Optimism over SW challenge

Chief executive of Scottish Water Jon Hargreaves gives WWT's Norrie Hunter an exclusive interview to discuss the company's planning and investment strategies for the next ten years

The merger on April 1, 2002 of Scotland's three water authorities into a single public body, Scottish Water (SW) formed the fourth largest water business in the UK and Scotland's twelfth largest company. Scottish Water's objective is to renew and refurbish much of the country's aging infrastructure whilst achieving efficiency savings of £100M over the next five years. The body plans to invest in excess of £3Bn over the next 10 years.

The challenge facing SW is immense but chief executive Dr Jon Hargreaves believes it provides an opportunity to develop and introduce new methods of delivery and customer service.

Dr Hargreaves is convinced the formula now in place is one which will ultimately benefit customers, contractors, suppliers, employees and the Scottish Executive's desire for a cost-effective and efficient public sector water industry. WWT spoke to Dr Hargreaves about the task ahead for Scottish Water.

WWT: What level of investment is projected by Scottish Water as absolutely necessary to meet new
quality, safety and environmental standards?

JH: Over the next five years we need to spend £2Bn and over 10 years probably £3-4Bn, which represents over 50% of the Scottish construction industry market. Most of the monies will be spent on refurbishing water mains, new sewage works and water treatment plants.

This financial year, throughout Scotland, we shall be spending £350-400M, with roughly 40% of that on underground infrastructure and the rest on water and wastewater treatment and automation.

WWT: What will be the role of the private sector in future capital investment projects and on infrastructure improvements?

JH: About 60% of the wastewater treatment in Scotland is currently being done under private finance initiative (PFI) projects. We have no plans to do any more PFIs at the moment as there are no projects big enough to warrant using this route. We have not thrown-out PFIs and will use them if circumstances warrant.

Scottish Water will spend about £1.8Bn over next four years in capital projects and we have gone to the market to look at a number of joint ventures to deliver all the projects we will commit to. This will see the involvement of construction companies, pipe, screens and pump manufacturers, consultant and civil engineers, in an integrated way with our own people to deliver the programme to an agreed price.

This is a fantastic opportunity to work in a very different way to how it has been done in the past. The whole purpose of this is to effect better solutions through joint-venture programmes. What we are not doing is outsourcing, it is about building knowledge and capacity into the Scottish water industry whilst saving money. The market is already very excited about this.

WWT: Under the Competition Act, customers could end up choosing who supplies their water and wastewater services. What impact do you envisage from competition on Scottish Water and its customers?

JH: Big industrial customers are already using some of our competitors' services and some have even gone off the mains supply to drill their own bore holes and recycle their effluent. The amount of cash coming from them is decreasing and this will continue over time.

As far as domestic customers are concerned we, like those south of the border, are waiting to see how competition will evolve and how legislation may affect this. However, we have argued quite vehemently that Scotland should not be opened up to competition before England. We support the principal of competition, it is good for business.

The difference now compared to when the industry here was split into three authorities, is that Scottish Water is big enough to compete with the private sector if it has the where-with-all to compete and it is my job to ensure it does. When the market opens up to competition we should be able to stand on our own two feet and that is important to Scotland. We will have a robust, sustainable and successful industry that people are proud of and something that can sell its wares overseas when the time is right.
The efficiencies that Scottish Water will achieve will help us reduce the increase in charges over the next four years but Scotland is no longer going to have the cheapest water and wastewater services in the UK, we shall be about mid-table. This is because of our need to spend a tremendous amount on rebuilding Scotland's water and wastewater infrastructure.

WWT: You provide service for some 5.2M domestic and 60,000 business customers. What changes are you making to customer service in the new authority?

JH: We believe this needs a totally different approach. It is not about having loads of people in 'hen-houses' [call centres] and to this end, we are now well underway with a project throughout Fife called Personalising with People. This is a first in Scotland that goes against the trend of most of the other utilities. It is about managing the way customer calls are handled, with one person totally responsible for solving a customer's problem. Already this project had shown us that it is the most cost effective way of dealing with customer service and one which the customer appreciates actually works.

By improved management of customer calls and empowering our front-line people to make decisions on the work thereafter, means we can solve issues first time and faster. We need to get a lot better at keeping our customers advised as to what is going on.

WWT: Have you any plans or are you currently discussing a proposal to begin billing domestic customers directly instead of continuing to use local authorities as collectors?

JH: This is now under discussion, to find out what is the best way of doing this. It is not straightforward with all the different rates of relief that apply to so many different people - for example, 25% in Scotland are on-and-off benefit every 12 months.

This is currently worked out and managed by local councils. The challenge is how would we manage this. We are looking at all the options, particularly what will be right for our customers. We may stay with councils.

WWT: What has been the value of the assets transferred from the three Water Authorities (WAs) to
Scottish Water?

JH: Between £4-5Bn of assets have been transferred. I reckon we are now one of the largest land owners in Scotland.

WWT: What is your relationship with the Scottish Executive in the running of the new water authority and what objectives have you been set?

JH: Over last 12 months worked we have worked extremely closely with the Executive on developing Scottish Water, they are our shareholder and we still borrow money through the government at a favourable rate.

They have many other objectives like the sustainability agenda and a regulatory role. Objectives they are setting us relate to customer service efficiencies and sustainability compliance and it is pretty clear where they want us to go over the next four years. This is a clarity that is quite unique and unusual in the public sector.

WWT: What commitment can you give to customers that the new WA will remain in public ownership?

JH: It is all about management at the end of the day and being allowed to select the best managers for the job. This we have done and there is no reason why we can not be as good at delivering the service as the private sector. I do not see any need to sell the assets of Scottish Water unless the government at some future date, and I would be very surprised if they did, decided that was a windfall they could benefit from or they did not want to fund the capital programme through public sector borrowing. Our job is to create those efficiencies and get this business working so the politicians have some clear choices.

I have not been set any privatisation objective.

We can create a new model here that no one else has, that, with commercial freedoms, can demonstrate it can act efficiently and effectively as the private sector. It is something Scotland could be proud of. I think there could be a lot of people beating their way to our door in five years time to find out how we have achieved this. This could provide an income opportunity for the future.

WWT: What is the new management structure within Scottish Water and how does this differ from what existed in the old Was?

JH: There are two fundamental differences. We have decided that the vast majority of our services can be provided on a Scotland-wide basis. Boundaries have disappeared. There is now one number for our three call centres in Glasgow, Edinburgh and Dundee. However, there are now key account managers for domestic customers actually out in those geographical areas. Problems will be solved locally like the bobby on the beat, people will get to know their local manager

Asset operations is being divided into four-geographical areas: Highlands, the Islands and Argyll; Tayside, Grampian and Fife; Lothians, the Borders and Galloway and finally Glasgow, Forth Valley and the South West.

In the top structure we have directors responsible for finance, commercial (responsible for large customers and business development), customer service, business service support and asset management.

This set-up is not the final solution, it will continually evolve and change.

WWT: Explain briefly how the role of suppliers will now differ.

JH: Our purchasing power is greatly enhanced and we are spending £200M on revenue purchase this year. We are, however, going about procurement in a different way. For example, we shall be standardising a lot of things and using our power to get best deals and, if we are smart about this, we will be able to give our suppliers much more security, allowing them to plan long-term. Standardisation will be one thing the market will notice, like now, we have one electricity supplier.

WWT: Has the supplier base expanded and are you seeking to source the bulk of Scottish Water's requirements from Scotland?

JH: My word to Scottish suppliers is be proactive, talk to us and try to understand our problems. We have a challenge ahead and need their help


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