90. Water Briefing September 04

Introduction

Scotland's water industry is facing a number of important decisions in the coming months. The Water Services (Scotland) Bill proposes significant changes to the regulatory regime together with further competition and privatisation. The Scottish Executive is also consulting on the level of investment required over the period 2006-14 and how that should be financed. This briefing covers the investment and charges consultation. It should be of concern not only to UNISON members in the industry but also to the wider membership who have a citizenship interest in the provision of safe drinking water and the treatment of wastewater together with the level of water charges they pay.

Context

This is the third investment programme for the water industry in Scotland since 2000, formally known as Quality and Standards III. It follows a £1.8bn programme that ends in 2006, the equivalent of £192 per household per year. There was significant criticism of the consequential increase in water charges together with the 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.

Investing in Water Services 2006-14

Quality and Standards I and II have 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. The numbers are massive. It would cost £32bn to replace all of Scottish Water's assets. Whilst we can be grateful that all of it does not need replacing the costs of maintaining, expanding and replacing the older parts are still huge.

The capital cost of maintaining the current system alone will cost £2.2bn over the eight year period. There is a demand to extend the system to accommodate new developments, particularly new housing. 8,600 sites providing 230,000 houses need to be connected to the system and that has to be paid for at about £1bn. A further £800m is needed for first time connections to properties not currently connected to water or sewage systems. Then there are environmental improvements needed to meet new EU standards and correct the legacy of under-investment. These costs range from £2.5bn for mandatory improvements to £3bn if we are to show some movement towards guideline standards.

To improve drinking water quality dealing with pollutants such as lead, trihalomethane and cryptosporidium will cost £1.3bn to meet mandatory standards and up to £2.6bn to approach the guideline standards. Smaller sums are also needed to provide greater security for water supplies (£120m to £260m) and to meet water abstraction standards (£260m to £540m). Other priorities include tackling the odour from sewage works, water pressure and sewer flooding total £258m. These figures are broad estimates and recognises 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. 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.

Affordable is the major constraint and is covered in the next consultation. This is closely linked to sustainable. The main constraint under deliverable is construction industry capacity. 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 investment required as set out above exceeds £1bn per annum. Effectively taking 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 helps to explain the investment needs of the industry. There are few options available. The real issue is how to pay for it and find the capacity to build the infrastructure needed.

Paying for Water Services 2006-14

This consultation sets out the Executive's 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 serve customers. It therefore proposes that customers should continue to meet all the costs of providing water and sewerage services. There are many 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 fund the write off of 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 the harmonisation of water charges across Scotland. Effectively a cross subsidy from urban to rural areas. The paper proposes the retention of national charges and retains that principle in its competition plans in the Water Services Bill. Fixed and variable costs should be reflected in the charges for each group. 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. That would involve an increase in charges for domestic users.

Low 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 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. 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. The investment needs are substantial and charge payers will have to meet this cost with some shifting of the burden between different groups. There are those including the CBI and the Tories who will argue that privatisation is the solution. However, they have yet to explain how the additional cost of private finance and the need to generate profits for shareholders will reduce the bill.

Action for Branches

The full consultation papers can be viewed at http://www.scotland.gov.uk/consultations/environment/pfws-00.asp. Other UNISON briefings on the water industry are available on the water pages of the UNISON Scotland website. Comments should be forwarded to Dave Watson d.watson@unison.co.uk by 4 October 2004.