Investigative Correspondent Conor Ryan says water charges will be used to pay off legacy debts incurred by councils through costly overruns, bad practices and contract failures in earlier capital projects.
WATER charges will have to be used to pay off hundreds of millions of euro in legacy debts linked to blown budgets on infrastructure schemes across the country.
Many of the projects were completed years ago but issues with final accounts remain and local authorities have had to borrow money to settle costly contractor claims and legal disputes.
Work is currently under way to assess the extent of the liabilities which will be transferring to Irish Water.
The debts include unpaid development levies and commercial water charges which have not been collected.
However, the vast bulk was brought about from loans that councils had to draw down when budgets for expensive investment projects went down the drain.
There is currently more than half a billion euro worth of debt on local authority accounts for unfunded capital projects — this also includes land purchases and housing loans.
There is no tally available on the amount that specifically relates to the water investment, although individual contract accounts and council reports suggest the figure will be substantial.
Irish Water is already assuming the functions of the local authorities and the Cabinet is battling about the pricing structure.
Yet the relevant parties have still to decide on the level of borrowing which will shift onto the books of the new utility company.
In a statement the Department of the Environment said assessments are in train to calculate the level of debt.
“Deliberations on the future of local authorities’ unfunded capital balances are ongoing. The level of local authorities’ water-related liabilities is being ascertained and will be informed by the local authorities’ annual financial statements,” it said.
The City and County Managers Association said once the figure is established the transfer is expected to happen with a ministerial order later in the year.
“Work is currently ongoing to ascertain the value of debt transferring to Irish Water from local authorities.
“The value of this debt is made up of several components, including debt arising from non-domestic water charges, debt arising from unpaid development levies, borrowing incurred by local authorities to finance capital works on a water asset (and) unfunded balances on capital projects — where a defined funding stream is no longer available to the local authority through the cessation of the department’s investment programme and / or local authorities no longer being in a provision to raise finance,” it said.
Most of the debt in question has been drawn down from the Housing Finance Agency with loans that are on relatively low rates. However, the repayments still put significant and recurring burdens on councils which have had to cut services in other areas.
Documents released under the Freedom of Information Act from South Dublin County Council show it paid more than €200,000 last year in interest repayments because of the unforeseen costs of a reservoir construction project that was hit when the main contractor went into liquidation.
Dublin City. A plan to improve the availability of drinking water in the capital was supposed to cost less than €50m. Since 2007 the bill has trebled.
That particular South Dublin’s debt of €9m is less than those being carried by other councils.
In Donegal there are €49m worth of loans linked to water projects sitting on its accounts.
That council has had particular financial difficulties and was forced to negotiate with the Housing Finance Agency to switch its repayments terms to interest only.
It is hoping to ease its overall burden by pushing the big loan to Irish Water.
A second county is in major financial difficulty, Sligo. It has been borrowing heavily in recent years just to balance its books. But it is also affected by €49m in non-housing loans it has to repay — €19m of this is directly tied to water projects.
Like Donegal, other local authorities appear to have placed a lot of trust in the assumption that all of the liabilities in question will move to Irish Water.
According to its response to auditors Westmeath was planning its 2014 budget assuming that €20m in debt would be moved to Irish Water on January 1. It paid €1.9m off its non-mortgage loans in 2012.
In the audit for Monaghan council the manager said it was carrying a debit balance of €3m due to overruns on the Carrickmacross main drainage scheme and had related debts of more than €5m.
Its statement said “loans payable relating to the funding of water and sanitary capital projects are currently being funded from development contributions. They will transfer to Irish water in 2014”.
Mayo council took out a loan of €30m in 2012 to fund its capital deficits, some of which was related to water investment. But it said this would not remain on its books for long.
“Monies owing for water services capital projects, which the council anticipates will be funded by Irish Water”.
Cork City is still short €19m for its main drainage scheme and the Department has not approved funding. But its audit response said its future should become clearer with the proposed establishment of Irish Water.
Cork’s treatment plant in Little Island. The city is still short €19m for its main drainage scheme and the department has not approved funding.
Other councils have been in long-running discussions with the department about getting retrospective funding to cover the additional costs of the work.
Kerry had a water-related deficit of €24m at the end of 2012.
The level of borrowing that now exists for projects that were delivered over the past decade reflects the amount of money that was thrown at water in recent years.
But it also points to recurring management issues which seemed to replicate themselves at many schemes.
Between 2000 and 2010 more than €5bn was invested in water service projects and rural schemes.
This covered drinking water and sewerage work with the largest investments targeted at cleaning up the supply and disposal in the major urban centres.
But more than any other sector of local authority spending it was blighted by delays and cost over runs.
Frequently councils have blamed surprises under the ground that held up contractors and the poor mapping of the infrastructure under the surface.
Initially there were significant problems highlighted with the type of contract which the councils were obliged to use.
The local authorities said this approach left too much scope for low-bidding contractors to return to the table with extra claims.
That flexible contract was ~superseded by the National Fixed Price Contract Framework which was supposed to deliver certainty.
However one of the more recent projects to run into problems, the Bandon sewerage scheme in Cork, was commissioned under this method.
Yet Cork County Council has told auditors this method of negotiation is prone to the same issues it was supposed to fix.
“The very nature of the Fixed Price Contract does give rise to increased claims by the contractor and this is an issue of concern to Cork County Council,” it said.
Flooding in Bandon, Co Cork.
In 2009 the Department of the Environment engaged accountants Ernst and Young to review capital spending by local authorities and the subsequent report identified major problems with tendering and project management.
Water was not the only sector with issues but it was the most costly.
Ernst and Young selected 29 water projects with a total expenditure of €126m for inspection.
The spending related to 2006-2007 and found that 20 of the contracts were put out with an incomplete appraisal and there was no project brief in 16 cases.
Ultimately 10 of these projects were over budget.
The review covered two areas of spending, the Water Services Investment Programme and the Rural Water Programme.
There was €101m involved in the WSIP projects audited, a third were over budget. For the €25m RWP programme just under half of the schemes failed to stay inside their spending targets.
The consultants said in a significant number of cases there was a lack of formal project management.
The Ernst and Young report looked at all aspects of council spending yet the sample of over-budget cases highlighted the disproportionate problems experienced in the water sector.
The result of bad practices, contract failures and blown budgets will mean that whatever the final figure hundreds of millions of euro of loans will transfer to Irish Water.
And it will be the householders who will be charged to make sure the company washes its faces and covers its repayments.
Water projects hit by a flood of costly difficulties
The project to clean up the waste water system for the city saw many holes dug to accommodate infrastructure and left a lasting one in the council’s balance sheet.
Although completed a number of years ago the Cork main drainage scheme has left a €19m deficit on the books.
The city council has been in lengthy discussions with the Department of the Environment about reducing or eliminating this debt, and the burden it places on the authority to service it.
It recently told auditors it hopes the issue will be resolved with the transfer of undertakings to Irish Water.
A plan to improve the availability of drinking water in the capital was supposed to cost less than €50m. Since 2007 the bill has trebled.
In January 2007 the council plucked for the lowest tender, with a bid of €48.9m to complete phase three of the scheme and upgrade the treatment works and increase the capacity.
Problems began early and large claims were made by the contractor. The council protested but to keep the process moving, it decided to negotiate rather than fight.
Within three years construction was already 18 months behind schedule.
A commercial settlement was agreed in 2011. This changed the value of the contract to €98.9m, more than double the original budget. But this did not include everything.
In 2012 another €30m was spent which brought the total cost to €145m.
City council management told the auditor it was a major infrastructure project and when it tendered for the work it was advised not to opt for a fixed price contract but a “measure and revalue” approach. It said this form of contract has now been scrapped because it provided too much scope for contractors to submit claims.
Recently the local government auditor flagged the fact that in 2011 he was told the revised cost of €98.8m would not rise. But a year later it had reached almost €145m.
The council said this was because there was another €50m spent on mechanical, civil works, electrical systems and consultancy fees.
“The approved cost for the project is €138.4m. The approved grant for the project is €87.8m. As always the department will review the final account on the contract and only then can the grant for the project be finalised,” the council said.
The development of a 24m litre reservoir in west Dublin and a 17.5m litre facility nearby were the showpiece facilities in the proposed €34m construction project.
The development did not go according to plan.
The scheme received a major setback when the original contractor, Pierce Construction, went into liquidation in November 2010.
However there had already been several surprises to hit the project’s budget. Reports, released under the Freedom of Information Act, showed the final bill is close to €60m, including €12.8m in legal costs and land purchases.
This was badly affected on the €6.7m lost on the liquidation of Pierce construction. But the ground conditions encountered during the laying of 41km of pipes also required extra funding.
Most of the original funding was committed by the Department of the Environment. However, the additional cost left the council having to borrow in excess of €9m from the Housing Finance Agency.
The €9m, used to engage the replacement contractor, has hit the council with an annual interest bill in excess of €200,000 last year. This was in addition to €3m taken out a year earlier.
The local government auditor asked Cork County Council to review its internal procedures after several costly overruns on projects.
Recently delivered water developments have been of particular concern with extra bills, legal costs and consultancy fees resulting in soaring budgets.
Two schemes, at Kinsale and Buttevant, saw total expenditure double.
Documents released under FoI showed that the biggest issue was in Kinsale where the main drainage project ultimately ran up bills in excess of €26m. The original tender for phase two of the work had been set at €6.3m in 2009.
The extras had crept up incrementally and the council was rebuffed in its bid to recoup more money from the department.
The Buttevant work was delayed by numerous issues and the €2.5m became a €5.4m burden after it was settled by arbitration.
That scheme began in 2006, before it was hit by delays, but recent contracts have also ran into trouble.
In 2012 work began on the Bandon sewerage scheme which had a budget of €3.5m.
In February 2013 Senator Denis O’Donovan raised concerns that a €7m contract had been awarded following a bid of €3.5m but this meant the contractor, SIAC, walked away from the project within weeks.
He said he places a lot of blame on Cork County Council. “It was ludicrous for the council to award the contract when anyone with a small bit of common sense would have known the contractor could not fulfil the contract for the price given, which was a third of the overall cost. It does not add up,” he said.
Junior minister Fergus O’Dowd said if Mr O’Donovan believes the council was not being transparent he should “kick up a stink about it” and that the council was obliged to provide him with any information he seeks under FoI.
One year later the Irish Examiner sought records relating to the scheme under FoI. These were refused. The council said the records were confidential.
“Arising from the conciliation discussions, both parties agreed to the suspension of the works. One of the terms of the agreement was that the existing clause of the conditions of contract relating to confidentiality and secrecy would remain in effect,” it said.
The council said it had been audited and its management of the project was found to be compliant.
In its response to the auditors the council blamed its obligation to follow the national fixed price contract framework, which it has said gives rise to follow-up claims by contractors when problems arise. It said risk reduction measures are employed but it had concerns about the way tenders were set up.
The Waterville drinking water and sewerage scheme was supposed to cost €10.8m. The final tally exceeded €20m.
The most recent set of accounts for the council revealed that the authority was carrying a debt of €24.8m because of loans built up on water projects.
The Waterville drinking water and sewerage scheme was supposed to cost €10.8m. The final tally exceeded €20m.
The department had approved a grant of €8.57m, but the council also borrowed heavily. It informed auditors it has been in discussions with the department about funding to reduce the balance.
The council said the level of debt it is carrying reflects the investment it made in recent years in water.
However, it is facing further expenses after it lost a legal battle over its plan to draw water from the Sheen river to supply the Kenmare water scheme.
The judge found in favour of the local community who argued an appropriate assessment should have been carried out.
A High Court dispute surrounding a public private partnership scheme saw a budget of €8.3m jump to more than €15m.
The problems involved a second contract for the installation of waste water pipes to the towns of Athboy, Rathcairn, Rathmolyon and Summerhill.
Problems began when subcontractors started suing the main contractors. Arbitration was required and afterwards the council started to engage with the smaller firms directly.
It sister project, around the areas of Moynalty, Dunroe and Duleek, also hit problems when the main contractor went into voluntary liquidation.
Fortunately for the council the works on this section had been substantially completed so the add-ons were not as great.
By the time the waste water treatment plant for Thurles had its improvement works completed the budget of €1.7m had grown to €2.7m. The additional debt was carried by the council.
Work to build and operate the group villages’ waste water scheme started with a tender of €10.3m and rose to €13.3m.
Unexpected ground conditions, archaeology work and the need to relocate power lines were blamed for a significant increase in the price of the Birr sewerage scheme.
The work was completed in October 2007 with a final account of €2.8m. It was supposed to be €1.8m.
The council told auditors the old-style of tender in place at the time was problematic.
“This contract was negotiated prior to the introduction of the new fixed-price contract scheme.
“Under the new arrangements this discrepancy would not have been an issue as the risk would be with the contractor,” it said in its review of its 2009 accounts.
Disputes, delays and redesigns complicated the plan to spend €44.7m on the city’s main drainage scheme.
The focus was the development of a waste water treatment plant to serve the city which was opened by Minister Phil Hogan in 2011.
The work was funded centrally by the Water Services Investment Programme.
One of the problems was that the design used in one of the subsidiary contracts was unsatisfactory. Fixing the issue cost €1m.
However a more costly contractual dispute continued throughout 2010.
A conciliation effort was undertaken and, following consultation with the department, the council decided to settle by paying a contractor €4m and carrying substantial legal costs.
The local government auditors flagged two issues in the water investment programme in Cavan.
Work began in 2008 on the Ballyjamesduff plant with a budget of €4m. When the final sign-off was being worked out in 2010 this had risen to €5.5m.
The department’s senior inspector was involved to resolve a disagreement with the contractor.
Elsewhere the council defended its decision to pay €100,000 for land to house a new reservoir at Cootehill when an independent valuation had told it the site was worth “somewhere in the region of €55,000 with an upper limit of €80,000”.
Cavan County Council said it felt it still got value for money. It said the area was considered the most suitable for the development and the asking price had been €200,000.
“Consideration was given to the cost and time involved in a compulsory purchase order process and it was considered that €100,000 represented reasonable value in these circumstances,” it told the auditors.
The department had approved a grant of €8.57m, but the council also borrowed heavily.Limerick City’s main drainage scheme was estimated to cost €188m but total expenditure ballooned to €354m.
When work began on the Limerick City main drainage project in the late 1990s it was envisaged that project would be delivered for €188m.
Fast forward to November 2012 and total expenditure had ballooned to €354m and a small number of residual issues were still under negotiation.
In 2007 the Comptroller and Auditor General delivered a damning assessment of one contract which was supposed to cost €9.5m but ended up saddling taxpayers with a bill for €83m.
This all blew up following a dispute with Uniform construction which could have been settled for €12m had the council not decided to reject a negotiated deal.
The company had blamed ground conditions it experienced during tunnelling work for its delays.
Elsewhere there was also a budget overrun on the Clareville water treatment plant which saw €3m added to its €32.9m contract price.
A sewerage scheme completed in 2012 had a price tag of €3.9m. This figure grew by 72% before the account was eventually settled.
Almost 60% of the investment came directly from the department.
The bill was eventually agreed after three separate conciliation recommendations and a subsequent decision to buy out the contract.
The final cost of the Glasson Ballykerran Cossan Sewerage Scheme was €6.7m
The council had to borrow €1.3m to bridge a shortfall in the budget for the Gillogue water contract.
It has been in discussions with the department about getting funding to pay off the debt, which arose when a plan to complete the scheme for €4.9m did not come to pass. The final cost was €7.5m.
Last year both the council and the department refused to release records relating to this scheme under the Access to Information on the Environment regulations.
The Gillogue issue has been one of a number of water projects that have contributed to a €24.8m debt on the council’s books.
The other projects were water supply work in Ballyvaughan and West Clare and sewerage developments in Feakle, Scarriff and Quilty.
The laying of a sewer pipe landed the council in the High Court where the argument was eventually settled at a cost of €160,000 including legal fees.
The problem dated back to 2001 when the pipe through Carrickmacross was laid at the wrong depth.
The town council, which was in place at the time, did not have professional indemnity insurance to cover the costs so the tab fell on the council’s desk.
However a far more expensive issue arose during the main drainage scheme through Carrickmacross. This saw a €12.1m project become a €18m one.
The 50% increase in the price of the work was put down to unexpected ground conditions, problems with access to river crossings and increases in the scope of the instructions.
The council said it provided a detailed justification and explanation for the overruns to the Department of the Environment.
At the end of 2012 the council was carrying borrowings of €5.5m because of issues with the water service investment in Carrickmacross and another development on the Old Armagh Road.
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