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Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
Investment and Asset Management Report 2000-02
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Investment and Asset Management Report 2000-02

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  • 1. Investment and Asset Management Report 2000-02 East of Scotland Water Authority North of Scotland Water Authority West of Scotland Water Authority
  • 2. Ochil House Springkerse Business Park Stirling FK7 7XE telephone: 01786 430 200 facsimile: 01786 462 018 email: enquiries@watercommissioner.co.uk www.watercommissioner.co.uk March 2003
  • 3. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Foreword This is the first Investment and Asset Management Overall, the report concludes that levels of investment Report produced by my office. It examines the and the condition of the assets are comparable with investment performance of the three Scottish water those in England and Wales, but that more prudent authorities during the financial years 2000-01 and management and better information would help 2001-02. It covers the period of the first Quality and achieve better value for money for customers. Standards process and my interim Strategic Review of Charges1. • The Quality and Standards process has brought a welcome degree of clarity and coordination, but it is The report provides objective information on important that this transparency is further developed investment in the water industry in Scotland. It also in the future. examines the current overall condition and performance of the industry’s assets. In particular, it • Investment in England and Wales increased addresses the following five issues: significantly in the early years after privatisation in 1989. Investment in Scotland did not begin to • The level of investment undertaken by the three accelerate significantly until after 1996. However, by authorities during the period 1996-2002. the end of Quality and Standards I, the Scottish industry had begun to invest more per property than • How this level of investment compares with that in in England and Wales. England and Wales. • Even without the investment committed through the • The condition and performance of water and Private Finance Initiative the cumulative investment sewerage assets in Scotland. levels per property, since the three authorities were formed, are similar north and south of the border. • How these assets compare with those in England and Wales. • The effectiveness of this level of investment has been reduced as a result of inefficiencies in both the • Whether the correct processes are in place properly strategic planning and procurement of capital to identify and deliver efficiently the investment needs projects. of the water industry in Scotland. • The condition and performance of the assets in During Quality and Standards I the three authorities Scotland, however, still appear to lie within the range invested over £880 million. This represents nearly £170 of comparable companies in England and Wales. for every individual in Scotland, or around £380 for each property. • Independent research commissioned by my office has indicated that significant scope for improvement Customers will want to be sure that investment is taking remains in all areas of the investment performance of place at the right levels and in the right way - that the three authorities. problems are neither being stored up for the future, nor that assets are being ‘gold-plated’. 1 Interim Strategic Review of Charges 2000-02, published in December 1999. PAGE 01
  • 4. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 In my Strategic Review of Charges 2002-06, I advised The role of regulation is to ensure that the interests of Scottish Ministers on the factors that should be taken customers are safeguarded and that customers receive into account in setting the level of charges in Scotland. good value for money. I believe that it is important that It was clear that there needed to be significant all stakeholders are aware of the investment that is improvements in levels of understanding relating to planned for the industry in Scotland and are clear about assets in Scotland and that this would play a vital role the benefits this will bring for customers, in terms of in allowing the industry to improve its capital efficiency. improvements to service, to the environment and to public health. This annual report will help customers to Investment is now the largest single area of understand more fully the improvements they have a expenditure for the industry in Scotland. As such, right to expect. customers will need to be reassured that the Scottish industry will achieve the capital efficiency targets set I will give credit when the industry delivers the out in the Strategic Review of Charges 2002-06. objectives of the investment programme in an efficient Failure to achieve these targets could result in one or and targeted way. However, I will also ensure that any more of the following undesirable outcomes: shortfalls in performance are immediately highlighted. To this end, I intend that my office will continue to adopt • deteriorating asset condition and performance; a rigorous and challenging approach in regulating the investment performance of the industry. • higher prices; • lower levels of customer service; • lower levels of compliance with environmental or public health targets than has been agreed; and Alan D A Sutherland • a greater burden on public expenditure. Water Industry Commissioner for Scotland March 2003 PAGE 02
  • 5. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Contents Foreword Executive summary Page 04 Chapter 1 Introduction Page 09 Chapter 2 Investment in water and sewerage services Page 10 Chapter 3 Historic investment in Scotland Page 16 Chapter 4 The condition and performance of assets Page 20 Chapter 5 Investment performance by the three former authorities Page 23 Chapter 6 Conclusions Page 27 Appendix 1 Investment appraisal audit report: summaries Page 28 Appendix 2 Asset condition and performance grades Page 38 PAGE 03
  • 6. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Executive summary Introduction The first Quality and Standards report originally envisaged total investment of £740 million over two This is the first annual Investment and Asset years. This compares with a total asset replacement Management Report. In the Strategic Review of cost of some £25 billion. Table 1 outlines the original Charges2 we recommended to Scottish Ministers that Quality and Standards plan split as shown between we should publish three annual reports on progress in drinking water and sewerage. the Scottish water industry3. Table 1: Investment required to meet Quality and These were: Standards I 4 2000-01 2001-02 Total • a costs and performance report; Investment in drinking water £185m £235m £420m • a report on the investment and asset management of Investment in sewerage £165m £155m £320m the industry; and Total £350m £390m £740m •a report on the level of service provided to In the interim Strategic Review of Charges, we customers. recommended increasing the level of investment in maintaining the assets, believing that Quality and This Investment and Asset Management Report Standards I had not fully recognised the extent of addresses the following issues: investment required simply to maintain the current level of service to customers. • The level of investment undertaken by the three authorities during the period 1996-2002. These higher revenue caps would have allowed more investment in infrastructure renewal. Sarah Boyack • How this level of investment compares with that in MSP the then Minister for Transport and the , England and Wales. Environment, modified this advice, reasoning that the • The condition and performance of water and poor quality of information available about sewerage assets in Scotland. underground assets would reduce the effectiveness of investment. The revised revenue caps did, • How these assets compare with those in England however, make in excess of £150 million available for and Wales. investment beyond the spending outlined in Quality and • Whether the correct processes are in place properly Standards I. to identify and deliver efficiently the investment needs of the water industry in Scotland. This gave a revised total forecast expenditure for the Quality and Standards I period of £890 million. The This first report covers the financial years 2000-01 and authorities’ actual capital expenditure of £888 million is 2001-02. It therefore relates to the final two years of consistent with the budget set by the interim Strategic operation of the three regional water authorities: East Review and it would appear reasonable that all of the of Scotland Water Authority, North of Scotland Water obligations under Quality and Standards I should have Authority, and West of Scotland Water Authority. This been delivered in full. was also the period covered by the first Water Quality and Standards process and by the interim Strategic Concerns arise, however, in relation to operating costs Review of Charges 2000-02. allowed to pay for Private Finance Initiative (PFI) projects5. The interim Strategic Review allowed the authorities’ forecast costs to PFI contractors of £144 million. Many of the schemes were then delayed, and only £57 million of 2 Strategic Review of Charges 2002-06, published in November 2001. 3 All amounts in this report are in prices of the day unless otherwise stated. 4 Investment totals do not include PFI. 5 PFI operating costs are the contracted annual costs faced by the water authorities for the service provided. The capital element of these projects is typically delivered early in the contract period and is paid for gradually along with operating costs incurred by the contractor over the life of the PFI project. PAGE 04
  • 7. WATER INDUSTRY COMMISSIONER FOR SCOTLAND this was actually required. Consequently, some £87 million From this there appears to be considerable scope for had been raised from customers beyond what was improvement in the planning and delivery of actually required. Of this, £19 million reduced the investment. projected total debt of the three authorities, and £68 million appears to have gone on higher operating The first step is to ensure that asset condition, costs than were originally budgeted. performance, capacity and operation is understood as fully as possible. Best practice requires that this fact Additional concerns arise in relation to the targets that base is at the heart of all decisions about investment in were set under Quality and Standards I. The targets set and the operation of assets. were at a very high level. In reality it has not been possible to monitor the impact of capital expenditure in Investment levels achieving those targets in a consistent or thorough way. It would certainly have been better for customers if Making direct comparisons between the levels of clearer and more detailed information about specific investment in England and Wales and in Scotland is not investment projects, and their expected outcomes, had a straightforward process. As well as the obvious been available. differences of geography and population density, adjustments also need to be made to reflect both Greater transparency would ensure that customers and differences in the timing of investment and the other stakeholders could be confident that their significant use of the Private Finance Initiative in expectations are being met. It would also help ensure Scotland. that effective delivery of the capital programme brings better value for money for customers. Use of PFI means that the effective investment spend in Scotland during 1996-2002 is higher than it appears. Until such levels of transparency are achieved, it is From a customer’s perspective the method of delivery important to assess whether investment by the three is not important as long as value for money is achieved. authorities is being carried out effectively. Figure 16 We have therefore adjusted reported direct investment shows our assessment in relation to industry best in Scotland downwards as a result of relative practice. inefficiency7 but have added investment delivered through PFI. Figure 1: The position of the three authorities in relation to industry best practice Areas for urgent Industry improvement best practice Strategic approach to long-term investment planning Strategic asset management plan Risk based approach to long-term investment Operating cost systems and data reliability England and Wales Capital programme management utility companies Project appraisal Asset information Asset condition and performance data Key: This is the level of performance achieved by all three authorities. This is the level of performance achieved by the best performing authority in that area. 6 This figure summarises the conclusions of the consultants who worked with the Water Industry Commissioner for Scotland on the Information Project. 7 Inefficiency results where customers’ money has been spent unnecessarily. The efficient level of investment is that level of spending required to achieve the planned outputs. Adjusting for inefficiency ensures that a fair comparison of improvements to assets can be made. PAGE 05
  • 8. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Table 2: Reconciliation of direct investment to The condition and performance of assets efficient effective investment In the report, we examine the condition and Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 performance of assets in Scotland, and compare this Direct investment with England and Wales. We also assess the extent to in Scotland £252m £277m £346m £397m £428m £460m which poorer condition or performance may restrict Less: Assessed opportunities to achieve benchmark efficiency. capital inefficiency £60m £78m £107m £139m £163m £175m The regulatory return provided to us each year by the Efficient direct water authorities contains information about both the investment £192m £199m £239m £258m £265m £285m physical state of the assets (condition) and also their Investment delivered ability to carry out their function (performance). through PFI £3m £15m £15m £136m £170m £126m Total efficient Asset condition should be monitored continually, so that effective investment £195m £214m £254m £394m £435m £411m investment takes place at the point where the costs of ensuring that an asset can perform adequately exceed Absolute levels of investment do not, by themselves, the annualised costs of replacement or refurbishment. give the full picture. A more appropriate indicator is the In this way, customer charges over the medium to long level of investment per property. Table 3 outlines the term are minimised and service levels are maintained. adjusted total investment in Scotland on a per household basis and compares this with England and Customers have an interest in how well the water Wales. Even after this adjustment for inefficiency, industry’s assets perform, because performance has a investment on a per household basis in Scotland is direct and often immediate impact on the environment broadly on a par with that in England and Wales. and on public health. Table 3: Efficient effective investment per The performance of an asset reflects its ability to fulfil household its purpose, and is a function of: 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Scotland £84 £92 £109 £170 £188 £177 • its condition, England • how it is operated, and and Wales £144 £167 £167 £166 £125 £136 • its capacity to carry out its required role. This is shown in Figure 2. It is possible for an asset in reasonable condition and of adequate capacity to perform badly through poor Figure 2: Levels of capital investment per property operating practice. Similarly, an asset which is not in (adjusted for relative efficiency) the best condition can, through skillful management, be 200 made to perform acceptably. 150 £ 100 50 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Year Scotland England and Wales PAGE 06
  • 9. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Condition of Scotland’s asset base Figure 5: Sewage treatment works in condition grades 4 and 5 We have used the information provided in the most % of sewage treatment works recent regulatory returns available to compare the 35 condition of assets in Scotland with those in England 30 and Wales8. Asset condition is assessed on a scale of 25 1-5, with 1 representing ‘very good’ and 5 representing 20 ‘very poor’. 15 10 We focussed on the four main components of a water 5 0 and sewerage company’s asset base: water treatment Mean England & Wales Median England & Wales 2nd Lowest England & Wales Highest England & Wales 2nd Highest England & Wales Lowest England & Wales Scotland works, water mains, sewage treatment works, and sewers. These four groups represent some 80% of the replacement cost of the total asset base. Figures 3 to 6 show the respective position of the Figure 6: Sewers in condition grades 4 and 5 Scottish asset base for each of the four main asset categories. 30 25 % of sewers Figure 3: Water treatment works in condition 20 grades 4 and 5 15 10 % of water treatment works 45 5 40 0 35 Scotland Mean England & Wales 2nd Lowest England & Wales Highest England & Wales Lowest England & Wales 2nd Highest England & Wales Median England & Wales 30 25 20 15 10 5 0 Median England & Wales 2nd Lowest England & Wales Highest England & Wales 2nd Highest England & Wales Lowest England & Wales Scotland Mean England & Wales These results appear at variance with the commentary that we have received in the regulatory returns from the water industry in Scotland. This commentary has tended to indicate that assets are in a comparatively poor condition. Figure 4: Water mains in condition grades 4 and 5 Performance of Scotland’s asset base 60 50 % of water mains Analysis of asset performance is measured using a 40 similar, five-point scale. Here, 1 denotes an excellent 30 asset, and 5 represents a failing asset. 20 10 Table 4 overleaf gives the percentage of the four asset 0 categories that lie in performance grades 4 (borderline) Mean England & Wales Median England & Wales 2nd Lowest England & Wales Highest England & Wales Lowest England & Wales Scotland 2nd Highest England & Wales and 5 (fail) in Scotland. This is compared with the overall England and Wales average. 8 Scottish Water’s Annual Return 2001-02, England and Wales Annual Return 1997-98. Although there is four years discrepancy between the reporting years, this is a relatively short period for assets with long lives, such as pipes and treatment works. PAGE 07
  • 10. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Table 4: Percentage of assets in performance Key messages for customers grades 4 and 5 Asset Water Water Sewage Sewers • Investment per household in Scotland is currently higher than that in England and Wales, even after the category/ treatment mains treatment country works works adjustments we have made above, for the following Scotland 2002 9% 38% 19% 30% reasons: England and Wales 1999 28% 29% 19% 7% - Scotland has a much longer coastline relative to its population than England and Wales. This Above-ground assets, such as treatment works, appear increases the impact of European directives such to perform significantly better than below-ground as the Urban Waste Water Treatment Directive and assets, such as water mains and sewers. The the Bathing Waters Directive. performance of below-ground assets seems to be - Scotland invested less in the water and sewerage poor relative to performance in England and Wales. industry in the period 1989 to 1996 than the companies invested in England and Wales after We noted earlier that condition and operating practices privatisation. are the two factors that most influence how well an asset performs. By analysing information about asset • The total cost to customers in Scotland of condition and performance, we are able to determine inefficiency in the investment programme since 1996 how operational policies may be impacting on is £752 million (in 2002 prices). This is equivalent to performance. If performance of an asset category £324 for every property in Scotland. relative to performance in other companies is worse • There appears to be no evidence to support the than its condition, this may imply that operational contention that by the end of the current regulatory policies could be improved. If performance is relatively period, there will be a significant backlog of better than condition, this would suggest that the investment in Scotland relative to the position in authorities’ operational policies were better. England and Wales. Table 5 assesses asset condition and performance in • If there is a backlog in investment, inefficiency in the strategic management, planning and procurement of Scotland relative to the England and Wales average, capital projects is likely to be one of the root causes. based on information presented above. A lack of funds for investment in recent years would not appear to be a valid justification either for poorer Table 5: Assessment of Scottish asset condition customer service or for poorer operational efficiency. and performance relative to England and Wales • It is imperative for Scottish Water to take steps to Asset Water Water Sewage Sewers gain a better understanding of both the condition and category treatment mains treatment works works performance of its assets through the development • • • • • • ◗ ◗ Condition • • of a detailed and accurate asset register. This would • • • ◗ Performance significantly improve investment decisions, to the Key: benefit of all customers. Better = • • • ◗ Broad equivalence = Worse = • The assessment appears to indicate that the condition of the sewerage infrastructure assets does not justify its relatively poor overall performance in Scotland. This implies that operating policies may be an issue. PAGE 08
  • 11. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Chapter 1 Introduction This is the first annual Investment and Asset Management Report. In the Strategic Review of Charges9 we recommended to Scottish Ministers that we should publish three annual reports on progress in the Scottish water industry. These were: • a costs and performance report; • a report on the investment and asset management of the industry; and •a report on the level of service provided to customers. The Investment and Asset Management Report compares levels of investment in Scotland with those in England and Wales. It also seeks to benchmark the condition and performance of assets in Scotland against those south of the border. Maintaining the condition and performance of assets over the medium to long term is key to ensuring that costs are minimised and a consistent service is provided to customers. This first report covers the financial years 2000-01 and 2001-02. It therefore relates to the final two years of operation of the three regional water authorities: East of Scotland Water Authority, North of Scotland Water Authority, and West of Scotland Water Authority. The report contains six chapters. Chapter 2 describes the asset base in Scotland and the drivers of investment. Chapter 3 compares historic levels of investment in Scotland with those in England and Wales. Chapter 4 outlines the condition and performance of the assets in Scotland and compares them with assets south of the border. Chapter 5 discusses how the three former authorities have performed in delivering their required investment programme and compares expenditure with the investment plan agreed at the start of the period. A short concluding chapter then follows. 9 Strategic Review of Charges 2002-06, published in November 2001. PAGE 09
  • 12. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Chapter 2 Investment in water and recently (within the last 50 years or so) need to be upgraded or replaced with some urgency, in spite of sewerage services their much younger age. This may occur, for example, because new technologies prove to be unreliable or as In this chapter we describe the range of assets that are a result of flaws in design. necessary to deliver a water and sewerage service. We then examine the funding and strategic planning of Non-infrastructure assets also have relatively long lives. investment in the industry. Finally, we identify what For example, service reservoirs and water treatment information is needed to ensure that customers receive works can be expected to last in the region of between best value for money from investment in the industry. 30 and 50 years. Sewage treatment works also have similar useful lives. By contrast, other water and 2.1 Water and sewerage service assets sewerage above-ground assets, including pumping stations and valves, will typically have much shorter The assets required to deliver a water and sewerage lives - often less than 10 or 15 years. service can be divided into five broad types: Some support service assets (such as vehicles and • Water infrastructure - the underground network of information technology) have short lives of between pipes, pumps and valves through which potable three and seven years, whereas offices, depots and water is supplied to customers. Water infrastructure stores would be expected to last longer. also includes dams, reservoirs and raw water aqueducts. Current water authority assets • Water non-infrastructure - includes water treatment works, pumping stations, service reservoirs and Information provided to us by the three authorities10 list water towers. their assets as including: • Sewerage infrastructure - mainly comprises sewers that collect the sewage and storm water and • over 500 water treatment works, transport it to where it can be treated. This category • over 1,900 sewage treatment works, also includes sea outfalls. • 47,200km of mains, and • 30,300km of sewers. • Sewerage non-infrastructure - includes sewage treatment works, sewage pumping stations and 2.2 Funding investment sludge treatment facilities. • Support services - the operational assets that are To replace all of the water and sewerage service essential to the effective management of the assets (pipes, valves, treatment works and so on) business, including vehicles, information systems, would cost something in the region of £25 billion at offices, depots and stores. today’s prices. This gives a good idea of the extent of investment that has had to take place to achieve the water and sewerage service we have now. The five asset types have quite different useful lives. Infrastructure assets typically have very long lives. For Of course, this investment has taken place over a very example, many of our sewers and water mains were long period. As the useful life of each asset varies, so built in Victorian times and can still be relied upon to investment to maintain and renew those assets can provide a more than adequate service. Water mains take place on a rolling basis. This means that can generally be expected to last between 60 and 100 investment can be prioritised on a yearly basis in a way years. Sewers, if well maintained, should last between that allows service to be delivered to customers as around 80 and 120 years. Having said that, some effectively and efficiently as possible. sewers and water mains that were installed more 10 Regulatory returns dated June 2002. PAGE 10
  • 13. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Figure 2.1: Costs to replace Scotland’s water and Table 2.1: Replacement costs, average asset lives sewerage assets and required investment Total £24.9 billion Asset Approximate Minimum Maximum Maximum Minimum Water non- category value average average required required Support infrastructure life (years) life (years) annual annual services £2.1 billion £0.1 billion investment investment Sewerage non- Water infrastructure infrastructure £9,800m 60 100 £163m £98m £1.8 billion Sewerage infrastructure £11,100m 80 120 £139m £93m Water non- infrastructure £2,100m 30 50 £70m £42m Sewerage non- infrastructure £1,800m 30 50 £60m £36m Support Sewerage services £100m 5 10 £20m £10m infrastructure All assets £24,900m - - £452m £279m Water £11.1 billion infrastructure £9.8 billion Table 2.1 shows that some £280 million a year, as an absolute minimum, is necessary simply to maintain the Investment to maintain the assets current level of service. A more realistic sum for maintaining the current level of service is likely to be in The assets of any business have a finite life and need the region of £400 million to £450 million per year. replacing at the end of their useful lives if business is to continue. Any prudently managed business will How investment is funded recognise the value that it receives from using these assets. This value is typically recognised in financial The very long useful life of assets in the water and accounting by making a depreciation charge to the sewerage industry lends itself to effective forward profit and loss account, thereby reducing the profit planning. This is true also of the long lead times usually earned. allowed for the introduction of tighter environmental and public health standards. This allows investment The water and sewerage business is no different. plans to be adapted in a way that is efficient both Water authorities typically recognise two separate financially and operationally. depreciation charges, one for above-ground assets and a second for the underground infrastructure. A useful example is that of a typical water main. The average expected life of a water main of around The following table highlights the very considerable 70-80 years is broadly similar to average human life annual investment necessary to ensure that assets are expectancy. If, therefore, an individual lived in the same replaced in such a way that the service is maintained. house for the whole of their life, it would be reasonable to expect the water main supplying that property to be replaced once during the lifetime of that individual. Customers contribute to charges during each year of their adult life. Some customers will pay in advance of receiving a new water main, others will receive the new main earlier and will pay for it during the remainder of their life. In effect, the whole customer base jointly PAGE 11
  • 14. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 purchases each year a quantity of refurbished mains Investment to improve assets which will keep the system in a fully serviceable order. Although they will benefit only once during their life Investment in water and sewerage assets will from the replacement of the main, during all other years sometimes be necessary in order to meet higher customers will have access to a safe water supply. environmental and quality standards, rather than simply being replaced on a ‘like for like’ basis to maintain the In other words, in any one year, those who receive the service. new water main are borrowing from their fellow customers the excess of their contributions through To fund this new investment within the timescales charges prior to replacement of the main. The required by new obligations, water authorities may have customer who receives a new main to serve their to borrow capital, on behalf of all customers. Borrowing property before they begin to pay for the water service in this way allows the cost of new investment to be borrows the entire amount from fellow customers. The spread over time. customer who receives a new main half way through their adult life will borrow approximately half the cost of However, such borrowing will inevitably mean that the the main from other customers, the rest being funded water authority has to raise more money from its by contributions already made. customers in order to bring its revenue and asset replacement liabilities (ie the interest on and the Customers promise to continue to pay charges even repayment of principal of the capital borrowings) back after replacement of the main in settlement of their into balance. debt (to fellow customers), and each year these contributions allow for others to benefit from the A prudent and well-managed company will therefore refurbishment of the main that services their property. use borrowing only to fund asset improvements, not to maintain or replace those that have already been If the average rate of deterioration of the water main created and depreciated. were regarded as broadly similar, each householder would receive the same average service over any 2.3 The Quality and Standards process period of 70-80 years. It is in the interests of all customers that environmental The same principle applies to shorter life assets, such and public health standards are met and that deadlines as technology (which would have a very short asset life set out in legislation are complied with. Much of the of around 3-4 years) or water treatment plants (which legislation is instigated by the European Union and is have a useful life of 25-30 years). They would be enforced through infraction proceedings. Member replaced on average 25 times (for the technology states who fail to comply face fines that would asset) and three times (for a water treatment plant) ultimately have to be paid by customers. during the average customer’s life. Prior to 1999, there was no coordinated approach The result is that the portfolio of assets owned by a towards investment in the Scottish water industry. The water authority can be properly maintained by an Government, environmental and public health annual sum of money, which, if consistently invested, regulators and customer representatives independently will ensure that the serviceability of the network is communicated their own priorities on investment to ensured. each of the three water authorities. The result was a lack of consistency, with no clear mandate to address customers’ concerns about improving water quality and meeting the tighter environmental standards required by legislation. PAGE 12
  • 15. WATER INDUSTRY COMMISSIONER FOR SCOTLAND The absence of a coordinated approach to investment part of the Commissioner’s remit is to advise Scottish carried a further risk to customers. Maintaining and Ministers on the factors which the water industry replacing assets that were nearing the end of their should take into account in developing their charges useful lives was unduly delayed because of the schemes. pressure on the water authorities to comply with legislative deadlines. Such delays could result in a When we conducted the interim Strategic Review of complete failure of a vital asset - leading to increased Charges we examined the investment needs outlined in costs for customers, unacceptable declines in the first Quality and Standards document. The interim customer service, or both. review signalled our concerns that insufficient attention was being directed towards maintaining and replacing The Scottish Executive recognised the need to improve those assets that were nearing the end of their lives. investment planning and coordination in the water We advised revenue caps that took account of this industry in Scotland. As a result, it initiated the Water concern. Quality and Standards process. This was an explicit attempt to bring together all stakeholders and to 2.4 What drives investment in the water develop a single statement of the investment needs of and sewerage industry the Scottish water industry. Investment can be divided into four broad headings: The outputs agreed through the Quality and Standards base investment, infrastructure renewal, quality process are similar to the Asset Management Plans enhancement and growth. that are drawn up by the privatised companies in England and Wales in consultation with the Base investment and infrastructure renewals12 Environment Agency and the Drinking Water Inspectorate (DWI). Maintaining and replacing above-ground and support service assets can be termed base investment. The Scottish Executive’s first Water Quality and Standards document11, published in November 1999, Base investment is the investment necessary to covered the two-year period from 1 April 2000 to maintain existing service levels to customers. It involves 31 March 2002 (referred to here as Quality and replacing equipment that is at the end of its useful life Standards I). with a similar asset. No improvement in the underlying average service results. It defined what the Scottish Executive expected the three former water authorities to deliver in terms of Infrastructure renewal is the process of replacing drinking water quality, safe and sustainable sewage infrastructure assets that have reached the end of their disposal and environmental protection. useful lives. The then Minister for Transport and the Environment, Base investment and infrastructure renewals accounted Sarah Boyack MSP welcomed the publication as “the for 41% of investment in Quality and Standards I. start of a process that will ensure that the water authorities’ customers and the Scottish water Quality enhancement environment benefit from a modern and efficient water and sewerage service at the best possible price”. This covers investment that is categorised as enhancing quality. The main driver for such The role of the Water Industry Commissioner for enhancement is usually a legislative deadline. Scotland was established at the same time as the initial Customer preference and political decisions can also Quality and Standards process was completed. A key influence this area of the investment programme. 11 Water quality and standards: Investment priorities for Scotland’s water authorities 2000-02. 12 Base investment and infrastructure renewals are sometimes referred to as capital maintenance. PAGE 13
  • 16. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Legislative drivers during 2000-02 included: the view that the low level of investment in the short- term implied by Quality and Standards I could have an • The Control of Pollution Act 1974, adverse impact on both the level of service provided to • The Urban Waste Water Treatment Directive, customers and on compliance with investment and • The Bathing Waters Directive, and public health targets. • The Drinking Water Directive. The revenue caps set out in the interim Strategic Other drivers included: Review of Charges allowed for greater investment in capital maintenance. Sarah Boyack MSP modified the • The Cryptosporidium Direction, advice, reasoning that the poor quality of information • Surface Water Abstraction Directive, available about the underground assets would reduce • Freshwater Fish Waters Directive, the effectiveness of investment. The modified revenue • Shellfish Waters Directive, caps did, however, make in excess of £150 million • Sewage Sludge Directive. available for investment beyond the spending outlined in Quality and Standards I. Quality enhancing investment is necessary to ensure that such priorities are achieved within the agreed 2.6 Information and the capital timescale. Quality investment accounted for around maintenance framework 52% of total investment in Quality and Standards I. Effective capital maintenance is best achieved by Growth planning expenditure to address asset maintenance pro-actively. Asset management in Scotland is Growth investment is the investment necessary to meet hampered by the relatively poor quality of asset the demand for services from new and existing information available. However, it is in customers’ customers by providing new assets or increasing the interests for capital maintenance to be properly capacity of existing assets. Examples of growth prioritised and to prevent a lack of perfect information investment include removing a development constraint being used to justify inaction. or connecting a new property to the water and sewerage system. Growth investment usually accounts In order to improve value for money for customers, the for only a small proportion of total investment. water industry in the UK identified the need for a In Quality and Standards I, growth accounted for 7% of common approach to capital maintenance planning. total investment. UK Water Industry Research (UKWIR) was commissioned to develop a framework around which 2.5 Ensuring effective capital maintenance capital maintenance planning could be based. The Office of Water Services (Ofwat), the DWI, the Understanding the condition and performance of Environment Agency, the Water Industry Commissioner underground assets is a complex activity, requiring a for Scotland (WICS) and the Department of detailed knowledge of the infrastructure. This degree of Environment, Food and Rural Affairs (DEFRA) all understanding is essential when making decisions supported the initiative. about the timing and level of investment necessary to maintain these assets, and can have a significant The key output was to create a process that companies impact on the value for money provided to customers. could use to develop ‘serviceability indicators’. These indicators could then be used as the basis to measure In Quality and Standards I it was agreed that capital maintenance performance. Several water and infrastructure renewals should grow over time to sewerage companies in England tested the framework between 1% and 2% of the replacement cost of the and it is now in the process of being adopted by the underground infrastructure. Following consultation with industry south of the border (with support from all of customers, management and industry experts, we took the regulators). PAGE 14
  • 17. WATER INDUSTRY COMMISSIONER FOR SCOTLAND We would like to see a similar framework adopted in • the operation of the water supply and drainage Scotland in the near future. This would ensure a proper systems; approach to the maintenance of assets in Scotland and • the condition and performance of assets (particularly would safeguard the condition of the network for future below-ground assets) on a consistent basis across generations. We expect the industry in Scotland to Scotland; strive to implement accepted best practice. • the extent of development constraints resulting from the capacity or performance of the water and 2.7 Key factors in delivering investment sewerage system. successfully Significant progress in these areas will be essential to In the interim Strategic Review of Charges, we made both the efficient operation of Scottish Water13 and the two key recommendations to help achieve success in efficient delivery of the capital programme in the next delivering the investment programme. These were: Quality and Standards period, ie 2002-06 (Quality and Standards II). • that management information parameters should be introduced, which would allow consistent efficiency targets to be set for the three Scottish water authorities and for proper comparisons to be drawn for benchmarking purposes; and • that the three authorities should introduce a common asset management process, which would also allow customers to be confident that best value in procurement and maintenance was being achieved. We commissioned an information project from a consortium of consultants including WS Atkins, Cap Gemini, Ernst & Young and Yorkshire Electricity to assist in implementing these two recommendations. The project highlighted the need to improve further the information that the authorities have about their assets. The information available to the authorities and to regulators has improved markedly over the last two years. This improvement is welcome, but more progress is necessary if we are to develop a greater understanding of: 13 Scottish Water replaced East of Scotland Water Authority, North of Scotland Water Authority and West of Scotland Water Authority on 1 April 2002. PAGE 15
  • 18. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Chapter 3 Historic investment in Scotland Table 3.1: Total investment14 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 In this chapter, we examine historic levels of investment Scotland in Scotland and compare them with investment in the excluding PFI £252m £277m £346m £397m £428m £460m water and sewerage industry in England and Wales. Capital element of PFI £3m £15m £15m £136m £170m £126m 3.1 Investment levels Scotland total £255m £292m £361m £533m £598m £586m Making direct comparisons between the levels of England and Wales investment in England and Wales and in Scotland is not total £3160m £3664m £3670m £3643m £2744m £2983m a straightforward process. As well as the obvious differences of geography and population density, Absolute levels of investment do not, by themselves, adjustments also need to be made to reflect differences give the full picture. One useful indicator is the level of in the timing of investment and to reflect the significant investment per property. use of the Private Finance Initiative (PFI) in Scotland. Table 3.2 indicates that, even excluding investment The level of investment in England and Wales delivered through PFI, Scotland has now overtaken increased significantly after privatisation in 1989. By investment levels in England and Wales. This is in spite 1996-97, the privatised companies were investing of the significant difference that existed when the three some £3.5 billion per year. A significant proportion of authorities were established. this investment was driven by the Urban Waste Water Treatment and the Bathing Waters Directives. Table 3.2: Levels of capital investment per property (excluding PFI) Investment in Scotland began to increase significantly after the formation of the three former water authorities Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 in 1996. Considerable use was made of PFI schemes Scotland £109 £119 £149 £171 £184 £198 England & to fund the investment required to comply with the Wales £144 £167 £167 £166 £125 £136 Urban Waste Water Treatment Directive and the Difference (£35) (£48) (£18) £5 £59 £62 Bathing Waters Directive. Using PFI in this way means that the effective investment spend in Scotland during Figure 3.1: Levels of capital investment per 1996-2002 is higher than it appears. property (excluding PFI) Investment in England and Wales has now stabilised at 250 around £3 billion per year. The Quality and Standards II 200 process, which begins immediately after the 2000-02 150 period discussed in this report (and covers the period £ 100 2002-06), foresees investment in Scotland stabilising at around £450 million per year. 50 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Year Scotland England and Wales The cumulative level of direct investment per property over the same period is illustrated in Table 3.3. 14 Reliable information prior to 1996 is not available. PAGE 16
  • 19. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Over the six year period, £27 more per property has Table 3.5: Cumulative levels of capital investment been invested in Scotland than in England and Wales. per property (including PFI) Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Table 3.3: Cumulative levels of capital investment Scotland £110 £236 £391 £621 £879 £1132 per property (excluding PFI) England and Wales £144 £310 £477 £643 £768 £904 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Difference (£34) (£74) (£86) (£22) £111 £228 Scotland £109 £228 £377 £548 £733 £931 England and Wales £144 £310 £477 £643 £768 £904 3.2 Levels of investment adjusted for Difference (£35) (£82) (£100) (£95) (£35) £27 efficiency Table 3.4 outlines the effective level of investment per In the Strategic Review of Charges 2002-0615 and in property since the three former authorities were our recent Costs and Performance Report 2001-0216 created. The impact of investment through PFI has we analysed the capital efficiency of the water and been added to the direct investment outlined above. sewerage industry in Scotland relative to that in England and Wales. Table 3.4: Levels of capital investment per property (including PFI) The analysis of capital expenditure in Scotland outlined in section 3.1 above does not take account of the Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 relatively poor capital efficiency of the industry in Scotland £110 £126 £156 £230 £258 £253 England Scotland. Our assessment of efficiency requires that & Wales £144 £167 £167 £166 £125 £136 the same, or a better, investment output is delivered for Difference (£34) (£41) (£11) £64 £133 £117 less money. This means that actual cash expenditure should be adjusted for inefficiency so that the effect on Figure 3.2: Levels of capital investment per the level of service, or on environmental and public property (including PFI) health standards, can be assessed objectively. 300 250 The following table outlines the percentage gap in 200 capital efficiency that was assessed in the Strategic £ 150 Review of Charges 2002-06 and in the Costs and 100 Performance Report. 50 0 Table 3.6: Capital efficiency gap relative to 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 England and Wales17 Year Scotland 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 East of England and Wales Scotland Water Authority 23% 27% 30% 34% 37% 36% The impact of PFI increases the relative investment North of committed per property in Scotland. Table 3.5 Scotland Water illustrates the cumulative level of investment per Authority 24% 28% 32% 35% 38% 38% property over the same six-year period. After proper West of Scotland account is taken of PFI, Scotland has invested £228 Water more per property than has been invested in England Authority 24% 28% 31% 35% 38% 38% Scotland and Wales. weighted average 24% 28% 31% 35% 38% 38% 15 Strategic Review of Charges 2002-06, Water Industry Commissioner for Scotland, November 2001. 16 Costs and Performance Report 2001-02, Water Industry Commissioner for Scotland, February 2003. 17 The gap is assessed in relation to Ofwat’s lowest submission for cost base benchmarking. This would understate the extra efficient, effective investment in Scotland per household relative to the Ofwat benchmark. The efficiency targets for Scottish Water in the Strategic Review of Charges 2002-06 were calculated relative to the less demanding Ofwat benchmark. PAGE 17
  • 20. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 In the analysis in the Strategic Review of Charges Figure 3.3: Levels of capital investment per 2002-06, we assumed that PFI capital investment was property (adjusted for relative efficiency) in £ delivered efficiently. The following table reconciles 200 actual direct spending in Scotland to the efficient effective investment spending that benefited customers 150 under the same assumption. £ 100 Table 3.7: Reconciliation of direct investment to 50 efficient effective investment 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Direct Year investment Scotland in Scotland £252m £277m £346m £397m £428m £460m England and Wales Less: Assessed capital 3.3 Key messages for customers inefficiency £60m £78m £107m £139m £163m £175m Efficient direct investment £192m £199m £239m £258m £265m £285m • Investment per household in Scotland is higher than Investment that in England and Wales, even after the delivered adjustments we have made above, for the following through PFI £3m £15m £15m £136m £170m £126m reasons: Total efficient effective investment £195m £214m £254m £394m £435m £411m - Scotland has a much longer coastline relative to its population than England and Wales. This increases the impact of European directives such Table 3.8 outlines the adjusted total investment in as the Urban Waste Water Treatment Directive and Scotland on a per household basis and compares this the Bathing Waters Directive. with England and Wales. Even after this adjustment for inefficiency, investment in Scotland on a per household basis is broadly on a par with England and Wales. This - Scotland invested less in the water and sewerage industry in the period 1989 to 1996 than the adjusted level of £820 compares with the actual £1,132 companies invested in England and Wales after that Scottish customers have financed. privatisation. After our adjustments the level of investment in Scotland overtook England and Wales in 1999-2000. • The total cost of inefficiency in the investment programme between 1996 and 2002 has cost customers in Scotland £752 million (in 2002 prices). Table 3.8: Efficient effective investment per This is equivalent to £324 for every property in household Scotland18. Country 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Scotland £84 £92 £109 £170 £188 £177 • There appears to be no evidence to support the England contention that there is a significant backlog of and Wales £144 £167 £167 £166 £125 £136 investment in Scotland relative to England and Wales19. So although investment in England and This is shown in Figure 3.3. Wales was higher immediately after privatisation, the roles have recently reversed. 18 The total is £312 per property before the adjustment is made to 2002 prices (£1,132 less £820). 19 This assumes that expenditure required to maintain existing assets is broadly similar to expenditure required for new assets. PAGE 18
  • 21. WATER INDUSTRY COMMISSIONER FOR SCOTLAND • There appears to be no evidence to support the 3.4 Conclusions contention that by the end of the current regulatory period, there will be a significant backlog of Comparing investment levels is not a simple process. investment in Scotland relative to the position in Important adjustments need to be made so that the England and Wales. method of investment delivery and the timing of investment neither exaggerate nor understate the true • If there is a backlog in investment, inefficiency in the state of affairs. strategic management, planning and procurement of capital projects is likely to be one of the root causes. Our analysis has indicated that while there was A lack of funds for investment in recent years would significantly less investment in Scotland during the not appear to be a valid justification either for poorer early 1990s than in England and Wales, the position customer service or for poorer operational efficiency. has altered markedly in recent years. • Given that per household investment is planned to be Levels of investment per property in Scotland have now significantly higher in Scotland during the Quality and risen above those in England and Wales. Even after Standards II period, it is likely that investment adjustments are made for capital inefficiency, it is likely expenditure on a per property basis over the entire that the industry in Scotland will have matched period 1989 to 2006 will have been broadly the same spending per household by the end of Quality and in Scotland as in England and Wales. Standards II. Figure 3.4: Actual and projected investment per property in Scotland and England and Wales 250 200 150 £ 100 50 0 2000-01 1996-97 2001-02 2002-03 2003-04 2004-05 2005-06 1997-98 1998-99 1999-00 Year Scotland England and Wales PAGE 19
  • 22. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Chapter 4 The condition and performance the best condition can, through skillful management, be made to perform acceptably. of assets 4.1 Condition of Scotland’s asset base In this chapter we examine the condition and performance of the assets in Scotland, and compare In this report, we assess asset condition on a scale of this to the position in England and Wales. We also 1-5, with 1 representing ‘very good’ and 5 representing assess the extent to which a poorer condition or ‘very poor’. There are detailed definitions of what each performance could restrict opportunities to achieve score means for each asset category20. benchmark efficiency. We have used the information provided in the most In asset-intensive businesses, such as water and recent regulatory returns available to compare the sewerage (or indeed any utility), informed and robust condition of assets in Scotland with those in England investment decisions need to be based on an accurate and Wales21. and up-to-date knowledge of the asset base of the business. This is fundamental to good practice in asset Performance and condition assessment by the three management. former water authorities appears not to have taken place on a fully consistent basis. In order to maximise The regulatory return provided to us each year by the consistency when making comparisons, therefore, we water authorities contains information about both the have chosen to use the consolidated annual return physical state of the assets (condition) and also their provided to us by Scottish Water in June 2002. ability to carry out their function (performance). The information provided by Scottish Water is not yet of The condition of assets should be monitored sufficiently high quality to allow the level of analysis continually, so that investment takes place at the point that we consider should be possible. Urgent attention where the costs of ensuring that an asset can perform should be paid to improving the consistency and quality adequately exceed the annualised costs of of information held by Scottish Water about its assets. replacement or refurbishment. In this way, customer It is possible that a fuller assessment could materially charges over the medium to long term are minimised change the condition and performance grades and service levels are maintained. discussed below. Customers have an interest in how well the water For ease of comparison, given some differences in industry’s assets perform, because performance has a reporting formats between Scotland and England and direct and often immediate impact on the environment Wales, we have focussed on the four main components and on public health. of a water and sewerage company’s asset base, namely water treatment works, water mains, sewage The performance of an asset reflects its ability to fulfil treatment works, and sewers. These compose its purpose, and is a function of: approximately 80% of the replacement cost of the total asset base. • its condition, • how it is operated, and We show information for the two highest and the two • its capacity to carry out its required role. lowest performers of the ten English and Welsh water and sewerage companies, along with the median and It is possible for an asset in reasonable condition and the mean for these ten companies. We cannot name of adequate capacity to perform badly through poor the company comparators used from England and operating practice. Similarly, an asset which is not in Wales for reasons of commercial confidentiality. 20 See Appendix 2. 21 Scottish Water’s Annual Return 2001-02, England and Wales Annual Return 1997-98. Although there is four years discrepancy between the reporting years, this is a relatively short period for assets with long lives, such as pipes and treatment works. PAGE 20
  • 23. WATER INDUSTRY COMMISSIONER FOR SCOTLAND We have focussed on the percentage of each asset Figure 4.3: Sewage treatment works in condition class in condition grades 4 and 5 i.e. ‘poor’ and ‘very grades 4 and 5 poor’, since these are the assets that are potentially % of sewage treatment works more expensive to operate. 35 30 Figures 4.1 to 4.4 show the respective position of the 25 Scottish asset base for each of the four main asset 20 categories. 15 10 Figures 4.1: Water treatment works in condition 5 0 grades 4 and 5 Mean England & Wales Median England & Wales 2nd Lowest England & Wales Highest England & Wales 2nd Highest England & Wales Lowest England & Wales Scotland % of water treatment works 45 40 35 30 25 Figure 4.4: Sewers in condition grades 4 and 5 20 15 10 30 5 0 25 % of sewers Median England & Wales 2nd Lowest England & Wales Highest England & Wales 2nd Highest England & Wales Lowest England & Wales Scotland Mean England & Wales 20 15 10 5 0 Scotland Mean England & Wales 2nd Lowest England & Wales Highest England & Wales Lowest England & Wales 2nd Highest England & Wales Median England & Wales Figure 4.2: Water mains in condition grades 4 and 5 60 50 % of water mains 40 These results indicate that, with the possible exception 30 of water mains, the condition of assets in Scotland is 20 on a par with those in England and Wales. For all asset 10 categories, the percentage of ‘poor’ and ‘very poor’ 0 assets in Scotland lies within the range of companies in Mean England & Wales Median England & Wales 2nd Lowest England & Wales Highest England & Wales Lowest England & Wales Scotland 2nd Highest England & Wales England and Wales. The Scottish industry’s water mains, although not in a worse condition than the worst company south of the border, do appear to have the second highest percentage of assets in a ‘poor’ or ‘very poor’ condition. PAGE 21
  • 24. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 These results appear at variance with the commentary Based on the information presented above, Table 4.2 that we have received in the regulatory returns from the assesses asset condition and performance in Scotland water industry in Scotland. This commentary has relative to the England and Wales average. tended to indicate that assets are in a comparatively poor condition. Our analysis suggests that there is little Table 4.2: Assessment of Scottish asset condition evidence to justify this assertion. As such, poor asset and performance relative to England and Wales condition would not appear to justify poor progress Asset Water Water Sewage Sewers towards benchmark efficiency. category treatment mains treatment works works • • • • 4.2 Performance of Scotland’s asset base • • ◗ ◗ Condition • • Performance • • ◗ • Analysis of asset performance is measured using a Key: similar, five-point scale. Here, 1 denotes an excellent • Better = • • ◗ Broad equivalence = asset, and 5 represents a failing asset. The full range of Worse = • definitions is included as Appendix 2. The assessment appears to indicate that the condition Table 4.1 gives the percentage of the four asset of the sewerage infrastructure does not justify its categories that lie in performance grades 4 (borderline) relatively poor overall performance in Scotland. and 5 (fail) in Scotland. This is compared with the This implies that operating policies may be an issue. overall England and Wales average. Condition and performance gradings, when properly Table 4.1: Percentage of assets in performance combined with assessments of risk, provide invaluable grades 4 and 5 evidence about where investment should be targeted to maintain and improve overall network performance. It is Asset Water Water Sewage Sewers imperative that Scottish Water makes progress in category/ treatment mains treatment country works works gaining a better understanding of both the condition Scotland 2002 9% 38% 19% 30% and performance of its assets through the development England and of a detailed and accurate asset register. This would Wales 1999 28% 29% 19% 7% significantly improve investment decisions, to the benefit of all customers. Above-ground assets, such as treatment works, appear to perform significantly better than below-ground assets, such as water mains and sewers. The performance of below-ground assets seems to be particularly poor relative to performance in England and Wales. We noted earlier that condition and operating practices are the two factors that most influence how well an asset performs. By analysing information about asset condition and performance, we are able to determine how operational policies may be impacting on performance. If performance of an asset category relative to performance in other companies is worse than its condition, this may imply that operational policies could be improved. If performance is relatively better than condition, this would suggest that the authorities’ operational policies were better. PAGE 22
  • 25. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Chapter 5 Investment performance by the Following consultations with customers, management and industry experts, we took the view that this low three former authorities level of base and infrastructure investment could have adverse impacts on both the level of service to In this chapter we analyse the investment performance customers and on compliance with investment and of the three former water authorities in Scotland in the public health targets. Our interim Strategic Review of period covered by Quality and Standards I. Our Charges therefore advised Ministers to accept a higher analysis of investment performance considers level of revenue cap than would have been necessary spending against budget, the management of the to meet the expenditure outlined in Quality and capital programme and the benefits of this capital Standards I (and shown in Table 5.1). programme for customers. These higher revenue caps would have allowed more 5.1 Quality & Standards I investment investment in infrastructure renewal. Sarah Boyack MSP the then Minister for Transport and the , In Chapter 2 we described how the Water Quality and Environment, modified our advice, reasoning that the Standards process defines the investment required to poor quality of information available about achieve agreed levels of water quality, environmental underground assets would reduce the effectiveness of and customer service standards. investment. The revised revenue caps did, however, make in excess of £150 million available for The first Water Quality and Standards process was investment beyond the spending outlined in Quality and published on 1 November 1999. It defined the Standards I. investment required for the two years from April 2000 to March 200222. This gave a revised total forecast expenditure for the Quality and Standards I period of £890 million. The total investment was £740 million over the two years, split as shown in Table 5.1 between drinking Quality and Standards I did not provide any detail about water and sewerage. the specific projects that were necessary in order to meet the environmental and public health obligations. Table 5.1: Investment required to meet Quality and Standards I 23 Targets were set at a very high level. In reality it has not been possible to monitor the impact of capital 2000-01 2001-02 Total Investment in drinking water £185m £235m £420m expenditure in achieving compliance with those targets Investment in sewerage £165m £155m £320m in a consistent or thorough way. It would certainly have Total £350m £390m £740m been better for customers if clearer and more detailed information about specific investment projects, and Quality and Standards I focused primarily on their expected outcomes, had been available. investment to improve compliance with public health and environmental obligations. Only limited attention Greater transparency would ensure that customers and was paid to maintaining and replacing assets, and other stakeholders could be confident that their infrastructure renewal was anticipated to grow over expectations are being met. It would also help to time to between 1% and 2% of the replacement cost of ensure that effective delivery of the capital programme the underground infrastructure. brings better value for money for customers. 22 Quality and Standards I can be found on the Scottish Executive’s website at www.scotland.gov.uk 23 Investment totals do not include PFI. PAGE 23
  • 26. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 5.2 Delivery of Quality and Standards I by £144 million. Only £57 million of this was actually the authorities required, since many of the schemes were delayed. Consequently, some £87 million was raised from Table 5.2 provides a breakdown of the investment customers beyond what was actually required. spending of the three authorities during Quality and Of this, £19 million reduced the projected total debt of Standards I. A total of £888 million was spent; the three authorities, and £68 million appears to have £428 million in 2000-01 and £460 million in 2001-02. gone on higher operating costs. Table 5.2: Expenditure during Quality and 5.3 Asset management performance of Standards I the three former authorities Authority/year 2000-01 2001-02 Total Having examined the total level of investment carried North of Scotland out by the three former authorities, it is important to Water Authority £128m £144m £272m East of Scotland establish whether this investment has been carried out Water Authority £122m £118m £240m effectively. This is generally measured by establishing West of Scotland Water Authority £178m £198m £376m whether the processes involved in the investment have Scotland total £428m £460m £888m followed good asset management principles. The £888 million actually invested is consistent with the Figure 5.1 shows that the authorities fall considerably revised forecast expenditure of £890 million for Quality short of industry best practice, particularly in the areas and Standards I. It is therefore reasonable to assume of strategic long-term investment planning, strategic that all of the obligations under Quality and asset management and in adopting a risk-based Standards I should have been delivered in full. approach to long-term investment. The figure is reproduced from the Information Project prepared by The interim Strategic Review of Charges made an consultants and described in Chapter 2. allowance of £918 million for operating costs during the two years of Quality and Standards I. This allowance Figure 5.1: The position of the three authorities in included the forecast costs to PFI contractors of relation to industry best practice Areas for urgent Industry improvement best practice Strategic approach to long-term investment planning Strategic asset management plan Risk based approach to long-term investment Operating cost systems and data reliability England and Wales Capital programme management utility companies Project appraisal Asset information Asset condition and performance data Key: This is the level of performance achieved by all three authorities. This is the level of performance achieved by the best performing authority in that area. PAGE 24
  • 27. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Following detailed analysis in this area, and Asset Management Action Plans discussions with the consultants who prepared the Information Project, we identified the following areas for We asked the three former water authorities to prepare urgent improvement. Action Plans to explain how they intended to address the gaps in their information and management • Investment and business strategy: development of processes. These gaps would impact on their ability to robust strategic asset management and long-term complete their annual return. investment planning. The authorities’ Action Plans did not include initiatives • Financial management and control: improved to improve their understanding of their asset condition systems for investment appraisal, project monitoring and performance data. The authorities did, however, and allocation of operating costs. specify an asset project in the European Journal in March 2001. It is very disappointing to note that this • Asset management: availability of accurate asset project appears not to have proceeded. information, condition and performance grades and risk profiles. Although the authorities’ Action Plans did not fully address the identified weaknesses in strategic • Service delivery: measures of levels of service and planning, there were some positive signs that the quality outputs. authorities understood the importance of this area and were taking steps to improve. • Information management: improved systems for collection and storage of information concerning The team was also concerned about the level of properties and populations served, volumes supplied scrutiny and challenge given by the authorities to and loads treated. projects as they pass through the appraisal stage. They found that the appraisals did not take a sufficiently wide Strategic asset management is a fundamental skill for view of all of the factors impacting on projects. It was any asset-intensive business. A robust strategic noted that this was due in large part to the lack of investment plan is central to all decisions about asset information about assets and detailed costs. The investment, linking the investment programme and the project team therefore recommended that we should operating environment of the authority. Such plans set out guidelines for investment appraisal. These were have to be a priority for management, yet the provided to the three authorities in summer 2001. project teams found that robust strategic plans were not in place. We decided to carry out investment appraisal audits in order to highlight areas falling short of best practice in Good asset management also requires a full and England and Wales and areas of strength. The process detailed understanding of the asset base. An used for the audits and a detailed summary of the inappropriate investment plan, based on insufficient results is shown in Appendix 1. asset knowledge, will increase not only capital costs but also operating costs; this would inevitably lead to The following figures represent the results from the higher charges for customers. The project team found audit, divided between the various stages of the that there was little information available at a detailed investment appraisal process. For each stage the scale sub-asset level and that the information that was represents progress towards ‘best practice investment available was incomplete. appraisal’ (100) and ‘currently not being carried out’ (0). PAGE 25
  • 28. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Figure 5.2: East of Scotland Water Authority The conclusion we drew from these audits is that the former authorities had significant opportunities to % progress to best practice 100 improve. We will continue to monitor the investment appraisal process in the newly formed Scottish Water. 75 We also propose to continue to broaden our 50 understanding of the overall effectiveness of the industry’s asset management processes. Customers 25 have a right to expect that investment in the water industry is carried out efficiently and effectively. 0 Investment Investment Project Project Post-project review strategy appraisal planning appraisal Figure 5.3: North of Scotland Water Authority % progress to best practice 100 75 50 25 0 Investment Investment Project Project Post-project review strategy appraisal planning appraisal Figure 5.4: West of Scotland Water Authority %progress to best practice 100 75 50 25 0 Investment Investment Project Project Post-project review strategy appraisal planning appraisal PAGE 26
  • 29. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Chapter 6 Conclusions • The condition of assets in Scotland lies within the range of comparable companies in England and This is the first Investment and Asset Management Wales. Overall, asset condition appears no worse, Report for the water industry in Scotland. and no better, than that south of the border. Effective delivery of the £1.8 billion Quality and • The performance of the assets in Scotland gives Standards II investment programme will require an greater cause for concern. There are indications that objective understanding of the current performance of the poor performance of the sewerage network may the industry in Scotland. If this programme is delivered be associated with operational practices. effectively and efficiently, customers will benefit from better water quality, environmental improvements and • Customers have the right to expect that the higher service standards. obligations of Quality and Standards I have been delivered in full. The three authorities spent almost Our analysis of the information on investment, the exactly the investment allowed to them in the interim condition and performance of assets, and the Quality Strategic Review of Charges. and Standards I process has revealed a number of critical issues. • Some £87 million allowed for PFI expenditure in the interim Strategic Review of Charges was not • The ‘Water Quality and Standards’ process has required. Of this, £68 million was used up by a higher brought a new degree of clarity and coordination in than budgeted level of underlying operating costs. defining the investment required in Scotland’s water The balance of £19 million resulted in less borrowing industry. Experience to date needs to be built upon, being required than had been estimated in the so that there is greater transparency of expected interim Review. This lowered the debt inherited by outputs at a local level. Scottish Water from the three authorities by £19 million from what had been projected in the • Water industry assets in Scotland are worth over interim Review. £25 billion. Around £400 million of efficient, effective investment is required each year simply to maintain We hope that this annual report will enable all the current level of service. stakeholders in the Scottish industry to understand better its investment and asset management • Although it is true that, relative to England and performance relative to that of the industry in England Wales, Scotland invested less in water and sewerage and Wales. Such an understanding can only improve in the early part of the 1990s, this has now been the value for money for customers in the medium to reversed. PFI has played an important role in long term. delivering this investment. Even after adjusting for inefficiency in the capital expenditure of the three authorities, the level of investment spending per property will more than match that for England and Wales over the period 1996-2006. PAGE 27
  • 30. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Appendix 1 Investment appraisal audit report: summaries Introduction This appendix summarises the results of three investment appraisal audits undertaken in September 2001 for the Water Industry Commissioner24. The aim of the audits was to determine the strengths and weaknesses of the water authorities’ investment appraisal processes and to identify good practice. The audit team chose a number of capital projects from each authority for audit. The projects were selected to include each stage of the investment appraisal process, as well as a range of different capital values. In all, 44 schemes were reviewed, with a total value of around £640 million. The audit The audit findings are based on both interviews with employees of each water authority (capital project managers or asset managers) and written documentation25. The audits covered the following areas: • investment review • investment strategy • project appraisal • project planning • post-project appraisal. Each of these stages was assessed against the following business competencies: • application of risk techniques, • robustness of information, • depth of analysis, • use of appropriate information technology. 24 The audits were carried out by a consortium of consultants including WS Atkins, Cap Gemini, Ernst & Young and Yorkshire Electricity. 25 The audit process was based on Yorkshire Electricity’s ‘Guide to investment appraisal’ document. PAGE 28
  • 31. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Audit results: Conclusions - The second weakness was that, in many cases, the initial costing of investment projects was poor. It was East of Scotland Water Authority unclear whether this was the result of poor information about costs or because of a lack of analysis and Investment review validation in review of investment needs. There was no written and only limited oral evidence of a clear process The audit team identified that there was generally to identify any uncertainties that could impact on insufficient challenge of the business cases presented. investment proposals. There was little evidence of analysis or verification of investment needs and problems to be addressed. Project appraisal In many cases the team noted that projects where the The audit team noted that investment appraisals of principal driver was environmental were not subjected some more recent projects were more robust. This is to a sufficient degree of scrutiny. It is good practice to encouraging. consider and evaluate other investment drivers to ensure that the best strategic option is selected. There was, however, no standard approach to investment appraisal. This meant that the quality of Investment strategy investment appraisals varied widely. The audit team found that improvements were being The quality of analysis of the whole life costs of made in this area. There was evidence, most notably investment projects was mixed. In some cases projects in water supply strategies, that existing assets were had not been compared on a net present value basis, being used more effectively. in others only the preferred option had been subjected to analysis of its net present value. The authority’s Integrated Network Management System allows investment to be prioritised in a The team also found no evidence of the use of systematic way. The information available from this sensitivity analysis. It is therefore not clear how system has also enabled network strategies to be managers could reliably select the best option for a developed. These strategies allow investment specific project. proposals to be developed in a more effective way. Even where assessment of a project’s net present value The audit team noted that projects with legislative was completed, it was not certain that the information drivers tended not to be included in the strategies. As upon which it was based was accurate. No evidence a result these investment projects did not benefit from was included as to the source of the cost information full and proper assessment in terms of business used. This lack of robust cost information was common performance criteria. This could result in reduced in the projects reviewed by the audit team. potential for capital efficiency. The weaknesses identified by the team included: The audit team identified two main areas for improvement. The first was that there was insufficient • there was no evidence that cost information was verified or challenged, challenge of projects for which the business case had been developed relative to other projects. At present, a • the cost database used in some projects was incomplete, business case is sufficient for an investment proposal to be accepted into the investment plan. This may result • assumptions were not documented fully, and in reduced potential for capital efficiency. • there was no clear link between the project appraisal and the overall project cost included in the investment plan. PAGE 29
  • 32. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Project planning Overview The audit team considered that performance of the The main weakness in the investment appraisal authority in this area was relatively strong. The process was that documentation was often inconsistent strengths that were identified included: and poorly managed. This weakness meant that important information about costs or net present value • the development of a risk register for most projects; analysis was unavailable. An incomplete paper trail • a robust approach to the value engineering of the makes it difficult to be sure that a robust decision project; and making process has been followed. •a structured approach to the approval of a procurement strategy. Several initiatives are underway which have the potential to improve the authority’s investment appraisal The team identified that project planning could be process. These included: improved if: • increasing the number of investment decisions • key information about a project was detailed in a based on network and asset base strategies; standardised formal brief; • increasing the use of risk-based decision making • key success factors were identified for each project; techniques in analysing strategies; and • efforts to standardise financial appraisal procedures • the process of project approval was more and the use of net present value analysis; transparent. • increased validation of the business case for investment projects; Post-project appraisal • further development of the capital cost database; and There was no evidence of post-project appraisal. This • the introduction of post-project appraisal. reduces the opportunities to learn lessons from the completion of a project. The team noted that the These important initiatives should resolve many of the authority carried out contract reviews on the completion issues identified during the audit. of a project to assess its delivery. Risk The audit team was able to identify some evidence that the authority used formal risk-based decision making techniques during the appraisal process. The team noted that risk-based tools were used to good effect in some of the strategies and value management workshops. One weakness stemmed from the fact that the performance criteria framework against which investment proposals were judged varied. This had an impact on the ability to compare investment options. PAGE 30
  • 33. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Audit results: Process summary - East of Scotland Water Authority Process stage Assessment Investment review • Has internal and external assessment been • Business cases are not subjected to sufficient undertaken during the investment review process? challenge - particularly when the principal driver is environmental. • Was the problem/need for the project clearly • Needs were identified, but with only limited identified? verification. • Do the strategic solutions/investment proposals • The Quality and Standards I report details all of take account of all obligations and standards the obligations and standards imposed on the imposed on the business? business. • Do the strategic solutions/investment proposals for • There does not appear to be an approved set of the asset base meet the strategic business plan business objectives. Proposals were assessed in objectives? terms of managers’ understanding of business objectives and key performance indicators. Investment strategy • Have the investment review outputs also been • The use of the Integrated Network Management used to determine the project proposals? System has allowed more effective prioritisation of investment proposals. • Are documented strategies in place to cover the • Good progress. The two main areas for main functional areas of the water and sewerage improvement are the challenge of projects and services (eg water resources, water treatment, costing of investment need. leakage, infrastructure)? Project appraisal • Has the preferred option been clearly defined in • The financial appraisal was weak. Some projects business, technical and financial terms? were not subjected to analysis of their net present value. Whole life costing was rare and assumptions were not documented fully. Project planning • What evidence is there of good project planning? • There was evidence of good use of risk registers and value engineering. • Improvements could be made through better processes, most notably in documentation of key information about projects. Post-project appraisal • Has post-project appraisal been undertaken? • No evidence provided. • Has the post-project appraisal been authorised to close the file on an investment project? PAGE 31
  • 34. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Audit results: Conclusions - Project appraisal North of Scotland Water A number of weaknesses were identified in this key Authority area: Investment review • In many cases, the source of the information used to project capital costs in the financial analysis was The audit considered the extent to which each project unclear. had taken account of legislative drivers, operational • The approach to whole life cost assessment and the issues and asset condition and performance. calculation of net present value was haphazard. For example, the team noted that: There was evidence that the authority analysed - on some occasions only the chosen option or a investment needs in some detail before including the minimal number of the options were assessed for project in the investment plan. There was a process to their whole life cost, challenge proposals, with evidence of robust analysis. - different discount rates (ranging from 6% to 10%) were used in different assessments, However, there was little evidence of procedures to - it was often unclear whether operating costs and/or maximise capital efficiency and no evidence of value capital maintenance had been included in the management. Of the capital projects examined, only whole life costing. one could be identified as having resulted in clear • Information on capital costs included in the efficiencies. investment plan did not appear to be clearly linked to the project appraisal. The authority is beginning to identify trends in asset • There was no evidence of appropriate use of and network performance. However, these initiatives sensitivity analysis, particularly for those projects are hampered by a lack of up-to-date, accurate and where either capital or operating costs were detailed information. uncertain. • There was no evidence that managers would ever Investment strategy question the information in the asset database. • There did not appear to be clear guidelines on There was evidence that investment needs were being appraisals. The result was that a comparatively low combined into regional or area strategies. value project could have the same level of appraisal as a high value project. However, the authority did not appear to analyse these strategies in sufficient detail. In particular, sufficient The audit team identified three strengths in the attention did not appear to be paid to factors beyond authority’s investment appraisals: the direct control of management. One exception to this was the Fort William PFI. • Objectives of the project were communicated clearly. • Each appraisal considered several options at a high The audit team found no evidence of clear and well level (including the ‘do nothing’ option). documented analysis of the needs that specific • The authority consulted extensively with external projects were intended to address. stakeholders. The audit team did, however, establish that investment proposals were making more use of a developing internal cost database and of the authority’s asset database. PAGE 32
  • 35. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Project planning Overview The audit team considered that best practice in There are significant opportunities for the authority as a investment planning was evident in all the projects whole to improve its performance by implementing best examined. However, the authority s performance would practice from one area of the authority in the other two be improved by introducing the following procedures: operating areas. Information systems in one area, for example, allow projects to be managed and appraised •a more standardised and structured approach to in a structured way. These systems could be applied compiling the risk register and to decisions about the elsewhere within the authority. Standardised document method of procurement; templates and checklists could help to provide a • a standard project brief detailing all of the key clearer, more auditable trail of project approvals. This information; system could also facilitate the development of • a system to track the progress of individual capital standardised option and appraisal reports. projects through the authorisation process; •a record of who had authorised and who had The audit team was pleased to note that there were a challenged individual projects. number of initiatives underway to improve the authority s investment appraisal processes. These Post-project appraisal included: Responsibility for post-project appraisal was delegated • developing strategies for water resources, the to the operating regions of the authority. Performance underground infrastructure and above-ground asset was mixed: the post-project appraisals in one area maintenance; were acceptable; in the second operating area, post- • introducing a standard design manual; project appraisals were weak and lacking in detail; and • increasing the emphasis on whole life cost analysis; in the third operating region there was no evidence of • ensuring that all investment appraisals are any attempts to carry out post-project appraisals. appropriately challenged - including those projects where the principal driver is environmental Post-project appraisal should include: legislation; • continued development of a capital costs database •a clear and objective assessment of whether the and of asset-specific operational costs; investment benefits have been realised, • implementing a new capital approval document •a detailed explanation of any over or under- template; achievement of the project benefits, and • introducing the Integrated Network Management • a robust process to ensure that lessons are learned System (INMS). for future capital projects. The team believes that these initiatives have the Risk potential to resolve many of the issues identified in the current audit. The audit team was able to identify little or no use of formal risk-based decision making techniques during the appraisal process. There was some evidence that the authority was beginning to apply risk matrices at a strategic level. While this is a positive development that is to be welcomed, the authority should at the same time establish a common understanding of risk. PAGE 33
  • 36. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Audit results: Process summary - North of Scotland Water Authority Process stage Assessment Investment review • Has internal and external assessment been • Some consideration has been given to legislation, undertaken during the investment review process? operational issues and asset condition and performance. • Was the problem/need for the project clearly • Full compliance across all projects. identified? • Do the strategic solutions/investment proposals • The Quality and Standards I report summarised the take account of all obligations and standards obligations and standards imposed on the business. imposed on the business? Links to specific projects were not always as clear. • Do the strategic solutions/investment proposals for • No specific link was made to the strategic business the asset base meet the strategic business plan plan objectives. Managers did refer to the strategic objectives? business plan when describing projects. Investment strategy • Have the investment review outputs also been • Not yet in place, although there was evidence that used to determine the project proposals? the authority was beginning to introduce such a link. • Are documented strategies in place to cover the • This is still the exception rather than the rule. The main functional areas of the water and sewerage audit found evidence in a few cases. There was services (eg water resources, water treatment, some evidence that the authority was beginning to leakage, infrastructure)? consider investment and operation of assets in a more strategic way. Project appraisal • Has the preferred option been clearly defined in • Significant weaknesses identified both in the detail business, technical and financial terms? of the appraisal and in the range of options considered in detail. Project planning • What evidence is there of good project planning? • Generally sound, but improvements could be made to standardise procedures and to ensure that progress of projects through the approvals process is easier to track. Post-project appraisal • Has post-project appraisal been undertaken? • One region does not carry out any post-project investment appraisal and a second region conducts only a cursory review. The third area’s post-project appraisal was broadly acceptable. • Has the post-project appraisal been authorised to • No evidence provided. close the file on an investment project? PAGE 34
  • 37. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Audit results: Conclusions - • clear analysis of options using net present value; and West of Scotland Water • detailed consultations with external stakeholders. Authority The team did also note that the appraisal process was the same irrespective of the size of the project. The Investment review weaknesses in the investment appraisals included: The audit team was impressed by the thoroughness with which issues of environmental or public health • sensitivity analysis of projects was, at best, ad hoc; compliance were identified and validated. However, the • there was little peer group review; team noted that, as in the other two authorities, this • insufficient account was taken of the information on asset condition and performance that was available; assessment was carried out in isolation. As a result, and opportunities were lost to consider other drivers for investment at the same time. The situation relating to • capital and running cost information was not challenged or verified. investment needs that were not driven by legislative compliance was quite different - in such cases there Project planning was no clear evidence of any structured analysis or validation of need. The audit team considered that project planning was a relative strength of the West of Scotland Water Investment strategy Authority. Some areas that could be improved include: Investment proposals were managed discretely and there was no evidence that managers had considered • a structured process to facilitate the identification of capital efficiency initiatives; whether proposed projects could be grouped together to form more cost-effective strategic solutions. • a systematic use of risk registers; • more challenge of the plan; and In general, the audit team considered that performance • establishing clear success criteria for projects; in the area of investment strategy was weak. There The team also considered that there was an important were a number of issues that should be addressed: and urgent need to address the process of authorisation of capital projects. In many cases there • the lack of asset and network strategies; was a lack of a clear authorisation and agreement to • the lack of a cost database for initial estimates of proceed. There was no information available on the scheme costs; existence of delegated authorities and their appropriate • more robust analysis in place of discussion of needs; use. • more consideration of those factors beyond management control; and Post-project appraisal • improved documentation relating to the need for investment. A post-project appraisal process appeared to be in place, although the evidence available to the audit team Project appraisal suggested that appraisals were not regarded as a priority. They were not completed in all cases. The The audit team saw a very mixed performance in appraisal consisted of a ‘customer satisfaction’ project appraisals. The team considered that questionnaire that focussed on the delivery of the appraisals typically had good and thorough technical project. and financial appraisals. The main strengths were: • clear definition of project objectives and scope; • a standard approach to the proportional allocation of costs to investment drivers; PAGE 35
  • 38. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 The post-project appraisal often lacked key data (such In general, the audit team found that documentation of as the original project estimate and actual cost) and in older projects was poor. There was some evidence of many cases there was no assessment of whether the attempts to introduce standard documentation and to planned investment benefits had been delivered. impose a degree of quality control. These initiatives Although the appraisals noted lessons to be learned, seemed to have had mixed success. it was unclear how, if at all, these lessons were made available outside the project team. A number of other initiatives are also in hand. These include: Risk • to adopt a more strategic approach towards There appeared to be no common understanding of investment in the network and asset base; the importance of taking account of risk in developing • more systematic use of a cost database; and implementing an investment programme. • systematic use of standard risk registers; • improvements to standard documentation templates; The team found only limited evidence that the authority and used risk-based decision making techniques during the • the introduction of risk-based decision making appraisal process. techniques throughout the investment appraisal process. Overview As with the other three authorities, successful There were some areas of strength but also some implementation of these initiatives would resolve many significant weaknesses. In common with the other of the issues identified during this audit. authorities there appears to have been weaknesses in processes; this manifests itself in a lack of consistency. The quality of investment decisions seemed to depend directly on the team responsible. PAGE 36
  • 39. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Audit results: Process summary - West of Scotland Water Authority Process stage Assessment Investment review • Has internal and external assessment been • Clear evidence that legislation has been undertaken during the investment review process? considered, but lack of evidence in other areas. • Was the problem/need for the project clearly • Needs - especially for projects where the driver is not identified? legislation - could be more systematically identified. • Do the strategic solutions/investment proposals • The authority’s input to the Quality and Standards take account of all obligations and standards process appeared to be robust. imposed on the business? • Do the strategic solutions/investment proposals for • Only limited evidence - projects are typically the asset base meet the strategic business plan managed discretely and not as strategies. objectives? Investment strategy • Have the investment review outputs also been • Complies. used to determine the project proposals? • Are documented strategies in place to cover the • Very limited evidence, with verbal confirmation of main functional areas of the water and sewerage need for strategies. services (eg water resources, water treatment, leakage, infrastructure)? Project appraisal • Has the preferred option been clearly defined in • The financial and option appraisal of projects is business, technical and financial terms? good. However, there is a need for more peer group review and a proper use of sensitivity analysis. • Capital and running cost information needs to be improved. Project planning • What evidence is there of good project planning? • Planning was sound but there was a need for a more systematic use of risk registers and assessment of the opportunities for capital efficiency. Post-project appraisal • Has post-project appraisal been undertaken? •A mixed picture was evident. There is a formal process but this does not appear to be a priority. There is no obvious way in which lessons learned can be communicated beyond the team • Has the post-project appraisal been authorised to responsible. close the file on an investment project? • No signatures on any post-project appraisals. PAGE 37
  • 40. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Appendix 2 Asset condition and Sewers performance grades Condition grade General meaning 1 Very good No structural defects. This appendix provides the detailed definitions of the asset condition and performance grades that we 2 Good For brick sewers (< 3 ring) require the water industry in Scotland to use in their Minor cracking or no deformation or loss annual regulatory return to our office. of bricks and mortar loss confined to surface and line and level as built and connections satisfactory. These are consistent with those used by Ofwat in the For other sewers instructions for their June return. Circumferential cracking or moderate joint defects. Asset condition grades 3 Adequate For brick sewers Deformation 0-5%, no fracture and only Water mains moderate mortar loss or displaced bricks or total mortar loss without other defects or occasional defective connections. Condition grade General meaning For other sewers Deformation 0-5% and cracked or 1 Very good Modern pipe material designed to fractured or longitudinal/multiple cracking current standards with no evidence of or occasional fractures or severe joint internal or external degradation. No defects or minor loss of level or badly bursts have occurred. made connections. 2 Good As condition 1, but not designed to 4 Poor For brick sewers current standards in respect of pressure Deformation 5-10% and fractured or total ratings, design specification or corrosion mortar loss or small number of missing protection. Deterioration causing bricks or displaced/hanging brickwork or minimal influences on levels of service. moderate loss of level or frequent badly There is less than 1 burst/km/yr of main. made connections or dropped invert. For other sewers 3 Adequate Water mains are generally sound. Deformation 5-10% and cracked or However, a few pipewall or joint failures fractured or broken or serious loss of or evidence of some external or level. internal degradation. Some deterioration beginning to be reflected in levels of 5 Very poor For brick sewers service. There are less than Already collapsed or deformation > 10% 3 bursts/km/yr of main. and fractured or extensive areas of missing bricks and/or displaced/hanging 4 Poor Water mains with a significant level of brickwork or missing invert. joint failures or evidence of significant For other sewers external or internal degradation or likely Already collapsed or deformation >10% to cause a marked deterioration in levels and cracked or fractured or broken or of service. Some asset replacement or extensive areas of missing fabric. rehabilitation needed within the medium term. There are between 3 and 5 bursts/km/yr. 5 Very poor Unsound water mains with extensive pipe failures, or significant external or internal degradation. There are more than 5 bursts/km/yr. PAGE 38
  • 41. WATER INDUSTRY COMMISSIONER FOR SCOTLAND Classification for civil structures & buildings Asset performance grades sub-assets Water mains Condition grade General meaning Performance General 1 Very good Sound modern structure, well grade meaning maintained in ‘as new’ condition. 1 Excellent Smooth bored mains and communication 2 Good Sound modern structure, well pipes not subject to corrosion or with maintained, but showing signs of minor sound factory applied linings, no wear and tear and/or deterioration of operational performance problems. surfaces. No evidence of corrosion in structural steel components. 2 Good As 1, but with loose deposits that are noticeable under abnormal flow 3 Moderate Functionally sound structure but conditions, slight tuberculation which may appearance affected by minor cracking give a rough surface, but does not or staining, but no leakage to/from substantially reduce the cross-sectional vessels with potable water. Buildings area of the pipe. May require routine have more than superficial wear and tear flushing or air scouring. as columns are affected by rust staining, minor cracking of brickwork or masonry, 3 Moderate Some problems with loose deposits or with barely adequate pointing. Minor deterioration of linings leading to leakage to/from vessels not containing occasional complaints. Risk of quality potable water. failure. Pipe with tuberculation causing up to 20% blockage by encrustation. 4 Poor Structure functioning and just safe but with problems due to significant leakage, 4 Borderline Frequent problems causing complaints, cracking, spalling, loss of stability or water quality known to have failed on deformation. Buildings have roof leaks, more than one occasion under normal rising damp, rotting structural woodwork, operating conditions during previous decayed brickwork or pointing. Corrosion twelve months. Mains with tuberculation substantially reducing size of structural causing 20-40% blockage by member(s). Danger of contamination of encrustation. potable water. 5 Fail Mains suffering severe problems of 5 Very poor Out of commission because unsafe to infestations and loose deposits. Water use, corrosion causing significant quality cannot be ensured. Mains with reduction in size of structural member(s) tuberculation causing >40% blocking by and overstressing, contamination of encrustation. potable water has been a serious problem. Note: For water mains, references to water quality do not apply to non-potable water. PAGE 39
  • 42. INVESTMENT AND ASSET MANAGEMENT REPORT 2000-02 Sewers Sewage treatment works Performance General Performance General grade meaning grade meaning 1 Excellent Properly designed, with self-cleansing 1 Excellent Hardly ever has a sanitary determinant velocity, no deposition or operational failure and no more than 20% of look-up performance problems. table allowance where more than 100 samples are taken per year. No non- 2 Good As 1, but with sliming or minor deposition sanitary failures. causing some hydraulic loss of pipe capacity. 2 Good More than 20% and less than 50% of look- 3 Moderate Sewers with some sliming and deposition, up table allowance for sanitary determinant minor backfalls causing loss of pipe failures. No non-sanitary failures. capacity and surcharging of sewer at times of peak flow. 3 Moderate Some cause for concern. More than 50% of look-up table allowance for sanitary 4 Borderline Sewers which need to be occasionally determinant failures, but still a slight margin cleaned out to prevent blockages, for further failures before becoming blockages within sewer occurring less than borderline (Grade 4). No non-sanitary 1 in 5 years due to silting, which can lead to failures. external flooding of property. 4 Borderline Cause for concern, due to isolated but 5 Fail Sewers requiring excessive desilting, or explainable breaches of the consent. The other excessive maintenance to prevent next failure of sanitary determinant will flooding of property or premature operation cause failure of consent. No non-sanitary of storm overflows. failures, although there is less than 5% margin on any one determinant during the last year. Above-ground assets 5 Fail Recurrent consent failures on either Performance General sanitary or non-sanitary determinants or grade meaning exceedance of discharge rate. 1 Excellent Meets all design and statutory requirements at all times and under all demand conditions. Meets authority’s internal standards at all times in terms of performance. 2 Good As 1, but shows minor performance shortcomings in non-critical aspects or under extreme demand or climatic conditions. 3 Moderate Asset meets all statutory and performance criteria under all normal conditions, but has minor shortcomings under extreme operational or climatic conditions. 4 Borderline Performance or operational shortcomings have a significant effect on asset function/effectiveness when capacity exceeds 115% of average throughput or major shortcoming on one or more key aspects. 5 Fail Substantially incapable of meeting externally imposed and authority’s internal standards except under normal or reduced operating conditions. PAGE 40
  • 43. Water Industry Commissioner for Scotland Ochil House Springkerse Business Park Stirling FK7 7XE telephone: 01786 430 200 facsimile: 01786 462 018 email: enquiries@watercommissioner.co.uk www.watercommissioner.co.uk March 2003

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