Department of Housing, Planning, Community and Local Government, and Department of Finance

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Aer Arann mode, is it?

I see that the Deputy for Galway West is here.

At last week's meeting the committee heard from Irish Water and the Commission for Energy Regulation and considered funding operations and the issues of maintenance and investment. In this session we will continue our consideration of the matter, focusing on the rural water funding programme and funding other than that related to Irish Water. I welcome the representatives of the Department of Housing, Planning, Community and Local Government, Ms Maria Graham, Mr. Colm Lavery and Mr. Patrick O'Sullivan. I invite Ms Graham to make her presentation.

Ms Maria Graham

Thank you, Chairman. I appreciate the opportunity to make a presentation from the Department's perspective on aspects of the funding of water services. I am accompanied by Mr. Colm Lavery and Mr. Patrick O'Sullivan, principal officers in the water division of the Department.

My understanding is that at the last meeting the committee had specific questions about the overall funding position prior to the establishment of Irish Water. I will seek to address them, as well as providing some perspectives on the overall funding of the sector to assist the committee in its consideration of the expert commission's report. As we have provided a detailed note with historical information on capital and operational costs, as well as forecasts to 2021, which I think all members of the committee have received, I will focus in this presentation on some of the key trends and relevant issues.

Prior to 2014, the Department managed two capital investment programmes - the multi-annual water services investment programme, WSIP, and the rural water programme, RWP.

Over the eight-year period 2006-13, just under €3.5 billion in Exchequer resources was invested in water under these programmes. The WSIP was focused on public water services capital projects valued over €1 million, while the RWP covered investment in small public water and sewerage schemes valued at under €1 million, as well as the recoupment to local authorities of grants paid to the non-public water sector, mainly the group water schemes. The Exchequer grants for public water services projects generally covered about 75% of the overall costs. The balance was funded by local authorities from revenue from commercial water charges, capital contributions from major users, the water component of development levies and borrowings.

Under these arrangements, the overall strategic direction of the WSIP and the projects outlined therein were selected by the Department following prioritisation by local authorities. The advancement of projects through key stages required departmental approval and grant approval was provided on a project-by-project basis, with approvals setting the split between the Exchequer and local authority funding. The capital expenditure on public water services in 2013, including the estimated local authority contribution, was approximately €319 million. At the end of 2013 local authorities had an outstanding debt in regard to borrowing for water and wastewater projects of approximately €600 million.

Prior to 2014 local authorities were wholly responsible for operational expenditure decisions and operational costs were met from non-domestic charges and local authority own resources. The most important of these own resources was the general purpose grant provided from the local government fund, LGF. While the general purpose grant had reflected the commitment by the State to provide funding to local authorities in respect of domestic water services following the abolition of water charges in 1997, local authorities had discretion as to how they applied the general purpose grant across expenditure lines. Based on local authorities' annual financial statements, and adjusting for services not transferred to Irish Water, the expenditure by local authorities on the operation of public water and wastewater services was about €720 million in 2013 and would have risen to €732 million in 2014, allowing for network growth and adjusting for the increases in commercial rates charges, which happened in 2014.

The capital funding for Irish Water in 2014, which was provided as a capital contribution from the Minister for Finance, was set at €239 million, which would have been the same as under the previous Exchequer funding arrangements of the WSIP and RWP had they remained in place. Irish Water utilised this funding and borrowings to finance a capital programme of €740 million, including metering and establishment costs in 2014. Overall, Irish Water operational costs in 2014, including financing costs, were €778 million. This covered functions transferred from local authorities, as well as new Irish Water activities. This expenditure was financed from non-domestic revenue, borrowings and operational subvention. The funding from the local government fund to Irish Water was based on an estimate of the net funding which would have been provided to local authorities towards water services from general purpose grants had the function remained with them, that is, operational costs less revenue from non-domestic charges with some adjustment for expected operational savings and the cost of financing the local authority outstanding debt as this did not transfer to Irish Water. On this basis, the subvention to Irish Water in 2014 was €439 million, approximately €47 million was recouped to local authorities for their water financing costs and the general purpose grant to local authorities was reduced accordingly.

Funding arrangements from 2015 onwards have reflected the commencement of economic regulation and domestic water charges. Capital funding is provided by a capital contribution from the Minister for Finance with the balance of capital expenditure facilitated through borrowing and customer revenue. A total of €406 million in capital funding was provided in 2015 and 2016. An amount of €270 million is scheduled for 2017 and similar amounts would be expected each year to 2020 under the Irish Water business plan. The business plan did not envisage the requirement for a contribution in 2021 on the basis that capital expenditure in that year would be met wholly by borrowing and customer revenue.

Turning to the operational side, operational subvention to Irish Water is designed to cover the costs of providing the free allowance for children, capping water charges at €160 or €260 per annum depending on household size and capping the unit charge at €3.70 for each 1,000 litres of water supplied and wastewater removed. Funding is also provided for working capital, which reflects the time lag between charging and receipt of revenue. On this basis, the Irish Water business plan generally reflects an average annual subvention of €467 million and average working capital of €32 million between 2017 and 2021. In 2017, €475 million is to be provided in line with the business plan and this is being increased by €125 million to cover the suspension of water charges provided for in the Water Services (Amendment) Act 2016. If water charging were to remain suspended in 2017 for domestic users, a further €114 million would be required, bringing the total additional funding requirement in 2017 above the business plan projection to €239 million.

I want to turn to comparisons between the operational expenditure under both models. The Irish Water business plan forecasts efficiencies in operational expenditure of €1.1 billion over the period to 2021, and these will be subject to scrutiny and challenge by the CER. As a consequence, the operational costs, excluding financing costs, will reduce from €769 million in 2014 to €614 million in 2021 at 2015 prices. By comparison, if the functions had been retained by local authorities, and allowing for the upward pressure in costs from new facilities and similarly excluding financing and commercial rates costs, it is estimated that the equivalent local authority figure in 2021 would have been of the order of €695 million.

A couple of points need to be borne in mind when comparing operational costs under both models. First, the PwC independent assessment in 2011, based on engagement with local authorities, recognised that operational expenditure by local authorities was artificially constrained for budgetary reasons. This is supported by EPA analysis which indicates that while 34% of incidents associated with licensed wastewater discharges in 2012 were for capacity issues, including the need for infrastructural improvements, 38% of incidents were due to operation and maintenance issues. PwC estimated that approximately €60 million was required to address this operational expenditure, OPEX, backlog. Second, there are costs reflected in the Irish Water model which would not have arisen for local authorities. These include some costs related to the set-up, such as developing new systems and so on, which are treated as operational expenditure under accounting rules but are treated as capital expenditure by the CER. It also includes a range of activities relating to new functions, for example, customer billing and running new asset management systems, as well as new programmes such as the first-fix programme. Many of these costs would be characterised as “spend to save” programmes, that is, expenditure now to deliver future efficiencies. Third, a much higher level of performance is expected from Irish Water operations across a range of metrics, including leakage, customer service, environmental compliance and reduction in boil water notices, as Irish Water avails of economies of scale and deploys new asset management systems and standard operational approaches. A performance assessment framework is being put in place by the CER in this regard.

Considerable capital investment was made by local authorities over the period from 2000 to 2013, particularly to build new wastewater treatment capacity. Exchequer capital spending on public water services peaked at €432 million in 2009 but declined to €319 million by 2013. By comparison, the average core capital spending under the Irish Water business plan is €590 million.

However, it is not only a question of the amount of funding required, it is also a matter of ensuring that the funding model supports the most efficient delivery of services, the right investment decisions and the appropriate balance between capital investment and ongoing maintenance. Aside from the limitations on strategic planning and economies of scale presented by a dispersed model based on 34 authorities rather than a single regulated utility, the previous funding model faced particular challenges from: the absence of a national asset management system to inform prioritisation of capital maintenance and investment; funding lines which tended to incentivise capital investment over capital maintenance; a lack of certainty on overall Exchequer funding at a programme and project level over an extended period in light of the annual Exchequer budgetary process; and delays in project implementation due to misalignment in the availability of funding from the two main sources, namely, the Exchequer and local authorities.

From this experience, conclusions can be drawn on the key features of an efficient funding model for the future, particularly if such a model is to support the correct investment decisions and the most efficient operations in respect of water services. These would include: that the model should ideally provide a level of certainty of funding over a multi-annual period to ensure appropriate strategic planning and timely delivery; decisions on operations and capital investment should be integrated and made by a single authority, and the sources of funding available should not skew this decision-making process; costs and outputs should be benchmarked against best practice internationally; and the funding model is likely to require an element of cost recovery and promotion of conservation to ensure compliance with the water framework directive. On the latter point, the Minister has recently received further correspondence from the European Commission which, inter alia, points to the need for the recovery of costs to ensure that the serious maintenance and investment needs of the public water and wastewater system can be met. I am aware that the question of compliance with the water framework directive will be dealt with at a future meeting of this committee, so I will focus on the other features of the funding model today.

From an organisational perspective, the single public water utility, with the new asset management approaches developed by Irish Water, can address the key issues relating to appropriate project selection, achieving economies of scale and securing greater efficiency in operations. As described by the Commission for Energy Regulation, CER, and Irish Water, the regulated approach ensures that the appropriate funding requirement over a reasonable time cycle is determined in an open and transparent manner, delivering efficiencies alongside service improvements. Generally, for a regulated water utility, when the funding requirement is settled, the revenue can be raised through charges and borrowing, with some State support. This gives the utility the greater certainty regarding its investment plans and operational decisions. If, however, the model is reliant mainly on State support to cover this revenue requirement rather than charges, other options need to be examined to provide a level of assurance that the business plan of Irish Water can, following regulatory review, be delivered.

It has to be acknowledged that funding what the expert commission termed the "regulatory settlement" through general taxation inevitably introduces risks of funding shortfalls or funding uncertainty because water services funding would have to be considered as part of the normal budgetary process. Ring-fenced funding would provide greater certainty and underpin delivery of the business plan but does present challenges for the normal management of the public finances. There are examples, such as the local property tax or the plastic bag levy, where revenues raised are directed to particular areas. It is fair to say that the greater the link between the revenue stream and its purpose, the more certainty can be provided on the funding environment for the utility and the greater the support for long-term planning, generation of efficiencies and service improvements.

There are also international examples of regulated utilities where the Government provides some guidance to the utility and the regulator as to the likely funding parameters over a multi-annual process. The recent decision on the 2017-2018 revenue control period by the CER had some component of this approach. The business plan for Irish Water to 2021, considered by Government, set out a perspective on the likely subvention and capital requirements over the period. As such, the Department, in its engagement with Irish Water and the CER on the 2017-18 revenue control, indicated that the business plan projections represented the outer limits of State support. In the first revenue control period, a ministerial policy direction was issued under section 42 of the Water Services (No. 2) Act 2013 and this set some conditions for State funding.

The overall funding model also needs to support policy to address deficiencies in the non-public water sector. In particular, significant capital funding is provided by the Department to the group water sector under the rural water multi-annual programme. To ensure parity of treatment between the public water system and the group water sector, a system of operational subsidies was introduced for the group water sector from 1997. These subsidies are paid to the schemes by local authorities, which are reimbursed in full for this expenditure from the local government fund. The subsidies have been adjusted, following consultation with the National Federation of Group Water Schemes, in light of the suspension of domestic water charges. Approximately €50 million is required on an annual basis to fund the non-public water services.

In summary, a stable multi-annual funding approach would underpin improvements in service and compliance by Irish Water. In line with the Irish Water business plan, which is prepared on the basis of achieving such outcomes, an annual amount of approximately €1.4 billion would be required by 2021 in order to fund the capital expenditure and operational expenditure cost of water and wastewater services not met by the non-domestic sector. Ideally, the manner in which this is funded needs to ensure that best value for money is achieved from the existing asset base and that the correct operational and investment decisions are made to deliver the best outcomes for customers. More detailed financial information is set out in the note we have provided for the committee and I am, of course, happy to answer any questions members may wish to pose.

I thank Ms Graham. I welcome Mr. John McCarthy, Mr. David Hegarty and Mr. Kieran Culhane from the Department of Finance and I invite Mr. McCarthy to make his presentation.

Mr. John McCarthy

Mr. Hegarty is from the economic side of the Department and Mr. Culhane is with our statistical unit. I circulated a very short presentation to members. The first slide sets out the background, outlining the rationale for trying to classify Irish Water as off-balance sheet. As members are familiar with this, I do not need to go into it in any great detail. The next slide shows that in July 2015 EUROSTAT took the decision that, for various reasons - the market test, the capping of fees and so forth - Irish Water should be classified within the general Government sector.

It is fair to say that it is unlikely, at least in the short term, that there would be any change to that classification. In this sense, the role of the Department of Finance is twofold: we are responsible for fiscal planning over the short and medium terms - and, to an extent, the long term also - and for taxation policy. From a fiscal planning perspective, the revenue and receipts from Irish Water are included in our latest medium term fiscal projections which were published alongside budget 2017. What would be the fiscal impact should a decision be made to abolish domestic water charges? I have set out our projections on slide 5 for the general Government balance over the period 2017-2021. The actual general Government balance includes approximately 0.1% of gross domestic product, GDP, per annum in the form of additional revenue from domestic tariffs. Members can see what the general Government balance would be if these domestic charges were abolished. The deficit in 2017 and 2018 would be zero percentage points worse and the surplus from 2020 and 2021 would be approximately zero percentage points of GDP lower than we have assumed.

I refer to what this means in respect of the fiscal rules, which members are aware are legally binding. We had a referendum on this in 2012 and we have our European requirements also. We corrected the excessive deficit and it was brought below 3% of gross domestic product, GDP, in 2015. We moved out of the so-called corrective arm of the Stability and Growth Pact and are now in the so-called preventive arm, which operates on the principle that prevention is better than cure.

The preventive arm sets targets for both the general government deficit and for general government debt. What does this require? It is Government policy that we eliminate the structural deficit by 2018. That is the deficit that would apply if one removed cyclical factors on both the revenue and expenditure sides. On the basis of the projections in the budget, we will just about achieve that by 2018. We are also required to reduce the general government debt-to-GDP ratio at a sufficient pace, namely to reduce the difference between the actual debt and 60% by five percentage points per annum.

The Irish Water business plan was agreed in October 2015 by the Government and it sets out its expenditure over the period. It, of course, requires a revenue stream to fund this. If water charges were to be abolished, a key question from the Department's perspective is whether taxation would be the appropriate mechanism to actually fund a public utility. We do not fund electricity or gas through taxation, even though they are public utilities. There is also the issue of the user pays principle. From an economic perspective - I must stress I am not going into policy which is a matter for the Government - there would be reservations about this.

What does economics tell us about the taxation impact? If water was to be funded from general taxation, we can look at Adam Smith's kinds of taxation. There will be a pool of taxation which might have to be increased to fund this particular revenue stream. Which particular tax head would be targeted? We all know taxes are distortionary and have an impact on economic activity. The insights of the OECD, the Organisation for Economic Co-operation and Development, are relevant in this perspective. The OECD sets out various scenarios on which taxes are the most damaging to an economy in terms of labour market impact, competitiveness and so forth. Equity would be another consideration that would need to be borne in mind. The incidence of the tax also needs to be considered. Who actually pays would be crucial. The final canon is that the overall administrative cost of tax should be low relative to the yield. It does not make sense to introduce a tax in which administrative costs are high if the yield is relatively low.

On the ring-fencing of tax revenue for particular expenditure, what is involved is tax revenue that amounts to 0.1% of GDP. There are questions as to whether it would be appropriate to put in place a new and potentially expensive tax infrastructure when the yield is potentially relatively low. I use the word "relatively" importantly here. With respect to hypothecation, in the past there has been a long-standing principle that expenditure is funded from the general tax pool. Hypothecation would essentially mean that the hands of Government are tied. In some respect, it would not be able to remove or reallocate revenue from a particular area as new priorities develop.

I thank Mr. John McCarthy for his presentation. I call on Deputy Jan O'Sullivan.

I thank Ms Maria Graham and Mr. John McCarthy for their presentations. I was not aware there has been further correspondence to the Minister from the European Commission on the Water Framework Directive and the issue of cost recovery. Mr. John McCarthy also referred to the issue of the user pays principle. These were the two issues raised in the letter from the European Commission to the chair of the expert commission. It stated that when we signed up to the wastewater directive in 2010, effectively we were covered by the directive and did not have any kind of exemption.

I accept we will meet the Commission and I do not want to stray into that area. However, as it has been raised, the committee should be given whatever information there is on this correspondence to the Minister. Is there information on whether the decisions the committee will make will have cost implications in terms of possible EU fines? Can this information be given to the committee so we can consider it? When we have our meeting with the European Commission, it will be less than a month away from the date on which we have to make our final decisions. Any information that could be given to us in this regard is information we require to make our recommendations.

I am not an expert on fiscal matters but Mr. John McCarthy said if funding is ring-fenced, one is imposing an extra cost through collection. Will he elaborate on that?

On the Deputy's first question on correspondence from the Commission, that was the letter I referred to in our closed session. We have just received it and will be making it available to everyone, either this evening or tomorrow morning.

I would be interested if the Department has further information.

Ms Maria Graham

The letter arrived on 12 January and we brought it to the committee’s attention. As the Chairman said, it will be made available to members. It is a short letter which follows on from the noting that the European Commission made in its submission to the expert commission. It pointed out some issues around the directive being a flexible instrument allowing member states a margin of appreciation but it also referred to cost recovery and the polluter pays principle. It stated that it is therefore important that the ongoing decision-making process leads to sound and lasting results which must bring Ireland back into compliance with the directive. It gave some views from the Commission in terms of how a fair balance might be struck. I highlighted one of them in the presentation, which was the recovery of costs and how we must ensure that Irish Water meets the infrastructure needs. The letter also talked about how consumption of water might be set at a normal use, a reasonable level and charging for excess use. It went into the components of the expert commission recommendation in that regard. That is what will be addressed at the future meeting.

The issue around investment in wastewater infrastructure is relevant. The Commission, in terms of compliance with the water framework directive and charging, has a number of open infringements with us with urban wastewater compliance. Much of the €5.5 billion in the Irish Water business plan is to address that infringement and bring us into compliance in that respect.

Similarly, regarding drinking water, we have a pilot infringement which requires investment in drinking water by both Irish Water and the rural water sector. When we talk about compliance with the directive, I take this to mean a holistic compliance. I understand that the letter will be circulated by the committee.

Is Deputy O'Sullivan okay with that?

I have one further question about this. Is there any indication that there would be financial implications to not having any kind of charge for people who use water excessively?

Ms Maria Graham

Regarding compliance with the directive, ultimately the onus of proof is on the State. If the Commission feels we are not in compliance, it could go to the European Court of Justice and then fines could be imposed. Fines under this system involve both an upfront fine and daily fines. The letter only refers to compliance, but the consequence of non-compliance with the directive is settled by the European Court of Justice.

I think Mr. McCarthy was asked a second question.

Mr. John McCarthy

The point I was trying to make about hypothecation is that this ring-fencing of revenue for a particular expenditure purpose would introduce rigidities into fiscal planning, which might affect resource allocation. The point I was trying to make is that flexibility is needed from time to time as different priorities emerge. The Government would need to be able to reallocate resources to different priority areas, as is done at present. Health is an example. We must increase spending in that area at the moment, but this capacity would be reduced or curtailed if particular revenues were curtailed into a particular area. A more general principle is the question why we do not introduce ring-fencing for many different areas in which there would then be absolutely no flexibility whatsoever for Government to reprioritise as different priorities emerge.

I think Deputy Ó Broin was second to contribute.

I thank the witnesses for their presentations.

Was the Deputy second?

I am happy to cede the floor if it is an issue. I do not mind.

The Deputy may go ahead.

I will first make a general comment. It is important for the committee to be clear that there are two separate funding issues in this discussion. The first is water charges as a contribution to the operational costs of the utility and the impact the abolition of water charges would have on the Government's deficit and on meeting the fiscal targets. A separate issue is water charges as part of a business model designed to take the utility off-balance sheet to facilitate it to borrow in its own right and not to negatively impact the Government's debt-to-GDP ratio. These are two separate matters that often get confused in the public debate.

My first questions are to the Department of housing. Ms Graham mentioned the figure of €239 million as being the overall cost of the abolition of water charges, but that is obviously the gross figure. Could she confirm to the committee the net figure when the conservation grant, the cost of the billing regime, etc., are taken out? That is the really important figure from the point of view of the deficit and fiscal targets. She referred to the figure of €50 million annually for non-public domestic water services. Will she clarify whether that is the current cost to the State of its subvention? If domestic water charges in the public system are to be abolished and there is to be equity, namely, if people not on the public domestic water system were not to pay anything, are there calculations of what the additional cost of that would be? The Minister, Deputy Coveney, cited a figure of €14 million in a Sunday Times interview at the start of the year as the estimated cost of an excess water charge, as recommended by the expert group. Is this a calculation from Ms Graham's Department or from Irish Water, or does it come from somewhere else?

I know this is not the meeting to discuss fines and compliance, but just so people are clear, can Ms Graham outline a timeline in the case of, for example, the infringement proceedings in the urban wastewater directive? This is an infringement proceeding that has been going on since 2012. Some people think fines arrive immediately. I ask the question so that people might have a sense of this.

Regarding fiscal impact, can the Department of Finance confirm the exact financial impact on the 2018 structural deficit target deadline if water charges were abolished? Could it also confirm to the committee that this could be off-set by, for example, fewer tax cuts - for example, an amendment to legislation effecting the abolition or the phasing out of the USC? Could this cost be off-set at the discretionary tax level?

Mr. McCarthy said it is unlikely Irish Water will be classified as off-balance sheet in the medium term. What does he mean by this? The reason I ask is that in Irish Water's capital programme, its capital investment significantly increases from 2019 onwards from €500 million currently to €777 million and then up to about €900 million. Would this need to be off-balance sheet to meet those borrowing targets, or would it allow the Government's debt reduction targets under the fiscal rules to be on-balance sheet with that level of expenditure?

I have one final question about this. Clearly, if the bulk of Irish Water's capital investment programme is borrowed - this is so under the current plan - there is an extra financing cost for that. I have asked this a couple of times during Question Time. I would like to know the additional cost to Irish Water or to the taxpayer from the borrowing over the eight years of the plan of the €5.5 billion. Can we have the prediction for this?

I appreciate the economic impact of the abolition of water charges, and I know this is sometimes difficult for economists but there is also a social impact of funding something through usage charges rather than general taxation. Will the Department of Finance factor not just the straight economic impact but also the social impact into its assessments as to which is the best taxation model?

Ms Maria Graham

On the Deputy's first point, he is correct that regarding the water conservation grant, which is not being paid in 2017, the €100 million has been netted off in the overall finances. The year we paid the water conservation grant, we had €100 million for it and then we had funding going to Irish Water. Within Irish Water, operational expenditure reflects billing costs. Again, I understand there would be a saving of about €25 million in this regard. Those are the figures.

Does that mean the debt figure would be €239 million minus €100 million minus €24 million?

Ms Maria Graham

Yes.

The Deputy's second question concerned the rural water sector. We would include about €1 million or so extra which we would use to continue to subsidise the sector. Regarding the rural water subsidies, in the rural water sector we give operational subsidies, but each group water scheme sets its own charging regime. We try in negotiations with the federation to get a fair subsidy that essentially reflects the circumstances at the time when there were no water charges and what would cover most of the water charges. The group water sector either gets water from the public system and then puts it through its networks or it has its own private sources. The subsidy in each case reflects the system used. Private users get the higher subsidies. The subsidies are €140 per household using a private system and €70 for the public system. We reduced the subsidies when domestic water charges were introduced to €95 and €40, respectively. The aim of this calculation was to bring people into parity. We brought the subsidies back up to their previous levels of €140 and €70 more recently because of the suspension of charges. These are the subsidy levels that broadly equate to those at the time when there were no domestic charges and the support the group water sector was getting.

My question is-----

Ms Maria Graham

We also give the group water sector capital funding. This capital funding peaked at about €100 million per annum. It is now down to about €18 million. This is because we had a huge programme of works to improve the quality of the sector. However, the group water sector also has businesses, farms and so on, which we do not pay for. We must make an estimate working with the information we get from the federation of what would legitimately cover domestic use.

Does Ms Graham have a figure for the possible complete subvention of group and private water schemes for domestic usage to go from the partial subsidy at present to a complete subsidy, if-----

Ms Maria Graham

We are probably close to full subvention. While I refer to an average figure per household, there are households that either use a lot of water or have a farm or use land for agriculture. We certainly tried to see that the subsidies we had developed equated to the average cost that the household and the group water sector would face.

There is not a significant extra cost other than for households that would have particular extra usage. It is the average-----

I am sorry but I want to move on and I ask that witnesses keep the answers as brief as possible to give everyone an opportunity. Will Mr. McCarthy give a brief reply to Deputy Ó Broin's question?

Mr. John McCarthy

I certainly can. We are looking at a structural deficit of minus 0.5% in 2018. That is on the button as to where we need to be.

In terms of the general government debt, all of the financing costs and so forth are included in the current projections for general government debt.

The Deputy asked whether, if water charges were eliminated, they could be compensated by another form of revenue and I think he mentioned the universal social charge. If water charges were eliminated, under the fiscal rules that would be classified as a discretionary revenue-reducing measure in 2017 and would need to be compensated for in 2018 by some other form of discretionary revenue-raising measure. Mr. Culhane will take the Deputy's second last question. I just looked at the economic rather than the social impact.

Mr. Kieran Culhane

The Deputy asked about the off-balance sheet position and how it would be on-balance sheet for the medium term anyway. EUROSTAT will classify a new entity at the outset based on business plans but after that it likes to see at least three years' evidence of characteristics of off or on-balance sheet activity. It would want to see three years of data before it would make another classification.

Mr. David Hegarty

The Deputy asked whether we could factor in the social impact of changes in the level of charges. We can do that in principle through using the SWITCH model, which as he probably knows allows us to look at the effects of tax and welfare changes. It has been used by the ESRI in its analysis of budgetary packages and it has taken account of the effect of decisions on the level of water charges etc.

I thank the officials for their presentations. Some of my questions might cross over others asked already. Ms Graham mentioned that the water debt from the local authorities did not transfer over to Irish Water. Could she outline the amount involved, who picks up the tab for that or where is that taken care of as and from now?

I refer to the comparison in terms of the operational expenditure. Is it fair to say that by 2021, the establishment of Irish Water will have brought about savings of approximately €400 million, if we look at the figures of €1.1 billion and €695 million in those first few years?

The regulator was before the committee last week. When we consider the level of pressure and scrutiny it is putting on Irish Water to bring about further savings and efficiencies in the coming years, is it fair to say that a comparable level of pressure was not put on the local authority system to be as efficient during that time or was there always pressure on the local authorities to try to do the best they could in that regard? How do they compare?

In terms of the figures, to be clear, the Department of Housing, Planning, Community and Local Government is saying that if there are no water charges in 2017, €114 million of Exchequer resources will be required. Does the Department of Finance agree with that figure? Is there clarity on that?

How was Irish Water funded in 2016? In particular, I would like to see the comparison between the first six months, when charges were in place, and the second six months. In terms of the Exchequer, where did the money come from for that? Ms Graham referenced €50 million to fund non-public water services. Is that €50 million part of the €114 million or is it in addition to it?

This question is specifically for the Department of Finance. If we move away from a charging mechanism, ring fencing will be a key area for us as a committee. One of the main advantages of having a charging mechanism was that we had a dedicated pot of money for investing to ensure we all had treated water to drink, that we put an end to raw sewage flowing into our rivers and that we were able to fix the many wastewater problems. Without some type of ring fencing of a pot of money for water and wastewater services, my fear is that we will go back to the mistakes of the past where Government decided that the hospital and the school would always win over pipes in the ground that are not visible to the public. I am concerned that we may go back to a process of not investing enough in our system. Would Mr. McCarthy accept that the mistake made in the past was that when that pressure came on in difficult financial circumstances, decisions were made to not invest as much as should have been invested in water and wastewater services? As a committee, that will be key to us in terms of any recommendations we make to the Oireachtas because we must ensure those mistakes are not made again. If we move away from charges that would have brought in a pot of money that could have been used to invest directly in those services and without ring fencing of some type, we will have a difficulty in getting an assurance that the work Irish Water needs to do in the coming years from a conservation and quality water perspective can be done because the resources may not be made available by future Governments.

Ms Maria Graham

On the first question on the water debt, while the water debt of €600 million that was in place in 2013 was held by local authorities, from the general finances perspective it is part of Government debt. The decision was made that rather than transfer that to Irish Water, we would continue to finance it through the local government fund. About €450 million of that was with the Housing Finance Agency and €150 million with commercial lenders. The funding from the Housing Finance Agency was raised by the National Treasury Management Agency, NTMA, so it was wound back into the NTMA, which is looking after that. We are continuing to give resources on an annual basis to local authorities on the commercial debt still outstanding as that is wound down. It comes out of the local government fund.

In terms of the operational savings, the business plan for Irish Water is €1.1 billion over the period of the plan to 2021. That is what it has said it can achieve, and it is held to account for that by the regulator, who may look for further savings beyond that.

The key feature in comparing the local authority system and the Irish Water system is that the regulator is looking over a multi-annual period whereas local authorities have operational budgets set by whatever financing they have on a year-by-year basis. The regulator is benchmarking, by international standards, to determine where operational costs should go over a period of time. It is a different perspective and a different way of going about it whereas a local authority, and some members of the committee may have been members of authorities, is dealing with a budget and what it has to do on a year-by-year basis. That is one of the key features.

In the note we gave members they will see that the operational spending in the years immediately prior to moving to Irish Water remained fairly steady even though there would have been pressure from new facilities coming on-stream. That reflects the fact that money was not going into capital maintenance. That is what the PricewaterhouseCoopers report I mentioned was referring to.

In terms of the rural water programme, the €114 million I mentioned is purely Irish Water. It is the extra funding we would have to give in this year. With regard to the €50 million I referred to, the subsidies to the rural water sector are approximately €24 million in 2017 and the rural water programme is of the order of €18 million. I was saying that in rough terms, between capital and current spending, we are talking about €50 million, but that is separate from the Irish Water funding.

In terms of how Irish Water was funded in 2016, we set out in our note at page 4 a table on the current funding. There is a subvention of €479 million. It got extra funding of €123 million to cover the suspension of domestic charges and it had working capital of €51 million but in the case of 2016, as Deputy Ó Broin pointed out, funding would have been allocated originally for the water conservation grant, which did not have to be used in that year. That was how the funding was provided. The capital contribution in 2016 was €184 million.

Mr. John McCarthy

The numbers from our colleagues in the Department of Housing, Planning, Community and Local Government are on a cash basis.

We supply the figures on an ESA 2010 basis, which is the European measure. They are broadly similar but they will never be exactly the same for statistical reasons, which is the way EUROSTAT and ourselves can calculate the figures. I accept the point on the need for prioritisation of water infrastructure. However, as I said earlier to Deputy Jan O'Sullivan, ring fencing reduces the degrees of freedom for the Government. Priorities will obviously change over time and I would argue that the Government needs to retain that flexibility as priorities change, which they inevitably will.

I want to come back to a point raised by Deputy Ó Broin, when I talked about a discretionary revenue reduction in 2017 and a discretionary revenue increase in 2018. I wanted to stress the point that it is purely from a fiscal rules perspective.

I am a little confused because I thought the remit of this committee was to consider a mechanism for water charging. A lot of the presentation I have heard seems to be a justification for the existence of Irish Water, which we are not discussing at all.

The expert committee appeared to recommend that there should be absolute equity between people who are getting their water supply through group water schemes and those who get it from the public mains. Has Mr. McCarthy calculated how much of a subsidy would be necessary for the group water supply schemes to bring that about?

In reply to Deputy Ó Broin, I think Mr. McCarthy said the loss of €125 million to the Exchequer from abolishing water charges included the abolition of the water conservation grant. What rate of compliance is that based on? Is it 90%, 95% or the 50% to 55% rate of compliance we have had? In arriving at that figure, is Mr. McCarthy counting in the cost of repaying the borrowings that Irish Water incurs, which I understand is very high?

On page 6 of Mr. McCarthy's presentation he seems to suggest that ring fencing would be more necessary if the model was entirely reliant on State support than if it was reliant on charges plus some State support. What is the logic of that? Is Mr. McCarthy suggesting that if it was not totally reliant on State support and if there were charges, then it would be more certain because the charges could be increased to meet the requirements in any particular year? If Mr. McCarthy is talking about this in the context of capped charges, it does not make any sense to me.

What is Irish Water's capacity to borrow now? Can it borrow and, if so, at what sort of rates? We are told that Ervia has prepared a report on future funding models. I am fascinated by the prospect of seeing what will be in that report. Is it completed and available? If so, can we have a copy of it?

Mr. McCarthy indicated that he did not agree that direct taxation was the correct way to fund a model such as Irish Water. He cited electricity and gas companies but with all due respect, that is a matter of policy. He said that policy was not his remit. When governments are looking at various things they must take into account matters other than the purely economic implications.

I would like Mr. McCarthy to elaborate on one point he made. He mentioned that one of the principles of taxation was that if it cost too much to raise, it was not a particularly efficient form of taxation. Is what has been happening here not a textbook example of that? There are billing systems, interest payments on borrowings and water conservation grants but they are hardly worth the candle. We are still not absolutely clear what the net cost to the Exchequer would be if we were to abolish water charges.

And the net take, not the aspirational take or the 100% compliance take.

What percentage of compliance is it based on?

Ms Maria Graham

I will take Deputy O'Dea's questions in order. As regards parity with the rural water sector, the subsidies would be of the order of €24 million or €25 million per annum. That relates back to our past experience when water charges were not in place.

Deputy O'Dea referred to the comments set out in page 6. To be clear, what I intended from the comments pertained to the delivery of the Irish Water business plan. If the objective is to deliver the investment and operational efficiencies in the plan, the question is how is it funded. If there are charges like other utilities, that gives the greatest range of certainty to the utility itself. It was not a commentary on a policy. It was simply saying that from a utility perspective, if most of its money is coming from its customers, it is doing the projections on customer revenue and applying it to its operations.

Surely it must adjust the charges depending on how much the State could afford to subvent them.

Ms Maria Graham

Yes, and in the business plan, a steady domestic capped revenue of €475 million was set out. The secondary point was that if there were no charges, then the choice appears to be general taxation or ring fencing. Mr. McCarthy has teased out some of the issues with both those approaches. In other words, ring fencing means that some form of taxation is particularly earmarked for that water investment. It would give greater certainty to the utility but my colleague has set out some of the issues from a broader public finance perspective. It is simply saying that there seem to be different ways of approaching it and is asking, if one wants to fund the same money, from where does the money come.

As regards borrowing by Irish Water, to date, ministerial consent has been given for an amount of €810 million with various commercial banks. We understand that the weighted average margin on these facilities is of the order of 1.5%. Last year, NewERA did a report for the relevant Ministers looking at - in the context in which we now find ourselves - the most sensible way for borrowing by Irish Water to arise. Should it continue to be through commercial banks? The original plan would have been to start with short-term facilities, because they were working off-balance sheet and then to move to cheaper long-term facilities.

As my colleague said, in the short term, even under some element of water charging, the decision of EUROSTAT was on-balance-sheet and is unlikely to be reviewed in the near term. What is the best way, therefore, of funding that borrowing? NewERA has completed that report, which contains considerable commercial information. We are redacting that out with a view to having the report available to the committee by the end of the week. We will send that on. In teasing out the options, the question is: what is the cost of borrowing through a commercial lender and what would be the cost if the State took on that borrowing? The conclusion was that we would move to State funding.

By the end of the business plan, one is talking of debt in the order of €3 billion, in terms of where it is coming from. Ultimately, however, all of the Irish Water capital expenditure, CAPEX, and operational expenditure, OPEX, as well as the debt, is reflected in Government debt and on the Government balance sheet.

Mr. John McCarthy

On page 8 of the presentation, the first bullet point says that policy choices are a matter for Government. In my opening line, I said I wanted to stress that.

I asked: "What does economics tell us about the situation?" I was not trying to advise the Government which employs me-----

Or this committee.

Mr. John McCarthy

Absolutely; I am giving the economic perspective. The points I made about compliance costs were in respect of taxation, not charges, particularly water charges. On compliance - I would need to check this with the Central Statistics Office - on the basis of EUROSTAT's requirements, we were required to set a compliance rate in the range of 50% from 2016. I do not know when it will get to 100%, but that is an issue the committee might raise with the Central Statistics Office.

The net take was €240 million. What did it cost to raise that amount of money?

Mr. Kieran Culhane

The advice in EUROSTAT's classification decision was to use the cash figure because of the compliance rate. Obviously in our forecasts for 2017 which we produced on a general government debt basis we adjusted the figure for Irish Water for accruals downwards to take account of the compliance rate. We estimated the figure as we did not know what the compliance rate would be in the years 2017 to 2020. We made an adjustment to our numbers in our budget calculations for the rate of non-compliance.

Will Mr. Culhane explain that in layman's terms? Let us get down to brass tacks. A sum of €100 million was given out in conservation grants and there were associated administrative costs. I am concerned about the net gain. Taking account of spending and all of the expertise and analysis, was it in the region of €30 million?

Mr. John McCarthy

Obviously, we know the figures for the conservation grant and so forth, but I do not have the figure for administrative costs.

We have to know what the net cost was. We are discussing the impact on the public finances.

The figure Irish Water is getting is undisputed. It is getting €240 million.

Mr. John McCarthy

Irish Water will know how much cash was brought in last year, but we do not have that figure.

Would it be possible to get that information in order that we could circulate it to members of the committee?

Mr. John McCarthy

The committee would have to request it from Irish Water.

Can we leave it to Mr. McCarthy to get the information? Would that be okay? I thank Deputy Paul Murphy for his patience.

I thank the delegates for their presentations. I will address my questions to Ms Graham. In her comments on proving compliance with a directive she said the burden of proof was on the member state concerned. That seems to be completely inaccurate. In the European Court of Justice v. Greece, C 600/12, the court reiterated that, according to case law on the burden of proof in infringement proceedings under Article 258 of the Treaty on the Functioning of the European Union, it was for the European Commission to establish an alleged breach. Will Ms Graham correct her remarks and tell us from where she obtained the information that the reverse was the case, as according to the European Court of Justice, it is the court that decides, not the Commission, on whether there has been a breach.

My second question relates to the financing costs. According to the document, they will balloon over time, with the result that by 2021, €73 million will have been spent, including interest on loans. According to Ervia, as indicated last week, it is charged a higher rate of interest than would be the case if the State had borrowed directly. By 2021, €1 in every €10 spent by Irish Water will be spent in meeting financing costs. If we were to return to the water billing model, over €1 in every €4 raised by Irish Water in water charges would be spent in meeting financing costs. When one considers that the off-balance sheet model is no more, at least in the medium term, why borrow at rates higher than those at which the State can borrow directly? There seems to be no benefit, only additional costs. Linked with this, the loans are probably secured on the assets of Irish Water. I presume if the loans were not repaid, the security could be called in. That was the model of privatisation which led to disaster in Detroit where there was an attempt to provide for off-balance sheet funding of services, with the result that $1 in every $2 raised by Detroit Water went directly to pay the bondholders.

My third question relates to group water schemes. It is correct to say that in February 2015 the group water scheme subsidy was cut from the maximum figure of €140 to €95 per house and that it was restored following the suspension of water charges. Therefore, instead of there being a division between Irish Water and group water schemes, it is fair to say that with the forced suspension of water charges those involved in group water schemes also benefited and there is no division between the two groups.

I have a question on EUROSTAT for Mr. McCarthy. I have the report from EUROSTAT and also a description of the European system of accounts. One of the elements is that sellers act to maximise their profits in the long term to qualify for off-balance sheet accounting. A particular criticism was made about the lack of economically significant prices. Is it fair to say that according to EUROSTAT, in order to qualify for off-balance sheet accounting, in reality it means an increase in water charges?

Ms Maria Graham

Let me respond to the Deputy's first question on the burden of proof. What I meant by the reference was that if infringement proceedings were to be initiated against Ireland, we would have to demonstrate how we were in compliance. Let us take the case with which we are most familiar - the infringement proceedings against Ireland under the urban wastewater treatment directive. We must demonstrate to the European Commission how we will come back into compliance with the directive by indicating investment on a project-by-project basis for each of the agglomerations. We are reporting on the progress we are making on a six-monthly basis, or if we were to fail to make sufficient progress, it would mean being referred to the European Court of Justice which would make a judgment. Obviously, before the case would go to court, the Commission would make its views known as guardian of the treaties and we would defend the State's position, but the court would decide.

The burden of proof in the court would be on the European Commission.

Ms Maria Graham

The European Commission would take a case to the European Court of Justice stating Ireland was not in compliance. It would show evidence of non-compliance and we would have to demonstrate that we were in compliance.

Would the burden of proof be on the European Commission or the member state?

Ms Maria Graham

The European Commission would be taking the case, but, equally, Ireland would have to demonstrate that it was in compliance.

Ms Graham uses the phrase "burden of proof" which is the legal term. I am asking a very clear question. In a case in the European Court of Justice is the burden of proof on the European Commission or the member state? I can tell Ms Graham that, according to case law, it is on the Commission, but I would like her to say it considering that she said the opposite a few moments ago.

Ms Maria Graham

If I was unclear, what I was saying was that the case would be taken by the European Commission. It would seek to demonstrate and prove to the European Court of Justice that Ireland was not in compliance and seek to have fines applied. I am simply saying that in a practical sense that means that the State would have to demonstrate to the Commission prior to and during the case that it was in compliance.

That is not the case. According to case law, the burden of proof is on the European Commission. Ms Graham should not mislead the committee if she is doing so on purpose, or else she should look up the case law. She should not use words such as "burden of proof". The burden of proof is on the Commission.

Ms Maria Graham

I have no wish to mislead the committee. I am simply outlining my practical experience in dealing with an infringement case. When a case is taken against Ireland, we have to demonstrate compliance with a directive. I accept that in a legal sense when we go to court, we are defending the case. While that is the position, in practical terms - this is borne out by our experience, in the case of septic tanks, of having fines applied under the urban wastewater directive when we defended a case involving infringements of the directive in respect of drinking water, the State spends a great deal of time in presenting lots of data to the European Commission to demonstrate how we are in compliance.

I thank Ms Graham. The point has been made clear. Will she respond to Deputy Paul Murphy's other questions?

Ms Maria Graham

I will work through them quickly.

I thank Ms Graham as a number of other speakers are offering.

Ms Maria Graham

The Deputy had a question on borrowing and this has been reviewed in light of the circumstances in which we now find ourselves, with a view to funding coming from the State rather than commercials. With regard to the point on where the borrowing is secured, it is not secured against the assets.

What is it secured against?

Ms Maria Graham

It is unsecured lending. It is simply about looking at the business plan. The Deputy is correct in saying that subsidies to the rural water sector were reduced when domestic charges came into being and they have been restored on the suspension.

Mr. John McCarthy

Mr. Culhane will speak to the Deputy's final point.

Mr. Kieran Culhane

The Deputy is correct that the definition regarding economically significant prices indicates there is a substantial influence on the amount of products that producers are willing to supply but also on the amounts of products purchasers wish to acquire. In the findings, the issue was that the massive investment in Irish Water did not seem to relate to the price charged for the products. It did not appear commercial from Irish Water's perspective. As a result of the cap, there was no incentive for users to turn off the tap so it did not seem to influence their behaviour either. Those were the findings.

It is fair to say that would mean increased water charges for the average user if we were to meet EUROSTAT levels.

Mr. Kieran Culhane

Yes.

That is for the model to work.

Mr. Kieran Culhane

It is for it to be off-balance sheet.

Many people have been waiting for a while to come in and I will do my best to get everybody in as quickly as I can. Please be as tight with the questions and replies as possible.

I thank the witnesses for their presentations. I am always intrigued when outrage and indignation are expressed when newspapers, etc., print headlines indicating that our motor tax will fund Irish Water and, by extension, the provision of water. May I take it from the presentation that the moneys collected for motor tax in this country have always gone towards the supply of treated water and collection of wastewater from households in Ireland?

Ms Maria Graham

Motor tax is one of the main revenue sources for the local government fund and the general purpose grant always came from that source and covered domestic water services in local authorities. That was reduced to reflect the fact it was now going to Irish Water.

So motor tax always funded the provision of water and it is not, as indicated by certain media outlets, a new development since the establishment of Irish Water. I thank the witness for clarifying the position.

Mr. McCarthy introduced a wonderful word, "hypothecation", that I have never come across before. I will again stick with the motor tax issue. I understand the point made that if we introduce hypothecation into the finance system, we would ring-fence for water first before ring-fencing for health, education and so on. Eventually, there would be no wriggle room for decision makers such as ourselves to move on. Would the witness be against hypothecation on motor tax, for example, being ring-fenced for the upkeep and repair of roads? There is a reason for asking this as it is related to the topic I wish to discuss.

It is a policy matter.

There is an objection to hypothecation in the general taxation system but is there an economic objection to a specific tax raised being ring-fenced?

That would be an ecumenical matter.

I thank Deputy Cowen but perhaps Mr. McCarthy could comment.

Mr. John McCarthy

The same principles apply that I mentioned before and as the Deputy said, that essentially reduces wriggle room. Ring fencing reduces the flexibility of Government. I am not referring to ring fencing but I am putting it out as a general principle rather than looking at motor, water or house taxes.

I am trying to get at what would apply if a specific water tax were introduced, as opposed to water charges, and it was guaranteed to be ring-fenced for the funding of provision of water. Is there an economic objection to that sort of a proposal? Is it similar to the economic objection for introducing hypothecation into general taxation?

Mr. John McCarthy

The point is that this will essentially be some form of charge rather than a tax per se. If some form of water charge is introduced, it is a charge rather than a tax. I am coming at this purely from a taxation perspective and what that means for public finances and taxation policy more generally.

We have a car tax so could we have a water tax? Would there be an objection to hypothecation in that case?

Is that not a policy matter?

Mr. John McCarthy

I have given the economic rationale so I do not want to get into the policy space.

That is fine. If the witness is not comfortable giving an answer, I accept that.

It is not really a policy question, it is based in economics. Is it difficult for the Department of Finance to ring-fence or specifically raise a tax for expenditure in that specific area? That is, if the committee could take the policy decision to introduce a water tax. I am just being hypothetical here as opposed to hypothecating. They are all lovely words. That is the point I am trying to get to as they are the options we must look at. If we looked at that option, would there be an economic argument against it?

Mr. John McCarthy

I will come back to the earlier point regarding the economic rationale pointing against hypothecation. I will answer that as I have done on purely economic grounds rather than in the policy space.

I am not an awful lot wiser.

That is as far as we can get. I thank members for their patience.

I thank both delegations for trying to assist the committee in its deliberations. One of the expert commission recommendations is that we should fund personal and normal domestic use from general taxation. I have specific questions. The new word "hypothecation" will become very relevant and I thank the Department of Finance for outlining what it means. We must be sensitive about the policy areas relating to Government but it is definitely the elephant in the room. We have two choices. We need a dedicated revenue stream if we are to provide a sustainable supply of water to meet what the expert commission is recommending to us. That is an adequate allowance for personal domestic users. How do we provide that dedicated revenue stream? Do we provide it through the charging system that was in existence or by ring-fencing funding. The committee would set a precedent by recommending that as it would automatically recommend that policy decisions would be decided by committee rather than the Government. Am I correct in assuming that as a result of what the Department has outlined? If that is the case, why are there no similar joint Oireachtas committees for health, education and various other sectors, including housing, that see critical demand but are not achieving the same focus or attention from officials and policy makers like ourselves?

Acceptable level of usage will be critical to our deliberations. It is recommended by the expert commission that there would be a free allowance to an acceptable level of usage. Figures have been provided by the housing Department but in Ms Graham's view, what is an acceptable level of usage and is adequate funding provided in the business plan as outlined? That would include funding to deal with quality of water, compliance obligations and asset management systems to ensure sustainability of supply. I presume this is allowed for in the business plan. How does that equate to the acceptable level of usage model now proposed by the expert commission? This must be determined by recommendation by the Commission for Energy Regulation and the public water forum but I am interested to hear the Department's view because of its experience in the area. What is the effect in terms of cost and being able to sustain that type of system?

My next question is important and some members have already raised the issue. It relates to equity and fairness.

Group water schemes have already been mentioned. The costs in providing equality of access to quality water for people on a public system and those on a group water system have not been properly analysed. The figures being quoted so far at this committee are essentially going back to what the subsidy being provided prior to water charges was. Even with that subsidy, people on group water schemes were paying substantial fees to maintain their systems. If I am right in understanding what the expert commission is recommending, a normal acceptable allowance would be free to public consumers. By comparison and for the sake of equity, that normal acceptable allowance should also apply to those people on group water schemes. Has that analysis been done? There is a critical difference. If a free allowance is applied to a public user, that same allowance should be applied to a person on a group water scheme. That then obviously brings greater costs in terms of subsidy to ensure quality and sustainability of supply to people on group water schemes.

I hope I have made that clear. We have two systems of supply in this country: people who supply themselves either through group water schemes or private wells and people who are on the public system. A greater subsidy will be required to ensure that people providing water for themselves or through group water schemes have equal treatment to those who are not going to be charged under the public system if what was proposed by the expert commission goes ahead. I hope I am clear on that. If we are going to call a spade a spade, as Deputy Cowen said earlier on, this is going to come down to a revenue stream of funding either by charging or by ring fencing, which would be a precedent, in my opinion, for the way in which budgetary allocations are made by a Government. If the committee is going to decide that the funding will be ring-fenced, why would that not apply across the board in other critical sectors?

Ms Maria Graham

In response to the first question the Senator asked, the business plan developed by Irish Water to 2021 sets very particular targets in terms of investment to meet infringements, address leakage and all of the key things that seem possible with that level of investment and achievable over that period. That is reflected in the business plan. Obviously, the funding reflects the total use of water and the question then arises as to what an acceptable level of usage would be. The Department has not prepared anything at this stage on what our view would be on that. The Senator mentioned CER and the public water forum having a role, as the expert commission suggested. In looking at other utilities in which there have been water charges for some time, there are people who are low, medium and high users. A normal usage is something that reflects a good and proper conservative usage of water. What the margins might be above the average usage that would reflect a normal level is something that will need to be tested. I know that Irish Water has provided consumption figures. From a Department perspective, as the committee's work evolves, if it has scenarios that it wants the Department to cost with Irish Water, we would be very happy to do that.

I thank the witness for that. I expected that reply, because we have not determined what an acceptable level of usage is. It will be critical to our committee's work. As a result of that, the CER or the public forum will help us to find it. Therefore, the cost that the Department is providing to the committee today could in fact be greater, depending on what the definition of this acceptable level of usage is. It could be greater than what the Department allowed for in its previous business plan. Am I right in saying that?

Ms Maria Graham

The business plan allows for the delivery. In gross terms, the business plan delivers the gross cost. How that is funded is a separate issue. It covers all usage, including waste usage. The business plan and the figures within it are correct. The figures I have provided on the costs of water services are the outer limits in the sense that they do not have an estimate of what a revenue coming from excessive usage might be. However, as I said, we can run two scenarios if the committee wishes.

As mentioned earlier, there are people who are paying for water in the rural water sector. Some of that is because of agricultural use. When we reduced the subsidy when domestic water charges came in, we were trying to ensure there was fair treatment. We were trying to see what the impact was. We did some work with the federation to get some ideas on what was the average cost being borne by people in order that the average cost to the group water sector was similar to the average cost borne by the Irish Water customer. When we were talking to the federation, one of the approaches was to set out the principles by which we would try to get a subsidy system that was amenable to it, given that there is a range of group water schemes that are not under Irish Water and are not big systems. We were trying to bring in a subsidy that reflected the fact that there were capped charges, free allowances for children and a product subsidy. I can pass these on to the committee. The principles underpinning the subsidy were to ensure there was fair treatment between drinking water consumers in the public and group sectors, taking into account the inherent differences in the structure, funding and organisation between the sectors, including the ability of individual schemes to set the price of water based on their local circumstances. There had to be a recognition of their particular cost structures, particularly as some of them have had expensive design, build and operate schemes put in for which we would have to continue to recoup local authorities on subsidy claims. Subsidy had to be tied to things like customer charters, compliance, optimal management and operational practice and the receipt of capital grants. The arrangements had to be as straightforward as possible to reflect the scale of the sector. It was important for the federation that, whatever the arrangements made, they were not too much of an administrative burden.

I am sorry to interrupt Ms Graham but a significant amount of that is going to come under the section on equity and fairness. I was comfortable allowing the discussion to go on while we were dealing with the assumptions underlying the budget and the business plan. However, if we may, we might defer the discussion.

I accept the Chair's ruling on that. I believe it is important that we flag at an early stage that it will need a more detailed analysis.

Absolutely.

The Department has offered to provide that to us in order that we can scrutinise it further during the discussion on equity and fairness. I would ask that not only those on group water schemes but also those with private wells and private water treatment systems are included in that analysis. It is part of the recommended report provided to the committee by the expert commission that we have been tasked with analysing. I accept the Chair's ruling. I believe there is a body of work to be done on analysing equity and fairness in terms of the private wells and the group water schemes, what they cost and how they should be subsidised to ensure that everybody is treated equally.

That is a very valid point. I call Senator Clifford-Lee.

The domestic metering contract was awarded in 2013 and had an objective of installing more than a million domestic meters over a three-year programme. It had a budget of €614 million, including VAT. There is going to be an underspend of around €148 million on that because the full level of water metering cannot be undertaken due to a number of reasons. The re-profiling of this underspend was confirmed by the Minister in July of last year. Has the Department considered the re-profiling of this €148 million capital underspend on water metering and diverting that towards the capital investment on the network?

Ms Maria Graham

I will answer that question. The full cost of the metering programme was reflected in the €5.5 billion. Irish Water indicated to us that there was going to be a saving on that. One of the suggestions for the use of that saving was for capital investment to support housing and water services that are required for housing, given the current priorities in the housing sector. The actual re-prioritisation of that is a matter for the regulator and for Irish Water. It has been re-profiled by Irish Water back into its capital programme and will be reflected, as I understand it, in the 2017 or 2018-----

Has the decision already been made on that?

Ms Maria Graham

We still have the €5.5 billion, but obviously less is required for metering and the rest will be used for other water capital expenditure.

I am not sure whether I have made myself clear. What is not spent on metering will be spent on other water services infrastructure.

Can Ms Graham give an estimate?

Ms Maria Graham

The original estimate was €649 million and €462 million has been spent.

I thank Ms Graham. The next three questioners are Deputies Lahart, Healy and Brophy.

I am not asking the officials from the Department of Housing, Planning, Community and Local Government to answer my queries now but on another date. I refer to the fuzzy area regarding the transfer of assets from local authorities to Irish Water. I ask them to supply me with a detailed paper on the transfer of assets from local authorities to Irish Water that includes the timeline, ownership and value of assets.

I wish to refer the officials from the Department of Housing, Planning, Community and Local Government to their presentation and the heading of expenditure on water services and funding arrangements. It reads:

Prior to 2014 ... The Exchequer grants for public water services projects generally covered about 75% of the overall costs. The balance was funded by local authorities from revenue from commercial water charges, capital contributions from major users.

The capital contributions were made by major users. They paid commercial water rates and also made a capital contribution to infrastructure. Is that correct? Please provide more detail about the matter. Is the arrangement still in place with Irish Water whereby major infrastructural projects are paid for by major users? The obvious ones that spring to mind are the drinks, IT and pharma industries. Do those industries still contribute to the cost of capital projects?

The water component was mentioned. My question is in the context of the arrangements that existed prior to 2014 and the 25% that was not covered by Exchequer funds. The presentation mentioned "the water component of development levies." What has changed as there is some anecdotal evidence? I refer to new connections. Under the old system, when the local authorities handled this service, was there a separate connection fee for water? Was the fee incorporated in the development levy? Is the Department of Housing, Planning, Community and Local Government happy with the situation? Has the Department monitored and seen evidence of a significant increase in connection costs since Irish Water assumed this responsibility?

Both sets of departmental officials can respond to my questions on the environment. Will the cessation of water metering damage the borrowing capacity of Irish Water? If the State becomes the sole customer of domestic water tariffs then is it feasible for Irish Water or its parent company, Ervia, to borrow on the markets?

Ms Maria Graham

The non-domestic arrangements are the same under Irish Water as they were for local authorities. CER has initiated a project that will examine how connection charges and commercial charges should be developed under Irish Water. That work will continue over the next year and a half via public consultation. From 1 January 2014 whatever a local authority charged for commercial usage became the same for Irish Water.

Some authorities had separate connection charges but the bulk of development levies reflected the capital spending by the local authorities on a range of infrastructure, including water. The water piece was extracted. For example, if the development charge per house was €10,000 then maybe €2,000 was taken out of the total sum for water and paid to Irish Water and the remaining €8,000 was deemed the development charge. The situation has remained exactly the same. That means capital contributions could be made by major users. This mainly happens in the industries outlined by the Deputy where, perhaps, a trunk main needs to be installed in order for a factory to connect with a public system. Such work would have been charged to the user. The user may also have a reduced operational charge. There was a combination of charges.

Does Ms Graham mean a reduced commercial rate?

Ms Maria Graham

Yes, a slightly reduced commercial rate may be charged to reflect the payment of an upfront capital charge. The user may receive a lower rate than other users in terms of the commercial rate. There have been instances around the country where a major user has funded essential infrastructure that was provided by the local authority.

I have outlined the current system. Under the normal utility model used by Irish Water that would move to a connection charge and a system of non-domestic charges. As I understand it from CER, the process will take time.

There is no connection between the cessation of metering and borrowing capacity. Borrowing is unsecured lending. It is based on the amount of borrowing that Irish Water wishes to raise and the fact that it will have an income, from whatever source, to fund same. That is not an issue.

Will the cessation of water metering act as an impediment to borrowing for Ervia or Irish Water?

Ms Maria Graham

No.

I thank both Departments for their presentations. My questions are mainly for the Department of Finance.

Mr. McCarthy has stated that the intention behind the establishment of Irish Water was to create a commercial entity that was off the Government's balance sheet and in order for that to happen, classification had to be provided by EUROSTAT. One of EUROSTAT's considerations is that the costs must be funded by less than 50% Government funding. Is that correct? Who will pay the other 50% plus costs?

Mr. John McCarthy

Both domestic and non-domestic users.

Mr. McCarthy told my colleague, Deputy Paul Murphy, earlier that such EUROSTAT classification would require an increase in domestic charges. Is that correct?

Mr. John McCarthy

That would be one of the factors.

Mr. John McCarthy

EUROSTAT used seven or eight different classification criteria.

Mr. John McCarthy

The important one is the so-called market test. The Deputy is correct.

The 50% funding plus costs, that the State will not fund, must be picked up by domestic customers on the basis that commercial charges already exist, although they could be higher as well. Is that what Mr. McCarthy is saying?

Mr. John McCarthy

I am saying greater than 50% must come from outside the State. The make-up would not be considered or in other words, it could be commercial or domestic.

I want the issue of borrowing to be clarified once and for all. Last week Irish Water told the committee that the State can borrow cheaper than can Irish Water.

Mr. John McCarthy

I do not know at what cost. Maybe Irish Water gazed into it. At present the State, depending on the term premium and duration of the loan, at around one or 1.5 percentage points. The rate has picked up a little bit in recent months but it is relatively low at the moment.

Can the State borrow cheaper than Irish Water?

Mr. John McCarthy

I do not know what it would cost Irish Water to borrow but I can outline how much it would cost the State.

Irish Water said the rate was 1.4% more.

Yes. Last week Irish Water told us it would save €5 million.

Probably per year.

I want to discuss the fiscal rules. It has been suggested that we must meet these fiscal rules.

I know that this is a policy matter, but it is a possibility that these rules could be breached by the Government, because they have been breached by other countries, and they are being breached by some other countries as we speak. On the other side of that, in his Budget Statement, the Minister suggested that not only was he going to meet the fiscal rules target of the 60% debt-GDP ratio, but that he was going to go to 45% of that. If the Minister was to forgo doing that, there would surely be considerable leeway for the State to fund water and wastewater services. If he was to go to a 45% debt-GDP ratio it would take something like €38 billion out of the economy.

Non-domestic or commercial charges were raised in both contributions. What is the current rate of collection of commercial water charges? Mr. McCarthy spoke about the relatively low yield and the question of administrative costs and billing systems in that regard. We were told last week that the billing system costs Irish Water €25 million. We were also told in that presentation that the excessive charge would not provide significant revenue. Would Mr. McCarthy have any views or thoughts on that kind of a situation? It seems to me that it does not make sense.

Our brief is the future funding of domestic water but I understand where the Deputy is coming from with his general question on commercial charges. I am okay from that perspective but I ask Mr. McCarthy to keep his reply ring-fenced to our brief.

Mr. John McCarthy

I will be very brief. I only have one sentence on the four or five questions. I believe my colleagues in the Department of Housing, Planning, Community and Local Government can help with the last one. On the fiscal rules, fines are automatic if they are breached. We have put that in legislation. No country has yet been fined, I will grant the Deputy that, but we do have automatic correction mechanisms whereby the Commission and the Council of the European Union can instruct a state to take corrective action if it deviates from the adjustment path. We have put that in our own Constitution via the Fiscal Responsibility Act 2012.

I mentioned the relatively low yield. I stress the word "relatively", obviously €250 million odd is a lot of money, but the total tax take this year will be approximately €50 billion. That is the sort of "relative" I wanted to put on that. The 45% ratio the Deputy raised is policy so I will not comment, but I will say it is not a legal obligation. The Minister in his budget speech simply said that given the volatility of our GDP, and we had the 26% in 2015 and the Irish economy is so volatile, it made sense to build up significant fiscal buffers to be able to address the next shock. We all know shocks will happen, it is just a matter of where they emanate from and the magnitude of the shock. In terms of compliance and connections my colleague, Ms Graham, will respond.

Ms Maria Graham

There were a couple of questions from members. Regarding borrowing, we will give a paper to the committee by the end of the week, the NewERA report, which will set out the issues around State versus commercial borrowing. To clarify, I mentioned earlier that there was €800 million in borrowing, that was from commercial banks. I had not added in funding from the Ireland Strategic Investment Fund which is €450 million. I just want to be clear on the level of funding at the moment. That will answer that question. We will get that to the committee as quickly as possible.

I do not have with me the non-domestic compliance rates. I will get that for the committee but it would be much higher than what was reached in domestic sector compliance. It would have been expected to increase over the period of time. Irish Water is gradually taking on the collection responsibilities from local authorities. I apologise to the Deputy. I thought I had it with me but I do not. We will get it for the Deputy.

Did I read that it might be in the region of 60%?

Ms Maria Graham

One of the difficulties is how one looks at it and how the aged debt is taken out of it. What the effect of-----

Will Ms Graham get us the figure anyway? Thank you.

Rather than looking at estimates, let us wait until we get the information and we will pass it on to the members of the committee. I will call Deputy Brophy. I will come back to Deputy Ó Broin. We have a few minutes left.

A number of the questions which I had have already effectively been dealt with so I will not go into them. I will focus particularly on one thing, namely, the funding of water. I presume it is the documentation, but can Ms Graham give me the figure? If the State becomes the sole customer of Irish Water, what will the State's bill for becoming the sole customer be? That to me is the key figure. There can be all types of arguments about what is net this, net that, taking out grants and taking out this, that and the other, but if the State becomes the sole customer, the State will have a bill. At the end of the day, unless I am misinterpreting somewhere along the line, if we pay that bill as a water charge, that means the State does not have that money to spend on other services, teachers, doctors, hospitals or whatever. We make a choice. If the State becomes the sole customer, can Ms Graham tell me what its bill would be per year?

Ms Maria Graham

I thank the Deputy. There is an appendix at the back of the note which we gave to members, which we were asked to prepare by the committee, which sets out costs on a year-by-year basis. If we look from 2017 onwards the total cost of water services rises from €1.4 billion to €1.665 billion. That includes the non-domestic sector. If one takes something between €250 million and €300 million off that as non-domestic sector, then that is the total for the domestic sector. That does not take into account what the views of this committee will be and how it might move in terms of revenue from excessive usage, which would reduce that further. Effectively, that is increasing because the investment programme for Irish Water is increasing, but in 2017 those baseline costs are in the Government expenditure.

What is that figure?

Ms Maria Graham

It is reflected in the Government accounts both in terms of debt-----

If we take Ms Graham's tabulation, she is saying to take out a couple of hundred million euro. What is the figure if the State is the sole customer? What does the State pay?

Ms Maria Graham

It would be in the order of €1.2 billion-----

And that is if the State is the sole customer?

Ms Maria Graham

-----in 2017. That is reflected in expenditure and capital.

The charges are €240 million.

If the State becomes the sole customer, what is the actual figure to the State?

Ms Maria Graham

It is €1.2 billion.

That is approximate, in fairness, but it is approximately €1.2 billion.

I thank Ms Graham.

Ms Maria Graham

I am distinguishing between capital and operational expenditure that is reflected in some place in the Government accounts, because Irish Water is on balance sheet. Where the funding would come through to voted expenditure and capital contributions, is something different. The revenue that would have been scheduled for the domestic sector, which is the replacement revenue that we are looking at, is somewhere around €270 million. It is important to understand that is not just going against operational expenditure. In the model as set out in the business plan, that €270 million in revenue was being used to pay for the financing costs of some of the investment programmes. It was not just going against operational costs.

There is a total cost there, and there is a revenue cost. I understand that. I just wanted to understand if we switch the whole thing to the State, what the total cost is.

With charges and without the charges it costs the State either €1 billion or €1.2 billion. Is that what Ms Graham is saying?

Ms Maria Graham

If one had all of the charges coming in then one would be talking about approximately €1 billion or just under.

If the State is absorbing everything as the sole customer, the figure would be €1.2 billion in 2017?

Ms Maria Graham

Broadly. I am doing a lot of rounding but that would be an indicative figure.

It gives a good indication in answer to the Deputy's question.

My query brings us back to the very first question because Deputy Colm Brophy is obviously trying to work out what would be the extra cost to the State of the abolition of water charges. From the extra €200 million one would have to subtract the cost of paying the water conservation grant and the costs of billing. Therefore, the real cost-----

The Deputy should speak for himself-----

-----because I do not accept it when he starts by saying I am trying to work out something. I have worked out what I need to work out. If he wants to express a view, that is grand.

The Deputy has made his point.

My understanding of Deputy Colm Brophy's question is that he wants to know, if water charges are abolished, what will be the extra cost to the taxpayer. The answer was that it would be in the region of €200 million. I am saying the cost of paying the water conservation grant of €100 million and the figure of €24 million for billing costs would have to be taken from that sum. Therefore, the actual net cost to the State of the abolition of water charges would be significantly less than €200 million.

Ms Maria Graham

Let me clarify-----

That is my point of view and Deputy Eoin Ó Broin said the same thing himself.

Please allow Ms Graham to answer the question.

Ms Maria Graham

I was talking about 2017. There has been no funding provided for payment of the water conservation grant. I wish to make it clear, therefore, that there is no figure of €100 million. I was rounding with a very broad brush. The cost of the billing system is somewhere around €25 million, which is not significant in rounding. The figure Deputy Barry Cowen had of €240 million was an adjustment. The sum of €25 million was taken from the figure of €270 million.

Will the NewEra report which I understand will be redacted provide clarity on current and future borrowing costs of Irish Water? That is one of the issues on which we really want clarity. What is the cost involved?

We want clarity on that issue.

Yes, as well as, projected into the future, the cost of the capital investment programme of Irish Water.

Ms Maria Graham

That is our intention. It is our intention that only material for individual commercial institutions will be redacted. That is what we are aiming to do, but as members will appreciate, we must consult in order to do that.

It would be very helpful if the committee were to receive that information. I thank the representatives of the Departments for their assistance.

The joint committee adjourned at 4.15 p.m. until 1.30 p.m. on Wednesday, 25 January 2017.