Business Irish

Wednesday 20 September 2017

Richard Curran: The great Irish Water dilemma: radical change does cost money but these figures don't add up

John Tierney, MD Irish Water,with former Environment Minister Phil Hogan
John Tierney, MD Irish Water,with former Environment Minister Phil Hogan
Richard Curran

Richard Curran

So much attention has been given to Irish Water's massive spending on consultants. It is an important issue in that it may well set the tone for how the organisation plans to do business into the future.

The water consultants' bill will come and go but the real action when it comes to determining the price we all pay for water is elsewhere.

The Commission for Energy Regulation will have to make a determination on how much the new state company can charge for water. It is important to emphasise that Uisce Eireann is a company and not a state body.

That means it is not a quango but a commercial operation. It is that commerciality that has prompted so much secrecy around its operations. The regulator will have to determine, through a complex formula, what kind of return on assets it will allow the new company to enjoy.

Once that important metric is tied down, the price at the tap will flow from it. Having a regulator decide on water charges is good, because it means there is an independent arm of state adjudicating on what the company is allowed to charge.

It is bad because the formula it will apply will have to be commercial, even though Irish Water will be a monopoly.

Regulated prices don't necessarily make the CER a consumer watchdog. Take the de-regulation of the electricity market and the CER allowed ESB charge higher prices, to encourage more entrants to come into the market. This meant they could all charge more together.

Consumers only got to choose who would charge them higher prices!

The other main battle ground in deciding water charges into the future (for the next 12 years to be precise) will be the SLAs or Service Level Agreements, being hammered out between Irish Water and the 34 local authorities.

This is where the real action is. County councils will continue to provide water services, with existing staff but under the stewardship of Irish Water. For the next 12 years, Irish Water will pay each local authority "X" amount per year to continue providing the service. How much will "X" be?

An examination of the annual reports and budget documents of county councils tells a lot about water services. Galway County Council produced a budget document in late 2012 for the year 2013.

In it the council said it expected a transition period for switching supply of water to Irish Water of four years. The contracts being finalised are for 12 years.

Galway County Council said it expected the money it would receive from Irish Water for supplying water services would be "cost neutral".

In its 2014 budget it pencilled in a spend of €27m on water services and expected to receive that amount from Irish water.

Galway County Council had built up debts of €52m associated with water investment which carry an interest bill of €2.8m per year. Understandably, it expected all of that to transfer to Irish Water.

It employs 130 staff directly on water services. They all keep their jobs with the council and the council expects Irish water to pay annually, whatever the cost of providing the water is.

If all county councils were to reach "cost neutral" service agreements with Irish Water, the scope for savings is minimal to zero.

In fact the cost of providing water to the public, excluding capital investment and fixing leaks, could go up, if the councils are paid the same, and there are a couple of hundred new staff at Irish Water itself.

Commercial customers not paying their water bills is a big problem for county councils. In Dublin, water and sewage costs are the second highest form of expenditure and the second highest revenue stream.

In 2012 Dublin City Council spent €120m on water services and took in €72.9m in water service income.

But when it comes to paying up for water, the uncollected arrears were 40pc, higher than they were for Dublin County Council housing rent, housing loans or commercial rates.

This will be a big problem for Irish Water.

For example in Louth County Council at the start of 2011 water service arrears were €5.1m. Around €365,000 had to be written off. Of the €11.5m outstanding in 2011, just €4.6m was collected, leaving 60pc outstanding.

Without the power to disconnect homes, there is little evidence that Irish Water will secure a higher rate of compliance when it comes to paying up.

This will only drive up the price paid by those who are compliant.

County Council annual reports show just how much some councils are struggling to provide higher standards of water, while not charging homes for the service.

The logic of setting up a single national water company is that it should be able to do things more efficiently, from procurement to work practices.

If it negotiates 12-year cost neutral agreements with 34 local authorities, while also hiring 200 new staff, it will unnecessarily drive up prices.

This will trigger higher arrears and a vicious spiral of increasing prices.

Environment minister Phil Hogan has moved quite quickly to get Irish Water this far.

The faster you go the more money you need to spend during the start-up phase -- including consultants.

Establishing Irish Water is a radical change, but the consequences of moving so fast, in order to get the changes through, may be a business model that will simply prove very expensive for us all.

Irish Independent

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