Trust funds

As Scottish Water has grown up, it has earned Wics' trust - and this will be fundamental to the next price review. Long-term FD, and now chief exec, Douglas Millican tells Karma Ockenden why

Douglas Millican came to the post of chief executive of Scottish Water in unexpected – and unhappy – circumstances. Finance director since its formation in 2002, and having acted as interim chief before, he was the natural choice to step in again as interim last October after Richard Ackroyd’s sudden illness and death.

The decision came quickly to ask Millican to step up permanently – the board understandably favouring his proven track record and detailed knowledge of the company over any outsider, given it was just a year ahead of crucial price review decisions. Millican formally became chief executive on 1 February this year.

Talking to Millican, it becomes pretty clear pretty quickly that he intends to do far more than just hold the reins and coast on Scottish Water’s achievements to date, impressive though they may be (see box, New heights, page 16). He has definite ambitions to both build on the successes of the first decade and ensure Scottish Water changes to thrive in the next.

Perhaps the single biggest change will be making the business genuinely customer orientated. This agenda has been developed jointly with regulator Wics – “empowered customers” is one of the three key elements of the next price review, running 2015-21.

Similar (though not identical) to the Customer Challenge Groups in England and Wales, the Customer Forum in Scotland is working with Scottish Water to establish and champion customer priorities and to agree the most appropriate outcomes. The objective is for company and customers to agree between them an acceptable business plan for 2015-21, which Wics will then accept as the final determination.

Millican says: “I can’t stress enough, this isn’t a plan to second guess the regulator. This is a plan to meet customers’ needs. Clearly it will need to pass muster with the regulator in terms of the scope for future efficiency and so on, but it’s a customer-oriented plan that’s got to pass from the regulatory angle, not a regulator’s plan.”

Scottish Water has conducted a huge customer research programme looking 25 years out and has discussed with the Customer Forum which service improvements it should make over and above those required by law. It has put forward its recommended proposition, which the forum has been “broadly supportive” of. Between now and October, this will be honed into a business plan. Wics will put forward its comments by December and there will then be a period of discussion between involved parties with the aim of having an agreed plan by February 2014. Wics will publish a (hopefully not too different) draft determination by April and a final determination by November.

Millican has his eyes on the prize: “An agreed plan is the prize we – and I personally – am after.”

Unlike in England, where some Customer Challenge Groups doubt Ofwat’s commitment to waving through business plans agreed between company and customers, Millican says Wics has made an explicit commitment to honour its word on that.

This is part of a broader trust increasingly evident in Scotland between regulator and regulated, an ever-closer relationship that could not contrast more sharply with the way PR14 in England and Wales is
panning out.

Wics has said it is moving from a “parent-child” relationship with Scottish Water in the next price round, to a “trust but verify” approach, on the back of established experience, maturity and trust. Being trusted is also the key plank of Scottish Water’s vision statement. Millican says there is a tangible sense of partnership now.

For example, Scottish Water and the regulator have worked jointly since 2010 on evolving water regulation, including the establishment of the Customer Forum. He says: “I cannot emphasise enough the model in Scotland is dependent on the quality of relationships and dialogue that’s going on between us, the Customer Forum, the commission and the quality regulators.”

How different down south, then, where there is the real prospect of Ofwat outsourcing PR14 to a third party – still unknown at the time of writing – despite business plans being due in December, and where the market is riddled with uncertainty (see feature, page 21). Millican won’t be drawn. “I’m not going to make any comment on England,” he says, adding: “I’m very happy for many reasons to be operating in Scotland.”

So what can we expect from the Strategic Review of Charges (SRC), as the price review is known? In terms of income, revenue from bills could be depressed. Millican says research suggests “customers absolutely need and desire improved service but probably have a diminished ability to pay in real terms”.

He is confident, though, that the Scottish Government will continue to make lending of around £100 million a year available. “It’s a great testament to government and its commitment to Scottish Water – and Scottish Water in public ownership – that in our 12 years they [government] have absolutely co-financed us in terms of access to borrowing.”

That’s not to say original budgets haven’t been slashed as public finances have been squeezed, but Scottish Water has never been left so short it has had to raise prices or slash spending.

To date, Scottish Water has only been able to borrow from the Scottish Government – an arrangement that has caused some to fret, given spending cuts.

While Millican says there is nothing concrete to suggest this will change, there does seem to be light at the end of this particular tunnel. He notes: “The Scotland Act that has just recently passed does give additional borrowing powers to Scotland [from 2016]… So there is potential. Whether the government chooses to exercise that potential with regard to Scottish Water, or whether that potential is used to finance other aspects of public services – that’s for the government to decide in due course.”

A clue that bond market borrowing might well be in Scottish Water’s future, though, is Wics’ new “financial tramlines” policy. In a nutshell, the idea is to establish upper and lower “tramlime” levels of acceptable financial strength for Scottish Water over the long term. This has a number of objectives, but it is hard not surmise that the policy is preparing Scottish Water for market borrowing. According to Millican: “What sits behind Wics’ tramline proposal is that we should have sufficient financial strength that if the opportunity is there for us to borrow from the markets, we could do so at a relatively attractive cost of finance.”

The government has already provided for Scottish Water to borrow externally to grow its non-regulated businesses – namely Scottish Water International and commercial and renewable energy subsidiary Horizons – via April 2013’s Water Resources (Scotland) Act. These are small interests at the moment, but important for the Scottish Government’s Hydro Nations agenda. Millican says: “At the moment, we’ve got no plans to use it [the new finance facility] but it’s really helpful that provision is there for the longer term.”

So assuming stable borrowing but a reduced ability to pay on the part of customers, how will Scottish Water manage in 2015-21? For one thing, capital spending will stay at around the £500 million a year mark, down from the 2008-10 peak of around £700 million a year. Around half will going into capital maintenance. Enhancement spending will be “increasingly in the infrastructure [networks] space”, according to Millican, with much less going into treatment plants than five years ago.

The company is looking to package this work into three blocks: a water infrastructure alliance; a wastewater infrastructure alliance; and a non-infrastructure package. It is currently in discussions with its part-owned capital delivery subsidiary Scottish Water Solutions 2 over the latter contract.

The company will also continue to look for efficiency savings. When we spoke, Millican was set to appoint two new directors on the executive team. One will head capital delivery – “recognising we need to continue being very efficient in our capital investment programme”. The other, a director of strategic customer service planning, will be charged with thinking creatively to deliver the right outcomes at the lowest cost – for example, through partnering with third parties and seeking non-asset means of delivering outcomes. This reflects Wics’ policy, again born out of discussion with Scottish Water, of building the scope for more innovation into the SRC (via a totex-style policy and other mechanisms).

So, ultimately, does Millican think Scottish Water will be able to come to an agreement with customers over plans for the next period? He says: “The process we have gone through with the forum will hopefully help us to a plan that has got a good prospect of being accepted, rather than a plan that is flying blindly.” He adds, with a nod to his old role as finance director: “Though at this point we are all talking in principles. Come January, we’ll be talking numbers. I can only say my absolute hope and the commitment from all of us here is to agree the plan.”

Finally, the elephant in the room: the prospect of Scottish independence. What’s Scottish Water’s position? Millican, perhaps understandably given his company serves all Scots, from gung-ho nationalists to the staunchest unionists, says simply: “Whatever happens on the 18 September next year, we will keep delivering for our customers in Scotland.”

New heights – annual report 2012/13

· Lowest bills in Britain: in 2013/14, the average combined household charge is £334, £54 lower than the average bill in England and Wales.

· £487 million of investment delivered, including the launch of a £250 million project to upgrade Glasgow’s wastewater network. The company is ahead of target for the overall £2.5 billion investment programme for 2010-15.

· Customer satisfaction up 5 per cent to 88 per cent; outperformed regulatory Overall Performance Assessment (OPA) target.

· Economic level of leakage reached a year ahead of target; leakage down 54 million litres of water a day.

· Highest ever drinking water quality; 99.88 per cent of samples complied with strict quality standards.

This follows hot on the heels of the first decade’s (2002-10) impressive achievements, including OPA doubled; average household charge down £30; £5.5 billion of investment; wastewater treatment compliance up 87 per cent; leakage down 44 per cent; sewer flooding incidents down 61 per cent; and real operating costs slashed by 40 per cent.

This article first appeared in Utility Week’s print edition of 5th July 2013.

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