The Scottish Water Industry
Scottish Water is the fourth largest water and sewerage
provider in the UK and one of Scotland's largest organisations.
Assets include over 46,000 kilometres of water pipes, 39,000
kilometres of sewer pipes, 1896 waste water treatment works
(including 1274 septic tanks) and 371 water treatment works
plus pumping stations, sludge treatment centres and reservoirs.
It employs over 4,000 staff.
Scottish Water has around 5 million customers in 2.2 million
households including 135,000 business customers. 2.5 billion
litres of water is provided every day and 1 billion litres
of waste water is taken away and treated before being returned
to the rivers and seas. It is the sole provider of water
and sewerage services to an area over 30,000 square miles,
a third of the area of Britain. Scotland also has a longer
coastline (over 6,200 miles) - with a small and relatively
dispersed population that requires a large number of small
water and sewage treatment works.
Sharp increases in water charges have ignited a debate
over how we finance the massive investment needed to update
Scotland's crumbling water and sewerage infrastructure.
Whilst UNISON accepted that charges had to rise, we argued
that they rose faster than they needed to, due to the charging
structure proposed by the Water Industry Commissioner (WIC).
Harmonisation was implemented almost immediately. Similarly,
he recommended that the fixed charge element "increased
significantly", again without sufficient phasing. The cost
is being largely met by current customers, and debt is planned
to almost disappear by 2016. The impact of these changes,
particularly for non-domestic customers, has been significant,
and has created considerable resentment.
The Scottish Executive is now consulting on the level of
investment required over the period 2006-14 and how that
should be financed. This is the third investment programme
for the water industry in Scotland since 2000 and it follows
a £1.8bn programme that ends in 2006. The detailed
consultation papers address the previous lack of consultation
and transparency as highlighted in a recent critical Scottish
Parliament Finance Committee report. Whilst charge harmonisation,
debt and the cost of private finance could have been managed
better, the reality remains that Scotland's water and sewage
infrastructure needs substantial investment. The main issue
remains how to build and pay for it.
Recent investment has delivered substantial improvements
to Scotland's water and sewage infrastructure. The quality
of drinking water has improved by 28%, our rivers are 15%
less polluted and our coastal waters 53% cleaner. This level
of investment now exceeds that of England and Wales, a partial
catch up for years of neglect.
The proposed new programme will cover an eight year period.
Just to meet mandatory standards, the capital costs are
massive. Including:
- maintaining the current system - £2.2bn
- new developments, - £1bn
- first time connections - £800m
- environmental improvements - £2.5bn
- drinking water quality- £1.3bn
These figures are broad estimates and recognise that the
impact of new legislation, government policy and customer
demand are difficult to predict. However, on these estimates
the total bill over the eight year period could range from
£8.5bn to £10.7bn.
The Scottish Executive has adopted four guiding principles
for determining the next investment programme. It should
be cost effective, affordable, deliverable and sustainable.
There is very little mention in the consultation paper of
cost effectiveness. The massive PFI programme cost millions
more than conventional borrowing before it was abandoned
in 1998. Many of these sewage plants did not meet their
discharge consents and odour problems have blighted many
communities. The WIC is now recommending that PFI Operations
are brought in-house. Scottish Water has now moved on to
broader Public Private Partnerships. Hundreds of experienced
staff have been paid to leave the industry to be replaced
by expensive private companies who are gradually privatising
Scotland's water.
Even if Scotland could afford the investment needed, a
major constraint is the construction industry's capacity
to deliver. It is estimated that the total capacity of the
industry in Scotland is £1bn per annum. The current
investment programme uses about 50% of that capacity. The
lower level of the new investment planned exceeds £1bn
per annum. Effectively taking over the nation's total construction
capacity at a time when the Executive alone has a large
programme of new schools, roads and hospitals planned.
In essence the Investing in Water Services consultation
explains the investment need of the industry. There are
few options available. The issues are; how to pay for it,
and finding the capacity to build it.
How do we pay for it?
The Executive consultation sets out the proposed principles
of charging and how these might be applied in practice.
The Executive argues that despite Scottish Water's wider
public service role its main function is to serve customers.
It therefore proposes that customers should continue to
meet all the costs of providing water and sewerage services.
There are others who argue that at least the public policy
elements should be provided from general taxation. However,
they are less clear which other public services should be
cut to meet this cost. UNISON has consistently argued that
historic debt should be written off as it was in England
at the time of privatisation. If the Treasury can write
off housing debt in support of stock transfer, then they
can do the same for the water industry.
The main driver for the creation of Scottish Water was
to harmonise water charges across Scotland, creating a cross
subsidy from urban to rural areas. The paper proposes to
retain national charges and this principle remains in its
competition plans in the Water Services Bill. It may be
that business users are paying proportionally more of total
costs in Scotland than in England, although more research
is needed on this point.
Low domestic water users currently pay the same charge
as high volume users. Whilst this discourages conservation
and is not cost-reflective it does reflect the industry's
high fixed costs. There are also few domestic meters in
Scotland and the capital and maintenance costs of moving
to a metered system would be significant, quite apart from
the risk of water poverty through self disconnection. A
flat charge is therefore likely to continue with relative
incomes reflected in the Council Tax bands. They are likely
to be reformed following the independent review of the council
tax to make them more progressive. The paper also seeks
views on the current discounts for single households and
second homes as well as new discounts for those receiving
Council Tax benefit. Following criticism of the recent sharp
charge increases the paper commits the Executive to introduce
any changes to charges more gradually.
On borrowing, UNISON and others have criticised the low
level of debt carried by Scottish Water, with most enhancements
to the system being met by current users. The paper seeks
views on the balance of borrowing but still proposes maintaining
the current level of debt. UNISON would argue that debt
levels could reasonably rise. On funding new developments,
there is a welcome recognition that developers should pay
for additional capacity for specific local developments,
not charge payers as a whole.
The consultation paper unsurprisingly offers no easy solutions.
Investment needs are substantial and charge payers will
have to meet this cost, albeit with some shifting of the
burden between different groups. The overall cost can be
reduced somewhat by the sensible treatment of debt, developers'
charges and the Executive meeting some of the public policy
obligations. However, charge payers will face increasing
bills for some considerable period of time.
Regulation
The Water Services Bill currently being considered by the
Scottish Parliament, proposes the
establishment of a Water Industry Commission for Scotland
- a corporate body to replace the Water Industry Commissioner.
UNISON welcomes this change. Experience elsewhere has demonstrated
that regulatory frameworks that rely on one person have
not operated satisfactorily and we endorse many of criticisms
of the current arrangements in the recent Finance Committee
report.
The model proposed in the bill has many similarities to
the regulatory framework that exists in private utilities.
These have been subject to criticism not only from the utility
industry and trade unions but also in the recent House of
Lords report on regulation. Scottish Water does not have
regulatory structures on the same scale as private utilities
and whilst it could create them, it would rightly be seen
as an inappropriate use of public funds. However, this leads
to an over reliance on data produced by the WIC for ministers
and Parliament - data and judgements that have been less
than reliable - as research commissioned by the water unions
and parliamentary reports have shown.
The key problem is that regulators promote competition
to the detriment of other factors. There is an over-emphasis
on price and efficiency, with little consideration of the
impact decisions may have on employment and other social
and environmental concerns. These economic models can also
be in conflict with government policy. Something we have
recently witnessed with the transmission loss proposals
from Ofgem that would have ended the nascent renewables
industry in Scotland.
The Water Services Bill proposes that in future it will
be a London based quango - the Competition Commission -
which will arbitrate between the WIC and Scottish Water.
UNISON argues that these decisions are public policy issues,
and are for ministers (accountable to Parliament) to take.
Competition
The main driver for the competition proposals in the Water
Services Bill is the UK Parliament's Competition Act 1998.
UNISON has previously highlighted the danger of this ill-considered
legislation for essential public services. In essence the
Bill seeks to implement the provisions of the Competition
Act whilst minimising the adverse impact on Scotland. It
should however, remind us to be vigilant about other international
competition initiatives that impact on public services.
In particular, reforms of the EU internal market, the EU
Services Directive, and GATS.
The policy basis for this section of the Water Services
Bill takes a more realistic view of the alleged benefits
of competition, than the original consultation in 2001.
Experience in other utilities has shown that alleged benefits
are more apparent than real and come at a significant cost
to the consumer. UNISON rejects the view that competition
in essential utilities brings benefits to consumers. There
is no evidence to support this oft-quoted position. UNISON
has also argued that the provisions of Schedule 3 of the
Competition Act 1998 remain a sound basis for exclusion.
UNISON agrees with the Executive that the risks to public
health and the environment outweigh any foreseeable benefits
from allowing access to public water and wastewater systems.
We have highlighted some of the many technical difficulties
in achieving common carriage. We also support the prohibition
of retail competition for households. Competition would
bring separate water charges and the loss of the essential
progressive charge basis, which is in our view a requirement
for an essential public service. New entrants to the market
would ‘cherry-pick' high-banded properties, forcing
Scottish Water to chase ‘high value' customers at the
expense of other consumers. Charges would increase for most
consumers.
UNISON does not support the introduction of retail competition
in non-households. The 150,000 premises covered by this
competition proposal are a significant part of Scottish
Water's operation.
Experience in the energy industry shows that business separation
is an expensive business. The loss of integrated operations,
economies of scale, rebranding etc, all add to the costs
charged to customers. If it is separated, the financial
arrangements for business separation are crucial to the
viability of the proposed retail arm and the wholesale organisation.
The assumptions built into the Regulatory Impact Assessment
are based on out-of-date efficiency savings and inaccurate
estimates of the size of the retail arm. In essence both
organisations would be set up to fail if this financial
structure is put in place.
A whole new industry is created with new customer service,
billing, marketing and sales operations, all of which divert
resources which should be more effectively deployed improving
our water and sewage networks. Further systems will have
to be established to allow switching between suppliers.
This has caused chaos in the energy market and will inevitably
do the same in water and sewage.
New entrants will be able to ‘cherry-pick' customers
and as Scottish Water will have a statutory obligation to
supply everyone, they could be left with disjointed operations
and less attractive customers including those with a poor
debt record. Again the rest of us will have to pick up the
bill.
Structure
The challenges facing Scottish Water has led to further
debate on the structure of the industry, including privatisation
or mutualisation. Supporters of privatisation have yet to
explain how the additional cost of private finance and the
need to generate profits for shareholders will reduce the
bill. Scottish Water has squeezed efficiencies out of technology
and the economies of scale at a speed that exceeded the
privatised industry in England - including almost halving
the workforce. This has resulted in real concerns over safety
and customer service, as recently highlighted by the Water
Quality Regulator. Ironically it is the partial privatisation
of Scotland's water through PPP/PFI schemes that has led
to higher costs and a fragmented service. Mutualisation
is also rejected. A mutual solution in a capital intensive
industry like water, is simply privatisation with a façade
of public involvement.
Whatever our reservations at the time Scottish Water was
established there is absolute unanimity amongst the water
trade unions that the current structure is the only practical
way forward. Whilst we recognise the problems, the corporation
has to be given an opportunity to work. A further reorganisation
will simply divert time and resources from the essential
rebuilding of the networks and give consumers a further
bill to finance the profits of multinational corporations.
Conclusion
The challenges facing the water industry in Scotland are
massive. The investment requirement probably exceeds both
the ability of water customers to finance it and the capacity
of the construction industry to build it. A deliverable
programme of steady improvement can be financed as set out
above but it will come at a cost to the charge payer. There
are no magic solutions and structural change will only increase
the cost.
Key Points
- Scottish Water is a massive undertaking with structural
differences that makes comparison with the industry
in England of limited value.
- Current investment has begun to catch up for years of
neglect and has made real improvements to water quality
and the environment. Whilst the structure of charges was poorly
handled by the WIC it was inevitable that prices would
rise significantly.
- The investment requirement over the next 8 years is
at least £1bn per year. Equivalent to the total
capacity of the construction industry in Scotland.
- The investment will largely have to be paid for through
higher water charges.
- The regulatory structure is rightly being reformed.
However, Ministers are avoiding their responsibilities
by handing over final decisions to a London based quango.
- Competition, even for the limited proposals on business
customers, is an expensive distraction.
- Scottish Water has made ‘efficiency' savings faster
than the privatised industry did in England. The workforce
is planned to halve, leading to real concerns over safety
and the quality of customer service.
- The public corporation structure needs time to establish
itself. Privatisation or mutualisation would simply add
profit and higher private sector borrowing costs to rising
water bills.
Further Information
The water pages of the UNISON Scotland web site www.unison-scotland.org.uk
includes further details on all the issues discussed in
this leaflet, and the STUC's Water Charter. Or contact Dave
Watson, Scottish Organiser (Utilities) d.watson@unison.co.uk.
Join UNISON - your friend at work
If you work in Scotland's Water Industry, why not join
the union that campaigns for Scotland's publicly accountable
water industry, and those who deliver it. If you join UNISON
you're one in a million. Phone UNISON Direct on 0845 355
0845. Or contact Dave Watson, Scottish Organiser (Utilities)
d.watson@unison.co.uk.
|
