Calls for Scottish Water to be taken out of state ownership and turned into a mutual like Wales’s Glas Cymru generated more heat than light last week
Alex Johnstone, MSP for north-east Scotland and Conservative spokesman for infrastructure, claimed Scottish Water misallocates resources, is immune from competition and overcharges its customers. He advocated taking it out of public ownership to drive up investment and deliver lower bills, adding that this would free up £180m to invest in other public services.
The proposal will fall on deaf ears in Holyrood. Soon after the SNP gained power last May, finance minister John Swinney rejected an earlier mutualisation proposal out of hand. However electorally unpopular it may be, the SNP should at least take another look at changing Scottish Water’s status.
The response from the McChatterati was entirely predictable. A rash of vitriolic responses sprung up on newspaper comment sections. The common thread, straight out of the Tommy Sheridan playbook, was that it is simply unthinkable that anyone should be allowed to profit from delivering a natural resource to Scots. Opponents harp back to the Strathclyde referendum of 1994, in which 97% of respondents voted “no” to water privatisation.
Certainly, many of the privatisations carried out by Thatcher and Major in the 1980s and 1990s have failed to result in sustainable British companies.
However, mutualisation need not inexorably lead to privatisation. What critics of Johnstone’s proposal seem to forget is that big chunks of Scottish Water — formed from the 2002 merger of the East, West and North of Scotland Water Authorities — are already in private hands.
The year after Scottish Water was created, it quietly established a new business called Scottish Water Solutions. One of the key private-sector partners in this, which is today responsible for some 70% of the water-related civil engineering work in Scotland, is Kellogg Brown & Root — a subsidiary of Dick Cheney’s hated Halliburton.
Other private-sector partners are United Utilities, Galliford Try and Morgan Est, which together form UUGM, and Thames Water, Gleeson, Kellogg Brown & Root and Alfred McAlpine (together these form Stirling Water). Scottish Water would never have hived off all its development work to these private-sector consortia unless it recognised that they have skills that it lacks. In doing so it has created a hybrid of the private finance initiative, dressed up as something else.
That a cherished national resource has already been partially privatised seems to have escaped attention. And according to recent research commissioned by the David Hume Institute, the curious structure appears to be working.
Appropriate competitive pressures introduced by the regulator, the Water Industry Commission for Scotland, are also said to have improved delivery.
But I don’t believe this halfway-house can be a long-term solution. Jo Armstrong, a former civil servant and economist at JA Analysis, claims that Scottish Water remains much less efficient than its English and Welsh rivals and that service levels are 40% below the least efficient English counterpart.
This recently became apparent to residents of Newhaven in Edinburgh, who had to contend with raw sewage on the street outside their doors for most of the Christmas break.
According to Armstrong, public ownership also leaves Scottish Water with a “sub-optimal capital structure” that leaves taxpayers exposed to unnecessary risk. The experience of Wales, where Glas Cymru is by all accounts a big success, suggest John Swinney should at least give Johnstone’s proposal a peak,
Flat round of beer
It looks like beleaguered brewer Scottish & Newcastle might hang on to its independence thanks to the credit crunch, which means John Dunsmore will escape the ignominy of being the most short-lived FTSE 100 chief executive.
In some quarters of the City, the talk is that the two-way takeover by Carlsberg and Heineken is on the rocks, largely because Carlsberg is struggling to fund its share of the £9.7 billion deal. The Danish brewer’s shares have slumped by nearly 25% since the proposed bid was unveiled, and analysts say it will struggle to raise £3 billion via a rights issue. It should all become clear next week, and by the Takeover Panel’s 21 January deadline at latest.
The possibility the bid could collapse, coupled with a wider sell-off in the sector provoked by collapsing beer sales in the UK market, have caused S&N’s shares to fall by 6% from their peak of 783p on October 31 to 729p at Friday’s close. If the takeover fails, the UK brewer’s shares can be sure to droop even more, causing severe hangovers for arbitrageurs.
Linen folds tent
Norman Murray, chairman of Cairn Energy, is taking the closure of British Linen Advisers, which he chaired from 1999 to 2003, in his stride. The great white hope of the Scottish corporate finance scene, British Linen handled some huge deals, including the £300m sale of Glenmorangie to LVMH. However, an exodus of employees from its Edinburgh office means the firm now has just a skeleton staff in London. The decision to give up on Scotland is a blow – but is indicative a wider trend that those behind M&A deals would rather pay fatter fees for the kudos of using London-based advisers.
This Scottish Agenda column was published in The Sunday Times on 6 January 2008.