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Why political crisis isn't just a drop in ocean for NI Water

By John Simpson

Published 29/09/2015

DRD took a £25m dividend from NI Water
DRD took a £25m dividend from NI Water

Northern Ireland Water is trading successfully, making a satisfactory profit and earning an annual dividend of £25m for its present shareholder, the Department for Regional Development (DRD).

Families in Northern Ireland do not pay directly for water services. However, the Stormont Government has £280m taken from the budget for health, education and other services to offset the absence of water charges.

The NI Water annual report for 2014-15 includes two sets of accounts as both a go-co (government-owned company) and a non-departmental public body (NDPB). The report describes the organisation as working a 'hybrid-delivery model' which would not be regarded as being the 'most efficient method for use by a provider of infrastructure investment'.

For example, the regulatory accounts show annual turnover last year at £370m earning a profit before taxation of £62m. The statutory accounts, using slightly different (and equally valid conceptual measurements) report annual turnover of £426m and profit before tax of £131m.

Conventional readers of annual accounts, first, need some explanation of why turnover differs by £56m and, second, why the profit definition allows one figure to be nearly double the other. The largest difference in these presentations lies in the accounting treatment of three items.

First, when new customers connect to the water systems, the cost of the new connection is met by the customer and the embedded asset is transferred to NI Water. For the statutory accounts this is treated as added income, increasing turnover, and added £55m in 2014-15. Second, the regulatory accounts do not include on the balance sheet the impact of the large and continuing public private partnership (PPP) contracts.

Ironically, the performance of NI Water can be described as having either an increase or decrease in turnover and, equally valid, either a large fall in profits in 2014-15 or a modest profits increase. If NI Water was a privately owned company, the observer would probably take the 'bottom line' of the regulatory accounts as the main commercial indicator: turnover just about stable and profits up by 11%.

The annual report offers a range of insights into the performance of NI Water.

In a comparison of the cost of water services to domestic customers, NI Water estimates that the average bill, after making adjustment for the existing charges for non-domestic customers, in 2015-16 would be £411. On today's costs, an average domestic customer charge would be 7% higher than the average in England and Wales. That difference would have been 17% higher five years ago: as efficiency in NI Water improves, the gap has been narrowing.

NI Water and the Regulator would both want to emphasise the successful cost-cutting achievements of NI Water in recent years as it makes the efficiency improvements targeted through the price control reviews. The efficiency gap, compared to a notional best English area, has reduced from an extra 49% on costs in Northern Ireland in 2007-08 to 13% more recently. This gap is the continuing challenge for the organisation.

The continuing crisis in the finances of the NI Executive also looms large for NI Water. The annual report draws attention to the squeeze on current funding which (the report adds) would require further reductions in operating costs 'which (in turn) would almost certainly have resulted in reductions in service provision to business and domestic customers alike.'

The organisation also reports a fear of infraction proceedings from the regulatory bodies if funding for capital enhancement schemes does not become available and deficiencies in water supply and waste water treatment emerge. NI Water is inevitably a large client of the Executive's capital investment programme.

In a review of the performance of NI Water, the evidence points to the merits of an organisational restructuring, opening up access to commercial funding. NI Water finances could be reshaped to make it better fitted for purpose. The present artificial stand-off on water charges by the Executive is making good management difficult.

Company report: White Mountain Quarries Ltd

White Mountain Quarries, based in Belfast, is one of the larger wholly owned subsidiaries of Lagan Group Holdings, chaired by Kevin Lagan, and registered in the Isle of Man.

This company is a market leader in contracting to provide quarry materials, surfacing and highway maintenance with civil engineering services both in Northern Ireland and in other European markets.  It is described as representing the quarry materials and contracting division of its parent company, Lagan Group Holdings.

Just last week, the company revealed that it has gained a £13m contract as part of the redevelopment project at Luton Airport.

The results in 2014 are regarded as satisfactory despite the highly competitive nature of the market place. This is attributed to the implementation of a successful growth strategy combined with improved buying, inventory management and overhead cost savings. Turnover in 2014 at nearly £62m was down 16% on the previous year and this impacted on operating profits which, were 5% lower.

Performance in the business sector of this company has recently been affected by a range of factors, including public sector spending reviews and variations in commodity prices. In the current year, trading is described as very challenging although early results are seen as satisfactory and during the year good progress is expected.

Post-tax profits are retained within the company. As a result the balance sheet value of shareholders funds have increased in each recent year. 

The average number of employees in this company increased in 2014 to 196, an increase from 170 in 2013.

Belfast Telegraph

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