Finance Committee, 10 Feb 2004

Meeting date: Tuesday, February 10, 2004

Official Report 301KB pdf

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Item in Private

Before we dealt with the previous agenda item, there was an expression of interest in talking generally about some of the issues to do with Scottish Water. If we bring forward agenda item 7, that will give us a peg on which to hang that discussion. We can then deal with the issue under that heading. I think that we are all agreed on that.

I think that Wendy Alexander wanted to comment.

Can the clerks update us on what they have done following last week's meeting? The clerks were to write to the Executive on a number of issues that arose, so it would be helpful to find out where we are with that. What issues are outstanding with the Executive and what correspondence has been entered into with the water industry commissioner for Scotland, Scottish Water and the Scottish Executive?

To clarify, we wrote to the water industry commissioner some time ago and we are awaiting a response to the specific issues that we raised. We recently received a letter from the Executive. Our adviser has been considering some of the issues that arose from last week's evidence. I intended to have a discussion this afternoon with the two reporters to assimilate all the information and to try to get it into strands from which we could generate questions for the Executive. Some of the questions that we want to ask are relatively clear and arise from the evidence that we have taken. I want to be sure, in conjunction with the reporters, that we have identified the correct issues.

What have we received from the Executive? The clerks have chosen to circulate some things. For example, the officials who appeared last week asked that their full statement be circulated, even though they did not read it all out. We learned subsequently that only some of the statement was read out and the full statement has been circulated. Has anything else come in from the Executive since last week?

Yes. We received a letter from the Executive late yesterday afternoon, which we will circulate to members, if they so wish. I hoped to discuss the letter with the reporters this afternoon.

Issues were raised last week on which we said that we would write to the Executive, and it would be unfortunate if the committee did not get the chance to pass its view on what we should write to the Executive on the issues that have arisen during the past three weeks. From looking at the Official Report of last week's meeting—this is an issue for the clerks rather than for us—it seems to me that four issues are outstanding on which we are committed to correspondence. I want to ensure that we are at one about what those issues are.

I am happy to go through my four issues, but the risk is that I might ask us to write to the Executive about something on which the Executive has already written to us. Perhaps the clerks will give us an indication of the terrain that the correspondence from the Executive covers.

We received the letter late yesterday afternoon. It deals with the issue of end-year flexibility, but I cannot remember off the top of my head what the other couple of issues are. However, as the convener said, if members and the convener are agreeable, the letter can certainly be circulated.

Would it be helpful if we circulated all the information to members?

I think so.

I will try to clarify the four outstanding matters. Was the letter that we wrote to the water industry commissioner circulated to members?

I think that it was, but I will check. If memory serves me correctly, the letter was written at the beginning of January.

I think that it was circulated to all members.

A second issue has arisen with the water industry commissioner since then; that is the issue that Fergus Ewing raised last week. It would be helpful to write to the water industry commissioner again to say that we have not yet received a response to our original letter and to raise that additional issue, which was whether the financial ratios were chosen with reference to the performance of water companies in the rest of the UK. That would probably close down that issue, which I am as keen as anybody to do. That is the outstanding business with the water industry commissioner.

Last week, a number of members expressed the desire to have a reconciliation in writing of the issues that the Cuthberts had raised. The Executive said that it was better to turn up and give evidence, but, as we discovered, the officials did not get to read out all their evidence, which vindicates the point that written evidence sometimes has merit. We should write to the Deputy Minister for Environment and Rural Development to say that we found it helpful that he gave a number of references to the importance of clarification in writing and that we hope that he will look sympathetically at providing a written reconciliation. Of course, that does not prejudge what the reconciliation might say. Given the confusion, a written reconciliation would improve transparency.

The next point that I want to raise is that I have looked back at some of our exchanges with the policy officials last week on the status of the £188 million and the £148 million. It is important that the record is accurate. Irrespective of what is in the letter that we have received, we should write to officials or the minister asking whether they think that the relevant sections in the Official Report are factually accurate or whether they want to revise the figures. If they want to revise the figures, that is fine; but it is important that the Official Report is not inaccurate on this matter. The figures that we have seem contradictory at the moment.

There was some contradiction, yes.

The integrity of the Official Report is important; we use it to hold ministers accountable. On this delicate matter, about which the Executive has been so adamant that it would not put things in writing, let us ensure that the Official Report—albeit it is a record of oral evidence—is accurate. If it needs to be adjusted, so be it.

Those were the principal issues that I wanted to raise. It would be helpful if the committee's adviser could clarify for us what he thinks are the substantive outstanding issues. That might perhaps generate a fourth letter. Because this is to do with factual accuracy, we should put a time limit on it. That would let the committee deal with the issue and put it to bed within a reasonable timescale. Perhaps when the clerks draft the letters they can include appropriate deadlines for the resolution of these matters. However, as I say, I am aware that the expert adviser has other substantive issues.

My view on the third issue that Wendy Alexander raised is that the answers that we have received are contradictory. If the figures are reported accurately in the Official Report, there is a contradiction. That matter is down on my agenda for discussion this afternoon with the two reporters.

I have had a discussion with Richard Dennis and Richard Wilkins and, as a result, I need time to think before drafting something for the committee.

There are two important issues. The first is the factual accuracy of the Official Report. We should write to the minister, including the extracts of the Official Report, to say, "Please let us know whether you are comfortable that the extracts are accurate. If not, please change them."

The second issue is the treatment of EYF. No doubt the reporters and the adviser will decide how best to pursue that.

There are a number of contradictions in the record from last week.

It is important that we write to ask whether the extracts are accurate. It will be up to the minister to choose which information is accurate. The second issue is what we, as a committee, might want to do thereafter.

I am largely content with that suggestion. I am looking forward to the meeting this afternoon so that we can make some progress.

I agree with Wendy Alexander. We should write, and get written replies. We are talking about fairly complex matters. Unless those matters are pinned down in writing, I do not think that we can do our job properly—we must come up with a worthwhile and solid report.

Because of the corpus of work involved in the various topics that Wendy Alexander has described—and in a few more that I will come on to—I doubt whether the WIC, the Scottish Executive or Scottish Water will be able to reply in time for our next meeting. By the time that they receive our letters, we will be into our recess. Various people—Mr Millican, Mr Sutherland and the civil servants—may, like others, be taking holidays. It is unlikely that we will receive replies by our next meeting. I hope that members will agree that we should rethink when we consider our report. That is not in any way a party-political point. It is common sense.

The next meeting is not for a fortnight.

I do not think that a fortnight is enough. The recess week intervenes and, as well as sending the letters, we have to receive the replies. I propose that we postpone consideration of our report until we have those replies. Otherwise we will find, in a fortnight, that we do not have all the information that we need.

I want to discuss supplementary material that I would like us to receive, but would you like to pin down this point first, convener?

We should establish first all the issues that we wish to address; we will deal with the procedural matter at the end.

Fair enough.

I think that we need the Scottish Executive to address a number of points. First, we need a specific reconciliation of the Cuthberts' analysis. So far, we have had only an assertion that that analysis is wrong, rather than a point-by-point rebuttal. Instead, we heard an oral presentation of a statement that had clearly been prepared. I think that we should have had notice of that; we did not.

Secondly, on the issues that I raised concerning the level of borrowings that is permitted, the level of borrowings that is prudent and the golden rule, I cast doubt last week on oral evidence that we received from Mr Sutherland on the factual issue of how much borrowing there has been by English water companies. Information that was provided by the Cuthberts and information from the statistics that were published by the Office of Water Services cast some doubt over whether Mr Sutherland's information was correct. The witnesses from the Scottish Executive—the civil servants—were not able to answer the point last week. I think that they, as well as Mr Sutherland, should answer that point.

The third point relates to the EYF, or the underspend. As well as responding to the specific figures and issues that Wendy Alexander highlighted, I feel that the Executive should be asking whether the use of EYF is now endemic—judging from the figures that we heard today—given the various substantive problems of planning permission, environmental constraints and so on, which were described to us last week. I think that we are facing an endemic underspend, which I think will go on year after year. We should face the matter head on. I would be interested in the Executive's response on that.

We need to hear the WIC's response to the Cuthberts' analysis. The commissioner's role involves giving advice on the level of borrowings that is required. I think it only reasonable that he gives a detailed response to the Cuthberts' analysis, given his statutory duties to look after the interests of customers. If the Cuthberts' criticism is correct, customers could have been short changed, or they could have benefited from more investment. Because of that statutory obligation on the part of Mr Sutherland, it is unsatisfactory for him to argue that that question over borrowings is not an issue for him. He, too, should reply to that question and should explain the figures that he gave us, which appear to be flawed.

I would like Scottish Water to respond to the request for a breakdown of how its capital expenditure has been allocated in outturn. There have been substantial underspends in recent years, largely because of projects that were supposed to have gone ahead in year one being postponed to year two, and also because of the process being implemented in spades. Such a breakdown has already been requested and alluded to, although perhaps not in as much detail as has been the case for some other weighty matters: we need to see a breakdown and a spreadsheet, showing where the money has gone in outturn. We also need to see—if possible—an estimate of where the money is going in the future. That information should be available, given the £1.8 billion of projected investment through Scottish Water Solutions. There will be a lot of data on the matter.

We need to grasp the nettle and see the actual projects that have been invested in, those that have been delayed and those that are in the pipeline. Only Scottish Water can provide us with that information. Once we get down to that level of detail, we will begin to get to the heart of what is going wrong in the water industry.

Although I saw the letter to the water industry commissioner, I cannot recall its contents in detail. Margaret Cuthbert made reference to the commissioner's evidence and, although I do not have the Official Report with me, it seemed to indicate that the water industry commissioner had borrowed as much as he was able to. We need to get the commissioner to clarify that suggestion.

One of the issues was that much of the commissioner's evidence suggested that he was arguing on the basis of prudence, but there were a couple of points—

As I said, I do not have the Official Report with me, but a paragraph that Jim or Margaret Cuthbert read out suggested that the commissioner thought that he had borrowed as much as he was able to.

I understood the matter slightly differently. I thought that it meant that he was able to borrow what was required, as opposed to what he was able to. In other words, he had no difficulty in borrowing the amounts of money that he thought were needed. The sum was £51 million in the first year, which is significantly below the budget provision.

I had not thought that he had said that he had borrowed as much as he was able to; the paragraph that was read out came as a surprise to me. We should seek some clarity about what he actually meant.

A number of useful issues have been raised. I suggest that, along with the reporters, we examine the various issues and the information that we have received and prepare letters to the relevant bodies, primarily the Executive. As I indicated, there is an outstanding letter from the water industry commissioner.

It will be impossible to write all those letters by committee, but we will try to capture all the points that have been made in our discussions. I hope that we can report back to the committee at our meeting on 24 February. I suggest that members leave it to the reporters and me to identify the progress that we have been able to make and to decide whether we are able to produce a revised draft or an interim update. Clearly, there is a degree of uncertainty with regard to the information that is available to us.

When we produce our draft report, it is important that we deal with it in private. Are members agreeable to our doing so?

Members indicated agreement.

There is a draft report on the table. I am sure that members have comments to make on it—at the last meeting, Fergus Ewing said that he had 30 points to make—and I suggest that it would help to speed up the process if members could feed in their comments at this stage. That would ensure that we do not have to back-end our report in the way that Scottish Water had to back-end its investment programme.

That is a fair point. It would be helpful if members could let us have their responses to the draft report by close of play on Wednesday. Of course, members will have further opportunities to make suggestions at later stages in the process.