Belfast Telegraph

A lifetime of neglect is at root of water crisis

Deferring water charges for a second year was wrong, and so,now finding a way to finance an incredibly capital-intensive industry is imperative, argues Chris Mellor

To make sense of the current sorry mess you need first to go back to the situation that confronted Northern Ireland Water when it was vested as a Government Owned Company (GOCO) in 2007, i.e inefficiency, poor customer service and environmental performance and inadequate systems and data quality relative to the rest of the UK water industry.

This was not the fault of the many excellent people who work for the company but mainly due to decades of underinvestment and the predecessor organisation effectively being run as part of the civil service with poor accountability and transparency. For example, the Water Service had crown immunity from prosecution for environmental pollution.

Regardless of ownership structure, the lessons from the water industry elsewhere are that to efficiently procure the massive capital investment necessary to bring about sustainable improved service performance and resilience in the infrastructure, requires a stable medium-term financial framework and incentives. It is hard to find anywhere an industry that is more capital intensive than water and waste water.

In addition, significant improvement in operational efficiency requires fundamental changes to business processes and the associated culture, which takes time to deliver and embed.

The original three-year plan for NIW from April 2007, a GOCO structure within an economic regulatory regime based on OFWAT - the water and sewerage economic regulator in England and Wales - and an objective of the company being self-financing within three years via the introduction of domestic water charges, took all of these factors into account and was soundly based.

Privatisation was actually considered as an option back in 05/06 but, I think rightly, rejected because of the risk premium and consequent loss of value to the public purse.

In my view it was first necessary to substantially de-risk the company, for example, from the threat of EU infraction proceedings, and allow the regulatory regime to establish and a predictable revenue stream to emerge. Then, a few years later it may have been possible to inject further momentum for improved efficiency via privatisation, or more likely in Northern Ireland, via some form of mutualisation similar to that in Scotland.

In the interim, NIW was set demanding targets for improved efficiency and service, policed by the regulators, recognising that the 20-year gap with the rest of the UK was never going to be closed in three years.

In the event, vesting in 2007 coincided with devolution and Stormont ministers decided to defer the introduction of domestic water charges and it has remained deferred ever since.

I think it was right to defer in the first year because it was clearly unpopular with many voters and needed political legitimacy if it stood a chance of working.

The mistake in my view was to duck the decision in year two.

The consequence now is that Northern Ireland faces severe budget cuts which can only make the medium-term situation worse.

So the prospects for water and waste water in Northern Ireland are not good. 'No votes in Sewage' as they always used to say back in England in the 1980s.

Meanwhile NI Water is neither 'fish nor fowl'. Legally it is a GOCO, but for all practical purposes it is an non-departmental public body which means the Northern Ireland Government controls the cheque book and has the capacity to interfere, as it has indeed demonstrated a willingness to do in the last 12 months.

The 'arms length body' arguments are nonsense.

The directors of the GOCO are therefore in an invidious position, having on the one hand all the responsibilities which flow from water legislation, the licence and the Companies Acts, together with future medium-term service and efficiency targets set by the statutory Utility Regulator, but on the other hand, without all the means to deliver in terms of the certainty of medium-term finance and freedom to manage the company.

Without going over the arguments for dismissing my three colleagues and I from the Board in March 2010, where naturally I have a different view to Minister Murphy, the fact is the recent Cost and Performance Report from the Utility Regulator shows NIW performed well against the targets it was set over the first three years.

My sources tell me things have gone severely downhill since last March. The recent events were perhaps therefore not surprising.

A case perhaps of reaping what you sow.

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