Water Industry Commission for Scotland

The Water Industry Commission for Scotland (WICS) is the economic regulator of water in Scotland. It is a non-departmental public body appointed by the Scottish Executive The WICS is made up of a Chief Executive, Alan Sutherland, a Chairman, Sir Ian Byatt and four other members. The remit of the WICS is to set budgets for Scottish Water to deliver the Ministerial Objectives. Their statutory duty is to ensure lowest financial cost for the customers of Scottish Water, whilst still ensuring that the Ministerial Objectives set for Scottish Water, by Scottish Executive Ministers, are achieved. This is a balancing act that places on them a great deal of influence. Their influence can, and indeed has, led to tensions between different actors within the sector of water in Scotland.

Background

In 1999 the post of the Water Industry Commissioner (WIC) was created. Alan Sutherland was appointed to the role. His remit was to advise the Scottish Executive on the charges that the Water authorities could/should set for their customers. After the Water Industry (Scotland) Act (2002) the Commissioner continued in this advisory role, though this time it was the newly formed Scottish Water that he would advise. The advisory role in itself was an influential role. Since the Water Services (Scotland) Act (2005) this influence has been increased. With the act now giving statutory powers to the newly formed six person commission to set charges for customers and the budget for the capital investment programme, to be implemented by Scottish Water. This has effectively transferred a great deal of power to shape the future of water provision in Scotland from Parliament to the WICS. Which is in contrast, arguably, to the founding principles of the Scottish Parliament of accountability, openness, transparency and bringing parliament and decision-making closer to the people. This dilution of democratic control is illustrated in the decrease of cross-sector/society representation on the board of Scottish Water. This is in contrast to the composition of the three regional water authority boards prior to the formation of Scottish Water in 2002.

Neoliberal ideologues

Some of the members of the commission have links with right-wing free-market think tanks and institutes. These links are with organisations who advocate competition and free-market principles in every sphere of society, including water. The members of the WIC come from a similar background: which is rooted in economics and/or the private sector, either in the water industry itself or elsewhere. However, having the Commission made up of economists with an expert knowledge of the water industry is in line with recommendations by the Better Regulation Task Force (BRT), a government appointed body made up of business people. They said in 2001 that: ‘The boards of regulatory bodies should include both executive and non-executive members. They should be appointed for their expertise rather than to represent stakeholder groups’

There are concerns that the absence of stakeholders and the predominance of experts, namely economic experts with a neo-liberal ideology, may well make the regulator unresponsive to the needs of customers. Further, there is genuine concern that the WICS may use their powerful position in the regulatory framework to shape an industry ripe for private takeover. In setting budgets and prices they are in a powerful position to shape and influence whether the public provider is successful or not.

Their view that private competition is more effective and delivers results for customers is no secret. They said in their annual report for instance 'We have a role in facilitating competition in the Scottish Water industry. Competition will promote further efficiency gains and, where practicable, further choice for customers' . This belief in competition and the use of market principles in delivering water in Scotland is a thread running right throughout the Commission's 2005-2006 annual report. Incentives is loudly encouraged asa means to improve performance in terms of economic efficiency. the Scottish Executive for allowing incentives ‘to encourage good performance by Scottish Water…by linking managerial bonuses to (economic) outperformance of the regulatory contract’.

One of the key planks of the arguments for private sector involvement in water in Scotland is to suggest that privatisation has been an almost unqualified success in England and Wales. Indeed the English and Welsh models are often cited by the WICS as models Scotland should strive to emulate. As Alan Sutherland said in 2003.

The industry in England and Wales has proved that it is possible to deliver better service, water quality and environmental compliance for customers, while also making significant improvements in its level of efficiency. There is no reason why Scottish Water should not be able to achieve a similar level of performance for customers here in Scotland and so justify the public sector model for the industry in Scotland.

Alan Alexander, ex Chairman of Scottish Water, in his evidence to the Audit Committee of the Scottish Parliament confirmed the marketised structure of Scottish Water early this year when he gave evidence to the Audit Committee. He said;

It is extremely important to remember that the industry is a public sector industry, but we try to operate within the disciplines and constraints that have been successful in transforming the industry south of the border. Sir Ian knows more about that than anybody’.

Purposefull Regulation?

• Sir Ian Byatt and Alan Sutherland have openly expressed their view that Scottish Water be taken out of public ownership. Both said when interviewed last year said that Scottish Water should be turned into a mutual model, thus freeing it from state ownership. Apparently they put in place a detailed blueprint for doing so.

• Byatt also said recently that “he is concerned at the prospects of financing it (Scottish Water) from Public funds” , his raising of the subject – in tandem with others who wish to change the current governance arrangements. Yet no Scottish Minister has said that they feel the current loan arrangements is bad value for money

• They have a fixed belief in competition and market solutions. Sir Ian Byatt has said in the past “Where competition is possible we should facilitate or promote it; regulation will only be necessary to ensure matters such as product safety” , this hints at a belief in the market being the ultimate arbiter and for regulation to be limited.

• Competition has been introduced in the non-domestic sector. This has been enthusiastically welcomed and driven by the WICS. “Sir Iain Byatt said opening up the market enabled new entrants to offer customers better value for money. And, that "this is a first for Scotland. All non-household customers now have a choice of water retailer." The introduction of competition fuels concern that this is the thin edge of the wedge and a trojan horse for the opening up of full-scale competition and private involvement

• Sir Ian Byatt’s advisor Neil Menzies is a former corporate Adviser to the Chemical Industries Association and latterly Scottish Affairs Adviser for ICI. The chemical industry is one of the main users of water in Scotland.

• There is a concern that their focus on economic efficiency trumps environmental and social objectives. This concern has been expressed by SEPA in 2004. They said, “SEPA has concerns over the absence of balancing duties for the commission. Regulators normally have a range of duties to ensure that they do not become focused on a single objective without considering the wider implications of their actions” .

• The WICS at a board meeting in March 2007 agreed to give a donation to the David Hume Institute for a study they were undertaking looking at ‘The Regulation of Public Services’. They based their agreeing to this request because the ‘David Hume Institutes’ aims were consistent with their remit of promoting customer’s interests’. This is a subjective claim, indeed many organisations opposed to the agenda of the David Hume Institute could make similar claims. Like the STUC or Friends of the Earth for example. It is telling that the WICS believe that they have similar aims to the DHI, given that ‘Its orientation is towards the relevance of market approaches and market solutions in determining economic well-being’. Another indication of the mindset of the commission . How much donated was not disclosed, Alan Sutherland was to decide this. Also, two members of the commission declared an interest in this in that both were members of the David Hume Institute.

• The Chairman of the WIC, Sir Ian Byatt is a senior associate at Frontier Economics as well the part-time Chairman of the WIC in Scotland. In February 6th 2006 Frontier Economics was awarded the contract by the WIC to be their economic advisors for the introduction and maintenance of the retail competition in the water sector in Scotland. According to Frontier:

Frontier (London) has been appointed as economic advisers to The Water Industry Commission for Scotland. The Water Services (Scotland) Act 2005 has paved the way for the introduction of competition in the Scottish water sector. From April 2008, water retailers can provide retail services (metering, billing, customer service) to non-household customers - of any size. Over a four-year period, Frontier will be providing advice to the regulator on a range of issues including the structure of wholesale tariffs and preparations for the next price determination.

• Neither Frontier nor the WIC offer any information on the financial arrangements of their contract. However through an FOI request we have ascertained that they are to be paid a minimum of £600,000 and a maximum of £1.5million should they achieve ‘satisfactory performance’ Incidentally when we asked through another FOI what the criteria was for satisfactory performance, the WICS said that “We do not hold any information on the criteria by which the eventual contract will be decided” . Given the sums involved and that they set the contract it does seem incredible that they do not hold any information on how the contract will be decided.

• The WICS offered no public information at all on the existence of a contractual arrangement between them and Frontier in there annual report, though they do state that between 2006-07 they spent £1,231,417 on consultancy projects. This compares to £232,785 during the last financial year for consultancy projects . Furthermore, there are no public records of discussions having taken place at any of the monthly meetings of the WIC on the matter of Frontier Economics appointment. This dearth of information on this matter does not fulfil the aim stated by Sir Ian Byatt ‘to be open and transparent in our work’. It’s as if Sir Ian Byatt, Frontier Economics and the WICS do not want to declare publicly their relationship.

Commercialisation of Water In Scotland

The World Bank has cited the reform of water provision in Scotland as a shining example of how to reform or corporatise/commercialise a public utility . Various things have happened in Scotland that helped to propel this process. These have included the use of incentives for high-level management to achieve ‘efficiencies’. These efficiencies have resulted in a 40% reduction of staff. To strive for economic efficiency, which is solely in the gift of the company to achieve, the WICS state that it depends on the organisation's remuneration policy; the organisation's policy regarding use of permanent or temporary employees and improvements in productivity . The implicit suggestion here is to cut wages, hire cheaper temporary staff while increasing their workload.

The Water Services Act (2005) introduced competition for non-domestic customers, this could well be the thin edge of the wedge and lead to further calls for full-scale privatisation. At the very least it could well threaten Scottish Water’s revenue base and lead to a decrease in cross-subsidisation. Introduced on April 1st 2008 Alan Sutherland the WICS Chief Executive said the introduction of choice would benefit businesses of all sizes. He added: "Scotland is leading the world in the introduction of a competitive framework for the water and sewerage sector. "It is a system that has never been tried anywhere else in the world" . This development has contracted billing and customer relations out to, currently, three different companies, as well as an offshoot of Scottish Water: though this may increase in the future. The companies now working in Scotland are Osprey, Satec, Aquavitae, and Scottish Water-owned Scottish Water Business Stream.

The commercialisation of Scottish Water has also been shown through the huge increase in the use of the private sector. Most recently this has manifested itself through Scottish Water Solutions (SWS): a joint venture between Scottish Water and two consortiums of private companies. SWS now carry out all of the capital investment work as part of the Quality and Standards (Q&S) programme of improving infrastructure. The capacity for Scottish Water to carry out this work has been cut and there is a fundamental reliance on the private sector to carry out this work. There are also over 20 Private Finance Initiative (PFI) contracts in Scotland operating treatment plants all over Scotland. They are exclusively run and managed by the Private Sector.

The Water Industry Commission for Scotland (WICS) is the economic regulator of water in Scotland. It is a non-departmental public body appointed by the Scottish Executive The WICS is made up of a Chief Executive, Alan Sutherland, a Chairman, Sir Ian Byatt and four other members. The remit of the WICS is to set budgets for Scottish Water to deliver the Ministerial Objectives. Their statutory duty is to ensure lowest financial cost for the customers of Scottish Water, whilst still ensuring that the Ministerial Objectives set for Scottish Water, by Scottish Executive Ministers, are achieved. This is a balancing act that places on them a great deal of influence. Their influence can, and indeed has, led to tensions between different actors within the sector of water in Scotland.

The Commission

• Ian Byatt was Director General of the Office of Water Services (Ofwat) between 1989 and 2000. In that role he was responsible for independent economic regulation of the water companies in England & Wales. From 1978 to 1989 he served in HM Treasury as Deputy Chief Economic Adviser. Since 2000 he has advised the World Bank and governments around the world on matters relating to the water industry. Sir Ian, who was an adviser to the Water Industry Commissioner from 2002, was knighted in 2000.

• Professor John K. Banyard OBE. Professor Banyard is a chartered engineer who retired in December 2004 as an Executive Director of Severn Trent Plc following a career in the water industry.

• Professor David Simpson,Deputy Chairman. Simpson was economic adviser to Standard Life from 1988 to 2001. He was the founding Director of the Fraser of Allander Institute at the University of Strathclyde and is a Trustee of the David Hume Institute. Professor Simpson acted as an adviser to the former Water Industry Commissioner for Scotland from 2002.

• Dr Mike Brooker Dr Brooker is a scientist who recently retired as Chief Executive of Welsh Water following a career in the water industry in Wales. During his career he was Chief Scientist and subsequently Divisional Operations Director of Welsh Water before becoming Managing Director in 1996.

• Alan Sutherland, Chief Executive. Sutherland was the Water Industry Commissioner from November 1999, when the position was created. During that time, he developed a framework for economic regulation of Scottish Water. He has extensive experience in management consultancy andin the investment banking industry, being a former management consultant with Bain and Company and before that a Manager with Robert Fleming and Company. More recently he was a Managing Director of Wolverine CIS Ltd, a division of Wolverine World Wide.

• Charles Coulthard Coulthard retired recently as Managing Director of Ofgem (the Gas and Electricity regulator) in Scotland. He served as Deputy Director of the Office for the Regulation of Electricity and Gas in Northern Ireland between 1992 and 1999. He is also currently the Chair of the Gas and Electricity Consumers Council in Scotland.

Lobbying and PR activities

• Instinctif Partners

Former lobbying firms

• Porter Novelli Scotland, 2004
• GPC International (now known as Fleishman-Hillard), provided media training
• Greenhaus Public Communication
• Three Monkeys

FOI

• Memorandum of Understanding Between the Water Industry Commissioner and the Water Customer Consultation Panels March 2003
• Sarah Chisnall (GPC), Letter to Alan Sutherland, Media Training Follow up 7 August 2003
• GPC, Invoice From GPC to WICS for Media Training 11th November 2003
• Devin Scobie, email to Katherine Russell Media Training 5th June 2003, 13.16.
• Sarah Chisnall e-mail to Katherine Russell re media training for Alan Sutherland July 2003
• Devin Scobie e-mail to Katherine Russell Re Media Training 5 June 2003, 15.43, Confidential.