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Scotland's Water
The Water Services Bill
The Executive's Proposals
The UNISON Scotland Response
June 2001
Executive Summary
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This is UNISON Scotland's response to
the Scottish Executive's proposals for the forthcoming
Water Services Bill. UNISON is the largest trade union
in the Scottish water industry.
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UNISON rejects the essential policy
of competition that underpins these proposals. There
is no evidence in the paper or elsewhere to support
the contention that competition will benefit consumers
without compromising drinking water quality, social
and environmental objectives.
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We believe that the Executive should
not reject the option of seeking an exclusion
from the Competition Act on public policy grounds.
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The proposed regulatory framework needs
to be strengthened if it is to discourage ‘cherry picking'
of the most profitable customers and the framework must
extend to off network provision. Without such a framework
most domestic and small business customers will have
to pay higher charges.
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The framework needs to include physical
arrangements to safeguard the integrity of the public
network and stronger financial penalties to safeguard
the taxpayer.
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The Bill will not provide a level financial
playing field with multi-national competitors in England
unless there is equivalent debt write off and public
investment in the current system.
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UNISON rejects the extensive use of
PPP/PFI schemes which are unnecessary and costly to
the taxpayer .
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We are concerned that some of the proposed
commercial freedoms are intended to encourage the further
break up of Scotland's integrated water industry, replacing
it with an enabling authority in which most water and
sewerage services are privatised.
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UNISON has reservations over the establishment
of one Scottish water authority and the proposals contradict
statements made in last year's Executive consultation
paper. Moving the organisational boxes around may give
the impression of action - but in reality it will distract
management focus from the key issues facing the industry
for several years.
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Other organisational options including
mutualisation are also considered and rejected in this
response. UNISON believes these proposals would if anything
accelerate the privatisation of Scotland's water.
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This is the third occasion the Executive
has produced a consultation paper on the water industry
with only a passing reference to the impact on staff.
The scale of the proposed financial cuts will devastate
the industry and put public and staff safety at greater
risk.
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In conclusion UNISON Scotland is concerned
that these proposals are another step down the road
of privatisation a policy which has been rejected by
the people of Scotland.
1. Introduction
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This paper constitutes a response
from UNISON Scotland to the Scottish Executive Consultation
Paper The Water Services Bill: The Executive's
Proposals. UNISON is the largest trade union in
the Scottish water industry.
2. Background
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A Water Services Bill is required
to update the legislative framework for the Scottish
water industry to take account of increasing competition
and other challenges facing the industry. The consultation
paper sets out the Executive's proposals following
on from the earlier consultation paper Managing
Change in the Water Industry. The investment required
to meet environmental and drinking water standards
is set out in a separate consultation paper Water
Quality and Standards 2002-2006. The UNISON responses
to these consultation papers can be viewed on the
UNISON Scotland website.
2.2 The Executive's proposals claim
to have two objectives:
(i) to ensure competition works in
the interests of all customers and does not undermine
arrangements to protect public health, the environment
and the Executive's social objectives.
(ii) to foster a sustainable public
sector industry which is able to compete on equal terms
with other suppliers and which customers actually choose
to use.
2.3 The Bill will establish a single
water authority called Scottish Water. It will
manage an investment programme in the order of £2billion
which implies the Executive's support for the central
option in the Water Quality and Standards consultation
paper. It assumes efficiency savings of up to £168million
by 2005/06. This increase from the Water Industry Commissioner's
(WIC) £134million cuts is presumably predicated on the
additional efficiency savings from the creation of a
single authority. The paper then sets out the arguments
for and against a single authority, concluding that
disruption can be minimised through a short transition
period and local responsiveness can be improved by strengthening
Water Consultative Committees. The new authority will
have more Executive Directors and will "become the employer
of their current workforces who will transfer to it".
There is no detail as to how the staffing issues are
to be dealt with.
2.4 The Bill will give Scottish
Water a general power to pursue commercial opportunities
subject to ministerial direction and guidance. This
will include freedom to enter into PPP/PFI schemes and
new powers to make agreements with third parties, including
the laying of water mains and servicing pipes. In essence,
Scottish Water will be responsible for the infrastructure
allowing it to service the systems through ventures
with third parties.
2.5 The licensing regime will become
the responsibility of the WIC including "promoting the
interests of all customers, whether of an authority
or a new entrant". There will be a new Drinking Water
Quality Regulator, and new entrants will be subject
to criminal prosecution if they supply water unfit for
human consumption. Scottish Water will be the
supplier of last resort for domestic purposes and they
will have powers to deal with unlawful connections and
require developers to meet the cost of laying sewers
and mains to service a new development.
2.6 New entrants will have to have
sufficient financial strength and technical competence
and charges will include "a proper and reasonable contribution
towards the maintenance of the public system as a whole."
Charging policies will include the geographical averaging
of charges to ensure accessibility and affordability
of services in rural areas and continue the use of council
tax banding as a basis for domestic charging.
3. Competition
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The policy basis for the Water Services
Bill is that the Executive "cannot and should not
control" the market and that competition should be
encouraged. UNISON rejects that view. There is no
evidence in this paper or elsewhere to support the
contention that competition delivers "efficiency,
innovation and improved services without compromising
drinking water quality, social or environmental objectives".
Experience in other utilities demonstrates that the
opposite is true.
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The Competition Act 1998 introduced
a new framework for competition bringing into domestic
law (this is a reserved power to the UK parliament)
provisions which enact European law on this issue.
In particular it introduces new sanctions for anti-competitive
behaviour. The Act applies to the Scottish water authorities
and is enforced by the Director General of Fair Trading
(DGFT) as the WIC in Scotland does not have the same
powers as the water industry regulator in England
and Wales, OFWAT.
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The Act includes provisions for exemptions
and exclusions on a number of grounds. However, The
Executive have rejected the option of seeking an exclusion
from the provisions of the Competition Act 1998. In
Annex B of the paper they set out the scope for exemptions
and exclusions under the Competition Act 1998.
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The case against exclusions under
the Competition Act in the paper is extremely weak
and the options are inadequately explained. UNISON
believes that the provisions of Schedule 3 (7) remain
a sound basis for an exclusion under the Competition
Act. Water and sewerage is an essential service in
a civilised society and competition puts that service
at risk, particularly for disadvantaged customers.
The public policy grounds could relate to rural and
social exclusion strategies under this heading. In
addition the Executives environmental objectives will
be difficult to achieve in a competitive framework
and this provides a further public policy basis for
an exclusion. Other EU countries (most notably France)
have taken a broad view of the public interest in
terms of utility competition.
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The Executive's reasons are primarily
political in that the Executive supports the principle
of competition, believing that it will deliver benefits
to customers. The Executive appears to have entirely
swallowed the outdated Tory competition mantra - a
sharp about face from its position in opposition during
the campaign to halt the Tory privatisation of Scotland's
water.
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Exclusion from the Competition Act
is not a total solution to the need to protect Scotland's
water. Exclusion on a permanent or phased basis would
not halt competition for off-network provision. It
is therefore still a requirement for water authorities
to operate efficiently within a stronger regulatory
framework which addresses the impact of water abstraction
and off network sewerage.
4. Regulation
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The paper gives an outline of the
proposed regulatory framework which will be included
in the bill. UNISON remains to be convinced that the
proposed licensing machinery will "safeguard the
Executive's public health, environmental protection
and social policy objectives". As we have argued
above this is a further basis for exclusion under
the Competition Act.
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In particular, giving the WIC a general
role to promote the interests of new entrant customers
means he may interpret that remit as a duty to promote
competition. In other utilities, this has been to
the detriment of the Scottish economy and consumers,
through the introduction of expensive and bureaucratic
systems (also see 6.7 below). The WIC's remit should
therefore explicitly exclude a duty to promote competition.
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UNISON doubts if the WIC at present
has the technical ability to carry out the licensing
function proposed. He could of course obtain this
expertise as other utility regulators have. However,
this creates further duplication and cost all of which
has to be met by the consumer. It is also unclear
what enforcement powers will be available to the regulator.
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UNISON supports the proposals in the
paper on meeting the costs of network developments
and criminal liability for the supply of water unfit
for human consumption and for causing harmful discharges.
This needs to be extended to off network provision
and include new regulations on water abstraction and
wastewater discharge.
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UNISON also welcomes the cost recoup
provisions in the supplier of last resort arrangements
which should include water authority contingency costs
to an agreed response. This should also include a
bond payable to water authorities to ensure the funds
are available to deal with supply in the event of
a new entrant or their customers being unable to finance
the additional cost. It should however, be recognised
that without duplicating facilities it may not be
possible to provide last resort facilities.
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The billing provisions which retain
the link between domestic charges and Council tax
bands are welcomed as are the charging provisions
for meters. However, stricter regulation is required
on the provision of meters to ensure that they are
only provided on a voluntary basis and all new entrant
customers should have a statutory right to revert
to standard billing subject to serving three months
notice on the supplier. These charging arrangements
should also apply to off network provision.
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UNISON supports the establishment
of the Drinking Water Quality regulator in statute.
The responsibilities of SEPA in relation to wastewater
will also expand and greater resources will be required
to monitor new entrants discharges. SEPA also need
additional powers to require disclosure of the full
content of discharges to them and the water authorities.
This may involve a full review of the Sewerage (Scotland)
Act.
4.8 The licensing regime should ensure
that the highest standards must apply to new entrants
from the outset. The paper does not specify in sufficient
detail the basis for charging. UNISON believes that
new entrants must be charged the full economic cost
of access to each part of the network including future
upgrading. This charge should be based on a full share
of the total cost of providing the asset, not the marginal
cost. In addition to the highest regulatory standards
there should be a requirement for performance bonds
to underpin a system of penalty and compensation payments.
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The water authorities will have to
be responsible for managing a comprehensive access
code to ensure that there is adequate supply. This
code should cover all possible situations including
seasonal demands, bursts, drought provision etc. There
will have to be physical systems in place to isolate
new entrants supply and provision for ‘last resort'
supply. This is particularly important given the proposed
criminal liability on water authorities arising out
failing to take "reasonable steps" when the new entrants
fail. All the costs associated with these systems
should be met by the new entrants not by existing
water authority customers including emergency supply
and clean up costs. The costs of introducing competition
should fall on those who wish to compete.
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There are many technical difficulties
in achieving common carriage which are not dealt with
in the consultation paper many of which impact directly
on safety. These include:
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Many existing mains have no spare
capacity for additional water
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The Fraser Report (Burncrooks) recommended
the zoning of water from different sources as a precaution
against contamination.
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Arrangements for proving and compensating
for mains pipes fractures caused by third party supply
e.g. pressure surges.
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Responsibility for boosting disinfectant
residuals.
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Backflow protection to stop accidental
or fraudulent back-syphonage
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Allocation of the cost of leakage
or lost water e.g. misuse of fire hydrants.
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Pipe size incompatibility when new
sources are attached to the mains.
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The arrangements in place in other
utilities for disadvantaged customers are generally
very limited. Arrangements in the Scottish water industry
should go much further than this. All new entrants
must be required to participate in arrangements for
protecting disadvantaged consumers.
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Many of the provisions set out in
the licensing regime are an honest attempt to discourage
‘cherry picking' of the most profitable customers.
However, it has to be recognised that these will at
best only be partially successful. This has been the
experience in other utilities where existing suppliers
have been forced because of competition to chase ‘high
value' customers at the expense of disadvantaged customers.
The paper does not deal with the issue of stranded
assets brought about by off network provision. The
only solution is to abandon the competition policy
and recognise the damage this policy will do to Scotland's
water and sewerage system.
5. Commercial Freedoms
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This consultation paper claims to
equip the public industry to compete on equal terms
with new entrants. UNISON submits that this, at least
in the short term, is unrealistic. Expecting a relatively
small authority to compete equally with multi-national
companies who will be able to cherry pick customers
displays a woeful ignorance of the commercial realties.
These companies have the financial muscle to pick
off and close down large parts of the Scottish water
industry with long term costs falling on the Scottish
taxpayer.
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The Scottish Executive should also
ensure that Scotland's water authorities operate on
a level financial playing field with their privatised
counterparts in England. This requires a sustained
period of public investment and the cancellation of
debt as happened south of the border at the time of
privatisation.
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UNISON Scotland does not support the
creation of Public Private Partnerships. They are
unnecessary due to the current state of public finances
and have resulted in significant additional costs
to the Scottish taxpayer. They have also been used
to partially privatise the Scottish water industry
contrary to the stated will of the Scottish people.
The details of water authority PFI schemes have not
been published to avoid public scrutiny. We would
support a relaxation of the borrowing rules to enable
water authorities to obtain conventional finance for
capital projects.
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UNISON Scotland supports greater flexibility
in the rules for establishing joint ventures although
the criteria should be robust enough to ensure that
the public sector model is not undermined. The primary
purpose of such joint ventures should be to bring
in specialist expertise to develop new forms of service,
not to provide private finance or to encourage further
‘back door' privatisation.
5.5 While some of the commercial freedoms
are appropriate, others, including authority to allow
third parties to lay and maintain water pipes and manage
the network, highlights a hidden agenda behind the proposals
in this paper. An authority in which the vertical integrated
nature of the industry will be replaced by an enabling
authority with most services provided by the private
sector.
6. Scottish Water
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UNISON still has serious reservations
over the establishment of a single national water
authority. However, if it is to be established there
needs to be greater clarity over its mission, structure
and role. The paper is silent on these issues.
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The proposal to merge the three Scottish
water authorities has not been the subject of public
consultation before the Minister made his announcement
prior to the publication of this paper. Last year
the Scottish Executive published a consultation paper
"Managing Change in Water Industry". It invited
views on how the role and structure of water authority
boards should develop given the changing nature of
the challenges facing the water authorities. That
paper also stated:
"It is difficult to argue that any
more radical restructuring options would clearly serve
the public interest better than the existing structure.
The Executive's preferred approach is therefore to provide
the water authorities with the stability they need to
meet the considerable immediate challenges, while recognising
that, since they operated a rapidly changing environment,
it may be necessary to reconsider the position in the
future".
The latest consultation paper does not
make it clear what has changed to justify such a change
of policy particularly when the Scottish Parliament's
Transport and Environment Committee are in the middle
of a detailed enquiry into the Scottish water industry
and such a decision may well have benefited from their
deliberations.
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The case for one water authority is
primarily based upon efficiencies that economies of
scale would bring through common systems and shared
services. There would be an important sharing of expertise
and scale of resources which would better enable Scottish
water authorities to compete with other providers
under the provisions of the Competition Act 1998.
Business customers in particular would benefit from
the ability to
negotiate contracts across Scotland with the same
provider. Domestic customers in the north of Scotland
would benefit from a cross subsidy from the central
belt resulting in a standard water charge across the
country.
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The case against one water authority
is that a large Scotland wide body might be less responsive
to the needs of local communities. Water consumers
in east and west of Scotland would have to pay higher
water charges to provide a cross subsidy for north
of Scotland customers. Whilst shared services and
other economies of scale might in the short term result
in some financial savings, there would undoubtedly
be a lot of expertise lost with the inevitable job
losses.
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If we were starting with a blank sheet
of paper there would on balance appear to be a case
for one water authority. A £600million turnover, £16billion
asset value, 6000 employee business, would appear
to put it on a level with the privatised water companies
in England and Wales. However, it has to be remembered
that many of those companies have large multi-national
backers and associated non-regulated business. The
Scottish water industry is not starting from scratch
and the strongest argument against one authority is
the disruption that such a large scale reorganisation
inevitably causes. As the Scottish Executive's consultation
paper Managing Change in the Water Industry
stated:
"The Executive's judgement
is that the immediate challenges for the Scottish
water authorities are clear: to implement urgently
needed ambitious investment programmes, improve
efficiency, raise standards of customer service
and to respond to growing competition. It is on
these issues that Management's efforts need to focus."
UNISON's considerable experience of such
change would indicate that a major public sector reorganisation
will be more than a year in the preparation and between
one and two years to harmonise and bed down the new
structure. During this period the Management focus is
distracted from the key issues facing the industry.
6.6 There are other organisational
options for the Scottish water industry which will be
pressed upon the Executive as part of this consultative
process. There are those who, despite the experience
in England and Wales, still have an ideological preference
for the full privatisation of the Scottish water industry.
At a time when even the private sector is seeking to
bail out of the ownership of the water industry in England
and Wales, this solution makes no sense and UNISON Scotland
strongly rejects any move in this direction.
6.7 The fallback position for those
who favour privatisation would be to break up the vertically
integrated industry in favour of a split between asset
management and services. This would leave the financial
responsibility for the ownership of assets with the
public sector and offer profitable opportunities to
provide water and sewerage services with the private
sector. This is a model which has been favoured by OFGEM
which has split up the integrated Scottish Electricity
industry into numerous parts. There is absolutely no
evidence that this model produces any benefits for the
consumer other than having to pay the additional cost
of administering such a diverse system and the loss
of economies of scale. UNISON Scotland again rejects
this option and we are concerned that some of the commercial
freedoms proposed could lead in this direction. The
Executive needs to make it clear that this is not their
intention and explicitly indicate this in the WIC remit.
6.8 A further option which at least
has somewhat more public support would be mutualisation.
Under this option, the assets of the Scottish water
industry would be transferred to a not-for-profit company
which would in theory be owned by the people of Scotland,
or at least those water customers who chose to participate.
This model has recently been approved in principle for
Wales by the Water Regulator OFWAT
following their earlier rejection of a similar
proposal in Yorkshire. The mutual company would have
some directors elected by water customers with the balance
being made up of "credible" persons who in practice
would have to be acceptable to the financial institutions.
The problem with this solution is that to satisfy the
financial institutions that there was minimal risk,
the structure would have to include the privatisation
of water and sewerage services by contracting out the
services to private companies. Alternatively in theory,
existing employees could form employee-owned businesses
to compete for this work. In addition, there would be
some technical Treasury objections which would need
to be overcome. Whilst in principle UNISON has no objection
to mutualisation and co-operative ownership in general,
the special features of the water industry, coupled
with the provisions of the Competition Act 1998, means
that this solution is in effect privatisation with the
façade of public ownership. We, therefore, with
regret could not support this option.
6.9 Announcing that there will be one
Scottish water authority inevitably raises more questions
than answers. The Water Services Bill will need to include
a statutory framework for the new authority including
its structure, financing etc. There will inevitably
be questions around charge collection, membership of
the Board internal structure, powers, financing etc.
and the consultation paper does not adequately deal
with these issues.
6.10 Possibly even more importantly
there are questions of culture and leadership. The current
three water authorities have different organisational
cultures, management styles and industrial relations
approaches. The potential for conflict is considerable
causing further problems to an industry which is already
facing major change. It will be important, at as early
a stage as possible, to being to address these issues
in partnership with the key stakeholders.
6.11 UNISON Scotland therefore remains
sceptical about the benefits of one Scottish water authority
at a time when Government and managerial focus needs
to be on the major challenges facing the water industry
in Scotland. Whilst moving structural boxes around may
give the impression of taking action, it is in reality
simply a distraction. On the day of the announcement,
we likened it to "re-arranging the deck chairs on the
Titanic" and have heard little since to change our opinion.
7. Staffing Issues
7.1 This is the third Scottish Executive
consultation paper with significant consequences for
staff working in the water industry. However, for the
third time in succession this paper makes virtually
no reference to the staffing consequences of the proposals.
It would appear that the Executive is blind to the legitimate
concerns of staff who have to actually deliver this
vital public service.
7.2 The dangerous ‘efficiency' cuts
have been increased to £168million. This is likely to
result in job losses of around 2500 mostly experienced
staff. On the basis of experience in the gas and rail
industries this could fatally undermine safety and customer
service. In the past year there have been four fatalities
in the industry in Scotland - all involving the staff
of private contractors. The speed of change will have
an adverse affect on staff morale and performance and
can only be achieved through greater centralisation
with the consequent loss of personal consumer contact.
7.3 A key consideration in the formation
and subsequent operation of one Scottish water authority
will be the treatment of staff. There are important
issues around staff transfer, pensions, locations and
terms and conditions none of which are adequately covered
in the consultation paper. Dependent on the timescale
for the establishment of Scottish Water early transition
arrangements need to be put in place. At present some
of this work is being undertaken by the existing authorities
with no statutory authority and no meaningful consultation
with staff and their representatives. Let there be no
doubt that UNISON will take whatever measures are necessary
to protect its members should the establishment of Scottish
Water be enacted.
8. CONCLUSION
8.1 The consultation paper claims to
be establishing a "public sector industry". However,
UNISON is concerned that the provisions if enacted will
result in a public shell, overseeing a largely privatised
industry. An industry in which most domestic and small
business customers meet the cost of competition.
8.2 Many staff are sceptical that these
proposals are simply another step down the road of privatising
the Scottish water industry. These concerns will only
be assuaged by a genuine partnership approach to the
establishment of the new authority with the aim of creating
a strong and vertically integrated organisation which
reaps the benefits of scale without losing the effective
delivery of services at local level. The Scottish Executive
will have to convince us and the other stakeholders
by its actions that its plans genuinely address the
issues set out above.
For Further Information Please Contact:
Matt Smith, Scottish Secretary
UNISON Scotland
UNISON House
14, West Campbell Street,
Glasgow G2 6RX
Tel 0141-332 0006 Fax 0141 342 2835
e-mail matt.smith@unison.co.uk
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