Committee
Public Audit and Post-legislative Scrutiny Committee 18 March 2021
18 Mar 2021 · S5 · Public Audit and Post-legislative Scrutiny Committee
Item of business
Section 22 Report
“The 2019/20 audit of Scottish Water”
Johanna Dow (Scottish Water Business Stream)
Watch on SPTV
We entered the English market with the full support of all our stakeholders, and it was very much necessitated by a desire to protect our Scottish customer base. You might wonder what the link is. More than 52 per cent of our customers have sites in England as well, and we were aware that, when the market opened in England, those customers would be at risk. Indeed, more than 60 per cent of all switching activity in the English market has been from multisite customers with sites in both markets. Therefore, the strategy to enter the English market was primarily necessitated by the desire to retain our Scottish customers. There was also an element of wanting to replace the losses that we had experienced in the Scottish market by acquiring new business in England. We recognised early that, in order to enter the English market, we would need to do so on some scale, because, although we were the biggest market provider in the Scottish market, in UK terms we were relatively small and the market was dominated by a handful of much larger players. Our strategy was very much about how we could achieve scale quickly in the English market but in a financially efficient way. We quickly determined that an option for achieving that would be through acquisition as opposed to organic growth. We targeted two separate acquisitions. We secured the acquisition of Southern Water in 2017, and more recently, as you rightly say, Yorkshire Water. As a consequence of those two acquisitions and the organic growth that we have experienced in the English market, we are now positioned as one of the three largest retailers in the UK market. On the second part of your question, about the due diligence that was undertaken on the acquisitions, vigorous due diligence was carried out on both acquisitions over many months, involving independent financial advisers who provided advice on the commerciality of the transactions and the due diligence process itself. It also involved legal advice and support. As part of the due diligence process, we considered all plausible risks, whether financial or otherwise, including reputational risk. Again, that process was incredibly robust. We secured the acquisitions with the full support of all our stakeholders, which required approval from the Scottish Government, the Water Industry Commission for Scotland, which is our regulator, and the various boards within the Scottish Water group.
In the same item of business
The Convener
Lab
Agenda item 2 is consideration of the section 22 report “The 2019/20 audit of Scottish Water”. I welcome our witnesses: Dame Susan Rice, chair of Scottish Wa...
Dame Susan Rice (Scottish Water and Scottish Water Business Stream)
Good morning, convener and members. Thank you for inviting us to give evidence. We value the committee’s scrutiny, the Auditor General’s report and the overa...
The Convener
Lab
Thank you for that introduction, Dame Susan. Colin Beattie will begin the questioning.
Colin Beattie (Midlothian North and Musselburgh) (SNP)
SNP
I want to look at Scottish Water’s business acquisition strategy. According to the report, Business Stream purchased the non-household customer book of Yorks...
The Convener
Lab
We will direct all questions to Dame Susan, and she will bring in her colleagues as appropriate.
Dame Susan Rice
We had very clear reasons for making those acquisitions. Jo Dow can explain those to you.
Johanna Dow (Scottish Water Business Stream)
We entered the English market with the full support of all our stakeholders, and it was very much necessitated by a desire to protect our Scottish customer b...
Colin Beattie
SNP
You touched on the need to protect your Scottish base. How volatile do you consider your customer base to be?
Johanna Dow
We operate in a competitive environment and our customers can choose to switch to another retailer if they are not content with the service or the price that...
Colin Beattie
SNP
What percentage is the attrition rate?
Johanna Dow
The UK average is about 4 per cent a year, and our figure is 3.1 per cent.
Colin Beattie
SNP
Given the fact that you have taken on those acquisitions, what has been the effect of Covid-19? Has it had any impact on the quality of the assets or on the ...
Johanna Dow
All our customers, the length and breadth of the UK, have been impacted by Covid to some extent. Most impacted is our small and medium-sized enterprise custo...
Colin Beattie
SNP
I have one last question. You have the contract for supplying water services to the Scottish public sector. Does that increase your financial resilience, and...
Johanna Dow
It impacts our financial resilience in the sense that it provides a positive contribution to our profitability. It has another impact in that, as you know, t...
Alex Neil (Airdrie and Shotts) (SNP)
SNP
I have a simple question about Business Stream for Dame Susan and her team. We have our own regulator in Scotland that regulates Scottish Water and its subsi...
Dame Susan Rice
That is a good question. I will ask Johanna Dow to give you some of the detail. There are 27 or 28—the numbers move around a little bit—retail providers, so...
Johanna Dow
I am in the really fortunate position of being regulated by two organisations—one, as you say, based in Scotland and one based in England. We are regulated b...
Alex Neil
SNP
On Scottish Water’s decision to make the facility to borrow from it available to Business Stream if money was needed as a result of the Covid crisis, did Sco...
Johanna Dow
Yes, we did, and the approval process for that took many months. The WICS was actively engaged throughout, and it had ultimate approval at the end of the pro...
Alex Neil
SNP
I will move on to the Scottish market. I am stepping down next month, but I have been an MSP for 22 years. In that time, I have had very few complaints about...
Johanna Dow
The level of customer satisfaction within the entirety of our customer base is high: it is currently sitting at just under 90 per cent. It is measured using ...
Alex Neil
SNP
That is good news. However, there is a 10 per cent gap in satisfaction between the smaller companies and, I presume, the larger companies. Is it one of your ...
Johanna Dow
It is. At the moment, the gap is 9 per cent. There will always be a gap because one of the things that influences that score is whether a customer has had re...
Alex Neil
SNP
Thank you. I go back to Dame Susan on the completely different subject of remuneration within Scottish Water. I do not want to talk about individuals or anyt...
Dame Susan Rice
Yes, I can. It is a helpful question; let me see whether I can give an answer that explains it. I will come at it from two directions. First, Scottish Water ...
Alex Neil
SNP
The chief executive of NHS Greater Glasgow and Clyde is paid less than 50 per cent of the total remuneration package of the chief executive of Scottish Water...
Dame Susan Rice
As I said before, I do not know the NHS in detail, so it is hard for me to respond specifically to that example. However, I would say that what Scottish Wate...
Alex Neil
SNP
I would say the health service—
Dame Susan Rice
Excuse me. I would say that the work that the business does—