Push the boat out on Scottish Water's future

Published on Wednesday 7 October 2009 22:00

AS THE frantic negotiations over the next Scottish budget hot up over the winter, the future of Scottish Water also looks set to come to the boil as MSPs search for savings.

The status of Scottish Water – Britain's last public-sector water supplier – has been the subject of a long-running debate. Conservative and Liberal Democrat MSPs have been pushing for it to be taken out of the public sector.

So far the SNP administration, and its Labour-led predecessor, have resisted the calls during previous budgets – though mainly on ideological, not cost grounds. The idea is that water as a basic commodity should remain in public ownership and that this leads to cheaper bills for customers.

Even the Conservative government which privatised most water firms in 1989 was unwilling to tackle the Scottish consensus over public ownership – partly, it was suspected, because of the fallout over the poll tax coming north of the Border first.

But this year's budget has brought a new urgency to the debate because Scotland and the wider UK are now entering what expert economists are describing as "an age of austerity".

Professor David Bell of Stirling University, an adviser to Holyrood's finance committee, recently said that 2 billion of savings would be required from the Scottish budget by 2014.

This has put Liberal Democrat and Conservative plans to mutualise Scottish Water back into the spotlight.

Both parties estimate that while such a move would not wholly privatise the organisation, the saving would be worth 150 million a year to the Scottish budget. This would be enough to build the Glasgow Airport Rail Link, which, for a saving of 100 million, is due to be ditched in the 2010-11 budget if the SNP finance secretary John Swinney gets his way.

The argument over mutualisation is that it is not a quick fix for savings – if ministers agreed to do it now, the savings could not come before 2011-12.

However, Liberal Democrat finance spokesman Jeremy Purvis believes he has a short-term measure as well: he wants Holyrood ministers to consent to Scottish Water borrowing or issuing a bond to raise finance for investment.

The approach would also require discussions between the Scottish Government and the Treasury, but together they can deliver a more flexible approach to financing the body than the current traditional borrowing from the Scottish budget.

Mr Purvis said: "For the coming year this equates to 150m locked away for supported borrowing (not grant) in the draft budget. Such an approach would not require statutory change to mutualise the body as this would take at least over a year.

"We would go much further now, however. We would ensure that Scottish Water operates better in three ways: in investment, energy and services."

In the last fully agreed year, 181.8m for 2009-10 was borrowed by Scottish Water from the Scottish Government with a 5.83 per cent interest rate for 17.2 years.

Mr Purvis also notes that it can raise funds by issuing a bond from a commercial bank, to be used towards its investment programme, specifically its renewable energy projects. According to Mr Purvis, the interest rate would typically be in excess of gilt yields by 0.385 per cent to 0.5 per cent.

Mr Purvis also wants to find new ways of reducing the organisation's expenditure. Among his proposals for the forthcoming year, he notes that Scottish Water is the country's biggest consumer of power, with an annual bill of between 40m and 50m.

And he wants Scottish Water Horizons (a commercial subsidiary of Scottish Water) to be given greater powers to provide energy for their water and waste water treatment sites by building renewable energy sources, such as turbines on them. Scottish Water Horizons is currently working with Scottish & Southern Energy to develop a project for 60 three-megawatt turbines.

Meanwhile, the Scottish Conservatives are continuing to push for de-nationalisation of state-owned Scottish Water to allow it to borrow to invest on the open markets.

The party prefers the Welsh Water mutualised model, which has been operated on a not-for-profit basis since its takeover by Glas Cymru in 2001, and has no shareholders or share capital.

It also receives no subsidy from the taxpayer, and instead returns a dividend to its customers – 20 in 2007-8.

Murdo Fraser, the Scottish Conservatives' deputy leader, is convinced that his party's plan would not just save money but also be the basis of better service for customers.

"As a nationalised monopoly, Scottish Water misallocates resources, is immune from competition and overcharges its customers," he said. "If Scottish Water is to deliver the safe, high-quality service that the public deserves, and if it is to attract the investment needed, then it must be taken out of state control."

However, despite these proposals to save taxpayers hundreds of millions of pounds and budget pressures on future expenditure, the SNP Scottish Government is still currently resisting any attempt to change the status of Scottish Water.

A Scottish Government spokesman pointed out that, as things stand, Scotland has the lowest average water bills of anywhere in the UK.

"The Scottish Government believes that the public ownership model offers customers the best value for money," he added. "We see no reason to change the current arrangements."

However, there are now an increasing number of voices within the industry who believe that change is on its way. In particular it is believed that money in the block grant from Westminster to support Scottish Water may at some point dry up because there are no Barnett Formula consequentials for England when it comes to water.

The case for reform has been recognised by many commentators, including the chairman of the Water Industry Commission, Sir Ian Byatt; Jo Armstrong, a former policy adviser to the First Minister under Labour; former Labour environment minister Sam Galbraith and leading economists David Bell and Donald MacKay.

And in a recent interview the former chairman of Scottish Water, Alan Alexander, said: "I would advise finding a way to make it possible for Scottish Water to maintain its drive towards efficiency without drawing money from the public purse."

He went on: "I think this is an industry which can be financed in a different way. There are other parts of the public sector which need to be financed from taxation income. Scottish Water doesn't."

But Gary Womersley of Waterwatch Scotland, a body that represents consumers, said that politicians would do better concentrating on what was best for consumers rather than how Scottish Water is run.

"Priorities of consumers and improving the service must come first," he said.