2. Agenda
■ Background on Welsh Water and the water sector
■ Glas Cymru - the business model
■ Three years on, how is it working in practice?
■ A “one off” or something that can be replicated?
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3. Welsh Water
■ 6th largest of the water and sewerage companies
■ Urban South and North East, otherwise rural, long coast
■ 1.2 million household and 100,000 business customers
■ Capital intensive business:
■ assets worth £15 billion
■ more assets per customer than average
■ £4 billion invested since 1989
■ 105 water treatment works, 27,000km water mains
■ 850 wastewater treatment works, 18,700km sewers
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4. Privatised water sector
■ Privatised in 1989
■ Step change improvement in efficiency and quality
■ Well established regulatory framework
■ Ofwat, Environment Agency, Drinking Water Inspectorate
■ Cashflow negative - £130 spend for every £100 revenue
■ Cost of financing assets now absorbs third of revenues
■ Investor concerns about “regulatory and political risk”
■ High cost of capital
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5. Glas Cymru
■ Formed in 2000 to make formal offer for Welsh Water
■ Origins date back to 1995 and “windfall tax”
■ Company Limited by Guarantee under Companies Act
■ Modelled on BUPA
■ Single purpose company - exists only to provide better
value services to Welsh Water’s customers
■ Key is cutting cost of financing assets and investment
■ Focus on offering high quality credit to investors
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6. Credit quality
■ Regulated monopoly providing essential public service
■ Non-exectutive board, strong incentives and disciplines
■ Equity capital “relocated” to competitive activities
■ Full disclosure against regulatory benchmarks
■ Cannot diversify into unrelated activitites
■ CLG structure to “lock in” credit quality features
■ Legitimacy through “not for profit”
■ Alignment of interests - reduced political/regulatory risk
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7. Role of Members
■ Supporting objectives of the Company
■ Importance of strong commercial disciplines/incentives
■ Independent Panel has appointed 50 Members
■ Members carry out normal corporate governance
duties of shareholders, but do not get dividends:
■ approving Annual Report and Accounts
■ appointing Directors and Auditors
■ compliance with “Combined Code”
■ Management of business and setting of strategic
direction are matters for the Board
■ Importance of other stakeholders - “at risk capital”
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8. Financing
■ £1.9bn bond issue in May 2001 - 70% oversubscribed
■ Cost of finance saving = over 10% of annual revenues
■ Financing efficiency being used to:
■ fund discretionary investment - £41m
■ pay for bill rebates - £23m
■ build up financial reserves - over £400m by 2005
■ By 2005 c.15% of “RAV” funded by “financial reserves”
■ Since 2001, £380m raised from investors to fund
continuing capital investment programme
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9. Service delivery
■ Competitive out-sourcing key feature of model:
■ “not for profit” financing of monopoly public service assets
■ “equity owned” enterprises deliver services
■ 85% of annual spend now carried out under contract
■ Welsh Water able to employ “best in class” for each
area of activity in the “value chain”
■ Objective is to secure best combination of value and
quality of service for Welsh Water’s customers
■ Reduced regulatory risk through greater transparency
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10. Service to customers
■ Welsh Water now ranked top (or next to top) on
Ofwat’s “Overall Performance Assessment”
■ Drinking water quality now 99.8% compliant
■ 97% of Welsh rivers in the best quality category
■ Wales has 40 Blue Flags, third of UK total, up from just
2 in 1995 when half of all wastewater was untreated
■ Best ever performance on low pressure, interruptions
to supply, minimising repeat flooding from sewers
■ Tracking research shows high levels of satisfaction
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11. Some lessons
■ Importance of having clear measures of success:
■ meaningful KPIs
■ industry benchmarks
■ Clarity of purpose, objectives and responsibilities
■ People:
■ commitment and trust
■ team working, shared objectives
■ recognising and celebrating success
■ Strong and aligned incentives, high recognition
■ Buzz that comes from running a business that really
matters, really well
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12. Can the model be replicated?
■ Some key circumstances:
■ substantial sums raised from capital markets since
privatisation - corporate governance well established
■ no government subsidy
■ normal commercial incentives and disciplines apply
■ costs reduced by around half since privatisation
■ step change improvement in performance
■ big ticket schemes and restructurings completed
■ established and stable regulatory framework
■ public service that cannot be allowed to fail
■ much of what matters is measured
■ investors’ main risk is management performance
■ team had right mix of experience and commitment
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13. Summing up
■ So far, so good - but real challenges lie ahead:
■ £1.3bn AMP4 capital investment programme
■ targeting further 14% reduction in operating costs
■ around £1.1bn to be raised from investors
■ re-letting contracts with a value of over £4bn
■ And can current focus and drive be maintained?
■ Support of long term investors, allowing Welsh Water
to give customers better value for money
■ Strong incentives and high recognition that make
working with Welsh Water a rewarding prospect
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