Water Works: the Regional Economic Impact of Dŵr Cymru Welsh Water

Water Works Welsh Economy

The Regional Economic Impact of DCWW Research Unit

Water Works: The Regional Economic Impact of Dŵr Cymru Welsh Water

1 Water Works Welsh Economy

The Regional Economic Impact of DCWW Research Unit

Water Works The Regional Economic Impact of Dŵr Cymru Welsh Water

Report by:

Jane Bryan, Calvin Jones, Max Munday, Annette Roberts and Neil Roche Welsh Economy Research Unit Cardiff Business School

For: DCWW Contact: 02920 875089

[email protected]

Cardiff Business School Colum Drive Cardiff CF10 3EU, UK www.weru.org.uk

10th June 2013

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Contents

1 Introduction ...... 6

1.1 Background ...... 6

1.2 Dŵr Cymru – A summary of activities and responsibilities...... 6

1.3 The Not-for-Profit Business Model – Focusing on the future ...... 6

1.4 Dŵr Cymru operating area ...... 8

1.5 Dŵr Cymru’s procurement ...... 9

1.6 Research Objectives ...... 10

1.7 Structure of the report ...... 10

2 Methodology ...... 11

2.1 Research parameters ...... 11

2.2 Research method – analysis of spending ...... 12

2.3 Research method – estimating economic impact ...... 13

3 Dŵr Cymru’s income, spending and employment...... 14

3.1 Introduction ...... 14

3.2 Dŵr Cymru’s Income ...... 14

3.3 Dŵr Cymru’s spending and employment ...... 15

3.4 Spending with suppliers outside Wales ...... 17

3.5 Conclusions ...... 18

4 The Economic Impact of Dŵr Cymru ...... 19

4.1 Introduction ...... 19

4.2 The Regional Economic Impact of Dŵr Cymru ...... 19

4.3 Dŵr Cymru’s Economic Impact in Context ...... 21

5 Conclusions ...... 23

5.1 Introduction ...... 23

5.2 Economic impacts ...... 23

5.3 Wider impacts ...... 23

5.4 Appendix: The Input-Output Method ...... 26

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The Regional Economic Impact of DCWW Research Unit Executive Summary

Introduction

The Welsh Economy Research Unit of Cardiff Business School was commissioned by Dŵr Cymru Welsh Water (DCWW) to estimate the economic impact of Dŵr Cymru activity on the Welsh economy.

Dwr Cymru as a business

DCWW is the trading name of Dŵr Cymru Cyfyngedig (DCC), which is the regulated company that provides water and sewerage services to over 3 million people. It is among the largest companies operating and headquartered in Wales. According to the Western Mail’s ‘Top 300’ Dŵr Cymru is the fourth largest company in Wales. DCC is owned by Glas Cymru, a “not for profit” holding company. Dŵr Cymru’s area extends into England, and some parts of mid/north east Wales are served by other water companies.

As part of its activities, Dŵr Cymru operates 67 impounding reservoirs, 66 water treatment works and supplies an average 828 million litres of water every day through a network of 27,000km of water mains, including 728 pumping stations and 645 service reservoirs. Dŵr Cymru also collects (and then treats) wastewater (and surface drainage) through a network of sewers. Following a change in Government legislation in 2011, Dŵr Cymru took on the responsibility of maintaining over 17,000km of sewers that were previously the responsibility of private households. This doubled the size of the company’s sewer network, to more than 30,000km, incorporating 1,861 sewage-pumping stations and 3,201 combined sewer overflows.

Most of Dŵr Cymru’s income derives from households (within and outside Wales). The other main category is business customers, with Dŵr Cymru supplying potable and non-potable water. Total income was £727m in 2012-13.

Table 1: Dŵr Cymru’s income 2012-131

Category £m Households 533.5 Non-households (Business and other sources) 184.2 Income from capital account2 9.2 Total 726.9 Notes: 1. These figures were based on estimates for the financial year 2012-13, hence will not be fully consistent with data as presented in the Annual Report. 2. This includes, for example, a contribution towards costs by developers for work undertaken by Dŵr Cymru on new building developments (new connections, diverting pipes etc). For accounting purposes these are offset from capital spending.

Dŵr Cymru is in the midst of a five year capital spend programme of around £1.5bn. As part of this programme, Dŵr Cymru spent an estimated £329m on capital projects during 2012-13. In addition to this, a further £290m was spent on operating costs (see Table 2).

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Total Dŵr Cymru spending on direct labour, operating spend and infrastructure projects was an estimated £619m in 2012-13. The company paid nearly £100m in wages and salaries associated with direct employment of 2,664 (full time equivalent (fte) jobs, of which around 2,400 are in Wales). Total non-wage spending was £519m for 2012-13, and around 40% of this spending is retained in Wales, largely with the construction related sectors of the economy. Dŵr Cymru’s has around 2,100 suppliers, of which around half are based in Wales. Of the remainder, some have a Welsh presence (e.g. a sub-office) and others have no presence in Wales.

Table 2: Dŵr Cymru’s spending and employment 2012-131

£m Operating spend2 289.8 Capital spend3 329.3 Total spending on direct labour, goods, services and infrastructure projects 619.2

of which Spending on salaries and wages4 99.8 Non-wage spending 519.3

Employment (ftes)5 2,664 Notes 1. These figures were based on estimates for the financial year 2012-13, hence will not be fully consistent with data as presented in the Annual Report. 2. Excluding financial/accounting transactions, largely depreciation 3. This does not sum to the capital account total, due to income received (see Table 1, note 2). 4. This is total/gross wages and salaries for Dŵr Cymru staff and for Dŵr Cymru Customer Services (DCCS). 5. Dŵr Cymru and DCCS, some of these employees live outside Wales.

Economic impact on Wales? The report estimates that Dwr Cymru directly and indirectly (i.e. through supply chain and household effects) supports nearly £1.1bn of economic activity and around £360m of gross value added in the Welsh economy. Dŵr Cymru is, in regional terms, a billion pound business. The report reveals that every £1 of Dŵr Cymru’s spend generates more than 56p in the rest of the Welsh economy. While the company employs just over 2,400 people in Wales, its regional spending supports around 3,700 additional jobs in Wales, making for total employment effects of over 6,000 ftes. Employment supported indirectly by Dŵr Cymru is largely in construction related sectors (45% of jobs), with a further jobs supported in business services, wholesale, retail, the public sector and in primary and manufacturing sectors.

The report shows that Dŵr Cymru supports activity in the more skill intensive part of the economy. Among Dŵr Cymru’s direct employees are over 100 engineers and more than 40 scientists. There are also around 30 employees on graduate placements and 25 employees on apprenticeships. The relatively high average incomes supported directly by Dŵr Cymru contribute to the generation of significant offsite household spending effects in Wales.

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1 Introduction

1.1 Background

1.1.1 The Welsh Economy Research Unit of Cardiff Business School was commissioned by Dŵr Cymru Welsh Water to undertake an analysis of their economic impact on the Welsh economy. This section of the report provides background to the research, and outlines the main research questions that were addressed, before summarising the structure of this report. We are grateful to Dŵr Cymru staff for their assistance in providing the detailed financial, human resources and supplier information on which the analysis was based. However, final responsibility for the report rests with the authors.

1.2 Dŵr Cymru – A summary of activities and responsibilities.

1.2.1 Dŵr Cymru Welsh Water (DCWW) is the trading name of Dŵr Cymru Cyfyngedig (DCC), which is the regulated company that provides water and sewerage services to over 3 million people living and working in Wales, as well as some adjoining parts of England (see section 1.4). DCC is owned by Glas Cymru, a “not for profit” holding company. As a result the company does not have shareholders and any financial surpluses are reinvested in the business (see section 1.3).

1.2.2 As part of its activities, Dŵr Cymru operates 67 impounding reservoirs, 66 water treatment works and supplies an average 828 million litres of water every day through a network of 27,000km of water mains, including 728 pumping stations and 645 service reservoirs. Dŵr Cymru also collects (and then treats) wastewater (and surface drainage) through a network of sewers. Following a change in Government legislation in 2011, Dŵr Cymru took on the responsibility of maintaining over 17,000km of sewers that were previously the responsibility of private households. This doubled the size of the company’s sewer network, to more than 30,000km, incorporating 1,861 sewage-pumping stations and 3,201 combined sewer overflows.

1.2.3 Dŵr Cymru’s main responsibility is to operate, maintain and upgrade its large network of assets to ensure a safe and reliable drinking water supply, and to deal effectively with wastewater so as to protect the environment.

1.3 The Not-for-Profit Business Model – Focusing on the future

1.3.1 Uniquely for a water company in the UK, and unusual for any large company, Dŵr Cymru is primarily accountable to its customers, rather than shareholders.

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The Regional Economic Impact of DCWW Research Unit 1.3.2 “Not-for-profit” organisations have traditionally been associated with community groups, voluntary organisations and the larger charity organisations (Save the Children, the British Heart Foundation, and the Women's Institute). Over the last decade social enterprises are also emergent, providing services with altruistic objectives, creating value and being accountable to the community, other users and employees. Housing Associations provide another contemporary example of the not-for-profit business model. These are often large organisations with substantial responsibilities, active in land acquisition, construction of new housing and maintenance of existing stock. Revenues are raised through rents, and profits can be reinvested into infrastructure.

1.3.3 A common feature of all these examples is the focus on the customer or service user. In 1989 the Welsh Water Authority was privatised through a stock market flotation together with the other nine regional UK water authorities. In 1996, it took over SWALEC and renamed itself Hyder. Three years later utility companies were subject to an Ofwat price review and then in 2000 the government imposed a windfall tax on utility profits, which contributed to the financial difficulties Hyder found itself in. This swiftly led to Hyder’s purchase by Western Power Distribution for its electricity distribution assets, with the debts and assets associated with the water operations sold to Glas Cymru for £1.

1.3.4 The founders of the new business carefully considered a number of options, and inspired by the successful BUPA business model which is accountable to over 10 million customers and with 52,000 employees around the world, decided to apply this model to Glas Cymru which, while unusual, would have the effect of focusing its leadership and management solely on the needs of its current and future customers.

1.3.5 The management find their accountability to their customers is rewarding in many senses. Their work is measured by customer satisfaction, by meeting the demands of maintaining the health of their users through the provision of a reliably safe water supply and waste service, guardianship of the landscape, and by providing an infrastructure that will fulfil the needs of future generations. Profits are retained by the business for reinvestment, and the organisation is able to secure reasonably priced investment funds through low-risk bond instruments. The focus is firmly on existing and future customers.

1.3.6 Ofwat report that Dŵr Cymru is delivering to its customers the lowest average household bill increase across all water and sewerage companies in England and Wales from 2009/10 to 2014/15 and ranked among the best companies for customer satisfaction1. Dŵr Cymru’s bill increase is less than half the average increases across the industry, and below the rate of inflation.

1 http://www.ofwat.gov.uk/pricereview/pr09phase3/det_pr09_finalfull.pdf

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The Regional Economic Impact of DCWW Research Unit 1.4 Dŵr Cymru operating area

1.4.1 The Dŵr Cymru area of responsibility does not coincide with the Welsh political boundary. Dŵr Cymru’s area extends into England, whilst some parts of mid/north east Wales are served by other water companies (Dee Valley Water and Severn Trent Water).

Figure 1.1 Dŵr Cymru’s operating area.

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1.4.2 Figure 1.1 shows Dŵr Cymru’s operating boundaries in terms of the water and sewerage areas.

1.4.3 As shown by figure 1.1, the area around Hereford is served by Dŵr Cymru, and covers around 145,000 properties in England.

1.4.4 Severn Trent Water serve around 22,000 properties in Wales, whilst Dee Valley Water, which is a water supply only company, supply water to 32,000 properties in Wales.

1.4.5 However, there are properties where, due to the boundaries, one company provides the water services and another company provides the sewerage services according to an agreement amongst the water companies. The company who provides the water collects the sewerage charges on behalf of the other company. Dee Valley Water collect sewerage charges on behalf of Dŵr Cymru for around 43,000 properties, while the figures for Severn Trent and United Utilities are around 10,000 and 13,000 respectively.

1.5 Dŵr Cymru’s procurement

1.5.1 Dŵr Cymru procures major projects through the Official Journal of the European Union (OJEU). Dŵr Cymru seeks to award projects according to OJEU objective criteria based on ‘the principles of transparency, non-discrimination and equal treatment and which guarantee that tenders are assessed in conditions of effective competition’2. Procurement decisions are then based on what is most economically advantageous. Larger-sized contracts face the highest risks, and it is normal practice to mitigate this by applying a project value/size of company ratio, which would automatically preclude smaller companies without prejudice.

1.5.2 Wales being a small nation (around 5% of the UK in terms of population) does not have many sizeable indigenous managing contractors in the construction sector, so higher value projects tend to be managed by Tier 1(meaning first in the supply chain) managing contractors from outside Wales. There is a common misconception that the economic effects of these contracts are ‘leaked’ out of the locality. While profits may be partly or wholly ‘exported’ many of the employment effects are retained within the local economy as it makes good sense for managing contractors on framework agreements to set up semi-permanent headquarter functions near the client company. A supplier survey (see later) was designed to investigate how much of the Tier 1 impacts were retained in Wales through purchases from the local supply chain, and by securing local sub-contract labour, the effects of which ripple through the local economy.

1.5.3 Welsh sub-contractors and inputs deliver good value on many of the construction related activities undertaken on behalf of Dŵr Cymru. Core elements include ground preparation, the renting of plant for excavation work, and specialist civil engineering works, and technical business services of which there is good local provision.

2 http://eur-lex.europa.eu/LexUriServ/site/en/oj/2004/l_134/l_13420040430en01140240.pdf

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1.5.4 In recent years, Dŵr Cymru has brought a number of functions, which had previously been sourced through the supply chain, in house. These include Dŵr Cymru Customer Services (DCCS), which employs some 400 staff in St Mellons, Cardiff. Another example is ‘Project Green’ the new laboratory facilities in Wales.

1.5.5 Up to the end of 2011, sampling and chemical analysis work had been undertaken by Severn Trent Water for Dŵr Cymru . When this contract expired, Dŵr Cymru made a board decision to go in-house in the future with the objective of providing gold standard safe-guards on testing, and rapid response. As a rider to the main aim, in-house functions are expected to deliver a cost saving of £1m per year from 2013-14 onwards. Dŵr Cymru now has a north Wales laboratory at Bretton (Flintshire) and with Glaslyn (in Newport) imminently operational. Bretton Laboratory employs 5 analysts, 3 senior analysts and a manager. The new £9m Glasyn facilities house £2m of state-of-the-art technology and will employ 40 professionals. The shift to greater in-house function has the potential to increase the supply of high quality employment opportunities within Wales.

1.6 Research Objectives

1.6.1 The overarching aim of the research is to estimate the economic impact of Dŵr Cymru on the Welsh economy. As part of this aim, the main objectives of this study are as follows:

 To develop a method through which to examine the economic effects that Dŵr Cymru has on the regional economy.

 To examine the spending of Dŵr Cymru across different industries/sectors in Wales in order to estimate supply chain impacts.

 To analyse Dŵr Cymru’s contribution to regional wages and salaries and to estimate the effects of related household spending on the Welsh economy.

 To examine the sectors of the economy that benefit most from Dŵr Cymru spending, and to identify areas where Dŵr Cymru is more dependent on goods and services imported into the regional economy.

1.7 Structure of the report

1.7.1 The remainder of this report is structured as follows.

 The next section outlines the research method in relation to the estimation of economic impacts.

 Section three describes the size of Dŵr Cymru as a business, in terms of income, spending and employment. Importantly this section also provides an estimate of the level and nature of spending which is retained in Wales, to generate further economic impacts.

 Section four provides estimates of the regional economic impact of Dŵr Cymru in terms of gross value added (GVA) and jobs supported, whilst section five provides conclusions to the research.

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The Regional Economic Impact of DCWW Research Unit 2 Methodology

2.1 Research parameters

2.1.1 This research method comprised multiple stages of data analysis and economic modelling.

2.1.2 The first stage of the project involved establishing parameters for the research. This included determining the appropriate period of study, the relevant spending to be included within the impact assessment, the distinction between direct and supply chain spending and the geographical boundaries of the research.

2.1.3 Given the timing of the study (which was conducted between March and May 2013), the most appropriate reference year for the study is the latest financial year (2012-13).

2.1.4 For many organisations, operating expenditure will provide the best guide to economic impact during any particular year. In most cases, capital expenditure will vary significantly from year to year, and hence any single of year data will not be representative of future years. Such ‘lumpy’ spending is not then included within the assessment, but considered separately.

2.1.5 In the case of Dŵr Cymru the distinction between operational and capital expenditure is less clear. Dŵr Cymru has a £1.5bn capital spending programme which covers a 5 year period. Hence this spending is on-going and fairly stable from year to year, and is necessary in order to maintain and update their assets around Wales. In addition, some of the Dŵr Cymru headquarter staff salaries are allocated to the capital account, as their functions primarily relate to capital projects (salaries would more usually count as operational spending).

2.1.6 As a result relevant spending for this project is defined as the sum of operating plus capital spend for the financial year to April 2013.

2.1.7 A further consideration is the distinction between what is counted as direct (within Dŵr Cymru) and what is regarded as supply chain spending. This particularly relates to the activities within DCCS.

2.1.8 DCCS is the contact centre responsible for the delivery of billing and income collection services to Welsh Water, and these functions, and the staff who carry out these functions are not generally counted within Dŵr Cymru. DCCS has a separate human resources department, and receive a payment from Dŵr Cymru for services. However, as it is part of Glas Cymru, the approximately 400 employees within DCCS have been counted as direct for the purposes of this study.

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The Regional Economic Impact of DCWW Research Unit 2.1.9 It is important here to reflect on the geographical boundaries of the research. An ideal approach might be the estimation of the economic effects of Dŵr Cymru on the water company area it serves. However the economic modelling framework to assess the multiplier impacts of Dŵr Cymru spending is only available for political Wales with limited robust means to regionalise the model for the water company area itself. Therefore this project represents an attempt to examine Dŵr Cymru impacts at a political Wales level.

2.2 Research method – analysis of spending

2.2.1 Once the research parameters had been established, the second stage of the methodology involved the estimation of Dŵr Cymru relevant spending by key item and by source (whether this spending is within or outside Wales). The examination of this direct spend in the region is the cornerstone of this project, and feeds into all of the other research objectives. This data becomes the basis for modelling indirect and household income effects (see later).

2.2.2 This spending was estimated through the analysis of Dŵr Cymru’s financial and supplier databases. These provided information on spending with first tier suppliers which was used to derive inference on the division of spending within Wales and outside Wales. This process was accompanied by a dialogue with Dŵr Cymru procurement and finance staff to give a fuller explanation of spending.

2.2.3 Dŵr Cymru determined suppliers’ location by the billing/invoice address. For example, if a (Tier 1) managing contractor had an invoice address outside Wales, then all the spending associated with that contract was initially allocated outside Wales. However it is likely in this case that some of that spending may directly or indirectly return to Wales. For example if the managing contractor has a sub-office in Wales, and/or the main contractor engages local sub-contractors to undertake the work. Hence the location of first tier spending was used carefully in gaining inference on the level of regional imports, and was supplemented by a purposeful survey of key/major suppliers.

2.2.4 There are a considerable number of Dŵr Cymru suppliers located both within and outside Wales. Hence survey resources were targeted on major suppliers to give the most complete assessment of expenditures. Some spending initially allocated outside Wales, was reallocated within Wales in the case of managing contractors with an office in Wales. In addition managing contractors were asked about local purchasing, and this information was also used to guide the allocation of spending.

2.2.5 Once the spending profile of Dŵr Cymru had been finalised, the next step was to allocate each spending item to sectors of the Welsh economy. At this point some further adjustments to the data supplied from the Dŵr Cymru database were made. For example some items for spending on ‘materials’ had been allocated to Wales. However in some of these cases, purchases would be made through wholesalers in Wales, whilst the item itself would have been manufactured outside Wales. For such identified items, only the wholesale ‘margin’ would be counted as spending retained in Wales, with the bulk of the purchase allocated outside Wales.

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2.2.6 A further major element of Dŵr Cymru regional spend (and impact) relates to staff wages and salaries. One aspect of the research was to analyse the human resources information to establish areas of domicile for staff. It is likely that the majority of staff will be drawn from the immediate region. A small percentage of staff were expected to live outside of Wales, particularly as the Dŵr Cymru area extends into England.

2.3 Research method – estimating economic impact

2.3.1 Once the data on spending with suppliers, and wage spending had been collected and analysed, the final stage of the method involves the estimation of the multiplier effects of this spending.

2.3.2 The underlying analytical framework for the estimation of these multiplier impacts is provided by the Welsh Input-Output (I-O) Tables. The development of these tables, is part of an on-going research project to map, in financial terms, the purchasing and sales interactions between different sectors of the economy. A summary of the I-O tables and method is given in the Appendix. The purchasing linkages of Dŵr Cymru with the other sectors of the economy, once identified, can be traced through the various supply chains within Wales.

2.3.3 This method enables estimation of the supply chain effects of Dŵr Cymru’s spending as well as the household spending effects connected with direct and indirect employee spending. The results from this economic modelling exercise can be presented in terms of jobs, output and GVA.

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The Regional Economic Impact of DCWW Research Unit 3 Dŵr Cymru’s income, spending and employment.

3.1 Introduction

3.1.1 The aim of this section is to outline the scale of Dŵr Cymru as a business. The key financial data will be presented, in terms of revenues and spending, together with the headline figures in terms of direct employment. The nature of Dŵr Cymru’s spending is critical to the analysis of economic impact, and this section will provide a detailed analysis of operational and capital expenditure.

3.2 Dŵr Cymru’s Income

3.2.1 Table 3.1 shows Dŵr Cymru ’s income by main category. The majority of Dŵr Cymru incomes are derived from households (within and outside Wales - as noted earlier, the Dŵr Cymru boundary does not match the Welsh political boundary). The other main category is business customers, and this includes the supply of potable and non-potable water. Other minor sources of income are classed as ‘non-appointed’. These are incomes derived from a series of other activities undertaken by Dŵr Cymru over and above those activities which the company is required to provide as a water company. Non-appointed incomes derive from tankered water and waste, and incomes associated with recreation provision (e.g. income from shops, cafes and fishing permits at recreation sites).

3.2.2 Total appointed plus non-appointed income was £717.7m in 2012-13. The table shows an additional item of income which represents incomes derived from capital account activities (i.e. not from the day-to-day operation of the water company). For completeness, and consistency with the methodology followed in this report this has been included in Table 3.1 and brings total income to £726.9m. This total represents a headline figure for the economic impact assessment (see later).

Table 3.1: Dŵr Cymru’s income 2012-131

Category £m

Households 533.5

Non-households (Business and other sources, including non-appointed turnover) 184.2

Total (appointed plus non-appointed) 717.7

Income from capital account2 9.2

Total 726.9

Notes: 1. These figures were based on estimates for the financial year 2012-13, hence will not be fully consistent with data as presented in the Annual Report. 2. This includes, for example, a contribution towards costs by developers for work undertaken by Dŵr Cymru on new building developments (new connections, diverting pipes etc). For accounting purposes these are offset from capital spending.

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The Regional Economic Impact of DCWW Research Unit 3.3 Dŵr Cymru’s spending and employment

3.3.1 As noted in the methods section of this report, the particular nature of Dŵr Cymru’s activity, with an ongoing programme of capital works, means that an economic impact assessment should include impacts that are derived from operational and capital expenditure during the year of analysis.

3.3.2 Dŵr Cymru’s capital programme represents £1.5bn of spend over a five year period. As part of this programme, Dŵr Cymru spent an estimated £329m on capital projects during 2012-13. In addition to this, a further £290m was spent on operating costs, see Table 3.2.

Table 3.2: Dŵr Cymru’s spending and employment 2012-131

£m

Operating spend2 289.8

Capital spend3 329.3

Total spending on direct labour, goods, services and infrastructure projects 619.2

of which

Spending on salaries and wages4 99.8

Non-wage spending 519.3

Employment (ftes)5 2,664

Notes 1. These figures were based on estimates for the financial year 2012-13, hence will not be fully consistent with data as presented in the Annual Report. 2.Excluding financial/accounting transactions, largely depreciation 3. This does not sum to the capital account total, due to income received (see Table 3.1, note 2). 4. This is total/gross wages and salaries for Dŵr Cymru staff and for DCCS. 5. Dŵr Cymru and DCCS, some of these employees live outside Wales, see later.

3.3.3 Total Dŵr Cymru spending on direct labour, operating spend and infrastructure projects was an estimated £619m in 2012-13. The lower section of the table, shows how this spending is divided into direct (gross) spending on wages and salaries for Dŵr Cymru staff (including employer costs etc), and non-wage spending (i.e. with suppliers).

3.3.4 Table 3.2 also shows that the £100m of spending on wages and salaries is associated with direct employment of 2,664 (full time equivalent jobs). As described in the note to the table, and in the methods section, this includes direct Dŵr Cymru staff and DCCS.

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The Regional Economic Impact of DCWW Research Unit 3.3.5 Table 3.2 shows a total non-wage spending of just over £519m for 2012-13. This includes spending on a range of goods and services and investment projects. This spending will be with suppliers both within and outside of Wales. Section 2 described the data collection process and the method for evaluating the extent of local (i.e. Welsh) sourcing. In summary a very detailed analysis of the Dŵr Cymru supplier database was undertaken to establish spending by key item and source of spending (within or outside of Wales). This analysis was further supplemented by a survey of major suppliers to Dŵr Cymru . The spending that was estimated to be retained in Wales was then allocated to the relevant sector of the Welsh economy.

3.3.6 Analysis of Dŵr Cymru’s supplier list suggests the company has around 2,100 suppliers. Of these, approximately 1,000 are based in Wales. Of the remainder, some have a Welsh presence (e.g. a sub-office) and others have no presence in Wales.

3.3.7 Of the total £519m of non-wage (supplier) spending, an estimated £214 was estimated to be retained in the Welsh economy (see Table 3.3).

Table 3.3: Dŵr Cymru non-wage spending by location, 2012-13

£m

Spending retained in Wales 214.2

Spending outside Wales 305.1

Total non-wage spending 519.3

3.3.8 Of the £214m of spending retained in Wales, the majority was with the construction related sectors of the economy. Figure 3.1 shows the distribution of spending on Welsh suppliers by main sector.

3.3.9 An estimated 70% of Dŵr Cymru spending retained in Wales was with the construction related sectors. This spending largely comprises Welsh based managing contractors, or national managing contractors who have an office in Wales. As noted earlier, the survey of key suppliers sought to establish the extent of local (Welsh) sourcing by some of the managing contractors who are headquartered outside Wales.

3.3.10 The public sector and other services account for 22% of spending. Examples of spending included here are abstraction charges paid to Natural Resources Wales, rates and other payments made to Welsh local authorities who undertake work on behalf of Dŵr Cymru.

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The Regional Economic Impact of DCWW Research Unit Figure 3.1: Spending on Welsh suppliers by main sector of the economy, %, 2012-13.

Primary and manufacturing 1%

Public sector and other services 22% Business services, wholesale, retail etc 7% Construction related 70%

3.3.11 A small percentage of Dŵr Cymru’s direct spending is with the primary sector and manufacturing. It is the managing contractors and other companies further along the supply chain that will source the majority of materials and related supplies.

3.3.12 The final ‘sector’ included in the table is business services, wholesale, retail etc., and this broad sector accounts for 7% of Dŵr Cymru spend.

3.4 Spending with suppliers outside Wales

3.4.1 Table 3.3 showed that around £305m of Dŵr Cymru was with suppliers and manufacturers outside Wales. This total contains a mix of import types. In some cases, goods and services were sourced from suppliers based in the rest of the UK, and the entire purchase would be allocated as spend outside of Wales. Examples include some engineering consultancy and IT services, mechanical and electrical maintenance and chemicals. In other cases, as mentioned previously, Dŵr Cymru purchases may be via Welsh based suppliers (wholesalers), with the item itself allocated outside Wales if it was not manufactured locally. Examples here include some materials and equipment. The final category included in this spending is managing contractors and subcontractors whose headquarters are not in Wales. As already noted, in some of these cases, part of the spending is retained in Wales.

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The Regional Economic Impact of DCWW Research Unit 3.5 Conclusions

3.5.1 Dŵr Cymru is amongst the largest companies operating and headquartered in Wales. According to the Western Mail’s Top 300 companies list, Dŵr Cymru is the fourth largest company in Wales3. In 2012-13, Dŵr Cymru income was almost £730m, and the company employed almost 2,700 people (full time equivalents). Total spending on (direct) wages and salaries, and bought-in goods and services was an estimated £620m in 2012-13.

3.5.2 This section of the report has provided estimates of the main elements of Dŵr Cymru spending that are retained within the Welsh economy. It is these estimates that provide the basis for the analysis of the impact assessment which is provided in the next section.

3 As ranked by turnover, and including those companies headquartered in Wales or providing accounts for the Welsh activity. Above Dŵr Cymru in the latest rankings (December 2012) were Iceland Foods, Admiral Group and GE Aircraft Engine Services.

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The Regional Economic Impact of DCWW Research Unit 4 The Economic Impact of Dŵr Cymru

4.1 Introduction

4.1.1 As earlier sections have explained, the impact assessment captures the overall regional impacts of Dŵr Cymru spending, from both capital and operational elements of activity.

4.1.2 These impacts are reported in terms of total turnover or output generated across Wales, the proportion of this that is GVA, and the total full-time equivalent jobs that are dependent across all these elements on Dŵr Cymru activity.

4.1.3 GVA is effectively a sum of incomes from employment, mixed (self employment) income and company profits, and is the best measure of the true ‘worth’ of economic activity to Wales (it is related to the often reported UK-national measure GDP). As such it is a subset of turnover/output and the two should not be added together.

4.1.4 The estimate for onsite Dŵr Cymru GVA given here is effectively the sum of gross wages and the surplus of total income received during the year over total expenditure.

4.1.5 The figures here are for financial year 2012-3, however they will be a reasonably accurate description of the annual impact of Dŵr Cymru over the capital works programme relevant to upcoming years.

4.2 The Regional Economic Impact of Dŵr Cymru

4.2.1 Referring back to Table 3.1, Dŵr Cymru had a total income, from appointed and other sources of some £727m. This translates into an estimated £200m of GVA, split roughly half-and-half between wages and surpluses (which in the Dŵr Cymru case are either re-invested in the water network in Wales, or returned to customers in the form of lower prices).

4.2.2 Dŵr Cymru across all its businesses employed just over 2,400 full time equivalent staff in Wales, including around 400 in customer services.

4.2.3 Section 3.3 shows that Dŵr Cymru spent almost £620m in 2012-13. Of this spend some £214m remains in Wales as supplier spending. The wage element of spending is also significant at around £100m, but here much of this ‘leaks’ from Wales. Some employees live outside the region, and even Welsh-resident employee wages suffer leakages in the form of employment taxes and non-Welsh elements of spend (typically around half of Welsh household incomes are spent on non-Welsh goods and services).

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4.2.4 This spend is subject to further indirect and household spending effects, as Dŵr Cymru contractors spend on their own supply chains, and as employees (directly and in the supply chain) support Welsh jobs in shops, restaurants and other sectors. By relating the total spending figure (£619m) to the results reported in the first column of Table 4.1, one conclusion is that every £1 of Dŵr Cymru’s spend generates more than 56p in the rest of the Welsh economy.

4.2.5 In total, an estimated additional £350m is generated across the Welsh economy by Dŵr Cymru spending in supply chain and wage effects. Combined with onsite turnover of £727m, this means that with a total economic impact of £1,077m, Dŵr Cymru is, in regional terms, a billion pound business. (Table 4.1).

Table 4.1. The Regional Economic Impact of Dŵr Cymru

Output/ Gross Value Employment turnover £(m) Added (£m) (FTE)

Dŵr Cymru Direct 726.9 197.5 2410

Indirect and household effects

Primary and manufacturing 34.1 10.9 220

Construction related 180.1 78.8 1,660

Business services, wholesale, retail, etc 83.8 48.6 1,050

Public sector and other services 52.3 27.2 760

All Sectors 350.2 165.5 3,690

Total Impact 1077.2 363.0 6,100

4.2.6 The economic impacts of Dŵr Cymru are estimated to be associated with a gross value added (incomes, profits and relevant taxes) of over £360m in Wales.

4.2.7 This economic activity generates significant employment in Wales. Across all other sectors, employment supported by Dŵr Cymru totals some 3,690 ftes. This then adds to direct employment in Wales to total 6,100 full time equivalent jobs directly or indirectly dependent on Dŵr Cymru across the region.

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The Regional Economic Impact of DCWW Research Unit Figure 4.1 Supported employment by sector

Primary and manufacturing 6%

Public sector and other services 21%

Business Construction services, related wholesale, retail 45% etc 28%

4.2.8 This offsite employment is focussed where Dŵr Cymru spends its money, in the construction related sectors of the economy. A significant number of supply chain jobs are also within the business services, wholesale, retail etc sector. A number of these jobs are supported by wage spending of Dŵr Cymru employees and the employees of supply chain companies. The distribution of offsite employment effects shows the wide range of the economy affected by Dŵr Cymru activity.

4.3 Dŵr Cymru’s Economic Impact in Context

4.3.1 There are a number of points to be made about the economic impact reported here. Firstly, Dŵr Cymru is a substantial business within the context of the Welsh economy, with only a limited number of non-public sector organisations in Wales of this economic scale – and indeed with a tiny number of these with a Welsh headquarters.

4.3.2 Secondly, in specific sectors the economic impact will be visible and important. For example, over 1,600 full time equivalent jobs are estimated to be supported in construction related sectors in Wales by Dŵr Cymru spend. The size of the construction sector is difficult to measure, partly due to high levels of self employment. This sector is also volatile, as the scale and nature of major construction projects varies significantly over time. The number of employees in construction in Wales has fallen in the period since 2008. In these difficult and uncertain economic times, Dŵr Cymru’s on-going spending programme is particularly important in supporting this sector and other parts of the economy.

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The Regional Economic Impact of DCWW Research Unit 4.3.3 The size of the total impact is then notable relative to direct impacts. This report estimates that in total Dŵr Cymru support over 6,000 jobs in Wales. This represents around 0.6% of total Welsh employment, which is a sizable contribution for just one company. For every person employed directly by Dŵr Cymru, a further 1.5 full time equivalent jobs are supported across the Welsh economy.

4.3.4 Dŵr Cymru supports activity in the more skill intensive part of the economy. Section 1 has already hinted at the nature of some direct employment within the laboratory functions which have recently been brought in house. Amongst Dŵr Cymru’s direct employees are over 100 engineers and more than 40 scientists. There are also around 30 employees on graduate placements and 25 employees on apprenticeships. The relatively high average incomes within Dŵr Cymru contribute to the generation of offsite household effects.

4.3.5 In addition, the levels of income paid (and GVA created) per employee are far higher for Dŵr Cymru -related activities (in the supply chain) than for the Welsh economy as a whole. In total, the £363m of GVA supported by Dŵr Cymru represents around 0.7% of Welsh GVA.

4.3.6 The high degree of Dŵr Cymru spending which is on subcontracting, and the significant proportion of spending which is retained in Wales, further contributes to the relatively high offsite impacts.

4.3.7 As noted in section 1, Dŵr Cymru’s main responsibility is to ensure a safe and reliable drinking water supply, and to deal effectively with wastewater so as to protect the environment. Hence added to these ‘quantified’ findings are a series of hard to measure and important impacts relating to environmental improvements, biodiversity, renewable energy technology, education and recreation. Indeed the measured economic impacts can be considered as a by product of the range of activities associated with meeting these central responsibilities.

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The Regional Economic Impact of DCWW Research Unit 5 Conclusions

5.1 Introduction

5.1.1 The overarching objective of this report has been to estimate the impact of Dŵr Cymru on the regional economy. However this section of the report also provides conclusions on some of the wider activities undertaken by Dŵr Cymru which have important, but more qualitative impacts in Wales.

5.2 Economic impacts

5.2.1 In terms of Economic impacts, the main findings from this report suggest that:

5.2.2 Dŵr Cymru is a significant Welsh-based company, directly employing over 2,600 people (ftes). The direct wages relating to these employees, generate further jobs and spending within Wales.

5.2.3 Dŵr Cymru has around 1000 suppliers based in Wales.

5.2.4 Approximately £214m of Dŵr Cymru’s (non-wage) spending is retained in Wales (representing over 40% of total spending), and supports economic activity in other sectors of the regional economy.

5.2.5 After accounting for indirect and household spending effects, Dŵr Cymru’s total economic impacts are estimated at over £1bn of output, £360m of GVA and 6,100 fte jobs.

5.2.6 Every £1 of Dŵr Cymru’s spend generates more than 56p in the rest of the Welsh economy.

5.2.7 The main impacts are in construction related sectors, and in business services, wholesale, retail etc, and indicates the wide range of the economy affected by Dŵr Cymru activity.

5.3 Wider impacts

5.3.1 All of the economic impacts provided in this report should be set in the context of Dŵr Cymru’s main objectives, which are to ensure a safe and reliable drinking water supply, and to deal effectively with waste water so as to protect the environment. The range of activities undertaken by Dŵr Cymru generate a series of harder to measure but extremely important impacts. Some of these are summarised below.

5.3.2 In terms of renewable energy:

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 Dŵr Cymru is playing a role in the development of Welsh renewables by investing in advanced digestion facilities which turn effluents into energy. This includes a £29m advanced anaerobic digestion facility in Afan, and plants in Cardiff and Wrexham to add to nine other facilities in Wales. By 2015 these schemes will generate around 50GWh/year.

 By 2015 Dŵr Cymru will develop 15-20 hydro-electric turbines which will be generating about 10GWh/year.

 A wind turbine at Nash waste water treatment works has been approved and is being procured. Planning is still being sought for a turbine in Swansea.

 Dŵr Cymru also operates 6 solar photo-voltaic generation sites together generating 0.5 GWh/year with potential to extend this to 1GWh (12 sites) by 2015.

5.3.3 Dŵr Cymru contributes to Wales’ tourism offer:

 Dŵr Cymru’s reservoir sites attract over 1 million visitors a year.

 Land-based activities supported by Dŵr Cymru include walking along way-marked trails; bird watching from bird hides.

 Dŵr Cymru supports the Welsh tourism offer in sailing and board sailing, canoeing and water skiing on its large reservoirs.

 Dŵr Cymru’s visitor Centres offer exhibitions, gift shops and restaurants.

5.3.4 Dŵr Cymru contributes to the protection of wildlife habitats and actively supports biodiversity:

 Dŵr Cymru reservoirs provide habitat for brown trout and offer some of the highest quality still water fishing in the UK.

 Reservoir sites are bio-diverse and offer habitat to pied wagtails, ospreys, sand pipers, little ringed plovers, pine martens and otters.

 Dŵr Cymru is also re-planting sites with deciduous trees and creating ponds and wild-flower meadows. A number of these areas are Sites of Special Scientific Interest.

5.3.5 Dŵr Cymru plays an important role in education:

 Last year over 14,000 school children visited the Dŵr Cymru education centres at Cilfynydd (Pontypridd), Cog Moors (near Barry), Alwen (Denbigh Moors) and the Elan Valley.

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 The Dŵr Cymru outreach programme accessed 13,000 children last year, raising awareness of water safety and conservation.

5.3.6 The European Union’s Water Framework Directive:

 Dŵr Cymru announced in July 2012 that it would provide matched funding of £400,000 for non- profit organisations to help improve the quality of Welsh rivers, lakes and waterways and create a more vibrant and healthy environment for people and wildlife within their supply area. In 2013 Dŵr Cymru announced a further £150,000 of funding. Project examples include:

 Loving our Lake - communities of Nant Peris, Llanberis and Fachwen are contributing to improving the water quality of the Llyn Padarn lake which has suffered from algal bloom.

 The Monmouthshire Olway and Trothy Project (MOAT) - The project connects with generations of farming families through community agents to reduce phosphates and fine sediments, and improve habitats.

 The Upper Tywi Catchment Restoration Project – work here includes lime dosing to restore the PH balance, and increase spawning grounds for salmon, leading to a self-sustaining fishery and improved relationships with the angling community.

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The Regional Economic Impact of DCWW Research Unit 5.4 Appendix: The Input-Output Method

The analysis of indirect and induced (household spending) effects in this report has made use of economic data contained within the Welsh Input-Output Tables. The Welsh Input-output project as a whole has been in progress since 1993. Tables have been published for each of the years 1994 to 1996, and for 2000, 2003 and 2007. The 2003 Tables were supported by the Welsh Development Agency and Cardiff Business School, and their development and construction undertaken by members of the Welsh Economy Research Unit at Cardiff Business School. The construction of the 2007 tables was supported by Environment Agency Wales.

The Welsh Input-Output tables reveal the different industries that make up the Welsh economy, and show how they fit together in terms of their sales and purchasing patterns. Each industry in Wales relies to a greater or lesser extent on local, regional, national and then international markets. Each industry also uses labour inputs, and imports goods and services. The Input-Output tables then allow comparisons between industries in terms of their pattern of resource use, and the sectoral and geographical destinations of their outputs, including the level of export activity.

The Tables can be used to identify sectors which are important to the local economy by virtue of their spending, employment, exports, or local linkages and consequent economic activity supported directly and indirectly in the Welsh economy. Then the Input-Output framework should also be seen as a detailed statement of account, with tables allowing reconciliation of the supply of, and demand for, goods and services in Wales.

In this report the Input-Output tables were used to estimate the total economic activity supported by Dŵr Cymru spending. For example, an increase in demand for the goods produced by the construction related sectors in Wales driven by Dŵr Cymru demands, would lead to an increase in the spending of the construction related sectors. However, as the industry increases its spending, their suppliers in Wales will also have an increase in demands for their goods, and then also the suppliers to the suppliers experience extra demands, and so on (indirect effects). The shock of the increase in final demand ripples through the Welsh supply chain. Moreover, as a result of these supply chain effects, the level of income in the economy will increase, and a portion of this income will be spent on Welsh goods and services leading to further increases demand. This is termed an induced income (or household spending) effect.