Irish Water:
Phase 1 Report

2nd November 2011
Irish Water: Phase 1 Report

This version of the report contains some
limited redactions to remove
commercially sensitive ...
Irish Water: Phase 1 Report

Private and Confidential
Mr. Mark Griffin
Assistant Secretary
Department of Environment, Comm...
Irish Water: Phase 1 Report

Important Message
Important message to any person not authorised to have access to this repor...
Irish Water: Phase 1 Report

Scope
Purpose of the
Study

Process
To undertake an independent assessment of the transfer of...
Irish Water: Phase 1 Report

Table of Contents
1. Executive Summary .........................................................
Irish Water: Phase 1 Report

Summary Assessment of the Current Provision of Water and Wastewater Services ...................
Irish Water: Phase 1 Report

Figure 1: Phased Transition Strategy ...........................................................
Irish Water: Phase 1 Report

1. Executive Summary

PwC

Page 9 of 131
Irish Water: Phase 1 Report

1. Executive Summary
Background
The delivery of high quality water and waste water services a...
Irish Water: Phase 1 Report

This report is the outcome of Phase I of the study which was concerned with recommending the ...
Irish Water: Phase 1 Report

Ireland is about average for the number of water connections per length of network, suggestin...
Irish Water: Phase 1 Report

International Experience
We have reviewed relevant models for water service provision in a nu...
Irish Water: Phase 1 Report

water services currently provided by the local authorities, and most of those currently provi...
Irish Water: Phase 1 Report

Operating Model Recommended for Irish Water
Our study recommends the Public Utility Model as ...
Irish Water: Phase 1 Report

Optimising the use of water and wastewater treatment facilities;
Facilitating increased stand...
Irish Water: Phase 1 Report

Whilst our analysis has indicated that there would be a number of potential advantages in emb...
Irish Water: Phase 1 Report

transition period through agency arrangements with the local authorities. Consequently, it is...
Irish Water: Phase 1 Report

2. Introduction and
Overview

PwC

Page 19 of 131
Irish Water: Phase 1 Report

2. Introduction and Overview
Background
Currently, 34 city and county councils are responsibl...
Irish Water: Phase 1 Report

The scope of the study includes water and waste water. It is required to address the legal fr...
Irish Water: Phase 1 Report

Challenges Facing Water Provision in Ireland
In the period since the year 2000 there has been...
Irish Water: Phase 1 Report

Directive. Four of the districts are wholly within the State (Eastern, South Eastern, South W...
Irish Water: Phase 1 Report

The objectives outlined above were used to help determine the criteria for the assessment of ...
Irish Water: Phase 1 Report

3. Overview of Current
Provision of Water and
Wastewater Services
in Ireland

PwC

Page 25 of...
Irish Water: Phase 1 Report

3. Overview of Current Provision
of Water and Wastewater
Services in Ireland
Overview
Under t...
Irish Water: Phase 1 Report

The local authorities are the Water Services Authorities. As such they have the primary respo...
Irish Water: Phase 1 Report

Designation of competent authorities;
Environmental and economic analysis of river basins by ...
Irish Water: Phase 1 Report

Standards – Drinking Water Regulations4 and Urban Waste Water
Regulations
The EPA plays a key...
Irish Water: Phase 1 Report

The Exchequer ran an operating deficit of close to €25 billion in 2009, which was reduced to ...
Irish Water: Phase 1 Report

Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudite...
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  1. 1. Irish Water: Phase 1 Report 2nd November 2011
  2. 2. Irish Water: Phase 1 Report This version of the report contains some limited redactions to remove commercially sensitive information Page 2 of 131
  3. 3. Irish Water: Phase 1 Report Private and Confidential Mr. Mark Griffin Assistant Secretary Department of Environment, Community and Local Government Custom House Dublin 1 11th January 2012 Dear Mark, In accordance with your instructions as confirmed in our contract dated 10th June 2011, we now include a redacted version of our Phase 1 report. As discussed and agreed this report excludes certain commercially sensitive information which has been identified by DECLG (“Department”). This report, which is based on our review of information provided by Department officials and local authorities, meetings with a range of stakeholders agreed with the Department, a review of international models for water and wastewater services, and the experience of our team, recommends an organisational form for water and wastewater services in Ireland. Yours faithfully Garrett Cronin Partner Page 3 of 131
  4. 4. Irish Water: Phase 1 Report Important Message Important message to any person not authorised to have access to this report Any person who is not an addressee of this report or who is not receiving this report directly from an addressee for the purpose of assessing the optimal structure for water services delivery in Ireland is not authorised to have access to this report. Should any unauthorised person obtain access to this report, by reading this report such person accepts and agrees to the following terms: 1. The reader of this report understands that the work performed by PricewaterhouseCoopers was performed in accordance with instructions provided by our addressee client and was performed exclusively for our addressee client's use. 2. The reader of this report acknowledges that this report was prepared at the direction of our addressee client and may not include all procedures deemed necessary for the purposes of the reader. 3. The reader agrees that PricewaterhouseCoopers, its partners, principals, employees and agents neither owe nor accept any duty or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss, damage or expense or whatsoever nature which is caused by any use the reader may choose to make of this report, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report is not to be referred to or quoted, in whole or in part, and not to distribute the report without PricewaterhouseCoopers' prior written consent. Page 4 of 131
  5. 5. Irish Water: Phase 1 Report Scope Purpose of the Study Process To undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility and to recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision; in particular to examine two principal forms of potential company structure (or variants of those forms) for Irish Water: A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging; and A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment. Scope of our Work This report covers phase 1 of the engagement and includes; An assessment of current water and wastewater services in Ireland; An overview of relevant models from other jurisdictions; Recommendations on the optimal organisational form for water services delivery in Ireland; Recommended target operating model, including financial and funding considerations; Assessment of the potential role for an existing State agency; Transition strategy; and Legal considerations in the implementation of the recommendations. Approach Adopted The approach to conducting Phase I of the study has been to: Assess the strengths and weaknesses of the current model for provision of water services in Ireland to identify the challenges that would need to be addressed by a new model for water service delivery, without losing the positive aspects of the current model; Review different Models for Water Service Provision Internationally to identify trends and lessons to be learned for water sector reform in Ireland; Take Soundings from Stakeholders in the sector regarding the changes they feel would best deliver improved services for Ireland and the implementation challenges for any new model; Identify potential operating models for Irish Water and Evaluate those Models against a set of Evaluation Criteria based on Policy Requirements for water reform in Ireland; Describe the Recommended Operating Model and its financial, legal, organisational, staffing, environmental and other implications; and Develop a High Level Transition Strategy designed to minimise the delay in achieving the benefits while managing the implementation risks of the recommended operating model. Sources of Information Information was received through:Consultation stakeholders (listed in Section 1), some of whom also made written submissions; Information provided on request by the DECLG, the local authorities and the LGMA; Publically available information; Research on international best practice. PwC have not audited or independently validated any of the information provided. Sponsor Representations We have shown a draft of this report to the Department sponsors and to the extent that we consider appropriate, we have incorporated their comments in this report. Page 5 of 131
  6. 6. Irish Water: Phase 1 Report Table of Contents 1. Executive Summary ............................................................................................................... 10 Background ..................................................................................................................................................................10 Purpose of the Study ...................................................................................................................................................10 Approach ...................................................................................................................................................................... 11 Strengths and Weaknesses of the Current Model ...................................................................................................... 11 International Experience ............................................................................................................................................ 13 Stakeholder Soundings ............................................................................................................................................... 13 Operating Models Considered .................................................................................................................................... 13 Operating Model Recommended for Irish Water ...................................................................................................... 15 Regulation .................................................................................................................................................................... 16 Potential Role for an Existing State Agency ............................................................................................................... 16 Financial Analysis ........................................................................................................................................................ 17 Transition ..................................................................................................................................................................... 17 Next Steps ....................................................................................................................................................................18 2. Introduction and Overview .................................................................................................. 20 Background ................................................................................................................................................................. 20 Objectives and Scope of the Study ............................................................................................................................. 20 Policy Context .............................................................................................................................................................. 21 Challenges Facing Water Provision in Ireland ......................................................................................................... 22 Objectives of Reform Programme ............................................................................................................................. 23 Consultation Process .................................................................................................................................................. 24 3. Overview of Current Provision of Water and Wastewater Services in Ireland .................... 26 Overview ..................................................................................................................................................................... 26 Legislative Framework ............................................................................................................................................... 27 Economic and Funding Situation .............................................................................................................................. 29 Regulation .................................................................................................................................................................... 31 Leadership and Coordination .................................................................................................................................... 32 Operations................................................................................................................................................................... 34 Asset Management and Capital Programme ............................................................................................................ 35 Customer Service and Billing ..................................................................................................................................... 39 Finance ........................................................................................................................................................................ 40 Staffing ........................................................................................................................................................................ 48 Marketing and Communications ............................................................................................................................... 50 MIS/IT ......................................................................................................................................................................... 51 Current Initiatives ...................................................................................................................................................... 52 Indicators of Performance ......................................................................................................................................... 54 PwC Page 6 of 131
  7. 7. Irish Water: Phase 1 Report Summary Assessment of the Current Provision of Water and Wastewater Services ............................................. 60 4. Overview of Relevant Models from other Jurisdictions ....................................................... 66 Introduction ................................................................................................................................................................ 66 Key Observations ........................................................................................................................................................ 67 Implications for Irish Water ...................................................................................................................................... 72 5. Options for Reform ................................................................................................................ 74 Overview of Options ................................................................................................................................................... 74 Agency Model ..............................................................................................................................................................75 Public Utility Model.................................................................................................................................................... 78 Minimal Change Model ...............................................................................................................................................81 Intercommunal Model ............................................................................................................................................... 83 Models Selected for Further Evaluation ................................................................................................................... 86 6. Evaluation Process ............................................................................................................... 89 Objectives for Reform ................................................................................................................................................ 89 Guiding Principles ...................................................................................................................................................... 90 Evaluation Criteria ...................................................................................................................................................... 91 Assessment of Options ............................................................................................................................................... 92 Conclusion on Assessment of Options ...................................................................................................................... 95 Recommended Option for Irish Water...................................................................................................................... 96 7. Assessment of Potential Role for an Existing State Agency ................................................... 98 Irish Water Requirements ......................................................................................................................................... 98 Relevant State Agencies ............................................................................................................................................. 98 Use of an Existing State Agency................................................................................................................................. 99 8. Recommended Target Operating Model .............................................................................. 105 Regulation ................................................................................................................................................................. 109 Leadership and Coordination ................................................................................................................................... 110 Operations...................................................................................................................................................................111 Asset Management and Capital Programme ........................................................................................................... 113 Customer Service and Billing .................................................................................................................................... 114 Funding Requirements and Financial Arrangements ............................................................................................. 115 Staffing ....................................................................................................................................................................... 116 Marketing and Communications .............................................................................................................................. 117 MIS/IT ....................................................................................................................................................................... 118 Integration into Regional and Local Planning ......................................................................................................... 118 The Role of Competition in the Provision of Water Services .................................................................................. 119 9. Transition Strategy ............................................................................................................. 122 10. Implementation Considerations - Legal ............................................................................. 128 PwC Page 7 of 131
  8. 8. Irish Water: Phase 1 Report Figure 1: Phased Transition Strategy .......................................................................................................................................... 18 Figure 2: Participants in Consultation Process........................................................................................................................... 24 Figure 3: Overview of Current Industry Structure ..................................................................................................................... 26 Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial Statements 2010) ........................................................................................................................................................................... 30 Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial Statements 2010) ........................................................................................................................................................................... 31 Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study) ............................................................................. 31 Figure 7: Preparation of the Water Service Investment Programme ....................................................................................... 36 Figure 8: Assessment of Needs .................................................................................................................................................... 37 Figure 9: Water Services Investment Programme ..................................................................................................................... 37 Figure 10: Basic Project Steps ...................................................................................................................................................... 38 Figure 11: OPEX Funding Summary (Source – Unaudited Annual Financial Statements - 2010) ......................................... 40 Figure 12: Direct Income to Fund OPEX €m (2008 – 2010 Actuals plus 2011 Budget) ........................................................... 41 Figure 13: Commercial Collection Rates (2010) .......................................................................................................................... 42 Figure 14: Breakdown of OPEX Expenditure for 2010 ............................................................................................................... 42 Figure 15: Income & Expenditure €m (Source – Annual Financial Statements - 2011 figures are budget) ........................... 43 Figure 16: Income & Expenditure (2008 – 2010) ....................................................................................................................... 44 Figure 17: CAPEX Funding-Overview (2010) ............................................................................................................................. 45 Figure 18: CAPEX Movement €m (2010) .................................................................................................................................... 45 Figure 19: Percentage breakdown of CAPEX funding (exc. opening and closing balances but including transfers) ............ 46 Figure 20: NDP Expenditure Trends €m (2000 – 2009) ........................................................................................................... 46 Figure 21: WTE’s engaged in Water and Waste Water Services ............................................................................................... 50 Figure 22: OPEX per connected property (domestic & non domestic) (Euro) .......................................................................... 55 Figure 23: Water OPEX per connection (Euro) .......................................................................................................................... 55 Figure 24: Sewerage OPEX per connection (Euro) .................................................................................................................... 55 Figure 25: Commercial Collection Rates in Irl (2010) ................................................................................................................ 56 Figure 26: Collection Rates........................................................................................................................................................... 56 Figure 27: Percentage Leakage .................................................................................................................................................... 57 Figure 28: Number of Direct & Indirect Staff (exc. SVT) ........................................................................................................... 58 Figure 29: Total Employees per thousand customers served (exc. SVT) .................................................................................. 58 Figure 30: Total number of direct and indirect employees per thousand water connections (domestic plus non- domestic) (exc. SVT) ....................................................................................................................................................................................... 58 Figure 31: km water pipe per thousand water connection......................................................................................................... 59 Figure 32: SWOT of the current environment for water service provision .............................................................................. 63 Figure 33: Countries chosen as international comparators for Irish Water ............................................................................ 67 Figure 34: Water undertakings in England and Wales 1956 to 1970 ........................................................................................ 68 Figure 35: Trends in operating costs for the England and Wales water companies ............................................................... 70 Figure 36: England and Wales water companies, overall performance assessment ...............................................................71 Figure 37: Agency and Public Utility Models ............................................................................................................................. 74 Figure 38: Agency Model .............................................................................................................................................................. 75 Figure 39: Public Utility Model .................................................................................................................................................... 78 Figure 40: Minimal Change Model .............................................................................................................................................. 81 Figure 41: Intercommunal Model ................................................................................................................................................ 83 Figure 42: Agency and Public Utility Models – Summary Comparison ................................................................................... 87 Figure 43: Evaluation Criteria ..................................................................................................................................................... 91 Figure 44: Advantages of Public Utility and Agency Model ...................................................................................................... 94 Figure 45: Embedding Irish Water in an Existing State Agency ............................................................................................. 102 Figure 46: The Overall Structure for the Public Utility Model ................................................................................................. 106 Figure 47: Water Services: Key Roles and Responsibilities ..................................................................................................... 108 Figure 48: Other bodies: key roles and responsibilities ........................................................................................................... 108 Figure 49: Regulation ................................................................................................................................................................. 109 Figure 50: Typical Organisation Chart for a Water Utility ......................................................................................................110 Figure 51: River Basins of Ireland ............................................................................................................................................. 111 Figure 52: Operations Services ................................................................................................................................................... 112 Figure 53: Typical Asset Planning and Approval Process ........................................................................................................ 113 Figure 54: Typical water company MIS systems structures ....................................................................................................118 Figure 55: Phased Approach ...................................................................................................................................................... 122 Figure 56: Implementation Plan ................................................................................................................................................ 126 PwC Page 8 of 131
  9. 9. Irish Water: Phase 1 Report 1. Executive Summary PwC Page 9 of 131
  10. 10. Irish Water: Phase 1 Report 1. Executive Summary Background The delivery of high quality water and waste water services and the need to meet ever-increasing demands for water, while ensuring security of supply and responsiveness to the needs of commercial and domestic consumers, poses a significant challenge to the State. Water and wastewater services cost approximately €1.2bn per annum, of which around €1bn is funded by the Government, with other sources, including non-domestic water charges, contributing just over €200m. There has been a substantial and historic under-investment in water and wastewater services in Ireland and while there has been significant investment in the last decade, a recent review carried out by Department of Environment, Community and Local Government (“DECLG”) indicates that there is still a substantial backlog of capital investment. With an ageing and poor quality infrastructure in some areas, substantial investment will be required to bring the standard of the water network up to the needs of a modern economy. The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU. It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach to managing water quality on a river basin basis; with the aim of maintaining and improving water quality. Full compliance with the Water Framework Directive has not been costed but is likely to run to several billion euro over the period to 2027. Given the wider economic context in which Ireland finds itself, sourcing funds to meet all of these requirements will be a difficult challenge. It is against this background that this study has been commissioned. Purpose of the Study Currently, 34 city and county councils are responsible for the production, distribution and monitoring of drinking water and for the provision of public waste water services in the Republic of Ireland. In the context of recent Government announcements concerning the creation of Irish Water, PwC was selected by the DECLG to: a) Undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility; b) Recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision. In particular the study was required to examine two principal forms of potential company structure (or variants of those forms) for Irish Water: A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging (the Public Utility Model); and A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment (the Agency Model). A privatised water utility is outside the scope for consideration. PwC Page 10 of 131
  11. 11. Irish Water: Phase 1 Report This report is the outcome of Phase I of the study which was concerned with recommending the optimal organisational form for water services delivery in Ireland. Phase II will focus on the detailed implementation issues involved in the creation of a new company in line with the recommendations made in Phase I, subject to their being accepted. Approach The approach to conducting Phase I of the study has been to: 1. Assess the strengths and weaknesses of the current model for provision of water services in Ireland to identify the challenges that would need to be addressed by a new model for water service delivery, without losing the positive aspects of the current model; 2. Review the Models for Water Service Provision Internationally to identify trends and lessons to be learned for water sector reform in Ireland; 3. Take Soundings from Stakeholders in the sector regarding the changes they feel would best deliver improved services for Ireland and the implementation challenges for any new model; 4. Identify potential operating models for Irish Water and Evaluate those Models against a set of Evaluation Criteria based on Policy Requirements for water reform in Ireland; 5. Describe the Recommended Operating Model and its financial, legal, organisational, staffing, environmental and other implications; and 6. Develop a High Level Transition Strategy designed to minimise the delay in achieving the benefits while managing the implementation risks of the recommended operating model. Strengths and Weaknesses of the Current Model A SWOT analysis was developed for the current provision of water services in Ireland. The key conclusions were that:The current model for water service provision has been operating under significant constraints. Our study indicates that low levels of funding and an inability to access alternative sources of funding in the past have resulted in a backlog of investment and maintenance in the water services infrastructure. Nevertheless, significant positive views of the current model came across very clearly in discussions with the various stakeholders, in particular:o o o The value of having a local body accountable to the local community for the provision of water services; The operational effectiveness of the current locally based maintenance teams with water engineers who “know their assets” and the associated asset maintenance regimes; The ability to draw on the wider resources of the local authorities in times of great need for water services, such as occurred during the cold weather events in the previous two winters. Efficiency levels do not compare well against international benchmarks. Some of the key metrics include:o o o o PwC Operating expenditure per connection is more than twice the average of UK water companies; The level of “Unaccounted for Water” (largely due to leakage) at 41% is very high against international benchmarks (although this would be expected to reduce as Phase III of the Water Conservation Programme is rolled out); Staffing levels are higher than comparable UK water companies on an employee per population served basis; The collection level for non-domestic water charges which averages 52% in 2010 is particularly low. Page 11 of 131
  12. 12. Irish Water: Phase 1 Report Ireland is about average for the number of water connections per length of network, suggesting that population dispersal is not a major factor in the benchmarks mentioned above. Other factors, such as the very large number of water and wastewater plants in Ireland may be involved. One way or another, these comparisons would indicate that there are opportunities to increase efficiency and reduce costs over time once Irish Water is established. Income currently received by the local authorities from the provision of goods and services from third parties and from Local Government Funding, for operational expenditure in relation to the provision of water services is not sufficient to meet their needs. It was estimated that there was a funding gap of €451.2m in 2010 which was met from other sources of funds including the general purpose grant received by the local authorities from DECLG; The dependence on the Exchequer for Capital funding has in the past constrained investment in the sector. While approximately €600m is provided annually in capital investment, it is estimated that there is currently a backlog of approximately €500m for essential projects. This figure is derived from DECLG data on schemes in local authority needs assessment not included in the Water Services Investment Programme 2010-2012. According to the Department and other stakeholders, this still leaves a significant compliance gap in relation to the provisions of the EU Water Framework Directive which may require several hundred million euro of further capital investment annually in the years to 2027; The study concluded that many of the issues identified above arise from a combination of factors including:Fragmented leadership and coordination with a range of stakeholders able to influence and control directions; including the 34 local authorities, the DECLG, the EPA, the CCMA the NFGWS and others; Difficulty in exploiting economies of scale, particularly as the water service is organised on the basis of county boundaries; Relative difficulty in implementing policies and projects of national importance; An ageing and poor quality network; and Historical underinvestment in the water service. The structures required to deliver an efficient and effective water service in Ireland, operating under the constraints of available funding are not in place. The fragmented nature of the current model result in significant levels of duplication across the 34 local authorities with limited sharing of resource, cooperation on strategic initiatives or coordinated operational planning in place. The introduction of customer charges will create the need for increased levels of regulatory management, which under the current model will result in further duplication of support structures. Overall, it is our assessment that the current local authority based service provision model is highly unlikely to achieve the efficiencies and quality of service that have been achieved internationally in the water sector through amalgamations. The local authorities have investigated opportunities for co-ordinated action. However the likely efficiencies suggested are small compared with the nearly 40% reduction in operating costs seen in Scotland post amalgamation. Fragmented local authority-based provision will perpetuate the management of sub scale water providers, inability to secure large scale procurement efficiencies and the ability to deliver efficiency through planning field work over a larger customer base/geographical area. A self-funding water service will require significant levels of external funding. Optimal external funding is based on the ‘investment grade’ of individual companies, which is driven by the size of the organisation, the focus and experience of the management team, the stability and efficiency of back office and frontline operational execution and for regulated entities, the ability to comply efficiently and effectively with economic and environmental regulatory requirements. In addition, since the level of external funding available is normally based on earnings, the extent to which operating costs are reduced through the rationalisation, consolidation and simplification of the delivery model increases the level of borrowings available to the company. Consequently, the ability to optimise the level of external funding is best achieved by a single water company, with authority to centrally manage the delivery of water services in Ireland. PwC Page 12 of 131
  13. 13. Irish Water: Phase 1 Report International Experience We have reviewed relevant models for water service provision in a number of countries, including Scotland, England, Wales, Northern Ireland, Germany, France, Netherlands, South Africa, Australia, and Bulgaria were reviewed. Our review pointed to fragmentation in the provision of water services in particular in continental Europe. However, the fragmented nature of water service provision is being addressed in most countries either by the amalgamation of municipal water services, the creation of utilities or the use of intercommunal structures (see below). Creation of larger bodies for the provision of water services, often outside of municipal control, is a key trend in the industry. Our research demonstrated that most of the models identified are based on the Public Utility Model. There is little evidence of arrangements similar to the Agency Model being used in the water sector. Another approach found to be in common use is the Intercommunal Model, where several municipalities jointly set up a company to which they delegate the provision of water services. Our research identified very few examples of the combination of water services provision with other infrastructure provision (e.g. roads) or utility services (such as gas or electricity). Multi-utility companies which were created in the UK a number of years ago were broken up in recent years to allow management teams to focus on specific activities e.g. water or electricity. The research indicates that investors have tended to value the focussed single utility model more highly than the multi-utility model. Where single function utilities have been created, the evidence indicates that there has been good performance in terms of cost reduction and improvement to the quality of service provided to customers. These improvements have been driven in part by regulation that has focussed on economic efficiency, environmental preservation and ensuring good outcomes for customers. Stakeholder Soundings PwC met with a wide range of stakeholders in the sector to obtain a cross section of views on the current water service and on potential future models for the water sector. These included representatives of local authority councillors and management, professional bodies, representatives of employers and of the unions, regulators, semi-state utilities and relevant government departments and agencies (see Section 2). A number of these organisations also made formal submissions to the PwC team. A number of key messages were consistent across the stakeholder groups consulted. These included:The need for increased efficiency and value for money in the sector; The desirability of moving to a River Basin structure for managing water services; The need for improved water quality and greater security of supply in the coming years; The importance of obtaining increased funding to meet the increasing demands of customers; The benefits of transferring responsibility for water services to a single state agency; and The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of water services; All of the information and views provided by stakeholders were taken into account in the analysis conducted by the PwC team. Operating Models Considered In line with the Terms of Reference, two primary models were considered – these were termed the Public Utility Model and the Agency Model. In addition, two possible variant models were identified – these were termed the Minimal Change Model and Intercommunal Model. The models are summarised below:The Public Utility Model: Under the Public Utility Model, Irish Water would be a Public Utility and would become the water services authority and the single point of contact for all customers. It would be a single integrated commercial Semi-state body corporate operating on a regional structure delivering all PwC Page 13 of 131
  14. 14. Irish Water: Phase 1 Report water services currently provided by the local authorities, and most of those currently provided by the DECLG (with the exception of policy and legislation). The regions would be structured around river basins rather than local authority boundaries. Irish Water would own the entire infrastructure for water services including all assets, liabilities, income and expenditure. All water service staff would be employed by Irish Water. BGE and ESB represent similar examples of this model in Ireland. In this scenario, local authorities would no longer have a function in the provision of water and wastewater services. The Agency Model: Under the Agency Model, a new state agency, Irish Water would be allocated full responsibility by statute for the provision of water and wastewater services and would therefore become the Water Services Authority for the full country. Similar to the Public Utility Model, Irish Water would own the entire infrastructure for water services including all assets, liabilities, income and expenditure. Irish Water would also take over most of the responsibilities of the DECLG, and undertake large capital projects and projects of national importance (including metering and domestic charging). In this scenario, local authorities (or groupings of local authorities) would be designated by statute as agents of Irish Water for operation and maintenance of the water services and for small capital projects in their regions. They would operate under the control of Irish Water on the basis of agency arrangements under which they would be paid by Irish Water for services provided. Staff required for operation and maintenance would continue to be employed by the local authorities. The Minimal Change Model: The Minimal Change Model would envisage retaining the local authorities as the Water Service Authorities. Irish Water would take over certain executive functions of the DECLG, including responsibility for large capital projects and projects of national importance. In this scenario, the operation and maintenance of the water service (and therefore the bulk of the existing personnel) would remain with the local authorities. Ownership of the assets would be retained by the local authorities, and they would continue to be financially responsible for the operation and maintenance of water services in their respective regions. Improvements in efficiency would be achieved through local authorities cooperating to achieve economies of scale. The Intercommunal Model: This approach, as outlined above, has been adopted in several parts of Europe. In this scenario, local authorities would retain the basic obligation to provide water services but would agglomerate to achieve economies of scale by setting up intercommunal companies to which they would delegate responsibility for the operation and maintenance of water services. In Ireland, this would involve three or more separate water companies each serving a different region. Evaluation Methodology PwC deemed it appropriate to use a qualitative methodology for the comparative assessment of the alternative models, taking into account the relative merits of each option against a set of evaluation criteria developed by us and reviewed with the DECLG and the stakeholder group referenced above. The criteria took into account the main objectives of the water services reform programme, which were identified as:Creation of a financially sustainable water service: Improving Ireland’s water services infrastructure; Ensuring environmental standards are met; Delivering improved outcomes for customers; Ensuring strong governance with clear accountabilities; Supporting other aspects of water reform in Ireland; and Promoting efficiency in water services. The evaluation was carried out with reference to international practice, and based on the available metrics and on the experience of the consultants. The views expressed by stakeholders were also taken into consideration. PwC Page 14 of 131
  15. 15. Irish Water: Phase 1 Report Operating Model Recommended for Irish Water Our study recommends the Public Utility Model as the most appropriate operating model for the provision of water services in Ireland in the future. Under this model, Irish Water would be a Public Utility with full responsibility for the water cycle from abstraction to waste water treatment and sludge disposal. The key factors leading to this conclusion are:The scope to design, build and implement a fit-for-purpose focussed utility which is subject to regulation and is proven to achieve greater efficiencies and economies of scale in the provision of water services than any of the alternative models. Irish Water will operate under one single coherent integrated organisation structure (as against 34 separate organisations today), with clear lines of accountability, authority and responsibility and a focused and experienced management team to facilitate timely decision making and efficient and effective consistent delivery; The Public Utility model is the most attractive proposition to lenders and is understood by investors who lend to the water sector in other countries. Its capacity to borrow on the international markets would be a key factor in enabling the company become financially sustainable; This model will also have the effect of reducing and ultimately eliminating the burden on the Exchequer to provide capital and current funding to the water sector, with consequent positive impact on the State’s GDP /Debt ratio; Under the Public Utility Model, Public Service staff numbers would be reduced with the transfer of staff to a new commercial semi-state agency. Based on comparative benchmarks (see Section 3), it is envisaged that the total number of employees required for Irish Water when fully operational (i.e. from 2018) would be significantly lower than the approximately 4,300 involved in water services today. This would result from designing a fit-for-purpose operating model, eliminating existing duplication of activity, consolidating work locations and creating centres of expertise, driving synergies through national/regional management of service delivery, leveraging technology to automate activity and remotely manage operations, rationalising roles and responsibilities of staff and leveraging the flexibility of external expertise; The Public Utility will also be the most effective model for delivery of national strategies and managing issues across local authority boundaries. This will make the organisation better able to respond to security of supply issues as it will be able to plan water resources at a national level; The Public Utility will be best positioned to introduce and manage nationwide customer charges and customer service provision from a single location; and Irish Water as a Public Utility will be a single entity for the economic and environmental regulators to regulate, being of a similar scale to compare/benchmark against UK water companies to assess efficiency and quality of service. The Public Utility Model will be best placed to more efficiently and effectively monitor, manage and report compliance with regulatory requirements. Transferring responsibility for water services from the local authorities to a new model as described will facilitate the achievement of critical mass, economies of scale and a simplified operating model, which are not possible under the existing fragmented institutional framework. Other benefits of the approach recommended include:Facilitating greater efficiency and effectiveness in asset management and capital programme execution and in managing the supply chain to optimise value for money. Effective strategic planning on a national and regional basis will be of particular importance for the water metering programme and for regional water resource planning; Enabling more efficient use of water resources; PwC Page 15 of 131
  16. 16. Irish Water: Phase 1 Report Optimising the use of water and wastewater treatment facilities; Facilitating increased standardisation of technology, modern procurement methods and increased purchasing power; Supporting the implementation of the Water Framework Directive and best international practice in river basin management; Enabling more effective use of field operatives; Facilitating reduction in overheads through consolidation of head office functions; Reducing reliance on consultants, with increased in house core skills due to scale; Facilitating economies of scale in billing and collection; Introducing 21st century operating practices throughout the country, as well as integrated best-in-class ICT and management information systems; and Presenting opportunities not otherwise available to staff dedicated to water services. Increased specialisation will provide routes for career development and training as well as enhancing job satisfaction. Irish Water will face challenges in achieving the benefits as set out above but there are recent examples of similar successes following consolidation in Scotland and England. In the period from 1994 to 2001, operating costs for water services in England and Wales were reduced from c£3.15bn to c2.65bn representing a decrease of 3% per annum. In Scotland, efficiencies of around 40% were achieved over the period from 2002 to 2006. It is recognised that retention of the local touch which local authorities can offer today, including liaison with Group Water Schemes, will be an important element of implementation as will be the ability to respond flexibly in times of urgent need such as happened in recent cold snaps. Regulation PwC have recommended that the Environmental Protection Agency would be the environmental and technical regulator for Irish Water, and that it would also become the regulator for Group Water Schemes, a role currently played by the local authorities. It is recommended that the role of the Commission for Energy Regulation (CER) be expanded to include water regulation, as this role would fit well with its existing responsibilities for regulating energy utilities. In this role the CER, in cooperation with the National Consumer Agency would be responsible for protecting the interests of the consumer. Potential Role for an Existing State Agency In the establishment of Irish Water, there is a clear opportunity to establish a new fit-for-purpose organisation, based on international best practice and structured to deliver an efficient and effective service to domestic and non-domestic customers. The single Water Utility Model is recognised in capital markets as an investment grade structure, with funding packages tailored specifically for this purpose. Precedence points to the efficiencies that have been delivered in relation to the operating costs of standalone water utilities in the UK as outlined above, and to the improvement in the quality of service provided to customers. Alternatively, it may be possible to leverage the structure, expertise and governance of an existing State agency, and clearly there is some merit in considering this. This approach may provide some marginal acceleration of the implementation timescale, but would not in our view significantly shorten it, since the critical path will be determined by the preparation of essential legislation, the lengthy and complex implementation programme, and by the speed of the transfer of assets, staff and responsibilities from local authorities to the new utility. Few examples of multi-utilities exist internationally on this scale. Experience indicates that multi-utility models have not been successful due to the need to maintain management focus. In the cases of Welsh Water and United Utilities (England), the water utility was initially integrated with the electricity utility but was subsequently separated out into individual utilities due to difficulties in managing multi-utility companies and the limited opportunity for operational synergies where water and electricity operations needed to be ringfenced for regulatory purposes. They were broken up by investors and management to allow a focus on the provision of a single service. PwC Page 16 of 131
  17. 17. Irish Water: Phase 1 Report Whilst our analysis has indicated that there would be a number of potential advantages in embedding Irish Water in an existing State agency, in our view these are outweighed by the disadvantages, in particular: The potential impact on the borrowing power of both Irish Water and the existing State agency; The constraints on integration and sharing imposed by the requirement to ring-fence the water service from other regulated businesses, and the requirement to maintain separation of the networks and supply businesses in some of the existing State agencies; The need for a fully focused management team to drive through the establishment of Irish Water over the next six years, managing the transition of activities from 34 local authorities to Irish Water, implementing water charges, and managing an evolving regulatory regime; The potential implications for Irish Water and the ESOP/ESOT’s of existing Semi States on the transfer in of water assets; The uncertainty surrounding the future ownership of the state agencies concerned following recent Government considerations to sell some State assets; and The international experience indicating the likelihood of failure to achieve significant synergies and efficiencies due mainly to the constraints imposed by the separation of the different regulated activities. Consequently, on balance, PwC see no compelling reason to assign responsibility for water services provision to another State agency. Based on the analysis conducted, PwC concluded that, unless the above issues could be satisfactorily addressed, Irish Water should be established as a separate company in its own right. A number of State agencies could, however, be suitable candidates, either on their own or in partnership with the private sector, to provide outsourced services to Irish Water. PwC has recommended that Irish Water procures a management partner through a competitive tendering process as soon as possible after January 2012. The role of a management partner would be to support the: Set up and management of the new organisation; National initiatives to be undertaken (e.g. billing, metering); and Design and management of the transition to a fully operational utility. It is envisaged that a number of State agencies could be suitable candidates for this role, either on their own or in partnership with the private sector. However, PwC expect that public procurement considerations will dictate that the partner would have to be selected through a public tendering process open to the private sector as well as the State agencies. Financial Analysis For the Public Utility Model PwC undertook a high level assessment of what the financial position for the business might be and in particular the likely funding requirements. A number of scenarios were run on these numbers, with varying assumptions in relation to the level of Government subvention, the level of external funding and potential charges to be applied. The financial analysis undertaken indicates that, subject to certain assumptions, Irish Water could become a self-financing utility as early as 2018, depending on how quickly Government wishes to cease funding and the level of water charges imposed. A key factor in evaluating the merits of the new operating model is the possibility that the borrowings of Irish Water could be outside the General Government Balance (GGB). In the scenarios explored, and subject to confirmation by the CSO / Eurostat, it would appear that a determination could be made that Irish Water’s borrowings would be deemed to be outside the GGB. Transition A phased transition strategy has been proposed which would commence in Q1 2012 and see completion of the transfer of responsibilities for water service from the local authorities to Irish Water by the end of 2017. The phased approach is recommended over a ‘Big Bang’ approach, as it allows Irish Water design, build and implement a ‘fit for purpose’ organisation structure to deliver water services without the constraints of the existing local authority model. It also allows Irish Water control the development of water services during the PwC Page 17 of 131
  18. 18. Irish Water: Phase 1 Report transition period through agency arrangements with the local authorities. Consequently, it is most likely to deliver efficiencies earlier, reduce the risk of failure and maintain security of supply throughout the transition period. This is illustrated in Figure 1 below. 2012 Phase 2013 2014 2015 2016 2017 Task Name Q1 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Phased Trasfer of Staff and Operations 5 Q1 Interim Agency Arrangements 4 Q4 Set Up and Launch Irish Water 3 Q3 PMO - planning and preparation. 2 Q2 Utility Model Fully Operational Figure 1: Phased Transition Strategy It is envisaged that passing the required legislation will take up to 18 months, during which time interim arrangements will need to be put in place within the DECLG to design and implement the new organisational structures, and the Irish Water CEO and Senior Executive Team will be selected. From that point (July 2013), local authorities would be appointed as agents of Irish Water with responsibility for operational and maintenance services for a period of up to 5 years. This transition period would allow Irish Water to build its own capabilities and determine the most appropriate resourcing mix of permanent staff, contract staff and various types of outsourcing arrangements. Commencing in January 2015, Irish Water would take over the water operations of the local authorities on a phased basis. The pace of transition of operations, and the unwinding of interim agency arrangements, would be determined by Irish Water management, in consultation with the DECLG and local authority management. It is envisaged that this transition would be completed by the end of 2017 at the latest. This phased approach to transition would allow Irish Water to set up and develop organically as a new utility with its own culture, structure and resourcing, taking on board the resources and skills it requires from the local authorities in a planned and manageable way while ensuring the retention of valuable local knowledge. It is designed to minimise the delay in achieving the benefits while effectively managing the implementation risks. To ensure a smooth and speedy transition, it is recommended that a Management Partner for Irish Water should be procured through a competitive tendering process. The partner could be in place by January 2013. The partner organisation should be experienced in managing utilities and in particular within the water industry. It is anticipated that the partner would provide an interim management team, comprising primarily second line management resources to support the Irish Water Executive Team in managing Irish Water for a period of up to 5 years from January 2013. Next Steps On approval of the recommended operating model and transition strategy for Irish Water, Phase II of the study will focus on the detailed implementation issues involved in the creation of a new company, and on the issues that would arise from the consolidation of water services provision from the local authorities to Irish Water. To achieve the timescales outlined above, it would be important to commence the detailed planning and preparation as soon as possible but no later than the first quarter of 2012. It is recommended that a Programme Management Office would be set up within the DECLG to manage and coordinate this process as soon as is practicable. PwC Page 18 of 131
  19. 19. Irish Water: Phase 1 Report 2. Introduction and Overview PwC Page 19 of 131
  20. 20. Irish Water: Phase 1 Report 2. Introduction and Overview Background Currently, 34 city and county councils are responsible for the production, distribution and monitoring of drinking water from over 900 public water supplies and for the provision of public waste water services. Investment by the 34 city and county councils in water services is guided by the River Basin Management Planning process completed in 2010 and priorities are set out in the Department of Environment Community and Local Government’s Water Services Investment Programme 2010 – 2012. The councils are also responsible for the supervision of any group and private water supplies in their areas and for the carrying out of various water-related inspection and enforcement activities. The Environmental Protection Agency continues to have statutory responsibility for the supervision of the quality of water and waste water services. The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF requires, inter alia, that by the end of 2011, the Government will have undertaken an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility. In the Programme for National Recovery, 2011-2016, the Government signalled its intention to create a new State company to take over key water/waste water functions from the 34 existing local authorities. The programme envisages that: “Irish Water will supervise and accelerate the planned investments needed to upgrade the State’s inefficient and leaking water network. The objective is to install water meters in every household in Ireland and move to a charging system that is based on use above the free allowance. Thus, Irish Water would become a major State monopoly requiring separate independent regulation to promote efficiency and competitiveness in the consumer interest and the general economic interest.” The programme also contains commitments in relation to the NewERA plan under which streamlined restructured semi-States will make significant additional investments, over and above current plans, over the next four years in “next generation” infrastructures including water. These investments – and the accompanying semi-state restructuring process – will be financed and pro-actively managed by a New Economy and Recovery Authority (New ERA), which will absorb the National Pension Reserve Commission. Against the backdrop of the EU/IMF agreement and the Government decision to establish Irish Water, PwC was commissioned to carry out an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility. This is a Phase I Report on the assessment carried out. The purpose of this report is to provide a broad indication of the role and functions that Irish Water should have and the rationale for assigning these functions to the company. The Phase II Report will outline additional detailed information regarding implementation and transitional arrangement issues. Objectives and Scope of the Study The objectives of the study, as outlined in the Terms of Reference from the Department of the Environment, Community and Local Government are as follows: a) To undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility b) To recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision. PwC Page 20 of 131
  21. 21. Irish Water: Phase 1 Report The scope of the study includes water and waste water. It is required to address the legal framework and financial and economic dimensions as well as organisational issues, having regard to international experience and relevant examples of best practice. The study is required to examine two principal forms of potential company structure for Irish Water: A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging; and A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for the delivery of smaller scale investment. The terms of reference require that the study contrast these organisational forms, or variants thereof, with current arrangements across a number of parameters e.g. governance, value for money, financial viability, statutory compliance, efficiency, level of service, cost to consumers, infrastructure investment, leakage rates etc. The study is also to consider the possibility/desirability of assigning responsibility for water services provision, or part thereof, to an existing state agency. A copy of the Terms of Reference for the project is contained in Appendix 1. Policy Context The study has taken due account of Government policies in the area of water services. The key policies include: Commitments in the Programme for Government in relation to the water sector in Ireland such as:o o o o The establishment of a new State body Irish Water, A fair and efficient funding model for charging for domestic water, The installation of water meters in every household in Ireland, and A move to a charging system that is based ‘on use above a free allowance’. The Programme for Government also provides that Irish Water, a new State company, will take over the water investment maintenance programmes of the 34 existing local authorities. It will supervise and accelerate the planned investments needed to upgrade the State’s inefficient and leaking water network which has proved so unreliable during the recent harsh weather conditions. The report of the Local Government Efficiency Group which was published in July 2010 and which, in addition to general recommendation on achieving greater costs and efficiencies in the Local Government sector, made a number of specific recommendations in relation to the water sector, including that an enhanced regional office approach be developed at river basin level for infrastructure delivery and implementation of the River Basin Management Plans. The National Development Plan, 2007-2013, ‘Transforming Ireland’, which sets down current national priorities for investment in national physical infrastructure, including the Water Services Investment Programme and the Rural Water Programme. A new National Development Plan is expected to be published shortly which will set out new national priorities for infrastructural development, including water. The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF in December 2010; The report of the Review Group on State Assets and Liabilities; and Other relevant policies on pay and staff numbers. Appendix 2 contains a high level description of the relevant policies referred to above. PwC Page 21 of 131
  22. 22. Irish Water: Phase 1 Report Challenges Facing Water Provision in Ireland In the period since the year 2000 there has been very substantial progress in a number of areas in the provision of water and wastewater services in Ireland. Between 2000 and 2010, the Exchequer has invested almost €5.2bn in the Water Services Investment Programme and the Rural Water Programme. Approximately two thirds of this was to address a substantial compliance gap under the Urban Waste Water Treatment Directive. In the period 2000-2009 there has been an increase of 3.7 million population equivalent in secondary wastewater treatment capacity and of one million population equivalent in water treatment capacity. In recent years the Rural Water Programme has invested approximately €100 million per annum to effect improvements in the quality of water supplied in rural areas, particularly for Group Water Schemes in response to a European Court of Justice judgement in 2002. As a result, many of the Group Water Schemes have seen substantial improvements in water quality and a professionalization of the management of those schemes through the introduction of Design, Build, Operate contracts, sometimes on a bundled basis. However, there has been a substantial and historic under-investment in water and wastewater services in Ireland and while there has been significant investment in the last decade, a recent review of investment in water services carried out by DECLG indicates that there is still a substantial backlog of capital investment. With 34 local authorities providing water services, there is a high degree of fragmentation in the provision of the services which inhibits the achievement of benefits of scale and the introduction of the kinds of standardisation of technology and procedures which can drive efficiency. The current WSIP 2010-2012 and the Value for Money review on the previous WSIP highlight these issues. It is estimated that there is currently a backlog of required investment for essential projects of approximately €500m. This figure is derived from DECLG data on preparation of the WSIP 2010-2012. In addition there are the requirements to fulfil obligations under the Water Framework Directive. There is increasing emphasis on the use of River Basins, not least in the Water Framework Directive. County and city boundaries do not generally coincide with River Basin Districts leading to a potential disconnect in this regard. There are high levels of unaccounted for water in the distribution system both in the public network and on the water user side (see Section 3). Estimated at an average of 41%, this is high by international standards. Ageing and poor quality infrastructure and a legacy of under-investment have been reported as the reasons behind this situation. This will require substantial investment to bring the standard of the water network up to the needs of a modern economy. The proposed water metering programme1 and the proposed strategic water supply from the Shannon to the Greater Dublin Area have each been reported to cost over €500 million. Full compliance with the Water Framework Directive has not been costed but is likely to run to a cost of several billion euro over the period to 2027. In addition, funding will be needed for ongoing improvements to the infrastructure. Given the wider economic context in which Ireland finds itself, sourcing funds to meet all these requirements will be a difficult challenge. The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU. It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach to managing water quality on a river basin basis; with the aim of maintaining and improving water quality. It also requires that management plans be prepared on a river basin basis and specifies a structured approach to developing those plans. It requires a programme of measures for improving water quality be brought into effect by 2012 at the latest. River Basin Management Plans are to be prepared and renewed in six year cycles and the first plans cover the period to 2015. The river basins approach adopts natural geographical areas in contrast to current water management systems which are based on the administrative boundaries of local authorities. To give effect to the Directive, Eight River Basin Districts have been identified on the island of Ireland for the purpose of implementing the 1 See for example The Irish Academy of Engineering and Engineers Ireland (2011) “Delivering Ireland’s Water services for st the 21 Century” page 13 “ a budget of €500m is required to achieve universal metering of the domestic sector. International evidence suggests the cost is more likely to approach Euro1bn.” PwC Page 22 of 131
  23. 23. Irish Water: Phase 1 Report Directive. Four of the districts are wholly within the State (Eastern, South Eastern, South Western and Western), three are shared with Northern Ireland (Shannon, Neagh Bann, and North Western), and one is wholly within Northern Ireland (North Eastern). The introduction of domestic charges for water and wastewater will change Irish consumers to customers. It should be expected that they will become more demanding and less forgiving as they begin to pay separately for water services. Keeping customers informed, responding to their queries and complaints and demonstrating value for money will be a key issue in this sector in the coming years. Objectives of Reform Programme Understanding the objectives for the creation of Irish water is a critical part of this study. Irish Water is being created to serve a clear purpose. The key objectives for the development of Irish Water can be identified from Government statements and the content of the main policy documents outlined above. Based on our review of the policy content PwC understand that the reform is intended to achieve: Financially sustainable water services: a key aspect of the reform of the public sector in Ireland in support of EU/IMF commitments is to reduce the requirement for public sector funding. A financially sustainable water service will deliver a more cost effective service, driving out cost through the elimination of duplicated services, waste, and the establishment of a more integrated service delivery model. Stability of revenue from customer charges aligned with a reducing cost base will improve profitability thus strengthening Irish Water’s ability to secure funding from external lenders. Improving Ireland’s water services infrastructure: as our description of the current status of water services in Ireland demonstrates, there is a backlog of investment to be undertaken on the system. There is also a national need to maintain headroom in the security of water supplies. The new structure for Irish Water needs to be able to deliver cost effective investment in a timely manner. Ensuring Environmental Standards: There is a need to ensure that can meet our environmental obligations such as those set out in the EU’s Water Framework Directive2. Significant funding will be required to address this in the coming years. Delivering improved outcomes for customers: the introduction of customer charging will raise customer expectations of the quality of water services (e.g. better quality drinking water, improved water pressure, fewer leaks, etc). Irish Water will need the capability to deliver improved customer outcomes across a broader range of measures than used previously. The entity will need to have clear capabilities to deliver for customers and also have appropriate regulation and incentivisation to focus on customer requirements. Strong governance with clear accountabilities: a critical success factor for many water sector reform projects is the clear identification of roles and responsibilities for the key players in the sector. Stakeholders need to be clear on their obligations and have the resources to deliver on these. Support other aspects of water reform in Ireland: the Government is considering and evaluating a number of policy initiatives at the time this report was being prepared including the introduction of charging, the creation of an economic regulator, a proposed near universal roll out of water meters, implementation of strategic planning, development of river basin management governance etc. It is important that the new structure for Irish Water supports these developments and does not create institutional blocks to the reform programme. Promote efficiency: efficiency has been a key driver in the reform programme for water services in Ireland and is a major theme in Government policy statements. The evaluation of efficiency presented is both in terms assessing whether the proposed model will be efficient but also the extent to which the implementation process for the preferred model can be efficient as well. 2 Which some stakeholders in Ireland estimate could create an investment burden of an additional E20bn PwC Page 23 of 131
  24. 24. Irish Water: Phase 1 Report The objectives outlined above were used to help determine the criteria for the assessment of potential organisational models for Irish Water. The criteria used are set out in Section 6. Consultation Process As part of the information gathering work, a comprehensive consultation programme was carried out. The list of participants in the consultation process was determined by the DECLG which included the following: Association of County and City Councils; Association of Municipal Authorities of Ireland; Bord Gáis; Bord na Mona; Chambers Ireland; City and County Managers Association; Comhar; Commission for Energy Regulation; Competition Authority; Construction Industry Federation; Department of Environment, Community and Local Government; Department of Public Expenditure and Reform; Department of Transport; Engineer’s Ireland; Environmental Protection Agency; ESB; Forfás/National Competitiveness Council; IBEC; ICTU; Local Authorities Members Association; Local Government Management Authority; National Consumer Agency; National Pension Reserve Fund; National Roads Authority; National Rural Water Services Committee; National Treasury Management Agency; and Office of Public Works. Figure 2: Participants in Consultation Process Participants were provided the opportunity to share their views of the current situation regarding water provision in Ireland. They were also asked for their views on potential new models for the sector. Overall the consultation programme proved to be a valuable process which enabled PwC to obtain the views of a broad range of key stakeholders. A number of key messages were consistent across the stakeholder groups consulted. These included:The need for increased efficiency in the sector; The desirability of moving to a River Basin structure for managing water services; The need for improved water quality and greater security of supply in the coming years; The importance of obtaining increased funding to meet the increasing demands of customers; The benefits of transferring of responsibility for water services to a single state agency; and The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of water services. These views have been taken into consideration in the analysis of options and the development of proposals for the new model for water services delivery. PwC Page 24 of 131
  25. 25. Irish Water: Phase 1 Report 3. Overview of Current Provision of Water and Wastewater Services in Ireland PwC Page 25 of 131
  26. 26. Irish Water: Phase 1 Report 3. Overview of Current Provision of Water and Wastewater Services in Ireland Overview Under the existing institutional arrangements governing the water sector in Ireland, there are 34 city and county councils (‘water service authorities’) responsible for the production, distribution and monitoring of drinking water from over 900 public water supplies and for the provision of over 1,000 public waste water services. The industry is structured as shown in the figure below: Department of Environment, Community and Local Government Local Authority Suppliers (incl. DBOs) Environ. Regulator EPA Local Authority GWS Local Authority Domestic Customers GWS Local Authority Funding Sources (incl. DECLG & Lenders) EU GWS Non Domestic Customers Figure 3: Overview of Current Industry Structure The diagram above presents a schematic of the key actors in the provision, control, finance and regulation of water services in Ireland today. The DECLG is responsible for setting policy and plays a role in controlling and managing the capital expenditure programme. Crucially, it allocates funding on an annual basis for operations and on a rolling basis for capital expenditure to the local authorities. The EU sets the wider context enacting such important directives as the Water Framework Directive and the Urban Waste Water Treatment Directive. It also has a monitoring function and can pursue legal cases against member countries of the EU for failure to execute the directives. These directives are transposed into Irish law. The EPA is the technical and environmental regulator for drinking water and wastewater services and plays a key role in the preparation of River Basin Management Plans. It has a key role in monitoring and enforcement of standards although it may delegate sampling and analysis to local authorities. PwC Page 26 of 131
  27. 27. Irish Water: Phase 1 Report The local authorities are the Water Services Authorities. As such they have the primary responsibility for the provision of the public water and wastewater services. They procure services and infrastructure from the supply chain including the use of the Design, Build, and Operate (DBO) model for some treatment plants. In addition to funding from the DECLG, they are able to raise income from development levies, non-domestic water charges, significant user contributions and by borrowing with the approval of the DECLG. Non-domestic customers and domestic consumers receive a service of drinking water and/or wastewater collection and treatment. Non-domestic customers are currently billed for this service directly. Group Water Schemes are voluntary cooperatives providing potable water to customers in some rural communities. They are important actors in the totality of the provision of water services and are represented nationally by the National Federation of Group Water Supplies. Investment by the local authorities in water services is guided by the policies and procedures of the DECLG, including the River Basin Management Planning process. Investment in the sector is primarily under two programmes namely the:Water Services Investment Programme (WSIP); Rural Water Programme (RWP). For the WSIP each local authority presents an assessment of needs on the basis of which (and other factors) the DECLG prepares the WSIP on a three year basis. The RWP is an annual programme under which funds are allocated to local authorities for smaller public water schemes. The local authorities are also responsible for the supervision of any group water schemes and private water supplies in their areas and for the carrying out of various water-related inspection and enforcement activities. The Environmental Protection Agency has statutory responsibility for the supervision of the quality of water and waste water services delivered by the local authorities. An important source of information for this part of the report has been the Value for Money study on the WSIP 2007-2009 from the DECLG. Legislative Framework General The legislative environment in respect of water services: Sets the framework within which participants in the sector must operate; Delineates the roles of participants in the sector including in respect of: o the regulation and supervision of the provision of water services; o the provision of water services; and Sets standards in accordance with which participants in the sector must operate. All aspects of the legislative environment, but in particular the framework and the standards, are shaped by applicable EU legislation. The Framework – Water Framework Directive3 (the “Directive”) The Directive establishes a framework for the protection of waters in order to protect and restore clean water across the EU and ensure its long-term, sustainable use. With this aim the Directive requires that waters be managed on the basis of their natural units’ river basins so that they at least reach ‘good’ status by 2015. Management of waters on this basis requires: 3 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 established a framework for Community action in the field of water policy. PwC Page 27 of 131
  28. 28. Irish Water: Phase 1 Report Designation of competent authorities; Environmental and economic analysis of river basins by those authorities; and Development and implementation of river basin management plans including a programme of measures to meet the objectives of the Directive. This Framework has a number of implications worth noting here: The need for co-ordination between any national or local water authorities within the river basin catchment area; The requirement to charge a price for water services (from which Ireland has received, to date, a partial derogation) which reflects the cost of providing the services (including environmental and resource costs as well as operation, maintenance and development costs) creating an incentive for the efficient use of water resources (subject to potential derogations of which Ireland availed to date in respect of domestic charging); and The requirement, in order to prepare cost-effective river basin management plans, to carry out an economic as well as an environmental analysis of the river basin including estimating the costs of implementing different possible measures and making forecasts of long-term water demand based on future population and economic scenarios. The Framework is the main prism; there are other influences including National Spatial Strategy, economic considerations etc. Roles of Participants – Water Services Act 2007 (the “Act”) The precise roles of sector participants are designated and shaped by a body of legislation with the Act at its centre. The roles of the Minister, the water services authorities and the EPA, and the interaction between those roles, are the key elements of the operational and regulatory framework. The Act confers a significant role on the Minister who has a general duty to facilitate the provision of safe and efficient water services and water services infrastructure in accordance with relevant EU legislation including the Water Framework Directive. For this purpose the Minister has overall responsibility (subject to the role of the EPA in relation to drinking water) for the supervision and monitoring of the performance by water services authorities of their functions and the planning and supervision of investment programmes for the provision of water services. The Minister has very broad powers to direct and guide water services authorities in the performance of their functions and to define those functions. He may, for example, make regulations requiring water services authorities to provide specified water services to specified classes of agglomerations, areas or concerns. He may also compare the performances of water services authorities and require coordination between them by directing two or more authorities to carry out functions jointly. The Act authorises each of Ireland’s 34 City and County Councils (29 County and 5 City) to provide water services, and includes provisions (not yet commenced) for those authorities to licence and supervise the provision of water services by other persons (not yet commenced), in its functional area. An authority may provide water services, in accordance with prescribed standards and public policy, in its functional area. Alternatively, it may, subject to the requirements of the 2007 Act, enter into an arrangement with another person in relation to the provision of such water services in part or all of its functional area. The 2007 Act authorises two or more water services authorities to enter into an arrangement for the purpose of one or more of them or jointly carrying out any or all of their functions under the 2007 Act. While the exercise of the powers conferred on water services authorities is generally at the discretion of the individual authority, water services authorities must comply with directions issued, and any regulations prescribed, by the Minister. PwC Page 28 of 131
  29. 29. Irish Water: Phase 1 Report Standards – Drinking Water Regulations4 and Urban Waste Water Regulations The EPA plays a key role in relation to the preparation of river basin management plans required by the Water Framework Directive. It also has a supervisory and monitoring role in relation to drinking water quality and licensing discharges to aquatic environments from sewage systems owned by water services authorities and discharges to waters by certain trades (IPPC licences). The Drinking Water Regulations prescribe quality standards to be applied to supplies of drinking water and related supervision and enforcement procedures. The Urban Waste Water Regulations prescribe specific standards for waste water treatment plans and related monitoring procedures. Compliance with these requirements has driven, and it is our view that it will continue to drive investment in water services infrastructure. It is also worth noting that Water Services Strategic Plans will have to be completed in the context of River Basin Management Plans. The allocation of roles to sector participants has a number of implications worth noting here: Responsibility for the sector is allocated between a significant number of parties, including a number of parties in respect of each river basin district, and accordingly considerable coordination is required between those parties particularly, but not exclusively, in the context of the Water Framework Directive; and The role of the Minister, and also, in the context of the Water Framework Directive, the EPA, would appear to be particularly important in achieving this coordination. Certainly the Minister has broad powers to require coordination between water services authorities if he considers that necessary. A more complete description of the legislative framework is incorporated in Appendix 3. Economic and Funding Situation Overview of Current Economic Situation The current Government funding situation is shaped by characteristics of the wider economic and political environment both in Ireland and across the EU. In several aspects, the Irish economy has represented an exaggerated version of typical Western economic trends over the last two decades. Sustained growth in the Irish economy, particularly in the services sector, outstripped that seen in several other Western economies during the 1990s. However, as elsewhere, doubts about the sustainability of much of this growth were expressed during the bursting of the dotcom bubble and the global slowdown through 2001. Irish growth continued, but was increasingly reliant on a construction and related property boom through the 2000’s, again outstripping growth rates seen in several major Western markets. The property boom was fuelled by a combination of factors, including: i) low interest rates; ii) a significant exposure of Irish financial institutions to property; iii) pro-cyclical taxation policies; and iv) a buoyant consumer confidence. The net effect was net inward migration, strong employment growth in construction and construction-related sectors and strong growth in capital tax revenues. Tax receipts on capital in Ireland were €3.4 billion in 2006, or 6% of total Irish tax receipts that year. This compared with a typical figure in the UK of barely double that absolute value, or less than 1% of total UK tax receipts.5 The Irish state increased its public expenditure broadly in line with receipts. However, as the Irish property boom drew to an accelerated end the effect on public finances was significant, as the loss of more than €2.5 billion in capital tax revenues from the peak coincided with significant losses in employment-related taxes and rising social welfare costs. Consumer confidence, which derived to a significant extent from the property boom, weakened rapidly and final demand fell across a wide range of domestic sectors again with negative implications for consumption-based taxes and employment in domestically-traded services. 4 5 European Communities (Drinking Water) (No. 2) Regulations 2007 CSO; EIU August 2011 PwC Page 29 of 131
  30. 30. Irish Water: Phase 1 Report The Exchequer ran an operating deficit of close to €25 billion in 2009, which was reduced to €19 billion in 2010 through the implementation of a radical programme of cuts in public expenditure and the imposition of very significant income tax increases. An additional deficit reduction of €15 billion is targeted before end-2014. In September 2008 the Irish Exchequer guaranteed the vast majority of deposits in six Irish banks and building societies. This commitment was required to prevent the outflow of deposits from the banks and building societies, most of which had a very significant exposure to the Irish property boom and a heavily impaired loan book. Two banks (AIB and Anglo Irish Bank) and two building societies (EBS and Irish Nationwide) are now under State control. A loss of market confidence in the ability of the Irish State to manage this combination of issues resulted in the acceptance of an EU/ IMF programme of €85 billion in financial support in December 2010. The package is broadly reliant on a number of austerity conditions over its 2011-2014 loan draw-down period, including a €5 billion increase in annual tax receipts, and a €10 billion fall in annual state spending (including €3 billion on capital spend and €3 billion on grants, subsidies, and procurement). Implications for Water Services As shown in Figure 4 – Figure 6 overleaf, to date the Water sector in Ireland has a high level of dependency on Government funding for both operating costs and capital expenditure. During the construction and related property boom, funding of the water service was heavily dependent on development levies which, in the context of the current economic climate, have all but disappeared. Given the funding landscape described here, the existing funding arrangements are unlikely to be sustainable in the longer term. Irish Government Finances are highly constrained for new capital expenditure and operating cost subvention. These Capital and Revenue constraints on Government finances provide a backdrop for the establishment of an Irish Water utility which will raise charges for the supply of fresh and waste water services to both the commercial and residential sectors, and that has the ability to raise debt finance on foot of its net revenue streams and tangible asset base. Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial Statements 2010) PwC Page 30 of 131
  31. 31. Irish Water: Phase 1 Report Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial Statements 2010) 700 600 500 400 300 200 100 2000 2001 2002 2003 WSIP 2004 RWP 2005 2006 2007 2008 2009 Non-Exchequer Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study6) Sourced from Table 6.1 of the Value for Money Review (2007-2009) Regulation There are several levels of regulation in relation to the provision of water and wastewater services in Ireland. This study focuses on two aspects of regulation namely economic and environmental/technical regulation. Economic Regulation The provision of water and wastewater services can be regarded as a natural monopoly situation as the available options for most consumers/customers are practically very limited. Currently in Ireland there are no direct charges for the provision of water and wastewater services to domestic customers on an ongoing basis. Ireland is unusual if not unique in the OECD in not having a separately identified charging system for domestic customers. Non-domestic customers pay water charges on the basis of metered consumption according to prices set by their local authority. This is usually a combination of a flat standing charge and a metered charge based on actual volumes used. There is an established methodology for the assessment of what represents full cost recovery of non-domestic water charges. This involves assumptions about how the cost is spread between non6 Non-Exchequer is “estimated matching funds” associated with the actual annual Exchequer spend on these programmes PwC Page 31 of 131

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