Corruption Control - Part Four: Ofwat.
We interrupt our series of blogs about the Environment Agency to take a look at the other regulator that is blinking under the spotlight as the shaky financial viability of various water companies makes the headlines - Ofwat - the Economic Regulator. What on earth has been going on?
Again we remind our readers that we are not alleging impropriety on the part of the persons named in the following blog but we are seriously questioning the processes and people that are supposed to protect organisations, their staff, and the public, from the risk of corruption.
Ofwat's position on outside interests and shares in water companies is similar to that of the Environment Agency, in that they are supposed to be avoided if they may compromise the individual (to paraphrase), but unlike the Agency it is very specific about forbidding interests in water companies. DIRECTLY OR INDIRECTLY - hold that thought.
Following suggestions that Thames Water was on the brink of being taken into public ownership due to its fragile financial state, a lot of questions are being asked about the performance of the Economic Regulator.
The current Chair of Ofwat is Ian Coucher who took over from Jonson Cox in May 2022. Mr Coucher was selected, as they all are, by the Environment Secretary, and on that occasion it was George Eustice.
Mr Coucher is also still a senior advisor at HIG Capital - a massive private equity/alternative assets investment company H.I.G - investing in companies throughout the U.S., Europe and Latin America. From the company's website: H.I.G. Infrastructure focuses on making value-add and core plus investments in the infrastructure sector.
The public might think, with considerable justification,that the regulation of water companies is in such a shambolic state that 100% effort and commitment would be required from the leadership of the regulators - undivided attention and maximum effort. Apparently not.
Mr Coucher's predecessor, Jonson Cox was appointed in November 2012 by the Environment Secretary, at that time; Caroline Spelman. We have no idea how she came to choose him but suspect it would not have been her decision alone, if at all.
Mr Cox was an interesting person to select for the job as he had been Managing Director at Yorkshire Water (1996 to 2000) and Managing Director and Executive Director at its controlling organisation - Kelda Group Plc (1992 to 2000)
He was then Group Chief Executive, of AWG plc (later Anglian Water Group Plc) (January 2004 to March 2010) and Chief Executive Officer and Chairman of Anglian Water Services Ltd (January 2004 to March 2010)
He also declared the receipt of a pension from Kelda Group Plc.
For the year 2017/18, while Jonson Cox was Chair of Ofwat, according to Ofwat figures obtained by WASP under the Freedom of Information Act, Anglian Water paid or declared a dividend of £1.9359 BILLION, yes, one thousand, nine hundred and thirty-five million and 900 thousand pounds.
In the preceding 10 years the annual average dividend was £353.3 million and even that was over 25% of annual revenue.
Yes, the £1.94Bn dividend was far greater than the income of the company.
Ofwat Licenses to water companies state:
It is hard to see how these dividends were not impairing the ability of the company to finance its obligations to the customer. In 2017 it was only a three-star company (out of four) and by 2019 it had dropped to a two-star rating. Hardly one that should be throwing billpayers' money at shareholders in return for a shabby service.
Ofwat and its Board of Directors Chaired by Anglian's former CEO, stood by and let this gross over-extraction of dividends happen and this raises the question; what was the regulator doing to prevent profiteering?
The current CEO of Ofwat, David Black, states that the allowed return on equity is 4.19% in CPIH (Consumer Prices Index including owner occupiers’ housing costs) returns. However, it does not appear, despite the assurances, that meaningful control exists.
The full detail is here:
We have been unable to establish whether Mr Cox ever had shares in Anglian or whether he had retained any financial connection to the company other than a pension - that would have been an important matter for the committee involved in the pre-selection and Ofwat itself but no one asked him.
He did not declare direct ownership of any shares although he had walked away with a reported, and highly controversial approx £10M severance package when he left Anglian Water in 2010.
The GMB water workers' union, complained in the media at the time that the figure would have paid for the cuts imposed on its staff during his tenure.
He did however declare that he was a Director of Cox Family Investment Company Limited that was established in April 2019. There is no indication of the type of investment involved in his declaration and there is no indication, that we can find, that anyone in authority has ever enquired into this. A word search on the transript for the hearing does not reveal a single mention of 'shares'. The company Cox Family Investment Company declared total assets of just under £6million in March 2022.
The nature of the business is described in Companies House records as 'Activities auxiliary to financial intermediation not elsewhere classified'. There is no obvious indication of the type of business activities or investments that the intermediary activities may apply to. There is no indication that anyone in authority ever asked and the company could have been investing in anything, Ofwat would simply not know.
He also declared a less than 0.25% stake in the 2010 start-up of Syrinix Ltd. Although he did not report it in these terms, it meant he was a shareholder as declared by Syrinix in the company's annual returns.
On its website Syrinix states: 'For over 16 years we have been trusted by some of the largest water utilities across the globe to monitor and analyse their water networks.'
The company specialises in providing technology for identifying and stopping leakage and maintaining supply (Some of Ofwat's key targets for water companies) and cites an example with Thames Water and multiple projects with Anglian Water and South East Water. United Utilities and Bristol Water are also mentioned.
Mr Cox reported the nonspecific start-up percentage of the equity he put into the business rather than whatever it had become in terms of significance as he reported over ten years.
Even more glaringly absent, when set against the detailed description of some of his declarations, is any detail whatsoever of the nature of the company, which it turns out, was highly relevant to two of the key drivers of water industry performance - the reduction of leaks and the maintenance of supply.
It seems unlikely that this business interest was subject to any special authority which restricted Mr Cox's engagement in decision-making in the area of leakage, as in his speech at the Water Industry City Conference in March 2018 he mentioned;
'Anglian is earning a reward on leakage improvement.' On the other hand, sadly I must note that a few companies face significant penalties - £76m in total (and it could have been more but for the caps on the incentive regime in this period) - for failing to meet the standards they promised. '
He later stated; So, risks associated with operational performance – for example leakage, supply interruptions, asset failure – are best allocated to companies to manage.
The pressure was indeed on from Ofwat for water companies to manage leakage and supply networks better.
In January 2023, Badger Meter, Inc. (NYSE: BMI) announced the acquisition of Syrinix, Ltd. for £15 million, funded with available cash. Source - Syrinix website and again, nothing to suggest anything other than a legitimate business transaction.
In response to a Guardian Article based on this part of the blog: ''A spokesperson for Cox said his investment in the startup was £10,000 and he did not participate in any of the further financing rounds after joining Ofwat. His return on the sale this year was around £5,000.''
To put this glossed-over interest in clear perspective: From the Ofwat Guidance on conflicts of interest:
1.3 While this procedure expressly addresses those conflicts of interest that can be readily anticipated, it is not possible to provide a comprehensive list of all of the conflicts of interest that might arise. Therefore: (a) this procedure must be interpreted with regard to its spirit and purpose and in particular with a view to meeting the objectives set out at paragraph 3 below; (b) Board Members must comply with this procedure in spirit as well as in letter; and (c) if there is any doubt as to whether a matter amounts to a conflict of interest, it should be presumed to be a conflict of interest until a decision is made to the contrary by the Chair or, in relation to a potential conflict disclosed by the Chair, the Chief Executive. 1.4 For the purposes of these Rules of Procedure, a conflict of interest is any interest, role, responsibility or duty that is held by a Board Member – whether or not financial in nature – that a fair-minded and informed observer, having considered all of the relevant facts, would conclude gave rise to a real possibility of bias in relation to a matter which that Board Member is required to consider or decide. 1.5 A matter which would otherwise constitute a conflict of interest need not be treated as such if each party which is likely to be affected by the matter that is under consideration has been given a full explanation of the Board Member’s relevant interest and has agreed, clearly and unequivocally, to waive any objection to the Board Member’s participation in the process of considering or deciding upon that matter.
Jonson Cox held shares in a company that specialised in a field that was directly influenced by decisions made by the Board of Ofwat in respect of regulation and by the incentives and penalties imposed by the Economic Regulator.
Whether or not this did involve a serious compromise or significant funds, it provides compelling evidence that the measures to manage risks involving conflicts of interest and therefore corruption are wholly unfit and must be reformed. If the Chair of Ofwat did not apply the guidance to himself, what does that imply for the general attitude to risk management by other board members and staff?
Thus Ofwat and the Environment Agency procedures for managing corruption risk are inadequately established to meet the challenges of the regulators and are applied with naivety or recklessness. Furthermore, once the Audit and Risk Assurance Committees, which underpin the corruption risk process, are populated and even chaired by Directors with significant and complex outside interests, the intrinsically flawed system becomes self-monitoring, self-forgiving, and self-perpetuating. The so-called guardians of integrity appear unable to recognise their own failings as we have seen in preceding blogs.
Surely active financial vetting must be applied to people who will be expected to represent the customer, country and environment rather than the polluter.
So that's a glimpse at Ofwat for now.
We wrote to the Secretary of State again to call for a broader inquiry this time and also to negate any plausible denial when the bubble of secrecy finally bursts.
Here it is
And with it went the contents of this blog in report form.
The Guardian reported on it so this blog was delayed for publication and journalist, Sandra Laville wrote this.
The call for an inquiry was supported by the Lib Dems' Tim Farron.
There is a clear trend in the Water Regulators regulators where conflicts of interest appear to be subject to the same sort of hands-off, self-certifying, generally ineffective oversight and regulation as the regulators apply to the industry - and we know how that worked out.
Note - The Freedom of Information team at Ofwat that supplied some of the above information has been professional and helpful, providing a far better service and closer compliance with the law than their Environment Agency counterparts - in our experience.
More to come - next up is another Environment Agency example - a truly bizarre one.