Water Industry Commission for Scotland - independent review: sponsorship oversight and governance

1. Introduction

1.1. Introduction

1.1.1. Scottish Government (SG) Internal Audit (IA) was tasked by the Permanent Secretary, as Principal Accountable Officer (PAO), to undertake a targeted review focusing on SG sponsorship oversight and governance with the Water Industry Commission for Scotland (WICS), the economic regulator of Scottish Water. WICS is an Executive Non-Departmental Public Body (NDPB). The review focused on the period following publication of the Audit Scotland Section 22 (s22) Report on WICS. The audit sponsor for this assignment is Director-General Net Zero (DG NZ).

1.1.2. Audit Scotland issued the s22 report to Scottish Ministers in December 2023. One of the key messages from the report was: “The financial management and governance issues found at WICS fall far short of what is expected of a public body. Immediate action is required to address the issues and promote a culture of Best Value across the organisation.” WICS has developed an action plan in response to the findings of the s22 report.

1.1.3. Each NDPB has an SG Director and Deputy Director (DD) who are responsible for ensuring effective relationships between the sponsor body and the SG, usually supported by a sponsor team (ST). STs are the first point of contact between the NDPB and the SG. They provide advice, help, and support to NDPBs and advice on accountability, governance and performance to Ministers and Portfolio Accountable Officers. The Public Bodies Support Unit (PBSU) is a central team in the SG which provides advice, guidance and support to STs.

1.1.4. The Water Industry Unit (WIU), Water Policy and Directorate of Energy and Climate Change (DECC) Operations within the DECC carries out the sponsorship function for WICS. For the purposes of this review the WIU is referred to as the ST. The ST is also responsible for the sponsorship of a further two public bodies – Scottish Water (which has two subsidiaries – Scottish Water Business Stream and Horizons) and the Drinking Water Quality Regulator, alongside a wider range of other roles and responsibilities. The ST has been subject to recent staffing changes. The team is now made up of colleagues relatively new in post, including the appointment of a new Sponsorship Liaison Officer (SLO) in December 2023. Sponsor responsibilities are defined in the WICS Governance Framework, Framework Document and accountability section of the Scottish Public Finance Manual (SPFM).

1.2. Audit Scope

1.2.1. The scope of this review was to provide the Permanent Secretary, as PAO, and DG NZ as Portfolio Accountable Officer, with assurance on whether: progress is being made to implement follow up reviews committed to and referenced at Public Audit Committee (PAC); progress is being made (by ST and WICS) on implementing the action plan and learnings from the s22 report; and that controls regarding SG sponsorship oversight and governance at WICS are being complied with.

1.2.2. The scope of this review did not include an in-depth review of WICS governance arrangements.

1.2.3. The agreed remit items for this review are detailed at Annex B.

1.3. Assurance and Recommendations

1.3.1. Assurance Category: Limited

1.3.2. Our review identified two high and two medium priority recommendations . A limited assurance rating has been provided. There are weaknesses in the current risk, governance and/or control procedures that either do, or could, affect the delivery of any related objectives. Exposure to the weaknesses identified is moderate and being mitigated. Please see Annex A for the standard explanation of our assurance levels and recommendation priorities.

Findings Summary

1.3.3. Progress is being made to implement follow up reviews committed to and referenced at PAC and to implement the action plan and learnings from the s22 report. WICS has put in place a workplan to address the recommendations from the s22 report. There have been regular meetings between WICS, the ST, Sponsor Director and DG NZ to discuss progress of implementation of the action plan. WICS has also undertaken a review of financial transactions – the outputs from this have been reported to PAC. Grant Thornton, WICS’ internal auditor, has also undertaken a review of the adequacy of management actions that have been taken in response to the WICS action plan. Further information is included at Section 3.1.

1.3.4. A series of improvements have been made to strengthen WICS sponsorship oversight since the s22. A deep dive session was held with the DG NZ, PBSU and DG Net Zero area Public Body leads to review risk and assurance practices for all DG NZ Public Bodies. Additionally, two new Non-Executive Directors (NXD) and a new Interim Chief Executive Officer (CEO) have been recruited. Paragraph 3.2.1 details some of the controls/actions that have been put in place since the s22.

1.3.5. Capacity issues, exacerbated by increased resource requirements to support WICS to make necessary governance improvements, as well as to support the administrative response following publication of the s22, have contributed to a lack of progress in taking forward further improvements – many of which the Sponsor Director and ST recognise need to be implemented.

1.3.6. Until recently, most of the sponsorship responsibility and engagement was concentrated in one individual in the ST. This gave rise to key person dependencies. Due to recent staffing changes, most of the ST are relatively new in post. As such, a refresh and reset of capacity, capability, roles and responsibilities and training and support is needed. As the ST reviews and resets its sponsor functions, it should escalate capacity issues, including any key sponsor functions which are not being discharged as a result, in order that the risks associated with this can be fully considered by the Sponsor Director. The Sponsor Director and ST have indicated a number of planned improvements. Our opinion as set out at section 1.3.2 reflects that these are not yet in place. Further information is included at Section 3.2.

1.3.7. Full details of our findings, good practice and improvement opportunities can be found in section three.

1.3.8. Findings are summarised against recommendations made in the Management Action Plan.