Water industry: Investment Planning and Prioritisation Group minutes - December 2022

Attendees and apologies

• Jon Rathjen, Scottish Government (SG) (Chair)
• Stuart McCaskell, SG
• Ruby Keddie, SG
• Douglas Millican, Scottish Water (SW)
• Mark Dickson, SW
• Alan Scott, SW
• Simon Parsons, SW
• Barbara Barbarito, SW
• Tracey Gee, SW
• Michelle Ashford, Water Industry Commission for Scotland (WICS)
• David Satti, WICS
• Niki Maclean, Scottish Public Services Ombudsman (SPSO)
• Sue Petch, Drinking Water Quality Regulator (DWQR)
• Sharon Forrester, Scottish Environment Protection Agency (SEPA)
• Gail Walker, Consumer Scotland

Items and actions

Welcome and apologies for absence

There were apologies from Barry Greig, Alan Sutherland, David Harley, John Kenny, and Ian Buchannan.

Minutes and actions arising from meeting of 21 September 2022

The previous minutes were agreed to be an accurate record.

The action points were reviewed:

• AP 1 – SW to provide update on management approach prioritisation. Closed – An update was provided at the Investment Planning and Prioritisation Working Group (IPPGWG) and SW will set up a session in January 2023 to clarify how management approaches are reported and tracked
• AP 2 – SW to provide update on lighthouse projects. Closed. SW sent an update to IPPGWG members and can provide further detail on projects should stakeholders welcome this
• AP 3 – SW to present paper on how risks are managed for asset replacement. Closed. David Satti clarified that the ask is to have visibility of the interactions between Management Approaches (MAs) and the Committed List. Simon Parsons noted that the Committed List contains a number of projects, and that a project could be a combination of multiple MAs. He suggested that further information could be provide in a bilateral discussion
• AP 4 – SW to consider how to provide further detail for Interventions to meet the needs on the Development List. Agenda item 6
• AP 5 – SW to provide an update on Information Sharing Tool. Carried forward. The tool is tied into the Reporting Redefined workstream 
• AP 6 – SW to clarify its cash balances. Complete
• AP 7 - SG to submit Q2-22/23 needs list to Ministers. Complete
• AP 8 – SW to clarify Management Approach numbering. Complete
• AP 9 – SW to provide update to IPPGWG on appraisals with significant changes in forecast dates. Agenda item 6
• AP 10 - SG to submit IPPG report to Ministers and publish on website. Closed. The report has been submitted to Ministers and will be published in due course

Action 1 – SW to provide an update on Information Sharing Tool

IPPG Working Group report

Simon Parsons presented the working group update report. He noted that:

• the working group met once in the last quarter with the next meeting scheduled for February
• SW presented a paper to show progress towards meeting Ministerial Objectives; this will be an annual update with the next report to be presented in August 2023
• there were conversations with individual stakeholders in terms of the Investment Planning Scenario (IPS)
• there were no new Needs for this quarter
• the working group discussed charges for 2023-24 and how it would impact the Investment Planning Scenario
• SW had presented a paper on an adjustment to Needs on the Development List

The Chair queried whether any Needs had been removed from the Development List as no suitable solutions had been found. Simon confirmed no Needs had been removed but that some Management Approaches had seen an increased level of demand. He added that some urgent Needs had been progressed more quickly. Simon also noted that once SW understands the impact of next year’s charges on the IPS it would consider whether any Needs would be re-prioritised. Douglas Millican highlighted that some projects are clear Needs which require a solution but that other projects are studies which may or may not create a new Need to be delivered. Douglas suggested that SW may be able to create a visual to better highlight which Needs would progress to a project and which may cycle back following a study. Sue Petch asked for further visibility on long-term demands and the potential cost of interim mitigations if projects are re-prioritised. Douglas added that Scottish Water will be able to progress some asset related issues within SR21 but that other Needs may be met over more than one regulatory period. Simon highlighted that some project commitments are already made for a 10-15 period. The Chair commented that Scottish Water has always had big capital commitments, for example the Shieldhall Tunnel. Michelle Ashford noted that there may be less money available in future periods, so SW will need to explain how it will meet expectations. Simon confirmed that the IPS would be refreshed once decisions have been made on charges for 2023-24.

The Chair reflected that the group should be careful with the language used; investment is not “pushed out,” rather SW may seek to extend the life of an asset if there is financial benefit. He added that it is a balance of risk and SW needs to make sure it has that balance right. 

David Satti raised the recent WICS information request and the investment planning scenario, noting that after charges for 2023-24 are understood, it would be helpful if SW could state what its priorities are and provide visibility of planning and prioritising so that WICS can understand whether any projects will be missed. The Chair replied that IPPF (Investment Planning & Prioritisation Framework) is a rolling programme of investment, and that level of visibility will not necessarily exist. Douglas added that Scottish Water must make wise choices on phasing projects based on the money that is available. He added that SW will need to provide visibility on investment obligations for future regulatory periods based on the current phasing choices. The Chair highlighted that IPPF provides flexibility so that if risks arise, investment can be brought forward. 

David noted his expectation that SW should be able to provide a list of projects so that it could clarify priorities should more money be available. Douglas added that Scottish Water would change the policy criteria of management approaches if additional funding were available, for example, recurring interruptions to customer supply is based on burst frequency and SW could reduce the number of bursts per year before it takes action. 

The Chair commented that the IPPF process was developed for this period and intended to be a different method of overseeing the investment programme. He added that it is uncomfortable getting towards the end of year two with the group still discussing the same issues without a resolution. The Chair noted that fundamentally, the process will not be significantly changed within this period; the next strategic review will be commissioned in 2023 and it will be necessary to consider how this approach has operated compared to the previous approach. 

Investment Planning Scenario

Simon Parsons presented the update. Highlights included:

• SW recently refreshed the investment planning scenario with the assumption that £4.9 billion will still be delivered
• stakeholders had been updated on the allocations and outcomes of the £4.9bn scenario
• however, it will be a challenge to achieve the necessary financing
• there are on-going conversations between SG and SW about next year’s charges
• once SW has clarity on the charges for next year, it will be able to produce a refreshed investment planning scenario
• an update will be provided at the next IPPG meeting

The Chair noted that charges for 2023-24 will get settled soon, but that we will still be subject to the uncertainties of inflation over the next few years which cannot be predicted. He added that there are other significant impacts such as COVID, the on-going war in Ukraine and Brexit; this means that £4.9 billion will be a challenge. 

David Satti commented that within the £4.9 billion investment scenario, £300m had been allocated to the transformation plan. He noted that this is expected to result in £100 million cash savings as well as negate the impact of capital inflation. David pointed out that this seems ambitious and asked what investment would be dropped if SW does not realise the cash savings. Simon answered that SW has made assumptions for the different investment scenarios, including the cost of capital inflation and where the transformation plan is going to deliver savings. SW would provide further information once the IPS has been refreshed. David asked whether SW could demonstrate how it will achieve the savings. Douglas answered that it is challenging but that SW is trying to capture the time and cost benefits.

Q3-22/23 Proposed Needs List

Simon Parsons confirmed that there are no New Needs this quarter.

Report on the progress of interventions to meet the needs on the Development List

Simon Parsons presented the paper, noting that the portfolio review process is on-going. Highlights included:

• summary of current investment maturity – over £2.2 billion is now with SW’s delivery teams, slightly below half of the actual investment programme. The level of investment in delivery for 22/23 and 23/24 has increased by £104m and £83m respectively since previously reported in Q1. The black line indicates the planned investment showing increases up from £799 in 2021-22 to just over £1 billion in year six. In terms of maturity, more projects are reaching delivery on a quarter-by-quarter basis
• Progress to the Committed List (PCL) - At the end of Quarter 2 22/23, year to date PCL was 105% which is above the target range and the end of year forecast is currently 115%.
• progress of the development of interventions with level 1 and 2 appraisals – 16 project investment appraisals were completed within the quarter and 15 of the 16 projects progressed through first time at the Investment Approval Group. These projects had a value of some £190m. Key appraisals included:
  • Dunside reservoir – SW will breach the non-operational reservoir and plant trees in the space available.
  • Erskine Wastewater Treatment Works (WwTW) – A system strategy is being developed to provide an optimum solution to 21 strategic Needs.
  • Udny Green WwTW – There is currently no capacity to accommodate the expected growth. A new WwTW will be constructed on adjacent land.
• SW highlighted projects where the appraisals have moved out by 12 months: 
  • Philipshill WwTW - This is currently SW’s biggest energy using treatment works; SW is working closely with SEPA to look at alternative solutions to meet the One Planet Choices initiative. 

Sue Petch highlighted that she had recently had a detailed explanation on how PCL is calculated and suggested the slides could be shared with stakeholders. It was requested that a glossary section is added to Objective Connect to store information papers. Simon highlighted that SW is currently reviewing progress measures to ensure they are working as intended. Douglas Millican added that in SR15 the OMD (Overall Measure of Delivery) measure was adjusted over time to ensure it did not create false incentives i.e., over-promotion of large projects to attain points.

Gail Walker raised Philipshill and asked for further information on the issue to be resolved. Simon noted that investment is required due to growth. SW would traditionally increase capacity; however, this would also increase the energy costs and carbon; SW has therefore paused the project to consider its options. Simon highlighted that SW has a sustainable growth agreement with SEPA and a solution would be developed in line with the agreement. Sharon Forrester noted that the solution would consider recovery of materials such as phosphorous as well as wastewater treatment. She added that there is a challenge to determine how to work within existing legislation.

The IPPG Q2 2022-23 report was agreed. The Chair requested the report be submitted to Ministers.

Actions

• action 2 – SW and SG to create Glossary and upload slides on PCL methodology
• action 3 - SG to submit IPPG report to Ministers and publish on website

Transfers to the Committed List

Simon Parsons presented the paper and summarised the key points:

• in Quarter 2, 12 projects at a cost of £46m and programmes of work with a value of £95m have been added to the Committed List. The total addition for the quarter is £141m
• the most significant additions were within Treated Water Storage and Enabling Economic Growth Infrastructure Funding
• the negative addition shown in the “Others” category reflects the re-allocation of work previously identified as IR18 into the relevant SR21 management approach
• key projects included:
  • Perth City WWTW – There is significant growth in the city and the works needs upgraded to meet demand. SW will use a novel approach called Integrated Fixed Film Activated Sludge (IFAS) as part of the solution. SW’s biggest Photovoltaic (PV) plant is at Perth WwTW, and it provides some 80% of the electricity requirements.
  • Non-Complex Service Delivery (NCSD) Phase 3 – 70-80% of SW’s projects are small, and investment is forecast to increase as SW creates new assets. By the end of SR21 it is likely to deliver 12,000 jobs with an annual spend of £175m
• the total value of the Committed List is now £1,633m

Sue Petch highlighted that it would be helpful to provide more detail on the links between the “Progress of interventions to meet Needs on the Development List” and “Transfers to the Committed List” papers. She noted 12 projects had moved to the Committed List but only one of those had an appraisal. Barbara Barbarito agreed to provide additional commentary in future papers. Simon noted that of the £141m committed, £10m worth of projects had an appraisal. However, other projects were approved under similar processes i.e., digital services.

David Satti highlighted that NCSD is the first one of the transformation projects this group has seen and that it would be good to understand the benefits arising as a result of this project. He added that Scottish Water has already committed to becoming more efficient and has embarked on a larger capital programme. David noted that it would be helpful to understand if this project would help existing commitments or if it is part of the cash savings. He asked whether SW could list the transformation projects, where the benefits would come from and how SW would achieve savings. Douglas Millican clarified that the transformation plan is a key part of SW’s Strategic Plan and informs all aspects of the business – efficiency, net-zero etc... He added that the minimum aim is to break even in cash terms, but the expectation is to provide savings. Scottish Water would consider how to provide further transparency on the IPS and the cash savings.

The Chair highlighted that transparency is important and he noted the challenge in assessing efficiency across the period under the IPPF process. He suggested that this could be examined as part of the Strategic Review of Charges (SRC) process but also noted the importance of determining whether IPPF has delivered better outcomes for customers and whether it has been more efficient overall. 

Any other business

The next meeting was scheduled for 15 March 2023, hosted by the Scottish Government at Victoria Quay, Edinburgh.