Friday, November 21, 2014

Irish Examiner 21/11/2014

Here is a piece carried by today’s Irish Examiner on the funding of public expenditure on water.  It is based on a recent post - ‘how much do we spend on water?’.  The unedited text for the piece is reproduced here.

Conservation grant a half-measure that muddies the waters

In 2012 public expenditure on water in Ireland was €1.5 billion.  This money is being spent on a system that does not work.  The ongoing protests about water charges fails to understand the key point – it is not about paying for water; it is about paying for the infrastructure to deliver clean water and treat waste water.

Over the past ten years the government has spent €18 billion on water.  Of this, only 10 per cent was to pay for the actual supply of water to households and businesses.  An emphasis on conservation can only save money on this small portion of the expenditure.  The other 90 per cent of expenditure is unaffected by the amount of water we use.

It costs about twice as much to manage and treat waste water and sewage as it does to provide clean water.  A further 30 per cent of water expenditure over the past decade was consumed by staff costs.  The remaining 40 per cent was devoted to investment in the water and waste water infrastructure.  This is the largest component of expenditure on water and the most important.

The most significant austerity measure introduced in relation to water since 2008 is not the botched introduction of domestic water charges – it has been the slashing of investment in our water infrastructure.  Since 2008 capital spending on water has been cut by over 60 per cent.

In 2008, the government provided €1 billion for investment in the public water system.  The same year the ESB also provided €1 billion for investment in the electricity system.  In 2012, the ESB’s capital expenditure was close to €800 million while public capital expenditure on water was cut to just €375 million.

As a semi-state company the ESB can leverage its revenues to borrow money to fund its investment.  As a commercial enterprise the ESB’s management can take a long-run perspective.

On the other hand, expenditure on water was part of general government expenditure and the huge cuts to public investment in water were introduced to meet short-term deficit targets and avoid adjustments elsewhere.  

Huge expenditure is needed to bring our water network up to scratch but it is not clear where the money will come from.  The government remains under pressure to reduce the deficit and the size of the public debt limits the government’s capacity to borrow even though interest rates are at historical lows. 

A public utility can raise the funds and its management can look beyond short-termism or the election cycle.  Investment in water and sewage infrastructure does not have political attractions.  It is disruptive, underground and offers little opportunity for ribbon cutting. 

Although they have been on the agenda for years, water charges were rushed in by the current government because they wanted to get them in the rear-view mirror well before the 2016 election.  The charges were over complicated politically-motivated add-ons such as allowances which required PPS numbers to be administrated correctly. 

If the politicians wanted to compensate people for the introduction of water charges it should have been done through the existing tax and transfer system.  This would have been possible in last month’s budget which had a €1 billion package of tax cuts and expenditure increases but a lack of joined-up thinking resulted in a failure to get a coherent message across.

Now we have a further complication with the €100 water conservation grant.  This is just further pointless administration.  The government want to cap water charges at €160 per household but because Irish Water must get more than half of its revenue from private sources households will actually pay €260 to Irish Water and receive €100 back from the Department of Social Protection. 

The government met major difficulties a few years following the introduction of the €100 household charge; now they are giving €100 to households to try and solve the mess made of water charges.   To avoid been deemed as a subsidy to Irish Water the €100 will be paid to all households.  So instead of collecting money off those on the public system we now have reached a point where we are subsidising those on private water schemes who paid for their own water up to now.

Ireland has a history of introducing measures with names that do not reflect their actual design.  For example, we have the respite care grant and the public sector pension levy.  This measures have their merits but their implementation has nothing to do with respite care or public sector pensions.  They are a transfer payment and a pay cut. 

There are many items on this list to which we can now add water charges and the water conservation grant.  These have nothing got to do with using or conserving water.

The principles of taxation are equity, efficiency, certainty and ease of administration.  The charges announced this week fail on three of these principles.  Both the charge and offsetting grant are at a fixed rate so are regressive.  The fixed charge means that there are no efficiency gains from conservation and the fact that households have to pay €260 to Irish Water to get €100 back from the Department of Social Protection only adds to the unnecessary bureaucracy of our system.

It is a little ironic that the outcome of the protests of the past few weeks has resulted in charges that are regressive and inefficient.  We should have water charges based on use but not necessarily because we need to conserve water.  Conserving water is helpful but it is not as if like we are going to run out of it.  It actually does fall out of the sky.  It is better management of the plentiful supply we have that we need.

Better management can be achieved by metering but the benefit of this will be in identifying leaks and unreasonable usage rather than in getting typical households to control their usage.  Universal metering is unlikely to being significant benefits.  The introduction of metering is to link charges with usage of water but we must have a utility that can adequately fund the 90 per cent of expenditure that is on top of the cost of the actual water.

Many of those protesting want the abolition of Irish Water.  A utility company for water is exactly what we need.  The system that resulted in the broken water network we have now must be dismantled.


  1. "Of this, only 10 per cent was to pay for the actual supply of water to households and businesses. An emphasis on conservation can only save money on this small portion of the expenditure. The other 90 per cent of expenditure is unaffected by the amount of water we use."

    How did you estimate this 90/10 split for fixed/marginal costs?

    I am not convinced that this ratio is accurate. Consider that additional capital investment required is proportional to demand. If Dublin grows without water conservation actions, then the additional demand from new residents may lead to a project to pipe water from the Shannon via a reservoir dug from a bog in the midlands - at a cost of billions.

    Alternatively, if the population reduces demand for water through efficient use, fixing leaks, rainwater harvesting etc. then such additional capital spend will not be needed.

    At a smaller level, new housing estates will require upgrades to water mains and new treatment facilities only if demand is not reduced.

    1. Ossian,

      I think we are making largely the same point. The marginal cost of water is very low. This has been the emphasis of the 'debate'. However, the average cost of water is not low because a lot of the costs are fixed or sunk. I would think that at best conservation can delay the necessary infrastructure works. I would count fixing leaks and adding rainwater harvesting facilities as capital spending. They would be substitutes to the 'Shannon' plan though can only have a finite impact.

    2. Hi Seamus

      The marginal cost of water supply and treatment is low until you pass a threshold and need a new water main or reservoir or treatment plant with associated staff and maintenance costs. Do we ignore these frequent tipping points?

      Many conservation actions have incredibly high ROI. A dripping tap will consume 20,000 litres per year. Fixing the leak is a capital investment of 20c for a washer. A typical roof collects 50,000 litres/year which may be used to flush toilets or water plants by the use of a water butt - not a high tech or a high cost item.

      The new charging scheme provides no incentive to fix a leaking cistern or tap, no penalty for those with a swimming pool or who wash the cars each week. When asked why the €100 rebate was called a "conservation grant", Minister Burton said that conservation would come "through education and fixing leaks". That does not make sense.

      I don't follow your view that efficiency cannot reduce future additional water capacity projects. There is wide variation across the EU in per capita consumption of water with many countries using a fraction of our average.

      Ireland is near the top of this chart with demand utterly unconstrained by any incentive.


    3. The Irish Water solution to our decaying infrastructure does not make it to good accountancy, let alone sound economics.

      For usage based metering to make sense the cost of metering infrastructure and the billing apparatus (perhaps 800m initially, who knows how much per year afterwards - 50m?) has to reduce usage through conservation by more than investing the billion plus euro in fixing leaky infrastructure (or water treatment or what have you). Given the low marginal cost of water and the much larger amount of water thought to be lost before the water even gets on property the idea that domestic water conservation is going to make a major impact on our problems is laughable. It's like spending more on welfare fraud than tax evasion in an attempt to help the budget balance.

      A point Seamus gets at but can not quite say is that water usage really should be paid for through general taxation, discretionary use is small and there seems little moral justification for charging different people a different proportion of their income to maintain the national water system.

      As for swimming pools I think it is fair to say that they are not a major problem in Ireland and for similar use cases it would be cheaper to legislate for charging people for a swimming pool license, apply a hosepipe ban (or whatever).

      Metering and usage charges are iniquitous and inefficient, and most of all the citizens of the country want it paid for through taxation.

  2. Hi Séamus

    A great article and it's terrible that these informed views don't get much publicity.

    I don't understand the interaction of the government's finances with those of Irish Water.

    Could you explain the figures? Is it that the annual losses/shortfall of Irish Water could be added to the national deficit thus pushing it over the 3% of GDP target? Or is it that the outstanding debt of Irish Water will be added to total government debt?


    Brendan Burgess

    1. Hi Brendan,

      It depends on whether Irish Water is classified as a state or semi-state enterprise. A state enterprise will be included in the government sector under Eurostat rules. A semi-state will be in the non-financial corporate sector.

      If Irish Water is in the government sector and spends more than it earns, the shortfall will be counted as part of the government deficit. It will be included when we are measured against the 3% of GDP limit and balanced-budget target.

      The amount depends on how much Irish Water receives and how much it spends. There is a €500 million subvention from government (which is included in the deficit) and around €500 million from charges (domestic and commercial). This is sufficient to cover operating expenses with a surplus but not enough to cover the necessary capital expenses. If Irish Water borrowed for capital expenditure and spent more than its revenue than this spending would be part of the government's deficit.

      Equally if Irish Water has debt (and it has been set up with around €4 billion of debt I think) then this would be added to the government debt if Irish Water is counted as part of the government sector. The Housing Finance Agency has about €4 billion of debt (the money it borrowed to fund LA mortgages) and that is included in the government debt - it was even counted twice at one stage!!

      There are figures in some PQs on the impact of Irish Water on the government deficit and debt. This depends on

      1) Irish Water being classed as a semi-state company outside the government sector.
      2) The amount of revenue and expenditure of Irish Water, and
      3) The amount of borrowings by Irish Water

      Irish Water funding capital expenditure by borrowing is a good thing. A necessary requirement is that it runs an operating surplus. It is not clear that this will be the case with "capped" charges.

      The ESB has financed its capital expenditure by borrowing. The yield on 5-year ESB bonds is currently around 1%.

      ESB FINANCE 12/2019 SERIES 3

      Though when the ESB issued the bonds back in 2012 the yield was around 4.5% so they are not gaining from the higher prices. Debt issued by an Irish semi-state now would benefit from the lower interest rates.

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  4. Hi Séamus

    Thanks for that explanation.

    As the reduced water charges will not be enough to cover expenditure, the deficit should be considered part of the Exchequer Deficit.

    If Irish Water borrows billions for capital expenditure, the taxpayer will be liable for it, so it should be part of our government debt.

    I don't like the way companies try to put stuff off balance sheet. Likewise, I don't think the state should do so either.

    The ESB is a profitable company where the income on its assets exceeds the costs including the costs of finance. I can see why that is excluded from the state's debt.

    But we will now have a loss making water utility whose infrastructure is more a liability than an asset because of the amount which needs to be spent on it.

    The ESB could be sold and would raise a lot of money. Irish Water is unsellable. So it should be treated as a state entity.

    1. Irish Water's operating deficit will still be recognised as a part of the government deficit. The c.€500 million subvention from the Exchequer to Irish Water will be counted in the deficit. To be a commerical semi-state requires that income from charges been more than this.

      The elimination of Irish Water's commercial rates liability means that the company has lower operating expenses and the Exchequer subvention has been reduced by that amount. I'm sure whether the rates reduction will be considered "state aid". It might be so would throw the >50% calculations up in the air again.

      If Irish Water is a commercial semi-state it's assets and liabilities will not be included in the government sector. They will be in the non-financial corporate sector. Like the ESB, Irish Water will make an operating profit (but only because of the government subvention).

      The reason for putting Irish Water on a commercial footing (even if that requires a state subsidy) is to get a more balanced, long-term approach to capital investment in water. In the past five years capital investment in water has been cut 60 per cent. As a semi-state Irish Water would not be subject to the deficit and debt rules that the government must adhere to.

      There is no real change on the operating deficit side - that still must be covered by the State. There is a change on the capital expenditure side. First, of course is that Irish Water must find people to lend to it, and then have the capacity to repay without requiring further subvention. If it can do that it will be able to stand outside the government sector; if it can't it will rightfully be counted as part of it.