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I apologise to our guests from the water industry for the late start to this item. As you will have discovered, due to unforeseen circumstances that have arisen in respect of a previous item of business, we have just had a fairly lengthy session with the Minister for Transport.
Convener, I would like to reciprocate and offer you our thanks for the invitation to address the committee this afternoon. I will make a short presentation on behalf of all three authorities. The committee may then want to question us generally or specifically. If any orchestration is required, I would be happy to indicate who would be the most appropriate person to answer particular questions.
Thank you. You have given us a very good overview, which will allow us to make a good start to the discussion. Your summary paper was also useful.
It is clear from your presentation that you feel that restructuring has enabled considerable advances to be made in the water industry in Scotland. Does any aspect of the new structure particularly commend itself?
I have worked with both systems. I believe that the structure that was introduced in 1996 has had a number of advantages for the Scottish water service and for our customers. The revised structure introduced three organisations of a strategic size, comparable with those in England and Wales. That has been beneficial, as it has provided the opportunity to develop economies of scale, to benchmark our performance against that in England of Wales and, I hope, to learn from any mistakes that have been made there.
I apologise for asking a question on the structure that looks backwards, but this has been part of the debate since reorganisation. Would any benefits arise from restoring the provision of water and sewerage services to local councils—perhaps to consortia of councils that would replicate the areas of the regional councils rather than to the current councils?
Your question implicitly concedes that the institutional structure of Scottish local government does not suit our needs. I am not convinced that any other form of return to local government—through joint boards or consortia—would enable us to make decisions as quickly as we will have to in the context of competition. That is what has changed over the past four or five years. To make decisions without the necessary reporting back that is implied by a joint board structure, we need a structure that involves a single purpose authority. There are some good international examples of utilities that have tried to operate in such a way in a competitive market and have found it very difficult.
Responsibility was taken away from local authorities some time back, there were many changes to the structure and you are now beginning to consolidate the arrangements, so I understand your answer to Murray Tosh's question and why you may have some concerns about revisiting a former position. However, would you consider the potential of companies limited by guarantee that are wholly owned by local authorities? That would give flexibility in relation to decision making, but would allow greater local accountability.
There is a problem of scale. It would be very difficult for one local authority to wholly own a company that would be big enough to do the job that we currently do. That would push us back into the consortia arrangements, which would present the same problems. I cannot find a way round that.
Under the old mechanisms, you would report back to councils. If it were a wholly owned public company made up of a consortium of people, would that not maintain accountability—through the annual report and the responsibility to internal shareholders—to the local authority but still allow decision making?
The area covered by West of Scotland Water includes 13 local authorities. If 13 local authorities owned the company, I would expect that local accountability to demand a degree of reporting back. I do not see how that could do anything other than make the process of decision making more cumbersome than is fitting to the kind of environment in which we have to work.
In your submission you say that you
I suggest that the chief executives answer that question individually, in respect of the area for which they are responsible.
As long as we keep the answers fairly tight.
In terms of the urban waste water directive, we have four or five—because circumstances at Eyemouth have changed—undertakings that will not be on stream at 31 December 2000. Those undertakings, which were given by the Government, are Levenmouth, St Andrews, Kirkcaldy, Dunfermline and Eyemouth—over which there is a question mark. That is not to say that we have not made any progress. Seafield—which treats a large proportion of Edinburgh's sewage—will be on stream and compliant.
Can I clarify whether you are taking about slurry as the pollutant in streams?
I am talking about general run-off from streets, agriculture and so on. Streams carry bacteria and run into beaches. They go into the high water or low water, depending on what is happening, and that is where the sampling is done. That causes localised pollution, which is a major issue. It is a bigger issue on the west coast, where there are slower currents, but the east—particularly the estuary—suffers from it, too.
In the north, 65 per cent of our sewage goes into the sea untreated. To tackle that from the angle of the urban waste water treatment directive, we have four private finance initiatives around our coastline and another scheme at Montrose, which is being built without PFI. Those schemes have either been built or are under way. By early 2002, all our sewage treatment plants will be fully up and running. By that time, the amount of sewage going into the sea without proper treatment will have fallen from 65 per cent to less than 20 per cent. That is very good news. Those schemes are Highland, Inverness and Fort William, Tay—a £120 million scheme taking in Dundee, Carnoustie and Arbroath—and Aberdeen. Aberdeen is another large PFI scheme, which covers Aberdeen, Peterhead and Fraserburgh. The Moray scheme, which will be put in place a little later than we would like, will cover Lossiemouth, Buckie, Banff and Macduff.
West of Scotland Water complied with the 1998 deadline to stop the disposal of sludge at sea. We are now able to recycle most of our sludge to reclamation—that is on an interim basis. We have 12 works to be completed under the urban waste water treatment directive, with undertakings throughout 2001. Those works are within a few months of being on programme. There have been some planning difficulties. Regrettably, sewage works do not seem to have best neighbour status, and planning difficulties have led to delays. However, those works are under construction and will be completed by late 2001 or early 2002. There are a further 30 projects to come on stream by 2005. At the moment those are progressing through various stages of planning and contract procurement. We hope to meet that deadline.
Moving on, is our drinking water of a comparable standard to the rest of Europe?
The right answer is that we are getting there. Rather like sewage, the situation with drinking water is complex, as the standards keep changing. We are all at 99 point something per cent compliance—99.8 per cent is very close to 100 per cent. Like everyone else in Europe, we are all chasing the dream of 100 per cent compliance. In small communities in certain parts of Scotland, as in England and Wales, compliance will take longer than it does with large supplies to cities such as Edinburgh or Glasgow.
So you do not think that any specific problems remain?
Each of us has small specific issues, although some are bigger than others.
It gives me no pleasure to say that NOSWA's drinking water is the worst in the UK. We need that investment of £400 million in order to bring the water up to standard.
There has been a transformation since 1990, when Strathclyde Regional Council started on a programme of 146 projects to modernise the water treatment facilities throughout its area. Those projects were due to be finished by 2004, apart from the Milngavie project for Glasgow, which I will come back to. We think that that programme of projects will be finished about 18 months early, so we are now in the final stages of upgrading the smaller supplies in Argyll.
It would be helpful if the witnesses would comment on private water supplies and where they fit into the system.
Who would be the best candidate to answer that question?
I can speak about the situation in the west of Scotland, where there are about 1,050,000 houses, of which all but 19,000 are connected to the public water supply system. The shortfall tends to be made up of small communities or individual properties that are not connected to the public supply, generally because they are so far away from the system. Using the normal criterion of costs, it would not be economic to connect them.
Three per cent of the population in the NOSWA area is served by private supply.
We have a smaller proportion of people who receive private supplies than either NOSWA or West of Scotland Water, but we face the same issues. Whether people are drinking safe water from private supplies is an issue that affects both Scotland and the rest of the UK. The responsibility sits with environmental health, but we provide support where we can.
So it is an environmental health responsibility if it is a private water supply?
Yes.
What exactly constitutes compliance? Are you saying that if we have 96 per cent compliance, the water is only 96 per cent as good as it should be? Or are you saying that 4 per cent of your customers get water that is not quite up to the standard? Or are you talking about the people who are not connected at all to whatever grids you have—the people with the private water supplies? I want to be clear about what the goal is when we are going for 100 per cent compliance and who, if anybody, is left outside that.
I look to my colleagues for support on this point, but I think that we need to distinguish between supplies provided by the water authorities and those provided privately. We do not have a remit on the private supplies.
The state of the infrastructure is crucial to water supply, and asset management planning should be achieved through the quality and standards process starting in 2002. Have you completed surveys of your overground and underground assets? If so, what state are they in?
I have an exhibit here. It is part of our infrastructure—a piece of unlined cast-iron pipe from Pittville Street Lane in Portobello. Apparently, it was originally installed in 1903 and replaced in 1999. As far as the underground water infrastructure is concerned, we have something like 12,000 km of pipe. Approximately 70 per cent of those pipes are in the same condition as the piece I have here. The other 30 per cent are not quite so bad, but they are certainly not satisfactory by modern standards.
There is very little difference between the west and the east in that respect, because the assets went in at roughly the same time. As I said in my introduction, having got close to the point at which, as a result of the investment of the past four years, we are able to meet the directives that we have been discussing, investment must now swing towards infrastructure, so that we can deliver the kind of service that we need.
Do you have a rough idea of the percentage of water that is lost through leakage from those old systems?
Various figures have been bandied about, but it is somewhere in the range of 30 to 50 per cent. In older parts of Edinburgh, it will be at the higher end of that spectrum; elsewhere, it will be less.
One of the things that we are finding is that some of the infrastructure that was put in place in the 1950s and 1960s, when plastic first came in, is now deteriorating and falling apart. That is true not only of Edinburgh; it is happening everywhere. Some of the 100-year-old stuff, such as the piece of pipe that you have just seen, can be revitalised by scraping and relining and will last another 100 years if given a decent coat of lining material.
Is the urgency of finding the finance to replace this piping quite considerable?
We are not using water as efficiently as we might be, and removing leaks has a cost. The impact of replacing pipes not only would involve the cost of the pipes, but would entail ripping up the streets of Glasgow, Edinburgh and everywhere else, causing massive disruption. The pace at which that is done has quite an impact on the economy. The other impact is on prices. Our job should not be driven by reducing leakages, but by the quality of service to our customers and the performance of our assets. We are not comfortable with or proud of the fact that we have large leakage, but solving that problem is secondary to the performance of the assets for the delivery of the service.
So you will just have to live with the situation for the foreseeable future.
We just keep going at a sensible rate.
We must remember that Scotland is different from England and Wales in that there is no real shortage of supply. We are fortunate in having a surplus of supply over demand. We had a remarkable dry spell in the west this summer, from the beginning of April right through to September, and we managed to get through the whole summer without imposing any restrictions on the supply, despite wastage. We had to do some clever things with shifting water round the countryside, but we managed to maintain supplies without putting restrictions on. I agree with Jon Hargreaves that a balance must be struck between academic leakage figures and what is in the best interests of the customer.
Going off on a slight tangent, if 30 to 50 per cent of water is leaking out in Edinburgh—and I do not know the figures for other areas—
It is about 30 per cent in our area.
Right, so about half of the water supply could be leaking into the ground. I recognise the economic impacts of trying to sort out all those problems at once, as well as the infrastructure cost issues. However, if we have overcapacity, does that not give us the prospect of exporting water to private systems south of the border that need to buy water from Scotland? That seems pretty obvious to me.
The infrastructure does not exist for moving water in bulk from the north to the south of these islands. I know that one of West of Scotland Water's predecessors considered the possibility of taking water by tanker to the south of England, but even that was not an economical way of moving water about. There are oil terminals, but there are no water terminals where pipes can be plugged into the boat so that the water flows into the mains. Theoretically, it could be done, but it would involve a huge amount of capital expenditure, at this end and at the receiving end.
Water is unlike electricity and gas. Water is water is water. You cannot change its density or properties. You can compress gas and change the voltage of electricity.
Would you like there to be improvements in the way in which water is regulated? I am thinking in particular about the lack of regulations governing boreholes and abstractions.
In a wide sense, we welcome regulation on the economic and the environmental side. Businesses need strong and independent regulators. We want to work with SEPA to achieve benefits for Scotland. Environmental regulation is good not only for the environment, but for business and quality of life. Our market research backs that up strongly. Results that we have had recently on the pollution of beaches show that 98 per cent of the people felt that the pollution of beaches was a problem and that 82 per cent felt that it was a serious problem. That gives you an idea of the number of customers who want such matters sorted out.
I ask members to focus on priority areas as we have lost some time today. Bear in mind the fact that we will see the witnesses again.
I want to go to the heart of the water industry as it affects MSPs: the e-mails and letters that we receive about water prices, particularly in the north of Scotland. People tell us that the industry has got the balance wrong between the needs of investment and compliance with directives and the ability of customers to adapt to rapidly increasing prices in the past couple of years.
Any subsidy from general taxation would be likely to fall foul of European competition rules and would lead to the kind of debate that surrounds the motor industry and shipbuilding industry.
I understand that. What about increasing the borrowing consents and the external finance limits? Would that allow you to put less pressure on revenue charges and, therefore, less pressure on your customers?
To an extent. However, the cost of the borrowing must still be paid. The servicing of the debt would have to be paid for from customer charges.
The question is difficult but it keeps coming up. The balance between what the Scottish water authorities raise to pay for investment through revenue and what comes from external finance limits borrowing is, rightly or wrongly, about the same as the balance that can be seen in the English public limited companies. Although we are driven by different factors, everyone in the sector is driven by factors such as rates of return on investment, and on the affordability at the time and what is being stored up for future generations to pay for.
If the Scottish Executive were to say that, in the new context that has been created by competition and having considered all the costs of investing elsewhere, it is prepared to double the external finance limits, would you decline to take advantage of that on the grounds that you have the balance pretty well right?
We would have to think about that carefully. I can only speak for East of Scotland Water, obviously, but I think that our reaction would be that we would take advantage of the offer to a certain extent but not to the full extent as that would quickly lead us to a position in which we would not be able to pay our interest. Whether one operates in the public sector or the private sector, interest cover is a key financial parameter. If income went down and interest payments went up, we could end up bankrupt at a point not too far in the future. The answer is not, "Just give us a load of money and let us solve the problem." We must get the balance right with regard to the pace at which we move.
I would like to respond to the reference that was made to charges in the north. It is important to put that into context. We are sorry that it has been necessary to increase charges, but we know from survey work that we have done with our customers that most people do not know what they pay for their water and that those who think that they know generally tend to think that they are paying more than they are.
Murray Tosh was just a boy back then.
Fiona McLeod has just reminded me that the United States actually had a President then.
This is a key area for the water industry. I would like to make a number of points about the balance that must be struck, and how we deal with the matter in the future.
I am not sure that the witnesses are responsible for being off balance sheet or for the euro zone, but we can try and get their views. Who wilI Alan Alexander throw into the ring to answer that?
I ask Bob Cairns to kick off.
The convener is right to say that those issues that should not really be addressed to us. The Treasury, as I understand it, determines what is on balance sheet or off balance sheet.
On the euro zone question, I believe that, even if we went to the bond markets in the euro zone, we would not be able to borrow any more cheaply than the accumulated adjustments account—AAA—rating at which the Government borrows. Any advantage would be very marginal.
Do you want to follow up on that, Bruce?
This perhaps shows my ignorance, but Bob Cairns used some terminology, about accountancy mechanisms, with which I was not entirely familiar. I am not sure whether I am getting a picture that tells me that we are comparing like with like—Bob Cairns compared local authority schemes with existing PFI schemes.
I will help to clarify that, if I may, convener.
I am sorry—my question was on Murray Tosh's area of questioning.
I have a question about customer relationships, but let us skip that one and go straight to PFI. The core issue is PFI—or public-private partnerships—versus traditional procurement. We have viewed this in terms simply of funding mechanisms, and of deciding how to generate the capital to do something.
I might have been too fulsome in my praise of PFIs, but they are very suitable for large-scale projects, such as the two that I mentioned. The downside of PFIs is that there are extensive initial costs. There must also be legal and technical advice before projects can be set up. PFI is not suitable for every small water treatment works or every waste-water treatment facility. In the case of large projects—or bundles of smaller ones—as in the case of NoSWA, PFIs have been successful.
I agree with what is being said about risk. The risk for the future—with changes in legislation—is in trying to get somebody other than the customers in the east of Scotland to provide the finance. Risks are tied up in today's price: if a PFI gets it wrong, it loses money. That is a major difference from conventional procurement, under which we would have to deal with changes that might happen after 10 years. Under a PFI the partnership would have to do that.
I am conscious that we have been hearing about PFI from one authority. I want to explore whether the situation is different for the other water authorities, who have different projects. One authority is doing small projects; another is doing two very large ones. I cannot quite remember—
Perhaps we could ask each authority to establish their principal headline attitudes towards PFI/PPP projects.
My view is similar to that of Bob Cairns. PFI/PPP is more suited to larger projects. The North of Scotland Water Authority is involved in smaller projects that are grouped together. Our guiding principle is that our financial deal needs to be broadly similar to—or better than—that which would be reached through the usual public sector procurement process. We have, for example, rejected a PPP scheme for Montrose. Financially, the proposal did not stack up and was a worse deal than that which was obtained through the normal public sector channels. We therefore followed that route rather than using a PPP. In general, PFI/PPP is better suited to larger schemes. I wonder, therefore, whether we are now at the end of the process: most of what we need to do from now on is on a smaller scale.
In the west, we have three PFI contracts, which will procure four waste-water treatment works and a sludge treatment centre. Those are big projects.
In the west we have projects around the coastal areas and we are trialling a much less bureaucratic—if I can describe it that way—public-private partnership than PFI sometimes turns out to be. The committee should not lose sight of the point that Bob Cairns made. Some of the big contracts can be done well and in ways that compete with other methods. However, there are high transaction costs in developing such contracts. That is especially true if a project is being conducted to deadlines such as those that we have recently had to meet. There are other ways of establishing partnerships across the public-private divide that could produce greater benefits to us in the next five to eight years.
I picked up from a recent visit to East of Scotland Water that PPPs and PFIs are not the only ways of involving private sector expertise and capital. That is the point on which Alan Alexander finished. I would like to hear what the witnesses think the committee should do. If the Executive is to allow a set of public sector agencies to enter new and innovative relationships with the private sector, it will have to change the parameters. That issue is part of our investigation. I would be grateful if the witnesses gave the committee a start on that.
In assisting the water authorities in responding to competition—that is, which imaginative arrangements across the public-private divide will help—the Scottish Executive has recognised the need to give us consent quickly when it is required under section 94 of the Local Government etc (Scotland) Act 1994. I would like pressure to be exerted for that section's repeal. We need to be allowed to make necessary arrangements on the basis of a business case that is generated by a rigorous assessment of risk against the objectives that the authorities must achieve.
Would you fund projects that fell under that category entirely from your current charges, or would you use your external finance limits?
That would depend on the project. For obvious reasons, it is difficult to give details. We need the flexibility that will allow us to forge a partnership without the interference of a long drawn-out process of approval.
The money can come from only three sources—borrowing from the Government, charges on customers, or the joint venture partner—which would have access to different funds from us. All three must be available to us if we are to defend ourselves and get the best out of the partnership arrangements. The third option is interesting. The more the partner invests, the less we must invest and the more the partner has control. If we want the Scottish water industry to stand up and be counted, to defend itself and to succeed in this competitive market—which I believe it can—the industry must be able to control its destiny. That means that we need access to cash. We can have that, but we give away our soul every time we let somebody else provide the cash, because they take the majority share.
I will be patient and allow Murray Tosh one follow-up question.
I suggest that, rather than expanding on the issue now, we could usefully pursue it with exploratory work on the recommendations that we might make to the Scottish Executive. It might be more appropriate to ask the relevant people for further information along those lines, which we could consider subsequently.
As Murray Tosh said, the matter of PPPs is one of the major parts of the investigation. Therefore, we would welcome such information.
I would like much more detail. I realise that we will not manage to obtain that today, so could we ask the three boards to give us the cost-benefit analysis of a project that has been completed? I would like details on net present value, whole-life costs from conception to end-life and what the cost to the public sector would have been if the project had been financed through normal borrowing. I understand about risk transfer and bringing in new innovations, but we need to get a feel for the costs at the end of a process.
I see that the witnesses are nodding. The information should encompass the alternatives that we talked about and should take in all the financial issues. When we see the witnesses again, perhaps we will explore those issues in more detail.
May we liaise with your clerk on what the committee wants and the level of detail that is required?
After consulting committee members, we will prepare a specification, which we will pass to you. If there are elements that you find difficult because of commercial confidentiality and so on, you can let us know.
If we are happy that we have resolved that issue satisfactorily, I will jump back to the question that I wanted to ask about customer surveys. Councillor Rennie had just about started to touch on surveying customers. He talked about their having a less than precise grasp of how much water costs them. I am sure that that is true across all three authorities.
We have put a great deal of effort into explaining the necessity of charge increases. We have attended community council meetings—we do that regularly; we have briefed every local authority in our area and all the MSPs; we have attended numerous public meetings; and we have worked with the media as closely as we are able. Our board meetings are open to the public. We produce a leaflet that we include with the bills that the local authorities send out. I can pass an example to committee members, who must ignore my scribbles.
Do you feel that the work that you have done has established consumer consent for the charges, or are you toughing it out because you know that you must take the money and that they must pay?
One of the significant changes that I have witnessed in the past 12 months or so is that many members of the public and their representatives—such as councillors or MSPs—say that we should phase our programme of work over a longer period. When we have explained that 65 per cent of waste reaches coastlines and estuaries untreated, people have regarded that as wholly unacceptable in this day and age.
That did not quite answer my question, but the question was loaded, so I suppose that that is fair enough.
There is almost no dispute that investment is necessary, but when we go one stage further and say, "This is what it will cost", we have a problem. We have tried to deal with that in the west by customising our mailing by local authority area, instead of sending a blanket mailing. I have an example that says:
Consent for charging is an interesting target to try to achieve, but there you go.
We regularly meet the local authorities—I met Mr Crawford when he was leader at Perth and Kinross Council. The regulator carried out a survey on satisfaction with the various utilities in Scotland, and water came out top. I have just been provided with figures—
As if by magic.
The number of complaints about the level of charges did not exceed double figures. If you consider the scale of the charge increases last year, that is significant.
We are concerned about how, on the one hand, we make customers aware of our charges and what they are for and, on the other, how we keep the charges at an acceptable level. That is a challenge. In trying to do both those things, we undertake market research and listen to focus groups and so on. A surprising thing that I learned recently was that 75 per cent of one group did not know how much they paid. We have done surveys on the level of satisfaction before and after increases, and it remains high. However, rather than have me warble on, would it be helpful to the committee to see some of the results of our market research?
It would be fair to exchange that with the individual that we nominate to be a member of that focus group. [Laughter.]
Well, the offer stands.
Before we move to issues of efficiency and competition, we have further witnesses to see so, in the interests of the committee's efficiency, I ask members to be concise and focused with their questions and I also ask witnesses to do the same in their responses. Do not get me wrong—this is an interesting and useful debate, but we have other matters to deal with.
In response to the convener's appeal to members to be concise, I ask the clerk to get me the answers to two of my questions.
Our efficiency objective is to minimise charge increases. It was said that our investment was in the interests of the authority, but all our investment is in the interests of our customers. From the outset, the authority has recognised that the investment programmes would result in increased charges. The efficiency challenge has been how to minimise those increases.
Is that a fair assessment of what is going on?
Some plants are not only visited daily—they are manned every day. The equipment in the waste-water treatment plants is so antiquated that investment is necessary.
I want to follow that up. In your submission, you state:
The authorities have been working on a project to consider all our activities: our asset management arrangements; our procurement arrangements for capital projects ; and how we provide information technology services, finance and laboratories. That project is at an advanced stage, but we have not yet reached any conclusions. That will happen in the next few months.
You do not have shareholders and the need to make profits, as your English counterparts do. That goes to the heart of the difference between the structure of the industry in Scotland and that in England and Wales. Is that a help or a hindrance?
It is a help in the sense that most people who started their career in the water industry 25 years ago, as I did, did so for the public service element of it. I have worked on both sides of the game.
You mention incursions by competitors into the Scottish market—will you quantify that for us? Have you, in turn, made proposals to English or Welsh domestic or business customers? Have you worked with any of the English or Welsh water companies—or companies further afield—with a view either to meeting competition and investment challenges or to efficiency savings?
The east of Scotland gets the short straw—we have the most industrial customers. Fifty per cent of our income comes from industry and we supply 20 per cent of our water to industrial customers. That is much more than the other two authorities. In the past 18 months, one way or another, we have lost about £20 million of income. It is not just about competition; it is about industry getting smarter and small businesses going on to meters and saving 50 per cent or 60 per cent on their bills. To be honest, because we have inherited charging systems from councils, it is also about some people having been billed incorrectly in the past. However, when it is all added up, there is £20 million of income that we had a year ago that we do not have today.
About a fortnight ago, at the request of the water industry commissioner, I chaired a forum for large users, about what was happening to the industry.
We can operate south of the border, but we cannot own assets; that is not written into the act. Our ability to do border raiding is therefore severely limited. However, in our case and in the case of the other two authorities, we are forming partnerships with people who will take us across the border. When one business has multi-sites, it may have six sites in England and four in Scotland; it will do a deal with one organisation to service all of them. I think that through the partnership arrangements that we are putting in place, we will find ourselves south of the border.
That covers efficiency and competition unless other members want to address the subject.
I do not know whether, when I was out of the room, any members asked about the implications of the Competition Act 1998. What do the witnesses understand to be the implications of that act for their organisations?
We have competition without common carriage. When common carriage comes through competition, as part of the revision of the Water Act 1989 that addresses that issue, our view is that whatever else it needs to be, it needs to be fair. There is a great possibility of cherry- picking. We are concerned that, especially in places such as Edinburgh, there will be areas where it would be great for a company to take a couple of hundred thousand customers, but they would not want to take the guys who would have payment difficulties.
It is useful to understand the pressures that you will face in respect of cherry- picking. Is there any argument that suggests that the water industry in Scotland should not be subject to the Competition Act 1998 and that you could opt out because you do not receive a public subsidy?
Our collective belief is that competition, although it may be difficult and tough, ultimately produces benefits for customers. We are here to serve customers. Protecting us from competition would not benefit customers in the long term. It has already provided a stimulus to customer service and to paying attention to costs. As long as it is a level playing field, there is no reason why we in Scotland cannot provide those benefits to our customers.
That is not really the answer to the question.
I think that the point is valid. Have you taken legal advice with regard to whether you fit under the exclusion bracket in the legislation—I think that section 3 of the Competition Act 1998 deals with that? We accept the point that you have made that competition is taking place anyway, but have your lawyers decided that you are excluded? Could that point be argued in a European court?
Our lawyers have considered that point, but we cannot use that as a way out of the situation.
I want to explore what you mean by efficiency and the relationship between efficiency and the cost of the service. When you say that you are a long way behind the efficiency levels of your English counterparts, does that mean that your cost levels of delivery are higher? Could you say something about cost comparisons?
We must consider all the costs incurred in the provision of the service. That will improve as we procure new assets at a lower cost and improve efficiency in the way in which we lay pipes and so on. That will reduce the total cost of providing the service. The second way will be by investing to lessen the demands on our system. Out of that will come a situation wherein the true cost of providing 1 cu m of water will reduce.
I appreciate that you are comparing the efficiencies that are involved in the laying of pipes and the provision of treatment services and so on, but that is an issue about what your business does. I want to know about the situation from the point of view of the customer. Does the underlying framework of the Scottish water industry—the rainfall into the reservoirs, the fixed infrastructure and so on—mean that the water provided here is more costly than it needs to be? Are there other factors?
That is a helpful question. As Ernest Chambers has said, the efficiency savings that we have made already are on the back of the reorganisation of the three authorities. On average, we have made savings of around 25 per cent on what it cost to run the service in 1995-96. We are not content with that and want to compare ourselves with the UK companies—not only our operating costs but the cost of delivering the capital programme. We have also talked to the water industry commissioner about those issues.
That might take us in a different direction. It might improve your business efficiency if the three water authorities were to be amalgamated—there might be some efficiencies of scale—but it would not necessarily lead to lower costs for the water consumers in the west of Scotland, for example.
It is important that we note the work on collaboration. We are seeking to reduce the inefficiencies without the disruption that a large-scale reorganisation would create.
We have a few more questions, including a very quick one from Nora Radcliffe, before we move on to other business.
To what extent are the water authorities in competition with one another? What is the interrelationship?
We are not in direct competition. It is impossible to rule out absolutely that we might be, particularly as Jon Hargreaves said earlier, where a major customer goes to the market with an invitation to tender to supply all its water. If such a major customer has sites where water is being delivered in an area that is covered by more than one authority and if a stand-off cannot be negotiated through our current collaborative initiatives, we cannot rule out the possibility that we would be competing for the same contract. Whether that is the same as competing against one another on a continuous basis is a different question. It would be dishonest to say that we could rule it out entirely. However, members can probably tell from my tone that we would not want that to be the usual modus operandi of the Scottish water industry.
The line that we have taken is that it would be wrong for us directly to compete with one another, so taking money out of the Scottish water industry. Where that might happen anyway through competition from the private sector, it is as well for one of the water authorities to be lost, to ensure that some of that business is saved for the water industry as a whole.
I would like to talk about the water industry commissioner whom Professor Alexander mentioned. The committee would like to know your views on the impact of the establishment of that office. Does the arrangement whereby the water industry commissioner represents users and suppliers work?
The commissioner has been in place for only about a year. It is clear that the office has had a significant and helpful impact on the water industry in Scotland. Many things have happened in a short time and we welcome the robust regulation on the economic side that that brings. Earlier, we referred to the benchmarking that we were doing anyway, but the commissioner's work has added to that. We also mentioned the efficiencies that we have already achieved. Discussions with the commissioner have brought a different focus to that. The commissioner has provided a helpful input, particularly on the information requirements to enable better asset management.
Yes.
Just as East of Scotland Water faces the greatest challenge with the erosion of business income, West of Scotland Water faces a great challenge with the collection of domestic income. We have a serious problem with bad debt because of low collection levels in various areas. That raises the question whether in future there might be a better—or different—way of collecting money, which might lead to direct billing. However, that measure is some way down the line, because our reliance on the council tax banding process for collecting charges has made it unnecessary for us to produce our own data on domestic customers. We would have to generate those data, ensure that they were clean and work out the costs and benefits of such a system. That said, some of West of Scotland Water's collection levels are so low that we must at least think about selective direct billing.
In England and Wales, there has been millions of pounds' worth of work on finding a fairer and more equitable system than tying water charges to council tax banding. Admittedly, those companies have been pushed by their regulator towards metering, which is not a sensible option in this part of the world. For a start, it costs a lot of money and is a different issue in other places.
I think that my question on metering has just been answered. The three organisations represented today seem to have made it clear that metering is categorically not on the agenda.
For domestic customers.
I understand that. So hoteliers—
However, if customers want metering, they need to have the choice.
Legislation dictates that if customers want a meter—
—we have to give them one. We cannot deny our customers meters.
However, as our policy is that domestic metering is not a good idea, we would not wish to promote it.
That could lead to a difficult situation. If people found out that metering on demand was available, low water users could start demanding meters, which would increase costs for other users.
That is another risk—[Interruption.]
We need to avoid collective answering, otherwise the official report will have no chance of working out the position of each representative from the water industry on some of these issues.
Okay.
Not you, Bruce. I am sure that the report will get you right.
Is there a desire for metering, particularly from low water users? If so, what impact would such a trend have on your industry?
There is no trend—
Very small numbers—
Hang on a second—who is answering the question? Professor Alexander, you are the ringmaster.
I was just saying that there is no such trend. Very few domestic meters have been installed in the west of Scotland. I do not think that there has been any research on how such a trend would affect our income; however, it would certainly have an impact at certain levels.
If the current 66,000 domestic customers in the east of Scotland switched to metering, we would lose about £5 million of revenue. As the customers most likely to choose metering are in the higher council tax bands, we are vulnerable to another set of income losses and are investigating how to mitigate against that eventuality. That constitutes another risk in the domestic customer market.
Such risks might be mitigated by ensuring that charges for domestic customers reflected the fact that a high proportion of water industry costs are fixed and are not affected by water consumption. However, I repeat that metering is not a major issue.
I understand that.
It is a very big question, and it is all yours.
Your presentation made it quite clear that the industry must establish a redefined public sector model that is stable and permanently viable. After everything that I have heard today, that model does not seem stable and I am not sure about its viability as I cannot see it clearly. The committee would find it useful if you could suggest proposals for redefinition.
Stability is not on the agenda for the short to medium term, as redefining the model will be an unstable process.
Probably the closest comparison that everyone will understand is the Post Office, which has had to respond to competition. Although that model might not be perfect, it provides some freedoms while maintaining what is essential for our business—control over our daily activities for the people of Scotland instead of having the freedom to go and do business elsewhere in the world. The Post Office is quite a good model, in the sense that it demonstrates what those freedoms can mean.
Bruce Crawford asked what we would look like. We can say with certainty that we will look different from how we currently look. We are not sure how we will look, but there are enormous competitive challenges ahead of us. All six of us were in public service before we took on our current jobs. We are determined to ensure that the public sector works, that it works efficiently and that it competes. That is an enormous challenge that few public bodies have ever had to face. However, we are committed to taking it up and to making things work.
That begs the question of when a public sector organisation is a public sector organisation. More and more of your assets and infrastructure will be owned by the private sector, as it will build, operate and own them. You have told us about the public-private partnerships that you have. How much outsourcing of administrative jobs and so on now happens in your industry?
Most of the work that we do in construction and infrastructure renewal is contracted out, so there is outsourcing there. That will continue. If a private company outsources part of its business, such as information technology, that does not compromise ownership of the business by the shareholders. I do not believe that outsourcing certain of the operations of the Scottish water industry compromises the ownership of the industry by the Scottish people. For me, that is the test.
The issue is quite simple, but it is complex in its simplicity. There is no reason why outsourcing should be cheaper and better than doing the work in-house. We need to deal with the things that prevent us from doing the work as well in-house. None of us has a hidden agenda to outsource everything within three years. Apart from anything else, we would then not have jobs. We owe it to our customers to make the work cost competitive. There are huge challenges in doing that. We need not only to determine the skills that are required but to deal with the custom and practice of the industry over the past 50 years. Like any business, we face big human resource issues.
The critical test of whether an industry is in the public sector is not how many assets its owns, but to whom it is accountable. We are accountable to the minister and, through the minister, to the Scottish Parliament. That is why we are here today. In my view, as long as that framework is in place, the water authorities will be public sector bodies that are able to meet the demands that are set by the Scottish Executive and the Minister for Environment, Sport and Culture.
That is an appropriate point at which to end our discussion. We look forward to the development of this model, which keeps the industry in the public sector but is adaptable, flexible and sustainable and, above all, provides the service that consumers want.
We have been investigating the possibility of the committee meeting tomorrow afternoon to consider the draft undertaking that was discussed earlier. Unfortunately, on procedural grounds it is not possible for us to meet at half-past 5 to do that, because the motion to approve the draft undertaking on Thursday would have to be lodged before half-past 5 on the previous day. Also, it cannot be lodged before committees have made their recommendation.
If we were to meet tomorrow morning, would that move us any further forward?
The Executive has said that, if we are able to give it a deadline, it will let me know first thing in the morning whether it can produce the necessary material for that time.
That is a wholly unacceptable response.
Why cannot we meet at lunch time, which would give the Executive a bit longer to come up with the material? We did it last week, when we suspended standing orders to allow the Education, Culture and Sport Committee to meet to consider for the fifth time its draft report on the Scottish Qualifications Authority inquiry.
It is urgent, for Scotland in general and for the parts of Scotland that would be served by those ferries in particular, that this problem be solved before Friday. That has been made clear to us. It might not be appropriate for us to stand on our dignity and say that we have not been consulted properly. This is a very unfortunate situation and it is wrong that things should happen in this manner, but we must find a way through the difficulties. Perhaps rule 10.1.3 is the only way forward. However, would it be appropriate for us to move during Thursday's meeting of the Parliament that standing orders be suspended, so that the ministers' advisers may be with her for a 15-minute question session?
I am less anxious about this than I was when we started the discussion earlier this afternoon. We have now heard from the minister and had the opportunity to ask all the questions that we wanted to ask. We know that the Executive will come back with slightly increased figures. Frankly, I was not particularly aware of what the original figures were. I was more interested in the way in which the contract worked—the deadlines and so on. I do not think that any of that will change. If I come up with more questions, I am happy to think that I will have an opportunity to ask them in the chamber.
I saw many members nodding when Robin Harper and Murray Tosh were speaking. Shelagh McKinlay advises me that other issues would make it difficult to hold a meeting at lunch time tomorrow. Notwithstanding my unhappiness at the circumstances, I can live with the idea of passing the draft undertaking straight to Parliament. If others members agree, we will allow the Parliamentary Bureau to deal with the matter under rule 10.1.3 of standing orders. However, I will write to the minister to express my deep concern about what has happened today. I hope that it will not happen again.
I found the discussion interesting. It is not insignificant that the previous witnesses did not find it interesting enough to hang on to hear what their customers think about the issues, but the committee can form its own view on that.
We recognise the need for investment, but we must find a way of making that compatible with ordinary people's ability to pay the charges. For us, that is the crux of the matter. Legislation is forthcoming in the Scottish Parliament—we see that as an opportunity. We also see our attendance at this committee as an opportunity.
The water industry has a different relationship with consumers from the one in the utilities and the postal services. In the water industry, it is only the commissioner's general function to promote the interest of customers, whereas, in the utilities and postal service, it is the regulator's primary function to protect customers. I represented consumers in the electricity and gas sectors for about six years. The environment in those sectors is far more robust. The regulator must produce their own environmental action plans and social plans. Those tasks are not placed on the commissioner in Scotland. It could be argued that the commissioner has only to look over the border to find the standards with which we want the authorities to comply.
You have certainly added to the issues that are raised in your submission.
It was useful to listen to the debate earlier.
That brought out several of the points that you made.
Trisha McAuley acknowledged the great need for investment. We have seen some examples of that need today. The council is concerned about the consumer's ability to pay, but investment must be funded somehow. How do you balance those concerns?
That takes us back to the earlier debate. We have no answer to that question. The Scottish Consumer Council wants to focus on the people who cannot pay the charges. That does not mean everyone, but the poorest people in our society pay a larger proportion of their income on basic services, and that proportion has been continually rising.
I want to ask you about disadvantaged domestic customers. You talked about how £17 to £18 a month was a substantial amount. Are you saying that the industry must improve the way in which it deals with such customers but that you have no ideas about how it could do that?
The industry could probably do a lot more to help such customers simply by giving them advice on how to handle the situation. Other agencies, such as Money Advice Scotland, can help. I attended the launch of its report yesterday. Such advice would be a major tool to help people in such a situation. The authorities must understand that they have an obligation to help customers, as do society and government. We have an obligation to concentrate on those who are disadvantaged, by whatever definition.
You mentioned the fact that Scottish domestic customers are different from their English and Welsh counterparts because of the level of service that is provided by the industry in England and Wales. Is the level of service and choice that we get in Scotland comparable to that received elsewhere?
What I said was that companies in England and Wales are perceived to be more efficient. That does not necessarily mean that they provide a better level of service. There has been an industry-wide debate about that. The three companies in Scotland are trying their hardest to deliver a good service—that is a theme. When I have spoken to the companies' chief executives, I have sensed that, individually and collectively, they try to provide. One problem is that the companies often do that in isolation; they do not tap into information sources about what good customer service means. Often, it costs very little to provide good customer service, but people need to know about the science of providing it to individuals.
How important is having a choice of water supplier to the domestic consumer?
That is an interesting question. I know that surveys carried out about six years ago in Strathclyde made it clear that people wanted the water industry to stay within the public sector. That implies that there would be no choice, but that does not mean that consumers do not want the highest quality and want beaches to be clean.
I am not talking about quality, but about choice.
From my standpoint, choice is always a useful lever on the marketplace to improve efficiency. However, I do not think that domestic consumers are as concerned about choice as they are about ensuring that, however much they pay, they get a good, clean, safe product and sewage does not appear on the beaches. Those are the criteria for water, but the criteria are different for other utilities. For example, price is the main criterion in the electricity and gas markets. Water is life-blood, so society has a slightly different attitude towards it.
Given the attitude of many consumers to price and the fact that people sometimes do not know how much they pay and how, do you think that consumers are persuaded of the need for domestic bills to rise over the next three years, as the commissioner recommended in his most recent strategic review?
Not at all. The commissioner has not made the argument for that. His attitude is that he is an economic commissioner who must achieve a target rapidly and hope that the three companies can meet their efficiency targets within that time scale. However, we have a history of under-investment in the water industry, which is why I started by saying that we recognise that there is a need for investment. Whether we can find other mechanisms to allow those who can least afford such a steep rise to pay over a longer period of time is part of developing more sophisticated payment methods.
Do you think that the consultative committees are giving customers a loud enough voice in the industry? Are they an improvement on the old-style customer councils?
Trisha will answer that question, as she was involved in the old-style councils.
I was a member of one of the area committees of the Scottish Water and Sewerage Customers Council. Graeme mentioned that there were problems in the previous system, and that was one of the reasons why the council was disbanded. We had a public voice and I attended meetings all around the country.
In discussions with the commissioner, we must recognise that he has been in post only for a year and that he was put into a structure that was laid out for him. At some stage, you will want to talk to the commissioner, and if you ask him a similar question you might be surprised. I am led to believe that he would value a more independent input from the consumer body. He has so many meetings to chair, and a year down the line he is starting to understand the benefit of mature consumer input in the process of communicating the policies that he is advising the Scottish Executive and the Scottish Parliament to carry out.
You heard what the water authorities said when we mentioned that to them. They seemed adamant that they want a direct relationship between them and their customers, and that they felt perfectly capable of establishing such a relationship without an independent body to represent the customers. I presume that you would take issue with the water authorities over that.
I was somewhat surprised by that. I do not think that Katharine Bryan went so far as to rule out independent bodies. The water companies start from the standpoint that they look after their customers and that they have to defend that position. However, through the Scottish utilities forum I have been involved in discussions as part of the Parliament's pathfinder process, in which the chief executives have individually recognised the value in having a consumer organisation to supplement the relationship with the customers that the water companies have. They interact with customers, and the whole population of Scotland consumes water. The big issue is not just whether people should pay for that, but whether the public health is impacted upon if the service does not come up to scratch.
Indeed.
We did not regard the one as not being possible without the other. It is obviously of benefit to consumers that the water authorities have a good relationship with their customers. However, when things go wrong, what should they do? The water authorities say that they conduct market research. That is not the same as a consumer body identifying the issues through complaints data and working at policy-making level with organisations such as ours, and through being able to speak to other people in the field, gather data and take action on behalf of consumers. That is not the same as a water authority doing market research. To fix things when they go wrong, a consumer needs an identifiable place, person or organisation to go to. The one method complements the other.
In the relationship between any consumer body and the industry, the consumer body must understand the problems of the industry, so that when things go wrong, it is not just jumping up and down, saying, "This is a disaster for everybody." The consumer body must recognise what is happening. It is the conduit between the consumer, who pays the money, and the industry. The consumer body has to be able to say to the consumer that, although something is inconvenient, it is not a complete disaster and can be explained. It has to be able to assure consumers that it is in contact with the companies or the regulator on their behalf. That is a mature way of considering what an organisation that is representative of consumers should be. That is an organisation of today and tomorrow. Perhaps such organisations have not been perceived in that way before.
There is one other thing to remind the committee of, although I am sure that members are aware of it. The current structure serves business and domestic consumers, unlike a lot of the other utilities. The water authorities are right to say that they are concerned about business users walking away and leaving them. However, there is no proper voice for consumers in the framework for domestic and disadvantaged consumers. Advocating their concerns does not seem to be an aim.
The point about domestic customers and those with particular needs has been made loud and clear.
The last bullet point on your submission says:
We are looking for a framework that does not act non-competitively. We are not convinced that we could say that any minister, no matter how wonderful, could never be non-competitive. More important, a regulator has the expertise and the impartiality to do the job properly. Complex legislation and structures are involved, and we have to get things right. That should be free from political interference. The person responsible for enforcing things has to be someone who knows the ins and outs of the industry.
That is correct—bearing in mind the fact that the regulator is accountable to ministers and to Parliament, and also the vehicle for holding companies to account. That system works well in other sectors.
Thank you, Graeme and Trisha, for staying on with us. That was a most useful session.
Thank you. It has been a marathon session, but it is over.
Meeting closed at 17:33.
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