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Water


Introduction

UNISON strongly supports a Scottish water industry that is publicly owned and accountable to the people of Scotland. The challenges facing the industry are considerable but not impossible to overcome given the right framework, adequate investment and a realistic timetable. In this leaflet we outline the key issues.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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