Dirty water, an ageing infrastructure and a new regulator. Scottish Water’s six-lawyer team has an uphill struggle. And all on a shoestring budget from the Scottish Executive. By Brendan Malkin

There is so much happening at Scottish Water that it must be hard for even its own lawyers to keep up with it all. Debates in the Scottish Executive about whether it should be privatised, horror stories about the quality of its water and calls for the overhaul of its ageing infrastructure are just some of the latest issues.

Facing these challenges is Scottish Water’s head of legal Tom Axford. Axford has had to implement a lot of change since he joined the public utility in 2002 – and all within extremely tight budgetary constraints.

The Scottish Executive requires the company to deliver its services with a 40 per cent cut in costs from four years ago.

As a result, Axford has had to make cutbacks where he can. Since joining he has gradually reduced the number of lawyers in his department from 10 to six. He has also reduced costs by hiring lawyers who already understand the water industry and are at home when dealing with heavyweight corporate matters.

At present his department is involved in a massive four-year project involving building new water facilities to replace the existing ones. The Scottish Executive has given Scottish Water a budget of £1.8bn to do the job, which is far short of the £2.3bn Axford says is required to do it properly. The project, which started in 2002, is due to be completed next year.

Luckily for Axford, the burden of coping with this tight budget is not just falling on Scottish Water’s shoulders. It is carrying out the project with various joint venture partners, including Thames Water and United Utilities, the English water and electricity operator. Scottish Water Solutions, a special purpose company set up for the project, has also just instructed Shepherd + Wedderburn to assist.

Commenting on the project, Axford says: “It’s another layer of work. We’re also hoping to reduce costs by looking for standardisation of contracts [for companies employed to do construction]. We’re looking everywhere we can to limit costs while getting it done as effectively as we can.”

However, the headaches are far from over. Another eight-year project aimed at improving existing infrastructure is being considered, and this, too, is likely to be done on a comparative shoestring.

The large amount of legal work involved in these projects, from acquiring sites on which to build new infrastructure to handling disputes with third parties, keeps Axford’s small department on its toes. It is assisted by a number of niche law firms in Scotland to which Axford outsources work. They include Inverness firm Macleod & MacCallum and Fife firm Steel Eldridge Stewart, which handle conveyancing matters, while Glasgow and Edinburgh-based HBM Sayers deals with employment issues and third-party litigation.

Most of the work Axford would normally outsource is sent automatically to the external law firm without being glanced at by his own internal lawyers. This is in order to be more time-efficient and ultimately more cost-efficient. Later this year all of the external firms he instructs will be subject to a competitive retendering exercise, a process which takes place every three years.

It is not, however, just Scottish Water’s antiquated infrastructure that the Scottish Executive is seeking to overhaul. Regulation is also top of the agenda. From April, a new regulator called the Water Industry Commission will monitor whether the amount Scottish Water is charging its customers is fair and reasonable. The regulator will also keep tabs on Scottish Water’s operational expenditure. The threat of having to make further savings, therefore, looms on the horizon.

It may be a reflection of the lack of regulatory experience in Scotland that Scottish Water could not find a single law firm in Scotland that it was happy to instruct on competition matters relating to this new regulator. Instead, following a beauty parade which included the company’s preferred corporate adviser Dundas & Wilson, Axford decided to use the London office of Herbert Smith.

But while Scotland may lack experience at the high end of regulation such as competition, it has been busy with corporate governance matters for a long time. Concerns over Scottish Water’s health and safety record have been raised frequently by the Scottish Executive and the media in Scotland. Scottish Water, for instance, has recently had to pay out £110,000 to dozens of people, mostly living in Aberdeen, who fell ill after drinking contaminated tap water.

This is an issue that Axford is keen to tackle. “Scottish Water has a very strict regulatory regime of external audit,” he says. “I regularly attend its audit committee’s board meetings and we have a large risk management policy. I also regularly advise on a range of legal proceedings, such as abatement notices for bad odour, or when we get prosecuted for failing to do work adequately.”

Having spent a large chunk of his professional life dealing with water issues, Axford of all people is qualified to handle the challenges that lie ahead – with or without all the money he may need.
Tom Axford
Head of legal and corporate secretary
Scottish Water

Organisation Scottish Water
Sector Water
Employees 4,000
Number of lawyers Six
Legal spend £650,000
Head of legal and corporate secretary Tom Axford
External law firms Dundas & Wilson and Herbert Smith