Performance-Based Programs: Do they work for hotels?
By Gary Cardono Director of Hospitality Sales, Globe Union Group, Inc. | May 13, 2012
Co-authored by Russ Horner, President of Water Management, Inc.
When homeowners need to upgrade their houses but do not have enough available cash, they usually go to the bank for a home equity loan – borrowing money against their home's asset value. Hotel owners have been using similar practices for years. But what happens when the property value declines?
Since hotel owners have faced the dilemma of decreasing property values for the past few years, we water management experts consistently hear something like this, "Unless you can guarantee that your upgrade will provide payback in less than one year we cannot move forward with a water conservation program." Payback periods are the time in which the total income or savings derived from a particular capital investment equals the total cost of the investment. They are generally measured in years.
The solution to the dilemma requires looking at a facility differently: "future savings" represents another valuable asset. As facility management has become more and more automated, budgets and metrics are constantly reviewed and analyzed. Utility costs – especially water – are rising faster than any other costs and most budgets already have built-in escalators of 5% - 10% to account for the predicted increase in utility rates.
Following the method of performance contractors, hotel owners can obtain loans based on the "value of future savings." This strategy is gaining traction and is now being implemented with great regularity in the public sector. The best aspect of water programs is they provide fast paybacks. In the past, using the argument that a one-year payback was necessary, the only measures that ever got implemented were showerhead and/or aerator replacement programs. Using the performance contracting strategy, water efficiency improvements can be made to the toilets, faucets, irrigation systems, and laundry equipment, and there is still money left over to implement sustainable measures such as rain water harvesting.
The typical internal rate of return for a comprehensive water program is 30 to 50 percent or better. With this sort of return, what is preventing owners from implementing programs? Perception follows reality typically by two or three years. The reality is – investing in water makes smart business sense, but the perception is often the opposite. One might ask, if water programs are so beneficial, why is it that many water utilities provide rebates to customers to replace older toilets?