Official Report 166KB pdf
Item 2 is an evidence session with Scottish Water and Scottish Water Business Stream on the Scottish Water annual report and accounts 2008-09. From Scottish Water, I welcome Ronnie Mercer, chairman; Richard Ackroyd, chief executive; Geoff Aitkenhead, asset management director; and Douglas Millican, finance and regulation director. From Scottish Water Business Stream, I welcome Mark Powles, managing director.
Convener, we are not very happy that the committee is constrained for time. The message seems to have got mixed up at whatever levels such things take place at, but we are here to answer questions for as long as you want. If you need us to go to half past 3 or 4 o'clock, we will shuffle any arrangements the guys on the panel have made. This is the only time that we meet you, so I am keen that we do not constrain it in any way. I am sorry if a different message was conveyed to you—we are slightly puzzled by it, but I would like you to know that we can stay after 3 o'clock.
I appreciate your offer, although we do have other items on the agenda that we are seeking to cover.
Sure—we are equally happy to go at 3.
I begin with a question about the overall assessment of Scottish Water's performance. We are told that the target for improvement in the overall performance assessment has been exceeded, but it is unclear whether the target for each of the 12 individual indicators has been met or exceeded. Could you tell us whether you have met or exceeded all 12, and, if not, which ones have not been met and why?
The whole principle of the overall performance assessment is that it is a single measure. You are right to say that it is made up of 12 indicators, but the only target we have is the overall target, which we exceeded significantly during the year. There are no targets for the individual sub-measures.
There must be some expectation of how those will change, in order to set an overall target.
Each year, we put in place plans for what we hope to achieve but the fact is that, given the very nature of some of the measures, once particular improvements have been made we are relatively guaranteed to achieve a certain level of performance. For example, if we take properties off the low-pressure register, we are fairly much guaranteed to get the points. With other measures, performance can vary much more from year to year. As a result, we endeavour to set stretching internal plans across all the measures to enable us to achieve our key external target, which is the single OPA measure.
Perhaps I should put the question another way. Which of the 12 separate indicators cover areas that have helped Scottish Water to achieve its overall target and which cover areas that have been more problematic?
Areas where we have the greatest improvement to make are sewage treatment works compliance, although I point out that we are continuing to make steady year-on-year improvement in that respect, and environmental pollution incidents, in which our performance is improving but is still quite a long way off where it needs to be.
It is only fair to point out that, last year or the year before, the first answer to your question would have been leakage, which missed the target in both years. This year, the team hit that target for the first time—and well done to them for doing so. There had been great improvements in leakage in the first two years but we did not actually hit the target, which meant that we lost points. However, we were covered by other things.
In its annual report, the Water Industry Commission for Scotland has challenged Scottish Water to match the top-performing companies south of the border by 2013-14. How do improvements in the overall performance assessment compare with the performance of companies south of the border and in what areas do we need to close ground on them?
As Richard Ackroyd pointed out, the principal measure of the existing suite of measures in which we need to improve is waste water treatment works compliance, in which we scored five out of the 50 available points. Our plan for the next regulatory period is to make significant improvements in that area.
Let me scale our performance against that of companies in England and Wales. I look to Douglas Millican or Geoff Aitkenhead for confirmation, but I believe that 418 is the maximum number of points that we can achieve. As you will see from our annual report, our score at the end of last year was 252, whereas English and Welsh companies at the top end will be scoring in the 390 to 400 range. That should give you a feel for the ground that we need to make up. In our draft business plan to the commission for the regulatory period up to 2014, we targeted 389 points as the score that we expect to achieve by 2014.
And you are confident of meeting that.
When we did a kind of risk assessment, we came out with an 80 per cent probability. However, we are striving and driving to meet that target and, if possible, do better than it.
Douglas Millican talked about qualitative assessment and the experience that people have of Scottish Water's customer service. You provide fairly clear information about the percentage of calls that are answered within 30 seconds, but what can you say about how happy people are when they put the phone down or about other aspects of the quality of their experience?
There are two things to say about that. First, at the moment, we do not have such a measure in the OPA, so it is not measured in a regulatory sense. However, we do our own customer satisfaction surveys, in which we get approximately an 80 per cent customer satisfaction score. We have set a target to get that up to 84 or 85 per cent. We improve over time.
You have acknowledged that that is one of the areas in which you need to close the gap on the top-performing companies in England and Wales by achieving higher scores.
Clearly, assessed customer service is not being formally measured yet but, from the shadow assessments that we have done, we believe that we are already top scoring on assessed customer service. It is just that that is not included formally in the OPA in this regulatory period. Clearly we need to make big improvements on the two new measures that are coming in on security of supply and pollution incidents. We need to make a lot of investment to enable us to make those improvements in the next period.
In terms of targets specified in ministerial objectives, the report shows that there are still a large number of unsatisfactory intermittent discharges. Why are there still so many of those discharges and will you meet the quality and standards IIIA target for that measure?
The sewerage network around Scotland is what is called a combined system, which takes foul and surface water flow, and storm overflows are a feature of that type of network. There are a large number of storm overflows in the network. Those that are classified as unsatisfactory by the Scottish Environment Protection Agency have been prioritised, and we will improve a number of them during the current regulatory period. There will then be a further batch for improvement during the next regulatory period. Over time, we will work through those and get them all to a satisfactory status.
How many systems have storm overflow problems?
I do not have the number off the top of my head but, by the end of this year, we will get to a cumulative figure of 264 unsatisfactory intermittent discharges during the current regulatory period. I will have to confirm the number for the end of the period.
Are the bulk of those in the north-east, the north-west and other rural areas?
They are spread throughout Scotland, but a significant number are in the greater Glasgow conurbation. That is part of the work that we are doing with Glasgow City Council and SEPA on the metropolitan Glasgow strategic drainage plan. A significant amount of work needs to be done in Glasgow on unsatisfactory overflows.
And you reckon that you are going to have that number—264 or so?
By the end of this year, we have to have moved a cumulative total for the current regulatory period of 264 discharges from unsatisfactory to satisfactory.
Before we move on, Des McNulty has a supplementary question.
On the unsatisfactory intermittent discharges, and the particular issue of odour at sewerage plants in the Glasgow area, I understand that the proposal to look at the strategic plan for the metropolitan Glasgow area is in place for the next Q and S period, which could mean that work will not begin until the following period, so we are talking about 2015 or 2016. Is that the real start date? Problems are continuing at Dalmuir—I do not know whether there are other issues. Is it the case that the study must cover the next period and that work cannot commence until after that, or is there a prospect of work starting before 2015 to deal with such issues?
Strategic studies are proposed for the next regulatory period, particularly for the waste water treatment facilities in Glasgow—there are currently four major facilities in the greater Glasgow conurbation. We need to come up with a long-term strategy for waste water treatment. However, in parallel with that work on a strategy, physical work will be done, particularly on storm overflows that are classified as unsatisfactory. SEPA knows that a number of overflows are unsatisfactory. There are studies for us to do on how to solve the problem, but physical work as well as strategic studies will take place in the next period.
In his recently published annual report, the drinking water quality regulator for Scotland said that nearly a quarter of Scotland's drinking water fails to comply with the E coli standard. The DWQR also commented on two incidents at water treatment works in my area last year and said:
We respond with concern to any such comment from a regulator. I will ask Geoff Aitkenhead to comment on the E coli issue. The overall compliance for samples in Scotland was pretty much the same in 2008 as it was in 2007—there was very minor movement. We would like the compliance figure to go up, but we are at 99.7 per cent compliance, so the figure cannot keep going up by a large amount every year.
According to the DWQR's report, 16 per cent of the 9,643 samples that were tested for coliforms in relation to waste water treatment works that serve the north-west did not meet the standard, and about 30 per cent of the 6,000 or so samples that were tested in facilities in north-east Scotland did not meet the standard. People have been affected over a wide area, even though we are talking about a small population. We are also talking about relatively small schemes, not all of which can be new.
Geoff Aitkenhead will comment on the coliform issue, which is not as straightforward as it seems.
First we must draw a distinction between samples that were taken at customers' taps and those that were taken at treatment works. More than 157,000 samples were taken at taps throughout Scotland, of which 80 were found to contain coliform organisms and two were found to have E coli—that puts the issue into perspective.
I welcome that, but I have visited Loch Ashie and seen that it is a fairly modern plant, so water not being properly cleaned—which gave rise to the incident that the DWQR thought about reporting to the procurator fiscal—is worrying.
The Loch Ashie incident was quite complex and a thorough root cause analysis was done for the incident report. The incident concerned an elevated level of aluminium in the water supply. That was why the alert was raised. We always work through such incidents with a consultant in public health medicine and the drinking water quality regulator. The root cause analysis shows that a short circuit within the treatment works took a high level of aluminium to the sample point at the works but not into the supply.
I understood that to be the case at Newmore, not Loch Ashie, but I am interested to hear what you say. When you talk about high levels of aluminium in the supply, is that actually getting out?
No. I will put the point in context. In both instances, the level of aluminium was higher than the permitted concentration value, but it was not high enough for the public health specialists to feel that it was a risk to public health and it was an issue of extremely short duration. I do not seek to diminish the incident at all, because such things should not happen, but we need to see it in that context. It does not happen widely and it is not a danger to public health.
I understand that, but the people in the area that was affected hope that the small schemes in their area will be of high quality.
The board places stretch targets on the business. By definition, those targets are designed to stretch us beyond what we planned for the year. We outperformed the planned profit before tax by, from memory, about £12.8 million against a stretch target of £15 million, so we were close to the stretch target.
I welcome that and recognise that you should be stretched to determine how you can achieve those efficiencies. However, is it realistic to make the spending on the types of schemes that are scattered across Scotland's rural areas more efficient in the same way that it is for the large schemes for the major cities?
The way in which we are regulated involves the Water Industry Commission establishing an efficiency target according to a methodology. If you want to understand how it does that, you probably ought to ask the commission direct, but it benchmarks against other water companies elsewhere and the efficiency targets that we are set are supposed to be stretching but achievable—it would be silly to set targets that were not achievable. When we start a regulatory period, it is not always clear exactly what we need to do to achieve the targets, but we set out and go for them with some vigour. We would not accept the determination if we did not believe that it was doable. That is the bottom line.
Gentlemen, can we turn now to leakage, which your chairman was anxious to turn to?
No pre-emptive strike this time, Charlie.
You met your leakage targets in 2008-09, after a number of years of failing to meet them. According to your annual report,
We have to take out 100 megalitres this year. Geoff Aitkenhead will tell you how we do that.
Action is going forward on a number of fronts. We continue with the front-line effort, which is to find and fix leaks wherever they are in the network. That consists of leaks that customers notify to us, when it is obvious that water is around and there is a problem. Equally, however, we now find and fix as many leaks that are not visible. Advanced technology is used to locate leaks in the underground network. That effort therefore goes on in the front-line find-and-fix activity.
In the draft determination of charges for 2010 to 2014, the Water Industry Commission states:
I understand the commission's view. It is looking for an asset management strategy that takes into account the leakage results that we are now delivering. The commission is therefore anxious to know at what point we will start closing down water treatment works because we do not need to produce as much water now that we are avoiding leakage. From our point of view, the first priority is always security of supply to customers, so we would tend to be a little bit more conservative and cautious than the commission in terms of the sequence of events. We are anxious to drive down the leakage and get to the economic plateau of leakage, then proceed with the rationalisation of assets. Naturally, there will be a little bit of overlap between those two areas, and some of the rationalisation can begin before we get to the end of the leakage journey.
The Scottish road works commissioner indicated that he would "not shirk" from imposing fines on utility companies that do not comply with the required standards for repairing roads. In his second annual report, he stated that Scottish Water was among the worst performing in that regard, with around half its utility works not having been repaired properly. What actions are being taken to alleviate the problem?
We agree absolutely that that is an unsatisfactory performance. Towards the end of the last calendar year, when it became clear to us that the results would not be good, we took pre-emptive action. In essence, we called in all the contractors who do that work for meetings with us. Improvement plans have been agreed with them all on how they will improve the quality of the reinstatements that they do for us—that is where the issue lies. We are monitoring their performance in that way. Clearly, if we do not see significant and reasonably rapid improvement, we will take more drastic action.
Obviously, the concern is shared across Scotland. My city is bedevilled by road works in one way or another—
It is not all their fault.
No, it is not all Scottish Water's fault, but the company plays a large part. If we can try to improve what is going on, it would be of great benefit. Do you have targets in place? The meetings that you described are all well and good, and you have decided on a way forward, but have you set targets for your contractors to ensure that the work will take place? What if they do not achieve what you have agreed in the meetings?
We have one very aspirational target: zero interruptions in the supply to our customers. That includes traffic disruption. Obviously, the target is aspirational. It will take us a long time to achieve zero; we are going for something very stretching.
It is fair to say, Shirley, that a big customer service complaint is that we fix something for somebody but we do not reinstate their pavement or road. That is one of the big ones that lashes back on us hard.
I am struggling to see whether there is anything between the aspirational target of zero and reality.
We have not set a series of annual targets, if that is the question. That said, I expect to see substantial improvement on the measure this year.
We look forward to questioning you again on that next year.
In your report, you say:
They are not. At the moment, our charges are rising below inflation.
In the current regulatory period from 2006 to 2010, our charges have gone down every year by half a per cent relative to the rate of inflation. What is important is the measure of inflation that is used for this purpose, which is the retail prices index. Every year, our charges have been 0.5 per cent below the RPI. Clearly, the commission proposal for the next period is that prices will drop by even more relative to the RPI.
Perhaps the delayed action in all that is what is causing Cathy to think that prices have risen by 3.5 per cent when inflation is at 2 per cent. That is perhaps what she is asking—it is a good question. Maybe you could just explain it, Douglas.
Sure.
A figure of 3.7 per cent is quite different to one of 1.8 per cent. To me, it looks like an increase—certainly, it is not a decrease.
In any charging year, prices are set with reference to the RPI in the year to the preceding October. The RPI factor that was used for the current year of 2009-10 was the RPI in the year to October 2008. There is quite a delay in the system before the RPI in the economy feeds through to the way in which pricing is affected. That means that this year, it will have appeared to customers as though prices have been higher than the inflation that they have experienced. However, our charges next year, in 2010-11, will be set by reference to the RPI in the year to October 2009. We do not know what that figure will be, but we expect it to be a deflationary number.
I wish you luck in explaining that to your customers, because I do not understand it.
We are financed through a combination of customer revenue and net new borrowing. For the regulatory period 2006 to 2010, the way in which the determination was struck, in line with ministers' investment objectives and the principles of charging, was that £800 million-worth of our investment programme would be financed from an increase in net new borrowing and the balance would be financed from customer revenue, so last year's increase in net new borrowing was one portion of that £800 million increase that we will be taking on board to finance part of the current investment programme.
Your accounts state that Scottish Water faced increased local authority rates and SEPA charges of £4.9 million in 2008-09. Why has there been such an increase in those rates and charges?
If you would like a detailed answer, we would need to reply to you in writing, but like any business that operates across the country, we need to pay whatever rates bills are sent in our direction. Similarly, we are charged by SEPA in accordance with its scheme of charges for the various licences that we hold and the services that it provides.
The annual report shows a shortfall in pension assets over liabilities of £160.9 million. Why is that? What is being done about it?
Our employees all have the opportunity to be members of the local government pension scheme. We participate in three separate funds—the Aberdeen, Edinburgh and Strathclyde pension funds. The position varies slightly between one fund and the other two.
I have just one more question.
I am sorry—which particular changes are you referring to?
What consultation has been undertaken with the workforce and its representatives?
We have no planned pension changes.
The way it works is that the trustees of the relevant pension funds establish the required contribution rate and we pay that.
I understand that, but your workforce is obviously affected, and I am interested in whether any consultation has taken place.
Not recently, but I think that there was a consultation when the local government scheme was changed a few years ago. Is that the case, Douglas?
Yes—the local government pension scheme arrangements changed at the start of this year; prior to that, an extensive consultation was undertaken with a number of interested bodies on behalf of the Scottish Public Pensions Agency. We were consulted, along with the trade unions, but we are not proposing the changes—we are purely admitted bodies within the pension scheme rather than principal employers.
Scottish Water spends huge amounts of money in capital investment, and I am concerned to ensure that we get what we pay for. The annual report indicates that a small amount of the Q and S II programme has not yet been delivered. Why is it still not finalised, and what is happening with it?
There are a small number of projects remaining from Q and S II. To put it into context, we launched 5,700 projects—which varied enormously in size—throughout Scotland during that regulatory period. There are a handful of projects still to deliver, which have largely been held up by an inability to buy the land that we need, or by issues with planning or SEPA consents. Those projects are under the microscope. We are not losing sight of any of them; they will all be delivered.
What proportion of the overall investment programme is signed off as fit for purpose by the quality regulators?
A substantial proportion—Geoff Aitkenhead will discuss that.
It is a significant proportion. At the end of the year to which the annual report relates, 59 per cent of the environment programme with SEPA was signed off, and a further 22 per cent was completed at the end of the year. Our process is that within one month of completing a project, we get the necessary paperwork to the regulator, which then has a further two months to sign off the project. The sign-off deadline for the end of the year in question—2008-09—was the end of June.
Are you content that you are achieving as much as you need to in that respect? Is there an issue with delays in projects at earlier delivery milestones? Are you content with the rate at which you are making progress against the investment that is made, and with the way in which that is assessed?
We are confident that the programme is on track. We would not deny, however, that it is a very big programme with some very tight deadlines and a vast number of schemes—keeping up to pace is a constant management challenge. We get an awful lot of regulatory scrutiny, particularly from the Water Industry Commission for Scotland, on the programme's rate of progress, and it is fair to say that it was a little surprised that we had completed so much of the programme by the end of March. We understand that surprise, because it appeared from the figures in December and January that we were lagging behind the milestone targets.
Are you confident that it will continue to work in the future?
Absolutely. We will deliver the programme. For reasons beyond our control, such as planning and land acquisition, some schemes will slip a bit. When that happens, we compensate by looking for other schemes to bring forward. We have been doing that throughout this regulatory period. There is much less flexibility to do that in the final year of the regulatory period because there is much less clarity at the moment about what will happen next year, in the next period. I expect that there will be a little bit of slippage, but not material. Everything that is in the programme will ultimately be completed.
I have a further question about the investment programme and the Q and S period. At the end of Q and S I, leading into Q and S II, something that was flagged up was a lag in consents and in getting new projects off the ground as you moved from one system into another. At the start of Q and S II, it took a wee while to build up the trajectory in the introduction of projects. That was identified as a potential problem before the process, and it turned out to be a problem.
Sure. We have an early start programme to try to do that, and we have an amount of money for this year to get ahead of the game.
We are investing £60 million in the current period in early start work, which is about getting investigations, feasibility work and some initial design work done, particularly for those projects that have a long lead time. That has enabled us to risk assess the programme for the next regulatory period and already to identify areas in which we will have to buy land, and we will need planning permissions and consents.
Presumably continuity of projects will benefit the construction industry, too.
Indeed. The early start programme was focused on getting a particular volume of work to the marketplace in the first year of the new regulatory period.
In the past six months, the committee has spent a lot of time dealing with the Climate Change (Scotland) Bill. Obviously, Scottish Water has a particular role to play in that context. It is noticeable in the annual report that you had a 1.5 per cent increase in CO2 emissions over the previous year. Why does Scottish Water still have a rising emissions trend? What are you doing to overcome that? How do your emissions compare with other industries in Scotland, and with similar organisations elsewhere in the United Kingdom?
Our carbon footprint has been rising as a function of the fact that we have been bringing on stage new treatment plants, predominantly to meet European directives for drinking water and waste water quality. It is generally true that we need energy-intensive treatment processes, usually featuring aeration, to meet those new standards.
I realise that you cannot do such things through customer charges, but the Scottish Government provides significant funding to Scottish Water each year. Can some of that funding be hypothecated?
We proposed in our plan that some investment should be allocated for renewables in the next period, but we have not yet received confirmation from ministers about that. That may or may not come. Beyond that, members know about the public finances. I doubt that money will be available.
I think that we would have to look for partners to help to fund large schemes. We would not think about charging customers for them. We would be open about that.
Okay.
Perhaps Mark Powles would like to talk about his business solutions.
When the market opened, we realised from a retail point of view that we could not build a business purely on reading meters, billing customers and providing customer service. Therefore, we brought in a team specifically to go into customer sites with a view to helping customers to use water more efficiently, meet their environmental credentials and reduce their consumption. In the past 12 months, we have saved our customers almost £5 million in consumption costs. We have also done a lot of work to help them to reduce leakage and to optimise processes in their businesses. That has a knock-on effect: if water consumption is reduced, power to heat water will not be used. That work has been well received.
Leakage is a huge issue for climate change, of course. We need to produce less water and use less electricity.
This might be an issue for how you present information in your next annual report, but it would be useful to have some quantification of how your different activities address climate change reduction. That would be a useful element to incorporate in your reporting mechanisms. I know that that will take time to put in place, but the committee would certainly be interested, and I suspect that others would, too.
I am not sure what that mechanism is, but I am sure that there are things that we could share with the committee outside of the set pieces. Richard Ackroyd mentioned the Glencorse water treatment works, which is pretty close to the forefront of sustainable design. If members of the committee are interested in a visit to that site, we would be more than happy to arrange it.
We take that offer on board—thank you.
The Flood Risk Management (Scotland) Act 2009 identifies you as a responsible authority. How does the act affect your current and future investment programmes? Are you confident that you can discharge your obligations under the new legislation?
It is a big issue for us, and we have a clear role under the legislation.
We were particularly pleased that surface water management planning was included as a tool in the Flood Risk Management (Scotland) Act 2009. We have done some good work recently with Glasgow City Council to understand how surface water management plans and sustainable urban drainage can be applied, particularly in the east end and the Commonwealth games village development. We need to extend that, and we have a lot of work to do.
I presume that that discussion will come under the metropolitan Glasgow strategic drainage plan.
It will, indeed.
Such discussions are starting with councils across Scotland.
I have a couple of follow-up questions about the climate change agenda. I want to understand a little more clearly what you were saying about the potential for larger-scale renewables facilities on land that is owned by Scottish Water. I assume that if you get into some sort of partnership arrangement with an existing renewable energy business, you would not be talking about generating electricity to feed directly into Scottish Water's demand, but would be looking to generate revenue by selling it to the grid. Is that right?
Yes. In the smaller facilities, we would be trying to satisfy our own site's demands before chipping the extra over the fence, as it were. Given the number of megawatt hours that we use in a year, the only way we could be self-sufficient would be by using large wind farms. Obviously, we would not be using the power directly in our sites, but we would effectively be using green energy to cover all of our needs. That is the principle that we are applying.
It is important to understand that, although that is a potentially great source of revenue for Scottish Water and is helpful in terms of Scotland's overall renewables targets, it does not reduce Scottish Water's operational emissions any more than buying electricity from an existing renewables supplier would.
That is correct, but we still think that it is the right way for us to go.
It is definitely under the heading "Good Things", but it is important to understand the distinction that I made.
Yes, but that is the only way we could be self sufficient, although you are right to point out that a large wind farm would just feed into the grid.
What will happen in 2014, if you meet the economic level of leakage that you have agreed with the regulator? You have mentioned how important that is with regard to tackling climate change. Once you have met one target, what will you do to ensure that you meet your climate change targets by continuing to reduce leakage?
We would never stop working on leakage even if we did not have a target to reach. In order just to stand still in respect of the economic level of leakage, we have to have a lot of people working on it, which involves a lot of money and time. If we did not do that, it would run away from us again. At that point, however, we would be spending money that we perhaps should not be spending, under the present definition, because we would be spending more than we would be saving. Whether that will change—for example, it might be the case that, because of climate change considerations, such work is judged to be something that should be done regardless of monetary concerns—I do not know.
You are looking at the matter from an economic perspective rather than from a climate change perspective.
There is another iteration to come. We in Scotland are, compared with the rest of the United Kingdom, at the beginning of the leakage journey, although we have made significant strides in the past three years. At the moment, we have a view on the economic level of leakage across Scotland, but we will drive straight through that, because we will be considering the economic levels of leakage on a zonal basis, which involves the asset rationalisation that we were talking about earlier, and which is done on a regional basis, rather than a Scotland-wide basis.
It might be useful if future reports said more about that, rather than just making statements about the economic side.
By 2014, we will be in the carbon reduction commitment scheme. We do not know what the price of carbon under that scheme will be at that point but, as the price goes up, the economic level of leakage will reduce further.
We have enough time to run through the final items that we wanted to cover.
The draft determination proposes an average charge cap for household customers of retail prices index minus 1.5 per cent. What is your view of the charge caps in the draft determination, and do you have any specific concerns about the draft determination?
There is a process taking place: we have to respond to the draft determination by 23 September. The board will meet tomorrow to discuss what that response will be, and the WIC will then come back to us in November, when we hope to reach an accommodation.
I should point out that, if the committee has a view on that, it is important that you register that view with the Water Industry Commission for Scotland before 23 September.
We will discuss later in the meeting whether we will do further work on that.
The draft determination includes some discussion of borrowing from Government. Specifically, it says that the Scottish Government may no longer be able to offer Scottish Water full flexibility in the timing of its borrowings. If the Scottish Government is not able to offer full flexibility in the next regulatory period, what impact will that have on the organisation?
The commission is speculating. An important part of our consideration of the price determination is to get a commitment from ministers that they acknowledge the level of borrowing that is necessary for us to achieve what the determination will ultimately require us to achieve. We are in active discussion with officials about that, and we hope to get confirmation from ministers that we will be able to draw down the right amounts at the right time.
If that is not possible, what plans are in place to deal with the situation?
If it is not possible for whatever reason, what options would be available? It would be a matter of deferring investment. Simple arithmetic says that we will not be able to invest as much if we do not have access to borrowing.
We could always change the regulatory regime and the status of Scottish Water to allow it to source resource beyond that which is available from the Government.
I am not sure that I would be happy with that.
I think the committee will note the suggestion.
I will ask about retail competition. Scottish Water's annual report states:
It is a moving feast but, in the year in question, our customers still represent more than 99 per cent of the market. About 500 properties or units have switched but, to my mind, switching is a narrow way to define whether retail competition is working; if we in Business Stream had sat back and waited for everyone to come in and try to take the customers from us, the figure might have been a lot higher. We have tried to listen to customers, to identify what they want from their retailer and to provide a range of services, discounting structures and price incentives that mean that they want to stay with us.
What is the profile of the 1 per cent of customers you have lost? Are they some of your largest customers? Is there any change in the small business sector or have small businesses not really bought into competition?
The profile is a mixture. Some are high-profile big businesses and quite a few are in the small and medium-sized enterprise market, from sole traders to people with two or three units. Our philosophy is that, although we will celebrate when we sign a long-term contract with a customer, we will also do an inquest every time somebody switches because we want to know why they have done so and what we need to do to win them back in the future.
What are the main reasons for switching that customers give you?
With some the reason is price. One can provide what I call economic discounts to a customer. I cannot legislate for somebody coming in and offering something that is completely out of kilter. In the early days, some customers switched for quite big discounts. I am happy to let such customers go because I cannot provide the service at the level of discount that they have been offered by somebody else. That is not the case for all customers. There is a long history and some customers have had bad experiences before the introduction of competition and after it, so they have left. However, nothing gives me major concern that we have not got our strategy right.
Your report also states:
There is spontaneous awareness and prompted awareness. I could quite happily get up to 90 per cent brand awareness very quickly, but I would probably have to spend £10 million or £15 million to do it. There is no doubt that we focus very much on educating customers to let them know that competition is coming, outline what their choices are and start to promote our services. We serve about 100,000 customers in Scotland, so it has to be an iterative effect. To get to 46 per cent awareness in the first 12 to 15 months after launching a brand was way above what we expected. We have used marketing spend prudently to create the maximum impact. We are now trying to segment our customer base, because the messages that we need to give to customers differ depending on whether the customer is a farmer, a retailer or an industrial plant. We have started to do much more targeted marketing, so I expect to see the figure increase over the next 12 months. It is a product of how much we are prepared to spend on marketing investment.
Are there any final questions?
Issues of flood risk management are in many of our minds, given the recent problems with floods in the north-east. You have, as a responsible authority, new duties to discharge with regard to flood risk management. Has any of that kicked in yet in respect of your response to what happened in Elgin, Fochabers and so on?
The major way in which that has kicked in is through the better planning and closer liaison that we are starting to do with the councils. I do not think anybody could have done anything that would have stopped the flooding in the north-east in the past week, although reports after the event will probably comment on whether anything could have been done to mitigate the impact. Scottish Water has, as much as anything else, been a victim of the flooding—our sewers have been flooded and some of our assets have been damaged. Ultimately, the only way we can deal with those matters is to have better defences around assets and to seek to find alternative routes for the water to dissipate.
It would be interesting for us to get your interim views once you know what has happened, because this is an example of the realities of flood risk management that we have to dig into in respect of the Climate Change (Scotland) Act 2009.
I have a final question. It is a gut reaction to the section in the annual report that lists, and gives background information on, the board members. They all seem to have something very important in common. Can you spot what it is? Has Scottish Water considered diversity on the board and among senior staff?
I have been attending diversity meetings with Karen Carlton. There has been one change since we printed the report—there is now a female on the board. We obey the appointment process assiduously. It starts off with blind sifting, so we do not know what the shortlist is until we turn the cards face up. After that, we have to go through formal interviews to establish competencies. We would say that we support diversity, so I am pleased to say that we now have a female on the board. I appreciate the question, but I think that what we have done in respect of appointments would stand up to scrutiny. You will understand that the appointments are mainly about professional competence.
I note that one woman has been appointed to the board in the past few months. Further on in the annual report, the names of the senior staff whose remuneration is recorded show a similar balance, in that they are overwhelmingly male. When those cards are turned over and people realise that things are so unequal, does Scottish Water consider how—to use a mixed metaphor—it casts the net in the first place?
For executive members, the net is cast nationwide, although internally rather than externally. Obviously, the non-executive members are recruited externally, so the result depends on who replies to the advert, who is headhunted and who is interested. The net is really cast very wide. The process is quite long and rigorous.
As far as the executive members are concerned, we are very conscious of that imbalance. We have women among our senior executive population below board level, but they are a minority. I think that it will take quite a while to change the situation because we do not have huge turnover at that level, but I have no doubt that we need to grapple with the issue.
Many boards are still at an early stage in considering such issues.
I understand what Richard Ackroyd is saying, but I suggest that he go back and look at the organisation's processes. Often, people will pick people like themselves—I do not suggest that the sifting process is not as good as it should be—but I think that the issue should be looked at. In ensuring that the organisation has highly skilled members of staff, surely there is no suggestion that Scotland's workplaces do not have such a thing as highly skilled women?
We certainly make no such suggestion. Let me just make two points in response: first, the selection process is not ours, but the Scottish Government's. Secondly, board members are not appointed by us but by the Scottish Government. For positions in the board where the appointments are not made by the Scottish Government—in Scottish Water Business Stream—40 per cent of the senior staff are female.
Perhaps we can put that point to the cabinet secretary when we see him soon. For the moment, gentlemen, thank you very much.