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Investing in Water Services 2006 - 2014

3 MAINTAINING SERVICE STANDARDS (CAPITAL MAINTENANCE)

Introduction

3.1 This chapter outlines the emerging conclusions from the working group looking at the level of investment which will be required to keep the industry’s current assets working properly to deliver the standards of service customers want.

What is capital maintenance?

3.2 Capital maintenance describes the need for Scottish Water to invest sufficient funding in its infrastructure to deliver at least existing levels of service, in terms of long-term sustainability, water quality and environmental considerations. Funds are spent on above ground assets (non infrastructure), e.g. wastewater and water treatment works, and below ground assets (infrastructure), e.g. underground pipes, for water and waste water.

3.3 It would cost approximately £32 billion⁷ at today’s prices to replace all of Scottish Water’s assets. It is vitally important therefore to maintain the infrastructure in a reasonable condition to offset the danger of significant decline in serviceability of its assets (e.g. more water main bursts). This would adversely affect the quality of service that the customer receives.

What is happening at present?

3.4 Within the current investment programme, a significant proportion (nearly £900 million over 4 years) is being invested specifically to maintain the existing infrastructure and prevent its deterioration. Included in this is investment to:

• replace 3,051km of water mains - (1,896 miles);
• replace 446km of sewers - (277 miles); and
• maintain the effective operation of the existing infrastructure.

How were the investment requirements for Quality and Standards III derived?

3.5 The specialist working group which looked at this issue considered a number of different approaches for establishing the appropriate level of investment required to maintain the existing infrastructure. These included a number of established engineering or finance-based methods as well as a new approach called the Common Framework Approach. The Common Framework Approach is considered to be the water industry’s best practice approach on this issue. Rather than looking backwards to either historic spend or the specific engineering condition of assets, it models the impact of capital maintenance upon asset performance as measured by a suite of what are called ‘serviceability measures’ or customer-focussed service measures. As the methodology seeks to provide a better relationship between capital maintenance spend and the standard of service the customer receives, the working group decided to use this approach.

What are the investment requirements for Quality and Standards III?

3.6 The Common Framework Approach links level of service to a set of ‘Serviceability Indicators’ specified below. With two exceptions⁸, these are based on measures similar to those used by OFWAT ⁹in England and Wales but they are still subject to refinement by the group. The indicators currently being used are outlined in table 4a and 4b below.

Table 4a: Wastewater Serviceability Standards and costs

Source: Scottish Water’s Work Package 2/1: Scottish Water Assets Interim Report Version 2

Table 4b Water Serviceability Standards and costs

Source: Scottish Water’s Work Package 2/1: Scottish Water Assets Interim Report Version 2

3.7 The costs identified for the period 2006-14 are based on the assumption that the level of service found at 31 March 2006, will be maintained throughout the forthcoming investment period. The definition of this scenario and the service standards associated with it are outlined in the tables above together with the costs. Investing to maintain the existing infrastructure is a fundamental requirement for the industry and is justified on a number of grounds. Firstly, given that the replacement value of all Scottish Water assets is in the region of £32 billion, it is important to invest in appropriate levels of capital maintenance to ensure that previous investment is not wasted. Secondly, investment in capital maintenance impacts directly upon the standards of service Scottish Water delivers to more than 5 million customers. For these reasons it is important that these standards do not deteriorate.

What are the costs associated with maintaining serviceability?

3.8 To maintain the level of service throughout the forthcoming investment period to that found at 31 March 2006 will cost an estimated £2.2 billion or £275 million per annum. The addition of a further £500 million of investment in Capital Maintenance over the Q&S III period would allow for further improvements to the above serviceability measures. For example, distributing this funding across water and wastewater infrastructure plus non-infrastructure, and for leakage reduction would provide enhancements in all of these areas. It could provide further improvements in water quality, reduce leakage rates across Scotland, reduce the numbers of failing wastewater treatment works and rates of flooding and sewer collapses.

How do we decide upon final investment requirements?

3.9 Further work is being undertaken to consider options for effecting savings on the global figures shown above. For example, it may be possible to deal with sewer collapses in a different way. There may also be instances of some costs overlapping with the work/costs from specialist working groups considering water quality and environmental requirements.

3.10 The process of finalising preferred investment options for capital maintenance is underway and the 4 guiding principles for consideration across the consultation exercise are listed at paragraph 1.17 above.

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