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We have been joined by the Minister for Environment and Rural Development for item 3, and we shall now consider the governance of Scottish Water.
I am accompanied by William Fleming and Andrew Fleming, from our water division, and by John Mason, head of the environment division.
A range of committee members wish to speak. We are also joined by John Swinney MSP, whom I will call with everybody else.
It is important to start by asking what resources you made available to Scottish Water to remove development constraints, which are at the heart of its development plan crisis.
My answer has two elements. As you know, we held an extensive consultation. When we arrived at the original global sum, the consultation resulted in an allocation between the three essential elements—development constraints, the need to comply with the immediate requirements of the drinking water quality regulator for Scotland and the need to comply with environmental requirements. The timing for complying with the environmental requirements was perhaps a little more flexible, because not all the requirements were regulatory.
Given that paragraph 12 of the Executive note says that the Executive was concerned about how Scottish Water would deliver increased strategic capacity to overcome development constraints, why did you take three months to decide to act to speed up progress?
One of the very disappointing features of the quality and standards programme was that the consultation failed to reveal adequately the level of requirement for development constraint. Indeed, it was most unfortunate that some local authorities did not respond to that consultation.
Can you tell me why, on 7 February, the water commissioner, Sir Ian Byatt, said that he welcomed an early meeting that you planned to have with a high-level group led by a senior civil servant? What was that group going to achieve in the midst of this crisis?
It was an attempt to understand better where the disjunction was arising. Clearly, it was a matter of grave concern to us that a body that we, effectively, fund and that is in public ownership for good reasons, was, apparently, entering caveats into its response to the Water Industry Commission's determination. That caused us great concern. The matter was extremely serious and we wanted to understand fully the nature of where we were and why those caveats were being entered. That led on to further concerns about the nature of Scottish Water's response to the Water Industry Commission's determination in relation to its delivery plan.
In The Scotsman of 22 February, you said that you would not want to replace Professor Alexander with a yes man. Presumably, therefore, the person who will replace him will occasionally say no or maybe to elements of Q and S III and the investment programme.
We could explore that, but I am not sure that I have to make any initial compromise. The Water Industry Commission's determination looked at the issues that we submitted, following the extensive consultation to which I referred earlier, and we made clear that the ministerial objectives were in exactly those three difficult areas and that we expected Scottish Water to produce a delivery plan that could meet those objectives. In major terms, that appeared to be the case. The biggest difference was that the Water Industry Commission decided that the plan could be met in full for a substantially lower sum and without compromising the Scottish Executive's objectives in terms of development constraint, the environment and the drinking water quality directives. That is an extremely important point.
I hear what you are saying. That is very much the WIC's view. You are effectively saying that there is no room for failure or revision within the Q and S III process.
I am not saying that. It is obvious that practical issues will arise. This plan has not been drawn out of thin air. I would be open to that criticism if we had not had such an extensive consultation and so much paperwork.
I have a question for you on development constraint. There are local authorities in Scotland that are competing against each other to get more economic development and more people to live in their areas. Fife Council is an example of that. That competition is causing tension in places such as north-east Fife, where some communities are set to double their populations and people are worried about the infrastructure, including sewerage. They are greatly concerned about the development plans.
The questioning so far has been about the delivery plan as a whole, and there are issues about why I am concerned about that. We are now drilling down to the relationship between Scottish Water and local authorities. Rob Gibson asked me where the figures came from. The figure of 120,000 homes was not plucked from the air; it has a real relationship to local authority evidence and to the overall Scottish housing plan.
That is an issue for Scottish Water to discuss with local authorities.
Yes, but it is also for me to express concerns about the matter on behalf of the owners of Scottish Water, who are the people of Scotland. It causes me real concern.
I have a general question and a specific one. Given that you say that you have deep concerns about aspects of Scottish Water's operation, which I imagine are shared by large sections of the public, will you share your thoughts about the weekend stories that the Chancellor of the Exchequer would like to privatise Scottish Water?
That is a bit like asking, "When did you last meet the Chancellor of the Exchequer and what issues did you discuss?" I have not met the Chancellor of the Exchequer, and I have not discussed the matter with him. The question should be addressed to the Chancellor. The Scottish Executive has no plans to privatise Scottish Water. It may not come as a surprise to the committee—its predecessor oversaw the passage of the Water Industry (Scotland) Act 2002, which formed Scottish Water—that primary legislation of the Parliament would be required to change Scottish Water's status. I cannot say why the story about the Chancellor appeared, nor on what information it was based.
So there is no truth to the story that discussions on the issue have taken place between the First Minister and the Chancellor of the Exchequer.
That is an even more speculative story. The question may be answered for the second time at First Minister's question time tomorrow. I am unaware of any such discussions. More fundamentally, although the story is interesting, it overlooks the type of legislation that would be required to change Scottish Water's status.
My specific question relates to the departure of Professor Alexander. I am interested in the background to the Executive's contractual obligations to Professor Alexander, particularly in relation to the ex gratia payment to him of £27,000 when he resigned. The term "ex gratia" suggests that you did not have to make the payment, but did so voluntarily. Will you give us the background to that?
In my position as the minister with responsibility for the water industry, I must work on a professional basis in dealing with the chairman, so personalities and other issues are completely and utterly irrelevant. From time to time, profound disagreements can arise. On this occasion, the disagreement was over the nature of the delivery plan and what had to be done in the best interests of the Scottish public and consumers. As would any company that has to deal with such matters, we believed that it was appropriate to acknowledge that Alan Alexander acted entirely honourably in the dispute and to recognise the contribution that he has made to the water industry. Our action was entirely in line with the way in which corporate bodies of a similar size deal with the resignation of a chairman.
Did his contract stipulate that he should be paid such a sum if he decided to resign?
No. The discretion is in the Water Industry (Scotland) Act 2002, which allows ministers to require Scottish Water to make such a payment.
Thank you, minister.
I am relieved that you have finished, Ted, because I was going to stop you after four questions.
I will pick up on Ted Brocklebank's theme. We were keen to have the minister before the committee because of the fear of instability in Scottish Water as a result of the circumstances and timing of the chairman's resignation. Is it the case that, had Professor Alexander not resigned, you would have moved for his dismissal?
That is entirely speculative. He resigned and I did not have to think about that matter. I do not intend to answer the "What if?" question. We had a profound disagreement and Alan Alexander decided to resign.
I am puzzled about the timing. Our briefing from the Scottish Parliament information centre says, "The letters were exchanged" between the two of you "from 1-14 February 2006." On 2 February, the Executive had already commissioned recruitment consultants to find an alternative chairperson. You will understand that the perception is that, behind the scenes, you were moving to have the chair of Scottish Water replaced. Is it fair to assume that you would have sacked him if he had not resigned?
No. In the run-up to the receipt by the Executive of Scottish Water's delivery plan, although we had not seen the plan in total, we were aware of emerging difficulties. Alan Alexander is a well-known public figure who holds very strong views, and we were aware that there was a potential—I stress potential—difficulty. I am perhaps a little overcautious, but I do not like to run my department on the basis of having to face surprises for which I have not prepared myself. The signs were concerning, although I still firmly believed that matters were capable of resolution. However, there were clear signals that things might get quite difficult. As a matter of prudence and precaution, I wanted to know what the options were and what the position was. That seemed to be prudent on my part, but it did not close my mind to matters turning out very differently.
Clearly, it is going to be difficult to shed light on that episode.
Let us be clear that, although I regard the disagreement between ourselves and the chairman and Scottish Water about the content of the programme over four years as a very serious matter, Scottish Water nevertheless has some highly professional people among both its executive directors and its employees. We should be careful not to assume that, simply because the chairman has resigned, the employees of Scottish Water have gone home to sip cups of tea as they await the new interim chair. They continue to perform their duties in a highly professional way.
I will take that as your not being able to put your hand on your heart and say that there will be no delays.
I would be a foolish minister to try to anticipate that. I do not run Scottish Water; I try to give direction and to ensure that the interests of the Scottish public are represented in this matter. I have received serious representations from all sorts of MSPs on the matter, including from John Swinney.
I appreciate the opportunity to ask questions, even though I am not a committee member.
Those bodies had several meetings, which I did not attend and at which my officials were not necessarily always present. Given that the delivery plan ultimately had to meet the requirements of those regulators, it was clearly important for Scottish Water to be in dialogue with them. That is what one would expect.
What was the purpose of that dialogue?
The purpose of such dialogue should be—I and my officials are not necessarily privy to those conversations—to ensure that Scottish Water is clear that the delivery plan that it is preparing will meet the requirements of the regulators. As we know, at the end of the day that was sadly not the case. The situation was also influenced by the fact that ministers had made it explicit to Scottish Water that it would be important that the delivery plan that it presented to us had the approval of the regulators.
If, in Scottish Water's discussions with the Water Industry Commission, the commission offered it a mechanism whereby slippage could be allowed on specific environmental projects that were, in the minister's words, not driven by regulation—projects that were welcome developments rather than absolute requirements—would it have been reasonable for Scottish Water to conclude that it had the commission's tacit agreement that it could present a business plan to ministers that met ministerial objectives in a way that, in advance of the February discussions, had been refined by the room for compromise that the minister talked about?
As both John Swinney and I are acutely aware, speculating on what might be a reasonable conclusion would require that one knew both what question was asked and what answer was given. As I was not present, I know neither what question was asked nor precisely the answer. However, what I do know—I realise John Swinney's direction of travel here—is that the letter that we delivered to the chairman stated expressly and clearly that we required the delivery plan to have been approved by the regulators beforehand. My point is that, even if such discussions took place—I cannot say whether they did, as I was not privy to any—one would have expected Scottish Water's management, as a matter of course, to have presented the final delivery plan to the commission for its approval before giving it to ministers. That did not happen.
In his written evidence, the minister states that he concluded on 1 February that the business plan that Scottish Water submitted fell short of the required ministerial objectives that needed to be achieved. However, as Rob Gibson has highlighted, the minister's officials convened a high-level group on 7 February to discuss the development of the Scottish Water business plan. Was it appropriate for the Executive to have acted as abruptly as it appears to have done while that dialogue was continuing on how a credible business plan that delivered ministerial objectives might be achieved?
There is slight confusion about the purpose of the meeting on 7 February. It covered a range of issues. We were in no doubt that the plan had not been approved by the regulators as we had required. The meeting of officials on 7 February was important because a worrying situation was emerging and we wanted our officials to be clear about what was happening and wanted to look beyond, to where we were going, given that we did not have a plan that had been approved in the terms that we were seeking. Also, that was the day on which the Water Industry Commission responded to the letters, saying that the plan did not meet its requirements. A lot of issues were bubbling up at that time. I do not think that we came to a precipitate view on the plan.
My objective is to ensure that there is no interruption to Scottish Water's investment plan, because it affects my constituency. I have been raising the issue for 18 months and I am bored senseless by having to raise it again.
If we are talking about the development constraint difficulties that came to light or emerged—whatever phrase you want to use—and should perhaps have been part of Q and S II—
They could not have been in Q and S II, because it was formulated years ago.
Indeed, but one of the difficulties with Q and S II was, as I explained in an earlier answer, the extremely unfortunate failure of a large number of local authorities to respond to the consultation. There is no doubt that the sums that were allocated to Scottish Water for Q and S II did not adequately respect that.
I know, but I am asking—
You are asking a simple question.
I am asking about Q and S III, minister, where those issues are supposed to be addressed.
Yes—
One at a time, please.
Those issues will not be solved in a day. Q and S III starts on 1 April. The matters are addressed in it and they are part of the next four-year problem. It is regrettable that a number of issues that are in Q and S III ought properly to have been in Q and S II and I am not denying that. I have never denied it; I have only said that it is regrettable that the consultation that took place four years ago had some unfortunate results. The issues have to be addressed and are in the Q and S III plan, which, as I said to Rob Gibson, removes the constraint on 120,000 new homes.
Richard Lochhead asked for a guarantee that there would be no impact on investment plans as a result of the chaos that we now have at the head of Scottish Water. Do we have assurance that there will be no interruption to the investment plans, whatever they happen to be?
Curious though it may seem, my interests in the matter are not in any way different from yours. As a member for the West of Scotland constituency, I have an interest in housing development constraints, as do others. I also have an interest as a minister and my aim is not to do anything other than ensure that the plan is realised and the development constraints removed. There is nothing between our positions on that. However, I had a fundamental difficulty with Scottish Water's plan because it appeared to enter a number of caveats, which gave us good reason to lack confidence in the ultimate delivery of the plan. I had to challenge Scottish Water and say that the plan was not acceptable. We are appointing an interim chair to ensure that we can deliver on all three elements of the plan within the timeframe.
When will the revised business plan be available?
I have not been advised of that. However, I repeat that we are dealing with professional people within Scottish Water, who are not constrained from making preliminary plans and delivering on the tail-end. There is no professional need for them to stop what they are doing. I understand and share Mr Swinney's concern about the matter and I want to move as quickly as I can to fill the vacuum. However, I do not think that it would have been proper for me, as a minister, to accept a plan that had fundamental caveats. In the final analysis, no matter what Mr Swinney said in his first question—though I do not dispute where that came from—the plan was not approved by any of the regulators.
I want to ask about integration between Q and S II and Q and S III. The Water Industry Commission came to the Parliament a few months ago to do a question-and-answer session with MSPs, who obviously raised their concerns then about Scottish Water's proposed delivery plan. One of the matters that was complained about was double counting. The example that was given, as I recollect, was that projects in Q and S II were appearing again in Q and S III. I asked whether projects in Q and S II that were not completed would be included in Q and S III, and the commission rather implied that they would not. I am concerned therefore that some capital projects might be left dangling because the commission would not allow Scottish Water to include them in Q and S III. I may have picked that up wrongly, but I certainly did ask that question of the commission and got a rather unsatisfactory answer about what would happen to some projects. I wonder whether you can give me any information on how Q and S II and Q and S III will integrate, if there are unfinished projects when Q and S III begins.
As I indicated earlier in response to Richard Lochhead's question about delays and whether the programme came to a shuddering halt, there are some £280 million-worth of Q and S II projects. Those simply have to carry on because they must be delivered. The money is there and there is no reason for those projects not to continue. I am slightly surprised by what Maureen Macmillan said about projects being double counted. That is not my understanding of the position, which is that Q and S II must get finished. Notwithstanding the hiatus in the delivery of the Scottish Water plan and the question of its chair, there is no reason why Scottish Water cannot pursue and prosecute those projects—that is what it must do. For the move into Q and S III, there are separate allocations and those funds are available to Scottish Water to deliver on the projects.
I have a few questions. Having listened to colleagues, I want to take a slightly different tack and ask about assumptions that were made in the delivery plan and concerns that the Executive has expressed in the paper that was presented to the committee today.
Absolutely. Some of them depend on understanding also what the Water Industry Commission does in its economic assessment of the performance of Scottish Water. It is tasked with looking at comparable companies in the sector and adjusting the comparisons, as nothing is identical. There are geographic and topographical considerations in Scotland that prevent direct comparisons from being made. While picking on one or two companies because of the size and scale of their operations, the economic regulator is expected to be cognisant of the fact that direct comparisons cannot be made.
That is a general answer. I asked specific questions about assumptions, which you did not answer.
I apologise.
I am just trying to get to the heart of what this means in practice.
There are provisions in the regulations whereby if entirely unforeseen events occur, Scottish Water can apply to the commission for an interim determination on the matter. Elsewhere, bodies do not anticipate that, but they know that the provisions are there and that they have the absolute right to apply to the regulator for a revision if there are material changes in their circumstances. Therefore, their plans do not start to hint at this or that happening. They know that if events occur that are entirely outwith their hands, they have the right to apply for an interim determination. That applies to the delivery plans from comparable companies in similar sectors and in the utility industry as a whole.
I am still wondering about issues such as electricity costs and the cost of capital goods, which are not necessarily within the control of the organisation. If those costs exceed expectations and if Scottish Water is not in a position to manage them down, could it do anything other than go back to the commission to put its case? Given how electricity prices have risen over the past couple of years, is it expected to assume what future price increases will be and accommodate them in the plan? How are such issues meant to be dealt with, given that price increases could be significant?
On the cost of capital, the commission's assessment takes account of what is being done in industries and companies that are as comparable as possible and demonstrates, both in terms of management and in terms of prices being obtained or potentially being obtained, where Scottish Water's delivery plan meets expectation. It was that calculation that brought about the opinion of the commission that, taking the plan as a whole, there could be a substantial reduction in the overall cost. However, if prices change materially for reasons that are wholly outwith the control of Scottish Water, there is a right of appeal.
It is because people have concerns about getting ahead and getting that huge investment programme going that I asked about the target date of 1 April for signing the contract. Colleagues had concerns about the process being delayed, so I wanted clarity about the fact that there was, in principle, no obstacle to that going ahead just because the chair has moved on.
There are separate governance issues that have been raised by the commission, but the need for Scottish Water to have that delivery vehicle is clearly understood.
I would like to ask about Scottish Water Solutions. Would Scottish Water be free to sign a contract before the delivery plan is signed off? What influence does the WIC have on the terms of that contract?
Irrespective of the final shape of the plan, you will see if you look carefully at the structure of Scottish Water that it clearly requires access to contractual and delivery experience. The commission's determination highlighted issues to do with where the balance of risk lay between Scottish Water and Scottish Water Solutions and who, in determining that balance of risk, controlled the final cost determination and where that determination fell. Those issues have to be, and are being, addressed, because they are critical to the nature of a contract that Scottish Water might enter into with Scottish Water Solutions. It is acknowledged that there were issues that needed to be resolved, and we understand that they are being resolved. That does not prevent Scottish Water from entering into a relationship to ensure that it has such a delivery vehicle.
Everyone has been able to ask their questions, some of which were quite searching. That was appropriate, given the nature of the issue. I thank the minister and his officials for coming along this morning and for providing us with information in advance.
Meeting suspended.
On resuming—
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