Risk and profit : unanswered questions about the strategic review of water charges 2006-10

In a paper in the January 2006 issue of this Commentary, [Cuthbert and Cuthbert, 2006], we identified a number of errors in the financial control of the water industry in Scotland. These errors had resulted in serious overcharging in the strategic review 2002-06, with, we argued, knock on effects to the 2006-10 period. A meeting with the Chairman of the Water Industry Commission, Sir Ian Byatt, was held on 22nd February at the Scottish Parliament to discuss one particular symptom of this, the high levels of new capital expenditure funded out of revenue in the water industry in Scotland

The wrong sort of rebate : the need to reform the UK budget adjustment

In this paper we argue that there is a continuing need for some form of rebate mechanism to iron out anomalies in the funding of the EU, but that the particular form of mechanism used to pay the UK a rebate has had severely adverse consequences, and needs to be reformed. Specifically, we argue that the current form of rebate paid to the UK has had perverse incentive effects, which go a long way towards explaining the UK’s semi-detached relationship with the EU

A constructive critique of the treasury’s country and regional analysis of public expenditure

The accurate measurement and control of public expenditure is fundamental to successful government: it is essential at each of the stages of policy development, implementation, and monitoring. This paper is concerned with issues in the measurement of public expenditure in the post-devolution United Kingdom: in particular, we provide a constructive critique of the expenditure data currently published by the Treasury. Our study is based on two regular exercises carried out by the Treasury: a. the publication of the annual Public Expenditure Statistical Analyses (PESA), b. the publication of the biennial Treasury Funding Statement for the Devolved Administrations (TFS)

Free care for the elderly

The policy of free personal care for the elderly in Scotland was implemented in July 2002. Work on the costings of the exercise had been undertaken by the Care Development Group (CDG), a group established by the Minister for Health and Community Care, and chaired by Malcolm Chisholm. Research to assist in the costings was specially commissioned and the research papers were published by the Scottish Executive Central Research Unit: (CRU, 2001). The CDG's main conclusion with regard to costs was that the initial cost of the policy would be £125 million, rising to £142 million by year 3. (CDG, 2001) Even before the policy was implemented in Scotland, the question of cost had caused considerable debate. Doubts, for example, were expressed by David Lipsey and Joel Joffe, two of the members of the Royal Commission on Long Term Care, who had produced a Note of Dissent (1999). In Lord Lipsey's view, "If it was affordable and if it was going to people who most needed it, yes great, free care would be a splendid policy. Unfortunately it is not affordable." One contribution to the debate on the cost of the policy in Scotland was a paper by Cuthbert and Cuthbert (2002), in which it was argued that the costs had been substantially underestimated. Recently, some members of the CDG have been quoted as saying that implementation of the policy could be too expensive: (Scotsman 12th October 2004). Nevertheless, the current state of the debate on costings is still unsatisfactory. The discrepancy between the cost estimates which have been produced by the CDG and ourselves is so large that it needs to be resolved. Moreover, the need for this resolution is heightened by two additional factors. First, the latest population projections by the Government Actuary’s Department indicate that there will be more old people in Scotland than was previously projected, which means that the effects of any underestimation of costs will be multiplied. Second, the Liberal Democrats have adopted free personal care for the elderly for the whole of the UK as a major part of their pre-manifesto3. The LibDem costings of £1.4billion for this policy for the UK appear to be broadly in line with the CDG costings for Scotland. So if the CDG has indeed underestimated its costings for Scotland there could be profound implications for the LibDem strategy. The main new information in this paper is derived from examining, in greater detail than in our previous paper, that part of the CDG’s work concerning the estimated costs of delivering free personal care in the community, as opposed to in residential and nursing homes. In the course of this critique we establish that there were flaws in the basic research commissioned by CDG, which meant that the numbers of elderly disabled people in private households in Scotland were seriously underestimated by the CDG, by a factor of more than 2. This mistake appears to account for a major part of the discrepancy between the CDG and Cuthbert and Cuthbert costings. In addition, in other parts of our critique we point to other areas where the methodology is suspect

The Fifth European Framework Programme : a comparison of Scotland and Ireland involvement

The knowledge economy is recognised as a key driver of economic progress. It is also recognised that within a successful knowledge economy an important role is played by research and development and its effective transmission into the market place to the benefit of the local economy. These views express themselves in the European Union context in the goal set at the Barcelona Council 2002 to increase R&D investment to approach 3% of GDP by 2010 from its current level of 1.9% and to increase business R&D from its current level of 1.06% to around 2% of GDP. This goal is a particular challenge to a country like Scotland where business R&D, at around 0.53% of GDP, is low compared to the European average: (Scottish Executive). There are a number of programmes at national and European level designed to assist the development of the knowledge economy. One of the most important programmes is the EU Framework Programme, which provides funding assistance and encourages research links and networks throughout the EU. The purpose of this paper is to examine the participation of organisations in Scotland and Ireland in the Fifth Framework Programme (FP5), and compare the patterns of participation in the two countries. A particular emphasis in the paper is to consider the involvement of business in Scotland and Ireland in FP5. The information used was collated from the European CORDIS database of FP5 projects as at end February 2003

Issues on Calman tax proposals still unresolved

The Commission on Scottish Devolution chaired by Sir Kenneth Calman delivered its report in June 2009. Among its recommendations on transfers of powers to the Scottish Parliament were a set of income tax proposals

Customs and Excise regional trade statistics : a note

United Kingdom Regional Trade In Goods Statistics, pro- duced by HM Customs and Excise, (Customs and Excise: Quarterly) provide up-to-date quarterly information on exports and imports and were introduced in 1999 “to support the economic decision-making of the devolved Scottish Parliament, Assemblies, and regional bodies within the UK.” Probing and analysis of the data which we undertook indicated a number of problems with the data, not least the wrongful inclusion in the Scottish data of a “catch all” UK category which for some industrial sectors represented almost 70% of the published Scottish data. The data, produced in the scope of National Statistics and “to high professional standards set out in the National Statistics Code of Practice”2 were therefore unusable for the stated purpose. In July 2003, a new methodology was introduced by Customs and Excise with the purpose of clearing up earlier data problems. This article considers whether the data are now fit for purpose, and concludes that many problems still exist

How the strategic review of charges 2002-06 casts a long shadow over future water charges in Scotland

The findings of the research described in this paper are that there were significant errors made in the setting of water charges in 2002-06 in Scotland, such that there was substantial overcharging of customers. This will continue at a lesser extent over the period 2006-10. The amounts involved are large: total overcharging in cash terms is likely to be at least £650 million cumulatively over the eight year period from 2002 to 2010, and could well be close to £1 billion. This affects both households and businesses in Scotland

Did flaws in the application of resource accounting and budgeting distort the Strategic Review of Water Charges in Scotland?

In August 2001, the Water Commissioner was tasked by the Scottish Executive to carry out a strategic review of water charges covering the years 2002-06. Based on revenue calculations made by the Water Commissioner in his review, Scottish Water issued its water charges for 2003-04. Since then there have been repeated arguments and complaints, particularly from businesses, that the prices charged are too high and are crippling business. For example, Peter Jones, writing in the Economist 29th May 2003, cited the example of the BP refinery at Grangemouth, where the annual water bill is now £12.7 million, as against £7 million for a similar establishment in England. This article examines the impact which the then newly introduced system of expenditure control based on Resource Accounting and Budgeting, (RAB), had on the Strategic Review. We conclude that there appear to have been mistakes in the application of the RAB system at the time of the Strategic Review, which mean that the review took an unduly pessimistic view of the water industry’s financial position. This implies that the charges set as a result of the review were potentially too high by a significant amount. There is a requirement to re-open key aspects of the arithmetic of the Strategic Review: in particular, on how the Scottish Executive set the original RAB limits and how these were then translated into the Commissioner's advice. The structure of the paper is as follows. Section 2 briefly sets the background. The main content of the paper is in section 3, where we examine how the Water Commissioner used the information given by the Scottish Executive with regard to RAB to determine how much Scottish Water could borrow, and we compare this with the figures the Scottish Executive itself produced for net borrowing. There is clear evidence of inconsistency between the Commissioner and the Scottish Executive, with the Commissioner producing in his calculations a much more pessimistic view than the Scottish Executive of the amount of net borrowing consistent with a given RAB control limit. The implications of this for the charging decisions taking during the review are potentially profound and may amount to more than £100 million per annum. We cannot establish categorically, on the basis of the available evidence, how this inconsistency arose: but it appears to relate either to revised estimates of depreciation which the Commissioner calculated during his review, or more probably, to the possibility that there is a mistake in the terms of the letter from the Scottish Executive commissioning the review of charges which has meant that a substantial element of investment has effectively been double counted. Section 4 identifies, and discusses briefly, a number of other issues which are relevant to the determination of water charges. The section concludes with the recommendations that (a) the arithmetic on the setting of existing charges should be re-opened, and (b), that there should be a more wide ranging review of charging policy

How the civil service responded to our proposal for changing the pricing system for Scottish Water

Water is one of Scotland's most vital and largest industries. It is an input into all other forms of economic activity as well as being part of every family's expenditure. It is therefore important, both for living standards and for the economy, that the pricing of water in Scotland is taken extremely seriously and that efforts are made to have an appropriate, sustainable charging system. Since 2002, when the office of the Water Industry Commissioner for Scotland was established, we have analysed the various methods used to determine water charges, and have shown that each of the various methods have major faults. In 2008, the Cabinet Secretary for Finance raised with us the problem of capital charges on the water industry: it was expected that changes in Treasury policy would make water capital charges an increasing real burden to the Scottish government budget. As a result of both this concern and our 2007 Commentary paper, (which had set out the problems with the current method of setting water charges), we proposed a new charging system for Scottish Water, details of which we published in the Fraser of Allander Commentary in February 2009. Under our proposed charging system, net new capital formation financed from customer charges would be regarded as being paid for by a notional loan from the customer base as a whole to Scottish Water. We suggested that the body of customers as a whole would then earn a return: this would be in the form of a rebate, equal to historic cost interest and depreciation on the notional loan. In our paper, we showed how this approach would be fully sustainable, and would lead to significantly lower charges for customers than the present regulatory capital value pricing system. The approach would also have had significant benefits as regards the capital charge which, (when the paper was written), the Treasury levied from departments on the capital assets of public corporations. Although we received no response from the Water Industry Commission for Scotland, (WICS), or the Scottish government civil service with responsibility for water to this or our earlier paper, it transpires that the civil service did provide a briefing on our paper to Ministers. In the summer of 2010 we were given a copy of the brief which had been put to Ministers by the civil service, commenting on our proposal. This brief was originally prepared for Ministers in 2009, and a slightly revised version was put to Ministers again in mid 2010. It is the later version of the brief which has now been given to us. This paper represents our critique of the civil service comments on our proposal. We will demonstrate that the advice put to Ministers was seriously flawed: in several respects the advice was factually wrong – and we believe that there were major omissions relating to matters which should have been covered in advice given to Ministers. Our conclusion is that Ministers would have found it impossible to make a properly informed decision about the relative properties of different charging methods, or about the merits of our specific proposal, on the basis of the civil service brief