╨╧рб▒с>■  /1■   .                                                                                                                                                                                                                                                                                                                                                                                                                                                ье┴7 Ё┐T#bjbjUU .*7|7|T      lшшшшшшшLвввв о L9 ╢╞╞╞╞╞╞╞╞╕║║║║║║$я  ╘▐ш╞╞╞╞╞▐^шш╞╞є^^^╞ш╞ш╞╕^╞╕^Z^╕шш╕╞║ цЄ(¤%╚LVв▄В╕╕ 09 ╕у ^у ╕^№.*"шшшш┘Scottish Water Solutions: is this what we want from a Public Corporation? Margaret Cuthbert Jim Cuthbert In 2005, the Water Industry Commission for Scotland wrote, Уwe have concerns about the nature of the responsibilities Scottish Water has delegated to Scottish Water Solutions (SWS). As such, we would be concerned were the present arrangement to be extended significantly beyond Quality and Standards II, without very careful consideration of the alternatives.Ф Despite this, Scottish Water Solutions Limited (SWS), was then awarded a г760m contract up to 2010 to help manage and deliver a major part of Scottish WaterТs Quality and Standards III capital investment programme. SWS was also assigned programme management, design and delivery management of an additional package of work valued at г240m. Negotiations for other parts of the 2006-10 capital programme are currently being discussed. So what is the nature of the concerns with the SWS model: and should people in Scotland be happy with the way things are going? Scottish Water was set up in 2002: and had the immediate problem of how to deliver on time a capital investment programme of no less than г1.8 billion over the period 2002-06. Faced with this problem, Scottish Water came up with an innovative solution: it would look for partners from the private sector, and then, effectively, hand over responsibility for delivering a large part of the capital programme to these partners. Under this model, substantial elements of important functions which would previously have been handled within Scottish Water itself, like designing, managing and costing projects, would be handled by the partner organisation: an organisation which would also itself be responsible for carrying out (or sub-contracting) the construction work. In January 2003, Scottish Water Solutions (SWS), the delivery mechanism for this new partnership arrangement, was set up. SWS is a partnership between Scottish Water itself, and two other companies, Stirling Water and UUGM. Scottish Water has a 51% share in SWS, with the other two companies each owning 24.5%. The partner companies are themselves owned by major players in the utilities and construction fields. Stirling Water is owned by Thames Water (25%), Gleeson (25%), KBR (Halliburton Brown & Root) (25%) and Alfred McAlpine (25%): Stirling Water is also well known as a PFI provider to Scottish Water: and hit the headlines concerning the difficulties at Seafield in 2007. UUGM is owned 60% by United Utilities, 20% by GallifordTry, and 20% by Morgan est. SWSаhas no employees and is operated by seconded staff from Scottish Water and each of the partner companies. There are major concerns about the SWS style procurement model. One concern relates to the question of cost and value for money. It appears that SWS itself costed significant elements of the 2006-10 Scottish Water capital programme, (when it itself would be a main contractor for the ensuing work). If SWS is responsible at the same time for design and costing, as well as carrying out the work, then are there adequate checks to ensure value for money? A second concern relates to the impact of the SWS model on Scottish firms and the Scottish economy. In effect, a large part of Scottish WaterТs investment programme, a potential engine of growth for the Scottish economy, was wrapped up and handed in the first instance to companies outside Scotland. The civil engineering part of the Scottish water capital investment programme between 2003 and 2006 was of the order of г1.1 billion, with a further almost г300 million involved in managing investment projects already in progress. This representedаaround 40% of all civil engineering investment in Scotland over the two and a half years to 2006. Further, capital investment by Scottish Water is not just about digging holes, pipe laying etc. The programme involves a great deal of УsofterФ high value work: research and development, consultancy, geology, management information systems, etc.: in fact, all of the types of work which we recognize that Scotland needs to be fostering among its businesses and its labour force for our future economic development. One might have thought that efforts would be made to ensure that a public corporation, like Scottish Water, would use its capital investment programme to stimulate such development in Scotland. As can be seen from the choice of consortium partners in SWS, this clearly has not been the case. Further, the software and IT companies subcontracted by SWS have also tended to be from outside Scotland. A great opportunity was therefore missed in the 2002-06 programme, and this continues to be the case in 2006-10. A further concern is that the repercussions of this procurement model are long lived: SWS was created to solve an immediate problem, the delivery of the 2002-06 water capital programme. However, its existence now seems to be embedded Ц at least for another four years- and in the meantime, any problem that there might have been in 2002 of lack of local expertise and know-how to carry out large scale investment programmes has become far worse. Local businesses, including those formerly employed by the Water Boards, have been by-passed in the first instance as work has gone to SWS. Even as regards that part of the water investment programme which has not been channelled through SWS, local firms have had high financial barriers to jump before they could be considered in the Scottish Water procurement process. Local businesses are therefore, more often than not, in the position of sub-contractors, actually doing the job but getting little of the design and management of big projects. Scottish Water Solutions could be regarded as one example of partial privatisation in water: one of the outcomes is that the benefits that we should be seeking from the public ownership of a major utility are not being attained. So what needs to be done to ensure the benefits of public ownership of water in Scotland are actually attained? First we need a vision of what a publicly owned water industry could and should deliver for Scotland, over and above its basic requirement of a clean, high standard water and sewerage system. Its sheer size - it is after all one of ScotlandТs largest businesses- means that its buying patterns influence the whole Scottish economy. Scottish Water should be providing major opportunities in Scotland for research and development, in the company itself, in other businesses in Scotland, and in our universities. It should also be providing major opportunities in training, education, and skills. It is capable of providing good quality job opportunities both within its own company, and within smaller contract companies in Scotland. Further, R&D work is then capable of being spun-out from Scottish Water or the universities to form start-up businesses in Scotland. Finally, the expertise gathered could help ScotlandТs efforts in improving living conditions in the Third World. None of this, however, will just happen on its own. The first step that is required is clear guidance from Ministers, to the regulatory body, the Water Industry Commission for Scotland, instructing the Commission to take cognisance of important effects like these in its direction of the water industry. There is, in addition, another vital area which needs attention. In earlier work of ours, we have pointed out that there is a major flaw in the method of setting prices applied to the water industry in Scotland by the Water Industry Commission. This flaw leads to significant overcharging, and distortion of the capital investment programme. Technical details of the flaw, which arises from a misapplication of the principles of current cost accounting, can be found in our website which is referenced below. Unless the pricing model is indeed corrected, the full benefits of public ownership, which should include significant lower prices for customers in Scotland, will not be realised. 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