In this regulatory period, three of the old PFI contracts that were entered into in the late 1990s will run their course. At this point, we are unclear about what the condition and operating capacity of some of the assets that will come back to the public sector will be at the end of those contracts. It is one of those situations in which we are hoping for the best and preparing for the worst. Scottish Water is doing an on-going piece of work in that regard, and we are in close dialogue with it about the potential implications.
Innovation is a really interesting issue and is probably something that is relevant to your committee. The evidence is that we are not going to build our way out of climate change and that we are going to have to find different and better ways of doing things. That might well involve working with farmers to allow land to flood and finding appropriate compensation and reward schemes to manage water better within catchments.
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We are also going to have to deal with shifts in demographics. For example, the increasing trend of population shift towards the east of Scotland and new-build property there will put serious pressure on existing assets, perhaps by the end of the 2020s, and that will have to be thought about.
Innovation will be key to solving some of those problems. Scottish Water has made what I would call a fairly good start at trying to apply different techniques and solutions to problems. I think that it has a lot further to go—and I think that it would say the same. Therefore, one of the things that the commission did in its methodology was to ask whether anything in its regulation of Scottish Water was making it more difficult for it to take an innovative decision or to do something in a more innovative way. The answer to that question, I think—and we put our hands up to this—is probably yes, for reasons that would include, for example, the way in which we have looked at payback on projects. We would look at projects purely within a regulatory control period, instead of saying, “Actually, this might pay back over 10 or 12 years.”
Frankly, our society has to get better at not jumping down the throats of public organisations such as Scottish Water if they try something that is on the frontiers of technology or process, say, and it does not quite work for whatever good reason. If we want our water industry in Scotland to be truly world leading and innovative, we will have to accept that some of the things that get tried might not work. That might be a bit of a culture shock for us all, but there will be situations in which stakeholders, including the Scottish Government, will agree among themselves to try something that they recognise pushes the boundaries of what might be possible and, in such cases, we cannot then come back and say to Scottish Water, “Naughty boy—you got that all wrong.” We have to get our approach there right, because it is really important that we have the scope and climate for innovation.
The other big theme of the price review is wanting Scottish Water to continue to build the trust of its customer base and to continue to make progress. That means dealing with all sorts of issues including payment terms, leakage reduction and responsiveness to customers. Again, if we want Scottish Water to be a genuine beacon of what Scotland can achieve, we need progress to be made on that sort of thing. For example, what sort of involvement does Scottish Water have in schools in communicating the value of science, technology, engineering and mathematics skills? I know that it does some of that already, but is there more that it can do? As we probably all know, there are real benefits in educating people when they are at school, communicating some of the excitement of an engineering—or, indeed, an economics—career and building the industry’s reputation at the same time. The whole trust issue is really important.
With regard to Scottish Water’s assets, I have already referred to resilience. I suspect that the Scottish Government and Scottish Water will agree with our view that there are probably too many communities with single water sources. That is something that we need to think about and address to the extent that we can address it.
My final point relates to a much longer-term challenge. Scottish Water has assets with a replacement cost of something like £60 billion. Today, it invests around £300 million a year in maintaining and replacing those assets; at the moment, it invests about £550 million a year, at 2012 prices, but a large part of that is for improving things. If you are spending £300 million a year on maintenance and replacement of an asset base of £60 billion, you are assuming—as the wonders of arithmetic will tell you—that all of your assets will last on average 200 years. Given that that includes everything from information technology and vans on the one hand to the sewerage system on the other, that is quite an ambitious figure. As a result, it is really important that we look at how much we spend on maintenance and at when we need the money, not necessarily because we need a lot more money now but because at some point, perhaps a long way out in the future—perhaps not even by the time my children are my age—customers will face some quite sizeable demands in order to replace assets that, fortunately, our Victorian ancestors built with a degree of robustness that we should be proud of and grateful for.