Upstream thinking provides a flood of ideas


11 November 2012


South West Water is changing the culture of improving the quality and quantity of the water it provides, and the finance team played a significant part in making the supply cheaper and more sustainable, as finance and regulatory director Susan Davy explains to FDE.


South West Water, the licensed water and sewerage provider for 1.7 million residents in the south-western region of the UK, launched its flagship environmental programme Upstream Thinking in 2006. It involves rewetting moorland and then working with land users to reduce water pollution from livestock, sediment, pesticides and fertilisers.

The project works with nature to improve water quality to meet growing demand and mitigate the effects of climate change, rather than just relying on intensive water treatment approaches. It requires collaboration across the company, including a need for strong leadership from the finance team to realise tangible benefits for all stakeholders.

South West Water collaborated with a number of environmental organisations to conserve and restore over 2,000ha of the Exmoor National Park peat bogs, greatly improving the water supply catchment area. At the same time, it developed a programme to improve water quality from over 700 farms.

"South West Water serves a pretty big area, with 1.7 million residents and with tourism adding eight million visitor nights a year as well,' says Susan Davy, finance and regulatory director. "So we need to protect the quality and quantity of our resources."

The company decided that investing in improving water quality upstream at source would reduce the long-term costs of cleaning and treating water at expensive downstream treatment plants.

Regulatory hurdles

This resulted in multiple regulatory obstacles. "It was really challenging," says Davy. "We are a regulated business and investment programmes are included in business plans and approved by [regulating body] Ofwat. So we had to pass the test of the regulator reviewing it."

Ofwat requires 30-year business plans, including price setting for the first five years, and has to demonstrate the benefits to customers in terms of reduced bills.

Upstream Thinking drew upon skills across the company including financial governance, project management, legal, tax and treasury advice. It was a complete turnaround in corporate culture brought about by the finance function.

"End-of-pipe solutions were very clear and defined," says Davy. "We were so used to working at our assets on our land. Instead, we started working with third parties and outside our asset base."

The finance function work has changed the company's viewpoint. South West Water is now working in partnership with charitable organisations, landowners and farmers to improve raw water usage at source. Ofwat approved the £9.1 million plan for investment between 2010 and 2015. The estimated benefit-to-cost ratio was 65:1 with the project providing, not only improvements to the environment, but also aiding South West Water by improving the natural storage of water and reducing pollutants, thus avoiding the cost of building new large-scale filtration facilities with their associated chemical and energy implications.

The result should be a long-term saving that will be reflected in customer bills. "It was a slow burn and it took some time," says Davy. "The business was confident the finance function could build the business case. Previously, we have relied on engineering decisions rather than finance. So it was different to what we did in the past."

Lessons to learn

Collaboration was at the heart of the project. 'A lot of the scientific work required to prove the benefits was done with universities and research councils,' says Davy. She advises others in her position to work hard on mapping the way the partnerships work in terms of the technical and financial impacts.

"The approaches and learning we have developed since 2010 will be instigated for our next business plan from 2015 onwards," she says.

The financial team at South West Water were announced as the 'Large business winner' at Institute of Chartered Accountants in England and Wales' (ICAEW) Finance for the Future Awards in June. The inaugural awards focused on the role that financial leaders can play in creating sustainable businesses. They were founded by NatWest, ICAEW and the Prince's Accounting for Sustainability project. For more information, visit www.financeforthefuture.co.uk.

 

Susan Davy, South West Water's finance and regulatory director.