Martin Baggs: A modern day bazalgette?

As Thames Water chief executive Martin Baggs steps down from his post in the most senior role at the UK's largest utility, he shares his thoughts and reflections.

by Claire Smith

“I’ve been thirty years in this industry and it’s in my blood,” says Martin Baggs.

He has just stepped down from one of the biggest jobs in water. For the last seven years he has been the CEO of Thames Water, the largest utility in the UK, serving a quarter of the country’s population.

“I’m still getting used to the phone not ringing,” he says.

We meet in a seaside café not far from his home on the south coast of England and he is remarkably relaxed - and happy to talk about his seven years at Thames.

“The first thing you notice somewhere like Thames is the numbers. All the numbers are huge,” he says.

Bazalgette’s Legacy

Serving 15 million people and with a workforce of 5,000, Thames has a capital budget of £1 billion a year and some of the oldest sewerage infrastructure in the world.

“When Joseph Bazalgette [19th Century English Civil Engineer] built his sewer system London had three million people - but it is still operating today.”

During Baggs’ time as CEO the utility launched the £4.2 billion Thames Tideway project, by far the biggest infrastructure project in the UK water sector. The planning specifications filled a collection of volumes 38 metres long and required an act of Parliament to put into action.

Thames also introduced a radical new way of working with suppliers, which Baggs believes will revolutionise the industry and could lead the way for similar programmes in other sectors.

The utility also divided itself into four autonomous sections, one of which, the business retail sector, has already been transferred to Castle Water, in preparation for the opening up of the retail business market in 2017.

Baggs joined the board of Thames Water as a utility expert working for Australian owned investment bank Macquarie. Having started as a graduate civil engineer in the drawing office of Southern Water he had risen to become operations director before moving to South East Water as managing director. When Macquarie took over at South East Water Baggs moved over to work directly for the bank, becoming its executive director in charge of European utilities.

“It gave me a totally different outlook, working with investors, but also working with management teams in different countries. That was a brilliant time and I learned so much so fast.

“The great thing about working with Macquarie is they are long term investors, they are not looking for companies to buy, strip and sell. When you are backed by people like pension funds you are looking for long-term secure investment.”

Changing A Poor Reputation

When Macquarie acquired Thames Water in 2006 the utility had problems. It had consistently failed its leakage targets, scored low on customer satisfaction and had a troubled relationship with its supply chain.

“Thames had a poor reputation as a client, of being a big and arrogant business that was commercially aggressive and didn’t listen to its supply chain. There were several big players who wouldn’t even work with Thames because they could get better contracts elsewhere.”

Baggs advised Thames to refocus on its core business by selling overseas interests. After serving for three years as a non-executive director he was invited to take over as chief executive in 2009.

“Between 2006 and 2009 the focus was on bringing some focus and control back into the business. This made the business stronger, more productive and made the risk profile far better for investors.”

Population growth, improving environmental standards and additional regulation meant the business would grow without any need for new acquisitions.

“People would ask ‘What is your programme for growth?’ But the fact is Thames Water was growing every year and it had lost its focus on its core, regulated business. So now Thames Water has met its leakage target for the last ten years, the health and safety incidents have reduced by 50% over the last three years and the number of customer complaints has halved.”

A need to concentrate on the core business was also at the heart of the decision to establish a stand-alone company to build the Thames Tideway Tunnel.

“Building a £4.2 billion tunnel under the Thames isn’t really the job of a water company,” he adds.

The project was already being discussed when Macquarie acquired Thames Water, but the plans were in their infancy.

“Ian Pearson, Minister for Climate Change had said the Thames Tideway was needed. And it was pretty clear that dumping 50 million tons of raw sewage into the river Thames every year is not right.

“Even when you get a shower of 2mm of rain in London you get raw sewage going into the Thames. What the Thames Tideway is designed to do is take all these overflows and discharge them to the Beckton works.”

The Flood and Water Management Act, allowed the creation of a limited company Bazalgette Ltd, which could procure funds and protect Thames Water customers and investors from a potentially catastrophic risk. The direct procurement model means rather than costing Thames Water customers an additional £70-£80 a year, as was originally calculated, the actual increase will be £20 -£25.

“It’s a great example of how you can develop a major new infrastructure project and get the right result for customers at the same time.”

The Four-box Model

Although the project is legally separate from Thames there is a huge interface. “Of the £4.2 million of work about £1.4 million is being delivered by Thames. When it is operational it will become part of the sewer system and Thames will be the operator.”

Under Baggs, Thames Water adopted the four-box business model, which involved separating water, wastewater, household retail and non-household retail.

“What you are doing is allowing more autonomy, which goes hand-in-hand with accountability. It means performance and result become more clear.”

Meanwhile Thames’ troubled relationship with its suppliers has been transformed by three major alliances, which see companies working together in pursuit of the same aims. The first, the eight2O alliance, focuses on construction.

“Traditionally contractors make money by digging holes - the bigger those holes and the more holes there are the more they get paid. So in the old way of doing things it pays for the contractors to dig as many holes as possible In the alliance the companies all share the same budget - so they can now make money by meeting targets. It’s going to take a while for it to work but it turns the whole contract model on its head.”

Next came the Infrastructure Alliance, which concentrates on comprehensive asset management and the Technology and Transformation Alliance, which is driving innovation in IT and digital services. Baggs says the leaders of other industries, including oil and gas are also looking at supply chain alliances as a way of streamlining their business.

“People want to be involved in something that is going to be a game changer.”

He believes the direct procurement model, pioneered by the Thames Tideway project, will be also employed again for nationally significant infrastructure projects, such as dealing with projected water shortages in the South East of England. “The last time there was a major investment was over 40 years ago and at some point we are going to have to consider it.”

In the future he believes the domestic retail market will be deregulated and that it will be possible for householders to choose to buy electricity, gas and water from the same supplier.

“It’s not if it’s when,” he says. “In the domestic market the retailers are already there - many of us already have the same market for gas and electricity. It is not beyond imagination for a retailer to be able to bill us for water as well.”

Baggs also believes the water energy nexus will become important in other ways - with utilities becoming more heavily involved in energy production, waste recycling and renewables. He does not believe the UK’s expected exit from the European Union will lead to any relaxation of environmental regulation.

“When you look at all that has been achieved do we really want to unwind that? Do we really want to unpick the environmental improvements that have been made?

“It might seem strange to be arguing for more regulation but when you look at the population growth, it is like building two or three new towns a year - so you have to got to make sure that the regulations are in place in terms of smart technology, energy efficiency and drainage systems.”

Bring On Big Data

With smart meters comes big data, which is one of the reasons Baggs is confident in his successor is Steve Robertson, whose background is in telecoms.

One of the big changes during his time at Thames was the growth of social media. “I can guarantee that the first email of the day and the last one at night would be a customer complaint. You are so accessible if someone wants to get hold of you and it is not something you can ignore.”

One of Martin Baggs’ fondest memories is the annual Thames Water boat trip for long serving staff.

“You’re going down the River Thames on a boat, you have got 200 people on board and the pride in the company is amazing. That is liquid gold.”

Claire Smith is a freelance contributor for WWi magazine, based in the UK.