“The 2006/2007 Audit of Scottish Water”
The sixth item on our agenda is a briefing from the Auditor General on the section 22 report entitled "The 2006/2007 Audit of Scottish Water".
For the benefit of members who have joined the committee only recently, the phrase "section 22 report" refers to section 22 of the Public Finance and Accountability (Scotland) Act 2000. If issues arise in the accounts of public bodies that have been laid before Parliament, I have the power to make reports to accompany the accounts.
By and large, such reports have been written when the financial audit has highlighted problems of one kind or another. However, this report on Scottish Water is a little different—it is not about a particular problem. I made the report partly because of the interest that the Audit Committee has taken in the financial performance of Scottish Water over recent years. I prepared reports on the Scottish water industry—later Scottish Water—in 2002 and 2005. Early in 2006, the Audit Committee took evidence on the second of those reports. The committee did not make a report at the time, but it expressed its continuing interest and I indicated that the performance of Scottish Water would be monitored through the audit process.
Our report summarises the recent findings of the Water Industry Commission for Scotland. The commission has produced a substantial report, but it is a long and detailed read. We have therefore tried to summarise it with regard to Scottish Water's progress in improving its efficiency and customer service. The report briefly covers Scottish Water's operating cost efficiency, its capital expenditure efficiency and its customer service performance. I will summarise the main findings under each of those headings.
On operating cost efficiency, Scottish Water was expected to cut its annual operating expenditure, relative to the 2000-01 base year, by £158 million over the four years to March 2006. Achievement of that savings target would have reduced Scottish Water's annual operating expenditure by 37 per cent to £265 million in 2005-06. Most of the savings were expected to come from significant reductions in its workforce—which have taken place—from a redesign of processes and systems, and from efficiencies that are a direct consequence of the merger of the three former water authorities.
By November 2006, the Water Industry Commission reported that Scottish Water had reduced its base operating cost to £259 million, against the £265 million target. The target, therefore, was achieved. Scottish Water reported that it had reduced its base operating costs by a further 5 per cent in the year 2006-07. However, those savings have still to be validated by the Water Industry Commission.
On capital expenditure efficiency, Scottish Water was expected to deliver its capital investment programme, covering the four years to March 2006, for £1,811 million. That cost target represented a saving of £549 million on what Scottish Water originally thought the programme would cost. In other words, there was a negotiation between the water industry commissioner at the time and Scottish Water that reduced the required capital investment programme.
The commission subsequently revised its cost target for the programme upwards to £2,110 million. That was done to take account of higher than expected inflation, additional pressures from new legislation and the need to provide security on Scottish Water's sites. At the same time, however, the commission raised the capital efficiency savings targets to £613 million.
In October 2006, the commission reported that Scottish Water had delivered 86 per cent of the expected outputs from its programme by March 2006, and said that the remainder will have to be delivered during the next investment period, which runs through to 2010.
Overall, the programme between 2002 and 2006 is expected to cost £2,166 million, which is about £56 million more than the commission expected. However, it still calculates that capital efficiency savings of £494 million were delivered to March 2006.
I apologise for the amount of numbers I am bringing up. I am happy to explain the situation later but, essentially, some fairly rigorous capital efficiency targets were set, after which there was a process of negotiation to and fro as new factors arose in relation to new legislation, health and safety, and so on. Scottish Water has made good progress towards the targets but still has some way to go. The Water Industry Commission calculates that Scottish Water has achieved capital efficiency savings of not far off £500 million. That represents quite a significant move forward.
On customer service performance, the commission reports that Scottish Water's customer service performance improved by 24 per cent between 2002 and 2006. In general terms, the performance still lags behind that of water companies in England and Wales and there are a number of individual measures in relation to which performance is poor, such as the incidence of sewer flooding in Scotland, which is recognised by Scottish Water as an issue. However, Scottish Water has narrowed the gap and the commission says that the efforts that are being made to improve customer service should be recognised.
Scottish Water also reported that it bettered the commission's target for customer service in 2006-07 by 17 per cent. Again, that is still to be validated by the commission. There have been some significant achievements, however. For example, more than 5,200 properties have had their low water pressure problems addressed.
In conclusion, Scottish Water's achievements in the past few years have been significant. Improvements in efficiency and customer service mean that the average household water bill is about £100 less than it would otherwise have been. Nevertheless, Scottish Water still faces challenges if it is to continue to improve its efficiency.
I shall, of course, continue to monitor the performance of Scottish Water through the audit process and, in doing so, will continue to rely to a large extent on the detailed technical work that has been done by the Water Industry Commission.
I hope that this update has been useful to the committee, following on from the evidence that the previous Audit Committee took a couple of years ago.
It is good to put on record the significant progress that has been made in relation to reducing charges to consumers and improving investment. Nevertheless, it is still a concern that Scottish Water lags behind comparable operators in other parts of the United Kingdom. Clearly, there is more still to do to improve its performance and delivery to consumers. Thank you for that analysis.
You have said that the contracts for provision of water and sewerage services to non-household customers will go out to tender in April 2008. Has that happened before? Did Scottish Water win the contracts before, or will it be the first time it will face competition for non-household customers?
It will be the first time. A system of licences is to be set up, which the Water Industry Commission will regulate. The idea is that companies will be able to buy water from Scottish Water and sell it to non-household customers.
I just wanted to know whether Scottish Water had faced such competition before and won. It has not faced competition before, and it has still not reached the standard that we want.
The issue is very much at the front of the minds of the managers of Scottish Water in drawing up their business strategy as they prepare for competition. It is one of the key factors that have created the pressure to achieve efficiency savings as quickly as possible.
The situation is not great, but no one should underestimate the problems that have been caused by the long-standing lack of investment. Scottish Water should be given credit for the improvements that have been brought about: the patient is recovering but has some way to go. It is also noticeable that the commissioner has had a positive effect.
Scottish Water will face a problem in 2008, when it will meet strong competition; however, considering the decades of lack of investment, it has had a mountain to climb and should be given credit for the progress that it has made. Let us keep a watching brief and hope that there can be further progress.
I want to return to customer service performance, which has improved over the three-year period. That is good, but there is still a gap. Is there any quantitative measure for customer service performance? Has Scottish Water reached a certain mark, and are the English and Welsh water companies at a different one?
The Water Industry Commission uses a similar approach to that which is taken by the Water Services Regulation Authority in calculating customer service performance. That enables Scottish Water's performance to be compared with the performances of water companies in England and Wales. The system takes into account a range of performance indicators, which it uses to calculate an overall score. That overall score can be measured according to the scoring system that is used for water companies in England and Wales.
The performance indicators address two things. On the one hand, there are performance indicators for such things as customer-billing performance, answering of telephones and so forth. On the other hand, there are performance indicators to address things such as inadequate water pressure, incidences of sewer flooding and unplanned interruptions to supply. The latter performance indicators are associated with the quality of the asset base. Given the investment that has been made in Scottish Water's infrastructure over the past few years, it is perhaps no surprise that the level of customer service performance is being driven upwards.
Does Scottish Water have a score that we can compare?
The report that you have in front of you today is a high-level summary of what was in the Water Industry Commission's report. The major study that we produced in October 2005 contained some exhibits concerning performance, but that information is slightly out of date now. I am sure that, from the Water Industry Commission's analysis, we could give you up-to-date figures if the committee was minded to take its interest further.
I can give you the scores as reported by the Water Industry Commission, but I am not sure how relevant they would be. The score has gone up from 133 in 2001-02 to 165 in 2005-06.
I have a question on the same theme of performance indicators. Low water pressure was one of the most common complaints that I received as a local councillor. In paragraph 15 of your report, you talk about
"the removal of over 5,200 properties from the low water pressure register".
Are those 5,200 customers now satisfied with their water pressure, or has Scottish Water simply removed them from the register?
That is an important issue that, unfortunately, in the context of the present report, we did not gather evidence about. You will have to address the question to Scottish Water, which I am sure will be able to answer it.
There are no other questions. I thank the Auditor General and his staff for their report and their attendance.
Meeting continued in private until 11:44.