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Issue 40: Is anything public anymore?
Author: Tommy Kane and Shona Russell
Is anything public anymore?
Tommy Kane and Shona Russell discuss the implications of the changes to the water sector since devolution and ask what can the new parliament do?
The sewage spillage from the Seafield plant into the Forth offered insight into the relative responsibilities of different parties in the water sector in Scotland. This example lasting three days following a catastrophic failure of a treatment pump was rightly documented by media around the UK. The plant is operated by Thames Water under a PFI contract with Scottish Water, Scotland's publicly owned water company. Agreed by the regional water authorities in the late 1990s these 30 year contracts with numerous private companies were signed in order to attract the finance, apparently lacking in the public sphere, to meet the requirements of the EU Bathing Water Directive and Urban Waster Water Directive designed to clean up beaches and to stop untreated sewerage being dumped in the sea. The appalling incident at Seafield does however serve to highlight concerns over the current drive for economic efficiency in the water sector. As well as drawing attention to some of the immense changes introduced since 1999 and which are explored here in an attempt to answer the question ' How 'public' is Scottish Water?'.
Recent legislation has centralised provision of water services to Scottish Water from the previous three regional East, West and North water authorities. The Water Industry (Scotland) Act (2002) centralised the provision of services, and was done on the basis of equity of charges and investment requirements around the country. The Act also enabled Scottish Water to undertake joint ventures with private sector companies through Scottish Water Solutions (SWS); over and above existing PFI contacts. SWS is owned by Scottish Water (51 per cent) and numerous private partners (including Thames Water, Alfred McAlpine, Gleeson, United Utilities and Morgan Est) and was responsible for delivering over 1,200 projects, 70 per cent of Scottish Water's £1.8billion capital investment programme between 2002 and 2006. Another act, the Water Services (Scotland) Act (2005), enhanced the resemblance of the regulatory framework to that in which privatised companies in England and Wales operate and introduced competition in the provision of water services in the non-domestic sector.
The creation of the Water Industry Commission for Scotland (WICS) in the 2005 Act, meant an independent economic regulator replaced the Water Industry Commissioner. This very slight name change should not be mistaken for a simple cosmetic tinkering with the system. The WICS has significant new powers and is chaired by an important and controversial political figure in Sir Ian Byatt (former chair of OFWAT, water services regulator for England and Wales), who oversaw the privatisation of the sector in the 1990s. Mirroring developments south of the border, the WICS has been given statutory powers to set the budget, whereas previously the Commissioner could only advise ministers on such matters.
Since then the WICS has introduced the Regulatory Capital Value model: a system that resembles a form of corporate welfare due to its guaranteeing a high rate of return for investors; from the payments from Scottish users of water (see J and M Cuthbert SLR Sep/Oct 2006). Effectively there has been an increase in the participation of experts in the water sector. Arguably this has been to the detriment of participation by the public through a lack of representation of local interests which was previously characteristic of former regional water authorities. Though the 2005 Act did reorganise customer representation with the creation of WaterWatch Scotland. Used to be known as Water Customer Consultation Panels WCCPS. Given greater powers due to perceived failure of WIC to fully represent customers interests.
Economic efficiency dominates assessment of the performance of Scottish Water by the WICS. Currently, budgets are set by WICS according to Scottish Water's ability to be cost effective and agreed objectives are met at the lowest possible cost. The Quality and Standards (Q&S) Investment Programme is the mechanism used to improve and upgrade the infrastructure of water In Scotland. The objectives for Q&S are set by Ministers, with advice from regulators and other stakeholders given through a body known as the Water Industry Objectives Group.
The ability of WICS to set budgets has not been without controversy. For example, there was a dispute between Scottish Water, the WICS and the Scottish Executive in 2005/6 about the level of funds Scottish Water needed to meet objectives for the period 2006-2010. Scottish Water disputed the budget of £2.15bn, determined by the economic regulator, estimating £3.2bn instead. After the resignation of Scottish Water's Chairman, Alan Alexander, Scottish Water agreed to greater operational efficiency and new strategic developments to meet objectives within the terms of the budget. Nonetheless, a diverse array of organisations have subsequently expressed serious doubts as to whether the Ministerial Objectives will be carried out within the lower budget. (See www.publicinterest.ac.uk, 'The Drift To Privatisation and How Democratisation Could Improve Efficiency and Lower Costs', October 16th 2006 for more information). If it does prove insufficient then the calls for mutualisation/privatisation will undoubtedly grow louder.
If disagreements such as that above arise in the future and cannot be resolved they can be referred to the Competition Commission, rather than involving the Scottish Executive. This UK body is normally involved in the mediation between interests of private sector companies; addressing allegations of price fixing or monopolistic behaviour. The STUC have questioned the implications for democratic accountability in the water sector given that the Competition Commission members are neither democratically elected nor used to mediating between views in the provision of water in Scotland, which is part of the devolved responsibilities of the Scottish Parliament. We share these concerns. The water trade unions and the STUC, have also expressed concern that the drive towards efficiency is having a detrimental impact on workers. Particularly for those working for private firms where there is concern about their workload, pensions, annual leave, and a deterioration of adherence to health and safety procedures.
The WICS incentivised Scottish Water to improve their performance by benchmarking them against English Water companies. Known as the Overall Performance Assessment (OPA), they will be measured in key areas of customer service. Nevertheless, there are instances of customers conveying concern on levels of service and investment. Did the drive for economic efficiency, for example, contribute to the horrendous sewerage leak at Seafield? Such a focus on economic efficiency could have been influential in financing decisions as there is no current budget to deal with the issues of external sewerage flooding as it was not an 'essential' part of the ministerial objectives. This is despite the increased threat of further flooding due to the infrastructure being unable to cope with the rise in the instances of heavy rainfall. Acknowledged by a spokeperson for Scottish Water earlier this year who said 'Scottish Water, does not currently have a budget for climate change nor external sewerage flooding' The drive for effectiveness continues with incentive programmes for senior management who may receive over £1million between them on achieving targets. Incidentally, this drive for effectiveness has seen a reduction in the workforce of Scottish Water by 40 per cent since 2002. Subsequently, leading to increased dependency on the private sector to build and maintain capital investment while decreasing the capacity of the 'public' company to do likewise.
The commercialisation is not solely found in the operations and regulation of Scottish Water. Scottish Water is also increasingly being treated as a commercial enterprise by those setting legislation. For example, Sarah Boyack recently announced the end of the exemptions from charges for charities and voluntary organisations by 2010, effectively meaning they are to be charged like any other business. Go to http://www.scottish.parliament.uk/webapp/wa.result fro more information.
Commercialisation and privatisation of water companies has been criticised the world over. In England and Wales the water companies have been roundly condemned for their inability to simultaneously achieve the panacea of efficient service, low prices, adequate investment and shareholder dividend. Thames Water has been criticised for 894 million litres of water leaking from its pipes daily, of planned increases in customers bills (by 24 per cent over the next five years) and reduction in workforce (1200 jobs). Furthermore, Thames Water has been fined £140 million and £128,000 for failure to meet its customer standards and for pollution incidents, respectively by OFWAT. However, the company is still benefiting shareholders with their most recent pre-tax profits rising by a third to £328million. The English water companies combined have accrued profits of over £2billion at the same time as households are facing rising bills and restrictions on their water use. In terms of leaks all English companies have a combined leakage of 3.6 billion a day. While globally, the privatised water industry is increasingly criticised for huge price rises, and not honouring promised investments and for disconnecting rather than serving the poorest and most marginal users. (See Research by the World Development Movement, Public Services International Research Unit, Reclaiming Public Water Network).
The provision of water around the world, not least because of mounting global water scarcity, is increasingly being seen as an opportunity by the business world. For example, MFS Limited, an Australian investment and Finance company, recently set up a Global Water fund to tap into the global $460million water market. Their reasoning is clear. A spokesman for MFS said, "inevitably the price of water is going to rise...It's a global supply and demand issue". He also made clear that 'it wasn't a green fund or an environmental fund, but "purely a money-making fund". (See The Australian 'New MFS Business Fund to tap into $460million Water Market' http://www.theaustralian.news.com.au/story/0,20867,21578316-643,00.html). These views correspond with the Multi-National Business Lobbyists 'The World Business Council for Sustainable Development'. They also said recently 'In a world of ever-increasing water scarcity, the business sector is confronted with a host of strategic challenges as well as significant opportunities'. In these global circumstances it is clear that the governance of water service provision here in Scotland is of vital importance.
Recently the Lib Dems intention to mutualise Scottish Water as part of their 2007 manifesto. The Tories also support mutualisation, though the Greens, the SSP and Solidarity have rejected it. Worryingly, neither the SNP nor Scottish Labour mentions plans to change the legal status of Scottish Water in their manifestos. At first, this seems reassuring - one could assume that no further changes are planned. But given that none of the far-reaching changes to our water system in Scotland since devolution were properly discussed in the manifestos, for the 1999 and 2003 elections, it's not quite as comforting as it should be. Mutualisation, despite conventional association with customer co-operatives, has developed differently from its theoretical image. Evidence from Welsh Water suggests that mutualisation of water companies creates a 'shell like' public corporation whose main purpose is to purchase services from the private sector rather than produce the services themselves. Further critics have observed that mutualisation has in effect handed control of water to a small group of private contractors and financiers, reducing the possibilities for meaningful democratic participation by others. Moreover, this fragmentation could lead to a lack of accountability and a deterioration of water service provision in Scotland
Instead of focusing on mutualisation we should aim to match the underpinning principles of the Scottish Parliament with greater participation and democratisation in the governance of water services in Scotland. This could mean engaging local communities in regional boards, giving local people the opportunity to help set local priorities rather than having instructions set from above. Not just for the sake of adherence to these 'so- called' abstract values, but because there is evidence to show that they lead to a service that's more responsive, cheaper and effective, as shown by Stockholm Water in Sweden, where representatives from local interest groups sit on the company's board. See Public Interest Research Network, report commissioned by the STUC, 'Scottish Water, The Drift to Privatisation and how democracy could improve efficiency and lower costs' October 2006 ( www.public interest.ac.uk).
The Strathclyde Referendum firmly rejected privatisation in 1994. Yet since devolution, the Scottish public has not been given a chance to vote on the future of their water service provider or indeed the changes that have saw further commercialisation and an erosion of the public ethos and ownership of Scottish Water. Rather than just calling for the protection of Scottish Water in its present form, the forthcoming parliament could and should be used to work towards encouraging greater democratisation and participation in the sector. Moreover, it should address Scottish Water's needs, its current capacity and its reliance on the private sector.
Tommy Kane is doing doctoral research in the area of governance of water, particularly in Scotland and is based in the University of Strathclyde.
Shona Russell is completing her doctoral research on accountability in the water sector in Scotland at the University of Strathclyde.
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