Can Thames turn it round?

The regulator has given Thames Water a hefty fine, a public drubbing, and ultimatums on transparency, board structure and proactive customer engagement. Jane Gray reports.

Thames Water has been held to account. Last week, writing exclusively for Utility Week, Jonson Cox gave the company a public drubbing for its long-running service failings mixed with financial and corporate obfuscation.

He demanded that Thames make specific commitments on five key points (see box, this page) to restore regulatory and public faith in the company’s ability to act in the interests of those it serves, and not just those of its investors.

Cox’s comments do not come out of the blue. For decades now, Thames Water has been in and out of national and industry headlines, stirring righteous indignation on account of its non-payment of corporation tax, its generous dividends to shareholders and its lacklustre performance on key customer-facing metrics such as pollution, leakage and sewer flooding.

Indeed, it was only in May this year that Ian Byatt, the former director general of Ofwat, reanimated public scrutiny of Thames, telling the Financial Times: “Nearly everyone on the [Thames Water] board are investors, and one cannot resist the idea that they are more concerned with money than with serving the public.”

He then suggested to Utility Week that the best solution to the saga of suspicion around Thames might simply be to break the company up, or convert it to a similar public interest structure to that of Welsh Water.

Cox didn’t go quite so far as that in his intervention, which followed close on the heels of Thames Water’s annual report and a hefty fine from Ofwat for falling drastically short of expectation on leakage reduction.

However, if Thames cannot show quickly that it is ready and able to meet Cox’s ultimatums on board structure, corporate transparency and proactive customer engagement, such steps may not be out of the question. Ofwat’s chairman is not a man of endless patience and rarely has the UK political environment been so amenable to radical action in defence of customers.

Thames’s response to Cox’s unprecedented open challenge to its board was curt but it was not defensive. In a brief statement it said that the company was “fully aware” of Ofwat’s concerns and “working hard” to address them.

Contrition

Utility Week’s conversation with Thames’s chief executive Steve Robertson after the publication of its annual report sheds more light on this. It also communicates a higher level of contrition for past failings than the phlegmatic official response to Cox.

Speaking about the direction in which he is determined to take Thames, Robertson – who took up post in September last year – pre-empted many of Ofwat’s demands. He pledged more transparency and open communication with the media. On customer communications, he said that he has personally intervened during his short tenure to drive focus and strategy into the way social media is used to interact with customers. Looking forward, he was also clear on the need to deliver a business plan for PR19 that is “transparent” in aligning the “expressed needs of customers” with intentions for investment and operational changes.

The wording of the annual report lent truth to his rhetoric. The remuneration committee’s report outlined how the company “is reviewing all incentive structures in order to focus the leaders in the business on delivering long-term sustainable improvements for customers” – as well as shareholders.

Nor did Robertson shy away from acknowledging the controversial missed leakage target and the “tricky” light in which it placed the company’s decision to deliver a £100 million dividend payment to shareholders.

Ofwat’s £8.6m leakage penalty was a “salutary measure” that has been “taken very much to heart”, said Robertson. There is now a determination to work “smarter” to ensure the end of the asset management plan (AMP)leakage target is met.

It’s an ambition that will be delivered through greater use of satellite data and drones as well as process and policy reviews to target efficiency and improve handling of customer-side leakage, which Robertson said accounts for about 30 per cent of Thames’s leakage challenge.

On the dividend distribution, Robertson judiciously articulated the need to contextualise the payment. His chief finance officer Brendan Rennet – another new joiner on the Thames executive team – backed his boss up, saying the decision was robust, despite the difficult political environment.

“The equity holders obviously form an essential part of the capital structure, and we need to be able to provide a reasonable and justified return for them over the [AMP] period,” said Rennet, adding: “If you look at the cash yield, it’s about 2.6 per cent from the last year, which is lower than you would probably expect to see from a comparable listed company.”

Vampire vanishes

All that said, both Rennet and Robertson diplomatically suggested that a new mix of investors at Thames – the so-called “vampire kangaroo” Macquarie sold out to a consortium led by Borealis Infrastructure in March – should allow for more focus on customer outcomes over investor returns in the future than may have historically been the case.

“With the change in ownership, about two-thirds of the investor base is now made up of pension funds, which are inherently long term in their nature,” said Rennet.

More specifically with regards to Borealis, Rennet said his experience of working with this “responsible” shareholder in previous roles gives him confidence. They are “very focused on the needs of the wider stakeholder group”, he said.

So Thames’s executives seem to be making the right conciliatory noises to appease regulatory concerns. And Robertson is certainly making no attempt to shirk responsibility for the possible sins of his forefathers in the chief executive’s chair.

On the contrary, recalling his appearance in court in March when Thames was issued with a record fine of £20 million for six pollution incidents, Robertson – then just six months into his job – said: “It makes no difference to me whether I’m the new CEO or the old CEO.

As the CEO of the company you take accountability for the performance of the business. And not just in the few months that you’ve been there.”

Is there the will?

So far, so good. But Ofwat will be looking for more than a can do attitude from Thames now. It will want it to proactively adopt Cox’s five-point plan and execute a rapid turnaround in performance for customers.

But it’s here that Robertson’s words become less promising for a happy ending. For all his assertive talk of management shake-ups and “drains-up” meetings to uncover root causes for leakage and pollution, he was cautious about promising too much change in the short term.

Thames must “accept where things have gone wrong, be clear about how we are going to remedy them” he said. But he also pointed out: “We need to understand in an infrastructure business, from the point where you start to fix things to the point where they are fixed, there can be quite a lot of water under the bridge.”

On leakage, Robertson said: “When you get a miss like this it is very unusual to turn on a sixpence and get back to target. In the meantime, I would not be surprised if there’s another miss – next year for instance.”

It’s doubtful whether Cox, or other regulators and former regulators who have unhappily gnashed their teeth over Thames’s performance for years will have much truck with this view.

Speaking to Utility Week, one regulatory leader damned Robertson’s promise of a “long-term recovery process” with continued shortcomings in the interim as “weak”. It’s a view others have echoed.

Robertson needs to accelerate his timetable for positive change, aligning it with Ofwat’s explicit expectations. If not, his efforts are likely to be condemned as too little, too late.

Ofwat’s five-point plan

Jonson Cox, Ofwat’s chairman, has challenged Thames Water to take swift action to deliver “a step-change in the way it operates and behaves”. Specifically, he called for it to deliver the following five goals.

1. Far-reaching improvement in its communication with all the company’s customers, using the right channels at the right time. Thames Water serves a diverse and vibrant community, which operates around the clock. It should be leading the way in customer communications.

2. An annual audited statement from the board to sit in front of the financial statements. That statement should focus on how the company has set its aspirations and performed for all those it serves. This will illuminate how well Thames Water is delivering for everybody who depends on its services.

3. Transparency and clarity about the financial returns to the company’s investors each year. This requires a clear comparison in the annual report between the financial flows under the complex highly leveraged structure the company has chosen and what those returns would be under the more conservative structure used for assessing all companies.

4. A prompt review of the board composition. This should look to ensure a standard of independence, that the board can hold the company to its promises to customers, and that the board can win and maintain public trust.

5. Demonstrate that management rewards give appropriate weight to performance for customers as well as financial performance. It should also explain transparently how performance standards have been set and assessed each year.