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

3. Findings, Good Practice and Improvement Opportunities

3.1. Remit Item One – Fact Finding Status and Position Update

3.1.1. WICS has put in place a workplan to address the recommendations emerging from the December 2023 Audit Scotland s22 report. The workplan has been split into two phases, with phase one focussing on governance, policies and procedures, reporting, and lease arrangements. Provisional coverage for phase two includes culture, roles and responsibilities, and budget holders.

3.1.2. WICS shared its phase one workplan with the ST SLO on a fortnightly basis up until March 2024. Of the 27 actions documented by WICS, 24 have been presented as completed (the 3 remaining actions were highlighted as dependent on the outcome from the WICS IA reviews). Additionally, WICS’ workplan update is subject to a recurring agenda item at leadership meetings, attended by appropriate personnel from the SG and WICS. WICS has confirmed with the ST that it will involve them in developing phase two.

3.1.3. As referred to by Audit Scotland at PAC on 8 February, WICS commissioned, and has now undertaken a review of financial transactions. The output from that review has been provided to PAC in correspondence. As also highlighted at PAC in February, WICS asked Grant Thornton as its internal auditor to review the adequacy of management actions that have been taken in response to the WICS action plan. That work has concluded and the draft report (subject to final sign off by WICS Audit Committee) has now been provided to the SG ST. The external review which has been commissioned by DG NZ will include reviewing the approach to the WICS review of financial transactions to comment on the robustness of the exercise.

3.1.4. A number of reviews are underway and/or commencing relating to WICS 2023-24 financial transactions, as well as associated governance arrangements. While there are recurring agenda items at both ST level and DG/Director level on progress of the action plan, the WICS SG ST would benefit from including a recurring agenda item as part of sponsorship meetings to seek assurance on whether these are being effectively managed by WICS and are subject to the appropriate challenge, scrutiny and escalation via the applicable forums, as per the Framework Document.

3.2. Remit Item Two – Scottish Government Sponsorship Oversight and Governance - Good Practice Post s22

3.2.1. Following the recruitment of the SG Charging and Regulation Team Leader in December 2023, who is also the WICS and Scottish Water ST SLO, a number of controls/actions were put in place to enhance formalised WICS sponsorship and governance arrangements, including:

• File sharing arrangements have been put in place for key governance documents, including WICS Board papers.
• Monthly sponsorship meetings between the ST and WICS, as well as monthly leadership meetings between the SG DG NZ, Sponsor Director, SG ST, WICS Interim CEO and WICS Board Chair commenced in January 2024 and are ongoing.
• Support regarding the appointment of the WICS Interim Accountable Officer and CEO and for recruitment of the Permanent CEO, including work on salary and job description.
• New ST lead recruited.
• Interim DDs in place with a permanent DD recruited to begin in October 2024.
• Work begun to permanently recruit two new NXDs to the WICS Board.
• Two temporary NXDs placed on the WICS Board for a year.
• Separated out other policy activity such as review of charges from sponsorship related activity and established separate work streams for these.

3.2.2. The ‘Scottish Government relationships with public bodies: progress review’ (the ‘Ryan Review’) was published in February 2022. The review made a number of recommendations for improving how the SG manages its relationships with public bodies. Following the Ryan Review, the PBSU introduced a number of tools to support STs and DGs as Portfolio Accountable Officers. One of these tools was a RAG report with an underpinning assessment of 22 questions across a number of key areas to be completed by STs. An overview of the strategic sponsorship RAG statuses is tabled at the quarterly DG NZ Assurance meetings. An analysis paper covering the RAG statuses for each of the 28 DG NZ sponsored bodies was provided as a supporting evidence paper at the May 2024 DG NZ Assurance meeting. The update for WICS had a red status, signifying issues were present and that WICS required increased oversight and engagement - previous RAG ratings for WICS were green. It is positive that this mechanism is in place, however the underpinning assessment needs to be robust for it to be used effectively and to support early identification of risks and issues.

3.3. Remit Item Two – Scottish Government WICS Sponsorship Oversight and Governance - Improvement Opportunities

Capacity and Capability

3.3.1. The Ryan Review recommended that Portfolio Accountable Officers and senior sponsors should review the capability and capacity needed in their teams to ensure relationships are being managed well with all public bodies. The WICS sponsorship resource allocation was reviewed by the ST in October 2022 and fed back to PBSU. Since the s22, the resource requirements have been further reviewed informally by the ST, with ST responsibilities being significantly higher than reported in October 2022. The ST provides sponsorship to two public bodies, and its BAU activity - particularly in 2023-24 - included a number of reactive/emergency response activities. Existing resourcing issues, coupled with these additional pressures, has exacerbated the capacity risks. ST resourcing, and associated objectives should be reviewed to ensure that the current resource allocation is appropriate and the arrangements for business-as-usual engagement with WICS is proportionate and manageable.

3.3.2. The ST SLO joined the Directorate in December 2023, having had no previous experience as an SLO. There was no WICS SLO in place between 31 October and 11 December 2023, the point where the issues were culminating into the s22 report. As a priority, PBSU should be consulted by the SLO on training requirements of the ST. We have been unable to establish the nature of the DD sponsor engagement with WICS during this period.

3.3.3. The ST has access to Audit and Risk Committee and Board papers and risk registers. These were not actively being reviewed. Most members of the ST are new in post and/or do not have previous sponsorship experience and would benefit from support and training to assist them with identifying the key governance documents they should review, in order to inform their understanding of emerging risks, issues and threats. The capacity issues in the ST need to be reviewed to ensure that these activities can be undertaken, and the team should escalate to the Director any key sponsorship functions that they cannot discharge due to capacity/capability gaps.

Framework Document

3.3.4. The WICS Framework Document requires review and updating. The PBSU developed a model framework checklist and SPFM model framework document. The ST, with WICS, should review and update the Framework Document with support from PBSU and with reference to the available toolkits and templates. The roles of the ST, including delegated responsibilities, should be clearly documented, as well as the channels to communicate assurance findings to the Sponsor Director and Portfolio Accountable Officer (DG NZ).

Sponsorship Support Tools and Assurance Mechanisms

3.3.5. Following the Ryan Review, the PBSU developed and implemented a suite of tools to support STs in their sponsorship role. These are not mandatory but exist to support STs and sponsor bodies. A commission was issued in May 2023 to establish the progress across DG portfolios of implementing these tools with a high-level portfolio overview presented to SG Audit and Assurance Committee in June 2023. A further progress update was commissioned in December 2023. Prior to the s22, the ST had not utilised the suite of tools, with the exception of the RAG assessment process. Since December 2023, due to the deliberate focus on the immediate response to the s22, including supporting WICS to enhance its governance and the administrative response to the s22, there has continued to be little progress in the uptake of these tools by the WICS ST, other than completion of the RAG status. The ST is actively considering and planning how to implement these tools, in a proportionate manner across its sponsor bodies, including WICS, moving forward.

3.3.6. The Public Body RAG Rating document is noted in the PBSU guidance as being integral to the successful implementation of ‘Strategic Sponsorship.’ The process aims to create an environment through which potential issues are identified at an early stage and addressed proactively. Sponsoring Directors, and/or DDs are the SRO for the population of the document and are responsible for signing off the returns. The quarterly WICS RAG returns be reviewed and signed-off by a defined SRO, in order to better identify and escalate any potential risk and issues. The Quarter Four RAG report which was completed by the ST in February 2024 was underpinned by a checklist which included gaps across the question set. This was also true of the RAG assessment in previous quarters. It is acknowledged that there was a period of change in the sponsor arrangements and as highlighted above, capacity issues in dealing with wider sponsorship responsibilities, the response to the s22 and business as usual. However, the underpinning assessment for the RAG report must be robust in order for the process to be effective in identifying emerging risks or issues.

Risk Identification and Escalation

3.3.7. The Ryan Review recommended that Portfolio Accountable Officers should ensure that all public bodies within their area of responsibility are aware that formal escalation of a risk or issue is an accepted part of governance, and they are clear on the process for escalation when this is required.

3.3.8. Section 34 of the WICS Framework Document details that the organisation should ensure that risks are dealt with in an appropriate manner and consistent with the risk management section of the SPFM. It also highlights that the WICS Audit and Risk Committee is required to notify the relevant SG Audit and Assurance Committee if it considers that it has identified a significant problem that may have wider implications.

3.3.9. The monthly sponsor meetings have been a platform to discuss emerging risks and issues. This should be formally embedded in longer term engagement when the sponsor arrangements are in a steady-state/BAU.

3.3.10. Processes relating to how WICS identifies and escalates significant risks would benefit from being agreed, documented and communicated to key personnel, to ensure that WICS is receiving the appropriate support, and associated risks are being managed and reported within the DG via the RAG status completion. This should be formally discussed and agreed at a future monthly sponsorship meeting to ensure that significant issues and/or risks arising out with formal reporting processes e.g. RAG status quarterly reviews and DG commissions, are escalated timeously.

Sponsor Contact and Engagement

3.3.11. The Ryan Review made a recommendation: “Portfolio Accountable Officers should ensure that there is regular contact between NDPB Boards and both Ministers and SG Officials. This is likely to include attendance at Board meetings for discussion of relevant topics, to ensure a good understanding of strategic priorities and issues”. It also states: “regular attendance may undermine accountabilities so should only be approved where it is justified as an escalation beyond normal governance arrangement”. Since the publication of the s22, SG sponsors have not attended Board meetings. DG NZ as Portfolio Accountable Officer responsible for approving sponsor attendance at Board meetings, should consider whether sponsor attendance is required moving forward during the period where recommendations arising from the s22 and subsequent reviews are being implemented. This is not a mandatory requirement and therefore we have not made an associated recommendation to this effect.