Minutes of the 159th Board meeting of the Water Industry Commission for Scotland on 1 August 2024

Present:    

Donald MacRae (Chair)   
Ann Allen (Member) – until 5.2 
Ronnie Hinds (Member)
Morag Sheppard (Member) 
David Satti, Interim Chief Executive

In attendance:    

Colin McNaughton, Director of Analysis – Items 5 and 6 
Donna Very, Director of Corporate and International Affairs – Item 3 
Shona Coan, Head of Finance – Item 4 only 
Experienced Analyst - Items 5 to 7

Apologies:    Robin McGill (Member) (Chair of ARC)        

Chair’s opening remarks

The Chair opened the 159th meeting of the WICS Board and welcomed newly appointed Members Morag Sheppard and Ronnie Hinds. 

1.    Apologies for absence

There were apologies from Robin McGill.

2.    Minutes of the last meeting and regular updates     

2.1    Declaration of conflicts of interest in relation to the agenda

It was noted that Morag Sheppard is a Member of the Environmental Standards Scotland Board but that no conflicts of interest are present in relation to the agenda for this meeting.

2.2    Minutes of the 158th meeting

The Board approved the minutes of the 158th meeting and the note of the June 2024 Board update meeting.
 

The Board noted that the Scottish Government has not yet provided clarity on WICS’ role in relation to international revenue generation and as such, this activity remains paused. The Interim Chief Executive informed the Board that he has requested the inclusion of WICS' Hydro Nation role in the Scottish Government’s independent review of WICS.

Members expressed concern over the pause, emphasising the importance of international networking for the effective regulation of the Scottish water industry. The interim CEO reassured the Board that only revenue generating activities are paused, while other international networking efforts can continue.

The Chair requested an update on the development of a resourcing plan. The interim CEO assured Board Members that this work is underway and will be linked to the ongoing HR review of roles and our financial plans for the six-year corporate planning period.

The Chair also requested an update on the process to appoint a leadership coach. Members noted that we received over 30 bids from suppliers through Public Contracts Scotland which has extended the time period for scoring. We expect to issue decision notices week commencing 6 August.

The Board agreed that Ann Allen will step down from the Audit and Risk Committee (ARC), and newly appointed members Ronnie Hinds and Morag Sheppard will join the committee.

2.3    Summary of action points

The Board noted the summary of actions. The following points were arising:

• Action 1:   This action will continue. 
• Actions 2: This action will be complete by October 2024. Agenda item 4 contains a terms of reference for this piece to ensure what we propose is satisfying requirements of Board Members. 
• Action 3: This action is complete. 
• Action 4:  Agenda item 3 provides an update on this work and thereafter there will be ongoing reporting to the Board.
• Action 5:   This will be presented to the Audit and Risk Committee later this year. 
• Action 6:  This work will be taken forward following the independent review by Scottish Government. 
• Action 7:  This action is ongoing. 
• Action 8:  This action due for November 2024.  
• Action 9:  This action is planned for September 2024. 
• Action 10:  This action is complete.
• Action 11:  This action is complete.
• Action 12:  This action is complete.

The Board noted the interim CEO's response letter to the Public Audit Committee (PAC) dated 31 July. Members also noted that the PAC is likely to continue seeking evidence after the parliamentary recess, which may result in further appearances from WICS.

The Board acknowledged the significant efforts of the interim CEO and all staff during this challenging period.

2.4    Non-Executive Members Update

Ann Allen provided an update on the developments taking place within the UK construction sector and the potential impact on the Scottish Water industry. It is possible that the UK government’s recent statements regarding infrastructure projects could create more capacity within the construction supply chain alleviating pressure on price inflation. She noted that water companies will be evaluating how these changes may impact their investment programmes, with more clarity expected over the next six months.

She also noted that most organisations are moving towards a three-day week hybrid working arrangement. This is based on developing a better sense of belonging for employees in the workplace.  Employers are focusing on the distinct types of work done in the office versus at home, becoming more directive to align business and team needs.

Morag Sheppard noted that the Scottish Legal Complaints Commission (SLCC) has successfully implemented a model requiring employees to be in the office at least one-third of the time. This approach, which does not alter employee contracts but relies on voluntary agreements, has worked well for SLCC. WICS agreed to discuss this approach with SLCC and explore potential learnings.

3.    Annual work plan progress 

3.1   Annual work plan progress update

The Board noted a paper which provides a summary of progress in delivering the 2024-25 work plan. The interim CEO noted the new format of this paper and welcomed feedback from Members.

Morag Sheppard requested further information about the stakeholders involved in the Scottish Government Investment Group (SGIG) and queried whether the Marine Directorate has been considered as a stakeholder for WICS and the wider industry.  The interim CEO explained that while there are stakeholders with statutory roles within the industry that we engage with regularly, we are looking to reach wider stakeholders in our communications and consultations for SRC27.

Members noted that that the organisation is in the process of reviewing its strategic risk register with a workshop taking place next week. Thereafter, this update paper will also include commentary on strategic risks which will be in place for the Board’s next formal meeting.

The interim CEO noted the following key areas requiring a change to timescales or scope of work:

• Hydro Nation strategy

The Board noted that we are awaiting clarity on WICS’ Hydro Nation role from the Scottish Government before this activity can progress.

• Business Stream review

The Board noted the proposal to expand the review to include a comprehensive assessment of all legal and financial risks and to ensure thorough consultation with market participants. The Board supported this consultative approach and recognised that it will extend the delivery timescale for this work.

• Retail market code of practice

The Board noted that it is taking longer than expected for market participants to reach consensus and agree a final voluntary retail market code of practice. WICS has written to participants to provide a final deadline by which a final code of practice should be agreed. Thereafter, WICS will adopt the code making it a mandatory code of practice and licence condition. The Board noted this update and agreed with the approach.

The Chair also requested specific updates on the following key areas of activity:

Hybrid working arrangements

The interim CEO explained that Zero Waste Scotland (ZWS) intends to use the early break clause in the sublease and return Moray House to WICS in September 2025. ZWS is also open to WICS taking the space back earlier or exploring a shared arrangement.

The interim CEO flagged that there is a risk of WICS carrying two rent costs if we pursue alternative premises prior to the head lease expiry in March 2026.

The Board noted the opportunity for WICS to return to Moray House and confirmed that there is an expectation that the office transition to hybrid working.

Members also noted that this would be a shorter-term arrangement given the head lease for Moray House expires in March 2026, thereafter a full options appraisal would be carried out to determine WICS’ future premises.

The interim CEO clarified that a decision from the Board may be required in relation to any final agreement and financial arrangements reached with ZWS.

Board Members asked that there is a health and safety risk assessment completed within the property before asking staff to return.

CEO recruitment

The Board noted that the Scottish Government sponsorship team have requested an external evaluation of the Chief Executive role and salary.  The Director of Corporate and International Affairs advised that the internal approval panel has approved expenditure to take this work forward.

The Board noted that the CEO's salary level could impact on the wider organisation and flagged a risk associated with WICS' ability to attract the necessary regulatory expertise and overall resource levels.

Members also noted the likely lengthy timescales associated with recruiting a permanent CEO and that any extension to the interim CEO appointment would need to be approved by the Board and Cabinet Secretary.

Members requested that the leadership team include a reference to current director salaries and the potential impact of this in the external review of CEO role and salary level.

3.2    Organisational change initiatives 

The interim CEO presented a paper outlining the organisational change initiatives WICS has committed to for 2024-25. 
The Board reviewed the priority of each activity and requested that certain activities be re-categorised as high priority.

Members emphasised the importance of getting this right, even if it takes longer, and highlighted the need for leadership to have the space and time to implement initiatives while being held accountable by the Board.

Board Members acknowledged the significant resource that will be required to deliver these initiatives and stressed the importance of careful resource planning and prioritisation.

Members appreciated the report’s detailed information, acknowledging its value given the current challenges facing WICS. It was suggested that a sub-group of Members could be created to review detailed information and to provide suggests on what should be escalated to the Board level for consideration.

Action: Members asked the leadership team to consider developing a RACI/RAID framework to clearly delineate decision-making responsibilities between the Board and the leadership team in relation to the committed initiatives for 2024-25.

Action: Members requested a best value framework that demonstrates how WICS delivers best value across its statutory duties, aligned with the Scottish Government’s best value framework.

4.1    Finance

Finance report

The Head of Finance provided an overview of financial results for the year ending 31 March 2024 and of the performance against budget until 30 June 2024.

The Board noted that the external audit is scheduled for mid-September with a full set of accounts due by the end of August.  Members noted a high cash balance, and that income has been steady, though reduced due to the pause on international consulting activity.

The Head of Finance outlined the key elements of a financial sustainability review, which will consider areas such as a return to hybrid working, staff training, remuneration levels and the balance of future consultancy costs.  The Board were supportive of this review and emphasised the importance of understanding a range of possible scenarios.

The interim CEO explained that there is a risk relating to WICS current use of consultancy services given the significant increase in prices we are likely to experience for the next corporate planning period 2027-33. 

Members acknowledged that securing framework contracts for the six-year budget period provides stability and predictability in costs and service quality, essential for long-term planning and resource management. However, because these contracts involve higher value over an extended timeframe, they will require Scottish Government approval. Members agreed on the importance of demonstrating to the Scottish Government why these arrangements represent best value.

Members noted that, in the past due to international income, WICS has been able to return cash to Scottish Water and Licensed Providers. After reviewing the corporate plan and financial sustainability, Members agreed to assess the potential to implement a similar approach for this period.

Action:  Develop and formalise a financial reserves policy for review by the Audit and Risk Committee to ensure WICS maintains sufficient funds to manage unexpected costs and financial uncertainties, aligning with the ongoing review of WICS' financial sustainability.

Compliance report

The Head of Finance provided an overview of a report detailing the organisation’s compliance with financial policies and procedures. The report demonstrates a high level of compliance with some key recommendations to make further improvement. The interim CEO confirmed that the issues raised in the section 22 report are not the issues WICS faces today but relate to legacy issues.

All agreed that there is a need to define ‘non-compliance’ moving forward to ensure there is a common understanding with our auditors.

Board Members recognised the significant efforts that have been made to date to improve controls, however noted two areas which require further action:

•  KC services

The Board noted that a long-standing retainer for King’s Counsel with specialist regulatory knowledge is no longer in place.

The Board requested that the leadership team develop a broader understanding of the use of KC services in the past and the associated costs to inform the 2023-24 external audit.

• Legal advice

The Board noted that there has been a requirement for Members to access specific legal advice throughout 2023-24.

The Board asked that the leadership team review current arrangements to ensure that this advice is accessible Members, and that the associated legacy expenditure is internally approved.

The Board recognised the significant workload for the finance team in recent months and thanked the team for their efforts. 

5.1 Methodology volume 3

The Director of Analysis provided an overview of the key areas covered within volume 3 of the draft methodology which includes our expectations of Scottish Water in relation to investment, levels of service and customer involvement. 

The Board discussed and made the following key observations:

Investment

The Board noted that a key aspect of our charging decisions will be the evaluation of Scottish Water’s investment programme. It is critical that WICS carefully evaluates the quality of Scottish Water’s investment information and the associated costs and efficiency.  WICS will use a range of benchmarking tools to assess Scottish Water’s proposals including those developed by Ofwat.

Members recognised the importance of Scottish Water communicating the risks and impacts associated with different investment levels. They acknowledged that the shift towards a more flexible and long-term investment programme requires a different set of skills and expertise in both WICS and Scottish Water.  The Director of Analysis explained this may require further engineering expertise within WICS or could be delivered through an external assurance arrangement.

The Board also discussed how climate change adaption and nature-based solutions will be reflected in Scottish Water’s investment programme and whether this should be defined and assessed as maintenance or enhancement expenditure.  
There was an agreement on the need to build a broader understanding of how Scottish Water can share risk with the supply chain and the costs associated with risk sharing. Members also noted the use of reinsurance in other large infrastructure projects.

Members recognised that a different level of scrutiny may be required projects of different sizes, for example, £100m versus £3m expenditure and that WICS’ approach should allow for proportionate oversight and analysis of both.  Members noted Ofwat’s investment gate approach and agreed that WICS’ role testing cost efficiency would be most effective at an earlier stage. 

Customer involvement and levels of service  

Members highlighted the importance of ensuring that Scottish Water's investments and levels of service measures align with customer priorities and agreed that the proposed approach to customer involvement should effectively address this.

The Board thanked the team for their efforts to produce volume 3 and endorsed the overall direction of travel.

5.2 Methodology overview

The Board discussed and approved the overview document with the following key observations:

• Members noted that WICS’ statutory duty is towards current and future customers, but queried whether wording may be strengthened if positioned to reflect ‘the people of Scotland’.
• Members asked the team to consider building on the current text to emphasise the importance of WICS role and Scottish Water’s performance. 
• Members suggested adding some additional context on our approach to assurance to make it more understandable for a lay audience. 
• Members noted that a customer challenge group could ensure that Scottish Water’s targets are appropriately consumer focused.

6.1 Scottish Water's costs and performance

The Director of Analysis provided an overview of an update paper summarising our analysis of Scottish Water’s costs and performance. 

Board Members noted the marked improvement in the quality of Scottish Water’s annual return submission.

7.1 Clear Business Water investigation

The interim CEO provided an overview of our regulatory role in the competitive retail market and the process for investigating any licence breach.  An Experienced Analyst provided a summary of the key findings and outcome of a recent investigation into allegations of blocking customer transfers by Licensed Provider Clear Business Water.

The Board endorsed the overall approach, acknowledging this the first breach by Clear Business Water. The company cooperated fully with the investigation and proactively offered remedial action to compensate affected customers.

The Board noted our intention to write to all market participants to remind them of their licence conditions and obligations regarding this matter.

Meeting close

The Chair closed the meeting and thanked Board Members and the team for their contributions.