What is the EU test on Irish Water about?

The EU Commission has signalled concern about the impact on Ireland's budget if Irish Water does not meet the test to allow it to remain off the state balance sheet.

Ministers have expressed confidence that we can meet the test, but privately official sources say that this cannot be taken for granted.

So what is this test about? The commission's statistical arm, Eurostat, must decide whether state-owned companies should be judged to be independent from government.

To meet this test, they must cover more than half their operating costs from income they earn from customers. The flip side is that less than half of the costs must come from the state’s government.

If a company passes the test, then much of the state funds paid over to support its investments and operations are not counted when the EU is calculating the state deficit each year and company borrowings can stay off the state’s debts.

This is important for Ireland because if Irish Water passes the test, the money the State is paying the company next year to support its operations would not count towards calculations the annual budget deficit.

Ireland is aiming for a deficit of 2.7 per cent of GDP next year. If we failed the test, Government officials calculate that more than €500 million would have to be added to the deficit related to planned payments to Irish Water.

If nothing else, changes this would increase the deficit to over 2.9 per cent, uncomfortably close to the 3 per cent ceiling we must meet under EU rules.

On the figures put forward by the Government, which show state funding paying for less than 45 per cent of Irish Water’s costs, the test should be met.

But there are two risks. The first would be if Eurostat took issue with the figures and the financial forecasts. One key issue here is whether it accepts that the €100 given back to households is completely separate from Irish Water - the Government needs the gross sum paid by households to the company to all count as income if the figures are to add up.

The second risk is in the judgement Eurostat will make about whether Irish Water can genuinely stand alone as independent entity in the long term. There is some leeway in the published rules for this kind of assessment, particularly for newly established company.

Failing the test would come as a blow to Ireland. It would upset the 2015 budget figures and mean Irish Water’s borrowings would go on to the national debt. In turn this would undermine the strategy of letting the company borrow to invest in the network.

The decision will be made next April.

Were Irish Water to fail the test, the short-term consequences would depend on where the budget figures were, compared to target.

The worst case scenario would be failing the test and then coming under pressure to cut or tax more to meet the deficit target.

With a good chance of meeting the test and the public finances ahead of target, this looks unlikely. But a lot is still riding on the Eurostat decision.