Managing Change in the Water Industry: A Consultation Paper

< Previous | Contents | Next >

H. SUPPORTING THE WATER AUTHORITIES

H1. The previous sections have considered the ways in which the water services sector in Scotland will have to develop in order to accommodate increased competition. These have identified the role of the water authorities as providers of essential facilities to all suppliers, and their separate continuing role as suppliers to customers, possibly in competition with new entrants. As owners of the water authorities, on the public’s behalf, the Scottish Executive has the additional responsibility of considering the effect of these new arrangements on the water authorities themselves.

H2. It is important that, where services are open to competition, there is a level playing field between new entrants and the incumbent water authority. This is necessary if competition is to develop in ways that are beneficial to all customers. The water authorities will have to treat their own supply businesses on an equal basis with new entrants. They will also have to measure the costs of their treatment and distribution businesses at some level of detail in order to set appropriate access charges.

H3. Where a water supply area or sewerage collection district has a new entrant in treatment, the water authority would then have in addition to ensure a level playing field between their own treatment works, and the new entrant.

(i) Joint Ventures

H4. When the three Scottish water authorities were set up, it was recognised that they should be able to engage in revenue-raising activities additional to their core functions of providing water and sewerage services. Under section 89 (2) of the Local Government (Scotland) etc. Act 1994, therefore, they are empowered to "form or promote, or join with any other person in forming or promoting, a company (within the meaning of the Companies Act 1985)". This is designed to allow the authorities to harness their expertise with that of other organisations to compete in the water/wastewater services market.

H5. The power to promote or form a company under this section is subject to approval by Scottish Ministers. In 1998, the Scottish Office developed guidelines giving the authorities an indication of the criteria that Ministers would use in determining applications for approval. These guidelines were designed to ensure that the operation of proposed ventures did not detract from the water authorities’ performance of their core functions, and respected the principles of prudence appropriate to expenditure by a public sector organisation. They therefore limited acceptable activities to a small range of services (for example, consultancy and training) which had to draw on the authority’s core competence in providing water and sewerage services, and which were incidental in scale compared to those core functions. The guidelines also prohibited the operation or management or ownership of water/sewerage facilities outwith Scotland.

H6. Until now, there has been little take-up of this power, due in part to the fact that the new authorities have needed time to develop their internal structures after their establishment in 1996. However, the authorities are now in a position to look for appropriate opportunities for joint business ventures.

H7. Ministers’ primary concern has been to satisfy themselves that there is a sound business case for the joint venture proposed. Since 1998, the business environment in which the authorities are operating has changed significantly, and the guidelines developed in 1998 do not provide sufficient flexibility to meet the challenges and opportunities in the new competitive regime. In addition, the actual process of applying for and securing consent has proved unwieldy.

H8. Ministers have decided to relax these guidelines in two ways – first, by removing some of the technical and financial constraints on acceptable activities mentioned above. Second, there is scope for a more streamlined approval procedure, where proposed ventures of limited size and significance can be granted approval very quickly provided that the authorities give a guarantee that a number of criteria have been met. Such relaxation of the guidelines would necessitate a rigorous approach by the authorities in developing a full and reasoned business case for proposed joint ventures, ensuring that the core business is not exposed to an unacceptable level of risk.

H9. A more flexible approach to joint ventures allows access to resources for investment which would not be possible under a traditional public sector structure. Another means of delivering value for money and achieving access to capital is the creation of Public Private Partnerships. These have already been used to deliver a number of major wastewater projects. They may also offer authorities a way of funding other ventures in the future.

(ii) The Role and Structure of Boards

H10. Overall responsibility for the management and strategic direction of the water authorities rests with their Boards. With the exception of the authorities' Chief Executives, who are ex-officio members, Scottish Ministers appoint members to the Boards. These members, including the Chairs, are appointed in accordance with the guidance governing ministerial appointments and on the basis that they have knowledge or experience relevant to the work of the authorities.

H11. The Boards are appointed to achieve a balanced membership that includes experience in relevant areas of business and engineering and an understanding of local interests, primarily through the presence of local authority councillors. In common with the Boards of most non-departmental public bodies, the only executive member on any of the Boards is the Chief Executive. The Boards determine policy for their authorities, but do not become involved in issues of day to day management. It is for the Chief Executive to manage the authority so as to deliver the policies established by the Board.

H12. These arrangements are fairly typical of those in place in a number of large public organisations. They make a clear distinction between those charged with setting the direction of the authority and overseeing its management on behalf of Ministers and the public, and those responsible for the actual delivery of services. It is a tested model that in many ways is well suited to the management of a long established public service, albeit one that is a substantial revenue generating business. Were the water authorities operating in a more or less steady state, the model would probably continue to be valid. However, that is not the case. As this paper discusses, the authorities need to adapt quickly to an increasingly competitive environment, but that is not the only challenge they face. They are also having to manage investment programmes of unprecedented scale to secure major improvements in the standards of their operations.

H13. It is open to question whether a Board that is almost wholly non-executive is best suited to responding to current circumstances. An alternative would be to increase the number of executive Board members by including other of the authorities' senior managers on the Board. This would reflect practice in the NHS Trusts. It would change the present relationship between the Board and these managers. The latter would contribute directly to the whole range of Board discussions and decisions, rather than advising the Board and accounting to it mainly for their areas of responsibility. This would undoubtedly change the nature of the Board, but as the authorities are likely to face increasing numbers of major commercial decisions, a new approach to strategic management and decision taking processes may well prove necessary.

H14. The size of the Boards is limited in the 1994 Act to between 7 and 11 members, and the practice has been to have a full complement of members. Were executive Directors to be introduced, it would be necessary either to amend the legislation to allow for a larger membership or reduce the number of non-executive Directors. There is a risk that any membership in excess of what is already provided for would prove unwieldy and an obstacle to effective decision making. There may be a case, therefore, for reviewing the role and numbers of the non-executive members. Any changes to the membership would need to ensure that the non-executive members continued to have the authority and expertise necessary to oversee and where appropriate challenge management.

H15. At present, the authority Chairs are expected to commit one and a half days each week to their duties with the authority and members 2 to 3 days each month. This relatively low level of time commitment may not be sufficient in future, particularly if the addition of executive members results in the Boards becoming more closely involved in the management of the authorities.

H16. The 1997 review of the water industry recognised that the establishment of the Scottish Parliament would result in it exercising democratic accountability over Ministers for the water authorities. Given the size and the scale of the authorities' operations, it appeared appropriate for accountability to rest at this level.

H17. Practice since the introduction of devolution has confirmed this assessment with the Parliament demonstrating its ability to hold Ministers to account for the management of the water authorities. In addition, the Transport and Environment Committee provides a means of providing detailed scrutiny of the Boards and senior management of the water authorities. This raises the question of the extent to which local councillors should continue to be present on the Boards as the means of providing democratic accountability. Clearly there is a case for a continuing presence if local authorities and their electors are to have direct input to the Board's decisions. However, even at present it is not feasible for every council to be represented on the Boards. Also it is arguable that the Direction issued in 1998, requiring the water authorities to consult annually with all the local authorities in their respective areas, is a more effective and even handed means of ensuring that the water authorities take full account of local interests in their operations. There is an issue about how this process could be more meaningful and effective. The Executive will wish to discuss best practice approaches with COSLA in terms of how this might be delivered across Scotland.

H18. The Executive would welcome comments on the function, composition and size of water authority Boards in light of these considerations.

< Previous | Contents | Next >