Looking to the future

Norrie Hunter considers what may be in store for Scottish Water

There appears to be a serious change of heart among water consumers north of the border. Less than a decade on from the landmark referendum in Strathclyde on the future ownership of Scotland's water and wastewater services, some serious questions are being raised as to the (then) rationale of 'hands off Scotland's water'.

Was it pure nationalism that led to the, albeit regional, 'no vote' on privatisation and to keep this natural resource in public hands? Many now say it was a case of the heart ruling the head and it was a mistake that has come back to haunt the country's charge-payers in the form of major increases to their bills and the prospect of further rises.

Following the latest price increases, as high as 550% for some business and commercial users, and alleged concerns in some business circles over the running of the industry, the Scottish Executive is now being urged to consider the future of Scottish Water in terms of privatisation or at least making it a mutual company. The Confederation of British Industry (CBI) in Scotland says this year's increased charges may now be "too high a price to pay by business and the public for Scottish Water remaining in public ownership". The organisation now wants the executive to carry out a "hard-headed review of the ownership and funding" of Scottish Water.

The CBI in Scotland also believes options like privatisation should not be ruled out, but maintains all possible alternatives to the existing set-up should be examined.

The CBI is concerned the significant bill increases are simply a means of reducing Scottish Water's crippling £2.2B debt - inherited from the three former Scottish water authorities after amalgamation last year.

deep concern

Bills in Scotland are now, in some cases, as much as one third higher than in England.

Digby Jones, the director general of the CBI, said: "Our members are deeply concerned about the increased cost of water compared to that in England, which is contributing to its competitive disadvantage. It is vital to guard against new threats to Scottish business competitiveness and jobs.

"We realise Scottish Water faces a difficult task in dealing with accumulated indebtedness but we cannot go on like this and it is time for the Scottish Executive to look again at the ownership and funding question."

There are predictions some small businesses around the country could go to the wall, with water charges now representing their largest single overhead. Large companies are also becoming disgruntled.

Scottish Water looks set to lose one of its major industrial customers. Grangemouth-based petro-chemical giant BP is so concerned about its annual water bill (now £12M) that it is seriously considering building its own WTW (estimated at £5M). The company is in discussion with British Waterways for the supply of raw water. Scotland's Water Industry Commissioner (WIC) Alan Sutherland has also come under fire from business leaders across the country, critical of his demands for Scottish Water to improve its efficiency and overall water quality standards. The Scottish Federation of Small Businesses (SFSB) claims jobs will be lost as a direct result of water charge increases. It is demanding the Scottish Executive launches a parliamentary inquiry into what it calls "the spiralling costs" of the industry and has submitted a formal protest to MSPs highlighting the costs - in some cases, ten times that of businesses in England - facing Scottish companies.

SFSB spokesman John Downie, claims the current demands on Scottish Water and hence its charge increases are unsustainable and a barrier to economic growth.

"Decisions made by Scotland's water commissioner Alan Sutherland on both efficiency and fixed charges imposed on Scottish Water are crippling many small businesses in this country. The executive has to review his position," he said.

Scottish Water's chief executive Dr Jon Hargreaves defends recent actions and the price increases to customers, maintaining there were inefficiencies in Scotland's water industry under the three former water authorities.

Dr Hargreaves stressed the importance of Scotland Water's current £1.8B investment programme "cannot be underestimated".

He said: "This is only the start of what is needed [to improve the water and wastewater infrastructure] in Scotland. We want the people of Scotland to work with us to create the best water service we can. But they have to be patient, it will take time to bring the infrastructure up to the level we need.

"Although drinking water is improving, continued improvement can only be delivered by sustained investment in the assets. Scottish Water is now investing to improve its water quality to English standards.

"This investment comes entirely from our charges to the Scottish customers and borrowing from the Scottish Executive. We would ask people to understand the charges are their investment in the future of Scotland's water."

Granted, English water companies have had a 15-year advantage over Scottish Water and during that time have ploughed finance into spend-to-save investments. Scotland Water claims this renders redundant any attempt to provide meaningful comparisons of charges with the English water utilities. However, Dr Hargreaves insists Scottish Water is already closing the operational efficiency gap with English and Welsh companies. "The WIC has charged us with closing a further 80% of that gap by 2006," he added. There is no doubt the scale and complexity involved in the creation of Scottish Water was immense.

The merger of the three former authorities and now the demands from the industry watchdog to vastly improve efficiency, quality and customer service, has presented the company with major challenges. Lessons have and are still being learned.

However, Scotland's WIC has already published a damning report on Scottish Water's running of the industry and the state of the country's water supply.

Trouble at the tap

A recent BBC Scotland television documentary - Trouble at the Tap - lambasted Scottish Water's chairman Alan Alexander and senior management for higher water charges than in England while suffering poorer water quality than England and inferior customer service standards.

The WIC blames not only the years of under-investment but the mis-management of the industry under the three former Scottish water authorities. He has little good to say about the new Scottish Water's handling of the industry so far. To meet demands for improved efficiency and cost reduction, Scottish Water has, this year, announced more than a 25% reduction in its workforce in a what has been described as a absolutely devastating blow and a move towards the privatisation of Scotland's water industry.

Around 1,500 jobs are to go this year across all departments within the company. The GMB union said the move would "compromise the safety" of supplies to customers. A spokesman said the size of the cuts was "like a shipyard closing on the Clyde". Scotland's Conservative party enterprise spokesman Murdo Fraser has claimed Scottish Water had become a "national embarrassment" and that it may be better managed if it were in private hands.

The country's Environment and Rural Affairs minister Ross Finnie, who continues to deny any plans to take Scotland's water industry out of public ownership, has suffered criticism from the Forum for Private Business in Scotland for his handling of Scottish Water's charge increases. The forum's Scottish campaigns manager Bill Anderson says the minister has paid "scant regard" to the dilemma faced by the country's small businesses and that Mr Finnie has adopted a "Pontius Pilate attitude" in his slow and negative response to calls for meetings.

In a letter to the minister, Mr Anderson highlights many Scottish hotels are paying water rates three times that of equivalent businesses in England and Wales.

Certainly there is one immediate and major problem for the Scottish Executive should it decide to privatise Scottish Water. In its present form, with such high debts, the utility is not an attractive proposition for the private sector investors. One leading Scots academic recently maintained private sector investors would not "touch it (Scottish Water) with a barge pole".

To make it anything like attractive, the executive would need to wipe out the massive borrowing (overdraft of around £2B) that Scottish Water is still repaying on soft loans. The UK government cancelled out all water authority debts when it privatised the English and Welsh utilities in the mid 1980s. According to industry analyst Robert Miller-Bakewell, Scotland's water industry is some 15 years behind the rest of Britain. He commented: "During the 1990s, politicians and civil servants failed to address environmental and customer service agendas. They preferred to do nothing instead of grasping the challenge of catching up with those service standards achieved in England and Wales."

In a recent (his first) investment and asset management report, Scotland's WIC said there had been a range of mistakes including the poor overseeing of contracts and the unnecessary replacement of water mains and other projects. This, he claimed, had cost each Scottish household more than £320.

Mr Sutherland singled out for particular criticism a number of private finance initiative (PFI) schemes totalling £296M. These, he said, had suffered delays and were the subject of "poor management" which had brought about higher operating costs for the three former Scottish water authorities.

Although the WIC praised the former three water authorities for investing £888M in water quality and wastewater treatment improvements, he stressed much of this investment had been offset by costly inefficiencies. Under criticism

Recent appointments by Scottish Water, such as Stirling Water and United Utilities, to upgrade its ageing facilities and take over the maintenance of the Scotland's water and wastewater network has being seen by some Scottish MSPs as a move by Scottish Water towards privatisation.

It is also being criticised because no Scottish companies are benefiting from the deal. The Scottish National party's Bruce Crawford MSP, the shadow environment minister, said this deal signalled privatisation of Scottish Water through "the back door".

He plans to raise the matter in the Scottish Parliament and to ask why no indigenous Scottish companies had received any of the work.

Discontent followed the publication of Scottish Water's first annual report. Seven senior managers, including chief executive Dr Jon Hargreaves, have been awarded large performance bonuses totalling £188,000.

The payments have angered Scottish politicians and business leaders at a time when water charges have escalated to levels higher than in England and Wales.

The company, which has assets valued at over £13B, controls and operates 441 WTWs and 1,127 service reservoirs that supply 2.5Bl/d through 28,000 miles of water mains. It also operates 1,600 WwTW, which are serviced by more than 17,500 miles of sewer pipes.

It is clear that, before there is any private investor interest in taking over Scotland's water industry, current programmes of maintenance and renewal will most certainly have to be completed and paid for.

This would then have to be followed by a government prepared to bite the bullet and wipe out Scottish Water's huge debt burden



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