Audit Committee, 10 Dec 2002

Meeting date: Tuesday, December 10, 2002

Official Report 118KB pdf

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“Overview of the 2001/02 water authority audits”

Item 2 is a briefing from the Auditor General for Scotland on his latest report, entitled "Overview of the 2001/02 water authority audits". The report examines the final operating year of the three former Scottish water authorities before they merged to become Scottish Water. The authorities were established in 1996 following local government reorganisation and were responsible for providing a safe water supply to households and businesses and for receiving and treating waste water.

I invite the Auditor General to brief the committee on the report.

As the committee well knows, the three water authorities became one body from April 2002. However, the report before the committee draws on the auditors' reports on the three authorities for the financial year 2001-02 and highlights some of the issues that emerged.

The report makes encouraging reading in the sense that financial control was maintained in the period leading up to the creation of Scottish Water. Financial targets were achieved and the audits were completed on time. In the report, I have highlighted some matters that the auditors of the three former water authorities thought that Scottish Water should bear in mind, including the importance of maintaining sound governance arrangements and ensuring that the financial and management systems inherited from the three previous water authorities are brought together in a controlled and cost-effective way.

The report highlights two particular financial issues. First, the accounts of the three authorities disclosed exceptional costs totalling just under £87 million in the two years up to March 2002. Those costs were attributed to reorganisation and relate mainly to expenditure under the voluntary severance schemes that were set up to reduce costs, meet efficiency targets and prepare for the creation of Scottish Water.

The second financial issue concerns the net debt across the three authorities, which increased substantially from £79 million at the end of 2000-01 to £95 million in 2001-02. Such an increase underlines the fact that the non-payment of water and sewerage charges continues to be a significant issue in Scotland. It is clear to us that it will require Scottish Water's early attention.

This report is the first of its kind—as I said, it is based on the audits of the former water authorities—and it will provide the basis for future audit work. I intend to report back to Parliament, through the Audit Committee, on Scottish Water's progress in its first financial year and in subsequent years.

As always, I am happy to answer any questions. My colleagues are here with me as usual to help the committee in any way.

I thank the Auditor General. Now that a new organisation has been created, our consideration of this report means that we are looking at past history. However, you highlighted the increase in the net debt across the three authorities to £95 million and the non-payment of water and sewerage charges as significant issues that warrant early attention. Within what time scale would you expect action?

Although the new water authority was established in spring 2002, we would expect it to address the matter immediately. It is clearly in everyone's interest that such a new organisation recovers as much of its charges as it can.

Obviously, much of the cost of restructuring is due to severance and repayments. How much of the increase in debt is due to the water authorities' belated investment in infrastructure through the private finance initiative and public-private partnerships? I say belated, because we are catching up with the rest of the country in that respect. I take it that interest payments and all that kind of stuff are involved.

Yes, absolutely.

Given that investment in infrastructure has risen from £100 million in 2002-03 to £120 million by 2005-06, I presume that the situation is likely to continue, if not get worse.

I am sorry if I have not explained this matter clearly. The net debt that I referred to is attributed to the non-payment of water and sewerage charges.

Oh, right.

People in the domestic and non-domestic sectors have not paid the water service charges that they are obliged to pay.

I remind the committee that we will consider the report in detail under item 5. At the moment, members should keep their questions a bit more general.

Well, the subject is highlighted as a major issue in the audit results. The Auditor General talked about sound governance arrangements. However, I am slightly surprised to find that East of Scotland Water's investment in a new office building to accommodate 250 people rose from £5.75 million to £11 million plus. That does not sound like sound management to me.

The auditor commented on that matter because of the way in which the water authority had cut corners in procedure and because of the very significant increase in the costs of the project.

The Auditor General mentioned that the water authorities met the targets that they were set. However, what was their target for debt recovery?

My team advises me that they did not set themselves such a target.

In that case, I will leave my follow-up question for the later agenda item.

If there no further questions, I will move on.