JOINT COMMITTEE ON THE ENVIRONMENT, TRANSPORT, CULTURE AND THE GAELTACHT debate -
Tuesday, 10 Jan 2012

Design, Build and Operate Water Schemes: Discussion

Chairman

We are in public session. I welcome the representatives before the Oireachtas committee. As the Dáil has yet to come back fully from recess and it will not sit until tomorrow so the committee is the only operation taking place in the Houses this evening. I hope you will be the number one item on the "Six-one" news but I do not think you will be. Thank you for coming before the committee and for accepting our invitation. We are discussing the topic of water provision - design, build and operate systems. I welcome the following: Mr. Paddy Beirne, water and sewerage caretaker, Leitrim County Council; Dr. Eoin Reeves, University of Limerick; and Mr. Michael Wall, sector organiser for local authorities, SIPTU. Thank you for your attendance.

I wish to draw your attention to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. However, if you are directed by the committee to cease giving evidence in respect of a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I also wish to advise that the opening statements submitted to the committee will be published on the committee’s website after this 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. I propose that we take opening statements in the following order: Leitrim County Council, University of Limerick and SIPTU. Is that agreed? Agreed. Before I call on Mr. Beirne to commence I will make some comments.

We have been discussing the water topic in recent months and we have gathered a good deal of evidence. This is the second last meeting we will hold involving witnesses. Deputy Flanagan's suggestion to broaden the range of our inquiries to include design, build and operate schemes was set out to assist us to consider the broader infrastructural needs and our capacity for water provision in years to come and, I believe, this approach is worthy of the committee's examination as part of the broader topic. I look forward to engaging with the witnesses today and to hearing your views and proposals. I call on Mr. Beirne to address the committee.

Mr. Paddy Beirne

I wish to give the committee a brief outline of some figures of treatment plants that have been provided in Leitrim to replace existing waste water treatment plants. Leitrim towns and villages was the first scheme. This included the replacement of six existing plants and five plants in villages where no plant existed prior to this. Plants existed in Drumkeerin, Drumahaire, Kinlough, Kiltyclogher, Tullaghan and Rooskey. The five villages that had no existing plants were Killargue, Ballinaglera, Drumcong, Jamestown and Cloone. All 11 plants are now in operation at a cost of €10.6 million, towards which Leitrim County Council made a contribution of 20%. The cost of the six existing old treatments plants operated by Leitrim County Council in 2008 was €166,000, with a population equivalent, PE, of 4,300 which equates to €38.60 per PE. Moreover, this figure also includes networks. The operation and maintenance cost of the 11 new plants for the first year is €589,428. This figure is made up of a fixed standing charge of €514,700, which is fixed for each of the 20 years. Consequently, this figure will accumulate to almost €10.3 million in the 20-year period. As for the variable charge of €74,730, this charge will increase as population, that is, flow and load, increases from year to year. The operation and maintenance cost to Leitrim County Council will work out at €98 per PE for the first year. Based on expectations of a PE of 10,050 by the year 2024, the PE cost by that time will be €67. However, this depends completely on the population increasing to that figure as if it does not, the cost will remain within the range of €67 to €98 per PE.

I will provide the joint committee with the breakdown of the costs for each plant. The table contained in my written opening statement shows the costs in the six existing plants for which figures are available. The plant in Drumahaire cost €48,000 in 2008, while the new plant there cost €98,704 this year. The plant at Drumkeeran cost €21,000 in 2008 but the new plant cost €60,424 to run. The old plant at Kinlough cost €48,000 in 2008, while the new plant there now is costing €107,156. The plant at Kiltyclogher cost €11,000 to run in 2008 and its replacement now costs €45,482. Similarly, the plant at Tullaghan cost €8,000 in 2008 while today it costs €21,271 and finally, the plant at Roosky cost €30,000 in 2008 but now costs €118,508. This cost constitutes a massive difference from when they were operated by the council. While all these plants required upgrading, the figures are unbelievable when one compares a total cost in 2008 of €166,000 with a total cost today of €589,428.

I refer to a waste water treatment plant operated by Leitrim County Council in Newtowngore village, which is similar to the five new plants built where no plant existed previously. It meets all the required guidelines of the urban and rural water directive and the Environmental Protection Agency, EPA, and cost €7,007 to operate in 2011. A similar design, build and operate, DBO, plant at Ballinaglera is costing €21,293 in its first year. Moreover, that excludes the networks, the cost of which is included in the figure for Newtowngore.

The second project undertaken, at a cost of €7.9 million, was the Carrick-on-Shannon waste water treatment plant. Carrick-on-Shannon is the largest town in Leitrim. The old plant had a PE of 3,000 people, was operated and maintained by Leitrim County Council and cost €200,000 per year to run. This figure of €200,000, to which I refer in respect of the existing old plant, was the council budget provided. If that sum was not used on this plant, it gave the council flexibility to do something, in that it could move it around, adjust it a bit or have a little job done somewhere else. I make the point that under the DBO, the money must be provided at the beginning of the year and is untouchable. The plant was overloaded and needed replacement. The cost of the operation and maintenance of the new plant was €393,179 in year one. The fixed costs are €284,256 per year in 20 years, accumulating to approximately €5.7 million in 20 years' time. The PE cost of this plant is €65 per PE, based on a PE of approximately 6,000. The operation and maintenance charge in year 20, when a design PE of 11,500 is expected to be reached, will be €453,781 or €40 per PE. While this depends on a population increase, I note County Leitrim is being hit by emigration at a notorious rate.

The above costs for all existing plants include those for networks and plant operators. However, the figures for the DBO plants do not include networks. The same number of caretakers remain employed by Leitrim County Council and still maintain the networks down to the gates of the DBO plants. This is not reflected in the DBO cost, which would have a higher price were one to take into consideration the continued existence of the caretakers. While the latter have been relocated, they still remain in the system. No consultation took place prior to the DBO approval. This was for the simple reason that the council management was instructed by the Department that it would be a DBO or nothing and that DBOs were the only show in town.

I turn to the role of a caretaker. A caretaker is the lowest-paid person in sanitary services in all local authorities in comparison with the engineering and technical staff. Caretakers provide cover seven days per week in most local authorities and always are in the front line to restore services in difficult times such as, for example, those occasioned by severe frost, burst water mains, water shortage or blocked sewers. They must work on their own initiative and outside office hours. Apart from having highly unsociable hours, they also possess local knowledge in this regard. The loss of skills and expertise on foot of the DBOs taking over and the relocation of the existing caretakers is immeasurable. However, the attitude of the Department is that it is a DBO or nothing and they are the only show in town. Regardless of the amount of training given in the meantime - it is important that training should continue - in 20 years' time the existing expertise will be lost because one cannot put it into practice if one does not have the running of the plants. The DBO contractors will have the ball at their own feet and the local authority will not be in a position to take over the plants in 20 years' time because of the loss of these key skills and will be forced to enter another contract.

I will cite some comments made at a meeting with officials from the Department on 24 November 2011. In response to the question, "Why DBO?", the departmental officials stated there is no or insufficient in-house expertise to operate plant of scale and complexity. This is complete rubbish because the expertise is there as we have been running the plants. While we might need up-skilling for the newer plants, we are there. However, the departmental officials have stated this is what they have been told by the local authorities. As for possible advantages over conventional methods, it was suggested a DBO ensures the risks inevitably associated with large scale infrastructure procurement are appropriately borne by the relevant stakeholders and the exposure of the Exchequer, and thus the taxpayer, is minimised. In response to these points, I suggest the consistent use of the DBO option by the Department in the absence of it being robustly tested always leaves the Exchequer and taxpayers highly exposed. The Department's view, as expressed at the aforementioned meeting, was that it is not really up for turning. It does not perceive anything wrong with the figures I have provided members that show the cost of these plants is three times that of the conventional plants operated by Leitrim County Council or any other council. Until the time comes when the tail stops wagging the dog, this will continue and it is unsustainable. In addition, I will provide members with figures for four existing plants that are meeting all requirements in the other four towns in the county. They are working out at €38.77 per PE at present, while meeting EU, EPA and wastewater directive guidelines. Consequently, the argument for the DBO only exists if people are not listened to. Were it cheaper or the same price, we would have no business in appearing before members.

Dr. Eoin Reeves

I thank the Chairman and members. My name is Eoin Reeves and I work at the department of economics in the University of Limerick. My background is that I conduct research into topics including privatisations and public private partnerships, PPPs, which explains why I have been asked to speak to members today. I will talk about the DBO model of procurement and about PPPs in general terms. The DBO model has been used extensively in Ireland since the late 1990s for the procurement of water services infrastructure. This marks a general shift towards PPP models as an alternative to traditional procurement models in the past 15 years or so. It is important to understand the difference between traditional and PPP models. Under traditional procurement models, a procuring authority such as a county council or another local authority would engage in separate contracts for the design element of a water treatment plant and a separate contract for the construction element. Under DBO, design, build and operate, and other PPP models - but DBO is the big one in the water services sector - the difference is there is a single contract for the different elements of the project life cycle which are the design element, the construction element and construction, the plant remains under the control of the same private contractor who runs it for a period of 20 or 25 years. This integrated approach to the delivery of infrastructure and the service on the back of the infrastructure is argued as being one of the main advantages of the PPP model.

The PPP model in general has been adopted extensively in this country since 1999 when the then Minister for Finance announced a set of experimental pilot projects. The PPP programme mushroomed as a result of the urgent infrastructural needs which were quite manifest as a result of economic growth at the time. I have provided the committee with the latest available evidence in my written submission and it is contained in a table. On the basis of data from the Department of Finance, our best estimate is that there are 109 different projects being procured under PPP. Of that 109, 66 are in the water services sector, such as waste water treatment plants and the remaining are in sectors such as the schools sector. A number of schools are being procured using the PPP model, some of which are up and running. Other sectors include third level educational facilities and some social housing programmes. In the case of the social housing programmes some have failed and one is up and running. Other projects include environmental infrastructure such as incinerators. Roads projects are the big ones as they include the motorway network running out of Dublin to most of the other big cities. There are 39 non-water PPPs. The available evidence indicates that these are at different stages of procurement and approximately 15 are up and running. Therefore, since 1999, only an estimated 15 PPP projects, including those roads projects, are actually up and running. This indicates that the PPP procurement process is complex and it takes time for these projects to come to operational stage. That said, overall there are 39 at different stages, including those in operation.

The water services sector accounts for the bulk of projects, a total of 66 of the 109. The high number of DBO projects in the water services sector is attributable to two reasons. First, there has been massive investment in the water services sector. The Department of the Environment, Community and Local Government provided us with data which indicates that €6.2 billion has been invested in water infrastructure between 2000 and 2010. The second reason DBO is so popular in the water services sector is that it is the preferred procurement method of the Department which has explicitly stated in writing dating back to 1999 that DBO is the preferred procurement model on the grounds that it offers better value for money.

I will scrutinise that argument on the basis of the following information. The international experience of water privatisation in general and the DBO model in particular is not impressive. A world-wide wave of privatisation in the water services sector commenced in the late 1980s and early 1990s. This was largely confined to developing or low-income countries. To pardon the pun, this literally dried up in the late 1990s, around 1997, due to the failure of many of the contracts entered into by public authorities worldwide and the services were returned to public control. I have given a number of examples in my written submission including Atlanta in the United States, Latin American cities such as Buenos Aires, and some Bolivian cities are also mentioned. More recently, this trend of reverse privatisation is evident in France and in Paris, the city brought a DBO back into public ownership. The most recent example of which I am aware is Pécs, a town in Hungary. There are other examples from eastern Europe which I include in my written paper.

The second reason is that the privatisation of water is a sensitive issue. In many of these cities because of disenchantment with the prices charged for water there has been significant public resistance and street protests. As a result, by and large, if I were to conclude on the basis of the evidence known to me, I would argue that water privatisation, per se, has been extremely unsuccessful. This is the reason that between 90% and 100% of all water, worldwide, is provided by the public sector.

As regards how the PPP process in the water services sector has been administered in this country, it is the question of value for money. Value for money can be defined as lower whole-life costs, project lifetime costs under whatever model comes out best. The argument made by the Department of the Environment, Community and Local Government is that PPP or DBO provides better value for money. This argument does not really stack up in terms of the international evidence because of the lack of hard evidence to allow for a rigorous statistical analysis required to test such a proposition. Many of the contracts in existence are still in their infancy. However, we can scrutinise the arguments in favour of DBO on value for money grounds. I will confine my argument to two points. The first argument is that DBO is governed by competition for contracts and competition is good for economic efficiency. I buy into that argument completely. However, competition is also involved under traditional procurement methods and the relative advantages of DBO are difficult to discern. Second, competition, although an ideal, is not something that is necessarily realised in practice. There are many obstacles to competition such as low numbers of bidders and the water services sector worldwide is dominated by some big players, the two biggest being French companies, namely, Veolia and Suez. It is well documented that these are the biggest players and they dominate the market for contracts in the water services sector. There are other reasons that competition is not necessarily realisable. These companies have been fined by the European Commission for uncompetitive practices such as collusion in bidding practices. This undermines the competition argument. I refer to examples of private contractors - not just in the water services sector - who will low-ball or underbid in order to win business and when it all goes pear-shaped, the risk falls on the public or the end-user of the public services. While the competition argument is appealing on paper when scrutinised it is open to question.

The other significant argument with regard to PPP in general and DBO in particular is that the model allows for transfer of risk to the private operator which incentivises the private operator to provide a better quality of service at a lower cost. This argument is backed up by the fact that the integrated nature of the PPP model, that it is a case of design, build and operate, allows for risk transfer to happen in practice. This means that if the operator does not provide a good infrastructural asset and then ensures it works over the lifetime of the contract they will be penalised. However, in reality, there is a big difference between what might be put down in the contract - a contract one will never see because of accountability issues - and de facto, actual operation of risk transfer.

I have done some work in the schools sector. I have visited the schools that have been procured under the PPP and the evidence suggests that despite under-performance by the contractor in the schools sector, there are no records of penalties for under-performance. This is a common story in the international PPP literature. A lot comes down to how the public sector manages the PPP contract over the life of the contract. It is a common sense reality but the evidence suggests there is far more experience in dealing with the commercial realities of a PPP contract on the part of the private sector than is the case on the public sector side. This may change over time.

My final point is to examine the value for money argument as regards PPPs in the water services experience in Ireland. During the past 12 or 13 years we have built up an impressive institutional framework to facilitate the use of the PPP model. An important element of that framework takes the form of the guidelines issued by the Department of Finance in respect of testing procurement models for value for money. The bottom line is that if the PPP model is to be adopted by a procuring authority, it is necessary to use a robust financial test in order to demonstrate better value for money. If the latter cannot be demonstrated, the guidelines suggest that traditional procurement procedures should be used.

The value for money test is not perfect by any stretch of the imagination. However, I will not discuss the nuances of that matter at this point. Imperfect as it is, the value for money test is supposed to be objective and it is an important tool of accountability in PPP procurement. I stress the word "objective". It is absolutely necessary that when the value for money test is conducted, it must be carried out on an objective basis and that the different procurement methods must be treated objectively and fairly.

The fact that the Department of the Environment, Community and Local Government has explicitly stated that DBO is the preferred method of procurement in the water services sector explains why there have been so many DBOs here to date. A number of problems have arisen in respect of individual procurements as a result of this approach being taken. These include the fact that even where value for money tests have been conducted in an objective manner and have demonstrated better value for money under traditional procurement, projects have not received approval because they are not consistent with the preferred policy of the Department of the Environment, Community and Local Government. There are a number of examples of which I and the committee's other guests are aware where the provision of vital infrastructure has been delayed as a result of disputes between individual local authorities and the Department regarding whether DBO or traditional procurement offer the best value for money.

The value for money test indicates that traditional procurement provides better value for money and this gives rise to a huge issue in the context of accountability. When one moves from a traditional procurement model to PPP, a governance issue arises as a result of increased private sector participation in the delivery of vital public services. The private sector interests involved must be held accountable, as must the decision makers who put the contracts in place. One of the tools to be used in this regard - imperfect though it may be - is the value for money test.

PPP and DBO certainly offer a degree of potential. However, they give rise to a number of major challenges for public sector managers and officials in the context of managing the process effectively. Those challenges, one of which relates to accountability, are not easily surmountable. If the PPP model is to work successfully and if it is to be useful as we move forward, meeting the accountability challenge by, at the very least, conducting value for money tests objectively rather than proceeding on the basis of preferred methods of procurement would represent a start. There is a long way to go in respect of this matter.

Mr. Michael Wall

SIPTU represents the general operative grades in the local authority system and this includes those who work within the water services. The staff to whom I refer are involved in the production of potable drinking water, in wastewater treatment and in the maintenance of networks. Through our professional-technical body, we also represent the engineering grades.

Our members play a major part in this very important infrastructure of the State. The provision and maintenance of what is an essential, life-sustaining substance - water - continues to be a core activity of local authorities. Our members have, during the entire period in which local authorities have been in existence, developed skills and expertise in the context of maintaining and developing water services for local communities. Water is a substance which is of such vital interest and is an integral part of existence and we have always viewed with caution any attempt to treat it as a simple commodity which could justify a sole economic strategic approach on behalf of society through Government policy. It is against this background and with this motive that we have consistently monitored and tried to influence, where possible, the Government approach to water.

The development of PPPs in Ireland commenced in the late 1990s. On 21 May 2001 the first guidelines - the Framework for Public Private Partnerships - were published. These were followed in 2005 by the Guidelines for Unions on Consultations with State Agencies and Public Authorities in the Republic of Ireland concerning Public Private Partnerships. These documents outlined the mechanism by which the suitability of any infrastructural project would be assessed and tested to ascertain if the PPP model would be used. In principle, they were designed to ensure that the PPP route would only be utilised following what has been repeatedly referred to as a "robust test". Part of that test was to be a comparison between full retention within the State agency structure or via the PPP system. Following ten years of involvement, it is our view that these protections have failed.

Very early in the process, use of the PPP model began to become common in the water sector, particularly in the context of wastewater treatment. There was sudden and strong support from the water services investment unit of the Department of the Environment, Community and Local Government for this model. In other words, it seemed that contrary to the concept of a robust test of the choice of route for the project, there was a developing indication that the Department had a preferred option.

In the area of water services, local authorities have the primary and legal role. Such services include the provision of potable water - which involves treatment and testing - the collection, treatment and disposal of wastewater and the maintenance and provision of effective and efficient networks. These networks consist of pipes which are to water what runways and airports are to airlines and what power lines are to electricity generators and providers. The networks have not been impacted upon by PPPs because the private sector has shown little interest in them. It is at the two ends of the pipe, so to speak, that the private sector has displayed an interest. At one end is the treatment process and at the other, namely, in the non-domestic commercial area, is the water meter.

Through the water services investment programme, the State provides financial support to local authorities in order that its water infrastructure might be upgraded and developed. This has been the first point of decision making in the context of the procurement option. When a local authority submits its requirements for water to the Department, it then proceeds to carry out a consultation in accordance with the approvals indicated within the water services investment programme. In accordance with the 2001 and 2005 guidelines, what is supposed to happen is that a full and even-handed evaluation is carried out and, through this mechanism, that a recommendation is made to the city or county manager on the procurement option. The matter is then referred to the Department via its water services investment unit. The initial move comes in the form of the appointment of a consultant - usually an engineer - and then the process of evaluation commences. The outcome of this process is intended to robustly test all options with particular emphasis on value for money. This should then indicate the procurement option which should apply.

On 26 June 2007 the then Minister described the process by stating:

The PPP approach is employed in the water services sector only where it is clearly established that it provides best value for money overall. Local authorities are required to examine all potential procurement options in an even-handed manner before recommending an appropriate procurement option. The most appropriate procurement option is approved under the Water Services Investment Programme and the same level of Exchequer funding is provided by my Department, irrespective of the procurement route selected. The overriding consideration is that all projects must deliver value for money and to this end, the Public Sector Benchmark and Post Project Review processes are important measures in ensuring value for money.

The evidence from the past ten years does not reflect this statement.

Since 2001 there has been growing concern regarding the manifest evidence that the Department has a clear and biased stance in respect of its preference for the PPP model in general and on the design, build and operate option in particular. The choice of PPP can involve use of a design and build model - which is where a private sector company would, for example, design and build a treatment plant which would then be operated and maintained by the relevant local authority - or a design, build and operate, DBO, model, where the private sector concern would design, build and operate the relevant facility. The design, build, finance and operate model is the one that is most rarely employed and it involves the use by a private sector interest of private sector finance. The use of that model is virtually unknown. All these options must be compared with the equal development of the project by the conventional means, namely by the local authority. We then begin to notice a striking similarity in all the reports across the country in terms of the format and content of the procurement reports produced by the consultants and the small group of consulting companies involved.

The Department engaged the services of PricewaterhouseCoopers to advise on the PPP evaluation of projects and PricewaterhouseCoopers used the term "preferred option" in regard to the DBO-type contract. Local authorities were given a clear signal that if they wished to have any hope of progressing their water projects, it would be via a PPP-model and a DBO proposal in particular as the only option. The procurement reports read like a mantra, all stating that the Department’s position was that it was Government policy, as it has been across a number of Governments, that the preferred option was the DBO and the submitting of any other proposal would not get through the Department.

We saw this development take place at local level throughout the country with senior management telling us privately that if they did not submit a DBO proposal they would not receive funding and the badly needed infrastructural investment at local level. Clearly, the consultants engaged knew this also and the reports produced across the country came up with exact same recommendations. We now see the resulting evidence of a preponderance of PPPs in the water sector in Ireland at complete variance with international practice and evidence. We must ask why this is happening.

Through the involvement of our members in every county we sought information from the Department on the evidence of the performance of PPPs. Where was the evidence that Ireland was unique in the world and that PPPs worked in the people's interest? Where was the database to show the financial benefits of the DBO model over the conventional means?

In specific cases where employees had the opportunity to engage on an equal footing with independent financial advice it was clear that the whole case presented by consultants in their efforts to comply with the Department's "preferred option" policy was a farce. We have no doubt that in future years this will be seen as a scandal and an abuse of public moneys. The run on DBO recommendations using replica templates and arguments became a far cry from a robust test and now no local authority will make any submission unless it is a DBO proposal, and this is now accepted.

Two recent cases, namely, the Lee Road water treatment plant and the Enniscorthy main drainage scheme in Wexford, illustrate this point. In those two cases the staff side had independent financial advice and after an exhaustive and robust test, which included the local authority appointed consultants and senior management, the outcome was that the projects delivered best value for money by conventional delivery. This was signed off by the respective city and county managers. There then followed extensive delays by the Department and very clear indications from it that no funding would follow as long as this was the position of the councils. Now more than four years later the projects have been held up by the Department and only recently, prior to Christmas in the case of Ennniscorthy, the scheme was approved after the Department revised the council's position and it is now to be a DBO proposal in contravention of the evaluation and the manager's recommendation.

I have provided to the committee the correspondence from that local authority illustrating the view of the council. What is most startling in the Department's stance is that it insisted on a DBO proposal because it was only 1% more expensive - that is 1% of €27 million. It acknowledged at the beginning of 2011 that after ten years of PPPs, it could not furnish any local authority with any evidence of the costs to run the projects by PPP. No data could be produced nationally. This correspondence is an absolute indication that the Department has a blind obsession with PPPs, at variance with international evidence and with there being no national longitudinal or empirical evidence as to why this should be the case.

This case is unique in that there is an exchange of correspondence which exposes what we have had concerns about for a long time - it is now time to acknowledge that the emperor has no clothes. There is, particularly in these times, an urgent necessity to investigate how and why this policy has come to be a diktat. We are equally concerned that PricewaterhouseCoopers has now been engaged by the Government to advise on the development of Irish Water.

It can be illustrated also in many other counties that the method of assessment was seriously flawed and that the outcome was preordained to the DBO, and we were informed as such by the council management. In most counties we were not given the opportunity to have independent professional advice. In the cases tested properly, the cracks were clearly illustrated.

This is the third Government with which we are working on this issue and we will continue to stress our view that we are not opposed to PPPs. We see them as an option, not a principle. The original concept contained in the 2001 and 2005 documents enshrined the position that it was fundamental that the PPP model must be suitable; we now fully believe that it is not suitable for water services and that a major error has been made by handing over nearly 70 water services to the private sector for 20 years with the resulting loss of skills and expertise from the local authorities.

We were recently told while meeting Department officials that a value for money report was shortly to be issued and that this would deal with many of our concerns. This was the report on the value for money survey carried out. In that report, which runs to 200 pages, only one page refers to the PPP model and it is simply repeated that it is the preferred option of procurement; there is no analysis or evaluation of it within it. Page 85 of the report states"the DBO model is the preferred procurement option". The report provides no data or evidence in that respect. When questioned on this the Department informed us that since March 2011 it has started to collate information on PPP costs and value for money, after ten years of it being in existence. We are seriously concerned about the future for Irish Water and it being maintained in public control. I have also provided the relevant correspondence.

Chairman

I thank Mr. Wall, Dr. Reeves and Mr. Beirne for their contributions. I call Deputy Kitt.

Deputy Michael P. Kitt

I thank the delegates for their presentations. I would make the rather obvious point that I am sure that the many towns and villages waiting for the delivery of water and sewerage schemes would not often ask which is the preferred option, the DBO model or the traditional method. Leitrim seems to have made good progress on the delivery of water and wastewater schemes.

An issue that has arisen in regard to the DBO model, whether one is in favour of or against it, is that water meters have been provided in many of the schemes to supply water services.

The understandable policy of clustering schemes for the management of water services or sewerage treatment would result in value for money. As in the case of Leitrim, there are many small towns and villages in Galway where two schemes could be clustered. However, in terms of clustering four or more schemes where objections may arise to the suitability of a site, the site itself or to the scheme, people might say that they want to proceed on their own in terms of the traditional management of water and treatment of wastewater. That point was not touched on by the speakers and I would like to address that.

The PPP model has worked in terms of road projects and that has been clearly signposted, but it does not work as well with school building projects or delivery of water services. Mr. Wall referred to the value for money report that is to be issued and he might be able to indicate when that might happen. It would be worthwhile for the committee to examine that. My query relates to delays in wastewater schemes and the grouping and clustering of schemes.

Mr. Michael Wall

The value for money report was published in the middle of 2011. It is available on the website. The important point in that regard is that we were told that the document would deal with PPPs and how it would make sense for that model to be suitable but we discovered that there is only one reference in it to PPPs.

On the clustering of schemes, we have dealt with a number of clustered schemes or bundles as they are sometimes referred to where, for example, a number of villages are bundled together. None of those issue matter to the way in which the test should be carried out. It makes no difference in terms of the timeframe for the conclusion of the work whether it is done by conventional mechanisms or PPP. I could see no difference in our work between one model and the other in terms of timeframe. However, it is certain that local authorities which had sought to do it by conventional means have been delayed.

Mr. Paddy Beirne

On the reference to the number of schemes and whether there are one or two schemes together, from my figures it is apparent that each scheme that has been done is working out at twice to three times the cost of the work being done by Leitrim County Council itself. The reason schemes are bundled is to make them more attractive. If those schemes were set out individually people would not be interested in them. When schemes are bundled the bag of money for them will be bigger. That is the reason for the interest. No one would be interested if small stand-alone schemes were advertised. The attraction is in the group which fills the bag of money faster.

Dr. Eoin Reeves

I wish to make the same point on the argument for bundling. The Department of the Environment, Community and Local Government is best placed to put the argument forward but the point has been made that the DBO model would not be attractive to potential bidders unless the small schemes were bundled. That appears to be the argument in favour of bundling.

Deputy Catherine Murphy

I thank the witnesses. Their contributions were very useful. It is clear that the context of the debate is the future arrangement for Irish water. The international experience is important. Equally, the attitude or policy in the Department, which goes across the three contributions, is powerful. The one reason the private sector will want to get involved in a public private partnership is because of the potential for profit. The point that was made about either end of the line is well made.

I wish to be sure that we are comparing like with like. The Leitrim experience relates to small plants. Are we talking about tertiary plants or secondary treatment plants? Are final pension entitlements factored into the calculations on costs? It is useful that we have robust arguments on situations that can be directly compared.

In my county of Kildare there are two big wastewater treatment plants. I was impressed by the amount of money that was saved by the efficiencies designed by local authority staff themselves in terms of looking at running costs, including electricity. That came out of a deep understanding of what was involved in operating plants. We should not dismiss the governance arrangements in the future and the expertise that would be required to understand the minute detail of what is involved in the plants.

It is clear that the roads constructed through PPP arrangements are the ones that are tolled. They were closest to the commuter belt areas and offered potential for a return. One should always bear in mind the consumer. People are likely to glaze over when one talks about millions of euro going to a local authority but if one tells them they are likely to have a water meter outside their house and that they will pay twice as much if the service is run privately as opposed to it being a public service I know which way they would vote on the matter. People will vote with their feet. They will want the most cost-effective service.

It is useful to get the information we have received. We have seen the reverse privatisation of the M50 and we can see exactly how that relates to the committee. Has the international experience been comparable in terms of waste water and water treatment plants, in that it has cost a great deal of money to retrieve the services? Have local authorities had to buy them back? What mechanism has been involved and where would we get information on the issue? We must take a long view and consider what is the potential in terms of the cost. I wonder why the Comptroller and Auditor General has not examined this policy issue. Perhaps the committee could suggest it is examined in terms of value for money and the policy position from the Department of the Environment, Community and Local Government.

I wondered about the reason one of the treatment plants in south Kildare did not get the go-ahead for a long time and got incremental extensions. It became a serious problem in terms of attracting industry because there was insufficient capacity, yet there was interest in having the industry, which indicates that the matter can have a much bigger effect when it does not progress in the way that it should apart from just the price of water to individual households. I am interested in hearing about the international experience, especially in terms of reverse privatisation situations. We must begin to examine worst-case scenarios.

Mr. Michael Wall

I tried to make the point in my presentation that from our point of view the issue is suitability. There are PPPs operating in many different parts of the economy. Our particular focus was on their suitability as a model for the delivery of water services. Others may make an argument on their suitability for roads, car parks or whatever else but they are different issues. We had doubts about the suitability of PPPs for water services.

As Deputy Murphy highlighted, one of the first things we examined was international evidence because we wanted to find information in that regard. Dr. Reeves carried out the only report specifically on the matter in existence in this country. He will refer to that. We also received more than 40 international reports from Public Service International which is based in the University of Greenwich in the UK. They included reports from the United Nations water section. Every one of them illustrated the difficulties that have arisen worldwide - in the United States, Canada, across Europe and in South America. The evidence is consistently the same. The model is what we are talking about, although we may refer to it slightly differently. Public private partnerships, PPPs, are particular to Ireland, private finance initiatives, or PFIs, to the UK - the names are slightly different. However, the model has a major question mark in its application to water and that is what we were looking at in particular. There are two other aspects which are fundamental to this and which influence it. One gives a contract of control for drinking water and wastewater which can last 20 years. One is pretty sure what can happen to a road over 20 years. Unless there is an earthquake or something that road will be pretty stable. However, the one sure thing about drinking water and fresh water is that circumstances are going to change. Anybody who says they can predict what will happen over the next 20 years in regard to water is just not being up-front. All the indicators show that water will become a very scarce and expensive commodity. For example, the regulation on disposal of wastewater outcome - it is called a cake - means that currently it is spread on land. It is after lunch now.

Chairman

Good man. There is nothing short in Mr. Wall's answers.

Mr. Michael Wall

Clearly, regulation will become stricter. The issue therefore is to sign a contract with fixed conditions. The one thing everybody knows about a PPP is that once a condition in the contract is changed, the price is negotiated. When a contract is signed on a fixed level, therefore, any aspect of it which changes means the contract is renegotiated.

Dr. Eoin Reeves

I will answer two of the points made by Deputy Catherine Murphy. She asked about the Leitrim figures - which I am not au fait with - and wondered if we were comparing like with like. This brings us back to the point I made in my presentation about value for money studies. The value for money study that should be done, according to Department of Finance guidelines, happens before procurement occurs and people go down the PPP route. I mentioned that as a tool of accountability and it is one, imperfect as it is. However, it cannot work as a tool of accountability unless interested parties get access to the actual data and can scrutinise it. The interested parties might be anybody but, from my perspective, an independent researcher would probably have to submit a freedom of information request and would probably not be successful because the cloak of commercial sensitivity and confidentiality is thrown over these estimates and prevents analysis at that level.

This means one has to turn to the Dáil Committee of Public Accounts which, however, is on record as saying it cannot get access to the data in regard to PPP contracts, for the same reason. That leaves the Comptroller and Auditor General, who, unfortunately, has conducted a detailed value for money analysis on only one public private partnership contract, the first schools contract. He found that as a result of errors made with the value for money assessment before going down the PPP route instead of yielding value for money, it would actually do the opposite. There would be losses over the life of the project as a result of using PPP instead of traditional procurement. Not surprisingly, given the apparent zeal for PPP among some in public authority, the Department of Education and Skills has ploughed ahead with PPP in the schools sector on the basis that lessons have been learned. Like any other citizen I would like to be able to scrutinise that evidence but, unfortunately, that is not possible. That is one of the big problems. It is not merely an Irish problem but an international problem with PPP procurement.

In regard to the second point, about reverse privatisations, I did mention some instances. This can happen in two different ways. There is the case of the city of Paris which has reversed privatisation. France is one of the countries that has an almost privatised water system. In that case, at the end of the design, build and operate, DBO, contract the contract reverted to the public sector. The cost in that regard, therefore, would be less. The reality of PPP contracts, as alluded to in the previous discussion, is that they are long term, lasting for maybe 20 to 25 years. Both parties are locked into the contract and have a lot at stake. Evidence suggests - the World Bank has provided evidence from Latin America - that more than 70% of PPP contracts in the water service sector in Latin America were renegotiated and, on average, renegotiations stared 1.7 years after commencement. Seventy per cent were renegotiated quickly which means the initial value for money study is almost redundant because there is a renegotiated contract. If it is not renegotiated and the public authority decides to take step-in rights, or some such thing, one can be sure that will be expensive and will probably require going through the courts, with the big private sector operators looking for some form of compensation. I am not aware of any study that gives an average figure on the basis of statistical analysis of the cost of reversed privatisations. I do not have that data available.

Chairman

Does Mr. Beirne wish to comment?

Mr. Paddy Beirne

On Deputy Murphy's point, I would wish to compare like with like. The figures we were provided with refer to the county council database. On the figures as provided - I apologise for all the figures I will throw to members - if one compares Carrick-on-Shannon DBO to Ballinamore, Drumshanbo, Mohill and Manorhamilton, the other principal towns of County Leitrim, it shows the cost to maintain the latter four plants for last year was €285,200. That works out at €38.77 per population equivalent, PE, which includes the network and the caretakers' wages. The PPP or the DBO costing does not include the network and only deals with the plant. That puts the DBO price even higher but we do not have a comparison figure for that.

At present, without the network figure, the cost in Carrick-on-Shannon is €65.60 per PE. That is the best way I can compare like with like.

Chairman

I will step in briefly before we continue with other questions. The broader context of what the committee is examining is 34 local authorities in the country that are currently dealing with water provision. The programme for Government clearly sets out the establishment of Irish Water which will take responsibility for those local authorities at both ends, to use Mr. Wall's expression. The vehicle for that agency has yet to be established. A number of companies are under consideration. As mentioned, and I noted it with interest, PricewaterhouseCoopers is the agency doing the scoping exercise to decide which will be the utility. There are three potential candidates. Bord na Móna might metamorphose into Irish Water; a company named Irish Water could be created; or there could be a type of surrogacy arrangement whereby Bord Gáis could create Irish Water and at a later date might allow it to evolve into its own agency.

Regardless of which outcome happens, Irish Water will take on the responsibility for the physical construction for water supply in this country and will take on board the relationships with DBOs as they currently stand. That is the area in question when the committee comes to the end of its consideration. There are documents upon documents, presentations upon presentations and we have the job of reading through them. I would like the delegates to give us their thoughts on this section in a very short sentence. It would make our job easier when we get to write the report.

What is their view with regard to Irish Water's relationship with the DBOs in the future? We have not arrived at considered recommendations for our report but as Deputy Murphy commented, we could advise the Comptroller and Auditor General to have a look at DBOs that may come under the future plans for Irish Water. In summary, what would the delegates recommend in terms of Irish Water setting out to meet its infrastructural requirements? Can they make a value judgment on whether it is better to have a single authority or 34 local authorities? I have asked two questions. First, is it better for one authority, or 34 local authorities, to deal with Irish Water as an infrastructural project? Second, how will the infrastructural requirements of the new agency that is to be established be met if design build operate systems are not used?

Mr. Michael Wall

I will do my best to answer those questions quickly. In response to the question about Irish Water, I would like to say we are speaking to the committee as part of a debate that is happening at an extremely apt time. I have been working in this area for over ten years. Not many people share the concerns we have about the model that is to be used for the delivery of water. Although we are having this discussion in advance of the establishment of Irish Water, we have come in at the tail end of the committee's deliberations. It is proposed to spend a significant amount of money at a critical time. The debate on what will happen with regard to Irish Water is somewhat separate from the debate we are having. All the documentation that is out there, including the value for money report and the various reports that have been produced over the last 18 months, state that the design build operate model will be used for the provision of water services. Our major concern is that there will be no debate on that question within Irish Water - it will be taken as read. Nobody is asking what the origin of that decision was. We are asking that question.

We have accepted that the establishment of Irish Water is a fait accompli. It is going to happen. We are pragmatic enough to know we will be dealing with Irish Water. It is interesting that the water services investment programme that ran up to 2012 was the first such programme to identify water provision in Ireland by river basin. It was previously identified by local authority. Water does not respect county boundaries. We do not have 34 water supplies in this country. Our water comes from natural river basins. The last water services investment programme correctly identified the geographical reality that water comes from specific locations. The last programme, which pre-dated the notion of Irish Water, provided that there had to be cohesion between local authorities in the delivery and maintenance of water in those catchment areas. That was happening anyway.

I wish to speak about the establishment of Irish Water itself. Obviously, we have a major concern about how water will be delivered. The terms of reference that the Government presented to PricewaterhouseCoopers stipulated that water would be delivered by local authorities. We hope PricewaterhouseCoopers will not make recommendations that are beyond its terms of reference. We are satisfied that the terms of reference stipulate that the local authorities will be responsible for the delivery of water services. We are concerned that if the manner in which such services are produced and delivered is not challenged, there will be no debate. In such circumstances, Irish Water will simply inherit the prevailing system. It will be able to quote from the very documents we have quoted to the committee today, and no one will ever ask where it came from. We hope we can engage with this committee and directly with the Minister before that happens. We have been quite pleased to be able to make direct representations to the Minister. He is the third Minister we have met to discuss the issue. We will continue in hope.

Dr. Eoin Reeves

I will do my best to respond to the Chairman's two questions. I do not have a crystal ball that allows me to understand how an Irish Water utility will be governed. Clearly, the establishment of an Irish Water utility will introduce another layer to the relationship between existing design build operate contractors and the public authority. In that sense, it will complicate the relationship. The key issue in that regard will be the systems that the new water utility will put in place to monitor and review existing design build operate contracts. I am not aware of any evidence in the public domain that sets out how contracts operate after they have been signed. They tend to be forgotten about after the contract has been signed and the infrastructure has been built. The Comptroller and Auditor General has compiled a separate report on the management of public private partnerships in schools. It was shorter than the value for money report to which I referred earlier. It identified the same problems I encountered during my research on schools. There are big issues in this respect. The systems that the new utility will put in place to manage existing design build operate contracts will be critical. The utility will have to ensure risk is transferred and ensure the contractors behave within the terms of their contracts. When renegotiations take place, the utility will have to be tough and firm when negotiating new contracts. My first thought on the question of future investment is that the Irish Water utility will be a commercial State-owned enterprise and will have a mandate to operate commercially.

Chairman

Like the ESB.

Dr. Eoin Reeves

Exactly. In the absence of the involvement of the Department of the Environment, Community and Local Government, the preferred approach will be taken out of the equation as well. In such circumstances, I cannot imagine how an entity with a commercial mandate will adopt design build operate on a wholesale basis. In my view, the evidence is not there, on value for money grounds, to support design build operate on a wholesale basis.

Senator Cáit Keane

This is an interesting debate. Many people, including myself, are on a learning curve in this respect. We have to consider what we are trying to do. As the Chairman said, we need to reflect on how we will do what we intend to do. The new water authority that has been mentioned will be involved in commercial activity. I appreciate what has been said about the research that has been done on the differences between private and public provision. I have not seen much of that research. I have heard many people speak about the value of private service providers in bringing cheaper services to the public.

We should start by saying water is a commodity that has to be used by everyone. Every public servant and public representative in the State has a duty of care to ensure the public gets good water. We are not talking about something that does not have an effect on public health. We are talking about vital infrastructure. When one is building a school, one hopes the building does not fall down. If it does, one hopes there are no children inside at the time. Water is used so frequently every day that if something happens, one might not have seen it coming. We have to think seriously about it.

This committee has to do a great deal of work on this issue before any kind of paper can be produced. Work is ongoing in this regard. The major advantage of public private partnerships is the system of funding associated with them. We all know that no funding is available for anything at the moment. The second advantage of this approach relates to risk-balancing - it allows the risk to be taken out of the public sphere and into the private sphere. The third advantage is that public private partnerships offer off-balance sheet financing to public bodies. We all know that the troika is in the country. We know what the books look like. I have examined the cost of metering water in this country and the report that has been submitted to the committee today. I have to ask where the millions of euro that will be needed will come from. I know some of it will come from metering and water charges when they are introduced. All of this has to be taken into consideration.

When public private partnerships and design build operate contracts came into vogue, one of the major reasons they were adopted by the Government of the time was that they were associated with innovation and design, as well as with speed of delivery. We all know of schools that had to wait for ages for projects to be started. There was such a backlog of schools projects that the only way to get them up and running was to adopt a system of speedy delivery, whereby the same design could be used for buildings on the ground. They are working from that point of view. The cost element and the report referred to by Dr. Eoin Reeves should be seriously examined by this committee. No report based on research should be hidden from a committee. If the committee wants information on the cost effectiveness of private versus public provision, it should be available to us.

Chairman

Will Senator Keane ask a question of the delegation?

Senator Cáit Keane

I will ask any question the Chairman asks me to ask.

Chairman

The delegation is here to be asked questions.

Senator Cáit Keane

Yes. The committee should be able to get information on the pros, cons and value for money of design-build-operate models versus publicly provided water systems. For 20 years I have been a local government member and know the good work it does in water provision. However, I am beginning to question if there are merits to private provision. Last night, for example, on Pat Kenny's "The Frontline" a consultant was asked how it costs €600 to provide a certain type of bed in a public hospital while a private hospital can do so for €177. Where is the like with like? I have not seen any good argument against the private provision of services. I would like to see more academic research in this area.

I accept problems arose in the UK with public utilities that were privatised. We must examine how we can prevent such problems arising here.

Chairman

For clarification, the proposed agency, Irish Water, will be established as and remain a public utility. The committee is discussing the component factors of the agency such as pump stations, water houses or the proposed reservoir in the midlands to service the greater Dublin area and whether these should be provided by design-build-operate models, public private partnerships or direct build by the State.

Senator Cáit Keane

There is also waste treatment.

Chairman

Will the Senator come back to asking a question?

Senator Cáit Keane

I understand because the Chairman is concerned that I might be frightening the public with discussions about private versus public provision.

Chairman

No, the Senator is talking about Pat Kenny and doctors on "The Frontline". We need to come back to the topic of this meeting.

Senator Cáit Keane

Yes, I am putting it in the context of the type of public services the private sector may be asked to provide. Transferring the proposed water authority's risks from the State to the private sector would be a pro. I accept, however, one does not know how it could change further down the line.

There may be a third way of looking at this as a public and private venture with society interchanging between the two. Anthony Giddens spoke about this third way of society, the public and private sectors interacting on a not-for-profit basis. There are difficulties, however, with one authority collecting charges for the provision of a service while a local authority cannot charge for providing a similar service. There is much work to be done in this area.

I have one question.

Chairman

Please.

Senator Cáit Keane

It was stated water service contracts in Latin American countries were renegotiated after 1.7 years. This is another issue we must examine when dealing with water service provision.

Chairman

We have a second session at 5 p.m.

Senator Cáit Keane

I would like to see independent research.

Chairman

I would like to see the Senator ask a question, please.

Senator Cáit Keane

I would like to see independent research led by this committee on this question. Michael Wall's report quotes from many other eminent reports but he is representing SIPTU, a vested interest. Mr. Paddy Beirne is from a local authority, another vested interest.

Chairman

Senator, every group that has been before the committee has been a vested interest. Will the Senator please ask a question? She is trying my patience. She has spoken longer than any other member. Will the Senator put a question?

Senator Cáit Keane

I understand what Dr. Eoin Reeves has said. However, he said he does not have the information to make a definitive judgment on public versus private provision. I want this committee doing some research on this.

Chairman

Does the Senator want Dr. Eoin Reeves to produce that information to the committee?

Senator Cáit Keane

Dr. Reeves turned the tables on the design-build-operate model. I would like him to present the evidence to the committee.

Dr. Eoin Reeves

Evidence concerning design-build-operate schemes is owned by local authorities, which have undertaken value for money studies of them, and the Department of the Environment, Community and Local Government. The agency best charged to seek that evidence is the Office of the Comptroller and Auditor General. Unfortunately, there have been no independent value for money studies by that agency on the water services sector.

Senator Cáit Keane

Will the committee ask for that?

Chairman

If the Senator had been listening earlier, both Deputy Murphy and I have looked at the possibility of this committee making such a recommendation to the Comptroller and Auditor General. I call on Deputy Naughten.

Deputy Denis Naughten

While I was not present earlier-----

Deputy Clare Daly

Am I not a member of the committee? It is my turn.

Chairman

My apologies. I call on Deputy Daly.

Deputy Clare Daly

I will be brief as I am still shell-shocked by the last contribution. Today's meeting is timely and important to the debate on policy changes in water services provision. To have this information on the record is a strong development and I could not understand from where Senator Keane was coming. Today's meeting has presented irrefutable evidence that the existing departmental practice of forcing local authorities to go down the design-build-operate, DBO, model has resulted in enormous problems and ends up being more costly than leaving it in the hands of the local authority and the traditional procurement models.

In the current economic climate, with money being taken off disabled people and so forth, this is powerful stuff. There is a responsibility, apart from the water safety end, to ensure our citizens receive better treatment. Answers must be provided as to why a policy that costs more and is unworkable is still being pursued. It is not just SIPTU which is claiming this but workers at the coalface, academics and senior directors in local authorities. Correspondence provided in these reports shows that senior directors in local authorities believe the State has been poorly served by the DBO model.

What does the panel think of the involvement of PricewaterhouseCoopers in promoting the DBO policy and the proposed Irish Water agency? That is a problem now and that exposes a potential flaw that we need to monitor because if we do not, there will be a huge cost to the State and the citizens going forward.

Those of us who were members of local authorities are aware that crises inevitably develop in the provision of water or waste water and it is not a straightforward textbook service. Problems emerge in the system all the time and the people who know how to deal with them and who have all the tricks based on years of experience at the coal face, which is the only place one can learn them, are local authority staff. The role of caretakers going forward will be hugely important. It is interesting to examine the figures. Caretaker wages are taken into account in the traditional model but they will still have a role in the DBO model and they will still be called on when services are handed over to a more expensive operator. How many caretakers are there? What is the balance between caretaker staff at the coal face and administrative, technical and engineering staff?

I refer to the time and, therefore, money saved by staff who know what they are talking about and who know the network and the efficiency of the service. By employing them directly, everybody is a winner. The protection of that expertise going forward into the new era of Irish Water is a necessity. Now that we have been told about this, we cannot shrink and say when this becomes a major scandal in years to come, "Sorry about that, we didn't know about this", because we know and the evidence has been presented. Unless it is contradicted, it will stand. The call has gone out and it has not been contradicted.

My final question relates to metering and the two ends of the network. The PPP element applies to both ends of the network. Chevron has been awarded the contract for the training programmes for the installation of water meters. Where does that fit in? Where did this come from? Who is calling the shots on this? Is this being dictated by the Department?

Mr. Michael Wall

I ask Senator Keane, Deputy Daly and the committee to look at the first two appendices of our submission, which are brief, regarding the point they made about the arguments. Those two pieces of correspondence contain the only piece of written evidence that we have got to come out of this debate because of the nature of our experience where a formal correspondence took place with a local authority attempting to take a stand on this. I draw the committee's attention to that. It clearly illustrates the point we are making. That correspondence is our experience throughout the country but it is very rare to get that in print.

With regard to the subject matter we are discussing, I have outlined the time we have been dealing with this. We are a vested interest and I do not make any apology for that but we have worked with PPPs as an organisation. We have no problem with them. What is unusual in this set of circumstances is that another body in the Department appears to have a very firm loyalty to a model, which is far stronger than our loyalty to the opposite one. We simply want it proven properly.

I refer to Deputy Daly's point on metering. We have brought in a lot of other issues this afternoon that we did not come in to talk about, including metering, but I would like to comment on it because, once again, nowhere in the media since the debate started have I read or seen a reference to the fact that there has been a major meter installation programme in this country in recent years. It has never been mentioned. I refer to the installation at huge cost to the taxpayer of the non-domestic water metering programme across the commercial sector by the 34 local authorities. We are not aware of any analysis of how that happened. If we are debating water metering, why has no one drawn reference to the one example in this country where it has happened? There has been no evaluation of it. It could be the subject of a separate meeting of the committee to illustrate some of the disasters in this field in regard to the use of the PPP model up and down the country for the installation of the non-domestic water metering programme. Some local authorities did it themselves, some used the PPP model and the remainder used other combinations.

Senator Keane asked whether there was a middle way. There is not only one option, the PPP. DBO is the comparable model which we have tended to work best with because most local authorities do not have the mechanism anymore to design and build a water station. People frequently forget about PPPs that they involve public money, not private sector money. Irrespective of who builds the pumping station or the treatment plant, public money is used. There is no difference in the timeframe. The Department provides the money and it is either given to the private sector to design, build and operate it or it is given to the local authority to do it. It is the same money. If this was private money, then this would be a different debate. We are talking about public money and every Minister we have spoken to since the beginning of the 1990s has always said it is public money and it should be treated equally in terms of what is the best option. That is why we have come here.

Dr. Eoin Reeves

With regard to the question of big consultancy companies, particularly given the evidence from the UK which went down the privatisation and PPP route to a greater extent and for a longer period than most other countries, it is well recognised that the way it works is that the big companies that recommend these market oriented policies also tend to do very well once they are up and running in providing advice and gaining revenues. It appears to be the way of the world. One might argue that there could be a better way but I do not think we will get into that here and now.

With regard to the establishment of the Irish Water utility, which is not exactly the reason we are here-----

Chairman

That is the reason we want to talk to Dr. Reeves.

Dr. Eoin Reeves

Sure. My big fear on the basis of what I know about State-owned enterprise and the privatisation experience is that once the commercial State-owned enterprise is established, it raises the spectre of shares being sold at the wish of a Government or our external governors, the troika. Whatever about telecommunications and we had a bad experience of that in this country, water is the one resource that is not suitable for privatisation. We have had more than 25 years of experience of privatisation in the UK and the one sector where the case cannot still be made for privatisation is water because of its characteristics. The sector does not lend itself to competition and, in the absence of competition, one has no chance in terms of improved efficiencies, lower prices and better services for consumers. That danger lies down the line following the establishment of a commercial State-owned enterprise called Irish Water.

Senator Cáit Keane

I asked a question about the off balance sheet financing mechanism for PPPs and design, operate and build. Has Dr. Reeves in his recommendation come up with a source of funding or will it be totally self-financing? The mechanisms are off balancing financing versus self-financing versus where is the money going to come from?

Dr. Eoin Reeves

We need clarity on this question of off-balance sheet financing. It is very important to understand that off-balance sheet financing is really smoke and mirrors. When PPP was first proposed here, and was supported by various vested interests, may I add, the argument was that we would get this infrastructure for nothing and it would not show up on the books. The real world does not work like that. It took a few years but EUROSTAT had to make a ruling that ensured Governments did not use PPP to procure infrastructure and keep the finances off-balance sheet.

Senator Cáit Keane

So there is no benefit.

Dr. Eoin Reeves

No, unless sufficient risk is transferred, as the rules state. We discussed risk transfers and the fact there are not guarantees in that regard.

Senator Cáit Keane

I asked three questions, including in regard to off-balance sheet financing and the spreading of or transfer of risk from private to public. If that is secured and tied up in the initial stages, it is risk secure.

Dr. Eoin Reeves

On DBO, the biggest risks relate to the construction period. However, under-----

Senator Cáit Keane

It was said earlier that the biggest risks are in maintenance and aftercare.

Dr. Eoin Reeves

In terms of cost, the biggest risks are during the construction period. Under the new forms of contracting which apply to procuring authorities since 2008, construction risk is transferred under traditional procurement as well. Therefore, DBO does not have a relative advantage in regard to the construction risk. The case for DBO on the basis of risk transfer is undermined by virtue of the fact a new form of contracting applies to traditional procurement as well, which is an important point. When one takes into account the points made in regard to renegotiation of contracts and so on, and the difference between what is de facto risk transfer, where operators are actually penalised for underperformance, or rather not penalised, the whole question of risk transfer gets very grey. There are no guarantees in regard to risk transfer. Many of the arguments in regard to PPP, therefore, do not necessarily stand up to scrutiny.

Mr. Paddy Beirne

Deputy Clare Daly asked about the number of caretakers in my county. The comparison is that while we have some eight caretakers, we have double that number of engineering and technical staff in sanitary services. When a DBO contractor moves into a plant, it takes over the plant from the day it comes in, and although the caretaker has a very important role, he is the first person to be moved out - he is put outside the gate straight away and goes to look after the network.

That is the greatest fear of all down the road, namely, there is no way the plants can be taken back because there are no skills to run them as the caretaker is relocated immediately. Throughout every local authority in the country at present, there is a self-preservation programme taking place where the strong push out the weak. There is no way any caretaker has been replaced in any local authority I know of in recent years. There have been replacements in other sections of local authorities but these are at higher level, not at the bottom of the ladder. The strong tend to strengthen themselves and get rid of the weaker ones. They feel they will be safe and will ride out of this recession by doing that. It is very short-sighted because, at the end of the day, if a plant has to be taken over, for example, if the company goes bust, what will happen? In that case, we do not have the skills to take it back.

Deputy Clare Daly

It is a question of expertise being protected.

Mr. Paddy Beirne

The caretaker is the person who will be out there on Christmas Day and on Saturdays and Sundays. We do not need a big office up and running to do our work; we are out there in the dark and wet, doing it. Nonetheless, we are the people who are being relocated first.

Deputy Denis Naughten

I apologise for not being present for the contributions but I was watching them on the monitor. I want to correct Mr. Wall on his last contribution. While there was a programme of installing meters, if it was anything like the mess in my county, where half the meters have yet to be installed, it has turned into a complete farce.

Mr. Beirne's initial evidence made the point in regard to five drinking water schemes in County Leitrim. He stated the cost in regard to the operation by Leitrim County Council compared to the current cost through the DBO is a 354% increase on the operation of those five plants. That seems an astronomical figure. It seems we know the price of everything but the value of nothing. From the evidence I have heard, we are looking at failed developing world policies being implemented in this country.

I have three questions. First, what incentive is in place, once the DBO is up and running, for the local authority to reduce the leakage on a particular scheme? The witnesses may correct me if I am wrong but, under the DBO contract, the contractor is guaranteed to deliver a certain volume of water out the gate of the plant. If demand increases, well and good for the contractor, but if it reduces, is it correct that there is no additional saving for the local authority?

Second, what would happen in a situation where, within a couple of hours, there is a dramatic increase in the need for water? For example, if there was a major fire, how does one over a weekend contact private contractors to increase the amount of water going through the pipes? Is it the case that the water supply to other communities will have to be switched off to divert the water to where it is needed?

The three witnesses might comment on my final question. From my experience, it seems the local authority is forced into a situation where it must take the cheapest contract. In regard to the provision of public water infrastructure, I have seen situations where contractors have come in way below the market price and got the contract, and the local authority is now spending millions of euro bringing them through the courts, trying to get money to carry out repairs to basic infrastructural projects that could never have been delivered for the price. While the local authority always knew they could not be delivered for the price, it was forced, under the current procurement rules, to give the contractor the contract.

Mr. Michael Wall

To deal with the first point, maybe the subtlety of my points in regard to non-domestic water metering were missed. I was trying to make the point that the situation with the non-domestic water metering project was very much a farce. I hope the subtlety of that got across, or I must be losing my touch.

With regard to leakage, what is important here, as Deputy Clare Daly said, is that if there are meters at the two ends of the pipe, and both of them turn on the basis of a charge, it is terrific that it is leaking because the person who is operating it at one end is being paid by the cubic metre and, at the other end, the consumer is being charged for what is going in, so the more leakage the better, if one is an operator. This is why there are no PPPs in networks. We all know in regard to the other utilities in the country that the big weak link in the chain of the whole privatisation process, whatever one thinks of it ideologically, is that the networks are left completely under-resourced. What is happening here is that people who support this concept in water love the idea of the two meters, with the State picking up the tab for the leakage. Whether we will ever have enough money to get that right makes no difference to the people providing it on the other side.

On the other hand, the conservation activity of the local authorities has been a huge success. In every local authority, the work that has gone into conservation has been massive and is a success story. That is how the issue of leakage should be dealt with, namely, within the issue of conservation. Part of that will have to be the upgrading of networks, but the point is that conservation is linked to networks.

Chairman

Would Dr. Reeves like to make a final comment?

Dr. Eoin Reeves

On the question of what happens if there is a dramatic need for more water as a result of changed circumstances, put simply, once a local authority is locked into a long-term contract with a private operator, the private operator picks up the contract and states that if it is in the contract, he or she will do it and if it is not in the contract, he or she will charge the local authority extra for it. That is how it works. That is what is commonly referred to in the economics literature as leading to the danger of high costs due to lock-in.

On the question of low-balling contracts, that is a fact of life also. It is part of the procurement world. I made the point in my presentation that competition sounds good in theory. Competition should be encouraged because it works to provide incentives to operate more efficiently but there is no guarantee that it works well in practice. The reality is that there is imperfect contracting, such as low-balling or collusion between bidders. Those are the kinds of obstacles that undermine the arguments for all forms of procurement. It is a danger in the world of procurement that requires good management of procurement by the public sector.

Mr. Paddy Beirne

In response to Deputy Naughten, my figures are for waste water treatment plants, not drinking water. They are factual. They are there for anyone to see. The same factual figures are there for the running of plants that we ourselves operate.

When a DBO water treatment plant is set up, there is a price fixed for so many metres of water a day. If the consumption increases, if it fluctuates to a high degree, say, in frosty conditions where water is left running or pipes are busted, it is a gravy train for the DBO provider because his price increases with the demand. Deputy Naughten gave a good example of a fire in his county of Roscommon some years ago where the caretakers were capable of controlling the situation and providing adequate water to the fire services. If, for example, that was a weekend and plant broke down, the caretaker or the person who would be responsible for a DBO could live two or three counties away. There would be alarm systems, which are being depended on a great deal in places, but at times one also must visit the plant and, possibly, make adjustments, increase pumping capacity, probably divert water back from other areas or stop water going out to a certain area to allow the fire fighters to be able to deal with a situation. That also creates problems. It is a situation one does not want to see arise at all. If it happens, we do not know what will arise as it has not been tested. However, it has been tested in Deputy Naughten's county and was very successfully dealt with by the local caretakers.

Chairman

I thank Mr. Beirne, Mr. Wall and Dr. Reeves. That concludes this section of our consideration of this topic. I thank them for what was an insightful and well presented position paper this afternoon. I propose that we suspend the meeting temporarily to allow the witnesses to leave the room.

Sitting suspended at 4.54 p.m. and resumed at 4.55 p.m.