Ofwat lays bare £5.6m error

The water regulator’s report into its budget planning process paints a picture of organisational mismanagement and sets out an action plan to prevent repetition of last spring’s events, says Ellen Bennett.

On 15 May 2013, Ofwat’s high profile and controversial chief executive Regina Finn resigned. The timing of her departure was a surprise to the industry, but the fact of it was no shock. Finn was believed to have a tense relationship with her new chairman Jonson Cox, and her standing in the water industry was at an all-time low following an undignified row the previous year over changes to water company licences. Two months after Finn announced her departure, Ofwat revealed that it was short on its budget to the tune of £5.6 million, going cap in hand to the water companies for more cash.

For the first time, the chain of events that led to Ofwat’s multi-million pound error have been laid bare, with the regulator’s publication of a report, Ofwat Budget Planning and Forecasting Process – Lessons Learned. The document paints a picture of organisational mismanagement and sets out a plan of action to stop the events of last spring ever happening again.

The budget for the year in question, 2013/14, was set in the usual way. Ofwat had in the past tended to underspend, and so had a surplus from previous years to call on. With this is mind, the board approved an annual budget of £21.5 million for 2013/14 in February 2013.

But, as the report admits, “while the normal processes had been followed, they clearly failed to work effectively”. It seems a “debate”, to use the report’s phrase, arose within Ofwat’s price review team about the “desirability” of using a delivery partner. Or, to read between the lines, there was an internal row over whether it would be necessary to draft in consultants. As the report goes on to admit, the crucial role of programme director of the price review was at this time filled by a temporary, part-time worker. The report comments: “Compounded by wider skills gaps within the organisation, this led to a lack of sufficient capacity both to deliver the complexity of the methodology and plan the next 18-24 months of the programme.”

By April 2013, the report says “it was clear that there were serious budget pressures”. In May, the prospect of a delivery partner was raised at a board meeting. This is the same month that Finn resigned, although the report makes no mention of it. Current chief executive Cathryn Ross declined to discuss Finn’s role in the budgeting error, insisting the report was about systems and processes, not individuals. Asked about individual accountability, she emphasised that the report was not a “blame game”. Finn could not be contacted for this article.

In June, Ofwat put out a tender for a delivery partner. When the bids came back, it was clear that the regulator would not be able to afford the support it needed with its agreed budget, even with the surplus from previous years’ underspend added.

Thus, in August, following negotiations with the Treasury and PwC, the successful bidder for the delivery partner, Ofwat’s board approved a revised budget of £27.1 million. The regulator duly levied a special licence fee on companies of £3.2 million, and drew down £2.4 million from its reserves.

So what went wrong? In what seems a coy reference to the blazing row over the Section 13 licence modification, the report confesses: “The organisation’s focus was inevitably on policy issues at the expense of effective implementation planning.”

The problems it highlights were significant and widespread, “including staff training, effective leadership and capacity, particularly the absence of sufficient, experienced programme management capacity below the executive team”.

The quality of management information within the organisation was poor. The report states: “Budget papers for the board and the executive now benefit from significantly greater detail, particularly on assumptions, to support effective scrutiny and challenges.”

The report sets out a number of other actions that are being or have been taken. As well as improved monthly financial reporting to the board, these include the provision of annual budget assumptions; an annual report on delivery management to the Audit Committee; improved measures around recruitment and retention; and the introduction of a “change protocol”.

Under the heading “developing a stronger financial culture”, Ofwat outlines plans for compulsory training for budget managers, and to ensure the executive team discusses resources and the budget on a monthly basis. Asked why this was not already happening, Ross says: “Of course budget training happened before, but we are trying to change systems and processes here. When you make major changes it is very important to give people support.” She added that the report has focused on giving concrete actions with clear accountability.

Ofwat has discussed the report with its parent department Defra, the National Audit Office and the water companies. Asked whether any of these external parties would take further action, Ross replied that the National Audit Office would scrutinise Ofwat’s annual accounts, as is usual for any public body. Ofwat’s own Audit Committee will be monitoring the progress of the action plan. Defra declined to comment.

The water sector’s reception of the report has been characteristically muted. Its timing is convenient – water companies are focused on PR14, and if there was ever a moment for them to criticise the regulator, this is not it. But in addition, there is a genuine sense among the companies that the new leadership of Cox and Ross has put matters right. “The companies just want Ofwat to have its house in order, in the same way it expects of them,” said an industry insider. “That’s what’s happening, so it’s time to move on and focus on the price review.”

Ross sums it up thus: “It is beholden on all of us when something goes wrong to put our hands up, say that didn’t go as well as it could have done, have an open and transparent process and come up with a concrete action plan. That’s what we’d expect the water companies to do, and that’s what we’ve done.”