Irish Water will still need drip-drip of State funding

The original concept for Irish Water was as a public utility which would eventually have the financial strength to borrow money from the markets, thus removing much of the burden for investment in the water network from the general exchequer.

At best, with its earnings ability now limited, Irish Water will now emerge as a kind of hybrid creature, depending on a mix of exchequer funding, charges from homes and businesses and some borrowing to fund its investment.

It starts with one big financial handicap. It is spending up to €500 million installing water meters, but with charges now effectively at a flat rate for a prolonged period, it has no way of getting a return on this investment. Households who use less will pay less - so there may be some small benefit in saving water. But higher water use will not mean higher charges.

And as the original PwC report on water services pointed out, water meters, to remain effective, need to be maintained, recalibrated and eventually replaced.

At a basic level, the lower level of charges means that more of the investment will be funded from general taxation and less via direct levies on consumers and businesses.

As Irish Water’s borrowing power in future will also depend on its income and earnings, the idea of turning the company into a stand-alone utility - like the ESB - looks remote. Irish Water will need the drip- drip of direct exchequer subvention to support its operations and investments for the foreseeable future.

In the short term, work still has to be done.

On the face of it, the figures suggest that the company may squeeze through the so-called market corporation test – used to determine whether it is an independent entity and that the money spent on it stays off the State balance sheet.

The rules here are open to some interpretation, so no-one can say for sure whether Irish Water will pass the test, likely to be undertaken next Spring. If it does not, the Government will face a problem with its 2015 budget figures, as most of the cash spent on Irish Water will move back into the exchequer figures.

The basic rule for the test is that the company gets more from charges than from the government. This will just about be the case in 2015 and 2016 - in the later year the sums are tight with €514 million in expected revenue from charges and €479 million from the Government’s subvention.

There may be some leeway granted in the figures for EU purposes. But the level of income is well below the cost of providing water services to houses and is also much less than assumed in the original report by PwC on how Irish Water might develop enough earnings to eventually emerge as a stand-alone company.

There are other questions, too. Despite the cut in charges, the expected revenue from household charges has only been cut from €300 million to €270 million. It remains to be seen if this is achievable.

If bad debts build up due to non payment by households, then the finances could come under pressure. Remarkably the historical compliance rate for non domestic charges has been just over 50 per cent. If this is repeated in the domestic sector, it will be bad news for Irish Water and for the Government’s attempt to keep it all off balance sheet in the years ahead.

More direct cost is also falling back on the exchequer.

Giving €100 back to each household will cost around €130 million next year - twice what was budgeted for originally. The net amount to be collected is now just €140 million, a fairly trivial amount in the overall budget sums. Part of the rationale of water charges – to move some of the burden of taxation away from income – will not be achieved in any meaningful way.

It now remains to be seen how much Irish Water can afford to invest. The original plan had been to invest €550 million per annum or more, to start addressing the historical under-investment which meant that over 40 per cent of water leaks away.

With such a low charging structure now in place, the financial rationale for establishing Irish Water remains in question – we will now have to see whether the promised operational benefits of having one organisation in charge can yield some benefit.