It’s unusual for a senior executive to volunteer information about a monopoly during an interview. But there’s no need for Liz Barber, director of finance and regulation at Yorkshire Water (part of Kelda Holdings), to be artful. When she talks about how innovation works within “a regulated monopoly”, or later a “vertically integrated monopoly”, she’s simply explaining the realities of the current UK water industry structure.
There are 17 water companies in England and Wales regulated by Ofwat, which was established in 1989 when the water and sewerage industry was privatised. To put that figure into context, there were more than 1,000 bodies involved in the supply of water in 1945 and around 1,400 responsible for sewerage and sewage disposal. Most of these were local authorities, but there were some private companies too.
There are hints of a desire to return to those freer, more competitive market conditions. In September 2016 Ofwat published its report on the costs and benefits of introducing competition to the residential retail water market in England, as requested by the government. Chief executive Cathryn Ross was rather blunt in her appraisal: “The service offers from water companies can feel behind the curve compared to the innovation customers benefit from when buying other goods. The uncomfortable truth is that, when it comes to retail offers, water companies provide an analogue service in a digital age. Customers tell us they think they should have the freedom to choose and don’t understand why water is the only retail market in which there isn’t some form of competition.”
From 3 April this year around 1.2 million eligible non-household and business customers in England will be able to choose their water supplier (there are already similar arrangements in the water and sewerage sector in Scotland). Breaking up the monopoly on the retail side seems inevitable. But when Ross refers to innovation she must surely mean in relation to cost, because when Barber explains to me what Yorkshire Water does to maintain its service amid some of the worst flooding ever seen in the region and, crucially, to limit its negative impact on the environment, innovation is at the fore.
The company has been innovative for the last 10-15 years, says Barber,
who joined to take on what she describes as “quite a broad role encompassing finance as well as regulation and market strategy” from EY in 2010, where she had worked with a number of water companies and regulators in England, Wales and Scotland. But interestingly, Yorkshire Water has started to look
at innovation in a different light.
It adopted integrated reporting in its 2015-16 annual report and financial statements to communicate its strategy, governance, performance and prospects in environmental and social as well as financial terms. This report was the first to be presented under the new UK GAAP (specifically, Yorkshire Water adopted FRS 102). And the company also works closely with bodies including Accounting for Sustainability (Barber is co-chair of its CFO Leadership Network) and the Natural Capital Coalition.
Large corporates need to be very aware of changing social attitudes and what’s going on around them, or face the consequences, says Barber: “It’s increasingly what society expects of big companies.” And doubly so for Yorkshire Water, because it provides an essential service: “Some people might think Sky is an essential service, and that’s debateable, but you can’t not provide water. It’s absolutely basic.”
Yorkshire Water consequently focused on impact rather than output. Barber explains: “We have a huge potential impact on the environment – we’re very big energy users, for example, because of the treatment processes and moving a lot of water around all the time. So we’ve started to evaluate that impact. We’re looking at our overall balance sheet not just from a financial perspective [profit was £248.7m in 2015-16 from a turnover of £1,007.3m], but how we’ve impacted the environment and how we will continue to. We look at how resilient our social capital is. What we charge customers and how many struggle to pay our bill. Can we use innovation in areas where we can make an impact on the money we charge? We’ve found those techniques revealing in terms of where
we need to focus our assets and where we might need to change our model.”
Of course, those techniques must work financially – as FD, it’s Barber’s job to ensure the shareholders are also happy. That means approaching issues in a “sensible and measured kind of way”. Take water discolouration: most of Yorkshire’s water comes from peak uplands and if that land is managed in a certain way it can dry out, which means the water becomes discoloured, she explains.
“You can either treat that by a carbon-heavy, intensive process or you can manage the land differently and make sure it’s no longer drained. So we have a project running at the moment where tenants run one of our farms very innovatively, in a highly environmentally-focused way, and we’re using it as a pilot to see how natural engineering impacts the retention of water, avoids flooding, improves biodiversity, and improves the quality of water,” she says.
“I do think big corporates need to be seen to be leading the way and not leaving it to the public sector or voluntary sector to demonstrate their worth to society,” adds Barber. “If you can’t demonstrate your business provides more good to society than otherwise, then you may not have a sustainable business.”
Faced with a surfeit of challenges – who really wants to go head to head with Mother Nature or deal with the repercussions of a burst sewage pipe? – Barber says Yorkshire Water works holistically: developing new technology, utilising its assets, innovating and working collaboratively. When it comes to flooding, for example, “rather than preventing the flooding we’re looking at whether we can support customers in protecting their homes. We’ll work with the Environment Agency and local councils, even Defra (Department for Enviroment and Rural Affairs) if it’s coastal flooding. The best way to get value for society is if everybody joins up. It takes clever modelling, clever partnerships, and knowledgeable asset management to make it come together.”
Barber then shares a rather astonishing stat: Yorkshire Water’s underground pipework – clean and waste – is 86,000 kilometres, “which would go around the world more than twice”. And it’s complex: “It’s underground, the ground moves quite a lot, water is dense and often pressurised to move long distances. There’s an awful lot of pipework and you can’t see it. So we put in a network of loggers that log flow all around the region. We can now see anomalies like a sudden reduction in flow and get a leakage team out to investigate. The industry is ripe for predictive analytics and we’re starting to model where we might predict issues in the water network to more proactively renew mains. It’s not a matter of renewing all the pipes because that would be totally unaffordable. It has to be managed on a risk-based approach, but we can’t always get it right.”
So what happens when it goes wrong? Last year Yorkshire Water was fined £1.1m for illegally discharging sewage that polluted the River Ouse near York and £600,000 after an ageing sewage pipe burst, polluting a fishing lake in Wakefield. “These pollution incidents were hurtful because we take our environmental responsibility very seriously,” says Barber. “That said, there are always lessons to be learned. We have a thorough internal investigation: was it predictable, could it have been predictable, and even if we can’t think it was predictable, what can we learn to make our knowledge better? We aren’t always going to get it right; so long as we learn and get the risk-assessed investment right each time.”
Another financial risk is the cost of bad debt, a sector-wide problem, and how to collect payment. Again, the firm invested in technology to meet the challenge, keeping bills low and helping struggling customers, aware of its obligations to provide services to all sections of society. “Our technology means we can understand who’s probably choosing not to pay and who is probably struggling to pay. Our approach is to be pretty rigourous around debt collection and those who can pay but don’t, and a socially responsible attitude to those who can’t pay.
"I think we’re the only water company that genuinely explores with customers where they may be eligible for our social tariff, Water Support. If you’re having to pay for an essential service and you can’t pay your bill, you do wonder how much distress that might be unnecessarily causing a household,” she says. “And whether you really ought to have put them into that financial distress in the first place. There’s an expectation of social responsibility, which I think is appropriate.”
It all goes back to long-term planning, making sure your business is fit for the next five, 10, 20 years. And that is hooked on trust, reputation, sustainability and social capital. Barber is comfortable discussing these topics, largely because they’re her bread and butter, but also because she lives the values of a chartered accountant.
Reflecting back on why she chose the ACA qualification, she says she studied geography at the University of Leeds, which she enjoyed, but wanted to join the world of business. “I decided the ACA was the best way to learn about business, the best professional training. I still think this, and most of the chartered accountants I know think this. I loved my time at EY, it’s a great firm, and I was happy to stay there unless a great opportunity came along.
I was partner for nearly 10 years and then this came up. It went back to my geographical roots so the two came together.”
For Barber, the transition from profession to industry was helped by her in-depth knowledge of the water and utility sector. She says: “If you’re going to overcome the challenges of doing something so different, go to an industry you already know, or a company you culturally know, so you’re already up the learning curve. That way you’re only getting one shock (change of job) not three (career and industry)”. She’s glad she made the leap, though: “It has been different; it’s been a real stimulus.”
It’s no wonder A4S sought her out to lead its CFO group. Barber is solid leadership material: collaborative, inquisitive and conscientious. She has enjoyed testing the thinking of CFOs, working on accounting for carbon, accounting for natural and social capital, looking at strategic risk to sustainability. “There’s more material about to come out on budgeting, forecasting, and I would say it’s just good practice, keeping your eyes open for those aspects of sustainability that are fundamental to your business.”
She will be a sure pair of hands as Yorkshire Water readies itself for industry reform and the commercial opportunities a new, open market might bring. And she takes her own advice. “The lesson I learned while I was progressing to partner at EY was to think about your impact rather than your input. Don’t think about the hours you’ve worked or how you’re going to manage, or for women, how you’re going to manage with children: think about how you’re going to succeed. With the hours and resources you’ve got, how you can make the best impact with your time. It’s a switch. It’s less, I’ve got to do this list and more, I’ve got to make that happen.”
She laughs when I ask how she likes to relax. “I’ve got two kids! I have very limited time to do much. We’ve spent years doing the house up. My husband and I are keen walkers, and I enjoy pilates. I’m also on the board of the University of Leeds and KCOM so beyond that and my job, there’s not much left.” No day is average, she says, and that’s just the way she likes it.