Minutes of the 163rd Board meeting of the Water Industry Commission for Scotland on 13 March 2025

Present:

Ronnie Hinds (Interim Chair)
Robin McGill (Member)
Morag Sheppard (Interim Member) 
David Satti, Interim Chief Executive 

Apologies: Ann Allen (Member)

In attendance:    

Colin McNaughton, Director – Items 4.4 and 5
Head of Finance – Item 4 

Chair’s opening remarks

The Chair opened the 163rd meeting of the WICS Board and welcomed Members. 

1.    Apologies for absence

There were apologies from Ann Allen.

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 162nd meeting

The Board approved the minutes of the 162nd meeting.

2.3    Summary of action points

The Board noted the summary of actions and agreed that material updates would be covered in other agenda items.

2.4    Members update

The Chair informed Board members that his appointment as Interim Chair has been extended until the end of the current calendar year. Additionally, it was noted that the recruitment process for new Board Members was launched on 10th March, with the aim of appointing new members during the summer.

The Chair confirmed that the application deadline for the permanent CEO position closed on 10th March, and the next stages of the selection process will now begin.

The Interim CEO (ICEO) provided an update regarding a recent letter received from the Public Audit Committee (PAC), which requests WICS' formal response to the Scottish Government's independent review published in November 2024. The Board agreed that this response should be used to highlight the full scope of changes that have been implemented and to provide further assurance to stakeholders. The ICEO confirmed that the aim of the response is to demonstrate the progress made and to emphasise that the changes reflect a collective effort by the Board, leadership team, and all WICS employees. It was agreed that the response should focus on cultural and organisational change within WICS.

The Chair highlighted the potential for WICS to attend the Net Zero Committee in September to discuss our regulation of Scottish Water. The ICEO and the Chair plan to engage with the Cabinet Secretary later this month to explore appropriate opportunities to promote Scotland’s water industry and regulatory framework.

3.    Organisational change

3.1   HR support

The Board reviewed a paper outlining the organisation’s progress addressing the long-standing gap in HR support as part of the ongoing organisational change programme.

Board Members noted that the current contract for interim HR support will conclude at the end of March, and that there remains a critical need for HR support to guide WICS through the remaining phases of organisational change.

The Board agreed that developing an in-house HR function is a priority for WICS and that steps should be taken to recruit permanent HR resource.

Members discussed the need for a robust recruitment process for this role that is open to true and fair competition.

The Board agreed that an extension to the current contract for interim HR resource would be required beyond the end of March to allow the recruitment process to conclude and any appropriate handover to take place.

The Board approved the proposal to develop a permanent HR function to address the longstanding gap and agreed that this approach represents best value for WICS. The Board asked the ICEO to determine the required contracted hours for this role, the most appropriate timescale for the recruitment process and confirm any necessary extension to the current HR interim resource.

3.2   Director weighting exercise

The Board discussed a paper on the appropriate salary level for vacant Director level posts.

The ICEO explained that a market weighting exercise has determined a salary range for Director level positions benchmarking against relevant public sector positions. Based on this exercise, the proposed salary range for Director level positions is £105,000 to £125,000.

Board Members discussed the evidence from the salary weighting exercise and agreed that a target range of approximately £115,000 would likely be appropriate to attract suitably qualified candidates.

The Board also acknowledged the need for a review of the broader salary banding structure across the organisation. This review will focus on simplifying and consolidating the current structure, and will be incorporated into the organisational change programme.

Members discussed how any changes to the current banding structure could be addressed over time to align with any new salary structure.

The Board agreed to delegate authority to the Chair and ICEO to engage with the Scottish Government Sponsor Team to determine the most appropriate approval route for the salary proposal for Director-level positions.

Finally, Board Members requested to be kept informed throughout the recruitment process for the vacant Director roles, particularly during the shortlisting and interview stages.

4.    Finance and Corporate Services

4.1    Finance update and financial results

The Board received an update on the financial results for the first 10 months of the current financial year and noted a forecasted net income of just under £1 million.

Members noted that consultancy expenditure is expected to be under budget for the current year; however, higher levels of consultancy expenditure will be necessary next year to support the delivery of SRC27.

The Board discussed and approved the following items of expenditure:

• Regulatory engineering consultant support £72,000
• Microsoft 365 licences for 2 years £32,500
• Write-off of an expired flight credit £636

The Board noted that the Microsoft expenditure would be classified as a non-competitive action and, as such, approval from the Scottish Government will also be sought.

Morag Sheppard requested assurance that external advice is available to support the organisation on IFRS 16. The Head of Finance confirmed that advice was sought last year, and that additional support can be obtained if necessary. She also highlighted the assistance provided by Audit Scotland, particularly in relation to accounting for the lease and sublease arrangements. Furthermore, she confirmed that Audit Scotland has agreed to engage in early discussions on this matter prior to the formal audit process.

4.2    Financial policies and procedures

The Head of Finance introduced the revised financial policies and procedures, highlighting that all further revisions resulting from audits and reviews have now been embedded in the documents. The most recent changes to the policy have focused on embedding best value principles, strengthening counter-fraud measures and providing greater clarity on gifts and hospitality. The Head of Finance confirmed that the policies and procedures have been reviewed in detail and approved by the Audit and Risk Committee (ARC), and if approved by the Board, will be rolled out to staff and accompanied by appropriate training.

The Chair queried the frequency periodic compliance audits conducted by the finance team, noting that these would provide valuable assurance to both ARC and the Board. The Head of Finance confirmed that a quarterly report would be presented to both the leadership team and ARC.

The Chair of ARC highlighted that this approach will help to identify any compliance issues or trends, allowing them to be escalated to the Board as needed. If significant issues arise, the Head of Finance may also inform ARC between meetings.

The Interim CEO (ICEO) confirmed that fraud risk assessments will now be an additional control mechanism, with a quarterly report on fraud risk providing further assurance.

The Chair raised a question about the clarity of the policy on booking travel and accommodation. He suggested making it clearer that using the corporate travel agency is the standard practice, but staff may explore alternative options provided evidence of better value rates is robust and retained.

The Board approved the revised financial policies and procedures.

4.3    Financial sustainability review

The Board considered a paper outlining the progress made on reviewing WICS’ financial sustainability. This work has informed the 2024-25 budget and includes a draft financial plan and procurement strategy to guide the development of the 2027-33 corporate plan.

The Board reviewed the information provided and discussed the following key areas:

Cash reserves

Board Members discussed the appropriate level of cash reserves for WICS and associated risks. Members noted that a key element of WICS’ cash reserves is driven by the potential costs associated with a CMA referral process. It was agreed that a decision on cash reserves should postponed and discussed further in the context of preparing the 2027-33 corporate plan.

The Chair recommended engaging with Audit Scotland ahead of and during the audit process on our strategy for managing the high cash balance, highlighting that further time is needed to assess the required levels of expenditure for the remainder of the current regulatory period and beyond.

Rebates

The Board discussed whether a decision could be made regarding rebates to Scottish Water and Licensed Providers at this stage. It was agreed that this decision should be postponed and revisited as part of the 2027-33 corporate planning process.

Cost allocations

The Board considered the proposed revised cost allocation model and agreed to revisit this matter ahead of the next regulatory control period, allowing more time to evaluate the approach and any potential funding implications.

Procurement strategy

The Chair requested a paper outlining how IT contracts have been rationalised, confirming that the discussions from the January Board meeting have been actioned.

Following these discussions, the Board agreed to postpone decisions on these key areas and to revisit them in November as part of the mid-year budget review and in preparation for the 2027-33 corporate plan.

Action: Mid-year budget review to be presented to the Board in November 2025.

Action: Paper outlining the review and rationalisation of IT contracts.

4.4    Levy freeze

The Board considered a paper which provides an overview of WICS’ approach to forego the 3% nominal increase of all licensed providers’ annual levy to support the implementation of the Market Health Check (MHC).

The Interim CEO explained that a decision regarding the levy freeze was made in 2023, but it was not approved by the Board or effectively communicated within the organisation. The paper now brings this decision to the Board for formal recording, providing an audit trail and closing the matter.

Board Members thanked the Interim CEO for the transparency and candour with which this issue was brought to the Board's attention but expressed concern that the decision had not been properly approved or communicated.

The Interim CEO assured the Board that moving forward, similar decisions would be discussed with the Leadership Team (LT) to ensure full visibility. The Board Secretary will also ensure that areas where the Board should be involved are identified, and the scheme of delegation will be refined to clarify these processes.

After discussing the available options, the Board approved Option 1, which honours the commitment to forgo the 3% nominal increase in the annual levy for all licensed providers until the end of the current regulatory control period.

4.5    Work plan and budget

The Board considered the work plan and budget for 2025-27, noting a shift in Strategic Objectives from international leadership to WICS being recognised as a trusted regulator.

The Interim CEO confirmed that approval is sought from the Board for the 2025-26 work plan and budget, with an indicative budget for 2026-27 included to provide greater visibility of the office’s future activities.

Board Members discussed the work plan and budget and raised the following key points:

• Morag Sheppard requested further information on WICS’ powers regarding Scottish Water’s performance. The Interim CEO confirmed that a paper would be shared with the Board clarifying WICS’ role in assessing Scottish Water’s performance. This paper would also address how Scottish Water’s bonus structure could be more closely aligned with the targets set by WICS in the Final Determination.
• Members discussed the wording of the strategic objectives and suggested several changes to strategic objective 3, and outcomes 6, 7, and 8. The Board agreed that the risk appetite associated with WICS’ reputation should be revised from ‘careful’ to ‘averse.’
• Robin McGill queried whether EBR and EBP should be explicitly embedded within the objectives. The Interim CEO explained that EBR/EBP underpins the objectives and is a key aspect of the organisational culture, which will be addressed as part of the ongoing organisational change.
• Board Members asked the Leadership Team to consider how the objectives and outcomes could be effectively measured, including assessing WICS’ regulatory performance. Morag Sheppard suggested a stakeholder survey as a potential approach. The Interim CEO noted that KPIs had been extensively discussed at the OECD NER, and WICS would engage in similar forums to understand how other regulators measure performance.
• Members also proposed the future introduction of KPIs to challenge Directorates to improve efficiency, reduce costs, or maximise the value from the existing cost base.
• The Chair expressed the need for greater clarity regarding the projected increase in staff costs. The Interim CEO agreed to communicate more clearly, on an ongoing basis, the rationale behind the future staff levels required to deliver an effective and sustainable WICS, with less reliance on external consultants.

The Board expressed appreciation for the work that has gone into the work plan and budget. The Board approved the budget for 2024-25 but requested a mid-year review of the budget in November to take into account further information.

4.6   ARC update

The Board noted an update from the Chair of the Audit and Risk Committee (ARC) on the work of the ARC.

The Board approved the revised terms of reference for the Audit and Risk Committee.

5. Pricing

5.1 Ofwat determinations

The Board noted an update from the Director of Performance and Reporting on Ofwat’s determinations and key learnings from WICS. He highlighted that six companies have referred their determinations to the CMA, the highest number on record, signalling an increasing trend of companies challenging decisions.

Board Members noted that WICS' long-term approach, which gradually transitions charges over time, contrasts with the approach taken in England and Wales during previous price reviews, where the focus was on reducing charges. Members also noted that around a third of the change in bills across the WaSCs in England and Wales is to recover some of the lost ground from previous price reviews, which is not required in Scotland.

Board Members discussed the constraints Scottish Water faces in relation to accessing alternative sources of borrowing and the impact on the supply chain of the significant increase in investment levels across the industry.

The Board also discussed the environmental investment programme, noting that Scotland's approach differs from England's, as it focuses more closely on maximising the value for customers. The Interim CEO also highlighted that Scotland is in a different position as around 86% of Scotland’s waters are assessed at good or better status compared to 16% in England.

The Chair thanked the team for the valuable insights contained within the paper.

5.2 Scottish Water's strategy

The Board discussed the key messages outlined in the paper which will form the basis for WICS’ response to Scottish Water’s long-term strategy consultation.

The Board noted that Scottish Water’s long-term strategy indicates that £50 billion investment will be required over the next 25 years.

The interim CEO confirmed that WICS has no role in approving Scottish Water’s long-term strategy, but that WICS will respond as part of the consultation process. It reflects our expectation for Scottish Water to consider a longer-term perspective.

The Board noted that WICS has not yet seen a detailed investment strategy which will be critical to understand the full detail of Scottish Water’s investment programme.

Members discussed the significant level of investment required and the charges that Scottish Water may propose, particularly in relation to the £50 billion figure. The Board suggested that the response could highlight the contrast between Scotland and England, specifically emphasising that, Scotland has been transitioning to a more sustainable levels of investment and charges over time.

The Board approved the key messages within the document but asked that the response is supportive but reflects a level of scepticism until more detailed information is provided on the investment strategy.

6. Annual work plan and organisational change

6.1 Annual work plan progress update

The Board noted the update on the annual work plan progress update.  

6.2 Organisational change update

The Board noted an update on the progress of the organisational change programme and Board sub-committee (Organisational Change Assurance Group (OCAG)).

Members noted that some deliverable dates have been revised due to dependencies and resourcing challenges.

The Board welcomed the proposal to develop a consistent progress reporting dashboard for the Leadership Team (LT), ARC, and the Board.

The Board discussed the terms of reference for OCAG, with particular focus on the role of the deputy Chair. It was agreed to maintain the current structure until the new Board members join.

The Board approved the terms of reference for OCAG.

Meeting close

The Chair closed the meeting by thanking participants for their valuable contributions.