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Scotland's Water
The Water Services Bill
The Executive's Proposals

The UNISON Scotland Response
June 2001

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Executive Summary

  • 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.
  • 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.
  • We believe that the Executive should not reject the option of seeking an exclusion from the Competition Act on public policy grounds.
  • 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.
  • The framework needs to include physical arrangements to safeguard the integrity of the public network and stronger financial penalties to safeguard the taxpayer.
  • 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.
  • UNISON rejects the extensive use of PPP/PFI schemes which are unnecessary and costly to the taxpayer .
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.

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1. Introduction

    1. 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.

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2. Background

    1. 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.


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3. Competition

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.

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4. Regulation

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.

    1. 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.
    2. 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:

    • Many existing mains have no spare capacity for additional water
    • The Fraser Report (Burncrooks) recommended the zoning of water from different sources as a precaution against contamination.
    • Arrangements for proving and compensating for mains pipes fractures caused by third party supply e.g. pressure surges.
    • Responsibility for boosting disinfectant residuals.
    • Backflow protection to stop accidental or fraudulent back-syphonage
    • Allocation of the cost of leakage or lost water e.g. misuse of fire hydrants.
    • Pipe size incompatibility when new sources are attached to the mains.

    1. 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.
    2. 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.


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5. Commercial Freedoms

    1. 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.
    2. 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.
    3. 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.
    4. 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.

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6. Scottish Water


    1. 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.
    2. 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:
    3. "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.

    4. 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.
    5. 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.
    6. 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.

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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.


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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.

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For Further Information Please Contact:
Matt Smith, Scottish Secretary
UNISON Scotland
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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