The business of regulation
Norrie Hunter on SEPA's new boss and challenges to Alan Sutherland
In a recent announcement, Sutherland said bills to be faced by consumers during the next year will depend greatly on Scottish Water achieving its targets and narrowing significantly the efficiency gap. In his strategic review (Cost and Performance Report 2001-02), Sutherland said failure to achieve this could result in such "undesirable outcomes" as higher prices, lower levels of customer service, lower levels of compliance with environmental or public health targets and a greater burden on public expenditure.
In the report he added: "Scottish Water is tasked with reducing costs by just over £380M annually by 2005-06. Progress towards that target is not sufficient - even if Scottish Water were to fall short in achieving their targets by 10%, or £38M, the average domestic bill would have to increase by over £10 a year." Achievement of these targets would only put the performance of Scottish Water on a par with the leading company in England in 1992.
Alan Sutherland has voiced concern that Scottish Water has introduced an executive incentive programme to encourage "movement towards these targets". The commissioner maintains that, in the interests of customers, the details of the scheme should be public and transparent. "There is clear precedent for this in the industry. The bonuses of Glas Cymru executives in Wales are assessed against clear, published and immediately relevant criteria. I would urge the adoption of such an approach in Scotland. If Scottish Water meets, or outperforms, its targets then its executives should be duly rewarded. Failure should not be rewarded," he stressed. Sutherland also maintains efficiency is not simply a cost-cutting exercise: "An efficiency is achieved only when an improved, or at least maintained, level of service is provided to customers at lower cost."
The costs and performance report by Scotland's water commissioner is likely to become an annual publication, together with reports on the investment and asset management of the Scottish water industry and levels of service provided to customers.
There are those in Scotland however, who believe the water commissioner may not have all the right answers. Gerry Fisher, a one-time member of the East of Scotland Water's Customers Council has his doubts over the commissioner's rationale: "The water regulator's estimates of efficiency seem to be taken as holy writ. Nobody seems to be questioning the underlying assumptions contained therein such as Sutherland's assertion the average water charges of £231 are £86 too high or that 37% savings are possible, or even feasible. His statement that savings of £380M are possible fly in the face of the facts.
"In his strategic review he shows that, after deducting interest charges, depreciation and PFI charges the total controllable expenditure of Scottish Water this year will be about £400M. Of the remaining £450M, more than £100M is for pipeline replacement, which he wishes to increase."
According to Fisher while it is possible to make savings in manpower costs the idea that it is feasible to run a Scottish water service with 2,000 less people and savings of only £50M of the £300M required is difficult to take on board. He points out that almost everything else has to go up: capital, interest, pipe renewals and questions where the commissioner's savings are to come from.
"The one item in the expenditure side of the accounts which could reduce is CFCR (capital from current revenue). This is the large slice of the expenditure, which the Treasury will not allow Scottish Water to borrow as capital to pay for the works which the government insist they carry out," Fisher points out. He maintains it is CFCR levels of "hundreds of millions [of pounds]" which have made Scottish charges greater than the privatised English companies bills: "the English water regulator refuses to allow privatised companies to charge more than the depreciation and interest on the capital they have spent," he concluded.