Sweating the asset – a public sector approach to allowing commercial use of a facility

The problem: Our public sector client operated a bulk fuels facility located alongside a public port. The facility, of several million litres, was a strategic facility for the client and provided a fuel reserve (in case commercial supply lines were interrupted).

The client recognised that to continue operating the facility, would need specialist skills that were not organically available to them. It was not easy for them to acquire the expertise, meet and maintain contemporary WHSE operating stands and continue to operate the facility efficiently – it was not their core activity.

In commercial terms, the asset was underutilised. The fuel holding turned over once or twice a year. A commercial operator would look to turn over the holding 7 or 8 times a year. Industry would term this “sweating the asset”.

The client, being keen to explore opportunities to lower costs and better align to industry practices, engaged Kiah to facilitate a review and provide fuel industry experience, insight – and options. Kiah quickly identified the potential to improve the client’s supply chain resilience by integrating the facility into a larger, commercial supply chain rather than being a consumer node at the end of a commercial chain. Arguably, integration might improve the client’s contingency plans while holding less fuel, with less management and less wastage.

The solution: Kiah brought together a team of experts with commercial fuels industry technical, operations and commercial experience. These were practitioners who had been responsible in previous roles for the “profit and loss” of their businesses. They knew how the industry worked. The quickly identified that the industry had a shortage of storage with reasonable access to the port.

Our client had more storage capacity than needed but hadn’t realised the value of this excess storage to industry players. Kiah realised that a change in perspective was needed – to shift to the idea there was an “asset to be leveraged” rather than simply storage.

An opportunity existed to satisfy both parties interests, though it needed a non-traditional lens to look at the problem – and then to seek to address the interests of the other party in order to satisfy client’s interests.

Kiah developed, in conjunction with the client, the options papers for the client’s consideration – and supported a competitive approach to market.

The outcome: The project resulted in a lease and licensing arrangement with a commercial operator, who now operates and maintains the facility, at the organisation’s cost, in return for the right to use the facility commercial purposes. At the same time, the fuel supply, storage and distribution function (for the client’s fuel demand) was met.

Operations, maintenance and supply chain outcomes for the client are improved, and the arrangement has delivered a $5m saving over the initial 6-year term.

The lesson: Good deals that unlock hidden value require a different perspective, and that perspective requires diversity of thought and experience.