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Sizing up efficiency challenge

ENGINEERING WATER Scottish reorganisation

It is all change again for Scotland's water authorities next year when a single company takes charge. But does this herald doom or boom for water engineers?

Disruption and uncertainty are imminent yet again for around 800 Scottish water engineers as they prepare for next April's merger of their country's three water authorities into one. Formed just five years ago, North, East and West of Scotland Water will be abolished to allow creation of a single publicly owned utility serving the entire 78,000km 2country.

In a move seen by observers as born more of necessity than choice, the new company, Scottish Water, must hit the ground running to tackle its two seemingly opposing main challenges.

It has to preserve a large, still rising workload, but one financed almost entirely from escalating water charges now fast approaching politically unacceptable levels.

'Onerous but achievable' is how Jim Brown, East of Scotland Water's managing director of water services describes tough new efficiency targets set earlier this year by Scotland's recently created water industry commissioner Alan Sutherland.

His demands for a 35% annual reduction by 2006 in 'controllable operating expenditure'- a cut across the three authorities of up to £170M year on year - was a major catalyst in the realisation that merger was essential.

All three claim that targets could probably have been met by the individual authorities. 'But we can achieve them with much less risk and pain as a single, larger business, ' Brown claims.

He speaks with some authority, as civil engineer Brown also heads up a 100 strong task force charged not only with smoothing the transition from three to one, but also recommending how, in practice, such cost savings can be achieved. Beneath him, 11 separate multi-disciplinary work groups are busy drafting sweeping new guidelines for everything from asset management controls to devising innovative computer networks.

Brown and his transition team must work fast to achieve what Scottish Water's chief executive designate, Dr Jon Hargreaves calls 'the huge challenge of adopting a more strategic approach to moving and treating water'.

The mechanics of the merger, first mooted by the Scottish Executive only in February, were set out in the new Water Industry Bill published just three weeks ago. In receiving the Scottish parliament's fast track treatment, the Act should emerge by next April giving Hargreaves, and a new style company management board, unprecedented commercial powers.

These will allow them to form private partnerships, raise external finance and compete in wide ranging water related ventures that are currently the sole domain of the private sector.

In contrast to existing water authority boards, made up largely of political appointees, Scottish Water's will include up to five of its own senior directors with the remaining seven nonexecutive members being key industry leaders. The aim is to model private sector management structures and inject significant commercial expertise into boardroom.

Scotland's problems centre on its relatively small and widely dispersed population. They require water supply and treatment networks spread over a vast area, but offer in return a disproportionately low cash base through water charges.

European Union directives - demanding major water quality improvements to both sewage treatment and coastal bathing waters - compound the challenge. Scores of clean up schemes remain on the critical path of capital works programmes as engineers battle to meet already extended EU deadlines.

Financing this fixed, up to £350M a year turnover for each authority - especially sparsely populated North of Scotland Water - is already forcing up water charges at an unacceptable rate. And the construction programme has yet to peak.

The new single authority, boasting an £800M/y turnover, £2bn capital works programme over four years and - initially - 6,000 employees, will still be only a middle ranking business compared to England's privatised water companies. But it is seen as the best path to reducing supply lines, sharing technical innovation and imposing asset management rationalisation.

'It will demand a quantum leap forward in strategic thinking and commercial approach, ' admits Charlie Cornish, chief executive for the largest authority, West of Scotland Water. 'But the strength of one large business must be more significant than that of three small ones.'

Both Cornish and Hargreaves, currently chief executive of East of Scotland Water, remain confident that planned construction will not be sacrificed in any cost cutting drive. The current programme is, they say 'secure'.

But Hargreaves, wearing his hat as prospective boss of the new authority, qualifies the claim.

'We will take a hard look at this construction programme, aiming to achieve the same output for less money, ' he warns. 'I am not in the business of beating hell out of contractors, but our duty is to our customers not engineers.'

Economies will also come through a standardised and reduced supply chain - from consultants to pump suppliers - plus a redefined 'big is best' asset sharing philosophy. There will, say engineers, be no dramatic rewriting of the water supply map.

Creation of the existing authorities in 1996 - taking over from numerous local council water departments - was based largely on geographical water routes. Scotland's mountains dictate a largely gravity powered water supply network and, though cross boundary water sharing will expand marginally after administrative boundaries are removed, opportunities for significant savings on reservoirs or treatment works are small.

Transition boss Jim Brown reckons that economies through strategic planning, rather than construction cutting, can alone shave £300M from Scottish Water's £2bn capital works bill.

Job cuts among the total 6,000 existing workforce are seen as inevitable and unofficial estimates of 2,000 going over the next few years are not being denied. Voluntary redundancy schemes have already been set up with West of Scotland Water alone losing near 8% of its 2,600 workforce this year.

But, come April, there will be no dramatic big bang. The existing 20 strong top management hierarchy, plus some 150 senior managers, will be heavily culled.

However the three disbanded authorities will most likely initially become area bases to a small new corporate headquarters, and most employees, including up to 800 engineers, will remain at their old desks.

Re-analysis will though soon produce rationalisation and technical outsourcing. Brown reckons that engineers willing to be flexible and relocated to the private sector should not fear being without a job. 'They may be working with, rather than for, the new authority but the water sector in Scotland represents over 45% of its construction market and demand for engineers will remain high, ' he says.

Paul Mullord, commercial manager for industry trade association British Water, has seen it all before during the 1989 privatisation of England's water industry. He says that some 50 existing strategic partnerships with consultants and contractors, plus around 200 framework supply contracts, should all be safe until their three year terms expire.

And then, as happened in England, the most efficient and flexible will not only survive but thrive.

'But, ' says Mullord, 'I do fear an initial 18 month period when everything is re-analysed and very little money is spent.'

A year after the merger, Scottish Water will face a further threat when a separate Water Environment & Services Bill reaches the statute book. By April 2003 full competition will be in force, with the private sector allowed to supply Scotland's water.

The new act will open the door for any British company to rent from Scottish Water use of its water supply network and to provide consumers with an alternative supply.

'Competition is good for consumers and I welcome it, ' says Hargreaves. 'Its arrival will force us to focus even harder on providing the most efficient service so we can adequately defend our patch.'

But he stresses that further legislation must ensure a level playing field so invaders cannot 'cherry pick' the most lucrative customers leaving Scottish Water - the designated body of last resort - fulfilling its duty of supply everyone else. 'Ours is largely a fixed cost business, so loss of customers forces charges up for the rest, ' he warns.

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