 Felly gwrs, rydyn ni periyd computersau. Rydyn ni'n rôl eich dda'r cyvelydd yn gweithio ar hyn o'r trwy iawn i'r tregylumau'r cyitym ddyn nhw'n trwy iawn i'r cyffredinol, ond mynd i'r cyflasod. Felly ar gyfer dros eich tympem mewn cyfrifysgol, rydym yn ei bobdannu gwneud am gynnyfodeg eich gyflasodau a'r cyfrifysgol i gynnydd y gyrthuig i gyflym. I have just put on the record at this stage I would like to thank Ash for the worth that she put in on the committee while she was here and we'll be sorry to see her go. The first item on the agenda is a decision on taking business in private. We have consideration of whether to take items 6, 7 and 8 in private. Item 6 and 7 are to consider the evidence that we will hear under items 4 and 5. 18. Idemat is to consider the proposals for a people's panel in relation to section 91 of the Climate Change Scotland Act 2009, which is about public engagement by the Scottish Government. Do we agree to take these items in private? We are agreed. Our next item of business agenda item 2 is the consideration of a draft statutory instrument, the greenhouse gas emissions trading scheme, amendment number 2, order 2023. I'm pleased to welcome Mairi McAllan, the Cabinet Secretary for Transport, Net Zero, and Just Transition. I'd also like to welcome Marina Cover, the Senior Policy Advisor, UK Admissions Trading Scheme from the Scottish Government, and Lucy Gohagan, the Head of Unit for Net Zero Economy and Carbon Markets from the Scottish Government. Thank you for joining us today. The instrument's laid under an affirmative procedure, which means it cannot come into force unless the Parliament proves it. Following the evidence session, the committee will be invited at the next agenda item to consider a motion for the committee to recommend that the instrument be approved. I remind everyone that officials can speak under this item, but not under the debate that follows it. I'd now like to ask the Cabinet Secretary to make a brief opening statement. Thank you very much, convener. Good morning, committee. I will take the opportunity for an opening statement just on how complicated this topic can be, and I'll try to set it out as simply as I can. I'm very pleased to be able to give evidence this morning on the draft affirmative instrument to amend the greenhouse gas emissions trading scheme order 2020. In July this year, the emissions trading scheme authority, which is formed of the Scottish, UK, Welsh and Northern Irish governments, published a joint response, a joint Government response to last year's consultation. The response contains substantial changes to strengthen the ETS and to better align it with our net zero objectives. We have already brought into law some of the minor decisions that arose from that Government response, and we did that via a negative statutory instrument earlier this year, and we're now implementing additional, mostly minor, amendments through this affirmative instrument. The thrust of today's amendments is that they amend free allocation policies to ensure the correct functioning of the ETS. The committee will remember that free allocations are those allowances that are given for free to operators who are at risk of carbon leakage, which, of course, is the risk of industries moving offshore to jurisdictions with less rigorous carbon policies. This instrument would specifically cap the amount of free allocations for the aviation sector. That is being done to amend what is a current anomaly in the system whereby data that is used for allocating free allocations to aircraft operators is inconsistent with current activity levels, and that is resulting in some operators receiving an over-allocation of free allowance and creating a competitive distortion. Therefore, today's provisions provide that free allocations will not exceed 100 per cent of the air operators' verified emissions, and that will be put in place until the withdrawal of aviation free allowance in 2026, which, of course, is a separate commitment from the joint response, which is not being legislated for presently. I would stress that, but I'll be happy to keep the committee updated on that. There are two other minor issues within today's instrument. It will introduce an amendment to allow installations with carbon capture and storage to receive free allocations. Again, that is due to inconsistencies in the legislation whereby it is currently not possible at present to do that. Clearly, we would see that as a lowering of the incentive to install carbon capture and storage, which was never the policy intent, and therefore we are changing it. Lastly, the instrument contains three technical amendments to free allocation rules for electricity generation to miraculously reflect operators' activity and incentivise electricity produced by means of high-efficiency co-generation. Just a very brief point, convener, on parliamentary processes. The Senate and the UK Parliament are running a similar scrutiny process on these matters from today's order. Although the Northern Ireland Assembly will do so as soon as it can, in the meantime, the order will apply to GB only. We will aim to bring forward the remaining changes to the ETS, which are set out in the response, such as expanding the scope of the ETS and phasing out free allocation for aviation in due course. I wrote to the committee on 7 July one of the most significant changes, namely that aligning the cap with a net zero trajectory that is currently being taken through the UK Parliament. I should have preferred that it was through the Scottish Parliament in the first instance, but it has been a pragmatic, although not ideal, response to there being no sitting Northern Irish assembly. However, as soon as there is a sitting Northern Irish assembly, we will lay the affirmative measures for that particular provision, and your committee will have the opportunity to scrutinise it then. That is quite enough by way of opening remarks. My colleagues and I are very happy to take questions. Thank you very much, cabinet secretary. I am looking around committee members. I just had a question on the over-subscription in regarding aeroplanes. Was there a huge discrepancy there? Was it being abused considerably? First of all, I am not sure that I would use the word abused. I think that it was basically an accounting issue whereby the free allocation was offered on the basis of activity data that was out of date, and it will differ between operators with some being far below 100 per cent of their verified emissions and others slightly over. Lucy, I do not know if there is anything you would want to add to that, but I think that the general response would be that it differs between operators and it was not the case of abusing it, it is just the case of the data that is out of date and it needs to be relayed. It was just a paper exercise for you saying that it was not being traded or that there was no financial benefit from the fact that somebody had no over-allocation. No, there would have been an over-allocation, so they would have financially benefited from that. The cabinet secretary is right that this is based on 2010 activity data, so it is something that, as we transition from the EU ETS into the UK ETS, that we just transition this data, this benchmark data, and it just does not match the existing activity levels of aircraft operators across the UK, so we essentially need to fix that anomaly. You peep my interest, I am interested to know how much and what the scale of that was. You probably will not be able to give me that information now and it would be wrong of me to ask, but I am sure that you could write to the committee and say exactly what level that was. I think it would be interesting for us to have a handle on that. We can certainly look into that, convener. We have, as part of our own impact assessments for some of those changes and more so for some of the wider changes, we have obviously looked at the Scotland-specific commercial entities. It is a little difficult sometimes to discuss the commercial details of that, particularly as there are so few in Scotland, but we do have some of that data and we will happily write to you with what we can. Thank you, cabinet secretary. Are there any other... Douglas? Thanks, convener. Cabinet secretary, you mentioned the free allocation for aviation is something that is going to be phased out over the coming years. What impact is that going to have on the aviation industry? Yeah, it is a good question and it is one that we have been looking very closely at. First of all, the reason that it is intended to be phased out is because it is now the view that aviation is not at risk of carbon leakage. That is a change in view and it is one that each of the authority members has come to agree on. We have agreed that we need to phase it out, but I am like you asking the question about impact assessments. One of the things that I have put very starkly to my authority partners is about connections with the Highlands and Islands. As we develop our approach to that phase out date, which is not until 2026, we are still developing how we do it, we are still assessing the impact. You will see that in the response to it. I have won a concession that says that we will consider the impact on connection to the Highlands and Islands and if mitigating circumstances are required, they will be developed. That is still to be done, but as I said, we are a few years hence just now and I will very much continue to assess the impact, both on operators but also on people who need to get back and forward to remote parts of the UK. There does not appear to be any further questions. If that is the case, we are going to move on to agenda item 3, which is the formal consideration of a motion S6M-10535, calling on the committee to recommend approval of the draft greenhouse gas emissions trading scheme, amendment number 2, order 2023. Cabinet Secretary, would you like to move the motion and speak to it or just move the motion? I will move the motion, convener. Thank you very much. Are there any comments from members or questions? There are not. On that basis, Cabinet Secretary, I am formally asked to ask you if you want to sum up as a result of that. I am not sure that there is much you can say. No, except to just ask for the support of the committee. Thank you. I formally put the question to the committee that motion S6M-10535 in the name of Marie Macallan be approved. Are we all agreed? We are agreed. The committee will report on the outcome of this instrument in due course. I invite the committee to delegate authority to me as convener to finalise the report for publication. Are you happy for me to do that? We are. Thank you, Cabinet Secretary, and we look forward to getting that bit of additional information that you can now offer to give us. I would like to thank you and your officials for attending it. I am briefly going to suspend the meeting to allow a changeover of witnesses. Thank you. Welcome back. Our next item of business is an evidence session with Scottish Water and with Business Stream, a subsidiary of Scottish Water. This is a chance for the committee to check in with Scottish Water on its important role. We will consider its last annual report and also look ahead to its main priorities and challenges. Before I go any further, I would like to welcome Sarah Boyack to the committee who is coming and we will get some questions at the end. Once the committee has had a chance to answer, I will ask a few questions. I would also like to remind, just as a matter of information, that I, along with every other person in Scotland or a majority of other people in Scotland—not everyone—is a client of Scottish Water in the sense that we get water, but I am also a client of Business Stream in the sense that I get water from them for my farm. I am pleased to welcome Dame Susan Rice, the chair of Scottish Water, Alex Plant, the chief executive for Scottish Water, Peter Farrier, the chief operating officer for Scottish Water and John Hannadau, the chief executive of Business Stream. Thank you for joining us today. Before we move into questions, I believe that Dame Susan, you wish to make a very formal that. Do you mind if I call you, Susan? I was going to ask you to do that. So, I think that you want to make a brief opening statement. I do, convener, and I will thank you and the committee for inviting us in to give evidence this morning. So, just a few words from me, high level, and just to set the scene. Looking back at the highlights from our last or latest annual report, which went to March 2023, I am pleased to say that Scottish Water performed well across its key indicators, including water quality, environmental performance and customer service. We also made good progress on our net zero route map. We delivered £886 million of capital investment last year, and that is our highest level ever, which I think we all feel very positive about. This was only possible with the hard work of all the teams across the organisation and our supply chain partners who are integral to our success. Business Stream, our retail business, delivered strong results in a competitive market, and through what continues to be challenging economic times for many business customers. We focused in Business Stream on supporting customers and promoting water efficiency measures, which is good for the environment and good for customer costs. I was delighted that Business Stream awarded a gold rating from global sustainability assessor ECOVADAS to recognise their achievements on the journey to net zero, very unusual to receive gold the first time you enter. Looking to the future, our key challenges are undoubtedly how do we adapt to climate change and maintain and replace our aging physical assets. These challenges are real and growing, they are complex and they are costly. During the winter, we dealt with massive swings in temperatures that caused significant water main damage and bursts across the country. In the early summer, we had an exceptionally long hot dry spell and had to manage drought situations and very recently extensive flooding affected many customers across Scotland. We are also seeing increased customer and societal expectations in the areas of improved environmental standards, net zero and a greater demand for uninterrupted services, regardless of climate change pressures. To meet those challenges, we know we need to transform and develop new ways of doing things. Some of this will involve capital investment to build resilience and some will be to develop nature-based solutions, particularly around managing surface water and to do this in partnership with others. Water is a precious resource, one that needs to be carefully looked after by everyone. As a board, we focus on risks and how to manage them. We continually try to understand and oversee mitigation of the escalating long-term risks that we face across our daily activities. There are no easy solutions to these challenges nor, indeed, can we avoid the difficult conversations about how they will need to be paid for. What I do know is that if we try to kick the can down the road, future generations will end up facing the consequences in terms of poor service levels and big hikes in bills. That just wouldn't be fair and it's not our way. Our commitment is constantly to consider what can and should be done to help Scotland flourish now and in the future. Thank you. We look forward to your questions. Thank you very much. I'm going to ask my first question to Alex. What do you see as a very easy question, as the key challenges facing Scottish water and what would be your priorities now that you're in role? Thank you, convener. It's a great honour to be with you this morning. I think that some of this touches upon the opening comments that Susan's just made. I think that the single biggest challenge facing Scottish water and indeed water companies across the globe is the impacts of our changing climate. The kind of approaches that we used to be able to deploy are increasingly not going to be fit for purpose for the more aggressive climate that we're seeing, the more frequent, severe weather events and the impact on assets that we operate and lots of which are old. This is not an issue that is unique to Scottish water, but we see it in our own assessments of the forward pressures on those assets and the state of those assets. A lot of the issues around how we make sure that we're investing appropriately to maintain and to replace those assets in ways that can cope with those different weather conditions I think is probably the single biggest issue and that's where I've been putting a lot of my focus in the opening few months of the time in role. Okay, thank you. I've looked at your accounts Alex and you won't be surprised or previous year's accounts, you won't be surprised that page 116 to 118 caught my eye just to give you a chance, but you're going to be able to answer this question off the top of your head. Your predecessor was paid a quarter of a million pounds. Are you on the same rate as he is? So I think issues relating to my remuneration are ones that Susan is probably the best place to cover, given that the discussions around that took place before. I will certainly ask her to cover the next bit. I'm asking a straightforward question, I think to you, is the salary the same? So the salary I was appointed on was higher than my predecessor. So can you tell me how much that was, please? So what I can't remember the exact numbers I'm afraid, it's how much higher it was compared to Douglas's. Well his was £245,000, his salary, his basic salary. Yes, and so my basic salary is higher than that and it is a matter of public record, but that is a... You must know what it is. I'm trying to remember the exact number, it's £295,000. How much? £295,000. £295,000. Susan, there's a wonderful phrase in here which, for simple people like me, seems to be gobbledygook, but it's called out annual outperformance incentive plan. For most people that's a bonus. What bonus do you expect Alex to be on if Douglas was paid £80,000 in bonus last year? So I don't have those numbers, I don't know if you have the actual formula for the bonus, but it's not really changed. Yeah, I can answer that. The bonus arrangements are the same as they were under Douglas's time when it is related to the performance of the company. So the bonus is up to a maximum amount, depending on the performance of the organisation during the year. And that bonus payment position applies to myself and to the executive director. Yes, so what is the maximum amount you can get? Now, no, 40% was my memory, yeah. 40%, 40% is the maximum of your salary. Wow, that could be a lot of money. And so, I mean, my questions go round to the fact that it's costing about over a million pounds to employ the three executive members and the non-executive directors, which in the big scheme of things is quite a lot of money, I would say. I mean, if your salary is 40% of my maths, it's not that good, but it could potentially take you up to 430,000. If the full bonus were paid, that would be the level that would construe from that percentage, yeah. Yeah, and then there's the pension benefits on top, which could be another bit, so it could be up to 450,000. Yes, that's the... I mean, all of these are public record masses. Yeah, I know, and I'm just laying it out, because as far as I'm concerned, you know, you do see questions about investment in the industry and you see about salaries of people who work for you. You know, and the thought that you might be getting might be getting 450,000, and if you work on Peter's salary, he might be roughly a little bit less at 350,000. It's a huge amount of money, and I'm just trying to lay that out so the public are aware of it. Yes, those are. Susan, you want to come back? Yeah, if that's okay. And the reason for coming back is that the executive salaries are actually matters for the board remuneration committee, so I will sit here as I do with my board hat. You're looking at the numbers through one lens, which is the lens of numbers. Let me just give a bit of context if I could, because I think that's helpful for people to understand. Our chief executive salary now is less than any comparable water company chief executive across the UK. So Alex did not benefit by making this move and jumping in. So you need to understand that. That gives you a context for the pool that we chose from. We ran a very wide search and looked at a lot of individuals. The pay really reflects the essential nature of water and wastewater services to the daily lives of really everybody who lives and is in Scotland and the relationship to public health, and also some relationship to economic prosperity. It's a really important and key role with a lot of responsibility. It's the fourth biggest water and wastewater utility in the UK, and we have to attract suitable leadership. We can't simply say, here's someone who's volunteering, let's put them in the role. You can't run an organisation as important as this without having someone who has both the leadership qualities personally and the knowledge and experience to bring to bear. And the reward packages for all of the executive roles in Scottish Water are actually substantially below reasonable market expectations. They've been benchmarked. We do that regularly, and we're very conscious that we are not playing at the same market levels that the other companies do. So I think it's really important to know that our concern was to find a high-caliber new chief executive in Alex who was willing to come to us and the package that we offered him. And I take all of those points on board. My only comment is, I don't think there's another water company in the UK that is owned directly by the Scottish Government and underwritten by the Scottish Government and the people of Scotland. They are the owners as an entity, whereas other companies have different ownership structures. Mark, you want to come in? Yeah, just following on from those questions, convener. I'm just interested to know whether Scottish Water sets a maximum ratio between the highest paid and the lowest paid workers and what that currently sits at. So it's an issue that we look at and we always kind of compare with it. I think it is in the annual report and accounts. There's a comparison between the highest paid, which is me in the case of Scottish Water and that. So I'd have to check the exact numbers, but the aim is to keep that in check so it doesn't get to beyond those ratios that you're talking about is something we look at. Partly for the reason that convener said, we recognise as a publicly owned entity different approaches need to apply in our circumstances will be true for a private company. I'd like to move on then, convener. Just before you do move on, Mark, can I just say that it'll be up to the Scottish Government to answer this because their pay strategy, as I'm aware for the public sector, pay strategy for 2023, their expectation is to deliver a 10% reduction in the remuneration packages for all new chief executive packages. So, that'll be up to the Government to ask. I don't want to dwell too much on this. I want to go to Mark to ask questions. Susan, if you really feel it's important, I reckon. I really do because there's an implication that we operated outside of Government policy and I simply want to affirm publicly that we operated within Government policy. I have a quote from a Scottish Government spokesperson which says what the policy is since 2010 and it says the 10% reduction unless certain circumstances prevail. We were in the situation of having circumstances prevail and we're within the Scottish Government policy in that. I think it's really important so there's no misunderstanding. And I'll just say funny that. Right, Mark, next question. Okay, could I just come back to your comments about extreme weather and the impact on your infrastructure? I'm interested to know exactly what that impact has been. And also, given what we've seen in recent months, intensifying extreme weather, have you identified any changing patterns to stone babbit, throw up thinking around whether there are particular regions of Scotland that are more vulnerable than others that need to be prioritised for investment? So what are we learning through the extreme weather events that we're seeing? How is that affecting your investment strategy? How is that putting pressure on the assets that you have? So I might ask Peter to pick up on this. The one comment I'd make is that in addition to the kind of very recent impacts from extreme flood events that we've seen and obviously distressed for residents are particularly in parts of the north east of Scotland, we also had very severe dry weather conditions earlier this summer which led to kind of drought conditions in parts of the country as well. So before I ask Peter to come in on the specifics it's just important to note that we have both that too much and too little issue becoming more frequent and that's what's driving some of our underpinning approaches and strategies. But Peter? Yep, so notwithstanding the fact that Alex has said that weather events are changing significantly and we have many many thousands of assets that need to have investment to keep them maintaining the standards that we expect. We have an emergency planning process in place very robust and very well tested which allows us to manage these events as best as we possibly can. So I have a full operational team who manage these and we take learnings from every single one that we have. So for example, you mentioned Storm Babette we've just been through Storm Babette and I'm pleased to say that through the robust planning that we do in advance of the storm coming once we're notified of the storm things like proactively putting emergency generation out to our big assets to make sure that power outages and do not impact on the assets. So we do a lot of proactive things like that and I'm pleased to say that through Storm Babette we had no significant water quality issues nor major water supply disruptions throughout that. Our biggest impact was a flooded wastewater treatment works at Breakin. The Breakin wastewater treatment works completely submerged in water but also I'm pleased to say that we immediately cleaned up all the mess and within six days that works was back up and running and delivering full environmental compliance. So that was Storm Babette. One of the best ones to mention is Arwin, Malik and Corey from previously. We took a lot of learnings from that because that was the most widespread power outage that I've ever experienced. I've been in the industry for 39 years and I've never experienced as wide a power outage as we did then. There was 1.5 million Scottish Water customers that were supplied by assets that lost power but we managed to maintain that all the way through the event because we had emergency generation strategy of which we went out and turned the generators on similarly beforehand. That protected 1.5 million customers all through that who never experienced any impact of it. We did have a small number of customers who experienced outages for a couple of days. That was down to power loss at small water pumping stations out in the network. And since then we have learned from that and we've changed our emergency generation strategy. So we have procured more generators. We've gone round all of these small pumping stations which don't have fixed generators on them and we have adapted them with electrical connections so that we can just come and plug in an emergency generator really easily. That was one of the main things. We also had an issue with not being able to communicate with our people during that because the phone lines went down after a very short period. So we have purchased a number of satellite phones now to allow us to deal with situations like that. We've started medium and long-term investment planning for generation across the whole of our asset stock and we could be talking about £2 million to £300 million worth of investment there. So that's going through the process. And one of the key things... Is that on... Sorry, interupt me. It's good to get the detail on that. But I'm just thinking about what Alex Plants just said about the other end of the extreme as well, about the drought situations. I mean, it's clear what you're describing as kind of resilience about how the plant is operating but what about the other side of the extreme with drought? I mean, the bigger scale challenges around reservoir water levels and everything else. Yeah, so one of the best ones just as an example was in 2021. 2021 was the worst year that I've experienced in terms of different weather events throughout the year. So we had a freeze period right at the start, a very hot early summer, storms in the summer, and then going into the winter period with storm arwin, et cetera, and wind issues. One of the things that we experienced there in the late autumn was extreme drought. And we saw reservoir levels drop down to levels that we'd never seen before. So there's one in particular in Lanarkshire called DAR, and the level of DAR dropped down to the lowest that we've ever recorded in 160 years. What that actually did, there was still water available, but what it did was it started to pull manganes out of the silt at the bottom of the reservoir, and the treatment works was not able to deal with that because we've never experienced manganes that that works before. So on the back of that, we're now having to look at a big investment at DAR in order to deal with manganes, to deal with events like that going forward. That's just an example of some of the things that we have to deal with. That's good to get a flavour, I think, of some of those challenges. And in terms of your blue-green infrastructure, is that for managing the kind of surface water, kind of, you know, fluvial events, is that going to be able to manage events like storm bubble going forward? You're going to need to change thinking on that. So on blue-green, I suppose, one of the things around looking at the future climate and how we best adapt to it is that we recognise that a lot of the solutions that we need to have in place in the future will be much more nature-based solutions so you're working with the grain of what's happening. Actually, to be fair, there are probably blue-green and some grey, because actually we still need some engineering aspects to what we're dealing with alongside better approaches on blue-green. But when you get that kind of approach right, what it allows actually is an alleviation of the problem at source. Because if you think about things like very extreme rain events as we've just had, the kind of environment that is now receiving such extreme rain is different to that 150 years ago, because so much more of the surfaces are hard-paved and therefore you have very quick run-off in storm drains, and then you have the overloading of sewage systems and the kind of situation that happened in Breakin. When you get blue-green infrastructure right, you're doing much more where you're creating more means by which surface water can be managed in the environment before it actually hits the sewage and storm water system. And you can store water more effectively on the land when you do those kind of things. And there are examples of that actually very close to here and what we're doing in partnership with Edinburgh Council and the Scottish Government of Craig Leith to look at how you remodel the area such that when you get such extreme events, you hold more in the landscape. We're very much aware of what that approach is. I mean, the question is about whether what you've planned now is going to be enough or going forward. If you think it's going to be even more extreme other events, you need to scale that up. Is that going to be adequate? I think we're going to need to scale up. It's the short answer. Okay. I have a last question just in this area is just around the kind of legislative framework as well. Do you see a need for any sort of change in the legislation required to enable you to adapt to the impacts of climate change? So, I think some of the policy proposals that have been discussed with the Scottish Government over recent times, which have been consulted on, are partly about recognising that different future climate. And I think there are helpful things in those proposed policy changes that would ease the issue. And in particular, I think, what's helpful, most helpful perhaps, is that in the past, I think we've had a mindset where we think, well, we will deal with these issues as Scottish Water. We will try and find a way in which our engineering assets can cope with the issues. The reality is actually one where the scale of the climate challenges that we're facing need lots of bodies to work together effectively to try to mitigate those impacts and adapt. And some of what's in the legislation is very much around looking at surface water differently and the different contributions that go in, actually going back to your points about droughts, looking at water resources in a collective way across all sectors so we understand what the likely future demands for water resources are and where we have the supplies to meet that demand. So I think the change is foreseen in that and those policy proposals will actually give us more tools as a nation, if you like, rather than just the Scottish Water to help address some of the issues that we're seeing more frequently. Okay, okay, thanks. Thanks very much, Mark. Monica, I think you've got some questions next. Thank you, convener, and good morning to the panel. Yes, I'll come to Alex Plant. Quite interested to hear more about your experience of the water industry in England and to understand what lessons can be learned drawing on your previous experience. We've heard that you previously worked for Anglian Water, probably knows one of the worst polluters on record in England, and I have examples in front of me of the environment agency calling for water company bosses to be jailed for serious offences against the environment. So incidents of ecocite have been described. So drawing on that experience and that context, what can you give us for the situation in Scotland? Yes, thank you. Quite a wide question. I suppose one of the key lessons I learned from my time working in England is that I think what we've seen and some of the issues you've described are a consequence of, it almost goes back to that point about we need to make sure we're keeping ahead of the investment curve so that we can maintain both environmental standards and indeed drinking water quality standards in the face of those more complex climate challenges and indeed increase customer expectations, which I welcome. I think it's good that people are expecting higher quality in the environment. I think what's happened in England has been for whatever reason insufficient investment going in for really quite a number of years and the consequence of under investment then comes through in terms of service quality. And if you look at the plans now being put forward by the English water companies to their economic regulator, you're seeing a very large increase in bills being proposed on average around 29% real terms increase in bills to try to catch up with some of that sort of lost time if you like around investment to deal with those issues. So a first lesson is let's not get ourselves in that position. And I think Scotland has the opportunity to not find itself there but we need to make sure we keep that steady investment going so you don't end up with cliff edge increases in bills being needed which is the kind of thing we've seen in England nor diminution in quality standards which in the end means that I think customers in England have somewhat lost faith in their system of water provision which is very sad but in Scotland I think we have an opportunity to not find ourselves in that position but we need to make sure that we're focusing hard as we can on delivering the kind of service quality that Peter was talking about but also that the investment programme is keeping pace with the changing demands of climate. Thank you for that response so the situation we've heard in England is pretty bleak or it certainly has been pretty bleak but we've had media coverage in the weekend here in Scotland so I'm sure we won't want to to gloss over that so there were some really hard hitting statements and I know that Scottish Water has contested some of the analysis but let's just look at even the perception in terms of what people are saying we've got surfers against sewage accusing Scottish Water of appalling behaviour campaigners and politicians I won't name them all here but fear, lack of spill monitoring could mean that dry spilling is a bigger issue than the data indicates and yeah we're having Scottish Water accused of illegally discharging hundreds of times during dry weather soiling beauty spots much love beaches and so on examples of human waste so we've seen the media coverage we've heard the reaction from politicians communities and key campaigners what is your assessment of this as the chief executive officer so I mean firstly I think some of the reports you just described we as you say we dispute the kind of methodology that sits behind that and indeed what we've seen from our initial look at some of the material there is that over 80% of the instances being claimed are ones where we've seen storm tanks being discharged from now storm tanks only operate when you have extreme weather they are for storm storm events so I think there is I think there is something not correct in what is being put forward by some of those just for clarity we can come back to the methodology so that's in dispute but are you disputing the impact on communities and the environment are people exaggerating about the impact so I suppose the first thing I should say is that we are we are never sanguine about there being any negative environmental impacts in terms of what what we do as a as a wastewater provider in this particular part of our business so whenever there is an issue there we are seeking to improve the position so I'm absolutely not saying it's all right for those things to happen when they happen I would dispute as I said the findings that were set out in the media this weekend I think they're not they're not correct I'd also start by saying that you know we start in Scotland from a much better position than in the rest of the UK and in fact we have some of the best environmental water quality in Europe so 87% of our water bodies are good or better ecological status we want to go further with that and part of our 500 million investment in improving urban waterways is going to take us up to a higher level up to around 92% the other issue here is I think to my mind the issue that should be of most concern to us as a society is the quality of water in the environment now our wastewater operations have an impact on the quality of water in the environment and we should be looking at that and we are and we shouldn't rest on our laurels we should be trying to carry on improving it but there are other other elements that contribute to the assessment of water quality and we should be looking in the round and trying to understand catchment by catchment what is it that could be done to further improve what is a good position in terms of river water quality and that requires thinking about those catchments as an organic ecosystem and that's what we're doing okay so go back to some of the complaints that we're hearing we're talking about examples of human waste being overflowed into rivers and onto beaches even when the system is not under abnormal stress we've heard about some of the the good performance and the benchmarking compared to other parts of Britain but for people in Scotland right now you know is there an acceptable level of human waste being overflowed in this way what is an acceptable level to Scottish water so Peter you might want to pick this up can I just maybe just take a couple of minutes just to just to explain a couple of things so everybody will have seen headlines saying things like water company pumps rosage into watercourse causing pollution these are these have been standard headlines there's a few things just to clarify from that firstly that we never ever pump overflows into watercourses that kind of sounds like that is a willful act we do not pump these storm overflows are a necessary part of a combined sewer system and they act like a relief valve so that when it rains the rainwater exits the system and it works in exactly the same way as an overflow from your water tank in the attic to prevent your house from flooding it does exactly the same here overflows rainwater to prevent people's houses from flooding so that's the first point secondly the overflows are not raw sewage the overflows are 91% rainwater and thirdly the majority of the overflows don't cause pollution for the points that Alex said and the proof of that is the fact that 87% of our rivers and water bodies have got good or better status in Scotland so I just wanted to clarify that point you mentioned water before you move on because that is helpful and before I forget the number you mentioned that 91% I'm not sure what that's 91% of the total volume but can you tell us the volume of human waste that has been overflowed just to put some numbers on that well we can because we only have a small number of our overflows that are monitored that's why as Alex said in the urban water route mark that we've got here we're spending £500 million and we've committed to putting a thousand monitors into our assets by December 24 but just to let me be clear that only tells you how much overflow is going into 99% rainwater and the fact that we have got such good water quality in Scotland is an indication that these overflows generally don't cause pollution it's the dry spills that can cause pollution and that's why the report that went out at the weekend we have contested that because the information and that we do not agree with but would you accept that we don't really know the full extent of the problem because of the lack of overflow monitors so that's why people have been calling for more electronic monitoring so you gave a figure but just maybe you could update the committee on what progress has been made on that commitment to install I think it was 1000 new overflow monitors yep okay so we've we've taken quite a while about a year to prioritise the areas and locations could we have to make sure that we're we're putting these monitors in the area that is most important so we've taken some time to do that we've installed 60 so far but we have a firm plan to have the 1000 in by December 24 and we're confident in that okay and just final question from me for now um you mentioned misleading media of reporting and headlines a Scottish water planning to take any legal action in that regard we're not planning to take legal action at this stage I think we would rather always resolve these things by pointing out what we think are errors in the in the in the calculation and work with those bodies because in the end the things that people like services against sewage are trying to get to we agree with we want to get to the best possible water quality environment in Scotland so we would start by pointing out those errors and trying to work with those organisations so we can get a a better public debate on the issue because we want to make sure we're focusing the investment in areas that are most helpful and indeed we're talking about the monitors but there's a huge programme we've done hitherto working with SEPA to target those areas of greatest concern and a lot of hydraulic modelling to understand where there could be environmental harm to then target the available money in the right place and that's what we want to continue to do thank you Mark you want to just picking up what you're saying about targeting the most important areas for monitoring I mean presumably that's areas which are designated as bathing bathing areas yeah okay but and I accept that and I think I acknowledge that there's investment going in but would you also acknowledge though that that many people are now using bodies of fresh water rivers, locks for wild swimming and they need the information too about whether you know those those bathing areas are are safe to go into I'll give you an example of that I have constituents who went on a wild swim on the River Tay and everybody in that party I think around 10 people became ill a couple of days afterwards it's very hard for them to pinpoint exactly what the cause of that was but it's probably related to bacterial infection and they believe it came from a a CSO incident in Stanley in Persia so their call to myself and others has been look give us the information we realise that there needs to be investment in the asset to ensure that you don't get pollution but at the very least they need to know whether you know there has been an incident and whether they're putting their lives at risk by going into the water and that's a bigger question than just your bathing waters that's actually lots and lots of locks and rivers where people are are going for a day yeah and I think that's right and part of the when we are rolling out those monitors we're also thinking really careful about how we make sure we give information that's meaningful and helpful to the public to address the kind of issues you're talking about so there's a thousand enough then well let's see I mean it's that we are early stages rolling out now we've deployed about 60 so far we are confident we'll get the thousand in ahead of the time that we've targeted at the end of next year I think it is worth saying though for the designated bathing waters in Scotland 98% past those environmental standards so on which gets to an even better position with people who want to wild swim it won't be appropriate to wild swim everywhere but the designating designating bathing waters status approach gives you a mechanism by which you can do that and then ensure you're giving the best information to the public if you can and that's what we we will be doing Do you want to come in on that please? Can I just come in as well and it's just a point to clarify that the event monitors that we're putting in all they'll do is indicate how much water has gone into the water of course it doesn't tell you what the quality of that is it's SIPA who determine what the quality of the water the water body is and that's the 87% quality that we talk about so the quality of the the receiving water bodies is very good in Scotland but in order to determine every single water body's quality and get that to the public that's a massive that would be a massive exercise and it would require joined up work in between yourselves and SEPA absolutely we'll already do that with bathing waters so if if the because SIPA report the the bathing water results if we have any significant issue with an asset at the time of any storms for example we work with SIPA and SIPA will put a notification out to the public on bathing waters to tell them that it's potentially unsafe to swim there's only 98 designated bathing waters in Scotland so there's a lot of other places that people go to while swim swim these days okay that's helpful Pidda I was slightly confused by the figures that you said that you were you were quoting percentages and then you said but there were no accurate figures so I'm not quite sure how you come up with 91% and 9% I mean the critical point as I see it is in when there are storms yes there will be problems but but the water is bigger and therefore is more diffused and allows the pollution to move quickly out I'm not saying it's acceptable and I'm not sure well I'm sure you're not saying it's acceptable the key issues I think is when water is very low and and that the pollution therefore becomes more a smaller amount of pollution becomes more extreme are you happy that in the low waters that we had say in June of of this year especially around the highlands and at home and lock you and other places like that you know small pollution instance there could be much more problem problematical than big solutions are you happy that Scottish waters on top of that So Peter I mean I'll get Peter to pick up that particular question but I think the general point you make is a really good one because it is those sorts of events which are much more environmentally harmful than when a combined sewer overflow is operating as it should do because when it operates as it should do it provides the release valve and essentially primarily rain water and storm water that is being discharged the more intense environmental impacts are from exactly the kind of situation that you describe and they're often caused by blockages to sewers and so on but I'll let Peter pick up on that point but it's an important distinction as to where the environmental harm sits and that's where I think we should be deploying our efforts and our investment Peter You're absolutely right convener that's the time that there is a biggest risk of pollution when there is no rainfall and the water levels are running low we are as part of a transformation plan implementing a project called Intelligent Wastewater Networks and what that's doing is we've got another 1200 monitors that we're putting in there these are not event monitors that tell you how much goes into the river these are monitors throughout the network which tell us when levels are starting to build up in the sewers themselves and that will allow us in dry weather when we have blockages and we have 36,000 blockages a year the majority of them caused by wet wipes when we have blockages the sewers rise and you get overflows in dry weather these can cause significant impact so through our transformation programme we're putting in smart networks which will allow my operational team in our control centre to see events that are building up before they cause a pollution so that we can get out there and clear blockages before they actually cause a pollution and those 1200 monitors when are they going to be in by? Is that the end of 24 as well? They're in 24, yes because there's a huge amount of monitors going in by the end of next year Alex, you want us to come in? Quick point because it relates to the issue that Peter was just talking about a lot of those blockages are caused by wet wipes as Peter said so there's the intelligent monitoring of our network so we can get in ahead of the problem but actually the progress on banning wet wipes containing plastic would be massively helpful for reducing the incidence of these sorts of extreme weather events so we have been working with the Scottish Government but actually with the Government in the UK as well to try to move that forward and I know it's been an area of focus for the committee but anything you can do to keep keep pushing for that to happen as soon as possible would be very welcome and Alex, I think the committee would recognise that the Scottish Water has taken the lead on wet wipes and is pushing it hard but it is all the other things that people put down there as well which I'm not going to mention but it can be cooking waste and it can be toilet waste as well that we need to be on top of I would suggest so I think the point well made Jackie Yew put I'll just ask for clarification regarding your wet wipes when you're speaking about wet wipes are you meaning the flushable wipes as well all wipes or because I think it's quite important to get that message out because some folks get confused Wet wipes containing plastics which are essentially the ones that cause the blockages are the issue that we've been seeking to get banned so not flushable wipes I know you'd prefer no wipes at all it's a very unhelpful label but that's why I'm asking you the question I don't understand what the question is Some of the manufacturers decided to say these are flushable because they biodegrade over a period of time but that takes years and blockages happen within a matter of weeks of it going down the sewer so flushable is not something particularly if there are flushable and plastic in them but from our perspective it's of no benefit it will still cause blockages I think it's quite helpful to get that message out because some folk are trying to do their bit but are not realising that they're not helping Exactly and that's why that label is an unhelpful one as Peter described Okay, thank you Absolutely move on If I can move on from sewage and pollution now and maybe ask you a couple of questions regarding your net zero projects in your annual report it mentions the challenges that you're facing in negotiating land access for peatland restoration work Can you expand a little on what the barriers are that you're facing to gain land access and what's been done to improve relationships with tenant farmers and land owners to deliver your net zero projects? So you're right that the particular issues we've found around trying to get the level of peatland restoration across the hectareage we wanted is down that has been down to actually the ability to negotiate access with tenant farmers So as a result of that we've actually reviewed how we were engaging with both tenant farmers and indeed third party land owners to try to get to a point where we understand their views and their priorities earlier and then that can help us to get to a better position in terms of delivering some of the peatland opportunities we think are there So I think that's what we've done is to kind of go well actually there's an earlier engagement here that can get us to the right a kind of a win-win outcome so that everybody's interests are met and we can deliver some of that So that's been a review we've done during the course of this year And how successful are you? Are you beginning to see any benefits from that? So I think it's early to say whether we've got there I think that the learning from the particular landing question will be applicable when we look at this issue across the piece I'm confident that that those kind of ways of working will yield better outcomes I can't at the moment say and with one bound we have delivered all the things we wanted on peatland because that's still an ongoing issue We also had deliveries on the woodland Woodland planting issue was the same sort of question so some of our schemes have been slower than we wanted but actually again taken the learning and tried to work with all the relevant parties and whilst those woodland schemes have been slightly delayed I'm confident they'll be delivered during 23-24 wanted to do them during 22-23 So I think there's an awful lot of willingness to understand what we're trying to do but I think perhaps some of the earlier ones we just didn't get those conversations going early enough in the process to allow those plans to come to fruition sooner Okay, thank you And in regards to the economic global pressures that everybody's facing you know inflation supply chain issues operating costs how's that affecting your ability to deliver on your net zero projects is it having a huge impact? So yes I mean all of those factors are affecting as you rightly say people across the economy whether that's a household or whether it's a business so we are seeing the same sort of pressures in terms of the level of inflationary costs what we've been seeking to do even with a reduced amount of funding that was expected at the beginning of this registry period we're in is to keep progress on our net zero plans and the update we released just earlier this year demonstrates that we are actually on track to meet our net zero commitments but it is not easy and you know trying to keep the balance of all the operational investment we need to deliver alongside trying to make sure we're delivering what we've committed to on net zero is challenging but at the moment we're on track Okay, and I was going to ask if they were on track but we are on track already so back to you convener Okay and just say there's no dubiety and I haven't taken part in any questions you mentioned talent farmers and you mentioned woodland I am a talent farmer and I do have woodland so there's no dubiety in the committee that I've correctly declared my interests which are of course recorded in the parliamentary register Jim you want to come in? Yeah Thank you convener Very good I just want to go back to the issues you talked about Alex as far as getting permissions via a tenant farmer can you be a bit more specific and tell us exactly what the issues were was it that landowners had agreed to do something but hadn't consulted the tenants on what was the issues around permissions I can't hear you Pope sorry Don't touch the button Don't touch the button that will be done for you that could cause confusion Can you hear me now Jim? Okay so with apologies I haven't been involved directly in the issue that we were dealing with around peatland my understanding was about negotiating access with the tenant farmer so I think it's at the tenant farmer level that things were not as clear as they could have been but I'm hesitant to go further so I don't know the intimate details of the particular case Okay but I presume therefore that somebody had agreed to allow you access to land to do some kind of peat restoration but hadn't taken into account the person who was actually working the land that may be the case as I say I don't have enough of the detail of the individual case to give you a kind of a confident answer but I'm very happy to write to you afterwards just so I can go back and get a bit more detail to understand it which will then perhaps enable that question to be answered That would be appreciated thank you can be there and it's just to confirm if you could write to the committee with your answers to that and we will make sure that Jim gets a copy of that so we're all aware of that I have some questions on the Secretary of Economy Bill but I'm going to leave them to last because other members have there are other members with lots of questions and I've had quite a few so Douglas I'm going to come to you next to Erwin with your questions thank you convener and I'm just looking now at charges to customers obviously last year there could have been an increase of I think it's 11% but instead it was just a a 5% increase I'll say just a 5% increase you mentioned earlier in terms of increases maybe being lower and other parts of the the country that's now I think you said lost time and there may be a bigger increase coming up later on so with that increase being maybe smaller than you were hoping for is that storing up problems that might have to be addressed sooner in terms of bills being increased and I think the question you're bringing out is probably one of the most kind of central to the whole issue about how do we keep ahead of the issues that we're talking about today so this is obviously before my time by my understanding is the board's decision was recognising the particularly acute circumstances that we're facing households initially from Covid and then with the cost of living crisis and therefore rather than raising raising bills the level that was expected in the 2021 strategic review of charges the board decided to hold that back but the consequence of that is significant because it means that we have about 500 million less in the investment pot than we expected to deliver all the necessary things that we've been talking about today across that that six-year period so what we've been doing is recognising that shortfall and how we manage it as best we can but we will not be able to deliver all the things that we thought we would at the beginning of the strategic review period in 2021 as a result of that that choice I'm not saying I'm not saying it's the wrong choice I understand completely this challenge about recognising particularly difficult circumstances for households but also trying to make sure we're delivering the investment and I think there is this point about if you keep deferring you the problem become bigger each time you keep deferring so always you're trying to balance the needs of the current generation against the needs of the future generation and try to plot a course that reaches the best possible balance so with inflation still high do you anticipate large increases this year obviously it goes out at the same time as council tax bills that are going to be frozen so do you do you anticipate that the water charges are going to be frozen or is that just unrealistic so we are at the beginning of a process where we work through what the right answer is on annual charges and that's the ultimately decision for the board to take but our starting point I think is to say having made the choices we made in previous years we recognise that continuing to not kind of recover the investment trajectory we think we need will have significant impacts on service quality for customers and communities across Scotland so I don't want to I don't want to kind of foreshadow the those discussions that will be forthcoming before we come to a conclusion on charges by around about the end of the year but certainly my starting point would be to be wary of further deferring the necessary investment and just for for clarity so you you may have a figure in mind but then does that need agreement from Scottish Government or how does that how does that work it is a decision of the board we have a formal process whereby that is then worked through with our economic regulator the border industry commissioner for Scotland but it is a a board decision I don't know Susan will you wish to add anything on that I think you've basically said it but for the regulatory review period the current period is seven years the overall amount if you will to put it in simple terms that can be charged is set out by the economic regulator so they have a very responsible role in this it's then our job to decide each year how much we should raise the charges we took what was really exceptional decision last year and the year before to go in below what we were allocated if you will by way of the raise and we've had a lot of conversations I have personally with the previous cab sec and also the current cab sec so they understand fully the implications of holding back but at some point you say this is in the best interests of the people of Scotland given the other pressures around we can't do that anymore we don't expect we don't have a number as Alex said but we don't expect increases that are huge they will be possibly more than we've seen in the in the past couple of years when you translate any of these increases to daily living you're often talking about the cost of a cup of coffee a week so I can't give you a number but it is not something that should make the population fall over so in terms of you obviously got a large capital project do you anticipate trying to borrow more from the Scottish Government or it's often said that you've got cash reserves that you're sitting on I don't know how much they are could they be used? so cash reserves I think today are about 260 million lower than the figure in the report because they've been managed down during the course of this year just on cash cash balances but it's just important just to step back and explain why we hold that it's partly because we're a very large business with lots of kind of investment needs and kind of the management management of kind of payments and receipts in is to some extent volatile as any large business of our scale would be the cash reserves at about 260 million would represent something like nine weeks of trading that's the kind of buffer if you like that it gives you and in the case of being a public corporation as we are we don't have access to capital markets in a way that a private company would to sort of use that as a buffer so cash becomes a more important buffer for us so the board regularly reviews its sort of risk appetite on the level of level of cash balances you should hold I think in the moment that's around 200 million as a minimum so at two I think we're at 259 feels like a reasonable level to be at but I mean that's essentially there's little there's little to play for I suppose in that level without getting to the point where the company's kind of financial robustness would be at risk so when there's a call for you to use more to your cash reserves you would defend the position you've taken vigorously I think the position we're in now is a kind of prudent one to hold that sort of level I'd be uncomfortable as chief executive if we were looking at anything much much lower than that sort of 200 million level would start to become more difficult okay so I guess you know coming up I think we've heard so over the coming months you'll be balancing the increase of costs to consumers you'll be balancing your capital plan and then you know in terms of their the increases and staff pay as well I guess we'll be taking into consideration all those will be coming into the mix before you decide on the increase and also the your capital spend going forward that's right those all those things are of course interrelated I suppose the other thing that's worth saying is that about 80% of our expenditure historically and still currently is funded from customer charges and about 20% from Scottish from the Scottish Government debt that we hold so that's the 80-20 split on debt versus income if you like mm-hmm okay thank you thank you thanks Gimino Jim I think you wanted to come in on that and then I've got a brief question Jim yes thank you again Gimino I like this is kind of directed more to yourself and it's as much to do with the fact that I am new to this group and I'm sitting in as a sub however I was sent a quote from investment planning and prioritisation group which I think you sit on from the minutes of that on the 21st of September 2022 David Satie the director of strategy and governance of the water industry commission for Scotland stated that £799 million was invested in 2021-22 and there is no indication as to what has been delivered and if this amount amount was spent efficiently so I'm basically just asking yet is that a fair comment to have made by Mr Satie and if it is fair what have you done to improve that situation yeah thanks for that Gimino and I'm new to this too so we're in the same boat from that point of view I'm aware obviously that particular group in September of last year was before my time in office but I do sit on that committee and I've had conversations with colleagues of the water industry commissioner for Scotland around then wanting to understand more in a more granular level precisely what the investment plan has been delivering so what we've been doing I think since that comment that Mr Satie made last year is to try to work through so we're giving a much clearer sense of there's a global figure of £799 million at that point we're delivering more than that this year which is basically saying here is what is here is the investment programme here is what is being delivered here are the outcomes so I think that's the issue that the regulator wanted a clearer line of sight to and I believe we've made progress on that in the year since that comment was made okay can I ask one more question convener hard to say now Jim you've been very quiet so far this is probably too high level for this conversation but I'm bringing it up anyway on the basis of what you've just said about overall investment and the value of that investment I have a constituency issue right now where the water is being pumped from Glenfarg reservoir or sorry it runs from the Glenfarg reservoir down to Glenrothes so we've got a 17 mile peri distance there are various leaks within that piping system what's being proposed at the moment and I'm not sure if it's actually being started or if it is still in the space to go down the stage sorry being really difficult I'm trying to keep it not on constituency issues so can I can I respectfully suggest that Alex and Peter come back to you directly maybe Peter make a brief comment on it because I think I know this is really important but this committee's got to try and look beyond the constituency and I'm quite sort of strong on that so can I let Peter come back and then just think about his response and allow you to come back briefly yeah I'm not specifically sure what Jim was going to go into there but what I will do is I'll give him a commitment that I'll take this offline with him and make sure that we answer all of his questions Jim I know that you'll find that unsatisfactory but you've got an offer there to take this offline straight after this committee or as soon as possible to do it because I would like to keep it slightly a higher level if that's possible Jim sorry okay just before we leave this area completely obviously not putting up the charges for Scottish Water has implications on how people are enumerated and it seemed to me that looking at the counts that you have more employees at the end of the accounting period and I hadn't seen that the salaries had gone up significantly to replicate it's very difficult to do it in the in the accounts to see how much of that salary increase on the previous year was due to extra employees or due to pay is there a conflict between what you can pay your staff with what you can get in from the income that you raise from the public back to my earlier point around the way we are financed as an organisation that 80-20 split obviously that covers all of our outgoings whether that's our capital programme whether it's our salary bill or whether it's our energy bill or whatever else it may be so there is obviously a relationship between those things Part of the reason the numbers of full-time employees has gone up is because of the scale of that capital programme on the low obviously we work with our supply chain and some of the employee consequences sit within the supply chain we also need more people in our business as well to cope with that much increased level of activity is the biggest investment programme we've ever had and we need people to help us to deliver that so that's partly where that comes from there will also be an element which links to last year's annual pay increase of course so the two things are both there so there is a conflict with what you get in what you can put your charges up by to what you can pay your start it is one of the outgoings so they are interrelated of course okay thank you very much the next questions then Douglas have you finished all your questions yes okay Monica I think you've got some questions and then I'm going to come to Sarah yeah thanks convener yeah back to me and you mentioned pay convener so I wonder if you can give us an update on the current status of pay negotiations with the trade unions yeah I'll ask Peter to lead that because Peter leads our negotiating forum with the trade union so he's been in regular discussions over recent weeks with some some frequencies you may imagine okay and before Peter does just to remind the committee of my register of interest as I'm a member of the GMB and Unite yep okay so first of all I just want to say how disappointed I am that we've not managed to reach agreement with our three unions that that's Units and Unite and GMB we've put a proposal to our employees sorry we put a proposal to the unions that would give all of our Scottish Water employees a generous pay award by any public sector standards and a reasonable process of reshaping an outdated pay and reward system we went through a process with ACAS of over the last the previous two Mondays before this before this one and unfortunately that didn't lead to an agreement either and on Friday we received notification from the three unions of industrial action that would be commencing on Friday the 10th of November and there's three elements to that a full four day strike from Friday the 10th to the 13th no out of ours standby or contractual overtime for every weekend thereafter till January and no voluntary overtime continuously until January so as you can imagine we are working through that we've had a team in place to deal with this and we've used our very successful Covid management plans that we've put in place as a good starting point for this and our main priority throughout this will be to ensure that public health is maintained and the environment is protected throughout Thank you, convener well that is very disappointing to hear strike action which results in no loss of take home pay for workers is always a last resort it's a pretty desperate place to be with the cost of living crisis I think then it's worth going over some of the things that the unions have said in the last couple of weeks some of these comments do predate the ACAS meeting but let's get them on the record so unison said there's been no meaningful engagement with Scottish Water bosses so I guess that's people in front of us just now that there's been a withholding of information from trade unions and a feeling amongst members that Scottish Water bosses are behaving like Victorian mill owners so these are quite serious statements but then got the GMB saying Scottish Water is acting like a rogue employer and that is astonishing to watch a master class and how to demolish good and productive industrial relations I could continue with some of the quotes this is pretty damning isn't it well don't with respect Monica, I don't think this is the forum here that we will negotiate a deal with the unions we've I'm not a union negotiator in terms of what we've heard about your report and your performance and the impact on customers I think it is all entirely relevant with respect Monica and Peter if I could just say it's really difficult this and I know how seriously you take this and I'm sure Scottish Water take it extremely seriously and what I don't want to do is to be seen for something to be misquoted or misled down which may cause the negotiations to fail so I think you've very much made your point you've made your comments and I would encourage Peter to come back or Alex to come back one of you to come back I'm not asking you to set out a pay statement or a pay deal on the table but the committee is making the point to you that they are very concerned about this and Monica's eloquently made it what we're looking for is an undertaking from Scottish Water that they've heard what we've said and what they're going to do about it Let me come back because I think what you're doing is setting out what's been said in the press actually some of those things by our unions and I don't think those representations are fair but they come from a position of deep concern from the unions and unions exist to try to do the best deal they can for the people they represent they are an important part of our negotiating forum they're critical to how we've worked in the past and will want to work in the future so I don't want to get into a kind of who he said she said sort of thing that's not helpful but I do understand whence that comes that the point I would make coming into this is that it feels to me that the issue at hand is the need to modernise a 21 year old paying grading system and that is something that our colleagues in our unions recognise needs to be updated and colleagues across Scottish Water recognises needs to be updated what Scottish Water sought to do in bringing in that new paying grading system was to utilise the fact that by linking it to the annual pay award we could actually have some greater flexibility than would normally apply in public sector pay policy normally that would be a 3.5% base up to 5% if efficiencies could be shown by tying the two together we felt we could get an even better deal for our colleagues across Scottish Water and that is the minimum 8% deal that Peter described there were concerns about the tying of the two things together and there were issues that came through in feedback from colleagues which we sought to recognise and go back with an improved offer through the ACAS negotiations unfortunately that hasn't yet led to a conclusion but the message I want to give is that our door absolutely remains open at any time for continued discussions with our unions to try to actually get to a resolution for this and not then realise the very significant issues in terms of the take-home pay being lost by colleagues and indeed at the moment all of our colleagues are facing the impacts of cost of living that's been going on without the benefit of an annual pay award for many many months and that's really difficult for people so it is in no one's interest for this to not be resolved and we are very keen to resolve it Monica would you like to comment? On that final point I do agree it's in no one's interest this is not in the public interest it's not in the interest of your very hardworking staff who we are all very thankful to so I suppose my final question back is it given that Scottish Water is a signatory to the Scottish Governance Fair Work Convention that you will reflect on what's been said here today and elsewhere and demonstrate that there is effective voice in the workplace for all staff and for trade union partners who play a critical role here Absolutely Thank you sorry Monica to cut you short Sarah Would you like to comment? I would thank you convener it's much appreciated to be able to ask a question an interesting session I'd like to go back to the opening remarks where there was a discussion about resilience and the impact of loss of power emergency generation investment there's also the renewable power generation programme and I was wondering if you talk a bit about that there's obviously a lower in climate emissions benefit but is there an opportunity there in terms of resilience but also income generation you've talked about hydro wind, solar chp using organic waste it just how does that fit into the overall strategy from Scottish Water is it an income generator? I'd like to pick that up so it's a really really good question and the different aspects have different elements but that increasing our energy resilience is a part of what that net zero kind of campaign is going to do because the more we can both reduce our energy needs the very first thing you can do and we've been doing well in terms of reducing our energy needs by looking at different technologies that are less carbon hungry and particularly when we're delivering investment programmes so as an example we've just gone through a major refurbishment of our wastewater treatment works in Dalmanoch part of what we did there was to look at the particular aspects of the wastewater treatment and by shifting to a different technology we've reduced carbon by about 80% from that particular change and reduced our energy consumption we've also done things like shift fleet increasingly to EV rather than petrol and we're sort of doing many things that kind of reduce demand at source first but then things like I think it kind of you talked about things like solar and hosted wind and various other aspects that is starting to give us much greater self-sufficiency in the energy demands that we do still have even with that reduction the kind of income generation bit of it yes that's there too largely we progress some of those proposals and programmes through cross-ish water horizons which is our non-regulated subsidiary and that organisation is being doing quite a lot in that renewable energy space including in hydrogen where we have one of the first pilots about utilising our resources into the input to hydrogen production which can be then give us an income flow which back to the earlier conversations anything that comes in on that side can help to offset the amount that we need to seek from customers to deliver the resilience enhancements that are there so it's a quite an exciting area I think there's quite a lot we can do I'd like us to do more in that regard say on green hydrogen we have that one initial pilot the thing I think is most exciting is the potential to use the final effluent from our treated wastewater as an input into green hydrogen production the key thing then becomes the co-location so you need to be partnering with an energy company close enough to your wastewater treatment works to make those approaches economically viable that's very interesting and just a final follow-up question would be about heat and power networks you've mentioned energy from waste what about the potential for more community oriented given the infrastructure you have in terms of water heat networks that are currently being developed by local authorities so we do have some capturing heat from wastewater treatment processes and then that's linking into district heating I think we've got about three at the moment around the country so not large numbers but interesting pilots that are giving us a sense of what can be done there so I think again a lot of that often would be the ability to partner effectively with where the demand is for things like district heating which could be with local authorities it could be with housing providers it could be with particular high heat demand installations like swimming pools and so on so we've got I think three of them we're at the moment on capturing heat but I think it's an error we could again look at to do more okay thank you very much thank you convener thank you Mark I think you wanted a brief follow-up yeah I was interested to understand how you engage with stakeholders I mean you know there's obviously customer forums there's the role of the economic regulator but I'm interested in just what your relationship is particularly with environmental organisations and campaigners I think we heard earlier on you know surfers against sewage have been very critical in recent media coverage do you engage with these organisations do you meet with the likes of Fergul Sharki and others who are campaigning in this area do you take on board their concerns so I think my I mean I haven't met Fergul directly but we said we certainly he was a hero of mine when I was growing up so I have a have a history with the pictures of him on my wall when I was 15 so I'd be very pleased to meet Fergul or any of the any of the kind of environmental organisations that are arguing for improvements because as I said in my early response you know the outcome we want I think is the same we sometimes don't agree with the way in which the issue is presented because sometimes I think it cannot be the most helpful in order to deliver the outcome that we we are all seeking but my sense having moved up to the role in June is that actually relations are generally pretty good there's quite positive engagement between Scottish Water and environmental bodies on a whole range of issues and local community groups and so on I'm sure we can always be better but I don't detect there to be a kind of problematic relationship there may be differences of view of course but I think the engagement is pretty good okay I'd love to be able to say Fergul Sharki was before my time but everyone knows that's not true so Jackie you wanted to Jackie you wanted to say something thank you convener it was just in the entrance of transparency Monica where it was speaking about the pay increases in unions and everything I'd just like to declare that I've got a family member who works for Scottish Water but I've not taken part in anything so but I just thought for the entrance of transparency I would declare that to the committee today okay thank you and that brings us to the end of our session Joanna you're obviously sitting there feeling that business streams perfect say because you haven't been able to or haven't been asked any questions I apologise for that Alex and Peter and Susan if I may say there are a couple of questions that we wanted to ask on the Circular Economy Bill which is coming through the Parliament sadly we have run out of time I'm going to ask the clerks to write to you directly with those questions and what I would ask respectfully is if you could turn them round as quickly as possible because we are considering the circular economy bill as we speak so thank you very much I think it's been an extremely interesting session and I am briefly going to suspend the meeting to allow a change over of witnesses thank you welcome back our next item of business is an evidence session with the Scottish National Investment Bank as part of our stage one scrutiny of the circular economy bill I'm pleased to welcome Al Denholm the chief executive officer of Scottish National Investment Bank and Jimmy Williamson the executive director of the investment team for Scottish National Investment Bank thank you very much for joining us today and before we move into questions I think you want to make a brief opening statement yes good morning thank you very much good morning to the committee as well I'm pleased to have the opportunity to engage with the committee this is my first meeting with the committee and I look forward to working with you all in the future in terms of my own background I've worked in the investment industry for over 35 years initially with the subsidiary of RBS before managing investment portfolios and investment management business units for a number of leading asset managers that experience included Aviva Investors, Prudential, BlackRock, ING Investment Management, Insight Investment Management and Scottish Widows I've also led ESG investment teams since 2000 and their development has been something of a theme throughout my career I took up the post as chief executive of the Scottish National Investment Bank in May of this year I'm joined today by my colleague Jimmy Williamson who will introduce himself as well yeah good morning my name is Jimmy Williamson I'm an executive director on the investment team my background is in it's over 30 years of investment in corporate banking private equity venture capital as well as I'm supporting management buyouts private equity back management buyouts in multiple sectors and also consulting in industrial and energy markets the my day to day job in the organisation at the Scottish National Investment Bank is leading one of the investment origination teams which actually means originating, finding, sourcing, executing and structuring the investments that we make and then also partly involved in managing those on an on-going basis thanks Jimmy so since coming into the post I'm being pleased to see the progress that bank has made since its launch in November 2020 we're coming up for our three-year anniversary very very soon I'm hoping to work with the team to build on that progress I see particular opportunities to further develop the bank's reputation as an impact investor and in working with institutional investors to mobilise their capital to meet the key economic and societal challenges and opportunities we have in Scotland the bank has now concluded 29 investments committing almost £460 million directly with £750 million crowded in from third party investors as well that takes us to over £1.2 billion economic impact into the Scottish economy in those first three years finally we're pleased to be here today to discuss a circular economy this is an area we see as an important role for the bank and it's one of our key strategic initiatives or priorities we're supportive of the initiatives to to support the circular economy including bringing this bill forward I appreciate the committee having been hearing detailed feedback on some of the proposals of the bill as an investor though the bill is our interest is mostly at a higher level and how it might support the development of the circular economy business models to support and scale up circular businesses we're happy to share our perspectives and to try and provide an investor's point of view on the development of the circular economy and the various business models therein we already have a number of investments in this area a particularly strong example that the committee may be aware of is in natural fibre insulation manufacture in denature where our £5 million investment has supported them to open their manufacturing facility in Jedbro we are seeing other opportunities in the circular economy coming into our pipeline and hope to conclude more investments in this area in due course I'll conclude there and we're looking forward to our discussion thank you thank you very much and you have quite a few questions coming your way I think the first one's come from Monica and Monica thank you convener and good morning to our panel I didn't catch all the details but you did give an example just a second ago but my first question was really is to ask how the Scottish National Investment Bank is currently supporting the transition to a circular economy in Scotland and how that links to your mission and investment principles for example to seek to invest where the private market is failing and to be a patient and ethical investor I'll give an overview of that and I'll ask you me to come in with some examples if you mind just to go into a bit more detail so when the bank was set up one of the key objectives was to focus on the transition to net zero and the circular economy is a core part of that if you use less or you recycle it it all plays into that we think that's a good positive thing to do so the way that we are strategically aiming to do that as we've set it as a key objective of the bank to focus in this area we're going to publish results over time and how we're doing in this area for example the amount of money we invest in businesses how much waste has been reduced how those businesses contribute to the circular economy so it's a key initiative for us as I mentioned we've been starting to make some investments in this area we clearly are reliant to some extent on what I'll call commercial opportunities coming our way we are not a grant or project financing body we invest in support businesses as they have a commercial opportunity to scale up and in doing so if we can come across and help a business to look attractive or that does look attractive from a commercial perspective that gives a strong opportunity for third party private capital to come in alongside us obviously private capital has its own target returns and objectives and most of those private companies or private capital wants to make a positive return on their capital in the same way as we do which is part of our mandate Jimmy you've got perhaps some examples to bring that to life for example in 2023 for the first time our impact report we added a new objective to our net zero mission aims which is to grow the circular economy by 2045 that raises a prominence of the circular economy in our core mandate in a part of our net zero mission investment objectives and in practical terms that means that we as well as at an institutional level we are bound by objectives to report on progress of the investments that we make how they are contributing towards that end objective so we aggregate those KPIs that we establish for individual business investments in practical terms it will involve for example a amount invested in circular economy businesses the portion of the banks investments that contribute towards circular economy it could also involve KPIs for example at business level where we have targets around reuse of materials recycling of particular off products for example and those will be aggregated at an institutional level and we will report on those themes which underpin that trend towards circular economy in our annual impact reports so I guess the messaging there is that it's it becomes part of our core reporting framework Thank you, so just to build on that I wonder if you can say a little more about what are the key opportunities to integrate circular economy principles across your missions of net zero improving places and harnessing innovation and would you look at circular economy principles when you are investing in housing for example or energy projects or technology The consistent theme around circular economy plays they are very broad based whilst we position them within our net zero mission they apply across all of our mission areas the place mission as well as the innovation mission I think it's maybe if I paint some examples of the type of business models we expect to see and where we think the opportunities lie with well thought out legislation and regulation that comes from that and actually creates business models because those businesses that need to comply with that there's obviously a cost in doing so but equally there's a consequence of not doing so so what we find in other markets where regulation is imposed is that there are business models that establish themselves to help businesses comply service provision so that's one example of where we would expect to see interesting business models for investment opportunities going forward Other features we see are Scotland is instituting these bills it puts us relatively speaking ahead of the curve in other countries there are some countries that are arguably ahead of where we are and we would take soundings from those to understand what best practice looks like but that creates in our experience business models where if you're ahead of the game internationally it creates export market opportunities so businesses that are developing circular economy models here then start to export those models globally we've seen this and I've seen this in other examples where in the CFC and refrigeration gas sector for example recycling and reuse of those harmful chemicals were contained in a smaller number of businesses that became experts in those fields and you saw that those business models exported themselves around different international territories as regulation developed so I think that that creates and we like supporting export-orientated business models so we see opportunities there one of the other areas we look at carefully is you know where does Scotland have a particular competitive advantage or where do we have industries which are strong and whiskey would be a good example wind sector would be another example where we find circular models which play to those particular indigenous industries then they would rank higher on the bank's priority list in terms of where we'd want to deploy investment opportunities that gives me some context around types and the approach we might have but I think you raised a question around housing in particular can you just remind me? We were just as an example but you mentioned wind I just wondered if maybe you wanted to expand on that what you think the opportunities might be yeah I'd be happy to and clearly but with Scotland it's market developing it's placing Scotland at the forefront of you know particularly floating offshore wind there are a couple of areas where we see circular economy opportunities in the wind sector that there's a real issue in the wind industry around leading edge erosion I might get a bit technical leading edge erosion on the blades themselves and historically the manufacturers and the developers would just dispose of the blades replace them with new it's very expensive to do that and it's done and these weren't really costed so we are seeing business models developing where you know using different types of materials and techniques to predict you know failure rate in in in in those particular areas where the performance can be improved we also we would expect to see over time you know the the products engineered themselves to be able to be replaced whether that's been able to to put inserts into the into those blades that would be an example where there are actually business models developing and other might be in the area of turbines themselves there are parallels in the aerospace industry gas turbine industry where actually there are there are very detailed there are very complex supply chains built up to to to address failure of parts to enhance performance over time of those of that embedded infrastructure and that equipment the wind industry hasn't quite because it's less mature hasn't developed that same level of supply chains support so we see opportunities where we can help that embedded infrastructure that we'll see going into Scotland be less of a disposable in a type of operation and that supply chain helping prolong the life of those turbines for example that would be a couple of examples of where we see opportunities. That's helpful just a final question from me again sticking with yourself Jimmy you mentioned KPIs earlier on so what metrics and KPIs do you use in assessing investments to support the transition to a circular economy and again you talked there about supply chains so do you look systematically across the supply chain of a project and does that include looking at things like the ethical extraction of virgin resources embodied carbon biodiversity impact and the circularity of resources and are you confident that your investment criteria are robust enough to avoid any harm in those areas yeah thank you the on in terms of KPIs yes you're correct we have for every investment we make as well as objectives around the financial performance of that investment we we develop a suite of KPIs around the impact outcomes that we expect from those from those investments we've very recently developed a broad detailed set of KPIs which are you know which are pre-engineered and pre-loaded if you like for individual sectors including so we have a we have a you know our own and we have our own pre-agreed set of circular economy KPIs so we've looked at the circular economy industry sector what good looks like and we have a range of KPIs that we would then apply and we need to be proportionate to choose the right KPIs for those businesses and that work enables us when we see a circular model which we consider investing in we can draw from a universe of pre-existing outputs and measures for those outputs that are appropriate and should deliver the end results we're in the early stages of developing that more systematic approach to KPIs and we expect we'll see the outputs of that in due course and we'll report on that and our annual impact report thank you very much back to you convener I'm a little a bit interested in how you come up with the investment so you know with bank rate at the level it is at the moment some investors may be looking at a straightforward investment a fairly moderate rate of return of about 8 to 10 percent the riskier the opportunity it might go up to 17 percent it might go up even higher than that depending on what they're looking as a rate of return you obviously won't be looking at that which means you could be investing in more risky businesses and you're not going to give me a standard rate of return that you'd expect in your investment but can you talk more about that so I can understand you know how you are a facilitator to allow it without taking all the risk in the most risky projects if I could first tackle that one from a strategic holistic perspective one of the key things when the bank was set up is we're set up as a development bank to take some risks that perhaps the private sector wouldn't take up but we're also set up in a very clear set of guidelines that we couldn't crowd out the private sector so we can't offer investment terms that are called below commercial rates you know so far and because I would impinge into state subsidy control rules so we're very cognisant of what the market rate is you mentioned some numbers there but those are the sorts of numbers that we would perhaps be looking at on individual deals based on the risk profiles but it very much comes down to the credit risk that we're taking and what's the commensurate amount of interest rate that is charged on the debt or on the equity valuation that we place on something so we do have that mandate to operate commercially but what you're sometimes finding in some investments is that the private sector doesn't want to come in even at higher commercial rates just because the risk profile is not what it is and that's the role of the development bank now what that can mean in practice is we might take a longer term view so for example we might go in to create an opportunity and therefore crowd in other lenders or other investors on when the opportunity has developed a bit further and it's perhaps been de-risked a bit that that then allows them to come in and get it through their credit committees for example and that's how it would work in practice but we're absolutely we do not intend and nor are we allowed to price below commercial rates but longer term investments means that you tie up your capital which means that you can't replicate the investment as and when it's needed and what I'm guess I'm trying to ask you in a very clumsy way is that you won't be ever be below what the bank base rate plus about 4% is that right? Or will you be below that? Or it very much depends on the opportunity I mean we don't price on that basis we price on the risk basis based on what commercial rate is at point in time and as you know interest rates have gone up recently and therefore the prices that we would be lending have gone up commensurately but you'll never be below bank base rate will you? I just can't imagine it no so on something we do today now if bank base rate changes and something it was written I understand that so some people who came in two years ago when it was a 1% or thereby or a multiple of it will have got a very good deal especially if they've gone for a 30 year transaction um which in hindsight probably doesn't look that good in today's market for the bank to have the capital to invest in other projects how do you balance that? So one of the things that we're focused on and Jimmy you can talk about what you've seen today one of the things we are focused on to your point of recycling is to make sure that we are investing with a view to removing our capital at some point in the future with that be an equity investment or a debt investment making sure it's not tied up forever as you're indicating that's absolutely not our objective our objective is to provide some development capital to support the business in its growing stage over time third party will then come in and the need for our capital will be removed and we can then take that capital either through income return or equity return or debt principal return and then recycle that back into other investments that is the general model that we're talking about so that we're on the line with not tying up forever So what's the average length of time that you would aim to invest in a project for? Maybe take that question it really depends it will be determined by the project and by the market maybe just to your point the we've been given in our mandate flexibility to be able to if we're lending money to businesses to be able to lend on a fixed basis but we can also lend on a floating rate basis and what you find in the current as we're investing over a relatively longer period of time you know where we have to be responsible like any commercial investor would be around and understand the counter party risk if you're investing in a fixed basis at the moment lending then that's going to look quite expensive if you're locking in that rate so we have that flexibility to be able to offer floating rate lending at this point in cycle and that would be expected that the projects and the businesses that we're looking at just now that we're looking at a at a lending type investment rather than an equity type investment are more likely to take a floating rate exposure on the basis that the assumption is that rates will come down over a period of time that just that's just moving to the point around we have some flexibility to adapt to what the client is looking for but ultimately the client is the decision maker there rather than us imposing you know a particular structure upon them yeah right Mark you've got some questions I think yeah thanks Covina um I just wanted to ask about the role of small to medium enterprises social enterprises community businesses within circular economy and how you know you may be able to support them or or not through financing because I think what we've seen over the years is that's often where some of the really great innovation is in relation to circular economy so are these business models that you can find mechanisms to to support or I think I'll maybe start on this one yeah the the I think that the the point touched upon earlier is that the circular we see circular models across a wide range of of of business situations that there are there are purely projects that we might look at where you're actually treating some form of off product from another industry you know which by definition is a project so that can be quite it can be a business that's just setting up it might not actually exist as a business might be a special purpose vehicle or something but we understand your point around you know SMEs you know one of our concerns in a more general sense is you know new regulation in in in industries the larger enterprises generally speaking are are better placed to be able to comply and have the resources financial and physical people resources to deal with that we do see you know SMEs you know sometimes more challenged on that basis and you know in terms of our approach to businesses you know you know you know regard also whether it's a circular play or not or you know we've been set up to be able to invest in SMEs you know arguably more so than the larger enterprises you know subsidy control was actually encourage us to support SMEs it's it's it's it's it's it's more problematic there are more hurdles to navigate if we're dealing with the larger enterprises so in that context our you know our ability to to to help finance SMEs would be built around their investment thesis rather than to help you know address a cost issue so and that just adds to that one of the things that so we we see a role in a couple of facets one is there is a business that's ready for investment now it's ready to scale how does you know we can help us a development bank to help it's scale you know it's got a past to profitability it's got sales perhaps it you know it needs that they're visible and it can scale and that's the here and now of what Jimmy and his origination team will be looking at we've also got a number of people on our team who focus about that market creation element that you've just been referring to I think is that's how I thinking of your question yeah and so the free to rationalisation convening and sharing insights etc with key um stakeholders players within the industry with that being housing or circular or natural capital etc and we would be engaged in those conversations perhaps holding workshops perhaps holding conferences sharing insights about how those activities could at some point in the future attract commercial capital so that's how we would see ourselves doing that so for example I had a call yesterday with one agency where we were talking about how could we work together to see if they can bring capital into their space because we're seeing we understand what commercial investors are looking for where the conduit in the middle if you like is a development bank now can we join the dots over time now that won't happen overnight but we actively focused on that market creation that's what we call it in terms of this market creation okay that's useful to know and in terms of your restrictions on funding public bodies and you know you've met you've mentioned that already do you see that that situation changing over time because I do see that as an area of frustration I was talking just yesterday to five college you're going through a massive redevelopment of their of their campus and there's a frustration there that perhaps they're not able to invest in electric vehicle charging facilities or renewable energy in the way that they might do if they had it because they were set up as a different body so you know there does seem to be a lot of frustration in the public sector that investment opportunities infrastructure is being built now that needs to tackle a climate emergency but you know the finance isn't always there so we talk to many we have many incoming inquiries and we're one of the key criteria we have is if you like it has to be ready for that phase of commercialisation and we're talking to a number of major entities housing or universities or whatever where we could perhaps come along on projects which is part of an overall business plan as Jimmy said when the problem is with a project is this a sunk cost and you can never release your capital back out of the project so you can be a catalyst but from our perspective we would ultimately like to get out so we would rather we would therefore seek to talk to those entities and say how can they how can we help them achieve their goals through our market insights rather than necessarily invest in directly because I don't believe that that's in our mandate to do so directly and then finally just about the opportunities around I think you mentioned offshore winds already but is there potentials there with onshore wind as well and a linkage between the on and offshore sectors because we are going to be going through quite a dramatic phase of repowering onshore wind farms so I'm interested in what you see as a secure economy opportunities there to develop supply chain that then links into the offshore industry so we we are supporting both onshore and offshore so that's you know we don't have a specific one or the other mindset but what we're also doing to your supply chain questions we are actively seeking to develop the supply chain in Scotland what we've tended to find is supply chain tends to tends to be quite limited in Scotland there have been a number of studies suggesting that a lot of these components are imported it'd be great if they could be manufactured here I think Scotland provides an amazing opportunity to do exactly that with the consents that have been given there was a requirement for those people who bought the licensees to commit to supply chain spending in Scotland we are actively as a priority trying to develop those supply chains and we think that's a massive opportunity for Scotland if we can do that and into Jimmy's point once you create that expertise you can then export that expertise in the same way as I think the oil and gas sector created a global globally leading expertise and you go anywhere around the world and you hear a Scottish voice now on projects globally it'd be nice if we could get there with wind as well Is there something in particular about the way that the Scotland process has evolved which has helped that so that I think there's the supply chain statements being up front with bids for Scotland Scotland leases is that really provided a bit more certainty as to where the opportunities are is that revealed where the opportunities are has that helped to stimulate things So Jimmy is actually on the day-to-day lead on this when so it's very appropriate I think from an investment perspective it creates something which is highly unusual in the sense that there's a very there's a very significant long-term structural growth opportunity in offshore wind in Scotland which has got political support it's got broader community support it's got economic support and these projects take a number of years to develop and put into place so that momentum creates a very stable relatively speaking environment to make investment decisions and what we see in the frameworks that are being created around how Scotland's projects get developed and this is an important point to make is Scotland is predominantly underpinned by floating wind because the turbines and the locations are further offshore and that in itself is a new technology and that plays to that it's more technical risk that there's a very interesting transition finance play around this around taking skill sets from the offshore oil and gas industry to come around the north east where the engineering requirements for floating platforms is actually quite similar to what was used in the offshore oil and gas industry so that helps in that sense but I think to Al's point that he mentioned earlier what we've seen in terms of offshore wind capacity and capability in the UK and Scotland is an important part of that is outside China as that is the world's number one as a leader in that sector in terms of not only the deployed offshore wind infrastructure but also the commitments to more capacity going in we've got to that position really on an import-led model you know the OEMs the supply chain so on that the people element of it interestingly we are we're exporting our people so if you look at recruitment businesses specialist skill sets in that sector they are actually being exported globally because they're quite they're very flexible resources so I think what we're seeing just now is a really I think you know what's turning out to be well crafted thoughtful policies and systems put in place to encourage an investment an investment regime where we can take some of that what would have been imported and create that here sustainable original equipment manufacturers as well as you know better port and infrastructure that's longer lasting and ultimately where we want to get to is that infrastructure and those businesses that we create here aren't just here for that growth phase that the UK has and Scotland has that those actually start to serve export markets in due course and in our view that creates a much more sustainable investment in business community yep yep thank you Jackie I think you've got some questions now thank you convener the circular economy bill includes powers to set legal circular economy targets can you explain to us what you think that impact will be on the investment environment by having those economy targets in place do you think that these targets drive investment yeah so if I can answer that broadly rather than specifically on the bill I think one of the key things that businesses and this is a global comment it's not just Scottish businesses businesses like to have some certainty of two things one is direction of travel whether it be policy or whatever or in a new industry targets and whatever those targets are I'm not here to suggest what they could be but as a general comment I think it's fair to say that businesses are hoping to make commercial investments like to have some degree of certainty as to what the environment will be like when they make those investments and I think the circular economy is no different to any other industry at all it's just a general statement so yes I think it'd be helpful okay I'm just going to add just to that point that I mentioned earlier around business model if there's a consequence of not complying with the regulation that actually creates business models which will help businesses comply in that way and that can be separate businesses that are set up specifically for that purpose or there are existing service providers that do something similar that then move into that vertical so in a way there are there are there are there are business opportunities you know to help you know businesses navigate that that new legal framework okay thank you and do you think that the SNIB has the mandate to pursue circular investment opportunities in and around the areas of reprocessing or reusing which are more geared to reducing consumption emissions and which may not actually reduce our territorial emissions I'm trying to work through that question and I'm really sorry quite complicated at the end sorry, did you mind repeating it? Do you think that the banks have the mandate to pursue the circular investment opportunities in and around the areas of reprocessing not reprocessing sorry or reusing which I feel is more geared to reducing the consumption emission rather than actually reducing our territorial emissions so I think a general term anything that we can do to reuse I think is a positive thing and that that means having some form of processing to make that happen it would seem to be first blush something that we might look at but as I said earlier it has to be something that fits with our overall mission KPIs and it has to fit with our commercial KPIs as well and it has to fit both of those if I could give an example if I can give a sense for your question if I understand your question so for example investing in developing a port might lead to some carbon or concrete being poured but that creates the opportunity for offshore wind to be developed going forward and we've taken the view it's better to do the former in order to achieve the latter in that example so have you came across any tensions between reducing our carbon footprint and our domestic net zero targets? Are you aware of that? I think the societal you know the endorsement that is a good thing there are most of the circular opportunities we see and are likely to see going forward are industrial and commercial in the nature rather than retail level but there are retail consumer opportunities we were talking about one beforehand where you know a business called Bike Club where where actually kids grow up quickly and they don't use their bikes and those are resources which are which are left and it's more expensive for the families concerned where a subscription model was created that you subscribe and the total cost over time you know for your kids having access to new and second hand bikes is actually lower now you could argue for the manufacturers of bicycles that may or may not result in more bicycle sales but I think at its societal level and our business level you would endorse that as a good thing and I think the feedback we're getting from businesses in general or in circular models is not pushback that this is bad or it's going to reduce you know output or it's going to reduce you know the growth opportunities I think we struggle we could struggle to think of anywhere you know that's the case I think most accept this is as different progressions yeah yeah okay thank you thanks very much okay I've got a question on something that was in your 2022 report about enablers and these were people who were going to increase investment so who are the enablers or what are the enablers and can you give us a bit more information on them I'm really sorry I've only joined a few I don't remember the 2022 reports could you give more context I'm sorry well it said you you input in that report you are highlighting the importance of enablers to facilitate the growth of impact investment and what I want to know is I want to know who or what are those enablers yeah so so as we've said here we've touched on a couple of themes one couple of the enablers are you know policy certainty for example working with agencies we talked about the question earlier about creating clarity on between the private sector and the public sector we can do some market making enabling there and the other one is the development bank of sometimes going in earlier than a commercial bank would be I consider that an enabler to help and create the circle economy so we've touched on a number of examples already convener on what I would imagine was meant by that phrase I'm sorry I don't know the specific phrase that you're referring to but that's what I imagine was meant well and those enablers we're acting as a crowd we're also crowding in I've picked up on that point as well yes I understand that and I'm trying to work out if there's other people following your lead so I mean when it comes to for example forestry we've seen that there's private investment banks that are getting involved in that and I'm trying to to find out if there are other enablers as well like them yes absolutely thank you it's a really good question one of the things I've noticed and so is that over time a number of the large asset owners we kind of ourselves as an asset owner with this the two building commitment and this guard are very much interested in committing to what we'll call impact investments in a way that 20 and 30 years ago and even 10 years ago they just weren't it wasn't something that was on the radar screen of many chief executives or many chief investment officers of large institutions obviously there were some there were market leading in that some of the impact funds the ASG funds were market leading but I think what I've noticed in recent years is there's been a massive shift in changing mindset to focus on enabling investments in these sort of areas we're talking about whether it be large insurance companies large pension schemes other entities such as ourselves you call it UK Investment Bank British Business Bank we all generally have a similar impact thesis in our mandate not as directly as ours is and ours is very much front and centre the other people's mandates might be a bit more commercial first impact as a secondary objective ours is clearly impact and commercial equally but yes there's a lot of I think capital interested in coming to support these projects over time and I think that's why coming back to some of the points we were making earlier providing certainty and clarity will help that money be committed if you're sit as I have done if you're sitting around an investment committee at XYZ insurance company and I've mentioned I've worked for five or six of them on investment committees chief investment officers of a number you have boxes to take you have your own risk governance processes to go through and having that clarity of that investment is going to be a safe investment and it's achieving good at the same time is something that they're all looking to do okay so I understand that so there are companies out there and banks out there that want to join you so you have very clear principles and standards of practice in the way you invest how and who's going to ensure that everyone else follows those standards and principles because you wouldn't want to be tied into somebody who had lesser principles and standards of practice than you would would you well I think that's I think one of the key things is to actually bring the market along with you if you are a leader the key is to try and convince others to come along and share those views and so for example I mean I don't want to name names but I've been down in London for the last two weeks speaking to some of those very large institutions and you know they're all on a journey we're you know all these big institutions on journeys and they're developing you know I've worked for a number of those institutions throughout my career and I can see the journey that they've been on and it's a moving feat so I do think the investment the Scottish National Investment Bank is slightly further ahead in that journey and what we're doing by for example publishing our impact report is I think market leading we're about to publish our carbon management plan we also think is market leading and by doing that and putting that out there then we'll be setting standards that hopefully others will aspire to in time now it is a journey and not everyone's going to copy us the law have their own views but if we can be seeking to go on that journey and we are learning as well of course at all points we are young organisations seeking to learn as well we will seek to improve on all of these elements as well so we're not brilliant we don't profess to be brilliant but we're seeking to become a market leader in all these areas so I'm gently pushing you to see if you're going to codify the principles and standards of practice because what you don't want to do surely as an investor of the money from the people of Scotland is to be in something which doesn't epitomise everything that you want to do as a bank so I'm wanting to make sure that is there going to be a code is it, are you going to lay it out or is somebody else going to lay it out and you're going to follow no so very clearly one of the things that we're setting out in our impact reporting first of all is we are reporting on the impact we're making across all these missions and all these sectors and we're getting more and more granular over time and I think if you go back three years ago to now there's been an evolution in that the bank board has just signed off on a set of targets for those impacts and we don't actually think that many private sector investors are actually publishing targets they always a lot of them do backward looking reporting which is fine that's good because it's out in the public domain but I think setting of targets and ambition levels is something that will set us apart so we continue to do that but clearly we're doing it in the context of our grand challenges and what we're seeking to achieve so we're making sure the targets are relevant to what we're seeking to achieve and not just to scatter a gun across all have those targets been published yet? not yet we've just been signed off by the board okay holding our hands up from the committee's point of view I think we'd quite like to see those targets as soon as possible so we can understand how that meets into the evidence that we've had today sure of course I think that would be extremely useful Douglas I think you've got some questions yes thank you convener can you update the committee on the £9 million investment that was made into Circularity Scotland by the bank do we expect to see any of that money coming back? so as you mentioned we invested a few years ago back into Circularity Scotland £9 million debt facility we in our latest annual report we showed that we expected a write-off at that time of £4.5 million we showed that in the annual report we've also said in the annual report that we expect to recover around £1 million but that will be very much dependent on the administrator process and we've got no further insight since that point on what that specific number will be but we're aware they're going through a due process and that estimate seems from what we are hearing is a reasonable estimate of recovery so what happens to the other £3.5 million then what's if you expect so at the time of writing the annual report which was in March that was our view at the time and as you know things developed since then which cautioned us which actually crystallised what was at the time an unrealised loss into a highly likely loss which is where we now are of a much of a higher magnitude so from that £9 million you really expect £8 million to be lost now about yes around that number yes exactly so can I ask what lessons have been learned from that whole process of lending to Circularity Scotland was the UK Internal Mark Act something that wasn't seen as a risk before that may be seen as a risk now and have anything changed within the bank when you're actually looking at potential investments? Yes, I went through the due diligence on a process for CSL after I joined clearly it was something that was happening just as I joined so I wanted to get myself up to speed and therefore the answer I give will be based on that so at the time the investment was made was I think had the relevant due diligence of in terms of opportunity and risk analysis he would expect of any investment process of any asset manager I've looked at and the risk the elements of risk were properly discussed one of the elements that we saw at the time as a what we call a risk mitigant was that the deposit return scheme was something that was being used in the number of countries globally UK Government and various political parties within the UK Government and in the Scottish Government and in the Welsh Government had all shown their support for that and we were think our view at the time was that was a positive backdrop for the circularity Scotland business case as it turned out there were nuances in the Internal Mark Act Internal Mark Act was a new act to have been developed and I think published in 2020 I think in some ways it hadn't been tested it was tested clearly with the deposit return scheme the feedback at the time was clearly that the new understanding is that the various Governments referred to earlier and devolved Governments are still a support of deposit return schemes and I think that I think the element the key issues was around the timing of some of the elements of that So I guess going forward in terms of investment will you have a closer eye on the UK Internal Mark Act and the potential that it could I think going forward one would clearly take that into account as a lessons learned if there was a similar analysis required for the company we're looking at not all companies have that as a potential issue but as a learning organisation you would do that What I would add Mr Lumsden is that having been an investor for 37 years there are always learning opportunities and a skilled investor will always learn from those lessons and the bank will not not learn from those lessons if you know what I mean and do you think that that whole episode do you think it puts investors off looking at certain areas of the circular economy going forward I think one of the things that we have to be careful is I mentioned this earlier to Mr Barr's question I think having clarity on regulation and consistency is absolutely important for any investment any particular in a new in a new area you know if it's an established business area established business economy it's less less relevant but in something that's trying to create a new industry or a new service it's very very important to have that stability and yeah I think if what we're doing here on this committee the more stability and transparency that can be produced the better if you're seeking to crowd in the private sector investment clearly and you mentioned the bank had been set up for for three years now one of the things that was meant to be set up when the bank was created was an advisory board I think by by Scottish ministers I don't think there's any sign of that yet do you have any more information about when that advisory board is going to be created and what's function and all that's going to be? So, as you're right when the bank was set up there was an element for such an advisory board to be set up we understand that that is not our specific responsibility to do it's the responsibility of Scottish Government to set that up and I would hope that this issue haven't been raised they're focused on setting it up what I would add in the meantime is Scottish Government does have oversight over Scottish National messing back in a number of ways we have ministerial oversight we have director general economy oversight we have a shareholder team that oversees us as well the response on behalf we clearly appear at committees et cetera so I would like to stress that we are not unsupervised by any means at this point what we're talking about is an additional level of oversight that was written into the act yeah and it's meant to be to provide advice on the bank's objectives conduct and performance and I'm just trying I'm I'm slightly concerned with that not being in place who is doing that right that role and will they also play into the risk management framework that you have I would imagine they would well we agree that philosophically that that should be put in place but what I would say is the answer of this given is that there are a lot of people that are assessing us in addition we have an independent board that is performing that role as well on an on-going basis it's a board that is very experienced in its in its corporate governance skill sets covering from a number of different sectors both public sector background as well as private sector background so I think we've clearly this element that you've raised needs to be completed and filled in but I think the actual governance day-to-day is robust here and now today very clearly that's about this missing just now okay thanks can you know I've got more questions but I think we're out of time what we are well we're almost out of time I would like just like to ask a question something Douglas said saying that you're hoping to get a million pounds back from that's quite a high rate back for an investment of nine million liquidated assets there aren't many assets in that are you really comfortable you're going to get a million pounds back? The feedback we've had from administrators that is a reasonable assumption at this point but clearly the devil's in the detail and we'll find out in due course once they've completed their process administrators fees can be quite high I would suggest respectfully so we'll be interested to see if you get your million pounds back brief question HMRC always gets paid first before anyone else and there's an argument behind that should the Scottish National Investment Bank as its public money be up there with priority creditors or do you think there's not a reason to call for that? That is not something I'm actually qualified to give an answer to we can I think there'd be people who have a better better view on that one but clearly I would hope that the administrators will be taking these factors into account it's just yeah HMRC always seems to get their money before anyone else Sarah and do you have any questions? Thanks communer yeah it was two brief questions one was the follow-up on the renewables regeneration I think Mark talked about repowering onshore wind you've got massive offshore wind opportunities but we've had a lot of those opportunities for 20 years so it's thinking how you do get that circular economy approach reusing existing infrastructure keeping it lasting longer and you talked about Scotland there are huge opportunities but it's how you actually deliver that green industry opportunity in Scotland so what are your thoughts about it actually happening as opposed to just being a good opportunity? As we're short of time I'll give a very quick overview we are actively speaking with a number of projects that are aiming to deliver Scotland in different formats whether that be offshore wind specific operating you know that the operators of the fields whether it be people involved in some of the original equipment manufacturing within Scotland clearly those are all commercial discussions but there are a lot of these happening as I'm sure you know that the Scottish Government has also set up the strategic investment model structure to try and channel a number of those as well where we are liaising with them we expect to see a number of specific projects coming out of that process in due course we think it's imminent but you're absolutely right it's important that we deliver on this and make sure we fulfil the promise of Scotland I think there's two elements of Scotland I think will be the IC is important one is how you actually have the blades and the masts operating and delivering electricity for me it's just as important it's actually getting as much of that manufactured and serviced and my factory has serviced in Scotland to create the full economic benefit of that and we're focusing on both sounds good on a keep a horizon for that because it's not just the new construction but it's the reuse of existing equipment that would be exciting and also the reuse of existing skill sets I mean Jimmy talked about you know you've got a lot of people who've been working in the Ireland gas sector for many many years who have a lot of the skill sets that are transferable and if we can help transition those skills into this renewable area that would be a big positive We've structured our investment origination team around offshore wind as a specific vertical and in doing that it creates responsibility and accountability among our investment team around you know resourcing and originating those transactions you know whereas you know you know so it's so it's it's more refined and it's more targeted you know so individuals and that allows us to you know be quite clear in the the ecosystem that we operate within that we are close to where those opportunities are likely to come from you know and in a broader sense observationally having worked in many investment institutions the pipeline that we have is is real it's credible it's significant and it's it's across multiple disciplines you know manufacturers ports and infrastructure as well as potentially you know generation you know opportunities as well support vessels yeah chains so so so in that sense and I guess our experience as commercial investors is it looks and feels real and it feels credible we need to I think the risks to those are around we talked about it before interest rates are higher inflation is higher that you know that that is not easy if you're investing in capital projects just now and we are seeing things slipping to the right of it but that's that's you know similar across other construction sectors but but it's it's real incredible it would be our view of what we're seeing on the ground okay thank you my second question would be about the circular economy bill local authority targets which will mean a huge amount of new investment you know from vehicles to infrastructure to process waste you're not allowed to sorry SNIB is not allowed to invest in public bodies but to what extent is that an opportunity in terms of infrastructure investment so that we are able to see that acceleration of projects particularly when some local authorities are doing a mix of public private investment local authority involved in owning part of the investment and working closely with the private sector so you mentioned that we're not allowed to invest in that area but one of the things that I mentioned earlier is we're trying to work in the market creation role to to work out how we can bring commercial into some of those areas something that's a nascent activity for us you know as we refer back to our three-year-old we're three years old but we're seeking to do that we've got people who are working with relevant authorities having conversations we've also got we've also seeded or invested in a couple of electric vehicle charging businesses as well which are up you know they're ready to go as soon as some of these issues get get a smooth smooth out because for example planning can sometimes be a major issue in actual installation so for example how do you get how do you smooth some of those areas but but yes we're very supportive of trying to do and roll out charging points to support the move to electric vehicles and so on okay that's useful feedback because I've had some feedback from the local authority side that they're worried about supply chains in terms of new vehicles for example that could be required but there's also an issue about accountability so the benefit of having local authorities owning infrastructure as part of this process while also using private sector investment and expertise so it would be good I think for the committee to get feedback on what you think comes next on that because it's a now issue yeah well as I say we've got two two companies that we're actively invested in that are seeking to roll out so we could probably get some feedback on what the challenges they're seeing or could feed back into you thank you thank you looking around to see if there's any other questions Douglas if there's time I was just going to ask you because you mentioned the use of public money earlier so last year's accounts I think it was almost a 20 million loss but you're still paying bonuses you know the acting CEO last year received a bonus of about 77,000 so how can the use of public funds be justified when there's such such big losses that you're still paying bonuses so we did report those losses last year I think the vast majority of those would run Realize which is marked to market so we talked about the movement of interest rates if we have a fixed rate instrument and interest rates are moving that creates a marked to market loss on our balance sheet what I would stress is that doesn't necessarily mean it's a bad credit risk at all and that we expect a loss so that's more of an accounting procedure and the vast majority of 14 or 15 million of those I think from memory 14 million were unrealized losses of as a result of marked to market and that's really to be expected in what I call a development bank you know you see those that volatility early on we've seen it in a number of other entities when they were set up at their early stage you see that volatility because you see that before you're actually getting some realized profits coming through what I would stress in addition is the the income we're receiving is significant now in our investments we're earning I think we earned 10.7 million I need to if that number is not 100% correct I'll come back and correct but I think it was 10.7 million last year on income in our portfolio which means we're very very close to being self sustainable on a cost income ratio on the investment so 10 million could be a good figure or a bad figure depending on we have a blend of our portfolio is a blend of debt equity and and so how much money have you put out to get 10 million pounds for that well 460 million what 460 million is out in investment and that is the in-year investment on that money and we'd expect that to go over time as that investment is drawn down over time that's not a great rate of return is it that's a committed number is 460 say I I know our income on her investment so far has been 10 points if I'm on an annual on that calendar year basis that report on your basis sorry you're not I've got this wrong you've said you've lent the equivalent of 460 million committed committed 460 million pounds and you've got 10 million pounds back is that right or have I got that one we haven't got it back that's not a case of getting it back that's the income on the debt that's the income yeah so if I gave if I gave a bank 460 million pounds with a base rate of five percent what would my return be having well it would be more than 10 10 million pounds surely I think maybe the an important point to take into account is that we're you know we're deploying a mix of death and equity so you know in that sense you know equity investments the development bank the expectation is that we will we will not achieve a return on those in the early years as we take development risk for example and the returns will come later which is quite consistent with equity investors you know with equity private equity venture capital portfolios for example will will not have you know significant returns at all in the early parts of the funds but they will be expected to achieve returns when those companies are sold so I I think just to understand our portfolios a mix of debt and equity I understand that but I'm just saying it's it's not even five percent it's about two percent return on the money that's out there but anyway thank you I understand that so thank you if there's no other questions thank you very much for attending this morning and what I would say is that our stage one report on the bill the circular economy bill would be published in early 2024 not putting exact date on it but that includes the public part for our meeting and we'll now go into private session thank you very much