NI Water needs a long-term view despite good results
The annual report by Northern Ireland Water tells a reassuring story. The overall water and sewage treatment businesses in Northern Ireland have annual running costs of nearly £320m and, after paying a dividend of £25m to the shareholder (which happens to be the Department for Infrastructure), is able to set aside £54m from pre-tax profits to contribute to the capital investment programme.
NI Water continues to trade profitably but is heavily dependent on funding provided by Government in substitution for what might otherwise be raised by a system of water and sewage treatment charges on every household.
Through the hybrid business delivery system, Government, taking funds that might otherwise be available for other public services, contributes £283m in lieu of domestic customer charges.
Average charges would be just over £400 per household each year.
Business customers already pay a direct charge. Last year, companies paid £69m in service charges.
In presentation, the profit and loss accounts of NI Water offer a healthy picture. The annual report from NI Water calls for more careful reading than a conventional reference to the bottom line, pre-tax profits.
The decision-making for the capital investment programme for NI Water is more complicated. The annual capital needs to maintain and improve the systems are large and arguably still growing.
In the recent financial year ending in March 2016, gross capital spending was £137m alongside a depreciation provision of £68m, which points to net additional assets of nearly £70m.
That addition to the value of capital assets needs to be seen in the context not only of a modest increase of about 2.5% in the overall value of capital assets, but against an assessed wider need for a larger programme.
NI Water has been appraised by the Utility Regulator and 'awarded' a significant and larger annual capital budget. However, the Government, as shareholder, does not guarantee the funding approved by the Regulator.
NI Water is caught in a regulatory process which is not usually thought to be too generous, and a Government financial system which has its own reasons to constrain spending on the public sector capital budget.
The report by NI Water speaks cautiously about the need for improved capital funding.
The incoming new chairman of NI Water, Dr Len O'Hagan, quietly comments that "the board will continue to work with the Department for Infrastructure to explore ways to access further sources of funding and to consider how best to refinance current borrowings of almost £990m in support of this".
There is an acknowledged and urgent need to invest more in areas where services are coming under strain.
Needs for the Belfast region, whether in serious drainage questions or supplementary demands for services are, currently, over £650m.
These capital programme needs will become more obvious either in times of exceptional flooding with heavy rainfall or in terms of a denial of adequate water and sewerage services in support of a growing economy.
The annual report documents a range of improvements made by NI Water that contribute to healthier services, environmental impact improvements and support for a developing economy.
However, whilst the board of NI Water has positive achievements to report, there is little doubt that the current unique NI arrangements do not ensure an adequate investment programme to meet long-term needs, and do not build in a commercial decision-making system to underpin an ability to raise funds, outside direct Stormont subventions, to operate a viable business.
The challenge is to restructure the current hybrid model and make NI Water a separate commercial entity.
Would the Northern Ireland Executive be prepared to offset part of the regional rate and to replace it with an hypothecated, separate additional item charged through the administration of the rating system?
Even then, local customers would still be better off than their counterparts in England.
The current funding model leads to compromises and an unsustainable search to ensure quality services.