Welcome to The Executive Exchange, a premier podcast series for on-the-go senior executives. Each episode features short, impactful podcasts where industry leaders share key insights and experiences from the water industry.
[00:00:00] Piers Clark: Welcome to the Exec Exchange, 15-minute podcast in which a leader from the water sector shares a story to inspire, educate, and inform other water sector leaders from across the globe. My name is Piers Clark and today my guest is Steve Wilson from Welsh Water, also known as Dŵr Cymru. Wonderful to have you with us.
[00:00:19] Steve Wilson: Thank you, Piers. I'm Steve Wilson. I'm the Managing Director for Wastewater Services, Business, Customers, and Energy for Dŵr Cymru Welsh Water, Dŵr Cymru being " Welsh Water" in Welsh.
[00:00:31] Piers Clark: Let's go back in time. You just left university. What did you study at university and where did you start work?
[00:00:36] Steve Wilson: I did environmental chemistry at Brunel in London and my first job was a graduate trainee in Yorkshire Water. I started there back in 1992 and did two years mainly in the wastewater part of Yorkshire water. My jobs are in the kind of the technical and scientific support. And at the time, I became the youngest plant manager running a series of wastewater treatment works in the Calder Valley around Halifax and that kind of area. And then I went into the non-regulated part of Yorkshire Water Projects, as it was called at the time, soon to become Kelder Water Projects.
[00:01:11] Piers Clark: When you say non-regulated, that means it's the profit-making arm. It's the one that's doing operating contracts for other utilities. And I think you were just about to say you then went to Scotland and Ireland and overseas. You did some overseas tours.
[00:01:24] Steve Wilson: Yes, I did two years in the States, in Connecticut. Kelda had bought an American water company, Aquarian, that served Bridgeport and South Connecticut and they were using that as a bit of a vehicle to also bid for operating contracts in the U. S. And so, I did nearly two years running an O& M contract in Bridgeport, Connecticut.
[00:01:46] Piers Clark: When did you join Welsh Water?
[00:01:47] Steve Wilson: Dŵr Cymru went down its not-for-profit route in 2001 and in its early infancy, it outsourced all of its operations. Welsh Water was very small, around 60-odd people, holding company, and it outsourced its operations. In 2005, Kelda won the operating contract for wastewater in the south of Wales. There was a water contract, a wastewater contract, and there was billing contracts. And the idea they had at the time was "if you go out to the marketplace and industry leaders, you're de-risking the operation" because at the point of setting up as not for profit, it was a huge amount of borrowing to set the company up. To make the lenders happy they outsourced the operation to what were market leaders at that point. So, I came down in 2005 and then in 2010, during that five-year period, the borrowing had reduced dramatically. Welsh Water had shored things up financially and it didn't sit right that, whilst they were a not-for-profit company, all these operating contracts were effectively for profit. Kelder weren't there for just altruistic reasons they were there to make a profit. So, in 2010 Welsh Water insourced operations.
[00:03:01] Piers Clark: At the time I was working in the UK water sector and I remember when they outsourced. There were a lot of us who thought that Welsh Water had outsourced its core. And then in 2010, when it was bringing it back in again, it was really about bringing back in house, the capability that you need inside a utility if you're to make informed long-term decisions. It was about pulling in the best of the expertise that they previously outsourced and bringing that back into the core business.
[00:03:25] Steve Wilson: I joined Welsh water at that point. I decided to stay down here along with a few others. And you're right, because you've got experienced operations, but you've also got those with a contracting and therefore cost focus approach as well. If you're going to try and make Welsh Water work as a not-for-profit entity, it's not for shareholders. Welsh Water wants to maximize its returns; then it can do something with those returns. It's what it does with those rather than giving them to shareholders that really matters.
[00:03:53] Piers Clark: Let's come to the meat of what we're going to talk about today. It is the unique operating model that Welsh Water has. So, for people who are outside the UK, can you just take 20 seconds to describe what happens in England and Wales and how the Welsh Water model then differed subsequent to privatization?
[00:04:10] Steve Wilson: England and Wales operate with a private set of companies running. There are 10 large sewerage and water companies across the England and Wales operating area, with Welsh Water operating in the majority of Wales. But we have a little bit of Herefordshire and a little bit of Cheshire because we follow river boundaries. So, River Wye comes out of Wales and goes through Herefordshire; that's part of our operating area. The Dee comes out of Wales and goes up towards Chester, so that's part of our area. But the bulk of mid-Wales, which is served by the River Severn, is part of what was Severn Trent. In England and Wales, you've got 10 private companies. Now, the difference with Welsh Water is we are a company limited by guarantee. We are not a state-run nationalized outfit, but we have no shareholders and all the returns, all the value is returned back to customers. So, we have a huge amount of customers on social tariffs, more customers as a percentage of our customer base than any of the English water companies. And we also invest that money into the long-term nature of our operating model so we can spend more money on things to improve the environment or for social good. We have a number of visitors centers providing access to recreation, water sports, etc....
[00:05:28] Piers Clark: You mentioned there that you've got more people on social tariffs. Is that because this financial model enables you to have more people on social tariffs, or is it because of the demographic of the population you serve?
[00:05:38] Steve Wilson: A bit of both. So, Wales is not an affluent part of the UK. We've got lots of pockets of quite extreme deprivation, but also a lot of that social tariff comes from the surplus. The profit that the business makes is reinvested in those social tariffs, which is why we can be more generous with that. When you look at the numbers and the percentage of the bill that is discounted, we're up there at the top end of that for those two social reasons.
[00:06:08] Piers Clark: Let's talk about the pros and cons of this not-for-profit model. Let's start with the pros. What do you like about it?
[00:06:13] Steve Wilson: Particularly in a climate where we're seeing bills increase, customers are feeling the squeeze. Water bills are a substantial part of household expenditure. And we have a number of customers in water poverty. I think it really works from a customer perspective in terms of high levels of customer satisfaction that they know that money is not going overseas to shareholders, that money that they're paying in is being invested in the business.
[00:06:37] Piers Clark: It buys you some social license. It buys you some public goodwill, which other UK water companies have struggled a bit with.
[00:06:44] Steve Wilson: On that point, we're still quite a high bill in comparison, primarily because the UK was quite late to the party in terms of putting sewage treatment around its coast. One of the reasons why the industry was privatized was that huge investment required to meet the Urban Wastewater Treatment Directive, and coastal sewage treatment was put in. Well, Wales has got a big coastline; 15 percent of the UK's coastline, lots of the cities, Cardiff, Swansea, Newport, etc..., population centers, all that, up until the 90s was going out to sea untreated. So, all that investment went in and customers have been paying the cost. One of the challenges in Wales is we have so much of the coastline, we've got a third of the UK's blue flag beaches. We've got 15 percent of the coastline, but with less than five percent of the population to pay the bill. So, the bills are quite high, but we get really high value for money feedback from customers and that is primarily because of the not-for-profit status. When the Consumer Council for Water in the UK, the kind of customer watchdog, does its surveys, despite having a higher-than-average bill, we still get really good customer feeling about value for money.
[00:07:48] Piers Clark: If there is nowhere to go in terms of "we're being pillaged for dividends to pay to external shareholders." If that argument can't stand, you immediately are on somewhat more solid ground. What about the downsides to this model?
[00:08:01] Steve Wilson: I think one of the downsides is, at this moment in time, there is a lot of disquiet in the UK about the state of our rivers, beaches, what water companies have been investing in or not investing in, in many of the customers minds. There is this feeling that the sector has not been investing enough in sorting out some of these problems and that we should have been putting more money in. And the economic regulator of what's the answer to this is " Yep. Shareholders need to put more money in." You need to get more equity. So, it's not just borrowing and debt and customer funded. You need to get your shareholders to put more money in and we haven't got any shareholders. So, the downside at the moment is we've only got two sources of income. One is customer bills and the second source is what we borrow. And so, at a time when we've been working quite hard at bringing our gearing down, our level of debt effectively we're now having to start to put that up because we all want to invest in better rivers, better beaches, wastewater infrastructure, climate resilience, the water pipe network. That can only come from those two sources. We have no shareholders to invest in. It's a one size fits all kind of regulatory approach in England and Wales. They remain agnostic about exactly what you do in terms of where you get your money from. But they're trying to regulate Welsh Water, which has no shareholders. We're using the same approach as regulating at Thames Water, who has shareholders and arguably the source of a lot of the industry's problems in terms of that view about excess money going to shareholders.
[00:09:35] Piers Clark: For people listening from outside the UK, so we have, as Steve said, 10 water companies. Some are publicly listed. Some are owned by private shareholders. Some are owned by pension funds and private equity shareholders. And then, of course, we've got Welsh Water, which is a not for profit underpinned by guarantee. Do you think that the Welsh Water model will be rolled out and adopted elsewhere? Do you think that would be the right answer for the UK sector?
[00:10:03] Steve Wilson: There's a lot of talk about this at the moment and the reason the not-for-profit Welsh water mechanism and model came about was through adversity. The previous for-profit owners of Welsh Water were Hyder Utilities. And they got into a bit of financial difficulty and put the business up for sale. Through that mechanism, the whole not for profit thing came about. Turkeys don't vote for Christmas, so shareholders aren't prepared to give up their returns unless things are pretty dire. Now, one might argue that, certainly down the road towards London at the moment with Thames Water, that there are some quite dire situations there. So, you need adversity, I think. The second thing which helped Welsh Water come about in the not-for-profit piece was devolution.
Welsh government was set up with a lot of powers around the environment, various sort of devolved powers which actually meant that they wanted to try and do something different in Wales as well. So, I think that helped. The Labour Party has been in power in Wales since devolution came about and more in that kind of social enterprise. The model 's under pressure at the moment because of this one size fits all approach. And one of the other challenges that we've got is we've got a third of the UK's blue flags as I mentioned, we've got 778 or so of the Water Framework Directive water bodies that we need to improve. We've got a very small customer base. We have only 1. 4 million households in Wales, 3 million people paying the bill. And that's the challenge. It's not about necessarily shareholders. It's about the size of the challenge that we've got to invest in.
[00:11:43] Piers Clark: Steve, been wonderful speaking with you. Thank you for that insight. We always finish with the question of what do you owe your parents?
[00:11:51] Steve Wilson: I think what you need in the wastewater business in the UK at the moment is resilience. It's been some tough times, but actually that's what I got from my parents. I'm the first generation who ever went to university. My dad and family used to work on a farm and then got a job in the town. And what I really took from my parents was this kind of, you've got to work hard, you've got to be resilient, life doesn't give you anything on a plate. And I've certainly carried that forward into this job.
[00:12:15] Piers Clark: You have been listening to the Exec Exchange with me, Piers Clark. My guest today has been Steve Wilson, Managing Director at Welsh Water, and we've been talking about the unique operating model of Welsh Water. Hope you can join us again next time. Thank you.