The directors are required to report on how the Group applies the Principles of Good Governance contained within the Code.
Directors
The Board (Code principle A1)
The Company has a seven member Board of directors which meets regularly and is responsible for the overall strategy and direction of the Group. The Board has a formal schedule of matters reserved for its decision, including the approval of financial statements, acquisitions and disposals, major capital expenditure, and significant financing matters. There are procedures in place to enable all directors to take independent professional advice.

Chairman and Chief Executive Officer (Code principle A2)
The roles of Chairman and Chief Executive are separated and there is a clear division of responsibilities to ensure a balance of power and authority. S macLachlan has been appointed Senior Independent Director.

Board balance (Code principle A3)
The Board comprises three executive and four non-executive directors. The composition of Audit and Remuneration Committees is entirely non-executive. A brief resume of each of the directors is given in this section under Directors and advisers. Each of the non-executive directors is considered to have been independent throughout the year, other than D O Lloyd, who was a director of the Company’s joint venture partner in Halcrow Water Services Limited until 30 April 1999.

Supply of information (Code principle A4)
The Board receives monthly information which includes actual, budgeted and prior year financial performance. Key performance indicators are also reviewed on a monthly basis. Detailed annual budgets and projections for subsequent years are presented to and discussed by the Board. In between meetings non-executive directors are appraised of all matters that may materially impact upon the Group.

Appointments to the Board (Code principle A5)
Any appointments to the Board are a matter for the whole Board to consider and consequently there is no separate nomination committee.

Re-election (Code principle A6)
All directors are subject to re-election by shareholders at the first Annual General Meeting following their appointment, and submit themselves for re-election at regular intervals, and at least every three years, thereafter. Each executive director serves under a contract which is terminable by the Company giving not less than one year’s notice. Non-executive directors do not have service contracts. They are initially appointed for a three year term, normally renewable for a further three years.

Directors’ remuneration
Level and make-up of remuneration procedure and disclosure (Code principles B1, 2 and 3)
The Board, through the Remuneration Committee, sets the Group’s remuneration policy for executive directors and determines the specific remuneration, benefits and terms of employment of each executive director.

Further details relating to Corporate Governance on Directors’ Remuneration are given in the Remuneration Report.

Relations with shareholders
Dialogue with institutional shareholders (Code principle C1)
The Company maintains regular contact with major institutional shareholders, and monitors the extent of significant shareholdings in the Company. Where institutional shareholders express a desire to meet directors, every effort is made to appropriately appraise such shareholders of Company objectives. The Company compiles the Annual Report with all shareholders’ interests in mind, and specifically includes reports by the Chairman, Chief Executive and Group Finance Director, covering strategy, objectives, operational and financial performance.

Constructive use of the Annual General Meeting (Code principle C2)
Notice of the Annual General Meeting is sent to shareholders at least 20 working days before the meeting. Separate resolutions are tabled for each substantial issue, and specifically include a resolution relating to the Report and Accounts. All proxy votes are counted, and, except where a poll is called, the totals for and against each resolution are indicated after it has been dealt with on a show of hands. The Chairmen of the Board, and Remuneration and Audit Committees are available to answer questions at the meeting.

Accountability and Audit
Financial reporting (Code principle D1)
The directors fully understand their responsibility for the preparation of the Annual Report and Accounts.
A detailed statement is set out within the Statement of Directors’ Responsibilities included in the Directors’ Report.

The Annual Report and Accounts includes the Chairman’s Statement, Chief Executive’s review and Finance Director’s report, together with other elements of information such as segmental performance. These reports give a balanced assessment of the strategy, objectives and operations of the Group, and outline the future strategy and prospects.

The directors have made appropriate enquiries as a result of which they have a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Internal control (Code principle D2)
The directors are responsible for the Group’s internal control systems. Throughout the year there has been in place a system of internal controls covering operational and administrative as well as financial risks. In the light of the publication of Internal Control: Guidance for Directors on the Combined Code, this system has been reviewed during the year and, as a result, additional procedures and reports have been developed. The updated system has been in operation since 1 April 2000.

For the current financial year, the Group has adopted the transitional approach permitted by the Financial Services Authority and reviewed the effectiveness of the system of internal control in accordance with
the previous guidance. Accordingly, the disclosures below are restricted to internal financial controls.
The Company will report in accordance with the Turnbull guidance in the next annual report.

The directors have overall responsibility for the system of internal control within the Group. The system is designed to provide reasonable, but not absolute, assurance that the assets of the Group are safeguarded, that proper accounting records are maintained and that reliable financial information is produced.

The Group’s internal financial control and monitoring procedures include:
• a comprehensive Corporate Governance policy with clearly defined rules relating to the delegation of authority;
• control of key risks through clearly laid down authority levels;
• preparation of annual budgets by all operating units. The budgets are reviewed by executive management and are subject to Board approval;
• monthly comparison and review of actual results against budget forecasts and prior year with written commentary on significant variances;
• a clearly defined framework for capital expenditure including appropriate authorisation procedures and approval levels. There is a prescribed format for capital expenditure applications which identifies the commercial and strategic reasoning for the investment as well as the financial implications;
• completion of self certification questionnaires which confirm compliance with required standards of internal control. The results of this procedure are reported to the Audit Committee;
• reporting on internal financial controls and procedures by external auditors. These reports are reviewed by the Audit Committee prior to the issue of the interim and annual reports.

Although the Group does not have a dedicated internal audit function, as indicated above, the Audit Committee outsources its requirements for internal audit reports to external auditors.

On behalf of the directors, the Audit Committee has reviewed the effectiveness of the system of internal financial control.

Roger N A Wood

Chairman of the Audit Committee

5 June 2000