Cash flow is vital to our water supply

Scottish Water has transformed the water business in Scotland. It has dramatically improved services to customers. It has radically reduced costs, saving the average householder £100 a year in bills. It has delivered one of the largest investment programmes in the UK, significantly improving the water environment in Scotland. It has significantly reduced its leakage. But it has one big problem, resulting from its legal position as a public corporation. Any borrowing has to come, pound for pound, out of the total public expenditure available to the Scottish Government.

When I was chairman of the Water Commission, from 2005 to earlier this year, I foresaw the coming expenditure crunch, in the UK generally and Scotland in particular. At the last price review, the Commission was concerned that economies in public expenditure could constrain investment or increase prices. Ministers assured us, however, that lending to Scottish Water would be a priority; and we set prices on that basis.

However, lending to Scottish Water has been cut to zero in the current financial year. The fine print of the Budget documents tells us that the intention is to restore it in subsequent years, but where will the money come from? The crunch is only just beginning in Scotland.

The water problem could have been dealt with differently by low cost borrowing from the capital markets. This would have freed up a capital sum of up to, say, £3 billion (depending on the UK and Scottish shares of the debt) that could help with other public expenditure programmes and continue to fund some £150m a year of Scottish Water’s capital expenditure in the future. This would have been sufficient to sustain the statutory corporation’s long-term investment programme – a key element in the improvement of the water environment in Scotland and an important generator of employment.

This could have been done by converting Scottish Water into a public interest company, as suggested by the Scottish Futures Trust. As such it would remain accountable to the people of Scotland, without any loss of strategic democratic control. It would continue to be required to implement ministerial directions on environmental quality and methods of charging; its tariffs would continue to be regulated by the Water Commission, and the quality of drinking water and waste water would continue to be controlled by the Quality Regulators (DWQR and Sepa).

The present administration seems to have set its face against any such solution. Instead it has floated, in its “Building a Hydro Nation” consultation paper, the idea of diversifying Scottish Water into a company producing green electricity at prices that would make it self-financing. This seems to me to be more in the spirit of Walter Scott than David Hume. As we have seen in multi-utilities in England and Wales, water and electricity mix only with difficulty. More self-financing for Scottish Water may well be the way to go, but not by that route.

An alternative approach would be to seek independent borrowing powers from the UK government. But, following the eurozone’s experience with Greece and Portugal, I would scarcely expect the UK Treasury to give Scotland a free hand to borrow. It does not have an adequate Treasury capability; its finance function remains that of a Whitehall spending department, simply allocating whatever expenditure is available from the UK.

The Scottish Government does not set out a full financial or economic analysis of what it considers can be afforded by Scotland or how the money could be raised. Finance secretary John Swinney told a David Hume Institute seminar that he favoured the development of a Treasury function in Scotland, but has done little to implement it.

I sometimes wonder whether current ministers are more concerned with independence from money than independence from England. But greater financial responsibility should be a pre-condition for greater devolution. And while Scottish Water remains a public corporation, lending to it would count as public expenditure and would crowd out other public sector priorities in Scotland.

When I was chairman of the Water Commission, I spoke to the First Minister only once, back in the early days after the 2007 election. I assured him that, if the government specified its desired outcomes, we the Commission would ensure delivery. He did not respond. Later, cabinet secretary Swinney told me that the Commission should adjust to the changing objectives of the government but did not clarify what those objectives were. And then, in the recent election, ministers pledged a two-year price freeze for customers of Scottish Water without consultation with the Commission.

I was reminded of my days in the UK Treasury in the 1970s, when I was working on nationalised industry policy. Ministers spent more time on the pay of Board members than on the strategic business issues facing the Corporations. And when times were hard the first thing to be cut was investment in public corporations; governments seem more ready to talk of the long term than to do much about it.

In practice, sound bite so often dominates over analysis; efficiency becomes a matter of cutting costs – and pay. This is rarely a genuine saving; budget discipline is essential but it is much better to let the organisation decide how to make savings than to presume to make the business decisions for them.

In the rough and tumble of political life it has proved very difficult to create and maintain an “arm’s length” relationship between ministers and public corporations. This is in stark contrast to what has been achieved in the utility sector by regulators, who have emphasised the interests of customers, fostered choice and insisted on greater efficiency, ie a better relationship between what is delivered to customers and the resources used in doing so.

As JOHN Stuart Mill noted well over a century ago, where public service is concerned, democratic government must be paramount. But it does not, he went on to point out, mean that government should necessarily be the provider of services. Bringing in expertise in regulation and in business to implement democratically determined objectives makes it possible to give customers and citizens a better deal. Scottish Water is a clear example of that approach in action ; it has achieved good results for its customers and for the Scottish people, while being suitably incentivised and its results monitored by its regulators.

In looking at practical issues, the great Scottish philosopher David Hume taught us to be sceptical and to relate our beliefs to the evidence. His arguments are as relevant at the tercentenary of his birth as they were then. Scottish Water has a crucial financial, as well as environmental, role in Scotland. My advice to Scotland, its citizens and its politicians, is to use the markets to provide finance for its revenue-earning investment, and to use the savings for other infrastructure projects to improve hospitals, schools and railways. Hume would, I hope, have approved. lSir Ian Byatt is chairman of Trustees of the David Hume Institute in Edinburgh. He was chairman of the Water Industry Commission for Scotland from 2006 to 2011, and director general of Water Services in England and Wales from 1989 to 2000