like repeated electricity blackouts. A changing external environment may widen the gap in the capability structures of utility firms and in turn, affect the performance of the utility and the quality of the service.”
Defining a Capability Gap
A capability gap is an inadequate availability of knowledge, expertise and experience which leads to deficiencies in the performance of a utility’s tasks. A gap can emerge if the actual capability structure diminishes while a task remains largely unaltered - or if changes in a task lead to increased requirements that cannot be met with available capabilities.
Kabinga’s research has found that the emerging capability gap explains not only the performance decline but also the persistence of performance deficiencies. The underlying lack of knowledge, expertise and experience tends to have a long-lasting effect because capabilities are not readily available once they are lost and are hard to build up.
Business As Usual Does not Apply
Infrastructure sectors have features distinct from other industries: high capital needs, substantial economies of scale and scope with networks forming a natural monopoly, specific investments with strong interdependencies between the different components of large technical systems, and basic service provision.
“One implication,” Kabinga says, “is that utilities must also accomplish, in addition to effectively providing services, other objectives like delivering available, reliable and affordable infrastructure services. In addition, environmental concerns are increasingly important, particularly in the areas of electricity, water supply and sanitation. Accomplishing these objectives is often closely linked to and embedded in political processes.”
It must also be said that in providing basic services, utility organisations cannot withdraw if providing the services is difficult or no longer economically viable. They may not be able to adopt better business opportunities unrelated to the task of providing basic services, and specialising only in the most profitable areas is not an option. They must simply adjust their operations and provide services under the given market, business and regulatory environment.
Three Dimensional Capabilities
To do this, utilities need to find ways to build the diversity and span of their knowledge, Kabinga suggests.
They need to think about capabilities on three levels. The first – scale of capabilities – is the knowledge required to accomplish a task. For example, it makes a difference whether one engineer or 50 engineers perform a task. A utility should ideally implement internal training to build the required scale of capabilities, difficult to build if a utility has only a few or no sufficiently experienced personnel able to train, work jointly together with new staff members and share their experiences. The lack of an internal workforce with sufficient experience in the respective areas is a central reason for the persistence of capability gaps and performance problems.
Second – scope of capabilities – captures the span or diversity of knowledge required for performing a task. A task solely performed by a team of civil engineers differs in its knowledge diversity from a task performed by a team of civil engineers, environmental lawyers and project managers.
Third, a central feature of knowledge is the degree of tacit knowledge, different from codified knowledge which can, for instance, be described in a document. Tacit knowledge is learnt through experience and learning-by-doing and forms a substantial part of individual human skills.
“Difficulties regaining a specific set of tacit knowledge once lost,” Kabinga says, “mean performance deficiencies persist. When there is insufficient tacit knowledge, the capability gap is most persistent. The corresponding performance problems tend to last longer than in the cases in which the mismatch results from insufficient scope and scale.”
To rectify insufficient tacitness, a utility must maintain a workforce that is balanced in its experience levels and implement an organisational environment and HR practices that allow a constant transfer of knowledge during the daily operation and in accomplishing specific tasks, from people with long tenure tracks in the organisation to those with shorter tenures. Depending on the task, these learning-by-doing processes may be very time consuming but highly relevant for maintaining capabilities and permanently building a sufficient base of tacit knowledge.
One consistent finding is that team learning fosters performance. It improves efficiency and reflects how strong capabilities depend on learning-by-doing and accumulating-experience-by-working on a task, individually and in a group.
A shortage of sector-wide training and apprenticeship programmes can be addressed by implementing internal programmes in the organisations. Establishing sector level training programmes require more time and hardly equip individuals with the all necessary organisation-specific knowledge.
Closing the Gap
Utilities are often forced to operate with inadequate capability structures and perform the full range of operations necessary to deliver basic services in a less than ideal business environment. This becomes even more problematic in an emerging market context. Capability gaps will persist, with corresponding performance implications, until they are able to establish an adequate portfolio of knowledge, expertise and experience – and they will negatively affect the progress especially in emerging market economies like India.
Kabinga says, “The traditional view has until now been that appropriate incentives and regulatory structures increase the performance of public utilities. But a new approach, that looks at utility delivery from a capability-related perspective, could very well be a first step toward developing more effective strategies for solving inefficiencies in infrastructure sectors and providing important insights and advises for utility managers, regulators and policy-makers.”
Mundia Kabinga is an Old Mutual Emerging Markets Lecturer at the University of Cape Town’s Graduate School of Business (GSB), having previously worked at the GSB’s Management Programme in Infrastructure Reform and Regulation (MIR), and the School of Business at the Copperbelt University.