Meeting the shortfall

Following Alan Alexander's resignation as chairman of Scottish Water, after 'fundamental disagreements', rumours abound concerning its privatisation

Until the recent departure of Professor Alan Alexander as chairman of Scottish Water (SW), it had been more than seven years since the last major Scottish water industry resignation.
At that time, the chairman of West of Scotland Water, John Jamison fell on his sword after an incident in 1997 when diesel contaminated water entered part of the Glasgow supply system.
The latest head to roll north of the border is that of Scottish Water's chairman, Alan Alexander, whose stand-off with Scottish environment minister Ross Finnie, resulted in "fundamental disagreements" over the way the industry should focus its longer-term objectives.
Following Alexander's departure, there has been a renewed interest in the issue of privatising Scotland's water industry. A paper circulating in Chancellor Gordon Brown's department (and leaked to the Daily Telegraph) suggests that perhaps privatisation of the Scottish water utility is no bad thing - furthering the debate and the speculation. The price tag for SW could be £2-3B.
The current situation, however, leaves ministers with a financial dilemma. How is SW going to meet the investment shortfall in its quest to fulfil needs to expand and update the country's water and sewerage infrastructure? Scottish Water customers currently fund 85p in every £1 of investment.
The background to Professor Alexander's departure is interesting. Last November, the Water Industry Commission for Scotland (WICS), SW's independent economic
regulator, announced its determination of the water charges Scottish Water could levy during 2006-10. The WICS determination meant average water bills would rise by less than inflation with householders paying year-on-year increases of 0.5% less than inflation and business's bill rising by 1.5% less than the rate of inflation each year. The commission believed the funding would allow Scottish Water to deliver all of the executive's objectives for higher standards and increased strategic capacity in the period. The WICS determination priced delivery of the 2006-10 programme at more than £1B less than Scottish Water's estimates: £2.1B as opposed to £3.4B. SW's estimate could have seen prices rise by over 80% over the next few years.
Scottish Water had the option to seek higher charges by having the WICS' decision referred to the Competition Commission. On January 27, the utility announced that it would not seek a referral. At the time, Alexander Alexander referred optimistically to a "new approach" being developed with the regulators. Consequently, SW was required by the executive to submit a delivery plan that set out how it would deliver all of the executive's objectives within the financial limits set by the commission.
It sent a plan for 2006-10 to the executive on February 1, 2006. The plan, according to the executive, did not set out satisfactorily how Scottish Water would deliver all of the objectives in full, within the charge limits allowed by the commission. This was unacceptable to the executive. In addition, Scottish Water's regulators, WICS, SEPA and the Drinking Quality Regulator, expressed material reservations about the plan.
In these circumstances, the executive decided that Scottish Water must produce a new plan that commanded the confidence of the executive and the regulators. Professor Alexander was informed of this decision and, in light of it, said that he would step down with immediate effect.
A Scottish Executive statement said that Finnie had "raised concerns that SW's plans for the future fell short of his requirements in a number of material aspects and now wants Scottish Water to submit a new version". The statement continued: "In view of this divergence of opinion over the plan for the next four years, Professor Alexander has tendered his resignation."
Finnie added: "I thank Alan Alexander for the considerable role he played in merging the three former water authorities to create Scottish Water. Real progress has been made but we are not agreed on the way forward, and he has decided to step down.
"We will move quickly to appoint an interim chair who will be tasked with ensuring that Scottish Water delivers the requirements placed on it within the charge limits set by the Water Industry Commission.
"We set Scottish Water objectives to improve customer service, deliver further improvements in drinking water quality, improve environmental compliance and support new housing and economic developments. We now need urgently a plan for delivering these improvements that command the confidence of ministers, its regulators and its customers."
A brief statement from the departing SW chairman read: "I am sorry to be leaving Scottish Water over this difference in opinion. However, I am pleased to have delivered significant improvements in the water industry in Scotland over the past four years."
The resignation shook the publicly owned company - and the industry north of the border - with Alexander being by accused by some of being more sympathetic towards his directors and their problems of sorting out a century of under investment, than in tune with his political masters. It left many wondering who at SW would be next to go.
The departure of Professor Alexander had a political dimension, leading Members of the Scottish Parliament (MSPs) to speculate about the levels of ministerial interference to which SW is subjected. According to Alex Johnstone, the Conservative environment spokesman, although ministers claim SW is "an arms-length company capable of taking independent decisions; this resignation proves that Scottish Water is still subject to strong government interference". The resignation led Scottish National Party environment spokesman Ken Gibson MSP to wonder if "perhaps he [Alexander] jumped before he was pushed".
Alexander, who had been chairman of West of Scotland Water, replacing John Jamison in 1998, took the helm of Scottish Water at its formation in 2000 when Scotland's three under-performing regional water authorities were combined into one large utility. The former professor of local and public management at Strathclyde University received £70,000 for three and a half days a week - subsequently reduced to £50,000 for a day less.
Alexander and his team at SW delivered major and much needed capital investment programmes to improve the country's crumbling water infrastructure and bring domestic charges more into line with privatised utilities in England and Wales.
The Katrine Project near Glasgow (see p26) - the largest water industry project ever undertaken in Scotland in over a century - is now well under way and looks like being delivered on budget and ahead of schedule.
However, during his tenure at SW, he also presided over 1,900 job cuts (around one third of the industry's entire workforce at the time the industry was unified) in an efficiency drive, and large price increases as water bills across the country were aligned.
Now SW is faced with the prospect of delivering the investment programme for £2.15B, thereby meeting ministerial demands for massive improvements while keeping charges below inflation over the next four years - a mighty task.
The man facing the challenge, at least in the short term, is Ronnie Mercer. As interim chairman, Mercer will serve at least until the end of 2006. Mercer is a former managing director of Southern Water and more recently a senior executive of Scottish Power.
One of Mercers' first tasks will be to finalise a new business plan that ministers and regulators will find acceptable. The plan is already advanced according to Athol Duncan, director of SW's corporate affairs: "Work is going on within the business to address the concerns which were raised by the minister and the regulators at the time of Alan Alexander's resignation. A new business plan will be submitted to the minister after the appointment of a new chair."
The statement continued: "We are committed to delivering the ministerial objectives. The recent debate has been on how we plan to do this over the four years. This will not detract from our determination to deliver all these objectives including tackling growth restrictions across Scotland."

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