Public Audit and Post-legislative Scrutiny Committee

Meeting date: Thursday, March 18, 2021

Official Report 564KB pdf

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Section 22 Report

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“The 2019/20 audit of Scottish Water”

Agenda item 2 is consideration of the section 22 report “The 2019/20 audit of Scottish Water”. I welcome our witnesses: Dame Susan Rice, chair of Scottish Water and Scottish Water Business Stream; Johanna Dow, chief executive of Scottish Water Business Stream; and Douglas Millican, chief executive, and Alan Scott, finance director, both from Scottish Water.

Dame Susan Rice will make a brief opening statement.

Good morning, convener and members. Thank you for inviting us to give evidence. We value the committee’s scrutiny, the Auditor General’s report and the overall audit process.

The year 2020 and the effects of Covid-19 were not something that anyone, including the Scottish Water group, could have fully envisaged or planned for. Within Scottish Water, our main focus has been to keep water and waste water services flowing across the country for our customers and to do that in a safe and compliant way to protect staff and customers. At the same time, we have continued to deliver our crucial capital investment programme in line with all Scottish Government guidelines.

Business Stream, which has also managed its operation activities well, acted quickly to go the extra mile to support those of its customers who were most affected by the pandemic. That help continues and will be required for many more months as the full economic effects continue to be felt. Business Stream believes that it is imperative to do what it can to assist its hardest-hit customers.

As you will know from the previous evidence session, on 28 January, Business Stream is a company in the Scottish Water group, but in regulatory terms it is separate from Scottish Water. It provides water and waste water services to businesses, to the public sector and to not-for-profit customers. It does that in the regulated, competitive non-household retail markets in Scotland and England. It has its own board with independent directors, which I chair. It is funded and subject to Scottish Water group governance through its immediate parent company, Scottish Water Business Stream Holdings.

Business Stream is one of the United Kingdom’s largest and most successful licensed water retailers, and its good reputation for quality and service has enabled it to grow significantly as the market has evolved. It works closely with business customers in all sectors, creating long-term relationships as it delivers value in a highly competitive market. It has also delivered positive cash returns for Scottish Water Business Stream Holdings—its parent company.

Throughout the pandemic, Business Stream has provided a wide range of measures to help to alleviate the financial pressures on its customers. Therefore, as a direct consequence of Covid, Business Stream has seen an impact on its cash flow and profits, which we understand is similar to what other licensed water retailers have seen. Business Stream has developed financial forecasts for possible future scenarios, to predict what measures might be needed as the economic effects of the pandemic play out. There is no certainty that additional financial support will be required, but it is important to ensure that the right measures are in place, if needed.

After careful consideration, including robust assessments and advice from external financial and legal experts, and in consultation with the Scottish Government and the WICS—the Water Industry Commission for Scotland—it was agreed that the parent company and its holdings should make a necessary Covid funding facility available to support Business Stream in these extreme circumstances, if and when required, with any borrowings to be repaid within a five-year period. At this time, Business Stream has not drawn down any of that funding and has no immediate plans to do so. No borrowing from the Scottish Government will be needed, because any moneys will come from overall Scottish Water group cash balances achieved by outperforming financial targets set out in the regulatory plan for the past six years. If that facility was used, there would be no effect at all on domestic customer charges or on Scottish Water’s capital programme activities.

It has been an extremely challenging period for many organisations, and we have not been immune. However, I am confident that the support that is in place offers the best possible route for ensuring that Business Stream and its business customers continue to thrive in the future, which I hope and trust you will agree is the outcome that we all want.

Thank you for that introduction, Dame Susan. Colin Beattie will begin the questioning.

I want to look at Scottish Water’s business acquisition strategy. According to the report, Business Stream purchased the non-household customer book of Yorkshire Water business services and Three Sixty from Kelda Group Ltd in 2019-20. I want to understand a bit more about the reasons for deciding to purchase other water businesses and what kind of due diligence process you had for taking those on. I am not sure who to direct that question to.

We will direct all questions to Dame Susan, and she will bring in her colleagues as appropriate.

We had very clear reasons for making those acquisitions. Jo Dow can explain those to you.

We entered the English market with the full support of all our stakeholders, and it was very much necessitated by a desire to protect our Scottish customer base. You might wonder what the link is. More than 52 per cent of our customers have sites in England as well, and we were aware that, when the market opened in England, those customers would be at risk. Indeed, more than 60 per cent of all switching activity in the English market has been from multisite customers with sites in both markets. Therefore, the strategy to enter the English market was primarily necessitated by the desire to retain our Scottish customers. There was also an element of wanting to replace the losses that we had experienced in the Scottish market by acquiring new business in England.

We recognised early that, in order to enter the English market, we would need to do so on some scale, because, although we were the biggest market provider in the Scottish market, in UK terms we were relatively small and the market was dominated by a handful of much larger players. Our strategy was very much about how we could achieve scale quickly in the English market but in a financially efficient way. We quickly determined that an option for achieving that would be through acquisition as opposed to organic growth. We targeted two separate acquisitions. We secured the acquisition of Southern Water in 2017, and more recently, as you rightly say, Yorkshire Water. As a consequence of those two acquisitions and the organic growth that we have experienced in the English market, we are now positioned as one of the three largest retailers in the UK market.

On the second part of your question, about the due diligence that was undertaken on the acquisitions, vigorous due diligence was carried out on both acquisitions over many months, involving independent financial advisers who provided advice on the commerciality of the transactions and the due diligence process itself. It also involved legal advice and support. As part of the due diligence process, we considered all plausible risks, whether financial or otherwise, including reputational risk. Again, that process was incredibly robust. We secured the acquisitions with the full support of all our stakeholders, which required approval from the Scottish Government, the Water Industry Commission for Scotland, which is our regulator, and the various boards within the Scottish Water group.

You touched on the need to protect your Scottish base. How volatile do you consider your customer base to be?

We operate in a competitive environment and our customers can choose to switch to another retailer if they are not content with the service or the price that we offer them. However, when it comes to our attrition rates—the number of customers who leave us—for the 12-month period that ended in October 2020, our overall switching or loss rates were significantly lower than the market average. Our loss rate is about 25 per cent lower than the average switching rate in the UK. That is a really strong position. An additional statistic is that, of the four largest retailers that operate across both markets, we are the only one that has maintained positive growth in our customer base.

What percentage is the attrition rate?

The UK average is about 4 per cent a year, and our figure is 3.1 per cent.

Given the fact that you have taken on those acquisitions, what has been the effect of Covid-19? Has it had any impact on the quality of the assets or on the original rationale for purchase, and are you looking for further acquisitions?

All our customers, the length and breadth of the UK, have been impacted by Covid to some extent. Most impacted is our small and medium-sized enterprise customer base—our smaller customers. In our overall customer base, we are really fortunate that we have a good mix of customers. More than 20 per cent of our customer base is public sector organisations, both in Scotland and in England, about another 20 or so per cent is large, industrial and commercial key customers, and the rest is SMEs. Across the UK, as I have said, there is much consistency of experience, particularly among those SME customers. They have, without a doubt, been worst impacted by Covid.

I would say that that has not had an impact on the acquisition value. The financial impact has been felt across all those customer bases—albeit to different degrees, I have to say. That has been driven partly by the different regulatory approaches that have been adopted in the two markets.

I do not think that the acquisitions have worsened our financial position—indeed, quite the opposite. As I said, the whole market entry strategy was predicated on protecting our Scottish customer base. I have no doubt that, if we had not done so, our financial position pre-Covid would have been significantly worse than it is at the moment.

The final part of your question was about future acquisitions. At this point, we have no immediate future plans for further acquisitions. I cannot rule out entirely that kind of growth, because one obligation that we have in the Scottish market and, to a lesser extent, in the Yorkshire Water and Southern Water regions is as a supplier of last resort. If one of our competitors were to exit the market in Scotland, through a business failure, we would have an obligation to pick up some of that customer base. However, we have no immediate plans for future acquisitions.

I have one last question. You have the contract for supplying water services to the Scottish public sector. Does that increase your financial resilience, and does it influence your ability to carry out a business acquisition strategy?

It impacts our financial resilience in the sense that it provides a positive contribution to our profitability. It has another impact in that, as you know, the credit risk associated with public sector organisations is typically low, which helps to reduce the risk in our overall portfolio.

I mentioned earlier that we have public sector customers in England as well. Our total revenue from public sector customers across the UK is roughly £150 million, of which half comes from the Scottish public sector. As to whether having the Scottish public sector contract has impacted our strategy from an acquisition perspective, I would say most definitely not.

When we acquired the Southern Water customer base and entered the English market, we did not have the Scottish public sector contract, so that was not a factor. Since we secured the contract, just over a year ago, that has not had any direct impact on or changed our English market entry strategy in any way.

09:15  

I have a simple question about Business Stream for Dame Susan and her team. We have our own regulator in Scotland that regulates Scottish Water and its subsidiaries, and there is a parallel regulation regime south of the border. Business Stream has operations in Scotland and south of the border, so who regulates the decision by Business Stream to, for example, expand into the English market with a possible impact on the parent operations in Scotland or on Scottish Water itself? Business Stream’s operations in Scotland are obviously controlled by the regulator in Scotland, but what is the interplay between its regulators north and south of the border?

That is a good question. I will ask Johanna Dow to give you some of the detail.

There are 27 or 28—the numbers move around a little bit—retail providers, so there are more than two dozen companies operating in Scotland that do the same kind of business as Business Stream. Almost all of them operate in England as well, so the situation does not pertain just to Business Stream.

Perhaps Johanna will explain the interaction between the two regulators that she experiences in running Business Stream.

I am in the really fortunate position of being regulated by two organisations—one, as you say, based in Scotland and one based in England. We are regulated by the Water Industry Commission for Scotland and Ofwat, which is its equivalent in the English market. The two markets are distinct and separate. Although we provide the same services in the two markets, the regulatory regimes are subtly different.

Turning to your question about which regulator approved the acquisition, the answer is that neither did directly. The regulators are there from a retail perspective to monitor compliance with market codes; they do not have a direct input into any organisation’s acquisition strategy. However, as I said, we had the approval and support of all our stakeholders for the acquisitions that we have mentioned, and that process involved interaction with the WICS in Scotland.

On Scottish Water’s decision to make the facility to borrow from it available to Business Stream if money was needed as a result of the Covid crisis, did Scottish Water and/or Business Stream require the approval of the Water Industry Commission for Scotland to do that?

Yes, we did, and the approval process for that took many months. The WICS was actively engaged throughout, and it had ultimate approval at the end of the process, as did the Scottish Government, which was closely involved in the discussions.

I will move on to the Scottish market. I am stepping down next month, but I have been an MSP for 22 years. In that time, I have had very few complaints about Scottish Water from constituents, and, when I have made complaints, they have been responded to professionally and quickly. The bulk of the complaints that I and my colleagues have had—to be fair, it is a couple of years since we have had many complaints—have been about Business Stream, particularly in regard to how you have handled microbusinesses and small businesses. In recent years, has Business Stream got its act together when it comes to how to properly handle such businesses?

The level of customer satisfaction within the entirety of our customer base is high: it is currently sitting at just under 90 per cent. It is measured using a basket of different measures, one of which is an independent customer satisfaction survey. Others require real-time customer feedback—customer complaints and complaints that have been escalated to the ombudsman. All of that is taken into the measure, and the level of satisfaction as a whole is at a smidgen under 90 per cent, which is a good reflection of the quality of service that we are providing.

If we separate that out and look at small and medium-sized enterprises and small businesses, we last independently surveyed those customers in February this year and overall satisfaction among them was 81 per cent. That tells me that the quality of experience that we are providing is consistently good. It does not mean that we get it right every time; no organisation does. However, if we look at the volume of complaints that are coming through, which is the ultimate measure of where we get it wrong—that manifests itself in a written complaint—we see that they are down, year on year.

In our most recent performance, the number of complaints is 50 per cent lower than it was in the previous year. That is supported in information published by both the Scottish Public Services Ombudsman for Scotland and by CCWater—the Consumer Council for Water—for the English market. Both have commented positively on Business Stream’s performance in that regard. Therefore, although I cannot say that there will never be isolated instances—as I said, organisations do get things wrong—I am content that the overall quality of the experience that we are providing is good.

That is good news. However, there is a 10 per cent gap in satisfaction between the smaller companies and, I presume, the larger companies. Is it one of your objectives to close that gap?

It is. At the moment, the gap is 9 per cent. There will always be a gap because one of the things that influences that score is whether a customer has had recent contact with us. The majority of our SME customers do not need to contact us, whereas we tend to have weekly interaction with our larger, key customers. That has an impact, but we want to close the gap as much as we can.

Thank you. I go back to Dame Susan on the completely different subject of remuneration within Scottish Water. I do not want to talk about individuals or anything like that; I am looking at it from a policy point of view and talking about the total remuneration package and how that is—[Inaudible.]

The permanent secretary of the Scottish Government had a budget that was well over £40 billion this year and they receive total remuneration of the order of £170,000 a year. Including pension, that is probably £200,000. The chief executive of NHS Scotland is paid even less than that to run a very complex organisation that is vital to us all, with a budget of well over £12 billion a year. You can understand why people are perplexed about why the total remuneration packages for running Scottish Water are 50 to 100 per cent higher than those. Can Susan Rice explain the justification for that?

Yes, I can. It is a helpful question; let me see whether I can give an answer that explains it. I will come at it from two directions. First, Scottish Water is just about the biggest organisation in Scotland. If it was a company, it would the biggest. It is performance driven. It is set extremely challenging targets in a range of different areas, and those targets are not set from within but by the regulator, so they are genuinely challenging. It has to deliver to very high standards and provide excellent service, all for the benefit of customers.

The targets all undergo a strict verification process, and the results are signed off by external regulators, to confirm that we have either met or outperformed those targets. There are more elements to it, but what I am saying is that there is a rigorous process around the expectations for performance in Scottish Water.

You mentioned the NHS. I do not know the NHS well in any sense but I can make a bit of a comparison that might help to explain things. Scottish Water’s goal is to attract and retain high-quality individuals who have experience and capability at all levels, including, obviously, the most senior levels, so that we can deliver what we want Scottish Water to deliver. Those people will be part of a much wider market. They are not civil servants, although I do not say that in any negative way at all. The people who can run a business such as Scottish Water are perhaps not people who have worked in other areas. Scottish Water is a huge infrastructure business that involves a massive investment programme. As I said before, operationally, its job is to deliver safe, constantly flowing water and to manage waste water and flood waters right across Scotland. It also has a massive scientific base.

We need our executives and other staff to have all those skills, and we need to look outside to ensure that we are getting in a good mix of individuals. People need experience and background in this space, so we hire either from within the organisation or from a pool of those who have experience in this area. That might be different in other areas.

I will make a comparison with the NHS that might help people to understand why there is an annual performance incentive programme and a longer-term incentive programme. As I understand it, in the NHS there is a large budget and an overall chief executive. However, I believe that there are a number of health boards around the country and each of those has responsibility for its catchment, which is quite right, and for the budget in that area, and I believe that there are senior executives in each of those health boards. I think that around two thirds or 70 per cent of the NHS budget is related to staff costs and benefits. You would expect that, because healthcare is delivered by people, so you need lots of people. In Scottish Water, there is a different situation. We have one senior team and one chief executive for the whole business, and I think that about 15 per cent of our budget relates to staff compensation, whether through benefits or salary. Most of the budget of Scottish Water is funding that has to be managed cleverly, efficiently and effectively by the people in Scottish Water. That is a very different level of responsibility, and we want to be sure that they manage those funds in a way that gives best value, manages risk appropriately and is compliant with all public sector expectations.

The chief executive of NHS Greater Glasgow and Clyde is paid less than 50 per cent of the total remuneration package of the chief executive of Scottish Water, turns over more than Scottish Water, and is responsible for a far bigger staff. All the criteria that you mentioned apply to her. The targets that she must meet are set externally, she has responsibility for a complex organisation, and she has the same responsibility for managing budgets and performance as the chief executive of Scottish Water. She is not a civil servant, either. There is also an international market in recruitment to the post of chief executive of a health board. The comparison is almost identical, and the total responsibility of the chief executive of the health board is far greater in terms of turnover, staff, complexity, performance and so on. I have not heard anything that justifies why Scottish Water’s chief executive—I do not want to personalise it, so perhaps I should just say senior people in Scottish Water—should get up to twice as much as the chief executive of the biggest health board in Scotland.

09:30  

As I said before, I do not know the NHS in detail, so it is hard for me to respond specifically to that example. However, I would say that what Scottish Water does is highly complex and, at the end of the day, is, indeed, a matter of life. If you think about it, there is nothing more important than water, and, if we failed in our provision—

I would say the health service—

Excuse me. I would say that the work that the business does—

With all due respect, the health service has far more impact on people’s lives and their life spans than Scottish Water. I accept that Scottish Water is an essential service, but so is the health service.

I think that Dame Susan is saying that, if Scottish Water collapsed, it would be a major catastrophe. That is the implication.

Dame Susan, it seems to me that you were saying that salaries in Scottish Water are commensurate with those in the private sector. Is that right?

Actually, they are below those in the private sector. We benchmark salaries across all the water companies in the UK, and we can see that the salaries in Scottish Water are consistently below those in other companies. They are at the high end of what is paid out in the public sector here. They are in sort of an in-between space. The current chief executive, who took over seven years ago, came in at a salary that was 10 per cent lower than that of his predecessor. You do not often see that happening in the private sector, although sometimes you do.

We benchmark every three years against companies in the water sector, and we see that, typically, we are low, and, in the past six years, we have fallen below the median of the sector.

Do you have any further questions, Alex?

I am not convinced by what I have heard, and I think that there is an issue that needs to be addressed. However, I am happy to pass on to others.

I would like to follow on from that. Who sets the salaries? Who decides what they are?

We have a board on which there are a number of external non-executive members who bring in a lot of expertise from outside. We have a remuneration committee that follows what is considered best corporate practice in that regard, as it only has members who are non-executives. It is chaired by an able and experienced person. We also have one non-executive director who has a specific remit, which is to have an understanding of the needs and requirements of the staff and colleagues in Scottish Water. He also sits on the remuneration committee, which considers comparisons and public pay. Above all, the remuneration committee does something that is very much best practice, which is to look at increases being given across the public sector and a number of other factors, such as what the rest of the staff in Scottish Water will receive by way of an annual increase, before it comes to a decision.

Earlier, you mentioned the infrastructure investment programme. What progress has been made on that? Has Covid had an impact on it?

That is an important question. There has been some impact, because, early on in the pandemic, the construction industry could not operate. Douglas Millican can give you a fuller answer.

We are in the final couple of weeks of a six-year investment period. When the pandemic struck, we were five years into the six-year programme and, looking at the programme overall, we were running ahead of schedule at that stage. We hit a hiatus and had to close down all our construction sites for three to four months from spring last year, as Covid hit us all, but we remobilised the programme through the summer. Looking right across the six years, it is now fair to say that, broadly, the programme is on track.

Will you summarise what the investment programme is? As a layman, I guess that you are replacing pipes and stuff such as that. Will you give us a flavour of what the programme involves?

Yes, absolutely. We can cut it in a number of different ways. There is infrastructure below ground and out of sight, such as water pipes and sewers, and there are things that are above ground, such as water and sewage treatment plants and pumping stations. In that grouping, there is investment to replace infrastructure as it comes to the end of its life, and there is investment to improve the capability of assets to deliver a higher service or enhanced environmental protection.

Broadly, about 50 per cent—nowadays, it is pushing 60 per cent—of the investment is for maintaining or replacing infrastructure when it comes to the end of its life, which could mean a water pipe that is 120 years old or a piece of technology that is five years old. There is a diverse portfolio of infrastructure.

The Auditor General’s report noted that Scottish Water had accumulated

“a cash balance of £391 million”,

which sounds quite a lot to me. This question might be for Dame Susan. How much of that £391 million is permanent? Will you tell us a bit about your cash reserve strategy? I presume that you are not planning to hold on to that money.

The cash reserve strategy is related to prudence and managing a business, particularly one that has long-term investments. I will ask Douglas Millican to explain it to you and provide some numbers and detail.

We are in this position having had a really successful regulatory period, which is coming to a close. We have had success in generating additional cash savings, either through generating more income or saving on our expenditure and, because of that, we have committed to an additional £300 million of investment. The total investment associated with this regulatory period that we will ultimately deliver is around £300 million higher than we agreed back at the start of the period in 2015. The cash that we are sitting on at the moment is the result of a timing issue and it will be deployed largely in the completion of the investment programme.

On the other aspect of your question, as a business, we must always have a minimum level of cash. Before Covid, our long-term policy was to hold a minimum cash balance of £100 million. Given the experience that we have had over the past year, the board has reflected that we are so glad that we came into this year with a cash balance that is much higher than £100 million. Looking ahead to the next few years, our current view is that we should probably always hold at least £200 million.

I really appreciate your short answers. You are getting to the point, which is good.

You think that it is prudent to hold on to £200 million rather than £100 million, and you have said—I think—that you are committing to infrastructure the £391 million that you had at the end of March 2020. Is that correct?

The simplest way to look at it is probably that when we exit this year, we will have a similar cash balance to what we had at the end of last year. That will be substantially committed to completing the investment from this period, and a residual element will be there as part of our permanent cash balance to enable us to manage risks going forward.

My final question is probably one for you, Douglas. What are Scottish Water’s future borrowing requirements? What plans do you have to repay your existing loans?

I will set this in a longer-term context. Over many years and many regulatory periods, we have invested significantly. Typically, if we look over that longer term, about 80 per cent of that investment has been funded through revenue from customers and about 20 per cent by taking on new borrowing, as we extend infrastructure to serve more customers or upgrade our infrastructure to deliver a higher-level service or environmental protection. That has been the situation in the past.

However, this is a decision that is ultimately made by ministers as the culmination of an involved process that runs for many years and results in ministers setting the principles of charging that apply to the forthcoming regulatory period. In the latter weeks of 2020, ministers confirmed the principles of charging that would apply from 2021 to 2027. As part of that, ministers looked at the expectation for what customers would need to pay for water services and the expectation for additional investments to be delivered, and said that their element would be to lend a little over £1 billion into Scottish Water over the next six years.

To come back to the question about repaying debt, I cannot envisage, in the foreseeable future, a position where our total level of debt will drop. As individual loans mature, they will get refinanced. I envisage that the total debt of Scottish Water will continue to grow, but on a proportionate and prudent basis relative to the size of our asset base.

I have a question for Business Stream. When we had our briefing, we spoke to the external auditor and, if I recall correctly, we asked about an updating of the projections that the Auditor General had seen at one point and that the external auditor had seen at a later point. There were worst-case scenarios and better-case scenarios. What is your current view of the projections? Could you also speak about the projections for doubtful debts?

You are absolutely correct. We started with three different scenarios that we used to model debt and arrived at the range that was set out in the Auditor General’s report. We have been monitoring performance against the mid-case scenario throughout the past 12 months. What is really pleasing is that our performance to date has been significantly better than we had forecast. If I look at the cash collection from customers, it is down markedly on previous years, but it is significantly better than we feared that it might be.

There is still a degree of uncertainty, as you will be aware. At the moment, the overall performance is significantly stronger than we thought that it might be, but we are also being quite cautious about what might happen over the next six to 12 months.

Based on our position at the end of February, as Susan Rice said earlier, we are reporting no need to borrow any debt at all this financial year, whereas previously we had forecast that there would be a requirement for £29 million of new debt.

Rolling those forecasts out into next year, we forecast that we will need to borrow about half of the £59 million of additional funding that we set out in our mid-case scenario, based on our projections. There are a number of key dependencies: the scale and pace of economic recovery is one, but the other most material one is any further regulatory actions in either of the two markets. However, having said all that, I am really pleased with performance to date, and, as I said, we are projecting that we will draw down only half of that facility.

09:45  

Quite a bit of time and effort has been focused on Business Stream and its potential to require extra borrowing. It is good to see that it is perhaps not that bad a situation. Do you think that somebody perhaps overreacted and focused on that too much when, in reality, you are almost working your way through it yourself?

No, I do not believe so. We are dealing with something entirely unprecedented on a scale that none of us has ever experienced. As an organisation and responsible business, we took incredibly measured steps to look at a range of alternative scenarios. They were all plausible, but we approached it by looking at what could happen, hence the range that I talked about. We had the mid-case range, which is the one on which the borrowing forecasts were predicated, and we had a slightly better scenario and a significantly worse scenario. With the benefit of hindsight, it is easy to say that we might have been too prudent in our approach. I would argue that it is much better to be prudent in your approach than the opposite, which is to underestimate the potential scale.

I am content that all our assumptions were plausible, and that what we have experienced so far has not been as bad as it could have been. There is still that caveat that none of us knows what will happen over the next 12 months or so. However, on the basis of where we are today, I am pleased with performance.

Prudence is a good travelling companion.

I do not know about your commercial experience, but are you able to compare raising funds from a commercial bank with how easy it was to get that from your parent company?

Yes, absolutely. We had to comply with several steps, but the underlying principle was that we had to demonstrate that the terms of commercial arrangements were negotiated on an entirely arm’s-length basis and that the terms on which those funds were provided were state aid compliant. As the Auditor General commented in his report, and as KPMG commented in its report, that was a really extensive process. It was incredibly robust and involved multiple different independent external parties, some of which were advising Business Stream in our capacity as the borrower, and some of which were advising the Scottish Water board in its capacity as the lender. I can tell you from being on the other side of that that it was a very robust process and absolutely on a par with a similar situation in which you would negotiate with a commercial bank.

As there are no further questions for the witnesses, I thank everyone for their attendance and their evidence. I will suspend the committee until 09:50, to allow for a change of witnesses.

09:48 Meeting suspended.  

09:51 On resuming—