Water Services – a Scottish Model?

Post by Prof Sarah Hendry

Water services is the issue of the day! Having seen so much coverage of the sewerage and surface water issues in the last year, the last few days has expanded that to widespread critique of the whole model, not just for Thames Water but across the sector in England. Currently, and I am trying not to be smug, the UK media is full of comments about Scotland providing a better model for service delivery than England. I have spent much of my career making that argument; that a public service could be as good as one in private ownership; and perhaps even better. Although some private sector participation is found in many parts of the world, the ‘English model’ of divestiture of the assets is rarely found. So it might be a good time to remind ourselves of the history of Scottish Water, and whether the differences – and the similarities – might provide some clues to the sorry state of affairs ‘down South’.

Some forty years ago, John Major’s government did not divest Scotland’s water services. As someone who campaigned to ‘Keep Scotland’s Water Public’ – we ‘won’. Arguably, the system was in such a poor state that no investor would have bought it – but either way, the assets remained in public ownership. Under the Local Government (Scotland) Act 1994, three regional authorities were created; in addition, Build-Own-Operate-Transfer schemes were enabled to bring private finance into the construction of wastewater treatment plants, implementing the Urban Waste Water Treatment Directive.

Some twenty years ago, after the Scottish Parliament was established, the Water Industry (Scotland) Act 2002 created Scottish Water as a public corporation, responsible for delivering all of Scotland’s public water and wastewater services. In 2005, the Water Services (Scotland) Act established the Water Industry Commission, the equivalent of Ofwat. After a difficult period of adjustment to the new regime, when Scottish Water was in the lowest quartile in every operational area compared to the English companies, Scottish Water has performed increasingly well.

The Water Industry Commission oversees a six year business planning cycle involving all the regulators, the Government, and an Independent Customer Group; this is not dissimilar to the business planning overseen by Ofwat. In addition to the Water Industry Commission, Scottish Water is regulated by the Scottish Environment Protection Agency (the equivalent of the Environment Agency in England) for abstraction of raw water and for discharges from UWWT works; and by the Drinking Water Quality Regulator (the equivalent of the Drinking Water Inspectorate).

So the names are different, and some details of the remits, but the broad regulatory model remains the same as that in England and indeed Wales. Similarly, at least until now, the standards applied have been the same, deriving from EU law, on drinking water, waste water treatment, and more broadly around the Water Framework Directive and related rules. Scottish Water, as with the large English (and Welsh) providers, is a stakeholder for river basin planning and its activities are key to both water quality and water quantity.

What then are the differences? The simplistic answer is the absence of private shareholders, and more generally a profit motive. In the past, I have argued that regulation, not ownership, is the key. A properly regulated entity should provide a service that meets the needs of its customers, maintains its systems, meets regulatory standards, and has a surplus for appropriate future investment. Whilst personally I do think water services should be in the public sector, a realistic and stable dividend to shareholders may not make that impossible. Scottish Water could be required to pay a dividend to its owner, the Scottish Government, if its surplus is more than required for its investment plans. Arguably, Ofwat has not been successful at controlling the companies (and perhaps that is also true in energy, and rail, and telecoms – all the big service sectors divested in the 1980s on the same model). That might be because its powers are deficient, or it might be some version of regulatory capture; better regulation might still be the solution.

Another important difference is scale. Geographic scale – Scotland is not much smaller than England, but with a tenth or less of the population. This low population density means that many services are provided across a much wider land area, which in practice makes the service more expensive to provide. There is also what we might call ‘jurisdictional scale’ – the small population, a relatively integrated public administration, and also having only one entity to regulate. That is in itself very beneficial for a regulator, but linked to that, at least in the last decade, there has been a genuine ‘pulling together’ between the entity, its regulators and the wider civic sphere. The absence of private financial interests has enabled a coherent message between the service provider, the government, the regulators and the customers which is not tainted by negative perceptions of profit and external beneficiaries.

This is not a call for England to re-nationalise, necessarily; it is not my place to make that call. But a more complex answer to the differences would look at the underlying business environment, and at wider questions of governance beyond regulation as such. Scottish Water has debt – historic debt, and current borrowings. This is public sector borrowing, which the English model has prioritised avoiding. But there would be no question of Scottish Water being able to massively extend its debt in the way that Thames and others have done. The equity to debt ratio has been allowed to reach an unmanageable place, especially as interest rates are rising. There are problems in Scotland too; of course. There are sewage overspills; there will be need for significant investment, especially in wastewater treatment; there are water scarcity problems on the horizon; there are issues around affordability within a completely different model of billing and charging. But the system is not poisoned. It has broad support and there is therefore a good starting position for making difficult decisions with wider buy-in from the public. That is clearly and visibly lacking in England and will make addressing all the 21st century challenges in the environmental sphere infinitely harder to achieve.