Hansard

I welcome the opportunity to discuss Scottish Water's performance. I hope that the letter from Tom McCabe—dated 20 November 2006—and my recent letter have addressed any concerns that the committee might have had about the autumn budget revisions and why the adjustments were required.I will discuss the big picture. We established Scottish Water four years ago and tasked it with pooling three separate and inefficient water authorities into one unified and publicly accountable business. At the same time, we required Scottish Water to transform the services that it delivered through improved operational practices and the delivery of quality and standards II, which is, in effect, a massive investment programme that is supported by £610 million of borrowing from the Executive.There is no doubt that delivering on Q and S II has been a tough challenge for Scottish Water, not only in relation to simple delivery but in respect of efficient delivery. Even so, by 31 March last year 86 per cent of the outputs that were identified in Q and S II had been delivered at a cost of £1.9 billion and the Water Industry Commission for Scotland had identified that Scottish Water had delivered £946 million in operational and capital cost savings—just under £1 billion, which is a pretty significant achievement. Those are unprecedented levels of efficiency for the public sector. If that were translated into the average household bill in Scotland over the four years, it would equate to a saving of £211.We think that the benefits of Q and S II are clear, not only in the correspondence that everybody gets but in tangible improvements on the ground. I got a sense of that from members' comments at last month's debate in the chamber, which was led by the Greens and in which Mark Ballard spoke. The disputes are now less about what is happening on the ground. There is universal agreement that Scottish Water has lived up to the challenges of Q and S II and is delivering for customers.The challenge now is to transform the water industry over the next four years and to improve the quality of service to customers. That is crucial. In early 2005, the investment objectives for Scottish Water for 2006 to 2014 were set out by the Executive. The clear objectives are to further improve drinking-water quality, to contribute to a cleaner water environment, to support housing and economic growth across Scotland, to improve customer service and to minimise odour problems at waste-water treatment works. In addition, Scottish Water still has to deliver the remaining 14 per cent of the Q and S II outputs.The cost of meeting all our objectives has been assessed by the WIC as requiring an investment programme of £2.45 billion. It will be one of the largest programmes undertaken by any United Kingdom water and sewerage service provider, but the WIC is confident that it can be delivered efficiently in that four-year timescale. To fund that, the WIC has determined that charges for customers will decrease in real terms and that the Executive will need to lend a further £527 million in addition to the £273 million that is required to conclude Q and S II.I will move on to delivery in the first year of the new regulatory period. As was anticipated by Scottish Water in its delivery plan, its capital expenditure is lower this year than can be expected over the next four years. That is because it takes time to set up delivery arrangements and to progress projects through from the design stage to the build and construction stage. Our current expectations are that £404 million will be invested in 2006-07 against a planned figure of £450 million in the delivery plan, although the committee should be reassured by the fact that Scottish Water reports that it is broadly on course to meet the Q and S III targets for 2006-07 and to meet the full requirements over the four years. What you see now is a gearing up of the four-year investment programme.I want to say for the record that I am keen that sight is not lost of the remaining 14 per cent of the Q and S II outputs that are still to be completed. By the end of this financial year, Scottish Water expects to have delivered 97 per cent of the outputs from Q and S II, but I am concerned to ensure that we still focus on the need for the remaining requirements to be delivered as soon as possible.On how the situation affects borrowing for 2006-07, the Scottish Executive has provided £20 million in the budget, in accordance with Scottish Water's upper estimate, to ensure that access to borrowing is not the cause of any capital delivery delays. However, that does not affect our commitment to lending almost £800 million over the regulatory period. That amount has been determined by the WIC with reference to the ratios that he has deemed to be relevant to the continued financial health of the company.It is a pretty challenging objective for Scottish Water to deliver a programme of that scale while also continuing to drive through further efficiencies in the system. The process that we have set in place should enable us to monitor that work and ensure that over the next four years the objectives on the timescales and the levels of efficiency are delivered. That process includes my direct scrutiny of Scottish Water's board. In addition, the Executive and Scottish Water's regulators are brought together in the outputs monitoring group, which checks a detailed set of indicators to consider Q and S III delivery and the final elements in Q and S II to ensure that it can see the promised improved delivery for customers as well as the required levels of efficiency. It also ensures that that will be achieved as soon as is possible.It is quite an ambitious challenge. The industry has come a long way since the services of the three regional water authorities were pulled together. I would argue that we now have better monitoring and scrutiny, not just by ministers, but by committees. Regular appearances in front of the Finance Committee and the Environment and Rural Development Committee concentrate everyone's minds and mean that we make tough demands of Scottish Water. The combination of the regulatory process plus that extra scrutiny has shed a bit more light on how Scottish Water works.Through rigorous regulation and, in the light of that increased scrutiny, the determination of Scottish Water's staff to deliver, substantial improvements have been made at the same time as we have delivered a massive investment programme and the best part of £1 billion of efficiencies. It should be acknowledged that that is a record for the United Kingdom water industry. Customers are benefiting from one of the largest investment programmes in the UK. We now have charges that are, on average, lower than those in England and Wales and, in real terms, the profile of charges is decreasing. The challenge for Scottish Water is to build on that work and to deliver on the next investment programme to upgrade and modernise the industry. I will stop there because I am sure that the committee has questions to ask.