ESB utility model works — replicate it for water

Irish Water was explicitly designed to meet the criteria of the market corporation test. The design is a failure, and an embarrassment for the Government, writes Seamus Coffey.

The failure of Irish Water to pass Eurostat’s market corporation test is an embarrassment for the Government. It is not because the Eurostat decision has significant economic consequences, it is because Irish Water was explicitly designed to meet the criteria of the market corporation test. The design is a failure.

In the run-up to this week’s decision it was thought that Eurostat would take an objective and limited perspective — if Irish Water could show that more than 50% of the revenue required to cover its operating expenses could be raised from private sources then it would be deemed a business and put in the accounts of the corporate rather than government sector.

Eurostat, however, applied the duck test — if it walks like a public body, quacks like a public body, and looks like a public body then it is a public body.

It has been repeatedly shown that Irish Water has little independence from Government. This was most visibly shown when the prices it could charge were revised in a Dáil announcement by the environment minister, Alan Kelly, last November.

There is no business justification for the capped prices that Irish Water can charge. Essentially, Eurostat has said you cannot call Irish Water a business if customers can use as much of its product as they want without having to pay for it.

It was originally planned that the Commission for Energy Regulation would determine the price of water based on a business case presented by Irish Water. This is what happens for the prices of electricity and gas. Irish Water went through the same process and a price of €4.88 per 1,000 litres.

After the large protests last autumn, the Government decided to reduce the price to €3.70 and cap them. A direct cap would have made it impossible for Irish Water to generate 50% of its revenue from private sources so the convoluted Water Conservation Grant was devised whereby customers pay €100 to Irish Water just to get €100 back from the Department of Social Protection.

We have a crumbling water infrastructure because it has been under the remit of politicians for too long. There aren’t many votes in pipes in the ground and sewage plants. Expenditure on our water infrastructure has been slashed over the past six years.

It was over €1bn in each of 2007 and 2008 but has been around €300m for the past few years. The ESB has largely maintained its level of investment in our electricity network during the crisis because it is not subject to the political expediency of reducing the deficit.

We need a national water utility that is not subject to the political weaknesses that our system engenders. In the ESB we have a utility model that works — let’s replicate that for water, prices, and all.

There are limited economic consequences to Eurostat’s decision. There will be no impact on the measures to be announced in Budget 2016 in the autumn. During the bailout we became accustomed to our deficit targets being at set levels. The 2014 deficit could be no more than 5.1% of GDP; the 2015 deficit could be no more than 2.9% of GDP.

This stepped process was about returning the deficit below the 3% of GDP threshold. We will easily achieve that this year. Below the 3% threshold budgets are framed in terms of annual improvements towards a balanced budget rather than to a set or predefined level.

Eurostat has stated that Irish Water should be included in the Government accounts. This has the impact of making the 2015 deficit bigger by about 0.3 percentage points of GDP which is essentially Irish Water’s borrowing for capital expenditure.

However, because Irish Water will be included in both the 2015 and 2016 figures, it has almost no impact on the change in the deficit. We need to reduce the structural deficit by 0.6 percentage points of GDP next year and Irish Water has no impact on that.

The government is right to argue that it still has up to €1.5bn of space for tax cuts and expenditure increases in the upcoming budget but this will be lost in the noise that Irish Water’s latest failure will rightly generate. The €1.5bn may be an overestimate for reasons outside of Irish Water and even having €1.5bn of space for tax cuts and expenditure increases doesn’t mean you have to use it all but those are different matters.

It is also the case that a lot of Irish Water’s expenditure is already recognised in the Government’s accounts. Irish Water’s day-to-day expenditure is around €1bn per annum. The utility collects, or at least intends to collect, around €500m in commercial and domestic charges. The €500m shortfall is made up through a subvention from the exchequer. This €500m payment will always be recognised in the Government’s accounts so the Eurostat decision affects only the treatment of Irish Water’s capital expenditure.

Eurostat’s decision is not without precedent. A similar situation arose in 2007 with Irish Rail which the then government wished to see included in the business economy rather than on its own accounts. Eurostat applied the duck test and advised that Irish Rail be treated as an organ of government.

Such a lack of independence sees Irish Rail running trains between Ennis and Athenry with almost no paying customers. Irish Rail is now classified as part of the government sector and this has had no noticeable impact on its operations and the provision of rail transport in Ireland.

Of course, the economy of 2015 is very different to the economy of 2007 and paying for water is a much more emotive issue than paying for rail travel. It should also be pointed out that providing water is only a limited part of what Irish Water does. In fact two-thirds of Irish Water’s annual expenditure goes on waste water treatment services. The cost of the water supplied makes up only 10% of Irish Water’s budget.

Opponents to water charges sometimes suggest we can save money by abolishing charges. That is not true. Providing our water services costs around €1bn a year before any thought is even given to undertaking capital investment to upgrade the infrastructure. Opposing charges only changes who pays; we need to spend that €1bn and more every year and doing so through an effective water utility is the best way to organise that.

Equally the proponents of water charges argue that they allow investment in our water infrastructure to be put “off balance sheet”. This is nonsense. If Irish Water runs up debts the State is on the hook. In our national accounts the debt might be put in the corporate sector but ultimately the State is on the hook. In this country we know only too well how debts from the corporate and financial sector can quickly end up on the balance sheet of the government.

We should borrow to invest in our water infrastructure because it is the right thing to do, not because we want to play fast and loose with budgetary rules that are designed to help us avoid falling foul of the excesses that got us into huge trouble in the recent past. Will we ever learn?

Seamus Coffey is an economics lecturer at University College Cork