Select Committee on Environment, Transport and Regional Affairs Memoranda


APPENDIX 2

BENEFITS OF ALTERNATIVE STRUCTURES

  Proposals for alternative structures have been developed by a number of companies including Kelda and more recently Glas Cymru, and are set out in the documents they have issued. The significant benefits identified from separating "Not for Profit" ownership of assets from operations include:

  Lower prices:

    —  100 per cent debt finance with high quality bonds will produce the lowest possible cost of capital in the longer term. Plans and structures will be put in place to demonstrate to bond investors that the asset-owning company is very low risk.

    —  Competition for operating contracts, covering all controllable costs, will be a spur to future efficiency.

  Re-investment of financial surpluses:

    —  Customers or members instead of ordinary shareholders will own the asset-owning company. The asset-owning company will not therefore pay ordinary dividends which means that the financial surpluses arising from lower costs will be re-invested for the benefit of customers and the environment.

  Legal and regulatory protection:

    —  The asset-owning company will continue to operate under a strict legal and regulatory framework which ensures that safe drinking water supplies cannot be compromised. Changes to the regulatory licence will be agreed with OFWAT to reinforce independence and ring-fencing and emphasise creditor and customer protections.

  Safety and quality of service:

    —  The asset-owning company will retain responsibility for providing safe drinking water and protecting the environment, and it will also retain the people and resources necessary to ensure that this primary responsibility is met. The integrity of the water supply system will not be compromised. By ensuring that the asset-owning company has a sound financial basis the agreed investment programme to improve service reliability and water and environmental quality will be carried out as planned.

  Reduction in risks:

    —  The aims of the asset-owning companies, customers and regulators will be aligned as a result of the removal of the tension that arises from shareholder ownership of an essential public service;

    —  A strong competitive procurement plan will ensure that most of the risk of variations in day to day running costs are borne by the contractors;

    —  A strong competitive procurement plan will ensure that most of the risks of variations in day to day running costs are borne by the contractors;

    —  Diversification risk will be eliminated;

    —  Substantial financial reserves will protect the asset-owning company and its customers against the risk of adverse trading conditions.

  Regional ownership and control:

    —  Water companies provide an essential public service and it is important that their ownership remains in "safe hands". Customers will benefit from the fact that the customer and environmental policies of the asset-owning company will be highly responsive to local priorities.

  Competitive procurement plan:

    —  The day to day operation of the assets and the provision of customer services will be outsourced. These contractors will give the asset-owning company the benefits of competition, best practice and best value.


 
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Prepared 29 January 2001