Inevitably, given the timing of our meeting so soon after the recent referendum, Brexit and its potential impact on the water sector is a key item for discussion. So too is the opening of the non-domestic water market in England, a process that Welsh Water is observing with interest from a distance – it is not a step the Welsh market will mirror.
First of all though, Jones is keen to talk about the evolution of Welsh Water’s relationship with its customers in the 15 years since its birth.
This financial year was the first year in AMP6 that Welsh Water achieved its gearing target for the business, and Jones says this is enabling it to “do more” for customers – primarily because it will use £32 million to drive customer-centric improvements, rather than delivering it to shareholders as might be the case in a conventionally structured water company.
“It was a blank sheet of paper, and it was a kind of once in a lifetime opportunity”
Jones himself was one of the authors of the company’s not-for-profit model, which was born, like many big company overhauls, out of adversity.
The now chief executive had been with Welsh Water for five years when the company’s owner at the time, Hyder, found itself under immense financial strain and was forced in effect to put itself up for sale.
It wasn’t the first time that Jones – then director of regulation – had been at the centre of a disruptive change process in the water industry. During privatisation, he worked at an economic consultancy that was closely involved in that most momentous industry reconfiguration.
Reflecting on Welsh Water’s painful turning point, Jones tells Utility Week: “As a director of Welsh Water at the time, it was a very difficult situation because it is a long-term business. It’s all about having long-term investment plans and being able to raise money efficiently to finance them.”
Shackled to its struggling parent, however, Welsh Water found its ability to present a long-term outlook fundamentally compromised. It was issued with a very poor credit rating and found itself shrouded in uncertainty – particularly damaging to an essential public service business.
Attacking this “perverse” situation head on, Jones and fellow Welsh Water director Nigel Annett took the courageous decision to go back to the drawing board and radically reinvent the company as a not-for-profit enterprise, with no shareholders and an intrinsically customer-first ethos.
“It was a blank sheet of paper, and it was a kind of once in a lifetime opportunity,” says Jones.
It also allowed the company, according to Jones, to commit unequivocally to being a low-risk, long-term business, unhampered by the potential for conflicts of interest between shareholders, dividends and customer interest.
But while this liberation from shareholders has brought opportunities to invest in long-term efficiency and service improvements, it also raised potential pitfalls. It’s a challenge to remain driven, efficient and keep costs under control without shareholders “breathing down your neck”.
To address this scope for creeping inefficiency, Jones and Annett ensured that the company’s new board had strong commercial experience.
“The board of directors are all commercial people and drive the business to be run efficiently,” he says. “And the regulator is able to make comparisons between our performance and that of other companies, and that’s a big spur as well.”
The proof of the pudding can be seen in the numbers. Welsh Water has the best efficiency record, in terms of operating costs, in the sector over the past 15 years. And this year, the model has begun to bear fruit with the company reporting an underlying “profit” of £18 million.
It’s to be hoped this positive position can be maintained as uncertainty around the “imponderable challenge” of Brexit hangs over the UK, threatening many ramifications, and not only for business.
“If the country goes into recession, that will not be good for any business,” says Jones. But Wales is one of the poorest regions in the UK, which means Welsh Water serves a lot of deprived areas, many of which have benefited from a great deal of EU funding.
With this source of social and economic support thrown into doubt, Welsh Water has an especially “big responsibility” to try to help disadvantaged customers.
Conveniently, the results of recent research – now to be carried out annually – should help Welsh Water to live up to this responsibility.
A series of engagement studies has produced insights that will help Welsh Water spend its £32 million “customer dividend” effectively – including ideas on how best to help disadvantaged groups, improve service and resilience, and support recreation and leisure projects.
“What is showing us about views and priorities, and so on, and how that chimes very much with the customer benefit model, is really fascinating stuff,” Jones says with a fervent air.
The research reveals that, contrary to popular belief, customers are keen for what is essentially their money to be invested for the long-term security of the water industry. “They’re interested in the long-term level of the bill, rather than just a quick rebate now.”
Welsh Water customers also appear willing to pay extra on their own bill to support those who are struggling to pay. On average, customers would be prepared to pay £15 more to help their neighbours who are struggling, a far cry from the average £1 imposed by most water companies.
As well as being an apparently philanthropic lot, Welsh Water customers are also uniquely satisfied, according to independent research from the Consumer Council for Water (CCWater), which shows that 78 per cent of customers in Wales are likely to agree that water companies care about the service they provide. CCWater also reported that levels of trust and satisfaction are significantly higher in Wales than in England.
What’s behind these satisfying results? Jones says the not-for-profit model is certainly “a part of the reason”. However, only a minority (about one-third) of the company’s customers currently know that it is a not-for-profit company – a lack of awareness that Welsh Water has only recently begun to address.
Jones explains: “We’re about to embark on a big engagement and awareness-raising campaign through social media, online communities, physical presence at shows – which are a big thing in Wales – but also being on the television for the first time in 20 years, to tell customers, ‘we are a not-for-profit company, we are doing well, now we want to hear your views on what our priorities should be so we can use this money to do a better job for you’.”
This is a good time to increase engagement with customers – including non-domestic ones. Unlike in England, the non-household water retail market in Wales will not open up to competition in the same way next year.
“The market is opening but in a very different way – a much smaller way – in Wales than in England. But that is the policy position of the Welsh government,” says Jones.
An economist by background, Jones believes competition has a huge role in market economics, but is not universally the right way to approach every market.
He insists the lack of competition won’t affect the company’s focus on customers. “I don’t think competition really impacts on us differently as a business,” he says. “We want to provide a really good service and really good value for money, and if you want to be successful in a competitive market, that’s exactly what you have to do as well.”
As customers in Wales will not be able to switch, the challenge will be to keep them satisfied so they don’t feel like they’re missing out on any deals or values that they could get in the competitive market.
“We’ve got to make sure that our customers are delighted to be with us, and wouldn’t feel that they’re losing out by not having that choice.”
Jones is under no illusion as to the scale of the challenge of a rapidly changing industry, as challenges arise both inside and outside the company.
Ofwat plans to introduce competition into other parts of the industry, not just retail, and also wants to switch from retail price index to consumer price index as a measure of inflation, as part of its Water 2020 reforms for PR19.
Jones says Welsh Water has “still got a lot to do as an organisation” to absorb the impact of these new developments while maintaining focus on core values, which provide a constantly moving target for high achievement.
“It’s not the sort of business in which you’re ever going to feel satisfied,” he says, earnestly. “In fact, our plans for improvement are probably greater now than when we started off – as you get better, you get more ambitious.”
That said, Jones is clear that Welsh Water has “come a long way, and it is very noticeable”.
With a “strong sense of endorsement from our customers”, the UK’s only not-for-profit water services provider will need all the lessons it has gathered over the past 15 years on financial challenge and organisational change in order to keep moving forward through an environment with fresh sources of uncertainty and sector reform.