Official Report 180KB pdf
We come to the main item of business this morning, which is our continuing inquiry into water and the water industry. Professor Alan Alexander, Ernest Chambers and Charlie Cornish join us this morning. Thank you for the additional submissions to the committee, which we have all read. We would be happy for you to make a short opening statement, should you wish to do so.
I think not. We made several points at our previous appearance before the committee and the time today would probably be best spent on questions on the specific issues under consideration.
Thank you. That is ideal.
I will deal with "Developing the Public Sector Model", the joint paper from the water authorities. What do you mean by "more room to manoeuvre" to achieve outcomes set by Government? In paragraph 4.3, what do you mean by developing the scope of the water authorities in terms of "market and product mix"?
As we say in the paper, we would like to see a move towards influence on the basis of outcomes, rather than control on the basis of inputs. That is the first principle. Given the competitive environment that we are now in and the need to progress as quickly and effectively as possible towards the efficiency targets that were set by the water commissioner, we need greater commercial freedom. That would allow us to enter into partnerships, including some equity sharing and joint ventures, and it would lever resources into the industry and make it easier for us to achieve efficiency targets more quickly.
With the arrival of competition and, as Alan Alexander said, efficiencies, there are reduced opportunities for us to develop in the same way as the industry in England and Wales has developed. If we are to close the gap, we must avoid the mistakes that others have made. It is clear that the industry in England has evolved during the past 26 years and that other utilities have evolved over a period. In order to make progress, we must learn the lessons; we could also cut out a lot of the learning exercise.
Could you be more specific about the major mistakes that were made south of the border? How can you avoid some of those mistakes? It would be useful if you could identify the mistakes that were particularly costly and how your proposals would benefit in cost terms from those experiences.
Some of the organisational roots have disappeared. For a while, the industry in England and Wales was reorganising every two or three years and each reorganisation had costs, in terms of finance and staff motivation.
It is fair to say that the marketplace for water and waste services in Scotland has changed radically over the past 12 to 18 months. Previously, we would have been considered a core supplier of water and effluent services. Some of our non-domestic customers are considering a range of opportunities, including supply of water and added-value services, such as the design, building and operation of an on-site treatment plant for a private company, although such plants would require funding. Many companies are multi-site companies, with premises in the south. Those companies are considering whether to go for a multi-site deal for the provision of water, waste water management and/or consultancy services.
It is worth adding two points to that. First, we have made enormous progress in the past six to eight months in developing a relationship with the Scottish Executive. That has brought about consent to the kind of initiatives that the paper implies. We hope that the proposed water services bill will underline the nature of that relationship.
How would the expansion in the market and product mix and the room for manoeuvre that you refer to impact on the regulatory framework? Given that your company would be a different kind of business, would the current framework need to be adjusted?
The bulk of our business would still be on core service provision within Scotland. We would have to discuss some issues with the regulator—for example, what happens with non-regulated business, which may well be out of the West of Scotland Water area.
I presume that there are examples down south.
Yes.
Will you be more specific about what you mean in your paper by "incremental investment" as an option for business development?
What we are trying to say is that we need to establish credibility and to walk before we can run. As Professor Alexander said, there has been a sea change in the relationship with the Scottish Executive. These issues were raised three or four years ago, with regard to external services. At that stage, what we were allowed to do was limited in relation to fee-earning consultancy work.
How would incremental investment affect charges?
That is where judgments will have to be made. Initially, what we do would have to be funded from charges. That is why we need credibility—in order to establish a way forward. At the moment, for the authority to have an equity stake, the money has to come either from charges or from borrowings, which are met by charges. There is no getting away from that, which is why we want to reassure you that this is not a big issue; it is about steady as you go.
On Des McNulty's point, part of the reason for wishing to go in that direction is that we believe that it will make it easier for us to defend and retain our existing customer base, especially on the non-domestic side. If we fail to do that, the effect on charges could be dramatic.
If a venture failed and money was lost, who would pick up the tab? Have you discussed assurances in respect of business failure with the Executive or the banking sector?
In such circumstances, great care would have to be taken with the agreement, to define and limit the risks. We need to walk before we run. Deals would have to be structured to minimise and define clearly the authority's exposure.
I read with interest the section on larger-scale investment in the water authorities' submission, which refers to new business, growing the customer base and business development. Ernie Chambers has used relatively low-key terms and said that the expansion would be incremental, but Charlie Cornish took a more ambitious sweep when he talked about expanding your area of operations and going outwith Scotland.
At present, you are right to say that our domestic customer base is secure. If common carriage comes into being on a wide scale, as it has with electricity and gas, that domestic base will be open to challenge. Several private sector organisations are considering bundling services such as gas, electricity and water, to make inroads into the domestic market. The priority of some major private sector companies is the domestic market. They will target that with what they consider core energy services—and water—as well as a raft of added-value services. Competition exists in the non-domestic marketplace. If common carriage happens, competition will also exist in the domestic sector.
When that happens—which I admit is some time forward—will you function as a highly commercial and highly competitive business that is like any other utility company in every respect except that it is in public ownership?
Yes. Unless we respond and provide the same levels of service as private sector utility companies do, we will lose business and income.
We need a level playing field. The private English companies have a secure domestic base—that is coming under scrutiny. Public authorities should be able to meet their competitors on a level playing field.
The degree of convergence is interesting. Competition law and market forces are driving everyone down the same road.
We need to put in a caveat: the public sector figure is obviously a best estimate. Moreover, the scheme at Dalmuir was an inherited scheme, which again goes back to the formation of the authority.
So the lower capital cost of the facility under PFI is largely because of the lower population to be served by the facility, rather than because of the superiority of the procurement process.
It is a mixture. Part of the reason is size. The contractor also opted to use fairly innovative technology—what it calls a compact plant. That meant that it avoided building as much concrete and steel. We have to take the population into account, but also the fact that the contractor introduced a technology that had not previously been considered to shrink the size of the plant.
It is not that we are after commercially confidential information, but we are anxious to identify the extent to which that procurement method gives you better value for money. Can you give us a better quantification? When you say that the capital cost is lower partly for one reason and partly for another, we do not know how much better the capital element of procurement is as opposed to the population element. I cannot ask you to give a figure right now—I am sure that that would not be commercially appropriate—but we want further information, if possible, so that we can analyse the superiority, as you argue it to be, of the PFI process.
Yes.
So the 40 in the table does not come into the equation?
The 40 refers to the design life.
Is there a depreciation element? If we apply depreciation over 23 years in one model and over 40 years in another model, do we not get a distortion?
No, I believe that the financial analysis has been done on a comparable basis.
Okay—
Murray, I have to interrupt—I understand from the technicians that we are not being recorded, which impacts on the official reporters. We will have to adjourn for a few minutes. I apologise for that. I also apologise for the fact that the room in which we are having this rescheduled meeting is so cold. Perhaps we should all huddle round the heater while the recording system is sorted out.
Meeting adjourned.
On resuming—
I reconvene the meeting and apologise for that short interruption. This meeting is doomed in many ways, but let us proceed. We were getting into the technicalities of funding issues.
I think that we had addressed depreciation, but there is a lingering concern that we are not comparing like with like. Under this 23 plus five-year agreement, is the built-in investment sufficient to equip the plant for a 40-year life, so that it can be compared with the 40 years that you would have had under the conventional procurement procedure, or will there be a further requirement for capital investment to achieve that 40-year life? If so, can the investment be quantified? If it can, we will feel that we are comparing like with like.
The contract is clearly worded such that the PFI contractor has the 23 plus five-year period to provide the service. It is likely that beyond the 28-year period there will be a need for further investment. Part of the concern is what the standards will be at the end of that period. That has to be part of the thinking, because we have seen many changes in standards. Because of concerns about standards, we have since the early 1990s moved away from building plant that has an 80-year life cycle. For example, the Muirdykes water treatment works in Renfrewshire was finished in 1967. It was expected that it would have an 80-year life cycle, but it was knocked down in 1990. The Overton plant in Greenock, which opened in 1970, was knocked down three years ago.
That would be helpful. I understand the point that you are making. I remember Councillor MacLean, the convener of the relevant committee in Strathclyde, telling me about when he went to open a new sewage treatment plant in Fort Matilda in Greenock. By the time it was finished, it already failed to meet the new European directive, so substantial further investment was required. I suppose that your current PFI project is catching up with that.
That is correct. The screen chamber was built at Battery Park, adjacent to Fort Matilda. First, the process was not right; secondly, it had been difficult to build a full-scale works on that site, which is why we are now building it at Underheugh quarry.
We still have concerns though. Under the traditional method, you would try to plan a 40-year life, whereas under PFI you are aiming at 28 years, so you are not necessarily comparing like with like. You offered to remodel that—that would be useful. We are not trying to prove anyone right or wrong; we are simply trying to get at how you weigh up the advantages when you decide which procurement method gives the public the best value at the end of the day.
You will never get a perfect answer, because an element of judgment is involved. It depends on what happens when you go out to contract. It is a matter of our making our best judgment. However, I am happy to put that in a letter to the clerk, if that would help.
Thank you.
The other significant disparity that is shown in the table of comparative costs concerns the whole life service fees. There is a 125 per cent difference. Do you need to add anything to that to clarify the difference?
Again, that is a function of the contract. I will remodel that to check that it is on a comparable basis.
I move from the tables—on which we will receive further information—to risk transfer, which has featured heavily in the evidence that we have heard.
It is difficult to attach figures to risk, partially because there was really no alternative on those particular contracts because of timing and availability of finance. That was the only procurement route open to us. Our negotiators endeavoured to minimise the risk transfer.
We know a wee bit about major procurement, as the Parliament must procure a fairly significant capital project. We understand that risks are shared among the client and all the contractors. What is different about risk allocation in the PFI and private-public partnership process as compared with conventional procurement methods, and how does that difference affect the final cost—and therefore value for money?
The big difference is that the risks in a traditional procurement contract relate to unexpected circumstances, such as rock or unsatisfactory ground conditions. Those risks tend largely to be in the construction phase. In our projects, another major risk is that the process will not work. A contractor may say, "This plant will meet the specification," but when push comes to shove the plant may not comply. Then, the contractor must undertake further works.
I should have gone to a night class to equip myself to ask my questions. I would like to get this right. The consortium bears a range of operational and process risks, which are reflected in its tender price to you. You pay it to carry that risk. What assurance do we have that that method of procurement gives us better value than a conventional procurement method under which you and your conventional contractors carry the same risks?
To an extent, time will tell how that works out. We are in the early stages. We believe that our contracts allocate risk in the best way. Time will tell whether that judgment is right.
Des McNulty, Bruce Crawford and Bristow Muldoon want to ask supplementaries. I am bearing the time in mind, but if the questions are on the same issue, I am happy to take them. Des, what is your question on?
Dalmuir.
We will receive clarification of the figures involved.
I was going to ask for a specific element in that clarification, but perhaps I will do that in writing.
Thank you.
I will quickly make a point, but before I do that, I want to clarify one thing. May I refer to the costs in the earlier papers that we received—the white papers that contained PFI company bid costs and are now in the public domain?
Yes, as long as you do not touch on the costs on the blue private paper.
I will not touch on the blue paper.
The increased contractor costs relate to financial and legal advisers rather than design costs. I do not believe that significant further costs will be incurred in designing the plant. The costs arise because of the complexities that are involved in having a number of parties, all of whom have their own financial and legal advisers. That makes the clock tick up quickly.
Would it be possible for the public sector to spend more money on design at the start of the project and thereby bring the cost closer to the cost under PFI?
I believe that the public sector costs are the costs that are reasonably incurred in ensuring that the project will achieve its specification.
So there would be no need to do what I suggest.
That is correct.
Did you want to ask a question, Bristow?
I am happy to pass at this point because my question related to the direct comparability of the two processes.
We will deal with that when the relevant paper is submitted.
I would like to ask for a little clarification of the company's investment strategy. The briefing that we have been given tells us that WSW is procuring three major waste treatment plants through PPP. Mr Chambers, can we reasonably equate the rest of your capital requirement for sewerage and water to your external finance limits? Do you fund the rest of your procurement through your borrowing or do you use an element of your current charges to fund investment? For that matter, do you borrow to carry out maintenance work and fail to match long-term funding with long-term investment?
Your question relates to one of the major changes in the past five years. In the time of Strathclyde Regional Council and Dumfries and Galloway Regional Council, all the investment was funded from borrowings. This financial year, however, about 50 per cent of the investment is coming from borrowing and 50 per cent is being funded through charges—the investment programme this year is of the order of £180 million and our borrowing limits are of the order of £90 million. Next year, slightly more will be funded from charges than from borrowings. There has been a distinct change, in line with what has happened south of the border.
In previous evidence and in one of the papers that we have today, you talked about not seeking significantly increased borrowing consents because you feel that, as it is, you are taking on sufficient long-term debt. Surely if a high proportion of your investment is being carried by charges, it would make more sense to borrow all the money over the long term. We feel that one of the reasons charges to consumers are so high is that so much is being paid from current expenditure. We think that it would be more economical for the customer if the investment could be funded from longer-term borrowing. I do not know why you advise us that that is not sustainable. It seems logical to me that you should be borrowing more to fund long-term expenditure.
We are advised that, while that would be more economical in the short term, a large debt mountain would be built up that would have to be serviced in subsequent years. Concerns have been expressed that if the long-term investment programme were to be entirely funded by borrowing, the financial viability of the authority would come under scrutiny. At the moment—by circumstance rather than design—our turnover to debt ratio is pretty close to that of English companies. If we had continued to fund all our investment from borrowing, that would have become distorted and would have be a millstone around the necks of our successors in their attempt to create a level playing field in 10 or 15 years' time.
I understand that, but you have just confirmed that if you had the choice you would not seek to borrow much more. That is the point at which you lose an amateur like me. The way I plan my life—following the Margaret Thatcher approach, you understand—if I know that I cannot buy a house in five years, is to take out a mortgage to allow me to do so over 25 years. I have found that the more economical way to procure the place where I live. In simple terms—and this is the Professor Anderson argument, if I may mention his name in your presence—if one tries to fund major works over five years, one is burdening the consumers and customers of 1999 to 2005 with costs that ought to be borne by consumers in the next 30 years, as they will benefit from the assets. Is not your thinking the wrong way around?
We must recognise that, traditionally, charges have not been sufficient to sustain a long-term business.
I am not disputing that charges probably had to rise.
One of the big issues that will become increasingly important is that, having established modern plant to provide the services people expect, we cannot go back to a situation in which we cannot maintain them. We need to recognise the sophistication of the plant. The life expectancy of the electronics is around seven to 10 years. We have to ensure that we have enough money to allow us to modernise, to maintain standards.
Last week, we heard evidence that suggested that an appropriate way to do that might be through bonds. If you were a public sector trust and were able to raise funding through bonds, would that be a more effective way to sustain your programmes? Would that have an advantageous impact on customer charges?
It would help in the short term, but it would still leave us with a long-term problem of what we could do when the bonds were used up. The indications are that bonds would cost us more than borrowing in interest rates.
Another witness raised questions about the transparency of the process and about whether the benchmarks, the public sector comparators and the PFI business cases were fully transparent. The witness from Unison whom we met last week gave us to understand that he had been unable to examine the waste water treatment business cases.
In relation to PFI contracts?
In relation to everything really, because there is a broader issue of comparative costs. Everything impacts on charging to the customer. We want to know about the whole process of what you do, how you pay for it and what you charge people.
With the appointment of Alan Sutherland and the introduction of combined cost and economic regulation, there will be transparency. At the moment, we are going through a process with the commissioner. He has looked at the operating costs and come up with a view and we are looking at the quality and standards process. The drinking water regulator and the environment regulator are identifying quality issues. A price will be put on that, which is still being defined. Alan Sutherland will then take a view on the capital efficiency—whether the customer will get value for money—and there is little doubt that he will ask us to procure our individual projects at a lower cost that is more in line with what happens in England and Wales. Transparency will come through the commissioner, both in setting the targets and in monitoring whether the outputs that are being achieved reflect the costs that were provided in the estimates.
Do you divulge to him everything he needs to know? What information on business cases goes beyond him to us and to the wider public?
We have to divulge the information he wants. Although there are confidentiality clauses in relation to the PFI, they are worded in such a way that information will be made available to members of Parliament or to the Executive if requested.
We are under some pressure for time. Are there any other supplementary questions on finance issues before we move on to water quality and investment?
I would like to ask another question. You mentioned the fact that current debt levels in the Scottish water industry are broadly comparable with those in the English water industry. To what degree is that distorted by the major write-off of debt that occurred in the English water industry during the privatisation process?
That is the outcome of that process. We need to recognise that, in 1996, the inherited debt from local authorities was £1.7 billion, which was reduced to £1 billion, so there was a £700 million write-off. There are certainly figures that indicate that that was a comparable level of write-off to that in England and Wales. The jury may still be out on that. The situation in England and Wales was complex because there was debt write-off and a green dowry. There have always been arguments about just how much that cost, but I believe that the Scottish Executive takes the view that the £700 million write-off in Scotland was comparable to what happened in England and Wales. However, as I say, there is some debate about the true position.
I have some questions on water quality and the investment that is necessary. I know that you can speak only for West of Scotland Water, but do you believe that you received a fair inheritance of plant infrastructure and debt when the three authorities were set up in 1996? What have the implications of that inheritance been for current operations?
We received what we received—I should be careful about what I say—as I had been involved in that process for some time beforehand. When water was under councils' control, their ability to invest was extremely limited. In Strathclyde, in 1980-81, the investment in water was about £7.5 million. Some £4 million or £5 million of that was spent on extending the system. Several new communities were being established at the time and the money that was available was largely spent on extending the system to meet the increased demand. The implication of that was that only about £2.5 million was available to modernise the rest of the system.
I notice what you have written about the investment in the networks in Argyll. I am sorry that there are no representatives from the North of Scotland Water Authority here today, or we could have asked you all to compare the impact of having a large rural hinterland to deal with. I wonder about the amalgamations and the establishment of West of Scotland Water, NOSWA and East of Scotland Water and whether there was a fair inheritance for the new authorities.
I do not think that that was a big feature of the amalgamations. The question was the logical supply arrangements. There was an element of history in that, as Argyll was part of the Strathclyde area. Dumfries clearly linked in, with the benefit that we now supply cross-boundary services. I do not think that the asset condition was a big feature at that stage. People were more concerned about the historical supply arrangements and the political boundaries. Out of that came the situation that we have today.
The Executive's consultation document on water standards lists three options for quality and investment, which have been described as the Rolls-Royce, the Mondeo and the Mini. I would like your views on the pros and cons of those three options. What do you think would be the implications of the chosen option, the Mondeo?
The investment plans have to be seen as a sensitive balance between absolute investment needs, what we could do if we had an unlimited pot of money to provide Rolls-Royce services, and affordability for customers. At the moment, and throughout the consultation period, a significant proportion of expenditure has been committed to statutory requirements. In the current year, some 80 per cent of investment is committed to meeting statutory deadlines. European directives on drinking water, urban waste water treatment, bathing water and shellfish, and the United Kingdom cost-benefit analysis must all be taken into account.
Do you think that we need more customer education?
That would be helpful. The trouble is that there are two polarised customer groups. There are the people who are receiving a satisfactory service and are probably wondering why we need to spend all that money and there are the people whose service is not satisfactory and who want immediate improvements.
People cannot afford to do it on their own. As I well know, many rural communities do not even have water piped to them; their systems need a lot of investment.
Yes. In the west, there are about 1,030,000 houses, all but 19,000 of which are connected to the water supply system. If we used the normal connection criterion of £1,000 per property, we could not extend the system to any of those 19,000 properties cost-effectively. As part of our rural policy, we have made a considered decision to invest £1.5 million a year to extend supplies. That will address the supply to about 5,000 to 6,000 of those properties over the next 15 years. It is very costly—up to £20,000 per property—to extend the supplies. Again, we need to strike a balance between the aspirations of individuals to be connected to the system and what the rest of the customers are prepared to pay.
I realise that you will probably never be able to connect everyone, but how long will it be before most rural customers are connected to the mains? Will it be 10 years, 20 years or even longer?
We believe that we will be able to deal with the groups of properties—half a dozen houses in a hamlet and so on—within 15 years. I do not think that we will ever be able to deal with the shepherd's cottage. We estimate that there are about 10,000 to 12,000 houses in the west that would cost more to connect than is reasonable, unless we were in an extremely strong financial position.
Thank you.
There are several more subjects to cover. It would be helpful if members and witnesses kept questions and answers fairly pointed.
We have about five or 10 minutes left.
We can push it a wee bit.
Good, because there are some meaty questions to be put. We might not get through them today, so perhaps we could ask for further written answers.
I will make a brief general point before handing over to Charlie Cornish to pick up on the specifics. We have said to the commissioner that the target is challenging, but achievable. One of the reasons that we have been able to say that we think that it is achievable is that we have used the time between now and when his target period begins—2002—to begin investigations into our efficiencies and, by extension, our inefficiencies. We are trying to get ahead of the game in the 15 months between now and when the commissioner's clock begins to tick.
Over the best part of the past year, we have been examining many areas in which we might be able to improve productivity and efficiency and ultimately make cash-releasing savings. Many of the projects are still at an early stage and we have not concluded what level of efficiency we can get through them. For example, on non-capital procurement, if we have an opportunity to achieve greater discounts, we may make significant savings—millions of pounds rather than hundreds of thousands of pounds. There are other areas where efficiency savings do not impact on staff, such as better transport management, procurement and energy efficiency. We also need to consider the work that consultants and contractors are carrying out in West of Scotland Water. If we can skill our people and resources to a sufficient level within a reasonably short time, that will present an opportunity for achieving a cash-releasing efficiency that will not have a significant adverse impact on staff.
It may be difficult, but I want to press you on it. In most public sector organisations, 60 to 70 per cent of fixed costs relate to staffing. What are your overall operating costs, and what percentage of those is the wage bill?
In round terms, we have operating costs of about £225 million and a pay bill of £75 million. Wages represent a significant proportion of the overall cost.
Are you saying that, although there are many areas that you can investigate, the number of job losses could be significant? I realise that you cannot give us figures at this stage, because you are working through the models.
It would be reasonable to reach that conclusion. The issue is tied into the many reviews of areas where we can generate new business opportunities. If we generate new business opportunities and secure new contracts, that will give us an opportunity to move staff into productive work where we are generating income. However, it is likely that, by 2005-06, the total number of employees in West of Scotland Water will have fallen.
One thing that makes it difficult to be specific is that, even before we come up with a ballpark figure, we must go through all the consultation processes with the work force, through our partnership agreement. We will be moving towards that over the next few months.
In that case, when will you be in a position to make reasonable assumptions and projections about the impact on the work force by 2005-06?
Sometime over the next six months, we will sit down with our trade unions to initiate their involvement in the efficiency projects. By that time, we should be more able to produce indicative numbers.
Finally, I want to ask about the case for a single authority. We all want more information on the benefits of having three water authorities compared to the economies of scale that can be achieved by a single authority. As a council leader, I was heavily involved in the difficult disaggregation process—particularly in the Tayside area—and I know about the many difficulties that arose and the great effort and time that was involved. I know that it will be difficult to put the answer in a nutshell, but are the economies of scale that would be achieved through a single authority outweighed by the aggravation of getting there?
I wish that there were a simple answer to that. As you imply, there is no doubt that there are some economies to be gained from having one authority rather than three. However, as you also suggest, those might be bought at too high a price.
No. I think that that is fair comment.
I honestly do not think that we can go into any more detail. We have already considered some of the economies and efficiencies that might be won by collaboration among the water authorities. However, any calculation must include considering whether greater efficiency can be won by changing the structure of the industry and whether the cost of reaching that point is bearable. We do not yet know the answer to those questions.
The issue is obviously fundamental to our consideration of the final shape of water service delivery in Scotland. Perhaps a bit further down the track we could receive some written evidence from West of Scotland Water—or from an amalgam of the water authorities—giving some more considered thought about the benefits or disbenefits of both options.
That evidence would be useful, as we will ask the question of each water authority. You will want to ensure that your views are made known. Obviously, we would also be interested in any collective view.
It might help the committee if we took some information from what we call our new project, which was a collaborative study undertaken in the run-up to Christmas. If we can reach some conclusions based on that joint paper, we will feed them to the committee.
Okey-doke. Bruce Crawford has another appointment to attend, so I will move to John Farquhar Munro.
Have we got time?
Yes. I will push things a wee bit.
There was some discussion about competition within the industry, which I am sure is a matter of concern to you and many of your customers. How would such competition affect your efficiency and profitability? Any competition within the industry will happen in the more populous urban areas rather than in the remote rural communities.
Charlie Cornish will be able to provide some detail on that question. However, I will say that the key issue for the industry will be the rules that govern competitors' access to the domestic market in particular. We should distinguish between competition that we might face in the domestic market and competition that already exists in the non-domestic market. Those two quite different issues must be addressed in different ways.
We are currently engaging most of our major non-domestic customers. For example, we have introduced a key account management framework, through which we will provide different types of services and deals. We have also secured long-term contracts—ranging from three to five years—with many of our customers, which takes them out of the immediate competitive market for that period.
Just for the record, could you tell us what you mean by "the right access charges"?
The right access charges will have to take account of the operating cost—the real cost of providing the service within the local area—and the costs of meeting a fairly substantial investment programme throughout the West of Scotland Water area. The charges will not be based on a particular cost for a service that is delivered from a particular treatment plant.
There is a conception that the industry would be interested only in whether market opportunities exist. That concerns me, because I do not think that remote and rural areas provide such opportunities. Coming from the west Highlands, I note that NOSWA has been serving small communities by spending millions and making tremendous efforts to provide water and waste water treatment plants. I would hate to think that the industry will be market driven in future and will disregard the important needs of rural communities. I hope that you will consider that issue.
Again, Charlie Cornish will be able to provide some details. The general principle is that we have a high fixed cost and that, if we lose the revenue from big non-domestic customers, we still have to maintain the asset. As our costs do not decrease in line with any revenue loss, it is important that we retain those customers. As I said at the committee meeting on 12 December, the additional cost of maintaining assets that are no longer entirely necessary or used goes straight to the domestic customer.
That is fair comment. It is probably also fair to say that there has always been competition in the non-domestic market. For example, companies have become involved in waste minimisation, water recycling and the construction of on-site treatment plants. Such issues are real threats to our current levels of income.
Our time is very limited, and I want to hear your views on two specific issues before we close the meeting. There will be an opportunity to follow up on areas that we did not manage to discuss today. First, our witnesses have felt that either we should be totally excluded from competition in the short to medium term or there should be a phased introduction of competition. Do you think that either option would be legal or desirable? Secondly, will you also briefly address the issue of mutualisation, which has been raised in our discussions? If you could bundle up both questions, we could bring this session to a close.
In answer to your first question, if the Scottish Executive can find a way of phasing in competition over a five to seven-year period, that would help to ensure a level playing field and would provide some protection against the cherry-picking that Mr Munro mentioned. As for the legality of phasing in competition, we would have to defer to the Executive's lawyers. However, we have received advice that any attempt to exclude us completely from the Competition Act 1998 or European competition laws would be a case of hunting the snark. The management of competition is within the competence of Scottish ministers and the Scottish Parliament.
Mutualisation has become an issue north and south of the border, and our paper highlights the difficulties of establishing the management arrangements. Although it might make life easier for the Executive from a corporate governance point of view, it is not a terribly productive way forward at this time.
Thank you very much. I look around the room and see a number of frozen individuals; indeed, I thought that our water inquiry was going to turn to ice halfway through this morning's proceedings. However, Murray Tosh heated us up by raising the prospect of Mrs Thatcher.
Meeting closed at 12:11.
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