Mel Karam is a pragmatist – a quality Bristol Water needs in a chief executive in the run-up to PR19. The first-time chief executive is a systematic planner who aims to re-form the company into a “global exemplar”. Not only that, he has a clear idea of where the water industry as a whole should head – particularly with regard to competition and customer legitimacy.
In a small, glass-fronted meeting room at the company’s head office in Bristol, Karam ponders each question put to him before articulating his answer in immaculate detail. He takes the same analytical approach to running Bristol Water (a company that has not always seen eye-to-eye with regulator Ofwat) and tells Utility Week he intends to improve the company’s view of itself, as well as how it is viewed by others.
Karam acknowledges the fact that things have “not always gone the way they should go” for the company, and is frank about Bristol’s past. “Let’s be very open and honest about the fact that the history has not been exemplary in terms of relationships,” he says. “Any company that ends up in a disagreement with its regulator twice in a row should look carefully at what it’s done and what it’s doing.” For PR19, though, things will be different. “We do not want to be in those circumstances where we’re at odds with our regulator – that is not a good position to be in.”
Extensive experience in asset management planning and best practice planning processes led Karam to the role of chief executive. His previous position as global head of asset management at KPMG International, in particular, gave him vital insight into other industries and organisations outside of the UK. “I found that my background experience and skills fitted very neatly with the stage of progress that Bristol Water was at and the needs of the company, and the journey it is going through. That fit seemed to be both strategically and tactically good.”
“My objective is to make sure that we have an effective business planning process that starts and finishes with our customers in mind”
Upon arrival in April this year, Karam began by studying Bristol’s past, “particularly its recent past”. His conclusion was that the company needed to improve its knowledge of its assets, its planning processes, its standing and reputation, and be more “outward-looking”.
Bristol had begun the process of “changing its ways” to make sure the shortfalls of the previous processes were being addressed before Karam took up the role, and he gives the previous team its due, saying it “moved very quickly” after the last price review to make changes in the operating model of the organisation. The company’s PR14 debacle resulted in a major hit to its revenues in the first year of AMP6.
Turnover dropped by £21.9 million to £110.9 million, and profit before tax fell by £9.4 million to £27.8 million. The company rejected its final determination for AMP6, effectively taking Ofwat to the Competition and Markets Authority, but ended up with a measly £20 million uplift to its totex settlement – far short of the £128 million it had demanded. Since then the company has gone through a radical transformation at the top.
It has a new majority shareholder – Icon Infrastructure – which now owns 80 per cent of the company. This shareholder is “very knowledgeable, very experienced” in the sector, and “understands regulation and regulatory affairs”, says Karam. The fact that it is the majority shareholder, as well, makes the processes and the decision-making framework easier and more aligned with the rest of the business.
The company’s board has also changed. The structure of the board and the governance has been “strengthened hugely” from where it was in the past price review, says Karam. And a number of new independent non-executive directors bring with them a “wealth of experience” in their fields.
The executive team, too, has been overhauled. “We have had our regulatory affairs, our asset management and our corporate affairs, and the way we manage the price reviews through the executive team, completely changed – we have new people running those functions, all brought into the company since the last price review.” But the effects of the PR14 dispute are still being felt. Prices reduced further in 2016/17, leading to a £0.6 million drop in income reported in its September interim results compared with the same period the previous year.
So how confident is Karam that Bristol Water will not end up in another dispute about its final determination this time around? He responds with a smile. “I would answer it in a different way,” he says. “My objective is to make sure that we have an effective business planning process that starts and finishes with our customers in mind. If we manage to do that, which is our intention, then by definition we should have fallen in line with the regulatory expectations of a good operator.”
Karam’s plan is logical: listen to customers to understand what they want in the long term, translate that into a five-year set of customer priorities, and put a plan behind it that demonstrates that those priorities are being achieved at the lowest cost to customers and with as much innovation as possible. “Then, when we have asked our customers if they are supportive of our business plan, and they have said yes, that should put us in good standing with the regulator.”
Karam aims to put in place a process that “starts and finishes with the customer”. “I’m confident that we’re going to achieve that process and, to the extent that I believe that aligns with the regulatory requirements, I’m confident that we will have a good outcome.”
Karam’s appointment at Bristol is his first turn in a chief executive’s chair. He has big ideas, but as yet is not willing to set out a defined strategy for the company. Instead, he describes how he is in the throes of working with stakeholders – including regulators, customer groups, the board and shareholders, and employees, particularly senior managers – to form a collectively recognised vision.
This work is already turning up “themes”, which he believes will help Bristol “come out of its shell” and improve its standing in its community and industry.
One of these is that the company needs to better understand its strengths and make sure they are leveraged to “create value for customers and other stakeholders”.
Bristol has a strong record of customer service, and scored in the upper quartile of the 2015/16 service incentive mechanism, with a very respectable 85 out of 100. However, Karam says there is more Bristol can do, beyond performing for regulatory mechanisms, to leverage a special relationship with Bristol’s famously localist community. This opportunity is “not very well understood”, says Karam. “The question is how do we use that strength to become even more customer-focused, to be even more responsive to our customers, and even more valued?”
The point Karam has identified early as a key consideration in developing a strategy for Bristol is its size – the company serves a relatively modest 1.2 million customers in total. “We need to recognise that we are a local company,” he says. And that “in a lot of cases” Bristol may not “have the full range of capabilities and resources that other utilities may have”.
On the other hand, Karam says Bristol’s relatively diminutive stature gives it an “advantage of being able to act more quickly and be more agile, and do things differently in a way that others can’t”. This is a latent opportunity which has not necessarily been recognised and built in to strategic thinking, he says.
“It is hugely important for the whole of the industry that we work together to demonstrate that privatised utilities add a legitimate value to society”
This kind of oversight reflects a Bristol Water that has become lacking in self-belief, according to Karam. The company must “believe” that it can compete and be better than others, insists its chief executive. “We don’t necessarily need to be better than everyone and everything, but we certainly need to understand what our strengths are and be ambitious.” Bristol must be “much more confident about itself, and more outward-looking”.
Finally, the company needs to demonstrate how it is becoming more efficient – against both its own history, and where it needs to be in the future. Karam wants Bristol to become a more “active participant” in the industry, as well as in wider macro-challenges facing the UK – like climate change. It can teach others a lot about the merits of community-based activism, he states.
However, bringing these lessons to the table will require sensitivity. The lead-up to the June general election raised questions about the legitimacy of privatised utilities, including privatised water companies, and Karam strongly believes it is the industry’s obligation to respond to society’s concerns.
“It is hugely important for the whole of the industry – including stakeholders and regulators – that we work together to demonstrate that privatised utilities add a legitimate value to society as a whole,” he says.
“It isn’t just about prices. It isn’t just about services. It’s about the trust and confidence that society has in us as good operators and, more importantly, as competent and confident longer-term custodians of what, in the customers’ minds, are strategically important assets and services. They need to trust us that in the short, medium and longer term, we look after their interests and that we are looking after the infrastructure for them.”
One way of increasing trust in the sector is more competition, Karam suggests, and there are some “big areas” from which the industry can take lessons. “There is a general notion that the holistic monopoly does not necessarily provide the best level of service from a customer perspective – we need to address that, and part of that is about opening up the industry and allowing others to participate a lot more.”
Karam’s view is that domestic competition in the longer term not only benefits customers but also improves the way an organisation sees itself as a service provider, rather than just a “compliance body” that ticks boxes to remain in line with rules and regulations.
Although a strong supporter of domestic competition, Karam believes upstream competition is where industry should focus in the short and medium-term. “I would like to see [upstream competition] developed further and more rapidly before household competition is even discussed. I see there is added value in the creation of a market around a commodity to the customers, more than just purely competition in the provision of a service.”
He says the value in upstream competition – both in terms of water resources and in preparation for other types of competition – “makes it a priority”.
Whatever the timescale for the introduction of competition, Karam says Bristol Water will be a “very active participant” in the process of developing the industry. After all, the company was “very active” in its approach to preparing for non-household competition, displaying an avid interest and input into the development of the industry codes and practices. And, Karam says, “we would certainly want to do that if household competition became a possibility”.