Thursday 25 December 2014

Whatever water truly costs, it'll never be free

Once the challenges of charges are debated and resolved, the value of our resource will surge

Published 20/07/2014 | 02:30

DISPUTE: Jack Nicholson in ‘Chinatown’, the film inspired by the rows over water taken from the farmland of the Owens Valley, California, by the Los Angeles Department of Water
DISPUTE: Jack Nicholson in ‘Chinatown’, the film inspired by the rows over water taken from the farmland of the Owens Valley, California, by the Los Angeles Department of Water

NOBODY likes paying for water. In Arizona in the 1970s, councillors in Tucson became the first politicians in America to impose hefty charges for water after a two-year drought forced their hand. One year later, the entire city council was voted out of office.

That, in a nutshell, is why citizens are almost never charged anything close to the full cost of water. It is also the reason why we are not having an honest political debate in this country. As Mark Twain supposedly observed: "Whiskey is for drinking, water is for fighting over."

So what would an honest debate look like? It would probably begin with politicians on all sides of the spectrum admitting that valuable resources should in fact be rationed (step forward People Before Profit). Perhaps the most basic principle of economics - one that is hardly contested anywhere - is that anything scarce and in demand commands a price.

A real debate would also admit it is not very difficult to meter water entering homes, although it can be tricky for apartments. It's done elsewhere. About two-thirds of countries in the western world meter more than 90pc of single-family houses. The know-how exists even if the Government here is far from installing it on the ground.

Despite bitter debates in many countries, including our own, there are many areas of agreement. Very few people are against metering for the likes of private swimming pools, while research shows metering new homes is also more widely accepted than converting older ones.

The question is not whether we should or can pay for water. After all, we already do through income tax and VAT. The real question is only who should pay for it?

What, in short, should water charges look like? To answer that question, we need a debate about the purpose of the charges. One charging system is appropriate for those who want to protect the environment while another charging system is right for those who want to save the State's finances.

What do we know from research elsewhere?

Experience from many developed countries suggests that fixed charges don't really work. For this reason, there is a move away from high fixed charges and a move towards volumetric charging, where you pay more if you use more. Even where fixed charges exist, the policy of allowing large free allowances is in decline. Hungary, Poland and the Czech Republic, for example, already use pricing systems based solely on volumetric pricing, with no fixed charge element at all.

Here, the Government would appear right to try to introduce a system without a standing charge which encourages waste.

To be sure, this creates problems for Irish Water when it tries to borrow the €6bn it needs to improve the infrastructure, but anybody designing a system to prevent water wastage should want a system that offers as many incentives as possible to deter waste. We don't know yet whether the Government will introduce higher charges for those who use more water than normal but the trend internationally has been towards increasing block tariffs.

This means the charge increases with each additional unit of water used.

Here in Ireland, much of the debate has understandably been dominated by concern about the affordability of household water services for vulnerable groups, such as the poor and families with many children. This has led to the development of the so-called "free water" plan that will "give" water allowances to families depending on how many children they have.

Speaking as the father of four children, this has a superficial attractiveness but it is not the best way to design a water system because it does little to discourage waste. Indeed, the notion that one has a certain ration, whether it is for a day or a year, is an invitation to waste water.

The research suggests the Government should tackle affordability problems by targeting vulnerable groups through higher pensions or child benefit.

In the real world, the Government may want to avoid this because extra child benefit could be classed as State aid but the alternatives are expensive, cumbersome, bureaucratic, invasive and could actually encourage waste.

Another area where the Government is avoiding best practice is the failure to impose water charges where citizens (often in FG heartlands) drill their own wells.

About half of OECD countries levy some form of general charge on water abstracted outside the public system. In some countries, this charge has an explicit environmental objective, so the proceeds are allocated to an environmental fund. The Netherlands, for example, has two abstraction charges. In other countries, those using their own wells get a 75pc reduction if they use the "best available technique" to protect the environment.

In reality, the Government seems determined to side-step the real debate which is how to avoid expensive waste. In two years' time, we know the entire charging system will be re-examined.

Expect the regulator and Irish Water to push for a more rational system which charges the full cost of providing water and the gradual end of the so-called "free water" allowances.

Thomas Molloy is Group 
Business Editor

Sunday Independent

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