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ETTA Options Paper 2004 Energy Industry Advisory Group Inc November 2004 The ETTA Options Paper has been prepared on behalf of the: Energy Industry Advisory Group Inc. The ETTA Options Paper has been prepared by: Arrina Pty. Ltd. ACN 007 437 416 168 Locked Bag 1 The Patch, Victoria 3792 Australia Phone: 61 3 97521300 Fax: 61 3 97521400 email: email@example.com 0 Note This discussion paper has been prepared as a ‘Commercial in Confidence’ document for limited circulation to the EIAG Board. Any comments in this paper reflect the views of the authors and are not intended for broader consumption or circulation. In the event that a person or persons outside the circulation group specified read the document it is on the understanding that the information contained herein is confidential. Any comments which may appear to be disparaging regarding a third or other parties should be read in context and are stated on a without prejudice basis. The authors take no responsibility and will be deemed to be indemnified from any legal action or claim as a consequence of the issues detailed in this discussion paper. Authors: Dr. Rovel Shackleford Dr. Michelle Pizer Document Tracking Title Release Date ETTA Options Paper Draft 1 4/11/2004 ETTA Options Paper Draft 2 8/11/2004 ! 1 Acronyms Acronym Explanation ABC Activity Based Costing ASIAL Australian Security Industry Association Ltd CBL Competency Based Learning CBD Central Business District CGIT Central Gippsland Institute of TAFE CSD Commercial Services Division EIAG Energy Industry Advisory Group EIEF Energy Industry Education Foundation ETTA Energy Telecommunications Training Australia FFS Fee For Service HV High Voltage IP Intellectual Property K Thousand ($) LV Low Voltage M Million ($) NMTC National Mining Training Centre NSW New South Wales NT Northern Territory OH&E Occupational Health & Environment OTTE Office of Technical & Tertiary Education PAWA Power and Water Authority PPP Public Private Partnership Qld Queensland SA South Australia SEC State Electricity Commission UNSW University of New South Wales Vic Victoria WA Western Australia Note - All currency is in Australian Dollars. ! 2 Table of Contents Page 1 Introduction 3 1.1 Project Objectives 3 1.2 Development Process 4 1.3 Business Description 5 1.4 Physical Facilities 17 1.5 Intellectual Property 19 1.6 The Value of the Business 19 1.7 Major Issues to Overcome 25 1.8 Stakeholders Defined 26 1.9 The Options Matrix 28 1.10 Recommendations 33 ! 3 1 Int rod u ct ion 1. 1 P ro je ct O b j ect i ves Arrina Strategic Planning and Economics, has been commissioned by the Energy Industry Advisory Group Inc (EIAG) and the Energy Industry Education Foundation (EIEF) to help produce an Options Paper that addresses the options associated with the potential acquisition of the training facility known as Energy Telecommunications Training Australia (ETTA). The objectives stated by the EIAG Board were as follows: The Options Paper should aim to identify the opportunities and implications, areas of growth and decline, and business development and operational activities, and then evaluate and assess the implications associated with the potential acquisition of ETTA. All considerations need to be framed within the context of investment and risk to investors. The underpinning considerations for acquisition include: • The future viability of ETTA as a commercial venture. • Future growth of utilities based training delivery. • Potential to develop a culture that can work with flexible training delivery modes. • The potential to leverage non-asset based solutions. • Maximise utilisation of existing facilities at ETTA. Rationalise the potential hurdles and risks associated with the acquisition of ETTA. Why now? Since disaggregation of the energy industry over 10 years ago there has been a constant and continual fracturing of the industry and its ancillary service and service providers such as training. The EIAG has emerged from Skilling for The Future (SFF) as a forum focused on dealing with the energy training/skilling debate in the most pragmatic way. There are few common threads that draw the ‘industry’ together in any meaningful way; there are lots of forums; lots of seminars; lots of discussion papers unfortunately there appears to be little action beyond good intent. This may be the final chapter in the disaggregation of an industry, its demise underpinned by inaction and a litany of failed attempts to reignite the passion of an industry to be the best at what it does; to develop a robust and dynamic well qualified workforce from the tradesperson through to the paraprofessional to the professional and in so doing protect industry and domestic consumers by providing a reliable and robust energy safe future for Australia. This discussion paper will hopefully ignite the passion of the industry and provide a catalyst for change by drawing together a group of likeminded industry organizations to fund and support the ongoing provision of timely, relevant and cost effective training to Australia’s energy industry. ! ! 4 1. 2 De ve lo p ment P ro c ess It was also agreed that the ETTA Options Paper needed to be robust and credible. Therefore, the development process included substantial consultation across the wide range of energy industry stakeholders, as well as numerous in depth interviews to verify issues and findings. Given the complexity of the energy/utilities industry the research was required to identify and address the key issues that emerged throughout the development process, three streams of investigation were conducted by the respective discussion paper authors as defined in (Figure 1.1). Figure 1 – The Options Evaluation Process " # $" % ( * * % + % % %, - ) , ( # # ' ( & . & As shown in Figure 1.1, a number of written outputs will inform the deliberations of the EIAG and EIEF Boards and members. These included: • An Options Paper (released 4/11/2004) documenting the options available to secure one of Australia’s best recognized energy training facilities, with a view to creating an energy industry owned and managed enterprise that is responsive to the industry’s skill development/delivery needs, ! 5 • A Business Case (to be released in the first week of December 2004) providing a realistic forecasted position for the option that the EIAG chooses to adopt. The business model must protect the ETTA investors and deliver an appropriate and responsive portfolio of training/skill development services to Australia’s energy industry; • A Prospectus (to be released mid December 2004) the prospectus will be the instrument used to attract potential investors to invest in ETTA as a viable business proposition which provides the dual edged benefits of a healthy return on investment and the delivery of timely skills training services to Australia’s energy industry. This Options Paper reflects the recommended options available to the Board’s of the EIAG & the EIEF as researched by the consulting team. Given this development process, it is impossible for this Options Paper to capture the entire range of permutations and variations of options available however the fundamental options have been selected with the understanding that any variation will need to be evaluated within its own context against the predetermined success criteria as outlined within this paper. The process adopted has negated the risk of significant repetition; as a result, this Options Paper focuses on the consideration of a range of pivotal options. 1. 3 Bus in e ss D esc rip t i on ETTA is the commercial, Fee for Service (FFS) division of Central Gippsland Institute of TAFE (CGIT). ETTA is not an RTO, it trades under the RTO status of CGIT. Between 1945 and 1994 the training facility formerly referred to as the, “Line-School” belong to the Victorian State Government’s State Electricity Commission (SEC). In 1994 the State Government of Victoria sold the SEC Line-School as part of the desegregation of the power industry. In 1996/7 CGIT acquired and annexed to ETTA the Gas Training Team from the Hyatt Gas & Fuel Training Centre closely followed by the Telecom Training Team from Telecom’s Training Centre at Doncaster. Within a time frame of less than five years the training disciplines for electricity (generation and distribution), water, gas and telecommunications were consolidated on one site now known as ETTA. The aggregation of the various training disciplines now broadly described as the utilities sector caused untold consternation and cultural upheaval with the training teams at ETTA. Table 2 denotes ETTA’s indicative portfolio of training as it stands today. ! 6 Table 2 Activity $ Contribution % Activity Lineworker Apprenticeship $1.6M 33% Telecommunications $620K 15% Gas Distribution $480K 10% Type B Gas $360K 8% HV Operations $300K 7% OH&E $280K 5% Short Courses $300K 5% Generation $200K 4% Security Risk Management $180K 4% Consulting $180K 4% Live-line Refresher $120K 3% Leadership $98K 2% Total $4.7M The projected fee for service revenue for ETTA, the Commercial Services Division (CSD) of CGIT amounts to $4.682M a proposed $1.24M increase on revenue targets projected in 2003. The Commercial Services Division activity is subjected to the prevailing whims of the markets that ETTA serves and as such it would be less than responsible to admit that the proposed income target represents a medium to high risk. Anticipated National Economic Impacts 1 Interest rates are expected to continue to rise in 2004/05 levelling off at approximately 6.25%. This will have the impact of slowing the economy and in turn cooling business activity. Other anticipated impacts include labour shortages which are expected to increase personal incomes thus placing further pressure on the discretionary training expenditure budgets of industry. The compounded factors of increased interest rates and wages may have a dampening impact on investment in training. However increased skills shortages in the utilities sector have the potential to escalate demand for quality flexible training/skill development significantly over the ensuing 8-10 years. Over the past eight years the Human Resources departments in most industries in Australia have become strategically impotent and as such their capacity to influence training budgets has diminished in most cases by upwards of 50-80%. This situation is changing as labour forces become more dynamic and the shortage of technical labour in Australia starts to erode the competitive capability of many industries. CEO’s are now placing this matter on the agendas of economic forums around the country. The Federal Government is also working on the skills shortage issue; this was a significant policy platform for industry during the recent Federal Election (October 2004). 2 Fortunately ETTA provides training into industries which are compliance heavy thus providing the ETTA team with the opportunity to be innovative in attempting the following: 1 Reserve Bank Forecasts 2004 2 Details in ETTA Strategy released in December 2003 ! 7 Recapturing market share lost to competitors conservatively estimated to be $2.5M per annum, Grow the business geographically into national markets such as WA, Northern Territory, NSW and Queensland which have been under serviced in the utilities sectors. Subject to the strength of the AU$ pursue regional markets particularly the more lucrative markets of telecommunications and energy in the Asia Pacific Rim. Driving the training agenda of industries as a cluster rather than working only on a client by client basis; in other words becoming more strategic and vertical by providing training/skill development at three levels: o Technical – trades o Paraprofessional o Professional Risk Mitigation Strategies for ETTA Business: Effective utilisation of training personnel through flexible contracting arrangement, multi skilling and multi-tasking, targeted delivery utilization from current 68% to 80% in 2005, Representation on strategically focused national industry committees/forums, Development and packaging of new products and services with a concerted focus on growing the higher value business opportunities such as consulting services and publishing, Continued reshaping of the way ETTA does its business from static to dynamic delivery models, Expansion of market share into national markets through strategic alliances, agencies and franchises, Capture of Victorian market share from existing competitors, Increase charge-out rates/fees to a realistic and sustainable level. Telecommunications (incorporating Sydney and Adelaide operations) – Target Revenue $0.637M (Table 3) The demand for telecommunications training is slowly returning after the roller coaster ride from 1999 through to 2003. ETTA has been successful in gaining preferred provider status with Telstra in its own right as previous arrangements through partnerships with other TAFEs eroded ETTA’s relationships and subsequently its income stream from Telstra training. The Security training business has grown significantly in 2003 and it is anticipated that the rate of growth will continue in 2004. The telecommunications team recently secured a national training program with Skilled to deliver 300 Traineeships to Telstra over the next thee years; the contract is valued at $3M. The telecommunications team are expected to move solidly into the training market in the Asia Pacific region on the back of their recent success in Tonga. The key issue to achieving this business will be their ability to be responsive. ! 8 Specialised courses such as RF Radiation Manhole Rescue and Dangerous Gases will ensure that the Telecommunications section becomes a preferred supplier within Industry in Qld, Vic, NSW and SA. Table 3 Area of Training Risk Assessment Comment Sydney Power Awareness Low Power Awareness refresher courses are an annual requirement which is mandatory for all staff working on electrical assets and will be consistent in NSW Security Short Low Associations with ASIAL and courses Direct Alarm Supplies will allow ETTA to penetrate the new security market, along with renewed advertising. ETTA has applied for a Master licence in NSW. Upon registration ETTA can accredit their instructors to deliver Security courses in 2004 Green Card Courses Low All construction workers require Green Card Accreditation to continue to work on any building site in NSW. The Sydney Instructor will be able to deliver this course upon receipt of his Adelaide category 4 OH&S certification in 2004 Open registration Cat 5 Medium In SA traditional TAFE Coaxial Cable colleges do not possess the Optical Fibre skills required to deliver these courses. ETTA’s reputation in training of telecommunications makes ETTA the ideal training provider. We will up skill the SA instructor to take on this market. ! 9 ETTA is the preferred Exchange Entry Medium supplier of exchange entry courses for TELSTRA in SA Melbourne An effort to package various Cabling licensing Medium licences has proven effective and we are already filling classes for 2004. ETTA’s facilities, equipment and hands on course program give ETTA an edge over traditional TAFE providers ETTA currently has trainee’s Refresher courses Medium in the Certificate III in Security Access and has the potential to increase this number due to our advantage over other TAFE Institutes with our excellent practical training areas Refresher courses provide Security Traineeships Low ongoing revenue as we attract back clients after completing their ‘initial’ courses a year ago. We are recognised by industry as providing comprehensive OH&S related courses in these areas and with the focus on risk management and credibility of training providers we envisage the trend will continue. ETTA has the ability to Telecommunications Medium deliver Security and Satellite Courses short courses in 2004 Telstra Mechanical Aids Telstra Courses Medium training is on the increase Mechanical Aids and reports are that ETTA is the preferred supplier for this training in 2004 ETTA has been named by Exchange Entry Medium Telstra as the supplier for ! 10 training of Exchange Entry in Victoria for all contract staff Lineworker Revenue $1.6M (Table 4) This area continues to perform well and is expected to achieve a better overall result in 2004/05 due to an increasing demand for competency assessments for qualified line worker tradespersons against the national training packages. The continued shortage of qualified trainers has been addressed through the recruitment of contractors who will be hired on an on-call basis. Table 4 Area of Training Risk Assessment Comment Line worker Low Continued demand for this area of training will be even greater in 2004. Interstate Medium ETTA is still the ‘User Choice’ apprentices RTO for Lineworker apprentices for the Northern Territory. ETTA’s sound relationship with the NT Govt has gained it training opportunities in the power, gas and telecommunications area. Apprentices High ETTA is the only provider of training in Victoria of this apprenticeship. It is a high cost area to deliver, due to OH&S requirements and consumables but industry has been leveraged for and funding from government ensures this course continues to be viable. Power Generation Medium ETTA continues to provide training and consulting services to the generation industry around Australia. The primary factors holding ETTA back in recent years has been a tendency to undercharge for this type of work. ! 11 OH&S Medium This is a highly competitive area however it is provided to service the ongoing needs of ETTA’s clients. This portfolio is expected to grow significantly in 2004. The team supporting this activity at ETTA has been reshaped to grow this business opportunity through product and service differentiation. High Voltage Medium-High Repeated support from major Operations clients due to good reputation for training. New areas to pursue in 2004 are interstate mines and other high energy users. Steady area with reliable income. Appropriate charge out rates will ensure the ongoing viability of this activity. Gas: Target Revenue $0.729M (Table 5) There has been high demand for traineeships in Gas Operations in 2003 and this will continue in 2004. The move to Ardeer is a key to ETTA’s success with Abigroup. ETTA continues to be the primary provider of their training at this stage. Over 80% of ETTA’s gas training has been delivered at Ardeer and an improvement across the board is anticipated once the review of the national competency standards is completed in 2004. Enquiries from interstate are increasing steadily. The gas team was restructured in July 2004 to become more responsive and flexible to meet the ebb and flow of industry demand. ! 12 Table 5 Area of Training Risk Assessment Comment Gas Operations Low ETTA has extensive enrolments from several major gas construction companies. Interstate interest from QLD, NSW and Tasmania is gaining momentum and points to a busy year ahead for this area. Type ‘B’ Low A shortage of qualified trainers in this area stifles ETTA’s ability to expand this niche market. ETTA is delivering on behalf of Tasmania TAFE and at this stage, ETTA is still the only provider of this qualification in Victoria as agreed by the Office of Gas Safety in 2003. This portfolio is currently Gas Pressure Control Low under review. Short Courses Revenue - $0.479M The short course market within the sectors currently serviced by ETTA has never been truly 3 exploited; currently the utilities sectors in Victoria alone spend $2.8M on short course training products such as: Project Management Risk Management Frontline Management Negotiation Time Management Specialist technical training Similarly there are also opportunities to deliver high value one-off workshops and seminars: typically these types of functions generate $20K-$50K per event. The short course team will investigate and attempt to exploit the potentially significant range of publishing opportunities that reside within both the utilities and generation sectors; these products are: Procedures manuals Ready reckoners Specialised handbooks and manuals 3 Energy Industry Training Statistics ABS 2001 ! 13 Technical book sales The risk is anticipated to be medium to high as this portfolio is new and untested. Workforce & Leadership Development: Target Revenue - $0.270M Formerly known as the Big W project, this project has evolved and matured into a product that has been adopted by wider industry. New target markets have been defined and are currently being exploited, particularly the traditional markets serviced by ETTA, This portfolio is medium risk due to the fact that the marketing opportunity has crystallized during 2003 providing a promising outlook for 2004. ETTA Current Ratios: The current ratio is forecast to increase by $0.03 to $1.21: $1.00. The return on assets for 2004 is -7.93%. The return on equity for 2004 is -2.88% Table 6 provides an insight into ETTA’s projected performance as at end December 2004; this target has been severely downgraded since the dismissal of ETTA’s General Manager in September 2004. Many initiatives have been terminated by CGIT. Table 6 ETTA Budgeted Performance 2004 FINANCIAL PERFORMANCE Forecast at end December 2004 RECURRENT OPERATIONS - REVENUE Fees 3,681,517 Govt. Student Fees & Charges 92,000 Common. Govt. Grants Govt Fee for Service State Government Current 688,275 State Govt. Other Ancillary Trading Sale of Non Current Assets Income from Facilities 8,000 Interest Received Other Revenue 17,840 TOTAL REVENUE 4,487,632 RECURRENT OPERATIONS - EXPENSES Salaries including Oncosts 2,766,180 Direct Teaching Expenses 125,000 Travel Expenses 200,100 Motor Vehicle Expenses 197,000 Equipment 11,000 Consumables 72,100 Other 321,468 TOTAL EXPENSES 3,692,848 FUNDED OPERATING SURPLUS / - DEFICIT 794,784 Depreciation 268,620 BUDGETED OPERATING RESULT 526,164 Capital Revenues 526,164 NET RESULT SURPLUS / - DEFICIT Table 7 provides an insight into the projected portfolio performance of ETTA for the calendar year January to December 2004. ! 14 Table 7 ETTA Business Activity Centres Unit ! " # ! " # ! " # # # # *Note the negative sign denotes a surplus Current Position (October 2004) CGIT is currently engaged in a process of contraction of ETTA’s training and consulting activity and is currently in a mode of winding back of national initiatives. Essentially the strategy is to deconstruct ETTA so that by end December 2004 ETTA will fundamentally only have an asset value equivalent to that of the 7.5 acres upon which the business currently trades. The reason why this approach is being taken is that it will be easier for CGIT and OTTE to seek divestment of real estate than a business. Neither entity; CGIT nor ! 15 OTTE truly values what ETTA can deliver nor its strategic value to the energy industry. This coupled with a current round of EBA negotiations with the teaching staff at ETTA and a significant reduction in revenue is likely to drive ETTA’s financial performance into negative territory by end October/November 2004. The $3M Telstra contract will be abandoned by ETTA in November 2004; and existing partnerships with providers such as BEC Engineering in WA, CBL in Qld and Charles Darwin University in the Northern Territory and NMTC have been reversed thereby reducing the opportunity to build and capitalise on strategic training opportunities around the country. Figure 2 provides a fundamental outline of the organizational structure of ETTA as it exists today. The future structure will be determined by the range of portfolios acquired and retained business activity of ETTA following CGIT’s progressive deconstruction of ETTA’s business model. ! 16 Figure 2 ETTA Structure 2004 CEO ETTA ETTA Operations Manager Finance & Expenditure Management ETTA Market Development Manager Human Resources International Administration Services Tendering Strategic Marketing Publicity Program Leader Telecommunications Public Relations Program Leader Electrical Distribution Commercial Development Program Leader HV Operations Business Planning Program Leader Electrical Operations Program Leader Gas Operations Program Leader Gas Appliances Program Leader Telecommunications Program Leader Workforce & Leadership Development Program Leader Short Courses Program Leader Infrastructure Risk Management Program Leader Generation Program Leader Consulting Services Instructors Program Leader OH&E Consultants Program Leader Water Support Staff ! ! 17 1. 4 Ph ys i cal Fa ci li t i es The facility known as ETTA occupies 7.5 acres of land 20 minutes from Melbourne’s Central Business District (CBD) in the South Eastern suburb of Chadstone. The ETTA facilities comprise outdoor training areas for the Lineworker training, HV/LV operations, gas and telecommunications, several classrooms, maintenance sheds and administration buildings. The facilities are purpose built and in most instances replicate to within 88% accuracy the assets that exist in the street. The unique feature of the ETTA facility is that trainees and apprentices can work in a safe environment that replicates the assets they will be working on when they complete their training. The first building was constructed in 1945 followed by extensive construction in the 1970’s followed by a yard upgrade in 1990/91. The facility is in a poor state of repair and requiring an estimated $2M to render the training facility safe and functional. CGIT diverted $5M capital upgrade from ETTA to Leongatha Campus about two years ago (2002). The Institute’s attitude to the ETTA facility has always been less than enthusiastic. All of ETTA’s administrators (4 in 10 years) have been openly and consistently castigated by the Institute for failing to improve the financial performance of ETTA. ETTA until 2003 was not a viable business and it was blamed for placing ongoing financial stress on the Institute. The land is currently zoned by the City of Monash as residential; this zoning will need to be changed to a zone category for educational purposes, if the site is to be used as a training facility in the future. The City of Monash has also requested that a Master Plan be prepared for the site when rezoning is requested; the indicative budget for this activity is anticipated to be $80K. ! ! 18 ETTA Training Facility Chadstone Victoria * ! ! 19 1. 5 Int ell e ctu al P ro p er t y Since 1994 ETTA’s instructor workforce has been diminishing at the rate of 5% per annum until April 2003 when the business was totally revamped and 18% of the workforce was retrenched. The positive change that occurred at this time was the introduction of a largely contracted workforce providing the capacity to tailor training response to demand thus creating a more demand driven workforce. Other initiatives included bottom up budgeting and a refinement of cost centre management relative to portfolios thereby creating a capacity to implement activity based costing (ABC) for the first time in any training institution in Australia. New management and financial management principles introduced in 2003 coupled with a workforce restructure; promotion of the ETTA brand and diversification of the services delivery portfolio resulted in ETTA achieving its first profitable performance in ten years. Training provided by ETTA currently meets the technical skills needs of approximately 50- 70% of the Lineworker trades; high Voltage (HV), generation and ancillary services training, such as traffic management, Red Card, vegetation clearing and occupational health and environment (OH&E). Since the termination of the ETTA Curriculum Development Team in 1998 there has not been any significant intellectual property development. Most of the training materials in gas and some streams of LV and HV still carry the logos of the former Gas & Fuel and SEC. About 40% of the curriculum content is stale and training methods still reflect practices developed in the 1960/70’s. Whilst existing trainers are qualified to conduct training; many have not been on the tools for upwards of ten years. The challenge now is that due to existing skills shortages in the utilities sector many trainers are being lured back to industry with the promise of better pay and conditions. The average age of the ETTA Instructor team is 58 years of age. Younger people are not inclined to join the training team at ETTA; trainers are paid less than 50% of the income enjoyed by their counterparts in industry. Intellectual property upgrades and methodology improvement will require an initial investment of approximately $300K. 1. 6 Th e V alu e of t h e Bu si n e ss Several methods were investigated to determine the value of ETTA as a business, such as: Asset Valuations: Calculates the value of all of the assets of a business and arrives at the appropriate price. Liquidation Value: Determines that value of the company’s assets if it were forced to sell all of them in a short period of time (usually less than 12 months). Income Capitalization: Future income is calculated based upon historical data and a variety of assumptions. s s Income Multiple: The net income (profit/owner' benefit/seller' cash flow) of a business is subject to a certain multiple to arrive at a selling price. Rules Of Thumb: The selling price of other “like” businesses is used as a multiple of cash flow or a percentage of revenue. ! ! 20 Table 8 attempts to provide a valuation of the business on an asset valuation basis over the core portfolio elements of ETTA’s business. The elements have then been weighted by potential stakeholder interest and a notional value has been placed against the component element at an indicative replacement value. The value has been mapped against potential stakeholder interest and income as a degree of analytical dissection is critical when considering the divestment/acquisition options. Table 9 delineates by portfolio potential stakeholder interest in ETTA incorporating investor and service participation considerations. Figure 3 & 4 chart the sectors that the EIAG can expect potential ETTA investors to come from and where the business can expect to derive its future income. Clearly several sectors seem weak; telecommunications, gas operations and gas appliance industry groups need to be encouraged to take a deeper interest in skills development and training. It appears that the strongest support for training and potential investment in ETTA in the short to medium term will be derived from the electrical energy sector in: Generation, Transmission, Distribution, Traction HV operations This collection of tables and figures should provide a clear picture for the EIAG as to which particular portfolios it may wish to target in its consideration for investment. It may be wise to strip out the portfolios of most relevance to the EIAG and build them into a strong business rather than focusing on the entire utilities sector. The authors are of the opinion that the EIAG should consider the widest range of possible options from the selective acquisition of ETTA portfolios through to the purchase of ETTA as it stands today. ! 21 Table 8 Value Components Activity Asset Value IP Value People P/A Government Activity Value EIAG Relevance $000,000 $000,000 $000,000 Funded. % % $000,000 L-M-H Telecommunications .5 .25 .3 8 16 .7 L-M Gas Operations .5 .25 .3 3 15 .7 H Gas Appliances .1 .2 .1 X 9 .4 H Electrical Operations .8 .3 .2 X 14 .7 H Electrical Distribution 2 .3 .5 80 23 1 H Other .1 .1 .1 X 2 .5 M Workforce Leadership X .1 .1 20 10 .2 M Short Courses .2 .15 .15 X 11 .5 M Total 4.2 1.55 1.75 18 4.7 Asset Value - denotes the value of the assets used to deliver this type of training at full replacement cost. IP Value - denotes the value of the IP to purchase or rebuild. People – this is the indicative lowest possible labour cost associated with running the portfolio at the trainer level. Government Funding – this is the amount of training income either directly or indirectly funded by State & Federal Governments. Activity – denotes the portfolio relative to activity of whole of budgeted income. Value – portfolio income per annum. EIAG Relevance – indicates the potential level of interest in a training portfolio matched to the current needs of the EIAG membership. ! ! 22 Table 9 ETTA Training Portfolios Other Short Courses Gas Operations Gas Appliances Telecommunications Electrical Operations Participation in ETTA Potential Stakeholder Electrical Distribution Workforce Leadership Stakeholders 1 Vic Government L H L M H L L M L-M 2 Federal Government H H L H H M M M L-M 3 Internal Support CGIT L L L L L L L L L 4 Personnel Support/Commitment M M M H H M L M M-H 5 Industry (Broad Context) H H M H H M M M M-H 6 Other RTO’s L L L M M L L L L 7 Generation L M M M M L L M L 8 Transmission L L L M M L L L L 9 Distribution L L L H H M M M H 10 Traction L L L M M L L M M-H 11 Regulators L H H H H M M M H 12 Unions L L L H H L M L H 13 Telecommunications L L L L L L L L L 14 Gas L H L L L M M M M-H 15 Other Utilities L L L L L L M M L-M L=Low; M=Medium; H=High ! 23 Figure 3 - Relational Interest/Commitment Chart / " 0 High / 2 / ! 0 / ! 1 1 2 ! "!# 1 3 $ % $ /! 4 +- 5 / & ' 2 // /0 / "( /0 ) /! 3 /1 / /2 ! ) 4 * + / / * ( * + / 5 ! 24 Figure 4 - Probable Investor Mix " / 0 High /2 / 0 ! /1 ! 1 2 ! " !# 3 $ % $ 1 /! 4 5 +- / & ' // 2 /0 / "( /0 ) /! 3 /1 / /2 ! ) 4 * + // / 5 ! 25 1. 7 Ma jo r I ss ue s t o O ve r co me There are many issues to consider at this time; the EIAG is in the position where it will be judged by the decisions made regarding the acquisition or otherwise of ETTA. The issues facing the industry are multilayered and multidimensional; the word that is commonly used is “dynamic”. This is simply untrue; the Australian energy industry is in a state of flux and constant change, in such an environment the development and implementation of strategic training and skill development initiatives at a national or local level is almost impossible and fraught with risk. The challenges and complexities facing the industry are further compounded by changes in Federal policy in regard to education. The primary funding conduit for TAFE is being dismantled and a parallel tertiary technical college network is being established. The only way that a sustainable and robust training agenda can be developed and implemented in this country is through collaboration. The energy industry has a unique opportunity to use the entire or partial acquisition of ETTA as a catalyst to rally the industry around the development of a national skills strategy for the industry; this initiative can be driven through the establishment of a skills centre of excellence to the energy industry. ETTA as a business has tremendous potential; initiatives developed over the past 15 months can deliver the following returns to ETTA: Table 10 Initiative Value $000,000 Timeline Gas Turbine Users Group .4 July 2005 New Training Options .6 April 2005 Hybrid .2 April 2005 PAWA Tender 3.2 March 2005 PAWA Risk Management .1 January 2005 NMTC .2 Ongoing Transalata Training Yard 1.2 July 2005 CBL .3 Ongoing Telstra Traineeships 3.4 3.2 current Telstra Tower Project .3 March 2005 Tonga training .1 Ongoing Malaysia .4 August 2005 TXU Online Induction .1 Current GASA Secretariat .2 July 2005 Techcom Simulation .2 March 2005 EDL .5 August 2005 Total 11.4 All the initiatives in Table 10 have been reversed due to the fact that the Institute (CGIT) appears to be devoid of qualified and experienced managers who are capable to manage these initiatives. ! ! 26 1. 8 St ak eh o ld e rs D ef in ed Table 10 details the key stakeholders in the potential ETTA acquisition/divestment process. Apart from the EIAG there are two other entities interested in the future of ETTA for varied reasons and then there are the existing stakeholder/owners and managers of ETTA. When considering the options it is important to view the opportunities from a range of perspectives. The convergent or divergent perspectives of other stakeholders either internal or external to the divestment of ETTA may have a positive or detrimental impact on the EIAG’s plans to acquire ETTA either in its totality or in its portfolio components. Table 10 Stakeholder Likely Agenda Likely Response EIAG Response Department of OTTE wants to sell off the land, it needs OTTE will make some veiled attempt at showing The best way to mitigate this response from Education. the funds; with an estimated market value an interest in ETTA, however its response is clear; OTTE is to seek the support of the Minster for (OTTE) of $12M the ETTA campus at Chadstone sell the land and claw back the funds it outlaid on Energy & Resources to either block OTTE’s has more value to OTTE in the bank. ETTA several years ago. OTTE will filter its disposal of the asset or alternatively transfer the The Minister of Education will be keen to decision making process on ETTA through CGIT. asset to a more empathetic Ministerial portfolio recover $4M that her department paid for CGIT will be the scapegoat for OTTE; the trade off such as Energy & Resources. The EIAG the Chadstone site nearly 3 years ago. will be that CGIT will get 50K hours from OTTE to response will also be dependent on which option fund training in the Valley. An inevitability has it decides to pursue. been orchestrated which will result in the demise of ETTA as a viable training business by December 24, 2004. ! ! 27 Stakeholder Likely Agenda Likely Response EIAG Response CGIT Divestment of ETTA. This has been an CGIT has already started to deconstruct ETTA; The EIAG may need to act reasonably quickly if agenda pursued by some senior managers at initiatives launched in the past 15 months have it hopes to salvage any of the ETTA business CGIT for several years. The logic of CGIT been reversed and asset maintenance activities. Alternatively the EIAG can wait for a commercial decision making defies gravity as schedules have ceased. The current executive fire sale and pick the components of interest up an Institute it has never been credited with of CGIT appears to be neither competent nor at a discount. The issue may be that in the making a sensible commercial decision. The confident enough to deal with industry. The next eight to twelve weeks ETTA’s best training disposal of a division known as SMART Driver preferred course of action is to run ETTA into the personnel will depart for industry positions. The training in 2003 is the most recent case in ground and thereby assist OTTE to achieve its paper authors have been informed that at least point. Since the fire sale divestment of objective to sell off the land. CGIT and OTTE 12 key ETTA personnel are actively seeking SMART to DECCA the business has gone will work with each other in such a manner that outside positions. from strength to strength SMART recently one will blame the other for the demise of ETTA engaged 5 new staff and purchased 2 knew and then divide the residual spoils of ETTA’s trucks to cope with demand for driver training. inevitable demise. Powercor Has a definite interest in the demise of ETTA. Powercor will applaud the closure of ETTA The EIAG needs to consider whether it will In recent years Powercor has set up its own because this will force industry to train through establish a rival training facility to Powercor training facilities around Melbourne and is their facilities in Melbourne and South Australia. (ETTA Mark 2) or join the Powercor national currently applying for RTO status. ETTA has Powercor has already contacted OTTE training initiative currently linked across three been a thorn in Powercor’s plans in recent supporting the closure of ETTA suggesting that it states of Australia: months. Powercor clearly has a national has not met industry needs for many years. Warren Centre UNSW in NSW training plan centred at ETSA in South Powercor is perusing the opportunities that may ETSA in South Australia Australia. emerge from the new Federal Government’s Training facilities in Victoria. initiatives on education. The establishment of specialist technical colleges. ETU The ETU has made some overtures over past The ETU may be considering its options. The The EIAG and the ETU should consider months regarding the acquisition of ETTA as ETU will be thinking about how it positions itself working in collaboration to secure a training and a full asset purchase; in other words in the light of the changing political landscape in skills development future for the energy purchasing ETTA as it stands today. Australia. All unions will be redefining their roles industry. and assessing how they will remain viable. ! 28 1. 9 Th e O p t io n s M at ri x The Options Matrix identifies the options for acquiring ETTA at four distinct levels: First Order Consideration – these options are low risk to the investor however these options may be the most difficult to initiate due to the fact that the primary stakeholder OTTE is seeking a quick and viable cash result; a complete sell off of ETTA as detailed in Option 7 would undeniably suit OTTE. These options may also be complex in the negotiation and acquisition phase. A simple walk in walk out arrangement will certainly be expeditious however this is also high risk as defined in the Fourth Order Considerations. Second Order Consideration – these options are of moderate risk; however are also complex in so far as some of the detail and multiple relationships will need to be established to achieve the desired outcomes. Third Order Consideration – these options are high risk for the investor but lower risk to the vendor; in this instance OTTE and CGIT. Fourth Order Consideration – these options are high risk to the investor however low risk to the vendor. These options would certainly be very quick to implement however the return on investment considering the level of capital investment may not be realised for at least 10-15 years if at all. The authors of this paper firmly believe that the funds should be committed to building a robust product and service delivery model which is and should be the core business of ETTA; investment in real-estate is not the core business of ETTA. There is the potential to attract two types of investor to this opportunity; the ETTA business investor and the property investor. The only overriding issue when considering this investor mix is that the utilization of the land that ETTA currently occupies at Chadstone would not provide the level of return that a property investor would be seeking. The true intrinsic value in the business known as ETTA is as follows: Intellectual Property (IP) – learning resources and materials, The People – a unique group of individuals generally respected by industry with the capability and passion to training to the energy sector. The Database – a comprehensive list of clients developed over 10 years, Brand – ETTA is a brand that is widely recognized by the energy industry. The land; pole yard, transformer yards, outbuildings and classrooms can be easily replicated at a number of locations through the utilization of existing asset and or the use of modularized training facilities. There may be a range of other options which will be permutations and variations of the options defined however these options are believed to reflect the core/fundamental options available to the EIAG. ! ! 29 Table 12 The Options Matrix First order consideration Second order consideration Third order consideration Fourth order consideration Cost Elements $000,000 No. Option Description Land Buildings IP People Total Risk Impact Yard/Tools Brand Cost $000,000 This option is like a PPP; OTTE will retain 1 Take over the management rights of X X X .4 .4 L-M the asset, the business will be transferred to ETTA; on a profit/cost or a no profit/no a business management group such as the cost share arrangement. With OTTE. EIEF. The EIEF will carry/share the costs and profits with OTTE. It is unlikely that OTTE will be interested in maintaining a ongoing liability/commitment to ETTA. OTTE’s preferred position will be that the business managers take all the risk. OTTE’s primary objective will be to sell the land that ETTA currently occupies and grab the cash. It is unlikely that OTTE will confirm this strategy however it has been the central discussion with CGIT in recent weeks. The trade off for CGIT is that it will receive about 50K hours additional training a year this adds about $500K to CGIT’s training budget. ! ! 30 Cost Elements $000,000 No. Option Description Land Buildings IP People Total Risk Impact Yard/Tools Brand Cost $000,000 Significant capital will be tied up in assets 3 Purchase the IP and ETTA 4 3 2.2 X 9.2 M-H which at best will only experience 75% brand/database and establish the utilization. The expectation that training facility in another location. apprenticeships will continue in the existing format may be tested in ensuing years. It is highly likely that two year traineeships will supersede the current apprenticeship programs this may reduce the asset requirement for training. The risk is that OTTE will seek a 2 Purchase of the business of ETTA and X X 2.2 .4 2.6 M- commercial lease arrangement possibly in lease the land and buildings from the range of $300K - $400K per annum. OTTE. OTTE does need the revenue. It is unlikely that the business can sustain this overhead. OTTE may forgo the lease income however a trade-off will need to be negotiated; such as apprenticeships funding offset by the ETTA business management team. This option basically substitutes one 4 Take over the management rights to X X 2.2 .4 2.6 L-M business manager with another; in this case ETTA. CGIT will be replaced by the EIEF. This is a low risk option as all risks are shared. OTTE will have some direct input into the business operations, however it is envisaged that overall direction setting will be driven by the industry. ! 31 Cost Elements $000,000 No. Option Description Land Buildings IP People Total Risk Impact Yard/Tools Brand Cost $000,000 Additional investment will be required to 5 Establish a new parallel business 4 3 1.8 .6 9.4 M-H build a new brand. Similar asset investment competing with ETTA. issues as options 3 & 7. Establish a symbiotic partnership with a 6 Purchase the IP and ETTA X 2 2.2 .4 4.6 M-H TAFE or RTO which will be compatible, brand/database and establish the empathic and is prepared to work training facility in another training collaboratively with industry. The risk is that institute (TAFE) or private RTO. the partnership could deteriorate to the level of the existing relationship with CGIT. The issue is that there is no real control over how RTO’s manage their priorities. The consequence of this is that there may not be any sustained level of certainty for the energy industry. 7 Over 90% of the capital will be tied up in Purchase the entire business known 12 4.2 2.2 .4 18.8 H land and buildings; unless it can be clearly as ETTA. The outright acquisition of demonstrated that the existing location at ETTA including all assets; databases; Chadstone is extremely strategic it seems forward contracts and liabilities. folly to invest in this manner. In the event that the business fails only 61% of the capital investment will be recovered. It is unlikely that the EBIT can justify the level of investment that this option requires. ! 32 Cost Elements $000,000 No. Option Description Land Buildings IP People Total Risk Impact Yard/Tools Brand Cost $000,000 This option will result in the ultimate demise 8 Status quo X X X X COST OF M-H of training to the energy sector in any TRAINING cohesive way. Training will become fragmented as a consequence of only the profitable and well supported components being picked up by other RTO’s. CGIT has clearly demonstrated that it has no vision for ETTA as the one-stop-shop energy industry centre of excellence. The training gap is likely to be filled by the likes of Powercor. This option will produce a parallel result to 9 Break ETTA up; move the sub- X X X X COST OF M-H Option 8. Energy industry training will elements of telecommunications, Type TRAINING become fragmented and potentially more B Gas, sort courses, electrical and complex and costly for end-users. leadership training into other RTO’s ! 33 1. 10 Reco m men d at i on s When considering how to move forward with the potential acquisition of ETTA it is worth pausing and thinking about what it is that the EIAG is attempting to achieve. There are two fundamental questions to be asked initially: 1. Does the EIAG want to invest in an entity which it can call a centre of excellence in energy industry training; an iconic landmark that has deep historical relevance to the industry in Victoria? Or, 2. Does the EIAG want to invest in new training methods and technology in a new setting which may be more dynamic with a workforce that is flexible and committed, thereby building a new ETTA? There are four critical elements to a successful training business: Intellectual property – as stale as some of ETTA’s IP might be it has a value and there is a solid core of IP that can be built on given the right amount of resources. People – the ETTA team in the main are high net-worth individuals, in an industry that is rapidly running out of talent; the team is worth retaining. Database – ETTA has the most comprehensive industry training database in the country. ETTA’s address and telephone numbers are extremely valuable as is its web address www.etta-traing.com . Brand – ETTA’s brand is well known in the industry and respected in most quarters; this is not to suggest that there is no room for improvement. The ETTA brand is recognized by 90% of the energy industry in Victoria and close to 78% of the energy industry in Australia. The recommendation is that the EIAG considers what it wants to achieve as an industry advisory group and then focus on the four elements worth salvaging from ETTA as listed above. There is a notional value associated with the four critical elements this is anticipated to be approximately $2M. Additional investment of about $3-4M will be required to relocate ETTA and realign its training technology to meet the new wave of training demand that will sweep this country in the next ten years. The next step: 1. Decide and commit to a preferred option. 2. Develop the business case. 3. Develop and issue a prospectus. 4. Pursue the preferred option and close the deal. ! !
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