Interview: Martin Baggs, chief executive, Thames Water

“There’s a lot of myth and legend out there and the onus is on us to explain to our customers and stakeholders what this industry is about.”

Martin Baggs looks happy. Showing Utility Week around two rooms on the top floor of Thames Water’s Reading headquarters, he is beaming with pride as he points out the pictures of the company’s 5,000 employees brainstorming values and strategies; the flow charts and diagrams that show their conclusions, and Thames’s progress through a business transformation project that began earlier this year.

It’s a world away from the battles that are often associated with Thames. Negative headlines are inevitable for the UK’s largest water company, serving England’s capital, but Thames gets more than its share. From the £4 billion Thames Tunnel mega-project to regular disagreements with Ofwat over funding, including last year’s application for an interim determination and this year’s price review, the water company is seldom far from controversy. But for chief executive Baggs, the focus is on the job in hand – improving customer service, keeping his staff well and safe, working with partners in new ways and getting the company ready for the many ­challenges ahead.

Prominent among these challenges is the introduction of competition for non-domestic customers to the water sector in 2017. In preparation for this, companies must separate their wholesale and retail businesses for the first time, and Thames is one of the few that is well advanced in doing so. It has already created a separate wastewater business and retail arm, and is active in the competitive Scottish market. Honing these plans and developing a strategy for the UK market is a major plank of the transformation project under way.

Meanwhile, Thames is already in the throes of transformation, with new ways of working including the Eight20 alliance, its delivery vehicle for AMP6. The alliance of eight includes IBM as well as more traditional construction partners. Baggs is rightly proud: “Most companies are way beyond project management and have been for some time. Most companies are now into programme management – this takes it into another dimension. We envisaged the alliance being a design and build programme management approach – it is now way beyond that. I sat in a meeting with the senior directors last week, and the alliance team were giving us presentations on the various incentive arrangements we’re looking to develop. We’re all sharing the same incentive arrangements – senior executives from construction companies giving us, a water company, a presentation on ODIs [outcome delivery incentives], well – that’s pretty mind-blowing. Did I think that was going to happen 12 months ago? No.”

To get to AMP6, you’ve got to go through the price review, PR14. Thames is one of three companies Ofwat flagged up as having significant discrepancies between its business plan and the regulator’s calculation, centring on the funding of the Thames Tideway Tunnel, of which more later. Does Baggs expect a satisfactory conclusion when the regulator makes its final determinations in December? “I sincerely hope so – a huge amount of work has gone into developing our plan.” He mentions affordability, bad debt, leakage and the emphasis on customer consultation that has characterised PR14. “I’ve been in the industry for 28 years, and this price review is significantly different to any other price review I’ve been through. Putting the emphasis on companies owning their plans has been the one big step change.”

Intriguingly, Baggs mentions that a company’s customers do not always want the same thing: “If companies are going to own their plans, you really need to reflect that in terms of how you monitor and incentivise. You can say we need to have consistency across the piece and sometimes it is really useful to have comparisons, but if we’re really serious about moving towards competition, you’ve got to be driven by what your customers want, and we’re seeing, even within our company, our customers’ views will be different in Swindon or Gloucester or Cheltenham compared to Brixton, Peckham or Enfield.”

The disagreement with Ofwat over Thames’s original business plan is not an isolated occurrence. Indeed, the relationship between the regulator and its largest regulated companies has been fraught at times. Last year, Thames surprised its contemporaries by applying for an interim determination – essentially, an unplanned rise in customer bills – at a time when the regulator had been loudly emphasising its focus on keeping bills down. Can Baggs talk about that? “Not really. That’s in the past. We applied in a very genuine way in terms of trying to recover costs we thought we were entitled to. Ofwat made a decision and we accepted that.”

Thames has also fallen foul of Ofwat on areas such as corporate governance, where it is currently overhauling its board structure to meet the regulator’s guidelines. The board has hitherto been dominated by investor representatives from the company’s shareholders, chief among which is Macquarie. But Baggs insists the relationship with the regulator is solid, dismissing Utility Week’s suggestion that the company is permanently in the “naughty corner” as “unfair”: “The relationship has improved over recent years. We recognise where we need to improve. Equally they recognise where we have made improvements already. It’s a difficult balance with the regulator; they’re there to protect the interests of customers. It comes back to the companies doing the right things for customers.”

Baggs is swift to praise Ofwat’s understanding of the need for a stable investment environment, and namechecks the regulator several times in his honour roll for the Thames Tunnel. The £4 billion construction of a sewer under London is a once-in-a-lifetime project that has necessitated the invention of a unique funding and delivery model which, says Baggs, could be rolled out to other infrastructure projects. After a lengthy process, it won planning permission in September.

Yet the tunnel is not without its critics. It has faced pockets of community resistance as well as high-profile expert opposition from professor Chris Binnie and former director general of Ofwat Sir Ian Byatt. This is obviously a sore point: at the very mention of the phrase “widespread opposition”, Baggs’s external affairs director, Richard Aylard, leaps in with an impassioned rebuttal. The opposition is not widespread at all: duly noted.

This small display of prickliness is interesting. Thames is under heavy fire from the media. As Aylard and Baggs point out, any national story about water companies is always going to take Thames as its starting point and for a water company that serves 25 per cent of the population, negative headlines are inevitable. Baggs diplomatically claims to believe most of the coverage is fair, but he also hints at some irritation with the press: “There’s a lot of myth and legend in the press, and I suppose that comes back to us explaining better what we do as a business, and how the industry has managed, and what we deliver, and how it is financed. We’ve all read the stories about tax and dividends and people making lots of profit and no investment – a lot of that is just myth and legend.

“When you read articles in the press that say we are paying record levels of dividends, we’re not actually, or making record profits. When you read press articles that say the level of investment has halved in the past ten years, actually it’s not. It’s doubled. There’s a lot of myth and legend out there and the onus is on us to be on the front foot and really explain to our customers and stakeholders what this industry is about, and that it’s actually a huge success.”

For the record, Thames has produced a document setting out its finances, which reveals it invests more than £1 billion a year, equivalent to £6 for every £1 returned to shareholders, and pays its “fair share” of tax, it says.

Difficult questions about the regulator and media dealt with, Baggs is on his feet with infectious enthusiasm, taking Utility Week to see the evidence of the transformation project in action. The future is about customers – where Thames is making significant improvements on the SIM score, rising from 63 in 2013 to 71 in this year’s figures, though it must be said, still coming last. It’s about smart meters – Thames is rolling out compulsory meters and following successful trials, will be universally opting for smart meters. “It’s a brave new world,” says Baggs, that will see home management systems linking energy and water, allow Thames to better manage its network and have the added bonus of helping identify and tackle leakage – a perennial bugbear for the company’s customers. And the future is about a happy and healthy workforce – health and safety is the thing that keeps Baggs awake at night, he says, and well-being is important too: he is gearing up to set an example by having his diet and exercise regime monitored for health and well-being week. After an hour of questioning on the highs and lows of running the UK’s largest water company, he’s still smiling – that’s a good start.