Wanted: a white knight for Thames Water

The abrupt departure of chief executive Steve Robertson, job cuts and another knockback from Ofwat on its revised business plans, are the latest turbulent twists in the Thames Water saga. Denise Chevin asks, who can turn the beleaguered ship around?

At the end of last month headhunters for Thames Water added a new commission to their wanted list: a charismatic chief executive who understands and appreciates the complexities of running a regulated utility. The successful candidate must have sufficient engineering nous to grasp the complexities of patching up Victorian infrastructure, know where to spend money and grasp how best to harness new technology. Additionally, they must possess the charm and charisma to galvanise a despondent team to deliver huge efficiencies. And, of course, be comfortable with the constant attention of the media, politicians and regulators that inevitably comes with this particular territory.

As just one small example of what they’ll be taking on, last month up to 100,000 properties in London were left with little or no water after a large pipe at a waterworks burst. A number of schools had to close and many hospital appointments were cancelled. It was just the latest in a long list of headline-grabbing incidents centred on operational mishaps and controversial corporate behaviours at Thames Water. Collectively, they comprise a charge sheet that has made Thames the whipping boy in an industry that many feel has failed on the promised benefits of privatisation and instead has delivered value only to shareholders and executives.

Still, the headhunters will not be short of applicants. Running Thames Water is the water sector’s equivalent to managing Manchester United. It’s big and glamorous – supplying water to 15 million people in and around London, or a quarter of the population. However, finding the right replacement for Steve Robertson, who parted company as CEO of the country’s largest water company after less than three years in the job, won’t be straightforward. Superstars in the infrastructure firmament are in short supply, and it comes at an awkward point in the price review cycle. An incoming chief executive will be tied to someone else’s business plan – and a challenging one at that.

So, what sort of new broom is Thames after and what is the extent of the challenge they face?

In the short term Ian Marchant, who has been independent chair since January 2018, has become interim executive chair while a permanent successor is found. He has made it clear he wants it to be for as short a time as possible and that he hopes to see calmer times ahead, including a more settled senior executive team and a more pragmatic stance on PR19.

Thames is already searching for at least four senior posts, vacancies created by members of the executive team leaving or working out their notices. This includes chief operating officer Lawrence Gosden (who has been persuaded to stay on in a new role as asset management director as a 12-month interim, whilst Steve Spencer chief delivery officer has moved across to become COO), strategy and regulation director Nick Fincham, HR director Janet Burr, and strategic planning and investment director (now MOSL chief executive) Sarah McMath.

You don’t lose four members of the executive team within six months; it’s not a coincidence

Such turbulence at the top speaks volumes, say observers. When Robertson’s departure was announced on 25 May, those close to Thames say they were were not surprised. “You don’t lose four members of the executive team within six months; it’s not a coincidence,” says one observer. “Steve was not an easy person to get along with. He didn’t listen to the team.”

When it announced the departure, the firm said that Robertson had “successfully transformed” the company “in a challenging environment” and that he was leaving by “mutual agreement”. Robertson is credited with increasing Thames’ focus on customer satisfaction, improving incident response capabilities, expanding support for vulnerable families and investing more than £2 billion in the network to improve overall performance. Supporters say he has been scapegoated for what was always going to be a problem child that would take some time to turn around.

Thames has been subject to harsh criticism from Ofwat over a long period, but the past six months have seen the regulator rebuke the company for its failure to tackle leaks, its response to the Beast from the East and its ongoing business plans. As a result of these perceived failings, Ofwat placed Thames in the “significant scrutiny” category when it published its initial assessment of the proposals put forward by water companies and ordered Thames to submit revised business plans on 1 April.

When I heard his interview, I did think what on earth is he doing.

A clearly stung Robertson probably did himself no favours with his response to Ofwat’s assessment of three Ds and six Cs under the nine “test areas”: being interviewed on Radio 4, he said he felt like any proud father who had been told his baby was ugly. “When I heard his interview, I did think what on earth is he doing,” says one fellow water chief.

Writing exclusively for Utility Week shortly after the Ofwat judgment, Robertson said he was concerned about how the company could significantly increase resilience while spending less money. But if it was tough then, it’s even tougher now. The revised business plan submitted in April has pledged a 1.3 per cent reduction (or around £5 per customer per year) at the end of AMP7 ( 2024/25) and then to keep bills flat in AMP 8; a 30 per cent reduction in pollution (compared with 18 per cent in September); 20 per cent reduction in annual sewer flooding; 20 per cent reduction in supply interruptions; and a leakage reduction of 20 per cent compared with 15 per cent in the September business plan.

On top of that, its efficiency gains are ambitious: in September it was proposing an opex per customer reduction of 13.6 per cent. This has now become 22.5 per cent. The totex spend is down from £11.7 billion to a proposed £10.9 billion. Never has the mantra “more for less” seemed so apt. On 3 July it announced 350 job cuts among support staff – with another 300 to go from not filling vacancies.

But even this totex figure is still over £1 billion more than the £9.4 billion Ofwat originally asked for. And the company will need to wait until 18 July when Ofwat delivers its next pronouncements to see if its revised proposals are accepted. Presenting its 2018/19 results at the end of June, Thames Water’s chief financial officer Brandon Rennet said that if the company was forced to make further budget cuts for 2020-25, it would mean slowing the pace of investment in resilience projects.

There is one school of thought that holds that Ofwat will be limited in just how tough it can be because if it pushes revenue down further then Thames could lose its triple A credit rating, making debt harder to service. But that has not stopped punitive fines being handed out in recent weeks to Southern Water, whose credit rating has fallen on the back of it – and early indications aren’t promising. Just this week (4 July) it wrote to Thames and three other companies expressing its disappointment with revised business plans.

Where did it all go wrong?

So how did it get to this at Thames? And where did it go awry for Robertson? Certainly, it all looked promising when he swept into Thames in September 2016 with an impressive customer services pedigree honed in the telecoms sector. He was chief executive of BT Openreach, which he set up, and then at Truphone, prior to being headhunted to take over from Martin Baggs at Thames.

Thames’ chairman at the time, Sir Peter Mason, said his chosen candidate had “demonstrated outstanding ability to innovate and meet customer needs in a regulated environment”.

At first Steve was incredibly visionary. He had very clear ideas, and a passion for customers and about water and how it fits into the wider ecology.

Former colleagues say they were struck by Robertson’s laser-like focus on customers – all letters from customers went straight to him, for example. “At first Steve was incredibly visionary,” says one. “He had very clear ideas, and a passion for customers and about water and how it fits into the wider ecology.”

Another observer adds: “Certainly, the first round of conferences he held with staff were good – but progressively it went a bit flat. And it soon became clear that in terms of performance metrics it really wasn’t that different.”

The problem, says a former colleague, wasn’t so much that Robertson hadn’t got the background or engineering understanding but that he did not always listen to advice from colleagues or seem to trust them. Coming from telecoms, where there are few different types of assets, to water where there are hundreds, and mostly in the ground, was clearly a major challenge.

As the numbers and performance failed to shift in the right direction, frustration grew and tempers flared. “It felt like he was trying to run the company on his own – it must have been a lonely job,” remarks one source.

Leakage proved particularly difficult to tackle and the company is losing a quarter of its output each year. Posting its results in June 2018, Thames acknowledged it had failed to hit leakage targets but pledged to do so for the next two years. However, leakage has subsequently increased to 695 million litres per day in 2018 – up from 677 million litres per day the previous year. At this year’s annual results to March 2019 (posted at the end of June 2019) – leakage had fallen marginally.

As Robertson pointed out in his statement in the interim report and financial statements to 2018/19 (published in December 2018) the company had been hampered by adverse weather. A sustained period of freezing conditions followed by overnight thaw caused pipes to crack and led to an unbudgeted 40 per cent increase in workload. The driest summer on record added to the problems, as volume pumped from the network increased and more pipes cracked.

“The weather also saw complaints soar – the freeze-thaw impacted 75,000 customers. Thames diverted customer services resources to dealing with the bad weather – resulting in a 34 per cent year on year increase in total written complaints,” he said at the time. The ambition is to halve the number by 2025.

We note the strong performance by Anglian Water and Portsmouth Water and disappointing performance by Thames Water and SES Water.

It all gave a hollow ring to Robertson’s pledge within a few weeks of arriving to move Thames into the upper quartile for customer satisfaction: by the time he left, Thames’ position in the table remained lodged at the bottom of Ofwat’s service and delivery report published in January 2019. Ofwat pointedly remarked: “We note the strong performance by Anglian Water and Portsmouth Water and disappointing performance by Thames Water and SES Water.” It also pointed to other missed targets, including the leakage.

Thames wasn’t alone in having targets blown off-course by the weather – but the water companies affected got short shrift from Ofwat, whose view is that more should have been done to plan for such an occurrence, and it demanded the culprits come up with a plan to prevent it happening again. Thames is at pains to stress it is spending £1 million a day in leakage prevention and that the fall in operating profit for the year to 31 March to £454 million, down from £505 million a year earlier, came as the company hired more manpower to find and fix leaks.

But this latest criticism from Ofwat provided yet more evidence that its patience with Thames continues to be tried. Since 2017, Thames Water has been fined more than £128 million for poor management of leaks. The £120 million compensation to customers in June 2018 was equivalent to a £15 rebate on their water bill.

In 2017 Ofwat’s chair, Jonson Cox, had taken the unprecedented step of issuing Thames with a very public dressing down, issuing ultimatums on transparency, board structure and proactive customer engagement. Cox demanded that Thames pull its socks up on five key areas to restore regulatory and public faith in the company’s ability to act in the interests of those it serves and not just its investors. Ian Marchant, the former chief executive of SSE, was brought in in January 2018 as chair to lead group review of corporate structure and governance – including closing the Cayman Islands subsidiaries.

All this came on top of a record £20.3 million fine in March 2017 for polluting the River Thames with 1.4 billion litres of raw sewage between 2012 and 2014.

The constant barrage of negative headlines during Robertson’s time at the helm did nothing to help Thames shed the bad boy image that has dogged it post privatisation, and particularly when the Australian infrastructure investment bank Macquarie was the majority shareholder.

Labelled the “vampire kangaroo”, Macquarie minimised its corporation tax and paid out generous dividends to shareholders (between 2006 and 2015 it paid out £1 billion), while building up £11.3 billion of net debt.

Macquarie sold its last remaining shares in the company in March 2017, and has been replaced by long-term pension fund investors such as the Ontario Municipal Employees Retirement System and the Universities Superannuation Scheme, who are taking a longer-term view.

Certainly, at end of year results in June 2018, Robertson and new chairman Ian Marchant were able to announce they had scrapped dividends for two years so as to sink billions into its ageing infrastructure (which was reiterated again in the 2019 announcements). In addition, in a series of concessions aimed at addressing criticism over excessive pay and high profits, Marchant also announced in June 2018 that a potential £3.75 million bonus for Robertson, to add to his £550,000 a year basic salary, would be deferred until 2020 when he expected to have key performance targets back on track. In a pioneering move, Marchant said Robertson’s bonus would not be related to profits. Instead 50 per cent would be linked to hitting leak targets, with the other 50 per cent linked to customer satisfaction scores and securing a favourable investment and pricing deal with the regulator.

At the same time Marchant has also pushed on with reviewing corporate governance, brought on more independent directors and transferred assets and liabilities in the Cayman Islands back to the UK. The company announced that it had completed the exercise at the end of June with the appointment of a final two non-executive directors.

The message coming out of Thames was one that senior management were on a mission to make the necessary culture change.

Robertson told Utility Week in an interview last year he was there for the long haul. “One of the things with infrastructure businesses is that you have to be very suspicious of people who come in, wave a big flag, have a short-term impact, and disappear again. How can I make my customers trust me if they think I’m here to make a bit of a splash and then disappear?”

But while he may have laid the foundations for the necessary culture change and provided much greater customer focus, there is little in the performance metrics to show these efforts have borne fruit as yet.

There is no easy fix dealing with Victorian infrastructure – it’s difficult to access because pipes and assets are in dense urban areas.

Some in the industry feel that Thames – and its chief executive – have been blamed unfairly. Improved results were never likely to come through within a couple of years. Says one analyst: “Thames’ water leakage problems relate to infrastructure within the M25. There is no easy fix dealing with Victorian infrastructure – it’s difficult to access because pipes and assets are in dense urban areas.”

He adds: “They are in are in the position they are in because of decisions in the 1980s when they didn’t spend enough investing pre-privatisation and management wanted to position itself as the company with the lowest water charges. Then, no one cared about leakage.”

As to its previous owner’s culpability, he remarks: “Macquarie taking cash out certainly didn’t help perceptions – though they were not that different to other water companies’ shareholders.

“If it was less focused on generating cash, the outcome might have been different. But that said, Steve’s criticism of Ofwat would not have helped. He should have been a bit more conciliatory towards Ofwat – and Marchant knows you don’t go around upsetting the regulator.

“I suspect someone would have had to fall on their sword to show Marchant has got a grip on it – and anyone in charge may have suffered the same fate.”

What’s is needed now?

With a creaking infrastructure and tougher Ofwat determination, anyone stepping into Robertson’s shoes is in for a challenge. There is pressure to reduce costs and they will need to rely on innovation and efficiencies. The easy wins have been made and the fat taken out way back in the 1990s.

In this respect Thames is not alone. The whole industry has signed up to 15 per cent cuts in leakages and several water firms will be struggling to meet the targets. Against this backdrop it’s no surprise that there are ever more questions about over whether the regulatory system is fit for purpose or is hopelessly broken.

So who might accede to the Thames challenge? While the names of people like Ian McAulay, currently turning around Southern Water, and Liv Garfield, a darling of the sector at Severn Trent, are bandied around as those who would be able to pull it off, there’s also no real expectation that either would be in the market for moving. The view is that Thames will cast the net wider, hoping to attract a candidate with an operations background. Though a qualified engineer won’t be obligatory, engineering experience would be welcome – just getting the investment spent will be a challenge.

“There are no obvious people from the water sector – the smart money is on someone from energy,” says an observer. “In water, people tend to be promoted on the basis that they’ve been there a long time and have operational knowledge. But at the top the job is about galvanising people and making sure everyone is pulling in the right direction.”

Good management, better use of technology such as new sensors to monitor the networks remotely and the right decisions on where to direct investment will pay dividends. New incumbents will also need to develop new contract models.

“There are some fantastic initiatives to drive innovation – but it comes down to risk and who will take that,” commented a veteran of the sector.

But a word of advice for those in line to step into the hot seat from our seasoned water chief, advice of which Robertson will be only too aware: “Anyone coming in could well underestimate the scale of the business. You’re continually in the spotlight and also the London dimension is massive – in terms of the complexity of the asset base and the additional regulatory attention.”

Optimists say Thames performance problems can, with the right leadership, be turned around in three to five years. There’s a lot riding on the search – for Marchant, his headhunters and the reputation of the sector.