Performance overview

This performance overview provides a summary of WICS’s purpose, the outcomes it aims to achieve, and the key challenges and risks that we face. 

Statement from the Chair

I am pleased to present our annual report for 2021-22, the first year of the 2021-27 regulatory control period.  

The final determination of charges which concluded the Strategic Review of Charges 2021-27 (SRC21-27) process set out the changes necessary so that future generations may experience the same high-quality, resilient services that we do today. The determination allowed for significant further investment by Scottish Water to support the business to adapt to climate change and as it moves towards its net zero emissions target by 2040. 

Shortly after the determination was published many individuals and households in Scotland began feeling the impacts of the challenging inflationary economic environment. Cognisant of these difficult conditions, Scottish Water opted to raise less revenue through charges in 2021-22 than was set in the final determination. Since that time we have been working with Scottish Water to understand how it will manage its costs and revenues during the remainder of the regulatory control period. 

The final determination set out our expectations in relation to the transformation Scottish Water will need to make to secure a sustainable future for the industry. During the year we have monitored Scottish Water’s progress, providing support and challenge where appropriate. 

Collaboration is an important aspect of the Scottish water sector. As such, I look forward to building on our already productive relationships with the new body Consumer Scotland, and with Scottish Water’s Independent Customer Group. We all have an important role in helping Scottish Water bring customer and community views into its decision-making processes.

To close, I would like to thank our Chief Executive, Alan Sutherland, and all of the WICS staff for their commitment this year. Although we have worked largely remotely again, I am pleased that there have been more opportunities to meet face to face. These opportunities are very welcome, particularly for our new graduate joiners who in many cases are meeting colleagues for the first time.

I would also like to pay tribute to Douglas Millican, CEO of Scottish Water, who is retiring after 10 years as Chief Executive and 20 years on its board and executive team. The progress Scottish Water has made in that time is testament to Douglas’s leadership. And last but certainly not least, I would like to say a personal thank you to Ian Tait, our Deputy Chief Executive, who retired from WICS in April 2022 after a period of almost 20 years. His contribution was invaluable.

 

Professor Donald MacRae OBE FRSE

Chairman

December 2022

Summary performance statement from the Chief Executive and Accountable Officer

I am pleased to present our annual report and to provide a summary of our performance for 2020-21. 

Our objective at all times is to establish the best outcomes for water and wastewater customers, communities, and the Scottish environment – an approach firmly rooted in doing what is right for both current and future customers. Our decisions are within the context of the Scottish Ministers’ objective to transition to a net zero carbon industry by 2040 and to ensure the sustainable long-term future of the water industry.

Our key achievements this year in delivering our strategic objectives are summarised here, with more detailed information provided in the sections that follow.

Supporting the sector vision and Ministerial objectives

Our first strategic objective is to support the sector to achieve its long-term vision and to deliver the Scottish Ministers’ Objectives for Scottish Water. 

This year was the first year covered by our final determination for the 2021-27 regulatory control period, which was published in December 2020. It considered the Ministers’ final objectives for the industry and their Principles of Charging and allowed for the investment necessary to improve water quality and the environment further, and to support economic growth. The determination also outlined the need for a long-term, sustainable and innovative approach to replacing Scottish Water’s assets. 

In the determination we set out our expectations in terms of the transformation that Scottish Water will need to undergo over the coming years. This included the need for Scottish Water to have a clear, well-defined strategy that covers what it plans to achieve in the short, medium and long term. 

We have worked with Scottish Water during the year as it has planned its transformation. As part of this we emphasised our expectation that Scottish Water should establish the required organisational capacity and capabilities to prepare the strategy and to support the business on an enduring basis. 

We have also engaged with Scottish Water in relation to the level of future annual average investment likely to be required by 2040 if it is to manage and optimise its asset base and operate in a manner consistent with a net zero position for both operational and embodied greenhouse gases.

Our final determination assumed that Scottish Water would achieve the transition in investment through an average annual price change of 2% in real terms each year. It has since become clear, however, that the cumulative price increase over the 2021-27 regulatory control period will be different to that assumption. To have visibility of the impact of this change we asked Scottish Water to prepare financial scenarios based on different combinations of price profiles, borrowing levels and time horizons. 

We recognise that we are operating in extremely uncertain times. This makes it even more important that there is clarity over what can and can’t be delivered in this regulatory control period and the impacts that this will have on future customers. 

Best in class levels of services

Our second strategic objective is to challenge Scottish Water to achieve best in class levels of service for its customers and communities. It is important that Scottish Water maintains a ‘laser like’ focus on its strategic prioritisation of investment and is able to take full account of the benefits and costs over the long-term when it undertakes option appraisals and decisions. This approach will help ensure best value for money for current and future customers. 

We have worked with Scottish Water this year as it sought to develop its investment strategy. A long-term strategic approach is particularly important given the scale of the investment programme from now to 2045 and the challenges that lie ahead. It is also important that Scottish Water has the information and tools in place to enable candid and evidenced-based discussions with stakeholders, including the quality regulators, about how the business is prioritising its investment and the trade-offs that will need to be made. 

During the reporting year we published our annual performance report for 2020-21. This considered Scottish Water’s investment and service performance in the final year of the SRC2015-21 period. The report noted that while Scottish Water was continuing to perform well overall in terms of customer service and the customer experience measure, there was evidence of an output delivery challenge for completing the remaining elements of the investment programme for the regulatory period. Early evidence indicates that the output delivery challenge is continuing into the new regulatory period. We will comment further on Scottish Water’s performance in the first year of the new regulatory control in our performance report which we will publish towards the end of this year. 

We are increasingly focused on making sure that the information we collect from Scottish Water, and its reporting to us and other stakeholders is fit for purpose. We are continuing to work with Scottish Water on the development of its reporting mechanisms for the 2021-27 regulatory control period to ensure that we can continue to hold the organisation to account for its operational and investment performance. In addition to the information request outlined above, our work in this area included supporting Scottish Water to develop its annual return.

International leadership

Our third strategic objective is to become international leaders in the field of economic regulation, as part of our commitment to supporting the Scottish Government’s Hydro Nation initiative. Our involvement helps ensure that we stay at the forefront of regulatory best practice while sharing our own expertise in water sector regulation with other countries. Our input brings a direct financial benefit by reducing the levy that we would charge Scottish Water. Furthermore these international opportunities provide valuable learning experiences for our staff, thereby supporting our employee recruitment and retention.

Our international work has gone from strength to strength this year. During the year we continued to work with the New Zealand Government’s Department of Internal Affairs (DIA) as it progresses the Three Waters Reform programme.  

We also continued to work with Watercare, the Auckland-based water services provider, to develop their processes and information, to build their regulatory capacity in preparing for the introduction of economic regulation in New Zealand. Other projects included working with Wellington Water and supporting the Romanian regulator (ANRSC) as part of a consortium with the consultancy BDO. 

More widely we have continued to extend our links with other overseas regulators, including through presenting at international conferences and by working with international organisations. 

Internal operations

In relation to our working arrangements, like many other organisations we have been considering options for our future as we emerge from the pandemic. Following extensive consultation with staff we are now trialling a hybrid arrangement, based on part home working and the use of flexible office space. 

We are pleased to have made further progress this year in relation to our commitment to promoting diversity and equality for employees and stakeholders. Our equality mainstreaming report, published in June 2021, set out the progress we would make in this area. We have since become a Disability Confident Committed employer, a scheme that provides us with the knowledge and skills we need to attract, recruit, retain and develop disabled people in the workplace. We are also taking steps to support good mental health, including through mental health first aid training. 

To close, I would like to thank all of our staff for their continuing commitment to our work in driving improvements for Scotland’s water and sewerage customers. I would also like to pay tribute to my colleague Ian Tait who retired this year after 20 years of working at WICS. He was an excellent Deputy CEO, and it was a pleasure to work alongside him for all those years. 

Our purpose and strategy

We are a non-departmental public body with a statutory duty to promote the interests of Scottish Water’s customers. We do this by challenging Scottish Water to achieve long-term value and best-in-class levels of service for its customers and communities. 

We published our Corporate Plan for the period 2021-27 in December 2020. The plan, which was agreed with Scottish Ministers, explains: 

• our strategic objectives 
• the outcomes we are setting out to achieve for customers, communities and other stakeholders 
• the activities we will need to undertake to deliver these outcomes 
• the resources necessary.

Our Corporate Plan is focused on ensuring that we continue to meet our statutory obligations to current and future customers. It will also ensure that we contribute fully to the delivery of the Water industry vision. This is particularly important given the need for Scottish Water to achieve net zero emissions by 2040 (on both an operational and an embodied basis) and to maintain service levels by repairing, refurbishing and replacing the industry’s assets in a timely way. Climate change will often mean that there is too much water where we do not want it and too little in the places that we do. Scottish Water will have a crucial role in managing how we adapt to our changing climate.

We report our progress against the objectives set out in the Corporate Plan each year in our annual report. 

Our organisational model

We have 28 employees and are sponsored by the Scottish Government’s Directorate for Environment, Climate Change and Land Reform. 

Our Board comprises four non-executive members (including the Chair) and the Chief Executive. The Board is responsible for overall governance. Further information about our Board members and about the role of our Audit and Risk Committee (ARC) is covered in the governance statement within the Accountability Report. 

We are funded through a levy on Scottish Water and on the retailers that participate in the competitive non-household market. The size of these levies is set by Scottish Ministers in light of the objectives and key targets agreed through the corporate planning process. Where resources allow, we seek to supplement that income with income derived from the external projects that we undertake as part of our international work. 

Our operating environment

We work closely with many stakeholders, and these relationships are summarised below.

Stakeholder	Interaction with our work
Scottish Parliament	We are accountable to the Scottish Parliament through Scottish Ministers
Scottish Government	The Scottish Government sets the overall objectives and principles of charging for the water industry in Scotland
Scottish Water	We have a duty to protect the interests of both current and future customers by making sure that: Scottish Water is sustainably funded for the long-term and delivers value for money Scottish Water is as efficient and effective as it can be so that customers pay no more than is necessary
Scottish Environment Protection Agency (SEPA)	SEPA regulates Scottish Water's performance regarding compliance with environmental standards and investment in improvements
Drinking Water Quality Regulator (DWQR)	The DWQR regulates Scottish Water's compliance with drinking water quality and investment to protect public health
Citizens Advice Scotland (CAS)	CAS undertakes advocacy and research on behalf of consumers in relation to Scottish Water's operations and investment planning
Consumer Scotland	Consumer Scotland is the statutory, independent voice for consumers in Scotland. Its Board commenced their responsibilities in April 2022 and will take on the water consumer functions previously delivered by CAS
Central Market Agency (CMA)	The CMA administers the competitive non-household retail market
Scottish Public Services Ombudsman (SPSO)	With responsibility for complaints and dispute resolution in the water sector, the SPSO provides insights into levels of trust and confidence among consumers

Our key activities and priorities

The three strategic objectives that were identified in our Corporate Plan 2021 are each underpinned by three outcomes. The objectives and outcomes are set out below. Each year we prepare an annual work plan which sets out the areas of focus and specific activities we will undertake during the year, to help us deliver our objectives.

Our key challenges and risks

The strategic risks the organisation faces were determined as part of the corporate planning process for the regulatory period.

Our principal strategic risk is around our failure to deliver our statutory duties. This would severely damage our credibility within the sector and impact our ability to regulate. 

We strive to limit any exposure to a loss of reputation and aim to be respected across the industry both nationally and internationally. Our reputation provides a robust platform that is critical to our ability to engage in dialogue with diverse stakeholders and to further our Hydro Nation activities.

This risk is actively managed by adhering to public body governance best practice, including Board oversight of governance policies, independent internal and external audit, and organisation reporting requirements. 

During the year, we approved a new risk management strategy. The strategy is reviewed by our Board and Audit and Risk Committee and is discussed on a regular basis by an operational board. 

Underpinning the principal risk are three strategic risks which focus on:

• Ensuring that WICS is resourced appropriately and that succession plans are in place.
• Staying attuned to the external landscape of the water industry and the strategies of our stakeholders in order to respond to changes.
• Remaining compliant with all relevant laws, regulations and policies and demonstrating the standards expected of a non-departmental public body in Scotland.

The steps we have taken this year towards minimising the risks include performing a succession planning exercise, so we have a capable leadership team to take the organisation into the future. 

By engaging regularly with our key stakeholders and undertaking horizon-scanning activities we stay abreast of external developments in the sector. 

We also ensure compliance with legislation and policies by having policies and procedures for our operational functions in place, of a standard expected of a non-departmental public body. We ensure that our governance processes are up to date, in line with Scottish Government’s good practice, by retaining legal support and a strong relationship with our Sponsor Team. 

Finally, our Audit and Risk Committee oversee the production and ongoing review of our compliance report and associated actions.

More information on our key risks and the impact these have on delivering our outcomes can be found in the risk section of the performance analysis.

Performance analysis

Performance against key outcomes

Outcome 1: Supporting Scottish Water to become sustainable over the long term

This year our focus was on closing down the Strategic Review of Charges 2021-27 project. This included supporting the delivery of the report by OECD peers into our approach and lessons learned. 

In November 2021 the report findings were formally presented to the OECD’s Network of Economic Regulators (NER), and the report itself was published by the OECD in October 2022. The report ‘Innovation and collaboration: Scotland’s approach to regulating water charges’ sets out key insights and recommendations from peer reviewers to inform future regulatory approaches. It also includes an analysis of the opportunities for overcoming key regulatory challenges. We will ensure that we take the lessons into account as we look ahead to the next Strategic Review of Charges (SRC27).  

During the year we started initial discussions about the high-level timeline for SRC27, including how and when our methodology would be developed. We began to identify key themes and areas to develop with the Board during 2022 and are putting plans in place at the current time to take these discussion areas forward. Our approach to SRC27 will reflect the extent to which we have confidence in Scottish Water’s progress on its transformation journey. In particular, we will seek to ensure that Scottish Water maintains a clear focus on the business’s strategic direction and has the capacity and capabilities necessary to support the development and enduring implementation of its strategy. 

During the year we engaged with Scottish Water on its progress on analysing funding, financing and costs, in light of the change in the revenue profile away from that set out in the final determination. In an information request, we are identifying the information that would be essential in understanding how Scottish Water would manage its costs and revenues. This analysis will be key to discussions among industry stakeholders about what can be achieved within the financial envelope that is available. 

Outcome 2: Incentivising an efficient and effective Scottish Water

As part of its transformation Scottish Water is changing the way it reports on its own prospects and performance. We are continuing to work with Scottish Water on the development of its reporting mechanisms for the 2021-27 regulatory control period, including the information request noted above and the annual return to ensure that any changes made satisfy our requirements as its economic regulator. 

We published our report on Scottish Water’s performance in 2020-21 in December 2021. This covered the final year of the six-year regulatory period 2015-21. The report noted that while Scottish Water was continuing to perform well overall in terms of customer service and the customer experience measure, there was evidence of an output delivery challenge for completing the remaining elements of the investment programme for the regulatory period. There is already early evidence that the output delivery challenge is continuing into the new regulatory period. For example, Scottish Water had expected to have delivered 68 of the 86 completion projects that carried forward from the previous regulatory period by March 2022. However, Scottish Water had only delivered 47 by this date. We will comment further on Scottish Water’s performance in the first year of the new regulatory control in our performance report which we will publish towards the end of the year.

Outcome 3: Helping to ensure the retail market maximises benefits for customers

Our focus this year was to support businesses with the transition away from measures that had been put in place during the Covid-19 pandemic. At the same time we initiated a process to review the financial resilience of retailers, with specific consideration given to introducing further measures to protect the integrity of the market by making sure that retailers are sufficiently resilient to future shocks. Recent failures of energy suppliers have shown how important it was to launch the initiative.

This review process, which we consulted widely on, led to the introduction of a new voluntary licence condition on financial resilience. All active retailers agreed to sign up to that additional licence requirement. Scottish Water is now working to finalise its methodology for assessing retailers’ financial strength. We expect a final financial resilience framework to go live by 2023, in line with our Corporate Plan.

During the reporting year we also sought to develop our initial thinking on how to engage retailers on the types of behaviours that align with the theoretical principles provided by the Ethical Business Practice framework. In this regard we have worked on introducing a market-wide process – a ‘market health check’ process – that would allow retailers to demonstrate such behaviours. The market health check process will allow retailers to demonstrate they have adopted the principles of EBP and are operating in the spirit and the letter of their licence. We have recently appointed a ‘market health checker’ who will take forwards this work, working closely with the retailers and with other stakeholders in the retail market. 

Outcome 4: Supporting Scottish Water to become an analytically driven organisation that takes full account of benefit and costs in its option appraisals and decisions

At the last Strategic Review we adapted the regulatory framework to move away from a fixed investment programme for the regulatory period. This change enables Scottish Water to plan and to prioritise its investment programme in a more dynamic way, thereby ensuring maximum long-term value. Alongside this change was a commitment by Scottish Water to develop an Asset Management Transformation Plan, a component if not the key component of its transformation. 

This year, we continued to engage with and encourage the work of Professor Dr Bryan Adey of ETH Zurich as he assists Scottish Water in its Asset Management Transformation Plan (AMTR). As part of this work it will be important that Scottish Water is able to develop a framework that quantifies, in a clear way, the consequences and impacts of each of its decisions and in particular its decisions to repair, refurbish and replace its vast network of water and wastewater infrastructure. We are concerned with the relatively slow progress in this area given the significance of the asset replacement challenge the organisation faces. The AMTR framework should also help enable Scottish Water to have candid and evidenced-based discussions with stakeholders, including the quality regulators, about how the business is prioritising its investment and the trade-offs that will need to be made.

Outcome 5: Acting as a hub of information and expertise to support decision making

An important element of our commenting on Scottish Water’s performance is for us to have a wide and detailed understanding of regulatory frameworks and approaches in other countries and jurisdictions. This enables us to identify areas of best practice or innovation in asset-intensive industries, which we can then draw on in our work with Scottish Water.  

The expertise we have developed over more than 20 years of regulation means we can support other regulatory organisations and regulated companies at home and abroad. Such activity ultimately secures better outcomes for customers and the environment in the water sector in Scotland. 

We undertake future horizon-scanning on an ongoing basis, with key developments raised and discussed by the senior team and build and maintain good relationships with a wide network of leading-edge practitioners, academics and policy makers. 

We also seek out opportunities to work with others on areas of shared interest. This year, for example, we joined with Northumbrian Water, Scottish Water, Sydney Water and Watercare in New Zealand in a project to understand future asset replacement requirements in different countries and jurisdictions. The output of this work will inform Scottish Water’s future reporting of asset replacement requirements and our thinking on asset replacement for the next Strategic Review of Charges.

We attend and contribute to diverse workshops, discussion forums and other events, sharing our expertise and helping us stay abreast of developments and innovations elsewhere. Many requests come from international partners seeking insights into the regulatory journey of the Scottish water industry. This year such contributions have included speaking at a workshop held by IPART the independent economic regulator for New South Wales and providing the keynote presentation at the Vic Water Connect Conference. We share best practice through organisations such as the OECD and academic institutions. Our CEO spoke, for example at an OECD workshop on practices that are conducive to improved water services and contributed to a webinar hosted by the Florence School of Regulation and WAREG. Our Chief Operating Officer chaired a session of the WWT Wastewater 2022 conference and, along with the CEO, took part in a peer-to-peer learning webinar hosted by the World Bank for the Water and Sanitation Regulatory Commission of Colombia.  

Our international work provides useful opportunities for our graduate employees to conduct analysis in interesting areas and to train others in regulatory processes and information – in turn contributing to their own development and progression. This year for example we undertook analysis for Watercare (Auckland’s water and wastewater company), supported the company in preparing its Annual Return information, and delivered training on regulatory frameworks and information requirements. Other training we have delivered includes to participants of Professor Dr Bryan Adey’s ‘Infrastructure management course’ at ETH Zurich.

Outcome 6: Promoting customer-centric decision making 

As Scottish Water works through the detail of its transformation plan, it is important that the business can demonstrate that the customer and community voice has been embedded and their views considered in Scottish Water’s decision making. 

In the final determination we welcomed Scottish Water’s commitment to carry out a national engagement programme with customers and communities. More recently, in its Strategic Plan, Scottish Water committed to making this a ‘world leading’ engagement programme. We welcome this commitment on the basis that there needs to be a collective understanding of the challenges that the industry faces and an appropriate response to meeting future funding challenges. It will be important, for example, to understand what sort of water industry customers and society want and the consequences of those options on future investment levels, future performance and the required levels of funding and financing over time. 

We will publish an annual report on Scottish Water’s overall performance later this year. The report will include an assessment of its progress in ensuring that customers and communities are involved in decision making. This will encompass assessing the extent to which customers could reasonably have confidence that their views are being heard and acted on.

Outcome 7: Acting as a cutting-edge regulator that contributes to developing Scotland as a Hydro Nation

As part of our work to support the Scottish Government’s Hydro Nation initiative, we continued to work with the DIA as it progresses the Three Waters Reform programme in New Zealand. Our final report, submitted in May 2021, was an important part of the evidence base that informed the Government’s decision-making. We provided additional support to help the DIA engage with councils as part of the reform process. 

We also helped Watercare develop their processes and information, to build their regulatory capacity in preparing for the introduction of economic regulation in New Zealand. And as part of a consortium with the consultancy BDO we completed a project for Wellington Water and supported the Romanian regulator (ANRSC). Some of our new analysts have worked with Apa Vital in Romania to help them develop a business plan. 

More widely we have continued to extend our links with other overseas regulators and organisations such as WAREG, the OECD’s Network of Economic Regulators, and the World Bank. We continue to seek new opportunities for business development by building partnerships with international stakeholders and exploring links with potential contractors. This allows us to develop a pipeline of suitable projects to pursue in line with our Hydro Nation strategy. 

Outcome 8: Ensuring that the office operates as efficiently and effectively as possible

A key area of in our 2021-27 corporate plan is to improve the way we communicate. To help deliver this objective we launched a new corporate website and brand in August 2021. 

The new website allows us to communicate our work clearly and accessibly using engaging content that is more reflective of our organisation and key messages; to better manage our public facing information and enquiries from members of the public; to support our recruitment efforts; and to publish content that reflects good practice and accessibility standards. In this regard we were pleased that the website was awarded the Digital First Scotland Standard, an assessment designed to ensure that government products and services provide the best possible user experiences and are secure to use. Our work on the website will also ensure that we have the right tools in place for future communications and engagement activities. 

During the year we have continued to ensure that we provide stable, secure and flexible IT services to support the delivery of our strategic outcomes. As part of this work we have made sure that our systems are cyber resilient by strengthening our defences in line with the Scottish Government’s Cyber Resilience Framework and Cyber Essentials Plus standards.  

Outcome 9: Sustaining a high-performance team, with a focus on continuous improvement

During the year we focussed on developing succession planning for the office and on developing our senior team, in addition to exploring options for future operating models which support our strategic objectives and outcomes. We completed our succession planning review, and a new executive team is now in place. 

In line with our graduate recruitment strategy, we continued our drive to recruit trainee analysts from a variety of backgrounds and nationalities. Unfortunately, we were unable to identify suitable analytical candidates in 2021, however more recent recruitment efforts have been successful. Two graduates have been appointed this year with plans in place for further recruitment rounds later in the year and early into next year. In addition, we welcomed two analytical interns during the summer of 2021 who spent three months with us gaining experience across a range of regulatory areas and working on our international projects. 

This year our staff have also been committed to training and development with many of our staff, senior leaders and Board completing further training in cyber security and awareness.  

Key performance indicators

Our Corporate Plan identified 11 key performance indicators (KPIs) against which we are measuring the success of delivering our nine outcomes over the regulatory control period. We identified the key KPIs for this financial year and our performance against each is described in detail in this section.

The KPIs that were identified for this financial year are outlined in the table below, with an analysis of how we performed against those indicators.

Outcome(s)	KPI	Performance during 2021-22
1-3	We will implement a regulatory framework that enables and supports Scottish Water to take full ownership of its relationship with customers and its decision making. We will report annually to the Board, and in our statutory annual report and accounts, on progress.	We have worked with Scottish Water this year as it has started to address the transformation that will be required to meet future challenges.
1-3	By November of each year we will publish our annual reports on Scottish Water’s overall performance in delivering the requirements set out in the 2021-27 final determination and identify any gaps that have the potential to impact on the level of trust among its stakeholders.	Our 2020-21 assessment of Scottish Water’s performance is complete. Work is ongoing to develop the performance reporting arrangements for the 2021-27 regulatory control period.
4-6	Our annual reports on Scottish Water’s overall performance will include an assessment of its progress in ensuring that project appraisals encompass a full assessment of the economic costs and benefits of investment. This assessment should include aspects such as the carbon impact, and of natural and social capital.	We have published our report of Scottish Water’s performance for the final year of the 2015-21 regulatory control period.   We are working with Scottish Water on the ongoing development of its reporting mechanisms for the SR21 period, including its annual return and the performance and prospects report.
4-6	Our annual reports on Scottish Water’s overall performance will include an assessment of its progress in ensuring that customers and communities are involved in decision making. This will encompass assessing the extent to which customers could reasonably have confidence that their views are being heard and acted upon.	We have encouraged Scottish Water to deliver on its commitments, particularly in relation to holding a ‘national conversation’. We will publish a report later this year on Scottish Water’s performance.
7	We will report annually on requests for regulatory advice and information and expertise from industry stakeholders and international partners, and on the nature of support we have provided.	We have responded to a large number of requests from international partners to provide advice and information this year. The contributions we have made are summarised in this report.
7	We will support the Scottish Government’s Hydro Nation initiative by delivering projects and assistance, providing a minimum annual net contribution to our income from this work of £300,000.	We delivered ongoing projects with the DIA, Watercare and Wellington Water.  We also completed a collaborative project with BDO in Romania to support the Romanian regulator ANRSC. We received a net contribution, excluding remuneration costs, to our income from these activities of £479k.
8	Each year of the Corporate Plan period, we will set out in an annual workplan the activities which we will undertake during the year. In the following year our Annual Report will include information on progress against our workplan.	Our 2021-22 work plan was approved by the board in March 2021. Regular updates against the work plan are provided to the board at each board meeting. These updates have informed the summary of performance in this annual report.
8	We will ensure that our income and costs remain within budget targets over the regulatory control period and will report our financial performance on a regular basis to the Board.	We delivered our priorities in 2021-22 in line with the corporate plan and budget. For more information on the financial results for the year, see the section on Financial performance. Our board received financial updates at every meeting.
9	We will achieve the desired structure for the office by 2025 and ensure that progress remains on track in the interim.	We completed our succession planning review and now have a new executive team in place. Although recruitment efforts were not as expected during the year, we will continue our programme of recruitment of analytical employees during 2022-23.

Key risks

Underpinning the principal risk of the overall failure of our statutory duties are three strategic risks. Operational risks are managed at a business area level, and these operational risks are linked to the three strategic risks.

Strategic risk 1

If we do not properly plan for the succession of key roles or adequately manage our resources and the retention of staff, then the organisation might lose focus and direction, causing significant business interruption. 

As a small office, we need to make sure that we are able to attract and retain the best talent, we ensure succession of senior roles, and that all employees have the skills, training and expertise they need. We will focus on ensuring that we have the resources, skills and experience in place to deliver the overall strategy and objectives now and in future.

During the year, we completed a succession planning exercise, with a focus on ensuring continuity in respect of the planned retirement of the Deputy CEO. This work has been supported by individual and team coaching of the senior team. All of our employees are provided with development opportunities, supported by a performance management process.

Strategic risk 2

If we are not attuned to the external landscape and the strategies of our stakeholders, there is a risk that we are unable to respond adequately to political, legislative or stakeholder driven changes within the industry.

We participate in a number of joint industry stakeholder forums, including the Stakeholder Advisory Group (SAG), the Delivery Assurance Group (DAG), the Investment Planning and Prioritisation Group (IPPG) and retail market forums. We also maintain ongoing liaison with key stakeholders, with regular dialogue maintained with our Scottish Government sponsor team and officials.

Our regulatory approach, in line with EBR principles, operates at the innovative end of the risk spectrum. This provides both Scottish Water and the retailers the time and space they need to engage and listen to customers and communities. We will continue to make sure that, as the industry moves towards an approach founded on candour and transparency (in line with the principles encompassed by EBP) and takes ownership of its decisions, this is done in a way that is in the best interests of customers.

We maintain contact with leading thinkers within the sector to ensure an innovative approach is maintained. This is developed through regular external engagement sessions with leading edge practitioners, academics and policy makers. In addition, our Hydro Nation and horizon scanning activities provide a useful source of engagement, external benchmarking and assurance.  

Strategic risk 3

If we are unable to act appropriately and proportionately within the expectations of public bodies as set out, from time to time, by the Scottish Government, in compliance with all relevant laws, regulations and policies then there is a risk that our activities are significantly disrupted, and reputation undermined.

We adopt the appropriate standards of corporate governance and put in place measures to ensure compliance. The policies and procedures of all operational functions of the organisation will be driven by applicable laws and regulations and the standards expected of a non-departmental public body.

Our governance processes are up to date, in line with Scottish Government’s good practice and reviewed regularly internally and by internal audit. During the year, the Code of Conduct for board members was updated to reflect the revised guidance from the Scottish Government. Our board members received training on the new guidance.

Financial performance

We prepare a detailed annual budget, in line with our Corporate Plan, which is submitted to our Board for approval. We use a comprehensive budgeting and financial reporting system, which aligns with the Scottish Public Finance Manual (SPFM), to compare actual results to the budgets that our Board has approved. Management accounts are prepared each month, with significant variances from budget investigated and reported. Cash flow and other financial forecasts are prepared regularly throughout the year to ensure that we have sufficient cash to meet our operational needs.

Financial performance 2021-22

As set out in the financial statements, there was a net surplus for the year of £614,994 before any adjustments for actuarial gains or losses (2020-21: deficit of £577,200). The use of surplus funds is outlined in our corporate plan for the period 2021-27.

Total income received for the year was £4,486,585 (2020-21: £3,423,460). Income received from Scottish Water and the licensed providers was in line with the corporate plan. 

We also received £479k in relation to international activities. The majority of this was received in relation to the work with Watercare in New Zealand and was greater than expected in the corporate plan. Last year we provided support to the Department of Internal Affairs in New Zealand, which brought in the majority of international income in 2020-21 and was completed during that year.

We also received £78k in relation to rent and service charge costs relating to the sub-lease of the corporate office from 1 July 2021.

Expenditure for the financial year 2021-22 was £3,870,386 (2020-21: £4,003,025). At the end of the financial year, an adjustment is made to replace actual employer contributions paid to the pension scheme with the current service cost, and associated interest. Current service costs represent WICS’s share of pension benefits accruing over the period, as calculated by the actuary. 

Excluding the pension adjustment, expenditure for the financial year would be £3,405,386 (2020-21: £4,258,025). Therefore, expenditure is £853k (20%) lower than the previous financial year. This reduction can be attributed to the following:

• Consultancy expenditure in 2021-22 was £432,097 less than the previous year. 
• At the end of 2020-21 a one-off lump sum of £309,000 was paid to the pension scheme. 
• Other savings made compared to the previous year include savings made from not having a physical office.

Excluding the aforementioned pension adjustment, expenditure for 2021-22 was almost £300k below the annual budget of £3,703k. The continuing COVID-19 restrictions impacted the timing of some activities of the office. Consultancy costs were £249k below budget as preparatory work for the SRC27 was delayed so that it could be carried out face to face. Costs relating to other activities that require in-person interaction, such as training, were put on hold, resulting in lower expenditure. Some, but not all, of these reductions will be sustained.

The balance on the General Reserve as at 31 March 2022 was a liability of £143,233 (2020-21: £2,943,227). The two main contributors to the improvement of this position are:

• A repayment to Scottish Water and the licensed providers of £1.3m in total, in relation to the previous regulatory period, was included within current liabilities at 31 March 2021. This was repaid during the financial year and the balance was clear at 31 March 2022.
• The pension liability has decreased by £1,720,000 from the previous year. The total investment return achieved by the Fund over the accounting period was higher than expected which led to a gain of around £970,000. In addition, the corporate bond yield (upon which the discount rate is derived) has risen over the period, which has led to a 0.7% increase in this assumption. This has served to reduce further WICS’ pension obligations.

Supplier payment policy

It is our policy to pay all supplier invoices that are not in dispute within the terms of the relevant contract and as soon as possible following receipt of an invoice. In line with the Scottish Government’s guidance, we aspire to a 10-working day target for paying bills to businesses in Scotland. Paying supplier bills promptly is seen as a key objective, and an important expression of our commitment to supporting business. The average time taken to pay suppliers in 2021-22 was 7 days (2020-21: 5 days). 

The Public Services Reform (Scotland) Act 2010

The Public Services Reform (Scotland) Act 2010 imposed duties on the Scottish Government and on public bodies such as WICS to publish specific information about their expenditure. The Act also requires us to publish two statements outlining the steps we have taken to promote and increase sustainable growth and to improve efficiency, effectiveness and economy. The duties to publish this information are intended to promote greater openness and transparency. We publish an annual document on our website setting out our response to the requirements of the Act.

Social matters

Our statutory purpose is designed to deliver environmental, social and economic success. We take our social responsibility seriously and ensure that all staff policies and procedures are up to date and comply with the most recent legislation. 

Anti-bribery and corruption

As part of our zero-tolerance approach towards fraud, bribery and corruption we have an employee code of conduct, whistleblowing policy and clear policies regarding acceptable levels of gifts and hospitality (both given and received). We actively encourage staff to be aware of appropriate behaviours with both customers and suppliers. We also maintain a gifts and hospitality register. 

No frauds were detected in 2021-22.

We take malpractice very seriously and are committed to conducting our business with honesty and integrity. We encourage open communication from all those who work for us, and we want everyone to feel secure about raising concerns. Our internal whistleblowing policy is in place to encourage and enable employees to raise concerns on a confidential basis. All staff are protected under whistleblowing laws if they raise concerns in the correct way. 

In addition to this we have an external whistleblowing policy which aims to assist contractors and the general public should they need to raise concerns about the water industry in Scotland. 

During the reporting period we received one case of whistleblowing relating to Scottish Water. The details are included in the table below: 

Date	Issues raised	WICS action	Outcome
18/05/2021	Failings within Ayr South treatment works team. Including allegations of: bullying and harassment favouritism dishonesty fraud deception	Forwarded to Scottish Water requesting investigation	Scottish Water initiated a fact-finding exercise into the allegations. WICS followed up to understand outcome and actions required.  Scottish Water provided an update on 10 August which concluded no evidence found. However, discrepancies required monitoring.  Update shared with senior team within WICS, and case closed on 12 August 2021.

Transparency of information

We aim to be open in all that we do; our default approach is to publish information on our activities on our website whenever possible. We maintain frequent dialogue with industry stakeholders and regularly set out our approach and decisions in published papers.

Complaints

We value and recognise the learning that complaints can generate, and we use complaints information to help us improve the services we provide. During the year we did not receive any complaints (2020-21: 2 complaints received). 

Our sustainability performance

Scotland has some of the most ambitious greenhouse gas reduction targets in the world and we wish to contribute as much as we can to help deliver this world-leading climate change action.

Public Bodies in Scotland are bound by the Climate Change Public Bodies Duties as set out in Part 4 of the Climate Change (Scotland) Act 2009. These duties require public bodies, in exercising their functions to:

• contribute to carbon emissions reduction (climate change mitigation);
• contribute to climate change adaption; and 
• act sustainably.

As a small office, we recognise that the extent to which we can continually reduce our carbon footprint is limited. That said, we do all that we can to make sure that our internal office functions are delivered in a sustainable and carbon aware manner. Our internal policies encourage employees to make carbon aware decisions in relation to procurement and travel.

Working from home has provided an opportunity to carry out our functions remotely , without the need to travel. We are reviewing our future working arrangements and we sub-leased our office space from 1 July 2021 to 30 September 2023. This will significantly reduce our environmental impact for the future.

Employees undertook negligible travel during the year due to the continued restrictions associated with COVID-19. Travel did resume in February 2022. Overseas travel is sometimes required as part of our contribution to the Hydro Nation initiative. We off-set our carbon footprint from international travel by funding tree planting in Scotland.  

Details of our carbon footprint is provided in the following table.

	2021-22		2020-21
Area	Non-financial information	Financial information	Non-financial information	Financial information
Energy	Electricity: 0.3 tonnes CO2 Gas: 0.2 tonnes CO2 Total carbon from energy: 0.5 tonnes CO2	Electricity: £195 Gas: £374	Electricity: 8.0 tonnes CO2 Gas: 8.5 tonnes CO2 Total carbon from energy: 16.5 tonnes CO2	Electricity: £4,979 Gas: £1,429
Waste	Waste to landfill: negligible Total carbon from waste: negligible	£203	Waste to landfill: 0.1 tonnes CO2 Total carbon from waste: 0.1 tonnes CO2	£634
Water	0.01 tonnes CO2	£344	0.04 tonnes CO2	£1,740
Transport and travel	5.2 tonnes CO2	£9,826	0.2 tonnes CO2	£283

The information in this table is based on our best estimates. We used the following sources for the information:

• Energy: all information based on actual usage as reported on gas and electricity invoices.
• Waste: financial information taken from actual invoices received in relation to waste collection and shredding services.
• Water: information based on water consumption reports detailing water, sewage and drainage volume and financial charges. 
• Transport and travel: Financial and mileage volume relating to vehicles is based on mileage estimates of journeys taken by employees during the year and estimated expenditure.

All conversions to carbon consumption are calculated using data available from the Department for Environment, Food and Rural Affairs.

 

Alan D A Sutherland

Chief Executive