The Scottish Water Experience
Observations & opinions of John Mackie from a week long study of Scottish Water, May 2010.
S...
Key Results
It is a matter of historical record that Scottish Water has achieved outstanding results since
the date the co...
- Scottish Water Horizons is a non-regulated part of the business that has three main
divisions within it;
o Horizons Envi...
Scottish Water Finance
The asset value of all water infrastructure managed by Scottish Water is around £40B MEAV
(modern e...
ICC - Intelligent Control Centre and WMS – Water Management System.
Seven former regions areas are now managed as four and...
Capital Procurement
Scottish Water Solutions 2 and Capital Investment Delivery team.
Over the current regulatory control p...
Conclusions
This study tour of Scottish Water has confirmed for me the findings of the 2008 International
Asset Management...
Acknowledgements
Special thanks go to the following individuals and organisations who freely contributed their
time and re...
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The Scottish Water Experience - Final Oct 2010 Water Journal

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The Scottish Water Experience - Final Oct 2010 Water Journal

  1. 1. The Scottish Water Experience Observations & opinions of John Mackie from a week long study of Scottish Water, May 2010. Scottish Water’s Vision: “Our vision is to becomeOur vision is to becomeOur vision is to becomeOur vision is to become Scotland’s most valued and trusted business, oneScotland’s most valued and trusted business, oneScotland’s most valued and trusted business, oneScotland’s most valued and trusted business, one that we can all be proud of.”that we can all be proud of.”that we can all be proud of.”that we can all be proud of.” Background Industry observers have long followed the fortunes of Scottish water utilities as a disparate collection of around 430 boards, town councils and counties, each providing water services in the 1960’s, were transformed into Scottish Water, a single progressive water utility, in 2002. In the process they have succeeded in driving down costs and improving service levels sustainably across all aspects of their business, while avoiding the temptation to privatise the sector as their near neighbours in England and Wales had done in 1989, when all of the assets in the 10 regional water and sewerage companies were divested to private utility companies. Scottish Water, although established as a limited liability company and governed by an independent board of directors, remains 100% in public ownership with all shares held by the Scottish Parliament. This one company effectively and efficiently delivers water and waste water services to all of Scotland’s five million inhabitants. While announcing the forward legislative programme on 8 September 2010, Scottish First Minister, Alex Salmond praised the performance of Scottish Water and said that he wanted to build on that success by giving them room to grow and help create the world’s first hydro-economy. The First Minister outlined a bill that will give Scottish Water statutory authority to partner with other firms to build a wide range of renewable energy projects, such as wind farms and hydro-electric power plants. This move could enable the company to generate over £300m a year in additional revenue from renewable energy sources by utilising the 80,000 acres of land it controls. This demonstration of confidence in Scottish Water by the Parliament indicates that the ownership, governance and regulatory balance is working very well and delivers very good value to the nation’s water customers. This paper presents the main findings from a week long study tour to Scottish Water and the water industry regulator during 3-7 May 2010, which was undertaken to gain first-hand knowledge of how these significant improvements were achieved and what lessons could be brought back and applied in a New Zealand context. Quick Facts about Scottish Water • First piped water in Edinburgh in 1676 • Scottish Water Established in 2002 • 1 company serving entire country • Wholly owned by Scottish Parliament • Serves 5 million customers (2.4 M households) • >£1 billion annual turnover • £500 M pa capital programme • 3,700 employees • 280+ water treatment works • 47,000 kilometres of water mains • 1800+ waste water treatment works • 50,000 kilometres of sewers • 844 m litres of drinking water a day • Funded 85% by water charges • 15% funded by Govt borrowing • Heavily Regulated by; • The Scottish Executive • Water Industry Commission for Scotland (WICS) • Scottish Environmental Protection Agency (SEPA) • Drinking Water Quality Regulator (DWQR) • Water Watch Scotland (funded by SW) • Plus Government Health & Safety and Audit Offices
  2. 2. Key Results It is a matter of historical record that Scottish Water has achieved outstanding results since the date the company was formed in 2002, from the three former Water Authorities that immediately preceded it. The following is a summary of some of Scottish Water’s key results achieved since inception: · Operating costs have been reduced by 40% · The staff headcount was reduced by over 40% in the first 4 years since establishment · The initial £2.3b capital programme was delivered for £1.8b in the first regulatory period · Annual bills were kept 0.5% below the retail price index (RPI) in the last four years · Future bill target is set to 1% below (RPI) for each of the next 5 years · There was a significant increase in the measured Service Performance standards · Leakage reduction targets have been exceeded · The average household bill is around 10% below the average bill in England and Wales. Ownership and Governance Scottish Water is a public company wholly owned by the Scottish Parliament and governed by a board of 13 directors. The board, chaired by Ronnie Mercer, is comprised of five executive and eight non-executive members. The eight independent non executive members bring a broad range of skills from the energy, financial, construction, banking and property sectors. The five executive members include the Scottish Water Chief Executive, Richard Ackroyd and four directly reporting Directors (Asset Management, Finance, Commercial and Customer Service Delivery). The Scottish Water business is comprised of four main divisions being; - The regulated core business delivering water supply and wastewater services across Scotland - Scottish Water Solutions, who are responsible for the delivering the capital programme using a mix of in-house and external capital delivery partners
  3. 3. - Scottish Water Horizons is a non-regulated part of the business that has three main divisions within it; o Horizons Environment – involved in the beneficial reuse of green waste & biosolids & green energy projects o Horizons Hydro Energy – including hydro and micro-hydro schemes o Horizons Utilities – formerly Scottish Water Contracting involved with utility construction services and fibre broadband. o Business Stream – the competitive retail arm which was opened to competition in 2008, offering packaged water services to commercial and industrial customers. Role of the Regulator Water Industry Commission for Scotland (WICS) The first visit of the tour was to Stirling to meet with Alan Sutherland, Chief Executive of the Water Industry Commission for Scotland, to gain an understanding of the drivers for change in the Scottish water industry and how the relationship with Scottish Water has matured over the eight years since the creation of a single water company in Scotland. Alan outlined the two main drivers for the creation of a single Scottish Water company; 1. Water bills would have needed to double in North of Scotland Water to meet new European water quality directives and environmental requirements due to the sparse population and high number of small and remote plants. 2. There were notable differences of service accountability between the three former water authorities in North of Scotland, West of Scotland and East of Scotland. The commissioner and the Scottish Parliament considered a merger to be a good idea but resisted some calls to adopt either a privatisation or a mutualisation model. Since 1999, Alan Sutherland has been the Water Commissioner for Scotland, and it was only in 2005 when he acquired a 6 member board (with 5 non-executive members). The Commission now has a support staff of 24. In the 4 years following the Scottish Water merger of 2002, staff numbers were reduced from 6,500 to 3,700. The former three water entities were operating as separate water authorities located in the west, east and north of Scotland. The western area, based in Glasgow, had a strong labour focus, Edinburgh in the east were more innovative and had dropped the authority title, while the north, with fewer resources and a more sparse rural population (which included the highlands and islands), largely retained their traditional regional approach, but were facing huge costs for the capital upgrades that were required to meet water quality standards. For the first 6 or 7 years from commencement, the language between the regulator and water company was described by the Commissioner as intemperate, as some of the ambitious targets being set by the Commissioner were considered unrealistic. But this relationship has matured as Scottish Water has developed and demonstrated their capability over time, giving the WIC more confidence in their ability to deliver quality programmes on time, on budget and at agreed service standards.
  4. 4. Scottish Water Finance The asset value of all water infrastructure managed by Scottish Water is around £40B MEAV (modern equivalent asset value) and they have an annual turnover of around £1B. The initial asset value was treated as a “Deemed Cost” at the start up of Scottish Water in 2002, and only new assets appear on Scottish Water’s balance sheet (around £5B). Although there is a regulatory requirement to achieve a surplus, there is no requirement to return a dividend to the Scottish Parliament. All surpluses are reinvested back into the business and out-performances are retained in what is termed a “Gilts Reserve” which can be used as a “shock absorber”, with the consent of the regulator, to off-set any unforseen events that could adversely impact customer prices. Scottish Water is funded 85% from customer billing and 15% borrowings (at interest) from the Scottish Parliament who are currently the sole provider of capital for the company. For the current regulatory control period it is expected that they will invest £140 million each year through to 2014/15. A major issue for Scottish Water is that their provision for doubtful debt was not recognised by HMRC (Her Majesty’s Revenue and Customs) for tax exemption purposes as local councils collect their revenue through an agency agreement based on property value (as there is no universal metering). As a result, they carry a £300M provision for impairment of trade receivables. There are ongoing discussions with HMRC to resolve this. Unlike New Zealand, Scottish Water does not have the legislative powers to collect bad debts from defaulters and also has limited ability to discontinue supply for health reasons. Despite this, their surplus before tax in 2010 was £130.5 M (against £190.1M in 2009), exceeding the regulatory target by £12.1 M. Smart Technology Solutions Part of the reason for Scottish Water’s success was leveraging smart technology into their new business processes and workflow management systems. Efficiently managing over 30,000 reactive and routine work order tasks undertaken every month across Scotland requires some careful planning and scheduling using some very powerful work management and dispatching systems. Mobile computing trials first began in Edinburgh and were incorporated with their Customer Relationship Management (CRM) system (“Promise” from Oracle). This application was purchased “off the shelf” and business processes were adjusted to fit application rather than altering the application to fit their process. Oracle met the challenge to deliver a working product within 12 weeks. An advanced scheduling tool named “Click” was integrated with the CRM which provides advanced telematics in vehicle. The daily work diaries of over 600 operatives across the country are pre-populated by the system based on the current planned workflow and reactive maintenance service requests. These are then incorporated into the work scheduler and electronically dispatched to work crews, according to their service response priority. It was apparent from a visit to the control room in Glasgow, that it was no more difficult to manage service requests for an entire country than it is for a single city. It’s only a matter of scale, and economies of scale in this operation were immediately evident. Two telemetry open enterprise (OE) SCADA systems are utilised;
  5. 5. ICC - Intelligent Control Centre and WMS – Water Management System. Seven former regions areas are now managed as four and a planned move to implement intelligent alarms, using a form of artificial machine intelligence, will further reduce unnecessary call outs and the resulting overtime they attract. This means that work crews can move to a 1 week in 6 or a 1 week in 8 standby regime, instead of 1 in 3 or 4, thus improving work-life balance for staff. All of the organisation’s critical documents are held in their “Documentum” document management system (From EMC), which is used for hosting and content management of various documents and procedures across the enterprise. A single mobile gateway, Oracle Mobile & IMS, went live in Feb 2009 across the country. This is used by 150 Electrical & Mechanical staff, 600 field staff and is run by 40 back room support staff. After its introduction, Service Level Agreement compliance went from 40% to 75% within a year and more jobs are now closed off, much sooner. Dispatched to Field Vehicles via Telematics Oracle Mobile & IMS – to 600 field staff. SLA compliance Improved from 40% To 75% in 1 yr
  6. 6. Capital Procurement Scottish Water Solutions 2 and Capital Investment Delivery team. Over the current regulatory control period, 2010-15, Scottish Water is financed to deliver an annual £500M capital programme. Around 65% of the capital programme is now delivered by an In-house Capital Investment Delivery (CID) team based at Alba Campus in Livingston with 20% via a joint venture arrangement with private partners known as Scottish Water Solutions 2. The remaining 15% covers IT, Fleet and Property spend that is managed within departments. There is less reliance on Private Public Partnerships (PPP’s) or Private Finance Initiatives (PFI’s) now than when Scottish Water commenced in 2002, as they have built a strong in- house delivery team and project management office over the years with the capability to manage and deliver multiple high value, complex projects. In discussions with the regulator, Alan Sutherland made the point that some arrangements entered into during the late 90’s were due to inaction by former Councils and there was a lack of time and money to deliver necessary improvement works. PPP’s were used to expedite capital programmes, but since that time, expertise has been built up within Scottish Water to manage the capital programme in-house. Some of the early PPP’s were not great deals in his view, but at the time, there were few alternatives. New Initiatives for 2010-15 The Delivery Plan prepared by Scottish Water for the 2010-15 regulatory control period is based on delivering their vision through six key outcome areas or “Aspirational Pillars” which are; Serving – Growing - Responsible – Leading – Committed - Strong The following is but a few of the initiatives outlined in the 2010-15 delivery plan that require to be delivered while water bills are held at 1% below CPI for the next 5 years. Climate Change Impacts – It has been assessed that £40M of assets are at risk due to climate change impacts and some work on adaptation is programmed in the next 5 years. £15 M has been provided for initial work relating to Climate Change (Scotland) Act compliance and capital requirements. There is also a target to reduce carbon emissions by 42% by 2020 and 80% by 2050. Water Metering – A £7 M domestic metering trial is funded in the next regulatory period and will include an assessment of smart metering. Only 4-500 domestic customers are currently metered – domestic metered tariffs are not attractive enough to encourage voluntary uptake. Leak Reduction – £29 M has been provided for a leak reduction programme to reduce leakage by 1/3rd by 2014 Water Quality Improvements - £263M has been allocated for ongoing improvements in drinking water quality. Edinburgh Trams Project - £8 M has been allowed to shift water and sewer pipe infrastructure from tram lanes currently under construction. This is effectively a transport cross-subsidy imposed on water customers due to current legislation and legal arrangements. Capital Programme – A £500M annual capital programme is funded for each of the next 5 years.
  7. 7. Conclusions This study tour of Scottish Water has confirmed for me the findings of the 2008 International Asset Management Process Benchmarking Project undertaken by IWA-WSAA, which concluded that top performing water utility businesses had three common attributes, which were: 1. That they were large organisations with a large customer base; 2. They were run commercially with an independent, non-political board; 3. That they operated in a well regulated environment. Scottish Water has all three of these attributes and their results appear to prove the rule. While progress in achieving outstanding results in both costs and performance is undeniable, the outside observer is quick to spot one major flaw in the model and that is the ownership of revenues and method of collection. Continuing to use local Councils to collect water revenue on a capital value basis through an agency agreement will be a major impediment to controlling revenue management and water demand management. The metering trials that are planned in the current regulatory period are likely to influence future policy direction on this aspect of their business. The recent announcements by Alex Salmond, the First Minister for Scotland, paves the way for Scottish Water to further improve their service performance and financial results by freeing up legislative barriers for the company to enter the renewable electricity generation market and provide easier access to capital markets. The Scottish Parliament has also stressed that there is no prospect of privatisation of Scottish Water on their agenda. One would have to ask why it ever would be, while the company is demonstrably returning best value to customers. With the recent advent of the first super-city in New Zealand and a single water utility, Watercare Services Ltd, providing water services to 1.4 million residents in Auckland, it seems illogical that the remaining 66 council run water departments would continue to provide water services to the rest of the country in an efficient and sustainable way. The arguments that are likely to be mounted here against adopting a similar model are likely to be very similar to those that were heard in Scotland at the time of the merger – “we’re different”, “we’re too remote”, “water is a human right”, “it’s privatisation” – none of those fears were realised in Scotland. There are clear benefits in capturing the economy of scale that a larger organisation(s) could bring with the resources we have available, particularly where there is clear corporate governance and accountability to a central regulator. While this is not to suggest that one water company would be the best fit for New Zealand, but perhaps a smaller number based on regional communities of interest would be better than 66. Now seems like a very appropriate time to open up the debate on water governance in New Zealand with the recent release of the Land and Water Forum Report: “A Fresh Start for Freshwater”, which advocates a number of changes that have proved to be successful in Scotland, such as the creation of a (land and) water commission, revising the role of the Environmental Protection Agency, embarking on a review of water service delivery and volumetric pricing of water, amongst others. With that said, Scottish Water does provide the basis of a sound model that New Zealand could take a lead from as it offers clear benefits to customers by way of stable pricing, improved service levels and quality, without the need for wholesale privatisation of water services which is as unpopular in New Zealand as it is in Scotland.
  8. 8. Acknowledgements Special thanks go to the following individuals and organisations who freely contributed their time and resources to assisting with my visit and this paper; Alan Sutherland, Katherine Russel, Ian Tait, John Simpson, Donna Very (WICS), Tom Aitcheson, Annalee Sutherland, Murdo McLeod, Bill O’Fee, Dorothy Marsh, Sandra Elgin (City of Edinburgh Council), Richard Ackroyd (CEO Scottish Water), Geoff Aitkenhead (Asset Mgmt Director SW), Nicky Rennie, Neil Hemmings, Brian Straithie, Gillian McFarlane, Mark Dixon, Kenny Laing, Paul Maxwell, Nigel Ayton, Tony Newall, Keith Phillips, Mark McEwan, Campbell Connor, Ken Hutchison, Robert Stewart, plus Neal, Stephen, Richard, Ian, Peter and many more personnel at Scottish Water who contributed to presentations and discussions during my visit. John Mackie MIPENZ, CPEng, REA, B.AppMgt Dunedin, New Zealand.

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