Joint Committee on Future Funding of Domestic Water Services debate -
Tuesday, 7 Feb 2017

NewERA, National Treasury Management Agency

Chairman

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable. The opening statement submitted to the committee will be published on its website after the meeting.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

At the request of the broadcasting and recording services, delegates and those in the Visitors Gallery are requested to ensure that for the duration of the meeting their mobile phones are turned off completely or switched to airplane, safe or flight mode, depending on the device used, and not merely left in silent mode.

Today's meeting will continue our consideration of funding domestic water and wastewater services. The meeting is in two parts. During the first part, we will hear from NewERA, which is part of the National Treasury Management Agency, NTMA, and is represented today by Ms Eileen Fitzpatrick, director, along with Mr. David Stokes and Mr. John Dillon. I am taking their submission as having been read by members. We decided that we will go into a question and answer session. The Department of Housing, Planning, Community and Local Government is represented by Ms Maria Graham, Mr. Patrick O'Sullivan and Mr. Colm Lavery. I invite members to put their questions, with Deputy Heydon first followed by Deputy Paul Murphy, or is Senator Coffey the first to speak?

Senator Paudie Coffey

I will give way first and come back.

Deputy Barry Cowen

I thank the witnesses for their submissions. I will deal with NewERA first. To many, the methodology behind NewERA and the failure to meet the EUROSTAT test undermined the whole concept behind and reason for the establishment of the water charging system. It would appear that passing the test is not now possible. I am conscious of the recommendations of the expert commissions and some questions emanating from that in respect of borrowings. What is the current borrowing cost of Irish Water in comparison to ten-year Government bonds? I ask this because, at present, I believe borrowing is done on a yearly basis. Is that correct?

If the State is to become the sole customer of domestic water tariffs, is it feasible to borrow on the markets whether it be by Irish Water or its parent company, Ervia, thereafter? Has Irish Water undertaken an analysis of this shift, as proposed by the expert commission report? It was published some time ago and I am sure there has been some consideration of the recommendations contained in it. It would be interesting to hear at this juncture whether there is any comment from NewERA in respect of this issue.

Some would say that the cessation of water metering was on the cards anyway because we were led to believe that 300,000 properties could not be metered. Has the shift of any remaining metering to district metering affected borrowing capacity if that remains a commitment or the wish of Irish Water even with the State being its only customer in respect of domestic charges?

Ms Eileen Fitzpatrick

I will provide some context for the report. It is primarily about the most cost-effective way currently for Irish Water to fund its commercial facilities in the context of the decision by EUROSTAT and in light of the suspension of domestic charges. The report looked specifically at the cost of current commercial facilities for Irish Water, which are on a one-year basis, and compared it with what the State is funding on a one-year basis. Based on an interest rate of 1.4% for Irish Water and -0.4% for the State, we would calculate that this amounts to an interest rate saving of about €14 million for the State so that is the primary context for the report.

On longer term funding rates for the State, Irish Water is not funding long term. Under any circumstances, in the usual order of merit State funds are cheapest. Semi-State and commercial semi-State bodies fund with a premium, while Irish Water is in a different phase of its development. If we compare the five-year cost of debt for Irish Water hypothetically because it is not currently funded with the cost of five-year debt for the State, it is cheaper for the State. From its perspective, given current circumstances, for the foreseeable future the most cost-effective way of funding Irish Water is through the State.

Deputy Barry Cowen

If one was to apply today's figures over a period of ten years, the cost would be €140 million.

Ms Eileen Fitzpatrick

The cost to the State now is 1.2%. The average rate for Irish Water for its commercial debt facilities is 1.4%. Even over a period of ten years, it would be more expensive because longer term money would be provided, but the State is funding it at a rate of about 1.2%. There has been a slight rise in rates.

Deputy Barry Cowen

In the short or long term, it is more beneficial to the State to borrow

Ms Eileen Fitzpatrick

Point-to-point, the curve shows that it would be cheaper for the State

Deputy Barry Cowen

If the State becomes the sole customer, the possibility of private borrowings will not be considered.

Ms Eileen Fitzpatrick

In current circumstances, it is pragmatic for Irish Water to let the State provide funding. That does not preclude, at any point, Irish Water from returning to commercial markets. Being what they are, commercial lenders will lend to someone if they think they will get an appropriate return at an appropriate level of risk. I do not think deciding to fund Irish Water from State resources would make any material difference or lock Irish Water out of commercial lending forever.

Deputy Barry Cowen

No specific analysis of that prospect has been made since the commission made its report public, in so far as Irish Water's ability to meet its capital programme in the next ten years would not be diminished by virtue of the fact that the State would be borrowing rather than having recourse to private markets because the subvention would be sufficient by comparison to what it was envisaged it would receive in domestic charges.

Mr. John Dillon

The certainty of funding-----

Deputy Barry Cowen

Would Mr. Dillon say it would be more certain than has been the case in recent years?

Mr. John Dillon

It would be cheaper for the State to fund Irish Water than for Irish Water to fund itself. That is the essence of what we have said in our report.

Ms Eileen Fitzpatrick

It currently avails of one-year facilities. It has a high degree of-----

Deputy Barry Cowen

Will Ms Fitzpatrick confirm that the cessation of the metering programme in no way interferes with the capacity of Irish Water to fund itself into the future?

Ms Eileen Fitzpatrick

That is probably a matter for someone else. We cannot make a comment on metering.

Deputy Barry Cowen

The Department can comment on it later. Do its representatives want to comment on it now?

Ms Maria Graham

If we are focusing on borrowing, it does not really matter who is lending to Irish Water once the lender is paid. Metering is not required for that purpose.

Deputy Barry Cowen asked, if the State was the sole customer, what that meant from a lending perspective. Again, that is a separate question because local authorities which received funding for the domestic sector borrowed from commercial lenders against non-domestic revenue.

Deputy Barry Cowen

That adds no weight to the argument that the State can still borrow at a certain rate, irrespective of whether it is a local authority or Irish Water. The failure to move in that direction does not affect the capability of the entity to provide for the required capital expenditure needed to improve the system in the future.

Ms Maria Graham

As the Deputy said, there are two separate issues, one being the revenue coming into Irish Water and the other-----

Deputy Barry Cowen

Because it is guaranteed.

Ms Maria Graham

As Mr. Dillon said, it is a matter of the certainty of funding. The other issue concerns who is giving the money.

Ms Eileen Fitzpatrick

Irish Water has about €800 million in commercial facilities. The proposal is simply to swap these commercial facilities for Government commercial facilities.

Deputy Paul Murphy

The NewERA paper is quite significant to our work. One will remember that, at a certain stage, the off-balance-sheet argument became a really key one for Irish Water. The objective in being off balance sheet was to allow borrowing that would not appear on our books under the fiscal rules and so on. The former Minister Deputy Alan Kelly said when Irish Water had failed the EUROSTAT test that it had had no impact whatsoever, but it obviously has.

I am following up on the main point, which Deputy Barry Cowen was getting at. As it stands, according to NewERA, the additional cost on a yearly basis of Irish Water borrowing with what is effectively a failed off-balance sheet mechanism is €13 million to €15 million. The main benefit that was meant to accrue from that model was that the borrowing would not appear on our books under the fiscal rules.

Ms Eileen Fitzpatrick

The natural advantage of a commercial semi-State entity that is off balance sheet is that its expenditure does not affect the Government balance. However, because it is now within the Government structure, what Irish Water does will affect the national accounts. From a pragmatic perspective, one is looking for the most cost-effective way and use of the sovereign is the most cost-effective way, but it does not have the advantage of a commercial semi-State body, the actions of which would not have an impact.

Deputy Paul Murphy

Are there substantial advantages to having it in this failed off-balance sheet model?

Ms Eileen Fitzpatrick

Going back to an earlier point, it is a different model. Irish Water is highly ambitious about capital expenditure and meeting the need in this regard. In this model I do not believe there is any reason it could not carry out its objectives in that regard.

Deputy Paul Murphy

Capital expenditure is a key part of what we are considering because we believe there needs to be more capital investment in water infrastructure in the coming years. The delegates outlined three possible options in their paper, one being to retain the existing plan which is to have Irish Water borrowing privately at higher rates, with the State being able to borrow directly; the second being to retain the existing private financing arrangement but to borrow directly via the State as new financing needs arise, and the third being to transition all private finance into Government borrowings. Ms Fitzpatrick opts strongly for the third. Will she explain her reasons?

Ms Eileen Fitzpatrick

On the first option which is to continue with the current model, we cannot see the cost advantage from a pragmatic perspective. On the second option which is to retain existing commercial facilities, the fundamental point is that it is still cheaper for the Government. We would have landed heavily on the third option. Irish Water may have some small qualitative issues around it in terms of flexibility or certainty, or the visibility of the expenditure. A private facility - a revolving credit facility - can be drawn down or repaid at very short notice. As Government funding is not quite like that, in terms of facilitating that flexibility, one could leave a very small amount which is really for working capital, but that is a fine point.

Deputy Paul Murphy

There is a significant yearly cost in the current model versus Government borrowing. Who does the cost fall on? Is it accurate to say it falls on taxpayers? This could be via two mechanisms, namely, the payment of direct and indirect taxes, and the payment of water charges.

Ms Eileen Fitzpatrick

Under the new model it will be Exchequer funded, so it will be from taxation.

Deputy Paul Murphy

The public will end up paying for the additional cost in the current model of borrowing.

Ms Eileen Fitzpatrick

Yes, through the taxation system.

Deputy Paul Murphy

Thank you.

Senator Paudie Coffey

There was a question regarding metering. If there is no continuation of metering it will have a fundamental impact on the cost base of Irish Water as it goes about identifying leakages and carrying out conservation, and this will affect ongoing sustainability. It is not correct to dismiss the impact of metering on costs. Can the delegation give its views on that? If we do not identify leakages and distribution patterns there will be a long-term impact.

The initial strategy was to attract external funding by virtue of the cost base being off balance sheet and that allowed the State, and Irish Water by extension, to invest substantially in capital infrastructure. The level of State subsidy was the key point and it narrowly failed the EUROSTAT test. What are the long-term implications of the investment plan? It does not matter to Ervia whether the funding comes from an external source or the State as long as one has a sustainable funding base but it does matter as far as State funding and State services are concerned. I want to highlight that point, for the benefit of the committee rather than the delegation, because the impact on State services will matter to us in our deliberations. The funding will either come from external sources or the taxpayer.

Irish Water has a capital loan from the Minister for Finance. What happens to that loan when it expires? Will it be turned into equity and how is it treated on the books of NewERA?

Ms Eileen Fitzpatrick

As regards metering, we do not have a role in policy setting and I referred to the Department of the environment in this regard. Metering has a lot of practical advantages that translate into cost savings in the future under the utility model. The utility can determine what the rate of leakage is and be very precise about usage. I did not make any comment on the importance or otherwise of metering but Ervia has already outlined many of its advantages.

Ms Maria Graham

I wish to clarify my response to Deputy Cowen on whether lenders would be neutral or not as to the question of metering being in place. There will be a session on metering at which a range of issues will be discussed around the promotion of water conservation and the cost base. There have been substantial gains from the first fix programme in identifying water resources that can be reapplied.

Senator Paudie Coffey

I had a question about capital loans.

When domestic charges were suspended capital loans were introduced to continue the service and to continue the investment in Irish Water. What happened to those?

Ms Eileen Fitzpatrick

The working capital loans are generally provided to make up the difference between expected cash inflows and actual cash inflows. In the context of the suspension of domestic water charges, the capital loan, which was €96 million, was converted into equity because a working loan is not typically for ongoing operational use.

Chairman

It is moving from working capital into equity.

Ms Eileen Fitzpatrick

Correct. That applies to the €96 million.

Senator Paudie Coffey

For clarity, the subsidy for 2016 and 2017 amounted to approximately €125 million. What is the estimated increase in the subsidy to Irish Water in 2017 if domestic charges are not reintroduced?

Ms Eileen Fitzpatrick

Some €239 million is the estimate. That is on a cash basis.

Deputy Eoin Ó Broin

I thank the witnesses for the presentations. Irish Water's capital investment programme as outlined in the business plan year-on-year includes revenue funding but the majority is borrowed from private sources or the Irish Strategic Investment Fund, ISIF. If Government was to move to option three for cost reasons, as has been outlined, I presume that the balance between the smaller portion of revenue funding and the greater portion of borrowed money remains roughly the same. The source of borrowing changes and therefore the costs reduce. Is that correct?

Ms Eileen Fitzpatrick

Yes.

Deputy Eoin Ó Broin

There is no additional fiscal impact for Government from shifting that borrowing from private or ISIF to Government borrowing.

Ms Eileen Fitzpatrick

No. Nothing in the model changes except the current commercial facilities.

Deputy Eoin Ó Broin

The interest that is being charged is still being charged to Irish Water and while it is a lower level of interest, it still has to work out where that comes from within its existing business model.

Ms Eileen Fitzpatrick

Correct.

Deputy Eoin Ó Broin

We know the parameters within which borrowed funding for Irish Water has operated and I am very clear on the cost of the short-term borrowing as the €20 million figure that is in the report, but what is the projected cumulative cost of the borrowing from 2014 to 2017?

According to Irish Water there is additional borrowing from 2018 to 2021 and I would like to know what the difference is in real terms between the cost of that borrowing from the original business plan and option three, and if there is a figure that can be calculated or forwarded to us.

Mr. David Stokes

On the cumulative costs we do not have figures for 2017 but I understand that the total interest payments are in the order of €35 million to €36 million between 2014 and 2016.

Deputy Eoin Ó Broin

Some €35 million.

Mr. David Stokes

It is around €35 million or €36 million, from the figures we have.

Deputy Eoin Ó Broin

Assuming nothing is changing this year, what will the annual cost be?

Mr. David Stokes

The annual cost is around €20 million, so that would be added.

Deputy Eoin Ó Broin

Another €20 million is added to the €34 million, so it is about €54 million. Is there a figure for the difference between the cost of the finance between 2018 and 2021 from the original business plan versus option three?

Mr. David Stokes

That will ultimately depend on what rate the State decides to fund at. It could make the choice of funding on a short-term basis, as Irish Water is doing at present. That might not make a lot of sense given that this is investment in long-term infrastructure. The State, for example, could fund it on a ten-year basis at around 1.2% or 20 years at 2%, but that decision has not been taken. I cannot give an actual figure on what the saving will be but the like for like difference at the moment is the €14 million figure.

Ms Eileen Fitzpatrick

We cannot state with absolute certainty what the rate will be because markets can change. It certainly is going to be able to fund it more cheaply.

The regulatory weighted cost of capital for Irish Water is about 3% across the debt.

Deputy Eoin Ó Broin

Is the figure of €14 million an annual or cumulative figure for the years 2018 to 2021?

Mr. John Dillon

It is a standard figure.

Deputy Eoin Ó Broin

From my understanding, depending on the outcome of this committee and the deliberations of the Government, Irish Water is considering returning to the application for the off-balance sheet status in 2018 or 2019. There are two issues connected to that.

When the Department of Finance representatives came before the committee some weeks ago, Deputy Murphy asked them a question on EUROSTAT. One of the reasons it gave a negative reading to the first application for the market corporation test was that there was a mismatch in the relationship between the revenue generated by the cost of domestic charges and the borrowing requirements in the plan for the capital investment programme. The consequence of that is that in order to get to an off-balance sheet position by 2018 or 2019 a higher rate or projection of a future higher rate of domestic water charges would be required. Is that the witnesses' understanding or interpretation of that bit of the market corporation test failure?

The capital projections for Irish Water sit at around €500 million until 2019, but from 2019 to 2021 they increase significantly to between €770 million to around €900 million each year. If Irish Water, irrespective of what happens with water charges, remains off-balance sheet post-2019, is it the view of the witnesses that it could meet those capital projections within the existing borrowing envelope of the State in order to comply with the European Commission's fiscal treaty rules?

I have one further question for the Department.

Ms Eileen Fitzpatrick

EUROSTAT is an independent European body. When it examines such matters, it has certain quantitative tests and is also entitled to take a qualitative view. Its opinion is absolute in these matters. Therefore, I cannot comment on its thinking process. It would apply a couple of very basic tests. It would look for the revenue to be generated to be at least 50% of the operating costs. It would look for economically significant prices to be charged and determine what the level of Government control would be.

Deputy Eoin Ó Broin

I ask Ms Fitzpatrick to put the term "economically significant prices" in plain English.

Ms Eileen Fitzpatrick

It is very hard to say what an economically significant price is, but EUROSTAT can examine a regime of water charges across Europe. I am careful in that I am saying I cannot say what EUROSTAT thought, but it may have argued that Scottish Water charges £400 or £476.

Deputy Eoin Ó Broin

In trying to work out the economic cost, the level of borrowing projected for capital investment would have to be taken into account. If one water utility had a very low level of projected borrowing, that would impact on how EUROSTAT viewed that test, whereas a very high level, such as in the case of Irish Water, could also have an impact.

Ms Eileen Fitzpatrick

I think it might be less concerned with that than with production costs. For example, Scottish Water had a very intensive capital period which it is now coming back from, but Irish Water is at the start of a very intensive process. I do not think the capital would have played a significant role. I cannot be absolute on that.

Deputy Eoin Ó Broin

Will the capital funding post-2019 remain on or off-balance sheet? Would Irish Water be able to sustain the projected capital investment post-2019 within the existing debt rules that have been subscribed if the figure is on-balance sheet?

Ms Eileen Fitzpatrick

That would be a matter for the Department of Finance to comment on.

Deputy Eoin Ó Broin

My last-----

Chairman

We are way over time.

Deputy Eoin Ó Broin

This is my last question to the Department. One of the issues the committee has to consider is that of a charge for excess or wasteful use of water. There are two relevant questions that I think we are all interested in. Depending on where one pegs average household or personal use, what would be the potential revenue stream from it versus the cost of administering such a scheme? Depending on the estimate of average household use, is the Department examining what such a stream could raise versus what it would cost to administer it in terms of building enforcement?

Chairman

I will come in there. We are in the process of preparing or looking for a document that will answer those questions and, hopefully, we can address it at the meeting on metering.

Deputy Eoin Ó Broin

This is separate to metering. This is more in terms of-----

Chairman

I am conscious of the time.

Deputy Eoin Ó Broin

Has the Department started looking at the issue? Can it provide the committee with any information on it?

Ms Maria Graham

We have been preparing some material on scenarios for the secretariat. To answer two issues, the €5.5 billion in capital investment in Irish Water is reflected in the capital plan and is, therefore, reflected in the budgetary perspective at the moment. Obviously, budgetary arithmetic is done on an annual basis and certainty of funding - a phrase to which we always come back - is one of the issues that concerns funding models. I would have pointed to that when first before the committee. In terms of examining scenarios and revenue streams that may come from an excess charge, this will depend on where it is set and the objective to be achieved. For instance, the plastic bag levy is an environmental charge that is designed to change behaviour. It is not intended to be a sustainable revenue source over the long term. This will be something that causes people to adapt their behaviour in order to conserve water and which will also have an impact on production costs over the long term. I am cautioning against simply looking at what are the administration costs and core revenue because the objective may sustain a different perspective.

Chairman

I need to interrupt because I want to give an opportunity to some other members to speak.

Deputy Eoin Ó Broin

Thank you, Chairman.

Chairman

That went on for a while, although they are important questions. I call Deputy Mary Butler.

Deputy Mary Butler

I would also like to speak on the capital investment requirements. We heard at earlier meetings that Irish Water's long-term investment planning strategy has been set out and that the investment required to address all known deficits is estimated to be circa €13 billion. Is the overall €13 billion figure achievable in the absence of a direct charging regime? It would appear from answers given to Deputy Barry Cowen that the capital investment programme can be met with the State being the main customer. Therefore, is this figure of €13 billion achievable with the State as the main customer? Is the timeframe for the implementation of the capital plan feasible without a direct charging regime? Those are my first two questions. I have two more, but perhaps those two might be answered first.

Ms Eileen Fitzpatrick

The €13 billion is Irish Water's total estimated cost of capital expenditure. The easiest way to look at it is that there is a business plan which has been approved by the regulator. Therefore, there is a plan. What is happening is that the revenue that was going to come from domestic customers is now coming from the State. The plan in so far as the Commission for Energy Regulation has looked at it is a feasible plan, but one line is being substituted, with the State now taking the place of the domestic customer. Whatever portion of that statement of the plan, if one likes, that was coming from the domestic customer is being substituted and the Government is stepping in in lieu. Everything else in terms of financial expectations and planning etc. stays the same. There is one fixed-----

Deputy Mary Butler

Therefore, with the State as the main customer, the figure of €13 billion is achievable in the absence of a direct charging regime. Is that what Ms Fitzpatrick is saying here today?

Ms Eileen Fitzpatrick

In terms of the business plan, as set out by Irish Water and approved by the regulator, when commenting on future developments one must be mindful that markets can change and things can happen, as occurred recently. In so far as there is a sensible business plan, the answer to the Deputy's question is "Yes".

Deputy Mary Butler

As of now, the implementation of the capital plans within the timeframe set out by NewERA in previous meetings should stand.

Ms Eileen Fitzpatrick

In fairness, the greatest focus has been on the first part of the capital plan.

Deputy Mary Butler

That is the €5.5 billion to be spent between 2014 and 2021.

Ms Maria Graham

Under the business plan, approximately 46% of the capital plan would come from debt, 28% would come from equity and 26% would come from customer revenue. This refers to the period from 2017 to 2021. Under this model, customer revenue from charges would help to fund the capital programme. It is obviously feasible for the State to step in under the expert model arrangement or in another scenario. The question is the certainty one would have in this regard and what would be put in around that mechanism. The expert commission had one view in which the State would be the customer. The less revenue one has from charges, the more one has the issue of water at the table, alongside housing, transport and other areas and sectoral interests that are seeking to secure capital. This is simply part of the normal Government arithmetic.

Deputy Mary Butler

To return to the figures provided by the Department, the customers of Irish Water would only contribute 26% to overall costs.

Ms Maria Graham

Yes, 26% of the costs of capital.

Deputy Barry Cowen

That figure would only apply in a scenario of 100% compliance.

Deputy Mary Butler

On efficiency in operation, does the removal of direct customers and suspension of charges change the potential of Irish Water to meet its efficiency targets? Will the cessation of the water metering programme affect the efficiency drive?

Ms Eileen Fitzpatrick

This matter is overseen by the regulator, which has set out highly ambitious targets for a reduction in operating costs in Irish Water. I do not expect it will have an impact on the regulator's view on what would constitute an efficient operation. Irish Water must meet its targets and report on them.

Ms Maria Graham

To address the same point, obviously there is an efficiency target. Regarding its implementation, metering has given rise to issues such as identifying leakage. The benefits of metering are more long term than on a year by year basis. If money is being saved by identifying leaks and reducing consumption, the rate at which capacity and plants must be built is deferred into the future. One is, therefore, comparing a short-term issue with a long-term one.

Deputy Mary Butler

As matters stand, is metering complete as far as the Department is concerned?

Ms Maria Graham

The first phase is complete in that more than 800,000 of the targeted 1 million meters have been installed. It was always the case that phase 2 would be subject to the regulatory process in terms of the decisions around the costs and benefits of future phases.

Deputy Paul Murphy

Irish Water tried to install meters in various locations but was prevented from doing so.

Ms Maria Graham

The first phase of metering was for meterable projects, with a target of installing 1 million meters. Of these, 200,000 were not completed but the other households, which were apartment blocks and other properties that were not considered technically feasible, would have been a matter for future phases based on the costs and benefits and an examination of the technology and so forth that would be involved. This would have been a matter for the regulatory process.

Deputy Mary Butler

The current phase is complete.

Ms Maria Graham

Yes.

Chairman

We have time to allow Deputy Pringle to put one or two quick questions. Two or three other members wish to contribute but I must be conscious of time as other witnesses are due to appear this afternoon. I will allow this session to continue until 1.15 p.m. but I ask speakers to keep it tight when putting their questions.

Deputy Thomas Pringle

I will try not to ramble on. I have two questions, mainly for the Department. To go back to the response to an earlier question, it was said 26% of the capital funding was provided by domestic water charges within Irish Water. Is it not the position that the Government provides all of the capital and that the figure of 26% is not exactly accurate? Will Ms Graham explain and expand on this?

Ms Maria Graham

There are domestic and non-domestic charges in the business plan model, as well as a subvention which equates to the State purchasing water as a customer in respect of the capped charges or free allowances. The amount is equal to the allowed revenue set by the regulator. What it sets as the allowed revenue covers operational expenditure and the cost of funds referred to previously to fund the capital programme. A combination of a surplus in revenue over operations, an equity provision which in the coming years will average €270 million and an amount of debt raised make up the capital spend.

Deputy Thomas Pringle

Regarding the figure of 26% referenced earlier, does Irish Water fund the cost of borrowing, that is to say, the interest on it?

Ms Maria Graham

It comes from the revenue raised from charges.

Deputy Thomas Pringle

It funds the actual-----

Ms Maria Graham

There is revenue raised from charges; there is equity or capital contributions coming in from the State and there is borrowing. They are the three elements that make up the funding for the capital programme.

Deputy Thomas Pringle

One of the obstacles that is constantly mentioned - it has been mentioned a number of times today - is certainty of funding for Irish Water. In a situation where the State is the sole customer of Irish Water, obviously it will bill the State every year. Is that not funding of a different type from the one about which Ms Graham has spoken in terms of certainty of funding? The State can decide whether it wants to invest in roads. It is not the case that Transport Infrastructure Ireland bills the State every year for a service provided. It is a different type of funding requirement. Is that not the case? It would fall due as a liability rather than be something over which the State would have control in deciding whether to give X or Y amount. The amount billed is a liability rather than being determined by a budgetary decision.

Ms Maria Graham

Yes. It is different from a previous funding model that would have seen operations and capital expenditure funded in different ways as in other areas of infrastructure. It is dependent on the bill being presented to the State and a mechanism being in place to enable the State to honour it. There is certainty. There are mechanisms in other countries where the state, for example, gives an outline of the funding likely to be available in a multi-annual period and the regulator and the utility work in that vein. We set out in one of our earlier papers how that might work. The Deputy is correct. There is greater certainty from the utility's perspective if it can simply present the bill to the State as a sole customer and have it paid.

Deputy Thomas Pringle

The model proposed by the expert group is that the utility presents a bill to the State. There is not that level of uncertainty if it is a liability on the State rather than a decision it can make on how much it will give Irish Water.

Ms Maria Graham

It depends on what the mechanism is when the bill is presented as to whether the State will have to honour the exact bill or whether it will be part of the budgetary process.

Deputy Thomas Pringle

It is a bill that has to be honoured rather than being part of the budgetary process.

Ms Maria Graham

If that is the mechanism put in place.

Deputy Thomas Pringle

That is the mechanism being proposed by the expert group.

Ms Maria Graham

I am distinguishing in terms of whether there would be a legal or a policy requirement in place. Budgets and appropriation accounts tend to be on an annual basis and the Oireachtas does not tend to be tied to a multi-annual process in that way. What the mechanism------

Chairman

I really need to move ahead.

Deputy Thomas Pringle

It does not tend to be, but it is not inconceivable.

Chairman

No, seriously.

Deputy Thomas Pringle

I have waited to be given time also.

Chairman

Some members may have no time.

I am trying to move on. Deputy Jan O'Sullivan is next.

Deputy Jan O'Sullivan

I want to ask the NewERA representatives if they are aware of the letter of 12 January to the Minister for Housing, Planning, Community and Local Government, Deputy Simon Coveney, from the European Commissioner for Environment, Maritime Affairs and Fisheries, Mr. Karmenu Vella, regarding possible fines on the State. At the end of that letter, the Commissioner states:

[...] in order for the charge on excessive or wasteful use of water to attain its purpose, the consumption of water for normal use should be set at a reasonable level, and the charge for excessive or wasteful use should be dissuasive. The completion of metering will be instrumental to this effect.

Has NewERA done any work on factoring in the possible costs to the State of fines for breaches of EU directives?

Ms Eileen Fitzpatrick

No, and we have not seen that letter. We would not, in the normal course of our work, be party to that type of correspondence. Our role is to advise Ministers from a financial perspective on consents they might give or capital actions they might take. We have done no work on fines, their potential level or on what charges for excessive use might be.

Deputy Jan O'Sullivan

From the committee's perspective, obviously we will have to consider all of the possible financial implications of the recommendations we make. Does Ms Fitzpatrick envisage that NewERA might be asked to look at that?

Ms Eileen Fitzpatrick

That would be a matter for the Minister. I do not know if the departmental representatives want to answer-----

Deputy Barry Cowen

Just on a point of order, did the Commission write to this committee too?

Chairman

The Commission wrote recently to confirm the names of those who will be attending. That is the only-----

Deputy Jan O'Sullivan

This letter was-----

Deputy Barry Cowen

The Commission made no comment on the expert commission's report-----

Deputy Jan O'Sullivan

-----circulated to all members of this committee. It is a letter from the Commission to the Minister, Deputy Coveney, but it was circulated to the committee. It is on that basis that I am asking the question.

Chairman

It was circulated a number of weeks ago. One or two members asked for that letter so we got copies of it. I am keen to go on. I understand that this is not an area or space with which NewERA deals, in terms of what the fines might be.

Ms Eileen Fitzpatrick

The point is that they are fines for the State.

Chairman

Yes, so, as I understand it, that is outside the brief of NewERA.

Ms Eileen Fitzpatrick

Absolutely. We would not normally deal with such issues.

Deputy Jan O'Sullivan

I know we will have representatives of the Commission before us but maybe the departmental representatives would comment on that, in terms of whether it has done any work on the question of fines.

Chairman

Can we have a quick "Yes" or "No" answer?

Ms Maria Graham

We can probably get some data for the committee on levels of fines from other sectors. I am not aware of anything on the same scale that would allow us to speculate on the potential size of the fines.

Deputy Jan O'Sullivan

I am conscious that other members want to contribute so I will not put my second question to the witnesses.

Chairman

I thank Deputy O'Sullivan for that. Deputy Kate O'Connell, who has been very patient, is next.

Deputy Kate O'Connell

The witnesses have not considered the impact of fines. The water bill is projected to be €13 billion over ten years. In the context of the recommendation in the expert group's report that there be a charge for excessive usage, has the Department considered the possibility that it might have to give money back to people who use less than the water allowance? Has consideration been given to the possibility of a monetary reward for water conservation? Perhaps people might get a cheque if they have barrels to collect rainwater or if they invest in their homes. Have the witnesses considered the impact of that?

I want to get the figures clear in my head. There is a €5.5 billion investment out to 2021 and the €13 billion figure is for ten years. Is that correct?

Ms Eileen Fitzpatrick

Yes.

Deputy Kate O'Connell

The shortfall is €239 million per year from non-payment of domestic water charges. If there are no domestic water charges for ten years, that adds up to the guts of €2.4 billion. Am I correct in saying that is the amount we will be out?

Ms Eileen Fitzpatrick

Yes, roughly.

Deputy Kate O'Connell

That is the price of two children's hospitals. I just thought I would put that to the committee - that is the value of the money and the cost to services of the non-payment of charges.

Chairman

Senator Lorraine Clifford-Lee is next and I thank her for her patience.

Senator Lorraine Clifford-Lee

I will be as brief as possible. My questions are directed to the Department officials. The Irish Water assumed compliance rate to the end of 2017 was 73%, with expected cash receipts of €259 million. Following the suspension of water charges in the first quarter of 2017, the Department of Finance adjusted the expected cash receipts amount by 25% to €194 million. On what basis was it assumed the compliance rate would be 73%? The reduction in cash receipts will have a knock-on effect in terms of future public finances. The Minister for Public Expenditure and Reform announced a new public pay deal of €170 million which is to come from within existing resources. Has there been any allocation of resources by the Department of Housing, Planning, Community and Local Government to that pay deal and, if not, is there any scope for that going forward?

Ms Maria Graham

By way of clarification, the €13 billion is over 20 years. In regard to the suspension of water charges, over the term of the business plan assumptions were made around levels of compliance which, as members will be aware, were rising all the time. As stated by Ms Fitzpatrick, in addition to the subvention, the Department would have given a working capital loan to Irish Water in recognition of the lag between billing and receipt of income. In terms of 2017, the working capital loan was €39 million and it was converted to subvention to address the gap between expected revenue-----

Senator Lorraine Clifford-Lee

On what basis was it assumed that the compliance rate would be 73% given actual compliance in 2015 was 53%? On what basis was it expected there would be a 20% increase?

Ms Maria Graham

The plan dealt with the position from 2015 to 2021 in a rising sense and the funding reflected that over time. The plan for Irish Water is based on an accruals basis and we look at what its cash requirements are on a year-by-year basis. Its cash requirement in terms of subvention was originally €474 million. That reflected its expected intake in terms of customer revenue. We added €125 million to that to deal with the suspension of charges.

Senator Lorraine Clifford-Lee

As matters progressed, did the Department not see a need to readjust that figure?

Ms Maria Graham

We deal with it in terms of accruals or actual bills and in the expectation that the billed revenue comes in at some point - in other words, the billing for 2017 is the expectation in terms of receipts. The working capital loan deals with the lag in that regard.

Senator Lorraine Clifford-Lee

So there is no reality to the 73% rate?

Ms Maria Graham

The percentage was chosen on the basis of what the expectations would have been of a utility and what our expectations are in terms of Irish Water receiving its revenue.

Ms Eileen Fitzpatrick

The atypical pattern is that it does rise over time.

Senator Lorraine Clifford-Lee

Is Ms Fitzpatrick speaking about an atypical pattern from abroad?

Ms Eileen Fitzpatrick

Yes, and the ESB. One can only look at other benchmarks.

Senator Lorraine Clifford-Lee

My second question was whether the Department of Housing, Planning, Community and Local Government will be allocating resources to the public pay deal.

Ms Maria Graham

I am unable to respond to that question as I deal only with issues relating to Irish Water. The Department's 2017 Estimates in relation to current pay are set out. Future pay levels will be a matter for the Department of Public Expenditure and Reform.

Deputy Barry Cowen

We are asking for information that might inform the committee on the likely impact of the pay deal on the Department.

Chairman

Perhaps Ms Graham would provide a written answer to that question to the committee or would respond to it by way of response to a parliamentary question.

Senator Lorraine Clifford-Lee

It is a question I am very eager to get a response to.

Ms Maria Graham

The figure of €240 million has been used as a general estimate of the likely extra cost of what needs to be replaced.

If revenue is generated through an excess charge, it abates that amount somewhat. That revenue would have to be found by the Government somewhere.

Deputy Barry Cowen

Some people have been finding revenue according to statements from-----

Ms Maria Graham

It is not-----

Deputy Barry Cowen

-----the Department of Public Expenditure and Reform in recent months. I need to know what impact that will have on the Department and the potential of our committee to make a recommendation.

Ms Maria Graham

All that is reflected in the Department's Estimates at this stage is the suspension of charges. Nothing else is reflected. That decision would have to be made based on the outcome of this committee.

Chairman

I propose that we ask for a written reply. There will also be an opportunity to ask a parliamentary question on the matter.

I thank NewERA and the Department of Housing, Planning, Community and Local Government for their assistance this afternoon. That concludes this part of the meeting. We will suspend briefly to enable our next witnesses to take their places.

Ms Eileen Fitzpatrick

For the record, I alluded to €810 million of external borrowings.

Chairman

Ms Fitzpatrick did.

Ms Eileen Fitzpatrick

The total borrowings were €1.26 billion, including a loan from the Ireland Strategic Investment Fund, ISIF, but we were discussing external borrowings because it was within government.

Chairman

Ms Fitzpatrick has reminded me of an important question asked by a number of members at previous meetings. When, or if, Irish Water borrows, are those borrowings secured against the assets of Irish Water or its cashflow?

Ms Eileen Fitzpatrick

They are unsecured.

Chairman

I thank Ms Fitzpatrick.

Sitting suspended at 1.17 p.m. and resumed at 1.19 p.m.