We now move to item 5 and the taking of evidence from witnesses on the financial memorandum to the Water Environment and Water Services (Scotland) Bill. This will be something of an omnibus session, given the various groups of people who are providing evidence to us.
I will make some broad, general points and my colleagues will pick up on the detailed questioning. Scottish Water very much welcomes the principles behind the water framework directive and the Water Environment and Water Services (Scotland) Bill. We are somewhat concerned about the fact that, in the absence of knowledge of the detailed delegated legislation that is promised by the bill, the bill's financial consequences for Scottish Water are difficult to quantify, although we will do our best to do so in response to your questions.
I thank the committee for inviting SEPA to give evidence. We have submitted written evidence to the committee and I will not repeat what is in that. It would be more helpful to highlight what we see as the sources of costs in the bill.
Like Scottish Water, SNH supports the principles that underlie the water framework directive and the bill. We believe that such legislation will deliver many natural heritage benefits, which will not be confined to the water environment, but will extend well beyond it. In particular, we welcome the broad, holistic approach that is enshrined in the bill and the move to assess water quality on a wider ecological basis than the relatively narrow and traditional chemical and other criteria allow.
I welcome Elaine Thomson and Brian Adam, who have just arrived from Aberdeen.
The water industry commissioner should do so, but the quality and standards process also needs to do so in respect of the determination of our investment programme for the next regulatory period.
In other words, it would be inappropriate for the water industry commissioner not to deal with the implications of the legislation in terms of the regulatory framework that it establishes for you. At the same time, you seem to say that costs are difficult to quantify. If it is difficult for you to quantify costs, it will also be difficult for the water industry commissioner.
If I may, I will hand over to Douglas Millican to discuss details. My point was that, at the moment, it is difficult for us to quantify costs in the absence of the detail that will come with the delegated legislation. Douglas Millican may want to add to that.
The issue relates to timing. There may be a fixed regulatory settlement until 2006, but we must consider the timing for the next regulatory review period, which will commence in 2006. The preparatory work will begin next year, but the substantive work on consideration of the quality and standards obligations for 2006 and beyond will be done around the summer of 2004, with firm conclusions needing to be reached by spring to early summer of 2005 at the latest. If uncertainties remain in early 2005, the commissioner will have difficulty discharging his functions and giving advice to ministers on the revenue cap for Scottish Water in 2006 and beyond.
I appreciate that to some extent we are entering uncharted territory. I am sure that the water framework directive and the intentions behind the bill are good. However, I have the impression that we are marching on with good intentions but with almost no clue about what we are about to spend from the public purse. Most members of the public are getting on with their lives this morning and are not overly interested in our proceedings, but I am sure that some people are. Ordinary taxpayers could be excused for being slightly nervous that good intentions are being advanced with no quantification of cost. That is not a good way of doing business in either the public or the private sector.
I do not disagree in principle with much that the member has said. Jon Hargreaves will comment in detail on some of those points. In our written evidence we were trying to indicate that it is extremely difficult for us to give the committee intelligent answers until we have more information on which to base those.
I want to pick up the member's point about the things that we do not know, as opposed to the things that we know. The costs that we know are estimated at about £28 million per year, plus an increase in operating costs.
The financial memorandum indicates that Scottish Water will need to spend £28 million over a few years to implement the directive and will incur on-going expenditure of £5 million. Those are the only costs that the bill specifies for Scottish Water. You have mentioned a number of other costs that you cannot quantify. Can you provide us with estimates—ranging from a best estimate to a worst estimate—of those costs in relation to the figures with which we have been provided? Are the figures that we have received the tip of the iceberg or do they cover a high proportion of the costs that Scottish Water will incur? Are the costs that you do not yet know likely to be trivial?
Unfortunately, it is extremely difficult—if not dangerous—to put a figure on the costs to which Alasdair Morgan refers. The list of priority hazardous substances has not yet been drawn up. A good ecological status has not yet been defined. The assumptions made about environmental objectives will not be finalised until 2009. Taking all those uncertainties into account, I think that it would be dangerous even to provide a range of figures.
If any of the items to which you refer lead to higher costs—which is almost inevitable—you can recover those only through charges.
That is correct.
Is it likely to be possible to identify the costs specifically and to target them at particular customers? Is it much more likely that they will be recovered via a general increase in charges?
Much depends on the precise nature of the charges and on whether there is a level playing field. I will give the committee an example to illustrate the point.
Are you saying that because you have to be competitive you are not able to recover some of the costs of implementing the urban waste-water treatment directive from individual customers, and that you recover those costs from customers in general?
Yes.
I want to pick up another issue that you raised in your opening statements. Developers' costs are estimated at £17 million per year. At the moment, flooding is a particularly important issue, but we must also consider how the longer-term costs of sustainable urban drainage initiatives will be met. You take a different view from the developers on your respective roles. Can you say more about Scottish Water's view on the issue? What are the implications of your dispute with the developers for sustainable urban drainage schemes?
There are two separate issues. We are talking about paying developers £1,000 towards putting in the pipework when they build a £500,000 house in Edinburgh. That does not address the issue of sustainable drainage or anything else; it is simply a contribution to the developers' costs. In this day and age, that seems slightly odd. On occasion, it might well be sensible to make such contributions but, in general, in the commercial housing market in Scotland, it seems odd to us that such contributions are made.
There needs to be clarity about what we are trying to achieve. If I understand you correctly, you are saying that, in the long term, sustainable urban drainage will be very positive for Scotland in general, and for your business.
Yes.
However, in the short term, on the assumption that developers pay the cost of installing urban drainage, there will be a problem in determining how maintenance costs will be met. I presume that issues will also arise to do with the establishment of the planning framework. It would be sensible for us to deal with those issues in our consideration of the bill. We do not want a perverse incentive to operate whereby people do not separate surface water from waste water. That would be the worst outcome. Does the bill deal with that issue adequately? It seems to me that there is a hole in the bill.
Issues to do with detailed specification and elaboration will certainly need to be dealt with. We do not see that in the bill. Some work is needed.
Will that need primary legislation or can it be dealt with by secondary legislation?
The Scottish Executive's view—and we agree—is that it can be done through existing legislation and through directions and regulations. However, clarity is required and, at the moment, there is none.
Are the definitions in the bill—to do with sewerage, for example—adequate?
I am not an expert on that, but I think that they are okay. What we need are some clear directions and regulations on this matter.
Can you supply us with clearer information on the developers' costs that you mentioned and on how the £17 million is made up? I am not sure that we have all the information that we need to make sense of things.
Yes.
We will supply that information to the clerk.
Thank you—that would be helpful.
If the currently available subsidy is withdrawn—and it does not sound as if there is a very good case for it—the charge will be passed on to the consumer who buys the house. However, I am more concerned about the maintenance. It sounds as if we could be setting up a situation where there would simply be an additional bill for certain domestic properties—or have I misunderstood?
At the moment, an element of all domestic property bills is for surface water drainage. That is fairly difficult to define, but the charge is there at the moment. In the long term, that cost should benefit the customer.
I want to pursue the issue of costs. I am looking at the SEPA submission, where it says:
Evan Williams will answer that question.
The estimates in the WRc report, which were the basis for the estimates of costs to industry, are broken down in that report. If it would be helpful, I could go through the figures. The estimates are based on a partial reading of the bill and the water framework directive. They do not take as much account as they might do of the fact that, in drawing up the measures in river basin management plans, we will use the most cost-effective combination of measures possible, in order to achieve good status. Where it would be disproportionately expensive to achieve good status, it will not be necessary for us to do so—we would be able to derogate and either delay achieving the good status that we desire or, indeed, seek to achieve a lower status.
I notice that the financial memorandum indicates that, in the longer term, you will be able to recover the large majority of your costs through charges. Do you have an estimate of how much you will recover each year through charges?
Current projections are that SEPA's costs will be approximately £5 million by 2009-10. Those costs will be additional to the current charging base of approximately £11 million. So the current £11 million will go up to approximately £16 million by 2009-10.
So who exactly will be getting charged?
Our colleagues at Scottish Water, to a large degree.
Very cosy.
That has saved us the bother of saying it.
A significant part of that increased charge comes from the introduction of the additional powers to control diffuse pollution, abstractions and impoundments. Again, the charge increase is not based on what SEPA is currently doing but on what it is doing plus the new activities that it will take on board under the water framework directive.
Paragraph 2.3 of SEPA's written evidence states:
WRc's report on benefits was conducted by Professor Nick Hanley of the University of Glasgow. That work sets out the benefits that will accrue to society and individuals from the improvement in water quality.
In other words, the benefits are difficult to define and they all depend on having money left after the hugely increased bills have been paid.
None of the benefits relate to savings. There are no savings identified in the benefits that you are talking about.
There was no identification of savings in that particular study. It might be a sensible extension of that work to identify savings.
How are the benefits quantified? If you say that the burn flowing past my house will be much cleaner and that there will be more fish in it, is that the kind of benefit that you are talking about? How do you quantify how much that is worth to me?
Theoretically, I think is the answer.
Something like that is notoriously difficult to do. The first thing an economist would do is ask you how much you value that benefit.
Yes, but that is not real money. I could tell you any figure because you are not asking me to hand it over.
I appreciate the conceptual difficulty of that. That kind of assessment of benefits has been going on for a long time and, in SEPA's view, it is fairly imperfect. Nevertheless, there is a real benefit to people.
I return to what you were saying about costs to industry. I am concerned about the paper industry, which is under a great deal of pressure and is extremely concerned about some of the issues surrounding water abstraction. One of the paper mills in Aberdeen says that the water that it is putting back into the rivers is cleaner than that which it is taking out. It is wondering whether it can charge SEPA rather than be charged by SEPA.
If there is no issue to do with water being removed from a watercourse, and if cleaner water is being put back into the watercourse, that will be reflected in the overall assessment of the balance of, and threats to, the body of water, although I am not suggesting that SEPA is going to start handing over cash. That benefit will be reflected in the overall achievement of the quality status of the water body. Where that is happening, it is unlikely that there will be additional pressure on the industry to improve further or to change its practice.
Where there is such a situation, and SEPA recognises that the company's procedures are adequate, do you agree that some of the bureaucracy involved in the process is unnecessarily burdensome, especially when you are dealing with industries that are under a lot of commercial pressure? I am talking about situations where you have reasonable confidence that the companies are meeting or exceeding all environmental requirements for clean water.
Where we are already achieving good ecological status of water bodies, the effort and involvement of all parties such as local authorities—not just the industries—around the river basin are likely to be much less. It is principally in areas where there is an identified risk that good status will not be achieved that there will be a targeting of effort and a requirement for input.
You submission states:
Yes. We say that there is a threefold increase in regulatory effort and, in effect, our total cost is increasing by 25 per cent.
Has consideration been given to identifying the most important regulatory mechanisms in terms of the direct benefit that will be gained in relation to the cost of imposing them? Those mechanisms could be identified as the first phase of the introduction of mechanisms. You could then consider how far you want to progress with the plans on some other aspects of the water framework directive. Have you considered piecemeal rather than wholesale implementation of the scheme?
The WFD provides for the delivery of the most cost-effective combination of measures that can be applied and provides for the fact that we can set less stringent objectives where costs would be disproportionate. We have the mechanisms to deal with such instances. Does that answer the question?
You have not given us information that would allow us to validate that judgment. Are you saying that what is outlined in your submission is your assessment of the most cost-effective mechanism? What evidence could you supply to support that contention?
I cannot answer that question off the top of my head.
Could you provide the committee with more information?
Yes, but I will need to come back to the committee with that information.
I have a question for SNH, so that its representatives do not feel left out. The SNH submission states that it was
Dialogue has taken place with the Executive but, as I said in my opening remarks, the nature of SNH's input to the process has emerged only relatively recently, because SEPA has had to focus on exactly how it will get together the information that it needs for characterisation of the various water bodies throughout the country. There were different options as to how that could be done. SEPA could have taken on additional resources and acquired suitable expertise to undertake the work, but I think that it reached its conclusion partly because of the deadlines to which it works. It is more practicable and better for SEPA to look to SNH for much of that input. The scale of the requirement for SNH has begun to emerge through recent consideration of how to implement the water framework directive. Dialogue took place with the Executive, but at a stage when it was difficult—even more so than it is now—to quantify the resource implications for SNH.
Can you put any estimate on the scale of the current requirement?
We have been trying to do that. Our current best estimates are that between now and the end of December 2004 we are talking about the equivalent of about seven or eight posts across the organisation. That represents about 1 per cent of our staff complement, so it is not a huge burden; however, the point that I emphasised in my opening remarks is that it comes at a time when the overall volume of our activities is increasing because of some of the other programmes that we are implementing, and because of the priorities that we have been given by the Executive. The burden is in addition to activity that we were already going to find difficult to accommodate within our budget.
Do you hope that the work of the seven or eight posts will be achieved by reprioritisation, or will you have to recruit extra staff?
We are currently trying to reprioritise. That is how we freed up some of the time that we have made available for the exercise. That has inevitably meant holding back some other activities, but we would be reluctant to do that indefinitely. We believe that a combination of reprioritisation and extra resources is likely to be required in the medium to long term. That might apply even more when we get to the later stages of implementation.
We heard from SEPA about how it was involved in the development of the non-market benefits and cost-benefit analysis. I note that SNH is also involved in that. How well developed is SNH's role in that? Do you see it as a major element? What resource is SNH currently putting into that and where has it come from?
It is fair to say that, over the years, economic evaluation of environmental benefits has been a matter on which we have kept a watching brief, rather than one to which we have devoted a lot of effort, but we recognise that it is likely to come increasingly to the fore over the coming years. Recognised techniques exist although, like Evan Williams, we are sceptical of how well founded some of them are. Take the example that was given of the house beside a burn, which might or might not be polluted. One way in which one can try to capture that sort of economic benefit is by comparing the price of houses beside polluted burns with those that are not, other things being—as far as possible—equal. We all know that in the real world things are never entirely equal, so the difference cannot be completely captured, but that is one of the techniques that can be used. One might be sceptical about that technique at first sight, but if one looks more broadly at the prices that are paid for houses in communities that are seen as having good environments and in those that are seen as having bad environments, one begins to get a feel for the scale of difference that a good quality environment makes.
If neither SNH nor SEPA is doing the analysis directly, who is and how is it being paid for?
I am aware that south of the border some work is being led by the Department for Environment, Food and Rural Affairs to try to quantify the value of some environmental benefits, not least those that are linked with, for example, agri-environment programmes. The matter is being addressed in that context. In respect of the reform of the common agricultural policy, what the public at large is willing to pay for environmental benefits that are delivered by farming is being considered. Work has been undertaken jointly by a range of public agencies over a number of years.
I am becoming concerned, from what I hear, that the statement in paragraph 145 of the financial memorandum that
As I said, we are clearly engaged in something that is highly desirable and perhaps to a large degree inevitable. However, on the evidence that we have heard this morning, this is the economics of the madhouse. We have no clue about what the charge will be to the public purse. To be frank, the general public are entitled to far greater clarity about the potential costs, but we are nowhere near to providing that. The only conclusions that I can draw from the evidence that we have heard this morning is that there will be an enormous bill for the general public and that they should have far more information about what the bill may entail before we go any further.
Another concern I have is that—given that the Executive is unwilling to fund extra costs—clearly the extra costs will have to be met by diversions from other budgets. We have talked about the person in their house beside the burn, but probably their greatest concern these days is not so much the quality of the water in the burn, but the fact that the burn might end up in their front room. To what extent will the extra costs take away from expenditure on flood prevention?
We might wish to ask the Executive that question.
I believe that tariffs will be developed that more broadly reflect the economics of the service that is provided, which
That comment was made in the context of advice from the water industry commissioner to the Minister for Environment and Rural Development last October, which set out the commissioner's view on the financial affairs of Scottish Water for the four years from 2002 to 2006. The background to that advice is that historically in Scotland, the vast majority of charges on business customers, as opposed to households, have been variable and have been based on charging so many pence per cubic metre of water taken. A small element is charged by way of a fixed or standing charge.
My recollection of the current significant capital investment is that a lot of the costs have fallen disproportionately on domestic customers, in order to protect industry. Given the increases in the next two or three years—which are double-digit increases, or as near as—how does Scottish Water intend to play out domestic against commercial charges, particularly in light of the comments from the water industry commissioner?
From a process angle, all that is set at the moment is the charging arrangements for the current financial year. In November, we will submit to the commissioner a scheme of charges for the following financial year, which will set out our proposals. Given that we are a couple of months away from that, we still have significant work to do, and the board must consider the proposals. However, the commissioner has indicated that he does not expect increases for domestic customers in the central belt—the old east and west water authority areas—to be more than 9.9 per cent next year. He expects that there will be no increases in the north area next year.
Is that likely to mean that charges might fall disproportionately on particular industries or particular parts of the country? The urban waste-water treatment directive had significant implications for fish processing and all food processing industries, which led to all sorts of schemes to come up with an alternative and to move away from Scottish Water. Have such charging implications been thought through?
The short answer is that there will be a greater effect on some industries than on others. That reflects the position that Scottish Water inherited. Because the previous water authorities tried to cap the impact on given industries in any particular year, we have not inherited a situation in which our charges reflect the underlying cost for each industry group. As we move from our inherited position—which is a mixed bag—to a position over the coming years that is more cost and cost-structure reflective, there will be a greater impact on some industries overall than on others. However, the picture throughout Scotland will not be generic; the outcome will depend on the old water authority area. If one authority made greater progress on harmonisation and moving to cost reflectivity than did another, the impact for customers in the former authority's area might be less than that in the area where the old authority made less progress.
Could you go into more detail on the commissioner's view on fixed charges? What will that view mean? I am worried that it will lead to a degree of complacency and that it will be a disincentive to making greater efficiency savings year on year, but I may be wrong. Could you give me more of the thinking behind your interpretation of the commissioner's view?
The commissioner's advice is open and leaves a lot of flexibility for Scottish Water to develop schemes of charges within the context of that advice. It is possible to develop fixed charging schemes that still give customers an incentive to reduce their demand on the public water system. For example, large industrial customers could pay a reservation charge by reference to the amount of capacity that they reserve in the system, for example 20Ml of water per day. If, however, they change their production process on a long-term sustainable basis so that they do not need 20Ml but instead need a much smaller amount, say 10Ml, we could take that into account in our forward investment planning and reflect that in a reduced future reservation charge that is based on 10Ml a day, rather than on the old reservation charge based on 20Ml a day.
I have a general point to make. The principles that underlie the balance between volumetric and fixed charges are part of a complex regulatory settlement. If we take that regulatory settlement as a package, I can assure the committee that the incentives to Scottish Water to operate as efficiently as possible are pretty strong across the board. Douglas Millican made the point that the revenue cap represents an enormous pressure on us to ensure that we operate in the most efficient way possible.
To give an idea of the scale, the targets that the commissioner set for the four years mean in effect that we must reduce operating costs by 40 per cent. In pound notes, that amounts to the best part of £200 million out of an operating cost base of about £450 million. Such a reduction represents a huge challenge.
I thank the witnesses for their evidence. We might want to ask Scottish Water some additional detailed questions about its view on the estimates of the impact on Scottish Water. We will do that by correspondence, if that is agreeable. We will take a five-minute break to allow for a change of witnesses.
Meeting suspended.
On resuming—
I welcome the team from the Executive who will give us evidence on the financial memorandum. Emmie Bidston is from the Water Environment and Water Services (Scotland) Bill team. Elinor Mitchell is the head of division at the water environment unit. Michael Kellet is the team leader of the water framework directive team. David Reid is head of division at the finance and central services department. Does David Reid want to make an opening statement?
For the purposes of this morning's meeting, the bill team will lead. I will provide support on finance matters, but the people who are actually handling the bill will present matters.
That is a good principle.
From discussions with the clerk, we understood that an opening statement would not be required. In a sense, the opening statement is the financial memorandum, so it might be more appropriate to proceed straight to questions.
The main question is not one that the financial memorandum can help us with: how much is it going to cost?
The difficulty is that the bill is introducing a new planning system for the water environment. That planning system will involve stakeholders, communities, industry, the groups that the committee has heard from today, and the public and private sectors. It is difficult to be firm about costs at this stage, as it is only when the planning system has been established and has worked its way through that we will be able to determine costs.
The process will be iterative. We are where we are today and, as the system moves on and regulations are made—all the stakeholders will be involved in discussions on those regulations—the costs and implications of implementing the water framework directive will become clearer. As Michael Kellet said, there will be a planning process and everyone will be around the table to discuss what will be in the river basin management plans. The objectives that are set down during that process will determine what the costs will be. Because the bill is an enabling bill, it is hard to determine up front what the costs will be and where they will fall.
I have two points. First, the comparison with a planning process is okay, but a planning process usually affects future developments. The bill will have an impact on what people are doing. It will have a retrospective effect, so it is crucial that we get it right.
We accept that a number of stakeholders have said to us that the secondary legislation will be a key issue. We will develop that secondary legislation in an open manner. We have consulted extensively, held seminars and talked to a range of stakeholders about the development of the policy underpinning the bill. We will certainly want to carry that policy through.
I remind the witnesses that we are not the Transport and the Environment Committee. We are here to examine the financial aspects of the bill—it is important for us to adopt that self-denying ordinance.
The report, which was produced by WRc with the input of the University of Glasgow and the University of Dundee, was an attempt to set out clearly the costs involved. It was possible to do that once we were clear about the provisions of the bill, with independent researchers giving us the best estimate of the likely future costs.
Does the Finance Committee usually consider the financial consequences of Scottish statutory instruments? As the costs of the bill depend on the cost of the SSIs, we cannot tell from the bill what its costs will be. If we do not look at the SSIs, what is the point of the exercise?
There is truth in what Alasdair Morgan says. It might be useful to get an estimate of the financial implications of some of the more important SSIs. We cannot expect such an estimate to be fully comprehensive at this stage, but it may be possible to set some parameters. Perhaps different sets of estimates could be produced to give us a better view of the situation.
That is the case, but to enable WRc to undertake its work in order for us to estimate costs, it had to make assumptions about the impact of the regulatory regime. Those assumptions are shown explicitly in the case studies that WRc prepared and we consider them to be reasonable.
My experience of the public sector is that, when people speak in broad ranges and do not want to define eventual costs, it is because they know that the costs will be high—they do not want to go there. We have all been in the game long enough to know that that is usually the case. Earlier evidence mentioned a range of figures that was very broad, to say the least.
We have had discussions with local government on numerous occasions about the policy that allows us to develop the bill. We have not discussed the detail of the financial implications of the bill. We have talked about the uncertainties already but, as the explanatory memorandum makes clear, we anticipate that the major financial costs will fall in the period between 2007 and 2011. That takes us into the context of the next spending review—not the one that is about to be announced—which gives us time to go into the detail. I understand that the costs that are set out in the financial memorandum—the £25 million to £65 million range—are estimated one-off capital costs that local authorities may have to put in place to allow the environmental objectives of the bill to be met. Those costs will be spread over the four-year period from 2007 to 2011. I can clarify that for the committee if requested so to do.
Surely there is a revenue consequence to a capital cost. Why are the revenue figures not included in the financial memorandum?
I am not sure that there will be a revenue consequence. It will depend on the planning system, but councils may have to examine their existing coast and flood protection measures to determine whether they can make physical changes that will be more environmentally friendly while providing the same level of protection. In that sense, there will be a one-off extra cost. Maintenance costs may arise, but such costs would arise for the protection mechanisms in any event.
If I were in local government, I would interpret your answer as indicating that I would be expected to absorb the costs.
I do not think that I said that. I am simply trying to explain the costs and why they are capital costs.
I know that you did not say that, but—
The Executive's approach to new burdens that may fall on local authorities is on the record. The Executive has given local authorities an undertaking that, when a new burden arises, it will provide appropriate levels of resource. As members will doubtless know, there are always debates about the right level of resource, but there is no reason why members should think that the new burdens policy of funding local authorities would not operate in this case.
I understand your point, but it seems an unusual way in which to approach financial matters. You are saying that you decide in principle what you are going to do and then you go ahead with it, irrespective of how it is to be financed. You think about how you are to pay for it later. You are also saying that you already have to maintain coastal protection mechanisms and that therefore there will be no consequential increases in revenue costs. If such costs happen to arise, you will think about financing them at some point, but they are not immediate.
The nature of the bill and the powers that it contains means that, until the characterisation work is done and the planning process begins, we will not have a firm idea about what needs to be done. Until we have a firmer idea about that, we cannot allocate costs. You are right to suggest that we are in a chicken-and-egg situation. The up-front work has to be done before we can determine the state of the water and what we can do to control and manage it. Once that work has been done, we will be able to get around the table again, in the context of secondary legislation, to work out the costs and how to fund them.
Surely you must see how that would make the taxpayer, or someone who runs a company, incredibly nervous. If you were to put that scenario to anyone who manages their own personal finances, they would refuse to do it—no one would do that with their own money. Perhaps we are operating in an unreal environment in the public sector and we should just accept that and carry on, but I do not see how anyone else—in particular someone running a company or a business—would for even a second consider handling their finances in that manner. It is incredible.
As I said, the point is that local authorities, industry groups and the public agencies that have appeared here today will all be involved in the planning process, so they will have a say in determining the environmental objectives and the most cost-effective means of achieving them. The process will involve those parties in taking decisions; it will not just happen and be landed on them without consultation or involvement. I acknowledge what you say, but the river basin planning provisions in the bill will seek to establish a process of involvement.
With respect, given that companies do not have a history of knowing why Governments make decisions, that will not greatly reassure them. They will be consulted and a decision will then be made, but it will still cost them a fair bit of money, and they do not have a clue how much it will be. Once this legislation is passed, that is it; there will be a cost.
There are checks and balances in the system. The bill requires that not only the environmental impact but social and economic impacts must be taken into account. That is a big step forward in policy. In the past, when European directives were implemented, for example the bathing water directive, a standard was set that had to be met, regardless of the cost to business or the public purse of doing so. Although, as has been said, the costs in this case are not clear up front, there are checks and balances in the system, in as much as everyone is involved in the planning process. There is also a balance to be struck between economic, environmental and social impacts. There is no environmental objective to be met at any cost.
Could you give me an example of how the checks and balances will kick in?
The water framework directive contains a derogation on environmental objectives, which we will replicate in the bill. That will be key for a whole range of sectors. The derogation can be applied to a water body that is designated as a heavily modified water body, which is the term used in the European directive. The derogation allows us to set an environmental objective for such a water body—a stretch of river or loch—that takes into account the valuable use to which the modification has been put.
Do you mean objectives such as knocking the dam down?
Exactly. We could set environmental objectives that take account of the fact that the dam fulfils a useful function for society by producing clean energy. Derogations might apply to other sectors as well. They will be particularly important in driving the planning process and the costs to which I referred.
Could one factor be a group of firms that said something was going to cost them too much? I do not get the feeling that that would be a ground for applying one of the economic derogations.
The directive provides for the derogation and then provides tests that must be met in order to use the derogation. One of the tests is the concept of disproportionate cost, so that factor can be taken into account in determining whether the derogation is used.
Does that apply only to heavily modified water bodies?
Disproportionate cost is used in a number of contexts. As Evan Williams from SEPA mentioned, the default environmental objective is good status, but under the bill and the directive we will have the power to set a less stringent environmental objective. Disproportionate cost will be an element in deciding whether we can do that. We can also delay the achievement of good status.
As well as the disproportionate cost factor, should not there be something that factors in affordability at any particular time? It seems to me that we run the risk of establishing a framework that requires us to spend money that we might not be able to find in the period in which we want to achieve the objective. Do we need greater flexibility in the system to allow affordability, as well as disproportionate cost, to be a factor in the equation?
Affordability will be a factor. The matter has been the subject of much debate in Europe. One difficulty with affordability might arise when there are two enterprises that sit beside each other, one of which is more efficient. In that situation, factoring in affordability might penalise the more efficient operator by driving up the environmental standards for that operator but not for the less efficient operator down the road. It would be difficult to use the affordability factor across the board. However, in the general river basin planning process, affordability will inevitably be an issue that the partners and ministers will want to consider.
The Executive is asking the Parliament to establish a broad legislative framework that will allow the Executive to make requirements on the various bodies concerned, without reference to affordability. You say that affordability might be considered around the edges, but that it will not be a central consideration in implementing the legislative framework. The Executive is asking the Parliament to approve a lot. We are being asked to approve the framework and to give the Parliament little control over the Executive's discretion within the framework. In fact, we are being asked to give the Executive little discretion on cost issues.
One important factor in the bill is that the environmental objectives that are set in the river basin plan will be the key driver of costs. The bill provides for ministers to have the final sign-off on the river basin plans. The plans will not be delegated completely to SEPA. The Parliament can hold ministers to account for decisions on the river basin plans.
What impact will the bill have on the price of items such as fish and chips? From what the witnesses have said, the bill will have a big impact on tattie growers, because it will involve more than a one-off cost for people who grow potatoes and who regularly irrigate their fields. What impact will the bill have on the retail price index? Are we heading for the £5 fish supper?
There will be no more monster neeps in Turriff.
I cannot answer that question. Mr Adam obviously refers to the report on the work of the Macaulay Land Use Research Institute on the potential impact of abstraction controls on potato producers. That evidence is before the committee. I cannot attempt to extrapolate how the bill will affect the price of chips.
The report suggests that financial margins might be reduced by up to 11 per cent. It states that the minimum impact will be a reduction of 0.5 per cent, but that it could be as high as 11 per cent. In a year when there is a significant scarcity of potatoes, there will also be heavy usage of water for irrigation. That will have a big impact. Perhaps I was being facetious, but my example was real. How can we ameliorate the bill's effect on individual businesses and the general public?
I have two responses to that. First, as the witnesses from SEPA explained, in establishing the bill and the regulatory regimes, we will ensure that we put in place a system that is risk based. The bill is not about seeking to regulate activity for the sake of regulation; it is about regulating where environmental degradation is being caused by the activities that are being regulated.
I think that we have had enough on potato growers, otherwise Brian Adam will get the same reputation for parochialism as his colleague Richard Lochhead.
You will not be surprised to hear me ask this question. Two committee members were late today because of the situation in Inverness. The flooding of Inverness flies in the face of everything that you are trying to do in the bill, in respect of mixing storm water with sewage water, so environmentally it is a disaster. I have not talked to Highland Council, but I imagine that the flooding will create something of a headache in relation to the capital and revenue budgets in the Inverness area.
It is difficult for me to answer that question as we do not have responsibility for flooding control, although we think that the river basin planning system will provide a useful forum for discussion of issues related to flooding because it will bring together local authorities and other partners on a catchment basis, which is the most sensible basis on which to think about flooding. The bill does not deal with the institutional responsibilities for flooding. Other colleagues in the environment group have responsibility for that, so I am sorry to say that it is difficult for us to say more than that this morning.
Surely you recognise that the subject impinges on what you are trying to do in the bill and that yourselves and ministers should consider it.
We think that the bill will have a positive impact because of the creation of the river basin planning forum. We do not think that our proposals will have a negative impact. Far from it, we think that providing a forum to consider matters on a catchment basis should be helpful in bringing partners together. As I have said, we do not propose in the bill to change the institutional responsibilities for flood prevention.
I will ask about some of the estimated costs to industry. Paragraph 159 of the financial memorandum refers to distillers and the paper industry. There seems to be a lot of uncertainty about what some of the costs might be. Paragraph 159 states that further research will be conducted to
We have had general discussions since the directive was agreed. The directive was not published until the end of 2000, but it was agreed in June 2000. Since then, we have turned our minds to consider how we should implement it and we have had regular discussions with a range of industry sectors, distilling being key among them. We have had discussions with the hydropower companies and textile companies and limited discussions with the paper and pulp industry, which we identified as a sector that could be particularly affected. That is why we asked WRc to consider the paper and pulp manufacturers as one of its case studies. It has done that in the report that it has put together. The case study on paper and pulp is the basis of the information in the financial memorandum about the likely impact. As we have described, there are inevitably uncertainties for all sectors because of the setting up of the planning process.
The same arguments apply to other industries. Until the environmental objectives are set for a particular body of water, it is impossible to determine what the impact will be on the industry and the associated costs. The commissioner will work on the distilling industry to get a fairer idea of costs, but the result will still be ballpark figures.
You recognise that there is nervousness in several industrial sectors because of things that have happened in the past. The fish processors are the most obvious example—they were not consulted early or adequately enough.
We recognise that nervousness: it has been expressed to us directly in our discussions with various sectors. One of the things that we said in the second consultation paper on the implementation of the directive that underpinned the meat of the bill was that we would seek to introduce the new regulatory regimes in phases from 2005 onwards. That will allow the industry to have some certainty about the likely impact before it has to do anything. The directive provides that the measures do not need to be fully in place until 2012. We envisage a phased implementation to allow industry and others to build up the things that they need to do to meet the requirements set in the river basin plan. I hope that we will avoid the situation that might have arisen in relation to previous directives where industries have had to turn about face almost overnight in order to meet more stringent environmental objectives. We are trying to avoid that by implementing the regimes in phases.
I hear what you say, but the fact is that some industries—Elaine Thomson mentioned the fish processing industry—have no fat left on them. For several reasons—not least what is going on in the North sea and our seas in general—many businesses are extremely marginal. Therefore, even phased implementation is a problem. I can think of one business in my home town that is really up against it. It would not take much for that business to pull up and say, "Stuff it". At the end of the day, we are talking about jobs in rural areas. I understand where you are coming from in relation to environmental planning, but do you think that the Executive recognises that it is not that businesses are nervous, but that they fear for their survival? Secondly, what discussions have you had with the tourism industry, which is key in the Highlands?
The second question is easy. We have not had any discussions with the tourism industry. That is perhaps a failing on our part. We have always anticipated that the impact on tourism would be positive, because the aim is to protect and maintain the quality of Scotland's environment. In that sense, the outcome should be positive for tourism. However we have not made direct contact with any of the tourism bodies.
We have not been in direct contact with the tourism industry, but in the cost and benefits report that was done by WRc, many of the benefits that are outlined are attributable to increased tourism—better angling and better facilities in Scotland.
I accept that. However, the point is that such benefits will roll out more slowly—it may take years. In the meantime, Mrs Mackenzie who runs a small business could be a wee bit marginal; her time scale is much shorter. I would like to be confident that you recognise the contrast between the short-term problems and the long-term benefit.
I am sure that Mike Kellet will take on board that comment.
The Executive is very supportive of the moves to promote sustainable urban drainage across the board. As my colleagues said, in many ways we are ahead of the game on that point. The Executive realises that there is a problem with arrangements for the future maintenance of SUD systems. There does not seem to be a problem with SUD systems being put in place in Scotland, but we acknowledge that there may be a problem with the arrangements for future maintenance. We are working closely with colleagues in Scottish Water and SEPA as well as the developers in the SUD working party—the committee will be aware that there has been a SUD working party under SEPA's chairmanship for many years—to determine how we best resolve that problem. At this stage we are not in a position to say whether primary or secondary legislation would be the most appropriate vehicle for a solution. However, the issue is important and we are trying to determine the best way to take it forward.
There is a financial regime issue that needs to be resolved.
Mr McCabe asked about the likely impact on charges for water services. In the first consultation paper that we published on the implementation of the directive, we made it clear that ministers' view is that neither directive nor bill will force us to change policy in relation to domestic metering. That point might be useful, given our earlier comments that we are confident that current arrangements comply with the terms of the directive. There is no desire to change the policy that has been explained to the committee and that has been widely set out.
Thank you; that was very helpful. Our objective now is to prepare a report for the Transport and the Environment Committee, which is the lead committee on the bill. I anticipate that we will consider the report at our next meeting.
Meeting continued in private until 13:27.
Previous
Budget Process 2003-04