Water Charges
I will announce today the results of the strategic review of water charges for the period April 2000 to March 2002. Those are the first major strategic decisions on the water industry by the new Scottish Executive, in a new regulatory framework, and they will have a crucial impact on the success with which the industry meets a challenging future.
Last September, I made a statement to this Parliament announcing the appointment of the water industry commissioner and setting out our approach to regulation of the water industry. At that time, I said that the Scottish water industry faces twin challenges: to meet the aspirations of the Scottish people in terms of environmental standards and drinking water quality and to do so at minimum cost to the customer. The strategic charging review is a vital step in meeting those challenges.
I am today setting out the results of the first strategic stage in the charge-setting process, in which ministers take decisions on the overall revenue requirements of the industry to meet their investment needs, taking account of potential efficiency improvements and the external financing limits already announced. This strategic review covers a number of years—in this initial transitional round only two—to give the authorities a sounder framework for medium-term planning.
For the strategic review, the authorities' revenue requirements are driven by their investment needs. Those are substantial for several reasons.
The infrastructure on which we rely was put in place in the Victorian era and decades of under- investment mean that much of it needs to be replaced soon. The commissioner estimates that the cumulative underspend is close to £2.5 billion. We must ensure that the security of supply is maintained and improved.
Mains bursts can cut off water supplies to thousands of people, as the incident earlier this week in Largs has shown. In the past few years, too many people in Scotland have found themselves in that worrying position. The longer that we put off this investment, the more of those types of incident we will see.
European legislation rightly pushes us towards higher standards. We must improve our record on water quality and safety. The urban waste water treatment directive will require proper sewage treatment for all our towns and cities and the
drinking water directive sets tough new standards for lead and some other impurities such as trihalomethanes.
Customer demands for better-quality water, greater care for the environment and improved service quality are growing. Despite the good results for this year, announced yesterday, we still need to invest more to clean up our beaches. As well as being unpleasant, dirty beaches have an economic impact that undermines tourism.
Our programme for government therefore includes three separate commitments on water: cleaner bathing water, an investment in drinking water quality and proper waste treatment.
The full range of challenges are set out in the water quality and standards paper that I published on 1 November. It clearly explains what ministers expect the water authorities to achieve on drinking water quality and environmental improvement.
The quality and standards paper was the starting point for the water industry commissioner's review. As I said back in September, one of the commissioner's key responsibilities is professional scrutiny of water authority finances.
Alan Sutherland has, in six short weeks, carried out an extremely rigorous review, and I am very grateful to him. He has transformed the terms of the debate by giving economic support and the customer regulator's support to the argument that greater investment is in the customer's interest. In his advice, he sets out the case for a major increase in investment in the water industry for the interests of the customer, which reflects his primary duty. In particular, he argues that a significant acceleration in investment is required to deliver what the quality and standards paper requires to renew and improve the Victorian infrastructure.
I accept the commissioner's basic argument. Recent events in other industries have highlighted the importance of investment in basic infrastructure. I have decided to go most, although not all, of the way towards Mr Sutherland's recommendations, mostly because Scotland's water industry must be put on the road to sustainability, maintaining its infrastructure and improving quality.
I have not accepted the recommendations in full, first, because some of the issues that Mr Sutherland raises need more public debate, especially in this Parliament; secondly, because our state of knowledge about the water industry's underground assets is incomplete. Further work is required to provide the necessary speed of replacement over the medium term. The commissioner's initiative on asset management planning, which I welcome, will help to fill that gap in our knowledge.
The overall revenue increases that I have decided on for the Scottish water authorities in each of the next two years are as follows: 15 per cent and then 12 per cent for the East of Scotland Water Authority; 15 and 12 per cent for the West of Scotland Water Authority; and 35 and 12 per cent for the North of Scotland Water Authority.
The larger increase for the north is based on a fundamental reassessment by the authority of the investment that it needs to meet its statutory obligations, which reflect the inevitably higher cost of providing water services in remote and sparsely populated areas. As has already been announced, the Scottish Executive has increased NoSWA's external finance by 50 per cent over the two years to ease the impact on customers.
The Executive's measures will finance a bigger investment programme for each authority. Among the benefits are spending of around £200 million on water treatment works, which will allow implementation of the cryptosporidium direction that I have just issued, which will minimise the risk of cryptosporidiosis outbreaks resulting from poor drinking water.
My decisions take the form of charges caps, but, given the urgent investment needs of the authorities, I expect that their charges schemes will be in line with the figures that I have announced today. Increases on that scale are obviously unwelcome to customers, and I can assure members that I would not endorse them if I did not believe that they were absolutely necessary. It should be recognised that, although the increases are significant in percentage terms, they represent only an extra 60p per week next year for the average customer.
I am particularly concerned about the impact of charges on low-income households. The current arrangements linking charges to council tax bands already provide substantial assistance to many of the less well-off. Band A households, which include a large proportion of low-income households, pay only two thirds of the average charge. Our legislation also ensures that people are never cut off. However, I have asked my officials to consider whether we can improve on the protection already provided by the current charging arrangements.
The charge increases make it even more important for the water authorities to give their customers value for money. It is the authorities' response to that challenge that is crucial for the long-term health of the industry, and I am committed to ensuring that they meet it.
I am therefore, today, endorsing two further initiatives put forward by the commissioner. The first will ensure that we have the information to
chart each authority's performance over time and to compare it with the other Scottish authorities and with the best in the UK. Benchmarking means learning from best practice elsewhere.
The second initiative will introduce common customer service standards throughout Scotland. In addition, we will introduce arrangements to link the pay of chief executives to the overall performance of their authorities. The Scottish Executive will demand the highest standards of customer service and efficiency from our public water industry.
There are other factors that will increasingly put pressure on the Scottish water authorities to improve efficiency and customer service. In particular, the coming into effect, in March, of provisions in the Competition Act 1998 will see growing competition in Scotland for the provision of water services.
The key issue that we face is how best to achieve benefits for customers through greater choice and value for money, while continuing to achieve our public health, environmental and social objectives. That may mean legislation, and I will publish a consultation paper on this in the spring.
Another key principle of the new regulatory regime is transparency. I can confirm that, today, the commissioner is making public both his advice and my response to it. I hope that that will inform debate on this crucial issue.
Now that the overall decisions have been taken, the next step is for each water authority to prepare its annual charges scheme and submit it to the water industry commissioner for approval. If agreement cannot be reached, the scheme will be referred to ministers for decisions. It is at that stage that the charges faced by individual customers are determined. I expect that information to be available at the end of February.
Today I am announcing substantial increases in water charges to meet the substantial challenges that the industry faces. There can be no compromise on drinking water quality and environmental standards. However, that means developing broad public support for investing in our future and consulting on where to strike the final balance between service quality and price.
I am confident that the decisions that I have announced today promote the interests of customers by meeting the investment needs of the industry and enhancing its efficiency. That will mean a properly funded, successful and, above all, public water industry in Scotland, providing Scottish customers with the high-quality service that they deserve. Ensuring that our unique Scottish water industry compares with the best is a major challenge for the new Scottish
Administration and the Scottish Parliament. I look forward to working with members in meeting that challenge.
I welcome the minister's statement. She has said that the proposal for massive hikes in water charges will be unwelcome. I assure her that that is a huge understatement. There will be outrage throughout Scotland at the charges, particularly in places like Forth valley, where, in two years' time, there will have been a 300 per cent increase in water bills since Labour came to power. In the Highlands and Islands, in two years' time, bills will have broken the £300 barrier.
Private finance initiative schemes are conspicuous by their absence from the minister's statement. Will she come clean and admit that the reason for the increases is to force the current generation of customers to pay what can only be described as a tap tax? That tax is designed to provide profits for the private companies in whose hands the minister is placing Scotland's water industry.
Will the minister confirm that NoSWA proposed issuing a bond as an alternative to PFI, but was turned down? Will she also confirm that she has pursued the writing off of debt in the water industry to keep bills down? What action has she taken to keep bills down for the hard-pressed consumers in Scotland, whose bills have shot up since Labour came to power?
I refute the suggestion that the substantial increases in charges have anything to do with the different procurement procedures in the water industry. We do not have an ideological objection to involving private investment where that would lead to value for money and efficiency. Let me give the example of the Almond valley Seafield and Esk project. If we had pursued it under the original Lothian region proposals, it would have cost £170 million; the PFI proposal that East of Scotland Water is pursuing cost £110 million.
It is possible to get investment in the water industry using both traditional procurement processes and PFI. It must be up to the water authorities to identify the most cost-effective way of doing that. That is why PFI has a place in the water industry—where the authorities see it as appropriate. It has a particularly important role in meeting the tight time scales faced by the water industry, following European directives. There is no shying away from those directives: we have to meet our obligations and to do so efficiently, with the best possible value for money.
I refute the allegation that the increases are the result of lack of investment by Labour-controlled local authorities. During the 18 years of Tory
Government, local authorities did not have enough money to meet all the demands made on them for education, transport and a range of local services. The water industry was one area in which it was most difficult to identify sufficient investment. It is not fair to lay the blame at the door of Labour- controlled local authorities. They have done their best to ensure that investment is appropriate. Over the past two years we have ensured, through the use of external finance limits, that extra resources were made available to enable the water authorities to meet their investment programmes.
I thank the minister for providing me with a copy of her statement in advance. Does she agree that the level of increases announced today is the result of capital spending having to be funded by direct charges, and that increases have, therefore, been driven by the external finance limits that she has set? Does she accept that the Competition Act 1998 will ultimately make for higher charges for many consumers, if large industrial users are cherry-picked, leaving the investment programme and all the overheads to be paid for by the remaining consumers?
Given the minister's non-ideological statement, should the Executive be considering a Scottish solution to this peculiar Scottish problem and allowing our water authorities greater commercial freedom to form private-public partnerships to access private capital and reduce annual direct charges to consumers in the long run, while maintaining investment levels? If not, is it not the case that the minister and the Executive are directly responsible for spiralling annual charges?
Ensuring that we get the correct levels of investment is a key issue. The charges that have been announced today are the result of having to deal with a massive backlog in investment. In the privatised water industry in England and Wales, that backlog started to be tackled in the mid-1980s. We in Scotland have to catch up to meet our international obligations.
It is important that we address the implications of the Competition Act 1998 through this Parliament. That is why I indicated in my statement that I would return with a consultation paper that we could consider collectively over the next few months. It is why I have endorsed the commissioner's recommendation that we continue our review of the asset management process and identify the rate at which future investment is required to tackle the backlog. It is why we must promote the highest standards.
The commissioner's suggestion of a high standards initiative is absolutely relevant in the context of the Competition Act 1998. It will ensure that the possibility that Murray Tosh has raised— of large industrial firms being cherry-picked by major companies from elsewhere—does not become a reality. That is why the water industry has to face the challenge of becoming more efficient and providing the highest possible levels of customer care, and why the two additional initiatives that I am endorsing today are of such significance for the industry.
We have spent three years getting together the components of the water industry that were in place before reorganisation of local government. The next challenge is to gear up the industry for increased investment and higher standards of customer delivery.
Today the minister has announced charge increases for North of Scotland Water Authority of 35 per cent for next year. I accept the need for that increase, but the fact remains that it represents £71 a year for a band D house. Given that many pensioners still live in family houses and will not benefit from banding-related relief, will the minister join me in pressing the Chancellor of the Exchequer to increase the state pension by more than the proposed 75p a week, to allow older people in Aberdeenshire to afford this water bill increase?
One of the key aspects of the increase in the North of Scotland Water Authority area is the extent to which the water authority has been involved in widespread consultation with users to ensure that people are aware of both the prospect of substantial investment and the possible impact of that investment. There has been extensive discussion in the north of Scotland. I know that the dispersed nature of the population means that this will cost more in the north. That is why I have ensured that the information is available widely. We can read the water industry commissioner's statement on that point.
As the Minister for Transport and the Environment, I will examine the possibilities of managing the process in terms of the impact that it will have on the lowest band of council tax payers and will try to mitigate the impact on them. I must stress that, although the potential rise is high, the rise in practice will not be as high as that.
I call Dr Elaine Thomson.
It is just Elaine Thomson.
The minister's statement to ensure the security of Scotland's water supply and meet modern environmental standards is to be welcomed. However, the minister will be aware of the concerns of fish processors with respect to the European Union waste water directive. Can she assure the fish processing sector in Aberdeen and the north-east that it will not be adversely affected
by the changes in water charging announced this afternoon?
I can say that the decisions that I have announced today do not have any impact on the size of the increases that Elaine Thomson is talking about. Trade effluent charges are a separate matter. It has been clear for some time that there are major challenges in dealing with the issue of trade effluent. I look forward to the publication of the Cordah report, which we expect to receive shortly. That will let us move swiftly to address the issue with the fish processors and with NoSWA.
I apologise to Elaine Thomson for giving her Dr Elaine Murray's doctorate. No doubt she will get one in due course.
Given that, next year, the hike in the water charges in the north of Scotland is to be three times as high as it will be in the rest of Scotland, I ask the minister whether she has seen the BBC programme "Castaway 2000". If so, is new Labour policy similar to the BBC's version of social experimentation on the isle of Taransay? Is Labour trying to see how difficult it is for people to survive and support their families? If that is not the case, why do the Highlands and Islands, the hydro capital of Scotland, have the highest hike in water charges, on top of the highest fuel tax in western Europe and the highest fuel costs in the world?
Will the minister finally give me an answer to the question that I asked on 23 November? Will she hold a public inquiry in Inverness to explain to the people of the north of Scotland why they are being treated to this form of social experimentation?
I do not see the need for an inquiry. Fergus Ewing might have noticed that NoSWA published a review of its corporate planning process. I ask him to examine that carefully, in addition to the work that has been done in addressing the future charge levels for the NoSWA.
I remind Fergus Ewing that NoSWA meets widely varied needs from Dundee and Aberdeen to Orkney, Shetland and the Highlands. The major European requirements present a challenging prospect. I refer him to the corporate planning document that identifies the process that NoSWA has gone through in improving its approach to procurement and management of the services, and encourage him to take forward the debate on the way forward for the water authority.
The minister is aware of my concerns regarding the infrastructure in the Highlands and Islands. Will the changes mean that there will be more investment to improve and extend the infrastructure in the area?
That is correct. It would not be acceptable for people in the Highlands and Islands to have lower water quality, less safe water and a less secure water supply than people in the rest of the country. When I was in Inverurie in the summer, I witnessed the collapse of the water mains there. I saw the problems that are caused when sewage goes straight into rivers. We need investment that is swift and achieves value for money. Customers must see that the process is being managed effectively. Those are the objectives that we have for the industry in the north of Scotland.
Does the minister agree that the rise in the NoSWA charges of more than 50 per cent over the next two years is extremely high? Does she agree that billing arrangements for those NoSWA charges should be reviewed to ensure that councils such as Aberdeenshire Council are not blamed by consumers for the rise, given that the bills come through letterboxes with council tax bills? Does the minister agree that consumers should know unequivocally that responsibility for the rise rests squarely with NoSWA, and will she review the billing mechanism?
It is important to establish a language with which to examine what is happening in the water industry, one that identifies the key challenges and benefits of that investment.
The approach taken by Mr Rumbles is not the best way forward. It is important for each authority to explain, in value-for-money terms, what customers will receive in practice, exactly what level of investment is to be delivered and what that will mean for water quality and standards. Each water authority must take that approach. I know that the water authorities are considering that question carefully, so that their customers will understand the benefits of the rises.
Does the minister agree that, even after the increases announced today, Scottish water consumers will, in comparison with consumers in England and Wales, continue to pay charges well below those levied by privatised water companies south of the border? If so, will she make it clear that it remains a priority for this Executive to retain the Scottish water industry wholly in public ownership by opposing any proposal that would allow privatised companies to cherry-pick in Scotland by using our water infrastructure, which was bought and paid for by Scottish taxpayers?
Absolutely—that is in our interests. The Executive is committed to ensuring that the water industry is managed efficiently and
effectively by the public control mechanisms that we have identified, although that does not rule out private sector investment, where it would be appropriate and where it would meet value-for-money objectives. However, Mr McAllion was right to say that the increases that we are recommending today will not lead to the situation where Scottish water consumers pay the levels set by the privatised water industry in England and Wales.
In order to give a sense of the impact of those increases in real terms, I reiterate that the average water consumer's charges will rise by in the region of 60p a week—40p for people in community charge band A. The percentages may seem high, but the amount a week for the next year, in terms of pence, is comparatively low.
I draw the minister's attention to the part of her statement that dealt with the impact of these charges on low- income households and to the fact that she has asked her officials to examine ways of improving the protection provided by the current charging arrangements.
In terms of the minister's instructions to her officials, what is her definition of a low-income household? What options has she asked the officials to consider? What time scale have those officials been given to report back and make recommendations?
In terms of what we mean by low-income households, we must consider both community charge bands and the issue that people may be on a low income, yet live in a house that does not have a low community charge band. From talking to the water authorities, I am aware that they are also conscious of—and most concerned about—those issues. I hope to carry out the review swiftly, so that the answers are available in time for the next annual water authority charge round.
Last year, I considered the impact of future price rises on the voluntary sector, which must be taken seriously. By announcing a two-year scheme for water charges, people can look to the future. However, we must still identify the possible impacts and ensure that we seek to mitigate those impacts where there are opportunities to do so.
Given that the minister said that although the percentage rises seem to be high, the actual amounts are relatively small, does she agree that, for some low-income households, even small rises will have a huge impact on a family budget? Will the minister give an assurance that measures will be taken to ensure that, when these proposals are reconsidered, the blow will be softened for those who are on the very lowest incomes and who are nearest the poverty line?
That is precisely why we need to consider the situation and determine what possible measures are available. I agree with Cathy Jamieson absolutely that, although to some people 40p seems like a small amount of money per week, to other people that is a significant amount. We need to take that seriously.
I ask the minister to address two questions that she has consistently failed to address in her statement.
First, looking forward to competition in the water industry, does she accept that the fact that the English private companies had their entire debt written off at privatisation puts the Scottish water industry in an uncompetitive position unless the Government is prepared to address the debt levels in the Scottish public authorities?
Secondly, will she confirm that NoSWA, the north of Scotland authority, asked to use a bond issue to finance the capital investments that it is now having to make, as it realised that that was cheaper than going down the private finance initiative route, but was turned down by the new Labour Government?
On the issue of the investment that was possible following the write-off of debts, the Scottish water authorities gained a higher proportionate write-off than those in England and Wales.
On the bond issue, I am happy to put my answer in writing to Mr Salmond afterwards, if he wants me to do that.
Does the minister agree with me that environmental and public health considerations are absolutely vital to the way in which this investment programme is to take place? Can she confirm that the arrangements that she is putting in place will ensure that those considerations will not be subordinated to profit expectations, as is the case south of the border?
The purpose of the quality and standards paper is to identify the levels of service that are required throughout Scotland, in the light of the demands of a number of European directives. It is important that we satisfy those directives in the most cost-effective way possible. The purpose of the quality and standards paper is to identify that. I give Des McNulty an assurance that our key objective is to meet those requirements of health and environmental standards at the best cost.
I apologise to the three members who wanted to be called, but I must protect what is left of the budget bill debate— which is not very much.