Water is our most precious resource, and in Scotland we’re lucky enough to have lots of it. Scotland has an amazing 30,000 lochs and
smaller ‘lochans’ and 35,000 km of rivers.
This is equivalent to 95% of the entire UK’s water resources, and covers 2% of the landmass. It is, however, the diversity of these waters as much as the raw statistics that impresses.” (Fisheries Research Services).
Delivery of water supply in Scotland and treatment of waste water is the remit of Scottish Water, which is currently wholly owned and funded by the Scottish Government. Many voices in business were calling for the privatisation of this national asset and many were equally opposed to ‘selling of our water’. Our proposal published in March 2010 called for a radical approach which enabled Scottish Water to have commercial borrowing powers, whilst still technically remaining a community asset.
We are delighted to see that SNP policy is gradually catching up with our proposal.
How to wash away Scottish Water’s problems
Graham Bell & Tom Miers
Herald Scotland 21 Mar 2010
Radical, innovative and world-leading.
Scotland’s most impressive reform since devolution is unheralded and little understood, but the shake-up of the water industry will have far reaching benefits for our economy and society.
From April last year, for the first time since the Romans invented mains water, Scottish businesses have been able to pick and choose between water suppliers. Competition in this industry should allow all sorts of benefits in terms of price reductions and service improvements.
If the regime can be extended to domestic users, then every household will benefit from the world’s most advanced water industry – yet there remains one large fly in the ointment.
While new market entrants are vying for custom on the retail side, Scottish Water itself – still state-owned – continues to play a vital role as the monopoly owner of the pipes and sewage network. Regulated by the Water Industry Commissioner for Scotland, its performance has also improved on the back of an enormous investment effort that amounted to £687 million in 2008/9.
This is where the problem lies. Currently much of this money (£182m in 2009/10) has to come from the Scottish Government budget, which is set on an annual basis. The trouble with such “annuality” is that it does not match the financing requirements of a major investment programme that is years in the planning and implementation. And it is fraught with political risk, especially in an age of tight budgets. Essentially we have an infrastructure company reliant for its finance on the outcome of an annual political beauty contest.
What can be done? The obvious answer is privatisation. Selling off Scottish Water would allow it to raise its money in the private capital markets. It would also save the Scottish Government that annual £182m while raising a tidy one-off sum at the same time. But this is Scotland, and a sell off is a
political taboo that even the Tories shy away from.
The Conservatives and others advocate mutualisation instead. But the fall of Dunfermline Building Society took some of the gloss off this solution. A mutual is accountable neither to the Scottish people nor properly to investors.
A third possibility is to raise money from public-private partnerships (PPPs). But as John Swinney is fond of reminding us, ultimately it is the Scottish Government that ends up paying under PPP contracts (£867m on in 2011/12), so such finance suffers from the same constraints as other government borrowing.
But there is another option that is based on a recent UK precedent, and is being considered increasingly seriously in the corridors of the Scottish Government and their partners at the Scottish Futures Trust and the Water Industry Commission. We explore this in a paper, A New Source, published by the think tank Reform Scotland. The precedent is that of Network Rail, the rail infrastructure company created out of the collapsed Railtrack.
Railtrack used to be private, but went bust in the wake of the Hatfield train crash. The UK government was reluctant to renationalise the company at the time, because of its significant debts, which would all have been added to the government’s own liabilities. Instead it created a new entity, a company that reports to a hundred or so “members” who are carefully selected members of the public. The Department of Transport is also a member with special powers. Essentially Network Rail behaves like a PLC, can raise private capital, and has its own balance sheet, a situation endorsed by the European Union. Yet it is accountable to the British public via its members.
Network Rail is remarkably similar in its profile and requirements to Scottish Water. Both are infrastructure companies with long-term finance needs that are best met from the capital markets. Both operate in highly regulated industries with licensed private customers. Both must retain the confidence of the public at large. Both have secure, long-term income streams. Realistically, neither can go bust.
So a “Network Rail solution” could be the answer for Scottish Water. It would allow the company to access the finance that it craves. And it would save the Scottish Government at least £180 m a year, a major relief in current circumstances.
Actually the saving could be much greater still. The financial arrangements negotiated between the Treasury and Scottish Government for Scottish Water are complicated. They involve a balancing charge paid by the devolved administration to the Treasury which corresponds to the lending to Scottish Water.
This is in turn offset by an adjustment to block grant made to the Scottish administration that reflects Scottish “ownership” of the asset.
If Scottish Water was taken off balance sheet, the balancing charge would no longer be made, but some argue that the adjustment would remain. The annual saving from divesting Scottish Water would be doubled to some £360m. That’s equivalent to 1p in the pound off income tax.
All this would need to be negotiated with the UK government. And that might in turn require amended legislation. This is why time is of the essence. Any UK government would normally be reluctant to revise the legal basis of devolution just for the sake of Scottish Water. Yet in the wake of the Calman proposals for changes to devolution settlement, this can of worms is going to be opened anyway. Opportunity knocks.
Graham Bell & Tom Miers are independent public policy researchers and advocates.
