It’s time to ‘focus on reality’: Pennon Group CEO, Chris Loughlin

“I wanted to create an environment where we can all input our thoughts and ideas and they’re all valuable.”

Chris Loughlin doesn’t like big egos, and he certainly doesn’t want them in his company. Pennon’s softly spoken chief executive entered the company wanting to change things for the better, and that’s just what he’s done.

When Utility Week meets Loughlin at Pennon’s head office in Exeter to talk about its transformation from a laggard to a leader and its future plans, regulator Ofwat had just made public its verdict on the water sector’s PR19 business plans. South West Water, Pennon’s subsidiary company, was one of just three, along with Severn Trent’s and United Utilities, to have its plan placed in the “fast-track” category, meaning it has provisionally passed Ofwat’s rigorous tests and doesn’t require any further work.

Loughlin is pleased to have been awarded this accolade and, he says, even more gratifying is the fact the company has managed to do it two times in a row. “We’re the only one that’s been able to achieve that.”

But things haven’t always been like this. “If you look back 10 or 15 years, South West Water was not necessarily the highest regarded company in the sector,” says Loughlin. In fact, questions were often asked about what should be done about the “South West Water issue”. “Not wanting to name names,” he says. “But there are other industry players now who are the ‘issue’.”

South West, which bought Bournemouth Water in 2015, has an inextricable link to the sea. Whether it’s the caw of seagulls you hear when you open the office windows or the wall murals of surfers in the reception area – there are constant reminders that the company serves the coastal gem of England. And being the steward of a third of the designated bathing waters in England and Wales comes with its difficulties.

At the time the water sector was privatised, 40 per cent of the sewage the country produced went straight into the sea with no treatment. This shocking statistic, Loughlin claims, underlines the “lack of investment” in the industry while it was owned by the state.

Originally, the plan was to keep South West Water publicly owned because the capital investment needed to clean up the bathing water in its supply area was just too much for it to fund. However, the government decided at the eleventh hour to make it private along with the rest of the industry. By this time, it was too late for the company to get its share of the “green dowry” – the money, which came from government selling shares in the water sector, paid to the new water companies to help them meet their environmental obligations. This caused the “South West Water issue”, which plagued the company for the first half of its life.

An independent review, commissioned by the environment department at the time, calculated that the company was short £650 million as a result of missing out on this government cash injection. At one stage bills were twice as high as Thames Water’s, Loughlin says, and people, quite rightly, considered this unfair.

“The idea of getting £650 million from the Treasury was unlikely to happen,” he says, “so we’ve been getting, for our customers, the interest equivalent of that in the £50 government contribution.” The government has confirmed that it will continue this contribution until 2020 at least.

Loughlin was appointed chief executive of South West Water in 2006. He was subsequently made group chief executive of Pennon in January 2016. He is also chairman of British Water, a director of Water UK and a trustee of the industry’s charity WaterAid. He began his career as a chartered engineer working in both the consulting and contracting sectors. Prior to joining Pennon, he was chief operating officer at Lloyds Register and before that, executive chairman of Magnox Electric. He was also a senior diplomat in the British Embassy in Tokyo.

Asked what drives him, he jokingly replies: “my wife”, before answering seriously that he is driven by values and principles. “I want to do the right thing and make a difference,” he says. “I think it’s quite a modest aim, but that’s really what drives me.”

Loughlin has certainly made a difference. In the time he has been at Pennon, South West Water has moved from being the laggard at the bottom of pretty much every league table, to being well regarded and well respected and, by many measures and independent assessments, being a leader of the industry. Two successive fast-track approvals by Ofwat serves to highlight this.

To achieve what he has achieved, Loughlin has needed the buy-in of everyone in the company. Big egos, he insists, are not welcome at Pennon. “I’ve always held the belief that you’re only as strong as your team. I wanted to create an environment where we can all input our thoughts and ideas and they’re all valuable. It’s not an autocratic organisation, it’s not in my nature to be like that.”

This inclusive philosophy extends to the way South West interacts with its customers. As part of its PR19 business plan – which it titled “A New Deal” – the company will offer customers a £20 million shareholding (about £25 per customer) from 2020 onwards. This builds on its “ground-breaking” Watershare scheme – launched as part of its previous business plan – which rewards customers for the company’s outperformance and protects them from underperformance in the current five-year period.

The New Deal plan began with a huge amount of customer research. Loughlin says he was surprised to see public support for nationalisation was high. “It wasn’t a surprise to me that Mr Corbyn and his colleagues put in a reasonably left-wing manifesto with thoughts on renationalising some utilities including water.” But what was a surprise to him was the public’s reaction.

“I looked at the Legatum research, as it happens, and it seemed to give a strong level of support for nationalisation as well.” Even more surprising for Loughlin was that there was no age differentiation. “I thought younger people perhaps wouldn’t remember how bad it was in the old days.”

South West did its own research as well. This was never published, but it did throw some light on what was driving the public’s perceptions. “It was not about the quality of service, it wasn’t about the prices, it wasn’t about how well or otherwise we interacted with our customers,” says Loughlin. “Instead, it was a broad social issue about not having confidence in companies to provide local support and services to the local communities – they felt they had a lack of engagement and a lack of control.”

The company’s New Deal plan was all about moving from customer engagement to customer empowerment. “Rather than just asking ‘what would you like as a customer?’, we asked ‘what would you like and how would you like to be involved in delivering it and how would you like to be in control of what is delivered?’. We wanted to create a New Deal whereby the interests of all our stakeholders are much more aligned.” The plan is an evoluction of Watershare. “It builds on what was there before – it’s not just a knee-jerk reaction to any political pressure.”

And it was the company’s customer-driven philosophy, Loughlin says, that propelled South West Water into the regulator’s fast-track category twice in a row.

He insists there was no “magic formula” to getting fast-tracked. “We never sat around the board table saying: ‘we are targeting this, we are doing that’.” When it came to PR19, instead of trying to second guess what Ofwat may or may not think about its plan, South West put all its efforts into producing what it considered a “good plan”, based primarily on customer research.

“We have tried to produce a quality plan that is not only quality in terms of its research and the way it’s put together but is also delivering what Ofwat wants and competent in terms of its finances. That must be a normal business thing, to deliver what you’re supposed to as efficiently as possible. It isn’t complicated really.”

Things in the water sector are changing. “Not so long ago, business plans and water resource management plans put to the Environment Agency were predicated on a planning assumption that we’d have standpipes in the street every 20 years, that’s just not acceptable anymore,” says Loughlin.

Today, the sector has a lot to be proud of, he insists. “Last summer was the hottest, driest summer on record and we didn’t have any water restrictions in the industry. We got close in certain parts and there was a lot of public outcry and political comment about it and yet it was the hottest, driest ever and that’s going to carry on, so you’d expect it to be a bit difficult, and yet we all managed.”

Going forward, Loughlin says, it is incumbent upon all water chief executives to stop their companies becoming distracted by issues such as nationalisation. “We need to focus on reality, which is all about meeting our customers’ needs, meeting the extreme volatility of climate change, weather volatility, population growth, growing customer expectations – those are the real challenges facing the industry. A lot of other things, for example the debate about legitimacy, or social purpose, or renationalisation, or share ownership, although important, are distracting attention from the main thing.”

His vision for the future of the sector, therefore, is simple: he wants to see a water industry at peace with itself and focused on the important things. “We need to focus on the far horizon as well as the near horizon,” he says.