Belfast Telegraph

NIW has liquid assets but route to profit proves difficult to chart

By John Simpson

Northern Ireland Water (NIW) is trading profitably. The organisation is meeting the financial targets and most of the performance targets set by the Utility Regulator and the Department for Regional Development (DRD).

The annual report, released today, is complicated. As a publicly owned utility, the reporting framework is somewhat tortuous. It demonstrates that a clear policy framework to be agreed by the Executive is overdue. The annual report uses three different accounting concepts to measure profitability and performance.

The easy questions are: is NIW paying its way? Is efficiency in NIW improving? Is NIW now able to cope with, or avoid, unacceptable flooding?

For policy purposes, there are other necessary questions.

How much is the subsidy to domestic water users costing? How is the continuing large capital investment programme being financed?

Even assessing profitability and performance is not straightforward.

Three different concepts of profitability can be found in the report.

First, using the concepts used in most commercial companies (under the GAAP conventions) NIW made a healthy post-tax profit of £40.4m, compared to £13.7m last year. Second, since NIW is a very capital intensive sector, if trading results are calculated using current cost accounting (allowing that current capital costs are much higher than historic) the result is an overall loss of £36.3m calculated on the 'appointed business.'

The third profit concept emerges in the Statutory Accounts which are shaped by the requirements for NDPBs (non-departmental public bodies).

This version of the accounts treats customer investment requirements, capital spending and depreciation on different bases. Post-tax profit is shown as £114.6m compared to £80.5m last year.

Whatever the definition of 'profit' the different treatments all end with one common deduction: dividends to the government shareholder (a legal requirement introduced at the time when it was intended to run NIW wholly on commercial lines) were just below £26m.

On this evidence, within the financial constraints, NIW is paying its way. NIW is also improving its efficiency.

The operating cost-efficiency gap with the most efficient comparable company in England and Wales was 49% in 2007-8: in 2010-11 the gap had been reduced to 34%.

If, or when, Northern Ireland adjusts by separating some of the water charges out of domestic rates, the cost of £408 per annum per household is closer to the English average of £379 and well below the £517 of the highest English region, South-West Water.

Taxpayers are subsidising domestic water users, through DRD, with a transfer last year of £269m.

In addition, DRD arranged the issue of a further £70m loan note to NIW

The capital investment programme allowed for NIW is well below the levels of the last decade. In 2010-11, capital spending of £183m was incurred. In the current year only £148m is scheduled followed by an increase to £180m in 2014-15.

This programme is well below what might be planned if NIW was a stand-alone entity. There is no claim that the replacement and enhancement of service levels will be adequate to ensure that another bad winter would have few ill effects.

Whilst the fixed assets of NIW, on an historic basis, are included in the balance sheet at £1,823m (nearly £2bn), there is a useful reminder of the replacement capital value in an estimate that, on a current cost basis, today's figure would be £7,892m (or nearly £8bn) with equivalent annual capital costs of £184m. The annual report of NIW is a crude reminder of the complex operating rules and financial formulae that apply. The plea for a coherent standalone organisation, able to borrow for its own purposes and obliged to operate to commercial criteria, gets stronger year by year.

The accounting mechanisms are complex and difficult to interpret.

The commercial implications for a trading public utility are not easily understood.

Is the Minister, Danny Kennedy, going to be willing to relieve the confusion and set up a more straightforward regime?