pwc irish water,en

Irish Water: Phase 1 Report

2nd November 2011


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This version of the report contains some limited redactions to remove

commercially sensitive information


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Private and Confidential Mr. Mark Griffin Assistant Secretary Department of Environment, Community and Local Government Custom House Dublin 1 11th January 2012 Dear Mark, In accordance with your instructions as confirmed in our contract dated 10th June 2011, we now include a redacted version of our Phase 1 report. As discussed and agreed this report excludes certain commercially sensitive information which has been identified by DECLG (“Department”). This report, which is based on our review of information provided by Department officials and local authorities, meetings with a range of stakeholders agreed with the Department, a review of international models for water and wastewater services, and the experience of our team, recommends an organisational form for water and wastewater services in Ireland. Yours faithfully Garrett Cronin Partner


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Important Message

Important message to any person not authorised to have access to this report

Any person who is not an addressee of this report or who is not receiving this report directly from an addressee for the purpose of assessing the optimal structure for water services delivery in Ireland is not authorised to have access to this report. Should any unauthorised person obtain access to this report, by reading this report such person accepts and agrees to the following terms: 1. The reader of this report understands that the work performed by PricewaterhouseCoopers was performed in accordance with instructions provided by our addressee client and was performed exclusively for our addressee client's use. 2. The reader of this report acknowledges that this report was prepared at the direction of our addressee client and may not include all procedures deemed necessary for the purposes of the reader. 3. The reader agrees that PricewaterhouseCoopers, its partners, principals, employees and agents neither owe nor accept any duty or responsibility to it, whether in contract or in tort (including without limitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss, damage or expense or whatsoever nature which is caused by any use the reader may choose to make of this report, or which is otherwise consequent upon the gaining of access to the report by the reader. Further, the reader agrees that this report is not to be referred to or quoted, in whole or in part, and not to distribute the report without PricewaterhouseCoopers' prior written consent.


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Scope Process

Purpose of the Study

To undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility and to recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision; in particular to examine two principal forms of potential company structure (or variants of those forms) for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging; and

A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment.

Scope of our Work

This report covers phase 1 of the engagement and includes;

An assessment of current water and wastewater services in Ireland;

An overview of relevant models from other jurisdictions;

Recommendations on the optimal organisational form for water services delivery in Ireland;

Recommended target operating model, including financial and funding considerations;

Assessment of the potential role for an existing State agency;

Transition strategy; and

Legal considerations in the implementation of the recommendations.

Approach Adopted

The approach to conducting Phase I of the study has been to:

Assess the strengths and weaknesses of the current model for provision of water services in Ireland to identify the challenges that would need to be addressed by a new model for water service delivery, without losing the positive aspects of the current model;

Review different Models for Water Service Provision Internationally to identify trends and lessons to be learned for water sector reform in Ireland;

Take Soundings from Stakeholders in the sector regarding the changes they feel would best deliver improved services for Ireland and the implementation challenges for any new model;

Identify potential operating models for Irish Water and Evaluate those Models against a set of Evaluation Criteria based on Policy Requirements for water reform in Ireland;

Describe the Recommended Operating Model and its financial, legal, organisational, staffing, environmental and other implications; and

Develop a High Level Transition Strategy designed to minimise the delay in achieving the benefits while managing the implementation risks of the recommended operating model.

Sources of Information

Information was received through:-

Consultation stakeholders (listed in Section 1), some of whom also made written submissions;

Information provided on request by the DECLG, the local authorities and the LGMA;

Publically available information;

Research on international best practice.

PwC have not audited or independently validated any of the information provided.

Sponsor Representations

We have shown a draft of this report to the Department sponsors and to the extent that we consider appropriate, we have incorporated their comments in this report.


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Table of Contents 1. Executive Summary ............................................................................................................... 10

Background ..................................................................................................................................................................10

Purpose of the Study ...................................................................................................................................................10

Approach ...................................................................................................................................................................... 11

Strengths and Weaknesses of the Current Model ...................................................................................................... 11

International Experience ............................................................................................................................................ 13

Stakeholder Soundings ............................................................................................................................................... 13

Operating Models Considered .................................................................................................................................... 13

Operating Model Recommended for Irish Water ...................................................................................................... 15

Regulation .................................................................................................................................................................... 16

Potential Role for an Existing State Agency ............................................................................................................... 16

Financial Analysis ........................................................................................................................................................ 17

Transition ..................................................................................................................................................................... 17

Next Steps .................................................................................................................................................................... 18

2. Introduction and Overview .................................................................................................. 20

Background ................................................................................................................................................................. 20

Objectives and Scope of the Study ............................................................................................................................. 20

Policy Context .............................................................................................................................................................. 21

Challenges Facing Water Provision in Ireland ......................................................................................................... 22

Objectives of Reform Programme ............................................................................................................................. 23

Consultation Process .................................................................................................................................................. 24

3. Overview of Current Provision of Water and Wastewater Services in Ireland .................... 26

Overview ..................................................................................................................................................................... 26

Legislative Framework ............................................................................................................................................... 27

Economic and Funding Situation .............................................................................................................................. 29

Regulation .................................................................................................................................................................... 31

Leadership and Coordination .................................................................................................................................... 32

Operations ................................................................................................................................................................... 34

Asset Management and Capital Programme ............................................................................................................ 35

Customer Service and Billing ..................................................................................................................................... 39

Finance ........................................................................................................................................................................ 40

Staffing ........................................................................................................................................................................ 48

Marketing and Communications ............................................................................................................................... 50

MIS/IT ......................................................................................................................................................................... 51

Current Initiatives ...................................................................................................................................................... 52

Indicators of Performance ......................................................................................................................................... 54


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Summary Assessment of the Current Provision of Water and Wastewater Services ............................................. 60

4. Overview of Relevant Models from other Jurisdictions ....................................................... 66

Introduction ................................................................................................................................................................ 66

Key Observations ........................................................................................................................................................ 67

Implications for Irish Water ...................................................................................................................................... 72

5. Options for Reform ................................................................................................................ 74

Overview of Options ................................................................................................................................................... 74

Agency Model .............................................................................................................................................................. 75

Public Utility Model.................................................................................................................................................... 78

Minimal Change Model ............................................................................................................................................... 81

Intercommunal Model ............................................................................................................................................... 83

Models Selected for Further Evaluation ................................................................................................................... 86

6. Evaluation Process ............................................................................................................... 89

Objectives for Reform ................................................................................................................................................ 89

Guiding Principles ...................................................................................................................................................... 90

Evaluation Criteria ...................................................................................................................................................... 91

Assessment of Options ............................................................................................................................................... 92

Conclusion on Assessment of Options ...................................................................................................................... 95

Recommended Option for Irish Water...................................................................................................................... 96

7. Assessment of Potential Role for an Existing State Agency ................................................... 98

Irish Water Requirements ......................................................................................................................................... 98

Relevant State Agencies ............................................................................................................................................. 98

Use of an Existing State Agency................................................................................................................................. 99

8. Recommended Target Operating Model .............................................................................. 105

Regulation ................................................................................................................................................................. 109

Leadership and Coordination ................................................................................................................................... 110

Operations ................................................................................................................................................................... 111

Asset Management and Capital Programme ........................................................................................................... 113

Customer Service and Billing .................................................................................................................................... 114

Funding Requirements and Financial Arrangements ............................................................................................. 115

Staffing ....................................................................................................................................................................... 116

Marketing and Communications .............................................................................................................................. 117

MIS/IT ....................................................................................................................................................................... 118

Integration into Regional and Local Planning ......................................................................................................... 118

The Role of Competition in the Provision of Water Services .................................................................................. 119

9. Transition Strategy ............................................................................................................. 122

10. Implementation Considerations - Legal ............................................................................. 128


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Figure 1: Phased Transition Strategy .......................................................................................................................................... 18 Figure 2: Participants in Consultation Process........................................................................................................................... 24 Figure 3: Overview of Current Industry Structure ..................................................................................................................... 26 Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010) ........................................................................................................................................................................... 30 Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010) ........................................................................................................................................................................... 31 Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study) ............................................................................. 31 Figure 7: Preparation of the Water Service Investment Programme ....................................................................................... 36 Figure 8: Assessment of Needs .................................................................................................................................................... 37 Figure 9: Water Services Investment Programme ..................................................................................................................... 37 Figure 10: Basic Project Steps ...................................................................................................................................................... 38 Figure 11: OPEX Funding Summary (Source – Unaudited Annual Financial Statements - 2010) ......................................... 40 Figure 12: Direct Income to Fund OPEX €m (2008 – 2010 Actuals plus 2011 Budget) ........................................................... 41 Figure 13: Commercial Collection Rates (2010) .......................................................................................................................... 42 Figure 14: Breakdown of OPEX Expenditure for 2010 ............................................................................................................... 42 Figure 15: Income & Expenditure €m (Source – Annual Financial Statements - 2011 figures are budget) ........................... 43 Figure 16: Income & Expenditure (2008 – 2010) ....................................................................................................................... 44 Figure 17: CAPEX Funding-Overview (2010) ............................................................................................................................. 45 Figure 18: CAPEX Movement €m (2010) .................................................................................................................................... 45 Figure 19: Percentage breakdown of CAPEX funding (exc. opening and closing balances but including transfers) ............ 46 Figure 20: NDP Expenditure Trends €m (2000 – 2009) ........................................................................................................... 46 Figure 21: WTE’s engaged in Water and Waste Water Services ............................................................................................... 50 Figure 22: OPEX per connected property (domestic & non domestic) (Euro) .......................................................................... 55 Figure 23: Water OPEX per connection (Euro) .......................................................................................................................... 55 Figure 24: Sewerage OPEX per connection (Euro) .................................................................................................................... 55 Figure 25: Commercial Collection Rates in Irl (2010) ................................................................................................................ 56 Figure 26: Collection Rates........................................................................................................................................................... 56 Figure 27: Percentage Leakage .................................................................................................................................................... 57 Figure 28: Number of Direct & Indirect Staff (exc. SVT) ........................................................................................................... 58 Figure 29: Total Employees per thousand customers served (exc. SVT) .................................................................................. 58 Figure 30: Total number of direct and indirect employees per thousand water connections (domestic plus non- domestic)

(exc. SVT) ....................................................................................................................................................................................... 58 Figure 31: km water pipe per thousand water connection......................................................................................................... 59 Figure 32: SWOT of the current environment for water service provision .............................................................................. 63 Figure 33: Countries chosen as international comparators for Irish Water ............................................................................ 67 Figure 34: Water undertakings in England and Wales 1956 to 1970 ........................................................................................ 68 Figure 35: Trends in operating costs for the England and Wales water companies ............................................................... 70 Figure 36: England and Wales water companies, overall performance assessment ............................................................... 71 Figure 37: Agency and Public Utility Models ............................................................................................................................. 74 Figure 38: Agency Model .............................................................................................................................................................. 75 Figure 39: Public Utility Model .................................................................................................................................................... 78 Figure 40: Minimal Change Model .............................................................................................................................................. 81 Figure 41: Intercommunal Model ................................................................................................................................................ 83 Figure 42: Agency and Public Utility Models – Summary Comparison ................................................................................... 87 Figure 43: Evaluation Criteria ..................................................................................................................................................... 91 Figure 44: Advantages of Public Utility and Agency Model ...................................................................................................... 94 Figure 45: Embedding Irish Water in an Existing State Agency ............................................................................................. 102 Figure 46: The Overall Structure for the Public Utility Model ................................................................................................. 106 Figure 47: Water Services: Key Roles and Responsibilities ..................................................................................................... 108 Figure 48: Other bodies: key roles and responsibilities ........................................................................................................... 108 Figure 49: Regulation ................................................................................................................................................................. 109 Figure 50: Typical Organisation Chart for a Water Utility ...................................................................................................... 110 Figure 51: River Basins of Ireland ............................................................................................................................................. 111 Figure 52: Operations Services ................................................................................................................................................... 112 Figure 53: Typical Asset Planning and Approval Process ........................................................................................................ 113 Figure 54: Typical water company MIS systems structures .................................................................................................... 118 Figure 55: Phased Approach ...................................................................................................................................................... 122 Figure 56: Implementation Plan ................................................................................................................................................ 126


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1. Executive Summary


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1. Executive Summary

Background The delivery of high quality water and waste water services and the need to meet ever-increasing demands for water, while ensuring security of supply and responsiveness to the needs of commercial and domestic consumers, poses a significant challenge to the State. Water and wastewater services cost approximately €1.2bn per annum, of which around €1bn is funded by the Government, with other sources, including non-domestic water charges, contributing just over €200m. There has been a substantial and historic under-investment in water and wastewater services in Ireland and while there has been significant investment in the last decade, a recent review carried out by Department of Environment, Community and Local Government (“DECLG”) indicates that there is still a substantial backlog of capital investment. With an ageing and poor quality infrastructure in some areas, substantial investment will be required to bring the standard of the water network up to the needs of a modern economy. The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU. It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach to managing water quality on a river basin basis; with the aim of maintaining and improving water quality. Full compliance with the Water Framework Directive has not been costed but is likely to run to several billion euro over the period to 2027.

Given the wider economic context in which Ireland finds itself, sourcing funds to meet all of these requirements will be a difficult challenge.

It is against this background that this study has been commissioned.

Purpose of the Study Currently, 34 city and county councils are responsible for the production, distribution and monitoring of drinking water and for the provision of public waste water services in the Republic of Ireland. In the context of recent Government announcements concerning the creation of Irish Water, PwC was selected by the DECLG to:

a) Undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility;

b) Recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision.

In particular the study was required to examine two principal forms of potential company structure (or variants of those forms) for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging (the Public Utility Model); and

A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment (the Agency Model).

A privatised water utility is outside the scope for consideration.


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This report is the outcome of Phase I of the study which was concerned with recommending the optimal organisational form for water services delivery in Ireland. Phase II will focus on the detailed implementation issues involved in the creation of a new company in line with the recommendations made in Phase I, subject to their being accepted.

Approach The approach to conducting Phase I of the study has been to:

1. Assess the strengths and weaknesses of the current model for provision of water services in Ireland to identify the challenges that would need to be addressed by a new model for water service delivery, without losing the positive aspects of the current model;

2. Review the Models for Water Service Provision Internationally to identify trends and lessons to be learned for water sector reform in Ireland;

3. Take Soundings from Stakeholders in the sector regarding the changes they feel would best deliver improved services for Ireland and the implementation challenges for any new model;

4. Identify potential operating models for Irish Water and Evaluate those Models against a set of Evaluation Criteria based on Policy Requirements for water reform in Ireland;

5. Describe the Recommended Operating Model and its financial, legal, organisational, staffing, environmental and other implications; and

6. Develop a High Level Transition Strategy designed to minimise the delay in achieving the benefits while managing the implementation risks of the recommended operating model.

Strengths and Weaknesses of the Current Model A SWOT analysis was developed for the current provision of water services in Ireland. The key conclusions were that:-

The current model for water service provision has been operating under significant constraints. Our

study indicates that low levels of funding and an inability to access alternative sources of funding in the past have resulted in a backlog of investment and maintenance in the water services infrastructure. Nevertheless, significant positive views of the current model came across very clearly in discussions with the various stakeholders, in particular:-

o The value of having a local body accountable to the local community for the provision of water services;

o The operational effectiveness of the current locally based maintenance teams with water engineers who “know their assets” and the associated asset maintenance regimes;

o The ability to draw on the wider resources of the local authorities in times of great need for water services, such as occurred during the cold weather events in the previous two winters.

Efficiency levels do not compare well against international benchmarks. Some of the key metrics include:-

o Operating expenditure per connection is more than twice the average of UK water companies; o The level of “Unaccounted for Water” (largely due to leakage) at 41% is very high against

international benchmarks (although this would be expected to reduce as Phase III of the Water Conservation Programme is rolled out);

o Staffing levels are higher than comparable UK water companies on an employee per population served basis;

o The collection level for non-domestic water charges which averages 52% in 2010 is particularly low.


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Ireland is about average for the number of water connections per length of network, suggesting that population dispersal is not a major factor in the benchmarks mentioned above. Other factors, such as the very large number of water and wastewater plants in Ireland may be involved. One way or another, these comparisons would indicate that there are opportunities to increase efficiency and reduce costs over time once Irish Water is established.

Income currently received by the local authorities from the provision of goods and services from third parties and from Local Government Funding, for operational expenditure in relation to the provision of water services is not sufficient to meet their needs. It was estimated that there was a funding gap of €451.2m in 2010 which was met from other sources of funds including the general purpose grant received by the local authorities from DECLG;

The dependence on the Exchequer for Capital funding has in the past constrained investment in the sector. While approximately €600m is provided annually in capital investment, it is estimated that there is currently a backlog of approximately €500m for essential projects. This figure is derived from DECLG data on schemes in local authority needs assessment not included in the Water Services Investment Programme 2010-2012. According to the Department and other stakeholders, this still leaves a significant compliance gap in relation to the provisions of the EU Water Framework Directive which may require several hundred million euro of further capital investment annually in the years to 2027;

The study concluded that many of the issues identified above arise from a combination of factors including:-

Fragmented leadership and coordination with a range of stakeholders able to influence and control directions; including the 34 local authorities, the DECLG, the EPA, the CCMA the NFGWS and others;

Difficulty in exploiting economies of scale, particularly as the water service is organised on the basis of county boundaries;

Relative difficulty in implementing policies and projects of national importance;

An ageing and poor quality network; and

Historical underinvestment in the water service.

The structures required to deliver an efficient and effective water service in Ireland, operating under the constraints of available funding are not in place. The fragmented nature of the current model result in significant levels of duplication across the 34 local authorities with limited sharing of resource, cooperation on strategic initiatives or coordinated operational planning in place. The introduction of customer charges will create the need for increased levels of regulatory management, which under the current model will result in further duplication of support structures. Overall, it is our assessment that the current local authority based service provision model is highly unlikely to achieve the efficiencies and quality of service that have been achieved internationally in the water sector through amalgamations. The local authorities have investigated opportunities for co-ordinated action. However the likely efficiencies suggested are small compared with the nearly 40% reduction in operating costs seen in Scotland post amalgamation. Fragmented local authority-based provision will perpetuate the management of sub scale water providers, inability to secure large scale procurement efficiencies and the ability to deliver efficiency through planning field work over a larger customer base/geographical area. A self-funding water service will require significant levels of external funding. Optimal external funding is based on the ‘investment grade’ of individual companies, which is driven by the size of the organisation, the focus and experience of the management team, the stability and efficiency of back office and frontline operational execution and for regulated entities, the ability to comply efficiently and effectively with economic and environmental regulatory requirements. In addition, since the level of external funding available is normally based on earnings, the extent to which operating costs are reduced through the rationalisation, consolidation and simplification of the delivery model increases the level of borrowings available to the company. Consequently, the ability to optimise the level of external funding is best achieved by a single water company, with authority to centrally manage the delivery of water services in Ireland.


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International Experience We have reviewed relevant models for water service provision in a number of countries, including Scotland, England, Wales, Northern Ireland, Germany, France, Netherlands, South Africa, Australia, and Bulgaria were reviewed.

Our review pointed to fragmentation in the provision of water services in particular in continental Europe. However, the fragmented nature of water service provision is being addressed in most countries either by the amalgamation of municipal water services, the creation of utilities or the use of intercommunal structures (see below). Creation of larger bodies for the provision of water services, often outside of municipal control, is a key trend in the industry.

Our research demonstrated that most of the models identified are based on the Public Utility Model. There is little evidence of arrangements similar to the Agency Model being used in the water sector. Another approach found to be in common use is the Intercommunal Model, where several municipalities jointly set up a company to which they delegate the provision of water services.

Our research identified very few examples of the combination of water services provision with other infrastructure provision (e.g. roads) or utility services (such as gas or electricity). Multi-utility companies which were created in the UK a number of years ago were broken up in recent years to allow management teams to focus on specific activities e.g. water or electricity. The research indicates that investors have tended to value the focussed single utility model more highly than the multi-utility model.

Where single function utilities have been created, the evidence indicates that there has been good performance in terms of cost reduction and improvement to the quality of service provided to customers. These improvements have been driven in part by regulation that has focussed on economic efficiency, environmental preservation and ensuring good outcomes for customers.

Stakeholder Soundings PwC met with a wide range of stakeholders in the sector to obtain a cross section of views on the current water service and on potential future models for the water sector. These included representatives of local authority councillors and management, professional bodies, representatives of employers and of the unions, regulators, semi-state utilities and relevant government departments and agencies (see Section 2). A number of these organisations also made formal submissions to the PwC team.

A number of key messages were consistent across the stakeholder groups consulted. These included:-

The need for increased efficiency and value for money in the sector;

The desirability of moving to a River Basin structure for managing water services;

The need for improved water quality and greater security of supply in the coming years;

The importance of obtaining increased funding to meet the increasing demands of customers;

The benefits of transferring responsibility for water services to a single state agency; and

The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of water services;

All of the information and views provided by stakeholders were taken into account in the analysis conducted by the PwC team.

Operating Models Considered In line with the Terms of Reference, two primary models were considered – these were termed the Public Utility Model and the Agency Model. In addition, two possible variant models were identified – these were termed the Minimal Change Model and Intercommunal Model. The models are summarised below:-

The Public Utility Model: Under the Public Utility Model, Irish Water would be a Public Utility and would become the water services authority and the single point of contact for all customers. It would be a single integrated commercial Semi-state body corporate operating on a regional structure delivering all


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water services currently provided by the local authorities, and most of those currently provided by the DECLG (with the exception of policy and legislation). The regions would be structured around river basins rather than local authority boundaries. Irish Water would own the entire infrastructure for water services including all assets, liabilities, income and expenditure. All water service staff would be employed by Irish Water. BGE and ESB represent similar examples of this model in Ireland.

In this scenario, local authorities would no longer have a function in the provision of water and wastewater services.

The Agency Model: Under the Agency Model, a new state agency, Irish Water would be allocated full responsibility by statute for the provision of water and wastewater services and would therefore become the Water Services Authority for the full country. Similar to the Public Utility Model, Irish Water would own the entire infrastructure for water services including all assets, liabilities, income and expenditure. Irish Water would also take over most of the responsibilities of the DECLG, and undertake large capital projects and projects of national importance (including metering and domestic charging).

In this scenario, local authorities (or groupings of local authorities) would be designated by statute as agents of Irish Water for operation and maintenance of the water services and for small capital projects in their regions. They would operate under the control of Irish Water on the basis of agency arrangements under which they would be paid by Irish Water for services provided. Staff required for operation and maintenance would continue to be employed by the local authorities.

The Minimal Change Model: The Minimal Change Model would envisage retaining the local authorities as the Water Service Authorities. Irish Water would take over certain executive functions of the DECLG, including responsibility for large capital projects and projects of national importance. In this scenario, the operation and maintenance of the water service (and therefore the bulk of the existing personnel) would remain with the local authorities. Ownership of the assets would be retained by the local authorities, and they would continue to be financially responsible for the operation and maintenance of water services in their respective regions. Improvements in efficiency would be achieved through local authorities cooperating to achieve economies of scale.

The Intercommunal Model: This approach, as outlined above, has been adopted in several parts of Europe. In this scenario, local authorities would retain the basic obligation to provide water services but would agglomerate to achieve economies of scale by setting up intercommunal companies to which they would delegate responsibility for the operation and maintenance of water services. In Ireland, this would involve three or more separate water companies each serving a different region.

Evaluation Methodology PwC deemed it appropriate to use a qualitative methodology for the comparative assessment of the alternative models, taking into account the relative merits of each option against a set of evaluation criteria developed by us and reviewed with the DECLG and the stakeholder group referenced above. The criteria took into account the main objectives of the water services reform programme, which were identified as:-

Creation of a financially sustainable water service:

Improving Ireland’s water services infrastructure;

Ensuring environmental standards are met;

Delivering improved outcomes for customers;

Ensuring strong governance with clear accountabilities;

Supporting other aspects of water reform in Ireland; and

Promoting efficiency in water services. The evaluation was carried out with reference to international practice, and based on the available metrics and on the experience of the consultants. The views expressed by stakeholders were also taken into consideration.


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Operating Model Recommended for Irish Water Our study recommends the Public Utility Model as the most appropriate operating model for the provision of water services in Ireland in the future. Under this model, Irish Water would be a Public Utility with full responsibility for the water cycle from abstraction to waste water treatment and sludge disposal.

The key factors leading to this conclusion are:-

The scope to design, build and implement a fit-for-purpose focussed utility which is subject to regulation and is proven to achieve greater efficiencies and economies of scale in the provision of water services than any of the alternative models.

Irish Water will operate under one single coherent integrated organisation structure (as against 34 separate organisations today), with clear lines of accountability, authority and responsibility and a focused and experienced management team to facilitate timely decision making and efficient and effective consistent delivery;

The Public Utility model is the most attractive proposition to lenders and is understood by investors who lend to the water sector in other countries. Its capacity to borrow on the international markets would be a key factor in enabling the company become financially sustainable;

This model will also have the effect of reducing and ultimately eliminating the burden on the Exchequer

to provide capital and current funding to the water sector, with consequent positive impact on the State’s GDP /Debt ratio;

Under the Public Utility Model, Public Service staff numbers would be reduced with the transfer of staff to a new commercial semi-state agency. Based on comparative benchmarks (see Section 3), it is envisaged that the total number of employees required for Irish Water when fully operational (i.e. from 2018) would be significantly lower than the approximately 4,300 involved in water services today. This would result from designing a fit-for-purpose operating model, eliminating existing duplication of activity, consolidating work locations and creating centres of expertise, driving synergies through national/regional management of service delivery, leveraging technology to automate activity and remotely manage operations, rationalising roles and responsibilities of staff and leveraging the flexibility of external expertise;

The Public Utility will also be the most effective model for delivery of national strategies and managing issues across local authority boundaries. This will make the organisation better able to respond to security of supply issues as it will be able to plan water resources at a national level;

The Public Utility will be best positioned to introduce and manage nationwide customer charges and customer service provision from a single location; and

Irish Water as a Public Utility will be a single entity for the economic and environmental regulators to regulate, being of a similar scale to compare/benchmark against UK water companies to assess efficiency and quality of service. The Public Utility Model will be best placed to more efficiently and effectively monitor, manage and report compliance with regulatory requirements.

Transferring responsibility for water services from the local authorities to a new model as described will facilitate the achievement of critical mass, economies of scale and a simplified operating model, which are not possible under the existing fragmented institutional framework. Other benefits of the approach recommended include:-

Facilitating greater efficiency and effectiveness in asset management and capital programme execution and in managing the supply chain to optimise value for money. Effective strategic planning on a national and regional basis will be of particular importance for the water metering programme and for regional water resource planning;

Enabling more efficient use of water resources;


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Optimising the use of water and wastewater treatment facilities;

Facilitating increased standardisation of technology, modern procurement methods and increased purchasing power;

Supporting the implementation of the Water Framework Directive and best international practice in river basin management;

Enabling more effective use of field operatives;

Facilitating reduction in overheads through consolidation of head office functions;

Reducing reliance on consultants, with increased in house core skills due to scale;

Facilitating economies of scale in billing and collection;

Introducing 21st century operating practices throughout the country, as well as integrated best-in-class ICT and management information systems; and

Presenting opportunities not otherwise available to staff dedicated to water services. Increased specialisation will provide routes for career development and training as well as enhancing job satisfaction.

Irish Water will face challenges in achieving the benefits as set out above but there are recent examples of similar successes following consolidation in Scotland and England. In the period from 1994 to 2001, operating costs for water services in England and Wales were reduced from c£3.15bn to c2.65bn representing a decrease of 3% per annum. In Scotland, efficiencies of around 40% were achieved over the period from 2002 to 2006.

It is recognised that retention of the local touch which local authorities can offer today, including liaison with Group Water Schemes, will be an important element of implementation as will be the ability to respond flexibly in times of urgent need such as happened in recent cold snaps.

Regulation PwC have recommended that the Environmental Protection Agency would be the environmental and technical regulator for Irish Water, and that it would also become the regulator for Group Water Schemes, a role currently played by the local authorities.

It is recommended that the role of the Commission for Energy Regulation (CER) be expanded to include water regulation, as this role would fit well with its existing responsibilities for regulating energy utilities. In this role the CER, in cooperation with the National Consumer Agency would be responsible for protecting the interests of the consumer.

Potential Role for an Existing State Agency In the establishment of Irish Water, there is a clear opportunity to establish a new fit-for-purpose organisation, based on international best practice and structured to deliver an efficient and effective service to domestic and non-domestic customers. The single Water Utility Model is recognised in capital markets as an investment grade structure, with funding packages tailored specifically for this purpose. Precedence points to the efficiencies that have been delivered in relation to the operating costs of standalone water utilities in the UK as outlined above, and to the improvement in the quality of service provided to customers.

Alternatively, it may be possible to leverage the structure, expertise and governance of an existing State agency, and clearly there is some merit in considering this. This approach may provide some marginal acceleration of the implementation timescale, but would not in our view significantly shorten it, since the critical path will be determined by the preparation of essential legislation, the lengthy and complex implementation programme, and by the speed of the transfer of assets, staff and responsibilities from local authorities to the new utility.

Few examples of multi-utilities exist internationally on this scale. Experience indicates that multi-utility models have not been successful due to the need to maintain management focus. In the cases of Welsh Water and United Utilities (England), the water utility was initially integrated with the electricity utility but was subsequently separated out into individual utilities due to difficulties in managing multi-utility companies and the limited opportunity for operational synergies where water and electricity operations needed to be ring-fenced for regulatory purposes. They were broken up by investors and management to allow a focus on the provision of a single service.


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Whilst our analysis has indicated that there would be a number of potential advantages in embedding Irish Water in an existing State agency, in our view these are outweighed by the disadvantages, in particular:

The potential impact on the borrowing power of both Irish Water and the existing State agency;

The constraints on integration and sharing imposed by the requirement to ring-fence the water service from other regulated businesses, and the requirement to maintain separation of the networks and supply businesses in some of the existing State agencies;

The need for a fully focused management team to drive through the establishment of Irish Water over the next six years, managing the transition of activities from 34 local authorities to Irish Water, implementing water charges, and managing an evolving regulatory regime;

The potential implications for Irish Water and the ESOP/ESOT’s of existing Semi States on the transfer in of water assets;

The uncertainty surrounding the future ownership of the state agencies concerned following recent Government considerations to sell some State assets; and

The international experience indicating the likelihood of failure to achieve significant synergies and efficiencies due mainly to the constraints imposed by the separation of the different regulated activities.

Consequently, on balance, PwC see no compelling reason to assign responsibility for water services provision to another State agency. Based on the analysis conducted, PwC concluded that, unless the above issues could be satisfactorily addressed, Irish Water should be established as a separate company in its own right.

A number of State agencies could, however, be suitable candidates, either on their own or in partnership with the private sector, to provide outsourced services to Irish Water. PwC has recommended that Irish Water procures a management partner through a competitive tendering process as soon as possible after January 2012. The role of a management partner would be to support the:

Set up and management of the new organisation;

National initiatives to be undertaken (e.g. billing, metering); and

Design and management of the transition to a fully operational utility.

It is envisaged that a number of State agencies could be suitable candidates for this role, either on their own or in partnership with the private sector. However, PwC expect that public procurement considerations will dictate that the partner would have to be selected through a public tendering process open to the private sector as well as the State agencies.

Financial Analysis For the Public Utility Model PwC undertook a high level assessment of what the financial position for the business might be and in particular the likely funding requirements. A number of scenarios were run on these numbers, with varying assumptions in relation to the level of Government subvention, the level of external funding and potential charges to be applied. The financial analysis undertaken indicates that, subject to certain assumptions, Irish Water could become a self-financing utility as early as 2018, depending on how quickly Government wishes to cease funding and the level of water charges imposed. A key factor in evaluating the merits of the new operating model is the possibility that the borrowings of Irish Water could be outside the General Government Balance (GGB). In the scenarios explored, and subject to confirmation by the CSO / Eurostat, it would appear that a determination could be made that Irish Water’s borrowings would be deemed to be outside the GGB.

Transition A phased transition strategy has been proposed which would commence in Q1 2012 and see completion of the transfer of responsibilities for water service from the local authorities to Irish Water by the end of 2017. The phased approach is recommended over a ‘Big Bang’ approach, as it allows Irish Water design, build and implement a ‘fit for purpose’ organisation structure to deliver water services without the constraints of the existing local authority model. It also allows Irish Water control the development of water services during the


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transition period through agency arrangements with the local authorities. Consequently, it is most likely to deliver efficiencies earlier, reduce the risk of failure and maintain security of supply throughout the transition period. This is illustrated in Figure 1 below.

Phase Task Name

20162012 2013 2014 20172015

Q3 Q3 Q2Q1 Q1 Q2 Q4Q3 Q1Q4 Q3Q4 Q4Q1Q3 Q2 Q4Q3Q2Q4 Q2Q1Q2 Q1

1PMO - planning and

preparation.

2 Set Up and Launch Irish Water

3 Interim Agency Arrangements

4Phased Trasfer of Staff and

Operations

5 Utility Model Fully Operational

Figure 1: Phased Transition Strategy

It is envisaged that passing the required legislation will take up to 18 months, during which time interim arrangements will need to be put in place within the DECLG to design and implement the new organisational structures, and the Irish Water CEO and Senior Executive Team will be selected. From that point (July 2013), local authorities would be appointed as agents of Irish Water with responsibility for operational and maintenance services for a period of up to 5 years. This transition period would allow Irish Water to build its own capabilities and determine the most appropriate resourcing mix of permanent staff, contract staff and various types of outsourcing arrangements.

Commencing in January 2015, Irish Water would take over the water operations of the local authorities on a phased basis. The pace of transition of operations, and the unwinding of interim agency arrangements, would be determined by Irish Water management, in consultation with the DECLG and local authority management. It is envisaged that this transition would be completed by the end of 2017 at the latest.

This phased approach to transition would allow Irish Water to set up and develop organically as a new utility with its own culture, structure and resourcing, taking on board the resources and skills it requires from the local authorities in a planned and manageable way while ensuring the retention of valuable local knowledge. It is designed to minimise the delay in achieving the benefits while effectively managing the implementation risks.

To ensure a smooth and speedy transition, it is recommended that a Management Partner for Irish Water should be procured through a competitive tendering process. The partner could be in place by January 2013. The partner organisation should be experienced in managing utilities and in particular within the water industry. It is anticipated that the partner would provide an interim management team, comprising primarily second line management resources to support the Irish Water Executive Team in managing Irish Water for a period of up to 5 years from January 2013.

Next Steps On approval of the recommended operating model and transition strategy for Irish Water, Phase II of the study will focus on the detailed implementation issues involved in the creation of a new company, and on the issues that would arise from the consolidation of water services provision from the local authorities to Irish Water.

To achieve the timescales outlined above, it would be important to commence the detailed planning and preparation as soon as possible but no later than the first quarter of 2012. It is recommended that a Programme Management Office would be set up within the DECLG to manage and coordinate this process as soon as is practicable.


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2. Introduction and Overview


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2. Introduction and Overview

Background

Currently, 34 city and county councils are responsible for the production, distribution and monitoring of drinking water from over 900 public water supplies and for the provision of public waste water services. Investment by the 34 city and county councils in water services is guided by the River Basin Management Planning process completed in 2010 and priorities are set out in the Department of Environment Community and Local Government’s Water Services Investment Programme 2010 – 2012. The councils are also responsible for the supervision of any group and private water supplies in their areas and for the carrying out of various water-related inspection and enforcement activities. The Environmental Protection Agency continues to have statutory responsibility for the supervision of the quality of water and waste water services.

The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF requires, inter alia, that by the end of 2011, the Government will have undertaken an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility. In the Programme for National Recovery, 2011-2016, the Government signalled its intention to create a new State company to take over key water/waste water functions from the 34 existing local authorities. The programme envisages that:

“Irish Water will supervise and accelerate the planned investments needed to upgrade the State’s inefficient and leaking water network. The objective is to install water meters in every household in Ireland and move to a charging system that is based on use above the free allowance. Thus, Irish Water would become a major State monopoly requiring separate independent regulation to promote efficiency and competitiveness in the consumer interest and the general economic interest.”

The programme also contains commitments in relation to the NewERA plan under which streamlined restructured semi-States will make significant additional investments, over and above current plans, over the next four years in “next generation” infrastructures including water. These investments – and the accompanying semi-state restructuring process – will be financed and pro-actively managed by a New Economy and Recovery Authority (New ERA), which will absorb the National Pension Reserve Commission.

Against the backdrop of the EU/IMF agreement and the Government decision to establish Irish Water, PwC was commissioned to carry out an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility.

This is a Phase I Report on the assessment carried out. The purpose of this report is to provide a broad indication of the role and functions that Irish Water should have and the rationale for assigning these functions to the company.

The Phase II Report will outline additional detailed information regarding implementation and transitional arrangement issues.

Objectives and Scope of the Study The objectives of the study, as outlined in the Terms of Reference from the Department of the Environment, Community and Local Government are as follows:

a) To undertake an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility

b) To recommend the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision.


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The scope of the study includes water and waste water. It is required to address the legal framework and financial and economic dimensions as well as organisational issues, having regard to international experience and relevant examples of best practice.

The study is required to examine two principal forms of potential company structure for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging; and

A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for the delivery of smaller scale investment.

The terms of reference require that the study contrast these organisational forms, or variants thereof, with current arrangements across a number of parameters e.g. governance, value for money, financial viability, statutory compliance, efficiency, level of service, cost to consumers, infrastructure investment, leakage rates etc. The study is also to consider the possibility/desirability of assigning responsibility for water services provision, or part thereof, to an existing state agency.

A copy of the Terms of Reference for the project is contained in Appendix 1.

Policy Context The study has taken due account of Government policies in the area of water services. The key policies include:

Commitments in the Programme for Government in relation to the water sector in Ireland such as:- o The establishment of a new State body Irish Water, o A fair and efficient funding model for charging for domestic water, o The installation of water meters in every household in Ireland, and o A move to a charging system that is based ‘on use above a free allowance’.

The Programme for Government also provides that Irish Water, a new State company, will take over the water investment maintenance programmes of the 34 existing local authorities. It will supervise and accelerate the planned investments needed to upgrade the State’s inefficient and leaking water network which has proved so unreliable during the recent harsh weather conditions.

The report of the Local Government Efficiency Group which was published in July 2010 and which, in addition to general recommendation on achieving greater costs and efficiencies in the Local Government sector, made a number of specific recommendations in relation to the water sector, including that an enhanced regional office approach be developed at river basin level for infrastructure delivery and implementation of the River Basin Management Plans.

The National Development Plan, 2007-2013, ‘Transforming Ireland’, which sets down current national priorities for investment in national physical infrastructure, including the Water Services Investment Programme and the Rural Water Programme. A new National Development Plan is expected to be published shortly which will set out new national priorities for infrastructural development, including water.

The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF in December 2010;

The report of the Review Group on State Assets and Liabilities; and

Other relevant policies on pay and staff numbers.

Appendix 2 contains a high level description of the relevant policies referred to above.


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Challenges Facing Water Provision in Ireland In the period since the year 2000 there has been very substantial progress in a number of areas in the provision of water and wastewater services in Ireland. Between 2000 and 2010, the Exchequer has invested almost €5.2bn in the Water Services Investment Programme and the Rural Water Programme. Approximately two thirds of this was to address a substantial compliance gap under the Urban Waste Water Treatment Directive. In the period 2000-2009 there has been an increase of 3.7 million population equivalent in secondary wastewater treatment capacity and of one million population equivalent in water treatment capacity. In recent years the Rural Water Programme has invested approximately €100 million per annum to effect improvements in the quality of water supplied in rural areas, particularly for Group Water Schemes in response to a European Court of Justice judgement in 2002. As a result, many of the Group Water Schemes have seen substantial improvements in water quality and a professionalization of the management of those schemes through the introduction of Design, Build, Operate contracts, sometimes on a bundled basis.

However, there has been a substantial and historic under-investment in water and wastewater services in Ireland and while there has been significant investment in the last decade, a recent review of investment in water services carried out by DECLG indicates that there is still a substantial backlog of capital investment. With 34 local authorities providing water services, there is a high degree of fragmentation in the provision of the services which inhibits the achievement of benefits of scale and the introduction of the kinds of standardisation of technology and procedures which can drive efficiency. The current WSIP 2010-2012 and the Value for Money review on the previous WSIP highlight these issues. It is estimated that there is currently a backlog of required investment for essential projects of approximately €500m. This figure is derived from DECLG data on preparation of the WSIP 2010-2012. In addition there are the requirements to fulfil obligations under the Water Framework Directive.

There is increasing emphasis on the use of River Basins, not least in the Water Framework Directive. County and city boundaries do not generally coincide with River Basin Districts leading to a potential disconnect in this regard.

There are high levels of unaccounted for water in the distribution system both in the public network and on the water user side (see Section 3). Estimated at an average of 41%, this is high by international standards. Ageing and poor quality infrastructure and a legacy of under-investment have been reported as the reasons behind this situation. This will require substantial investment to bring the standard of the water network up to the needs of a modern economy.

The proposed water metering programme1 and the proposed strategic water supply from the Shannon to the Greater Dublin Area have each been reported to cost over €500 million. Full compliance with the Water Framework Directive has not been costed but is likely to run to a cost of several billion euro over the period to 2027. In addition, funding will be needed for ongoing improvements to the infrastructure. Given the wider economic context in which Ireland finds itself, sourcing funds to meet all these requirements will be a difficult challenge.

The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU. It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach to managing water quality on a river basin basis; with the aim of maintaining and improving water quality. It also requires that management plans be prepared on a river basin basis and specifies a structured approach to developing those plans. It requires a programme of measures for improving water quality be brought into effect by 2012 at the latest. River Basin Management Plans are to be prepared and renewed in six year cycles and the first plans cover the period to 2015.

The river basins approach adopts natural geographical areas in contrast to current water management systems which are based on the administrative boundaries of local authorities. To give effect to the Directive, Eight River Basin Districts have been identified on the island of Ireland for the purpose of implementing the

1 See for example The Irish Academy of Engineering and Engineers Ireland (2011) “Delivering Ireland’s Water services for

the 21st Century” page 13 “ a budget of €500m is required to achieve universal metering of the domestic sector.

International evidence suggests the cost is more likely to approach Euro1bn.”


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Directive. Four of the districts are wholly within the State (Eastern, South Eastern, South Western and Western), three are shared with Northern Ireland (Shannon, Neagh Bann, and North Western), and one is wholly within Northern Ireland (North Eastern).

The introduction of domestic charges for water and wastewater will change Irish consumers to customers. It should be expected that they will become more demanding and less forgiving as they begin to pay separately for water services. Keeping customers informed, responding to their queries and complaints and demonstrating value for money will be a key issue in this sector in the coming years.

Objectives of Reform Programme Understanding the objectives for the creation of Irish water is a critical part of this study. Irish Water is being created to serve a clear purpose. The key objectives for the development of Irish Water can be identified from Government statements and the content of the main policy documents outlined above. Based on our review of the policy content PwC understand that the reform is intended to achieve:

Financially sustainable water services: a key aspect of the reform of the public sector in Ireland in support of EU/IMF commitments is to reduce the requirement for public sector funding. A financially sustainable water service will deliver a more cost effective service, driving out cost through the elimination of duplicated services, waste, and the establishment of a more integrated service delivery model. Stability of revenue from customer charges aligned with a reducing cost base will improve profitability thus strengthening Irish Water’s ability to secure funding from external lenders.

Improving Ireland’s water services infrastructure: as our description of the current status of water services in Ireland demonstrates, there is a backlog of investment to be undertaken on the system. There is also a national need to maintain headroom in the security of water supplies. The new structure for Irish Water needs to be able to deliver cost effective investment in a timely manner.

Ensuring Environmental Standards: There is a need to ensure that can meet our environmental obligations such as those set out in the EU’s Water Framework Directive2. Significant funding will be

required to address this in the coming years.

Delivering improved outcomes for customers: the introduction of customer charging will raise customer expectations of the quality of water services (e.g. better quality drinking water, improved water pressure, fewer leaks, etc). Irish Water will need the capability to deliver improved customer outcomes across a broader range of measures than used previously. The entity will need to have clear capabilities to deliver for customers and also have appropriate regulation and incentivisation to focus on customer requirements.

Strong governance with clear accountabilities: a critical success factor for many water sector reform projects is the clear identification of roles and responsibilities for the key players in the sector. Stakeholders need to be clear on their obligations and have the resources to deliver on these.

Support other aspects of water reform in Ireland: the Government is considering and evaluating a number of policy initiatives at the time this report was being prepared including the introduction of charging, the creation of an economic regulator, a proposed near universal roll out of water meters, implementation of strategic planning, development of river basin management governance etc. It is important that the new structure for Irish Water supports these developments and does not create institutional blocks to the reform programme.

Promote efficiency: efficiency has been a key driver in the reform programme for water services in Ireland and is a major theme in Government policy statements. The evaluation of efficiency presented is both in terms assessing whether the proposed model will be efficient but also the extent to which the implementation process for the preferred model can be efficient as well.

2 Which some stakeholders in Ireland estimate could create an investment burden of an additional E20bn


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The objectives outlined above were used to help determine the criteria for the assessment of potential organisational models for Irish Water. The criteria used are set out in Section 6.

Consultation Process As part of the information gathering work, a comprehensive consultation programme was carried out. The list of participants in the consultation process was determined by the DECLG which included the following:

Association of County and City Councils;

Association of Municipal Authorities of Ireland;

Bord Gáis;

Bord na Mona;

Chambers Ireland;

City and County Managers Association;

Comhar;

Commission for Energy Regulation;

Competition Authority;

Construction Industry Federation;

Department of Environment, Community and Local

Government;

Department of Public Expenditure and Reform;

Department of Transport;

Engineer’s Ireland;

Environmental Protection Agency;

ESB;

Forfás/National Competitiveness Council;

IBEC;

ICTU;

Local Authorities Members Association;

Local Government Management Authority;

National Consumer Agency;

National Pension Reserve Fund;

National Roads Authority;

National Rural Water Services Committee;

National Treasury Management Agency; and

Office of Public Works.

Figure 2: Participants in Consultation Process

Participants were provided the opportunity to share their views of the current situation regarding water provision in Ireland. They were also asked for their views on potential new models for the sector.

Overall the consultation programme proved to be a valuable process which enabled PwC to obtain the views of a broad range of key stakeholders. A number of key messages were consistent across the stakeholder groups consulted. These included:-

The need for increased efficiency in the sector;

The desirability of moving to a River Basin structure for managing water services;

The need for improved water quality and greater security of supply in the coming years;

The importance of obtaining increased funding to meet the increasing demands of customers;

The benefits of transferring of responsibility for water services to a single state agency; and

The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of water services.

These views have been taken into consideration in the analysis of options and the development of proposals for the new model for water services delivery.


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3. Overview of Current Provision of Water and Wastewater Services in Ireland


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3. Overview of Current Provision of Water and Wastewater Services in Ireland

Overview Under the existing institutional arrangements governing the water sector in Ireland, there are 34 city and county councils (‘water service authorities’) responsible for the production, distribution and monitoring of drinking water from over 900 public water supplies and for the provision of over 1,000 public waste water services.

The industry is structured as shown in the figure below:

Figure 3: Overview of Current Industry Structure

The diagram above presents a schematic of the key actors in the provision, control, finance and regulation of water services in Ireland today. The DECLG is responsible for setting policy and plays a role in controlling and managing the capital expenditure programme. Crucially, it allocates funding on an annual basis for operations and on a rolling basis for capital expenditure to the local authorities.

The EU sets the wider context enacting such important directives as the Water Framework Directive and the Urban Waste Water Treatment Directive. It also has a monitoring function and can pursue legal cases against member countries of the EU for failure to execute the directives. These directives are transposed into Irish law. The EPA is the technical and environmental regulator for drinking water and wastewater services and plays a key role in the preparation of River Basin Management Plans. It has a key role in monitoring and enforcement of standards although it may delegate sampling and analysis to local authorities.

Local

Authority

GWS

Local

Authority

Local

Authority

Local

Authority

Funding

Sources

(incl. DECLG

& Lenders)

Suppliers

(incl.

DBOs)

Environ.

Regulator

EPA

Department of Environment, Community

and Local Government

Non

Domestic

Customers

GWS

GWS

EU

Domestic

Customers


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The local authorities are the Water Services Authorities. As such they have the primary responsibility for the provision of the public water and wastewater services. They procure services and infrastructure from the supply chain including the use of the Design, Build, and Operate (DBO) model for some treatment plants.

In addition to funding from the DECLG, they are able to raise income from development levies, non-domestic water charges, significant user contributions and by borrowing with the approval of the DECLG. Non-domestic customers and domestic consumers receive a service of drinking water and/or wastewater collection and treatment. Non-domestic customers are currently billed for this service directly.

Group Water Schemes are voluntary cooperatives providing potable water to customers in some rural communities. They are important actors in the totality of the provision of water services and are represented nationally by the National Federation of Group Water Supplies.

Investment by the local authorities in water services is guided by the policies and procedures of the DECLG, including the River Basin Management Planning process. Investment in the sector is primarily under two programmes namely the:-

Water Services Investment Programme (WSIP);

Rural Water Programme (RWP).

For the WSIP each local authority presents an assessment of needs on the basis of which (and other factors) the DECLG prepares the WSIP on a three year basis. The RWP is an annual programme under which funds are allocated to local authorities for smaller public water schemes. The local authorities are also responsible for the supervision of any group water schemes and private water supplies in their areas and for the carrying out of various water-related inspection and enforcement activities. The Environmental Protection Agency has statutory responsibility for the supervision of the quality of water and waste water services delivered by the local authorities. An important source of information for this part of the report has been the Value for Money study on the WSIP 2007-2009 from the DECLG.

Legislative Framework

General The legislative environment in respect of water services:

Sets the framework within which participants in the sector must operate;

Delineates the roles of participants in the sector including in respect of:

o the regulation and supervision of the provision of water services;

o the provision of water services; and

Sets standards in accordance with which participants in the sector must operate.

All aspects of the legislative environment, but in particular the framework and the standards, are shaped by applicable EU legislation.

The Framework – Water Framework Directive3 (the “Directive”) The Directive establishes a framework for the protection of waters in order to protect and restore clean water across the EU and ensure its long-term, sustainable use. With this aim the Directive requires that waters be managed on the basis of their natural units’ river basins so that they at least reach ‘good’ status by 2015. Management of waters on this basis requires:

3 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 established a framework for

Community action in the field of water policy.


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Designation of competent authorities;

Environmental and economic analysis of river basins by those authorities; and

Development and implementation of river basin management plans including a programme of measures to meet the objectives of the Directive.

This Framework has a number of implications worth noting here:

The need for co-ordination between any national or local water authorities within the river basin catchment area;

The requirement to charge a price for water services (from which Ireland has received, to date, a partial derogation) which reflects the cost of providing the services (including environmental and resource costs as well as operation, maintenance and development costs) creating an incentive for the efficient use of water resources (subject to potential derogations of which Ireland availed to date in respect of domestic charging); and

The requirement, in order to prepare cost-effective river basin management plans, to carry out an economic as well as an environmental analysis of the river basin including estimating the costs of implementing different possible measures and making forecasts of long-term water demand based on future population and economic scenarios.

The Framework is the main prism; there are other influences including National Spatial Strategy, economic considerations etc.

Roles of Participants – Water Services Act 2007 (the “Act”) The precise roles of sector participants are designated and shaped by a body of legislation with the Act at its centre. The roles of the Minister, the water services authorities and the EPA, and the interaction between those roles, are the key elements of the operational and regulatory framework.

The Act confers a significant role on the Minister who has a general duty to facilitate the provision of safe and efficient water services and water services infrastructure in accordance with relevant EU legislation including the Water Framework Directive. For this purpose the Minister has overall responsibility (subject to the role of the EPA in relation to drinking water) for the supervision and monitoring of the performance by water services authorities of their functions and the planning and supervision of investment programmes for the provision of water services. The Minister has very broad powers to direct and guide water services authorities in the performance of their functions and to define those functions. He may, for example, make regulations requiring water services authorities to provide specified water services to specified classes of agglomerations, areas or concerns. He may also compare the performances of water services authorities and require coordination between them by directing two or more authorities to carry out functions jointly.

The Act authorises each of Ireland’s 34 City and County Councils (29 County and 5 City) to provide water services, and includes provisions (not yet commenced) for those authorities to licence and supervise the provision of water services by other persons (not yet commenced), in its functional area. An authority may provide water services, in accordance with prescribed standards and public policy, in its functional area. Alternatively, it may, subject to the requirements of the 2007 Act, enter into an arrangement with another person in relation to the provision of such water services in part or all of its functional area. The 2007 Act authorises two or more water services authorities to enter into an arrangement for the purpose of one or more of them or jointly carrying out any or all of their functions under the 2007 Act. While the exercise of the powers conferred on water services authorities is generally at the discretion of the individual authority, water services authorities must comply with directions issued, and any regulations prescribed, by the Minister.


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Standards – Drinking Water Regulations4 and Urban Waste Water Regulations The EPA plays a key role in relation to the preparation of river basin management plans required by the Water Framework Directive. It also has a supervisory and monitoring role in relation to drinking water quality and licensing discharges to aquatic environments from sewage systems owned by water services authorities and discharges to waters by certain trades (IPPC licences).

The Drinking Water Regulations prescribe quality standards to be applied to supplies of drinking water and related supervision and enforcement procedures. The Urban Waste Water Regulations prescribe specific standards for waste water treatment plans and related monitoring procedures. Compliance with these requirements has driven, and it is our view that it will continue to drive investment in water services infrastructure. It is also worth noting that Water Services Strategic Plans will have to be completed in the context of River Basin Management Plans.

The allocation of roles to sector participants has a number of implications worth noting here:

Responsibility for the sector is allocated between a significant number of parties, including a number of parties in respect of each river basin district, and accordingly considerable coordination is required between those parties particularly, but not exclusively, in the context of the Water Framework Directive; and

The role of the Minister, and also, in the context of the Water Framework Directive, the EPA, would appear to be particularly important in achieving this coordination. Certainly the Minister has broad powers to require coordination between water services authorities if he considers that necessary.

A more complete description of the legislative framework is incorporated in Appendix 3.

Economic and Funding Situation

Overview of Current Economic Situation The current Government funding situation is shaped by characteristics of the wider economic and political environment both in Ireland and across the EU. In several aspects, the Irish economy has represented an exaggerated version of typical Western economic trends over the last two decades. Sustained growth in the Irish economy, particularly in the services sector, outstripped that seen in several other Western economies during the 1990s. However, as elsewhere, doubts about the sustainability of much of this growth were expressed during the bursting of the dotcom bubble and the global slowdown through 2001.

Irish growth continued, but was increasingly reliant on a construction and related property boom through the 2000’s, again outstripping growth rates seen in several major Western markets. The property boom was fuelled by a combination of factors, including: i) low interest rates; ii) a significant exposure of Irish financial institutions to property; iii) pro-cyclical taxation policies; and iv) a buoyant consumer confidence. The net effect was net inward migration, strong employment growth in construction and construction-related sectors and strong growth in capital tax revenues.

Tax receipts on capital in Ireland were €3.4 billion in 2006, or 6% of total Irish tax receipts that year. This compared with a typical figure in the UK of barely double that absolute value, or less than 1% of total UK tax receipts.5 The Irish state increased its public expenditure broadly in line with receipts.

However, as the Irish property boom drew to an accelerated end the effect on public finances was significant, as the loss of more than €2.5 billion in capital tax revenues from the peak coincided with significant losses in employment-related taxes and rising social welfare costs. Consumer confidence, which derived to a significant extent from the property boom, weakened rapidly and final demand fell across a wide range of domestic sectors again with negative implications for consumption-based taxes and employment in domestically-traded services.

4 European Communities (Drinking Water) (No. 2) Regulations 2007

5 CSO; EIU August 2011


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The Exchequer ran an operating deficit of close to €25 billion in 2009, which was reduced to €19 billion in 2010 through the implementation of a radical programme of cuts in public expenditure and the imposition of very significant income tax increases. An additional deficit reduction of €15 billion is targeted before end-2014.

In September 2008 the Irish Exchequer guaranteed the vast majority of deposits in six Irish banks and building societies. This commitment was required to prevent the outflow of deposits from the banks and building societies, most of which had a very significant exposure to the Irish property boom and a heavily impaired loan book. Two banks (AIB and Anglo Irish Bank) and two building societies (EBS and Irish Nationwide) are now under State control.

A loss of market confidence in the ability of the Irish State to manage this combination of issues resulted in the acceptance of an EU/ IMF programme of €85 billion in financial support in December 2010.

The package is broadly reliant on a number of austerity conditions over its 2011-2014 loan draw-down period, including a €5 billion increase in annual tax receipts, and a €10 billion fall in annual state spending (including €3 billion on capital spend and €3 billion on grants, subsidies, and procurement).

Implications for Water Services As shown in Figure 4 – Figure 6 overleaf, to date the Water sector in Ireland has a high level of dependency on Government funding for both operating costs and capital expenditure. During the construction and related property boom, funding of the water service was heavily dependent on development levies which, in the context of the current economic climate, have all but disappeared. Given the funding landscape described here, the existing funding arrangements are unlikely to be sustainable in the longer term. Irish Government Finances are highly constrained for new capital expenditure and operating cost subvention. These Capital and Revenue constraints on Government finances provide a backdrop for the establishment of an Irish Water utility which will raise charges for the supply of fresh and waste water services to both the commercial and residential sectors, and that has the ability to raise debt finance on foot of its net revenue streams and tangible asset base.

Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)


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Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)

Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study6)

Sourced from Table 6.1 of the Value for Money Review (2007-2009)

Regulation There are several levels of regulation in relation to the provision of water and wastewater services in Ireland. This study focuses on two aspects of regulation namely economic and environmental/technical regulation.

Economic Regulation The provision of water and wastewater services can be regarded as a natural monopoly situation as the available options for most consumers/customers are practically very limited. Currently in Ireland there are no direct charges for the provision of water and wastewater services to domestic customers on an ongoing basis. Ireland is unusual if not unique in the OECD in not having a separately identified charging system for domestic customers.

Non-domestic customers pay water charges on the basis of metered consumption according to prices set by their local authority. This is usually a combination of a flat standing charge and a metered charge based on actual volumes used. There is an established methodology for the assessment of what represents full cost recovery of non-domestic water charges. This involves assumptions about how the cost is spread between non- 6 Non-Exchequer is “estimated matching funds” associated with the actual annual Exchequer spend on these programmes

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100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

WSIP RWP Non-Exchequer


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domestic customers and other users of the services and on rates of unaccounted for water (UFW) and how this is handled. There is an obligation on local authorities that they should have full cost recovery on non-domestic customers but there is no separate entity which directly monitors or enforces this obligation. In that sense, local authorities are self regulating for prices for non-domestic water service. Feedback from our stakeholder meetings indicated that some local authorities may be failing to impose charges resulting in full cost recovery according to the applied methodology. There is a wide variation in the levels of charges across the country (e.g. 2010 & 2011 - Kildare = €1.75 per cubic metre, Wicklow = €3.04 per cubic metre) and there are substantial arrears for non-domestic customers (52% collection rate).

Connection charges apply for both water and wastewater services for both new domestic consumers and non-domestic customers. These are generally applied on a cost recovery basis and vary from case to case depending on the local authority and the expense incurred in executing the connection. The policies as regards connection charges are set by each local authority.

Technical and Environmental Regulation For technical/environmental regulation, the main entity setting out and enforcing standards is the Environmental Protection Agency (EPA). The EPA is there, through its regulatory licensing and monitoring regimes, to protect the consumer in terms of quality of drinking water. The EPA in Ireland follows a rather standard model which would be easily recognisable across the OECD countries. Some of the EPA’s main functions as they would relate to water and wastewater include licensing and permitting (particularly of wastewater discharges), monitoring, inspection, enforcement, environmental planning, strategic environmental assessment and waste management with particular attention to wastewater sludge, insofar as the water sector is concerned. The EPA has a major role in developing the River Basin Management Plans. Drinking water standards are also monitored and enforced by the EPA, who maintain a Remedial Action List of water treatment plants where specific actions are required of the Water Service Authority to bring the standard of treatment up to required norms.

The technical/environmental regulation of Group Water Schemes (GWS) is delegated by the Water Services Act 2007 to the local authorities, who also provide a number of other roles for the GWSs including Rural Water Liaison Officers and ongoing day-to-day technical support. GWSs regulate their own pricing structures.

It is worth noting that in comparison with other utility sectors, the technical regulation of water and wastewater services is extensive with no equivalent of the EPA in the telecoms, gas or electricity sectors. The EPA therefore represents a substantial commitment to the achievement of better technical standards for water services.

The Consumer Within the current institutional framework for the water sector, there are no developed arrangements to protect the consumer, whether domestic or nondomestic, as in other sectors and in line with OECD and EU policies on ‘Better Regulation’. Local authorities are responsible for determining the level of non domestic charges, based on guidelines from the Department. Across the local authorities, there is no developed system of redress for the consumer or consumer charter of rights. There are no statutory rights of appeal or independent appeals mechanisms.

It can be concluded, therefore, that there is no independent economic regulation of the sector with the consumer interest at heart. Equally, it can be said that there is no effective representation of the consumer voice. This contrasts sharply with other utility sectors such as for telecoms, electricity and gas where there are well established independent regulators.

Leadership and Coordination As mentioned previously, the local authorities are defined in the 2007 Water Services Acts as the Water Services Authorities and as such the city and county managers, their respective directors of services and their professional staff are the leaders for the provision of water and wastewater services in Ireland. There are 34 local authorities with a very considerable variation in size, ability to leverage economy of scale, achieve specialisation in water services and geographical distribution of population served. In some areas, notably in the greater Dublin area, there is a considerable sharing of knowledge and resources. However, within the


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structures of local democracy in Ireland, the city and county managers report to their councils so ultimately the councillors are also leaders for the provision of these services. The interplay between city/county manager and the council (or its strategic policy committee) has been reported to be a key element of the existing structure. It allows a local democratic accountability but can have other effects such as influencing the setting of non-domestic water charges.

Thought leadership comes from a number of sources. The CCMA is an important forum for sharing ideas, knowledge and for agreeing joint initiatives including shared services. The directors of services for water services would also have similar fora for sharing knowledge methods and approaches. It should be noted that the engineering consultants also have played a very important role in the roll out of infrastructure and other initiatives. Many local authorities would have acknowledged that they did not possess the in-house skills to manage many of the larger infrastructure projects and would have engaged consultants to assist these implementations.

The DECLG is much more than simply a department responsible for policy but also has a considerable executive function especially in the design and execution of the Water Services Investment Programme and the Rural Water Programme. With particular reference to the WSIP, the DECLG can get into the fine detail of the individual projects and is involved at several stages in issuing approvals to proceed. For larger projects, the National Development Finance Agency (NDFA) must be consulted for advice. The DECLG also provides considerable coordination functions including sponsoring numerous initiatives from its own budget such as the Rural Water Liaison Officers and the Water Services National Training Group. In addition, in the design and execution of the River Basin Management Plans, it plays a key role with the EPA notably in encouraging all the relevant councils to approve the River Basin Management Plans which encompass all or part of their territory.

The Group Water Schemes provide potable water services to a considerable number of households in rural Ireland. Each scheme is essentially a cooperative run by a voluntary committee. These schemes would generally receive a considerable level of support both technical and administrative from the local authorities. The leadership of these schemes rests with the committees but it would be readily acknowledged that important leadership has been provided from the DECLG, not least in addressing the deficits set out in the 2002 judgment of the European Court of Justice and from the EPA in developing the Remedial Action List (RAL). The implementation of the grouped DBO’s could not have happened without the support and intervention of the DECLG along with the National Federation of Group Water Schemes. The National Rural Water Services Committee (NRWSC) provides input and direction on the design and selection of projects and schemes for inclusion on the annual Rural Water Plan. As such it is an important actor in the overall capital programme.

The Environment Protection Agency (EPA) also provides thought leadership on a range of issues (along with the DECLG) such as River Basin Management Plans, monitoring, inspection and enforcement, the RAL for water treatment etc. In the case of River Basin Management Plans, the DECLG and EPA were drivers of the process to complete this but the local authorities in each River Basin had to approve each plan – this was inefficient requiring multiple council approvals for each plan and in some cases, councils had to approve separate plans if they straddled the border of two, or even three River Basin Districts. This process of requiring multiple approvals before a single RBMP is an example of the fragmentation of the provision of water services.

The Local Government Management Authority (LGMA) provides an important guidance, coordination, sponsoring and implementation function in respect of Management Information Systems. However, in order to implement a new system there is a process of consultation with the CCMA to get a sufficient number of local authorities to participate and contribute budgets. It does not follow that all local authorities would participate in the implementation of a new system. For instance, when rolling out the CORE human resource management system, 29 of the 34 local authorities implemented the system and procedures while 5 (including some of the larger authorities) did not.

It can be seen that the leadership and coordination is rather diffuse and fragmented with a range of actors able to influence and control directions, including:

The 34 local authorities o The city/county manager and the professional staff o The elected council or its strategic policy committee


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DECLG

NFGWS

EPA

LGMA

CCMA and others including NRWSC. This multiplicity of water service providers and other actors in the provision of water services can hinder the achievement of the benefits of scale which are discussed in the SWOT analysis below.

Operations Each local authority is responsible for the provision of water services in their region and each is tasked with the responsibility to organise its operations to provide that service. The larger local authorities may have a dedicated Director of Services for Water while the smaller authorities may ascribe several services including water to a single Director of Services. Below the level of City or County Manager and Director of Services, there is no standard mandated organisation structure for the provision of water and wastewater services. It is an obligation on each local authority to set its own structures to deliver the services and City and County Managers have considerable freedom to design their respective organisational structures.

There is a practice in a number of countries to use river basin districts as an operational area. County and city boundaries in Ireland do not generally reflect river basin boundaries. Therefore river basins are not used as operational areas. The River Basin Districts which have been defined as part of Ireland’s obligations under the Water Framework Directive generally comprise several local authorities a number of whom have territory in more than one River Basin District. There are 8 River Basin Districts on the island of Ireland, 7 of which are wholly or partly in the Republic.

There are a number of entities which exist to enhance the cooperation between local authorities on operational issues. The Water Services Training Group (WSTG) is an initiative to coordinate the training for the personnel active in the sector. In addition, it seeks to set out some standard operating procedures (SOPs). However, this is not done on a comprehensive basis. SOPs are regarded not only as facilitators of increased efficiency and a documentation of the collected know-how of an organisation but are also a key facilitator of quality assurance. A fragmentation in this regard may also be regarded as an inhibitor to efficiency and quality assurance.

The City and County Managers Association (CCMA) also has a water services committee which acts as a platform for knowledge sharing and agreeing joint initiatives. Generally the detailed interaction between the local authorities and the DECLG is concerned with capital projects but there are instances of the DECLG acting as a coordinator or even as prime mover on operational matters, e.g. the Performance Management System. The Local Government Management Agency also provides some benchmarking services. For water services this includes comparisons of unaccounted for water (UFW) and collection of charges from the non-domestic sector.

In addition, a process of rationalisation of local authorities is also planned as evidenced by recent statements by the Minister regarding the amalgamation of authorities in Limerick and Tipperary.

Local authorities do not operate Group Water Schemes (GWS) but do provide ongoing technical support as a matter of routine to GWSs. This is particularly the case for those GWSs which have implemented a Design Build Operate (DBO) contract either on a standalone or bundled basis. DBO contracts for GWSs are structured as Design & Build (D&B) Contracts with the Local Authorities and Operation & Maintenance contracts with the GWSs. Local Authorities project manage the D&B phase while the GWSs manage (with ongoing assistance from the Local Authorities) the O&M phase, which can be up to 20 years.

There is a trend towards the use of shared services for some of the obligations of local authorities. Examples of shared services include the implementation and management of a new Human Resource Management system (CORE) and the adoption of River Basin Management Plans. These shared services are characterised by a collaborative, organic approach between local authorities. The pace of implementation of these shared services is set by the local authorities. In a number of areas this is on the basis of the Regional Authorities, eight in number, which are also responsible for regional development plans. These Regional Authorities do not coincide with River Basin Districts. The mismatch between city/county boundaries and River Basin Districts can make the process of River Basin Management planning somewhat unwieldy and an updated governance model is in


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development. The Greater Dublin region has been able to achieve more than the rest of the country in terms of shared services and plans for shared services. This may reflect that Dublin county was in the not too distant past a unitary authority and the degree to which there is a significant level of shared asset base (e.g. large water treatment plants serving two or more local authorities).

Each local authority is responsible for the implementation of utility management MIS including workflow management, field force management, computerised maintenance management systems, stock control, procurement, geographic information systems (GIS), customer relationship management, telemetry and Supervision, Control, Automation and Data Acquisition (SCADA) systems. While there is some commonality in some areas e.g. GIS, the implementation of even the GIS system is highly dependent on the commitment of each local authority to this. Each local authority, generally with the support of engineering consultants, chooses its own treatment technologies for water and wastewater treatment. Procurement contracts for operations are almost exclusively let on city or county basis. Staff from one local authority does not generally cross the relevant city or county boundary to work in other local authority areas.

In times of pressing need or emergency, local authorities do have the ability to deploy staff from one service to another. It has been reported for instance that during periods of extreme cold weather, local authorities were able to deploy staff from the roads and other services to support urgent work for water services. This is an important facility to consider when designing any future structures for the provision of water services.

Local authorities are each responsible for the provision of water services in their respective service areas. It can be reasonably concluded that with 34 local authorities each with a statutory duty and liability, there is fragmentation in the provision of back office services. Economies of scale across city/county bounds are limited to shared services which are being developed on a collaborative and organic basis but do not necessarily include all local authorities.

Asset Management and Capital Programme According to the DECLG, there are approximately 25,000 km of public water supply distribution network in Ireland together with a significant wastewater network. There does not appear to be a clear understanding of the overall length of the sewer network. There are 952 separate public water supplies serving 87.5% of the population with the remainder of the population being served primarily by Group Water Schemes or small or individual supply schemes.

For wastewater treatment, there are 482 agglomerations of greater than or equal to 500 population equivalent with 67% of the population connected to a public waste water network. The great majority of the rest of the population is served by septic tank or small scale wastewater treatment facilities. For the public wastewater treatment, two plants (one in each of Dublin and Cork) treat 55% of the wastewater. The total capacity for wastewater treatment7 in public systems in 2009 was approximately 40,000 kg BOD which equates roughly to a

population equivalent of 3.7 million. The capacity of treatment works was approximately 492,000 m3 per day.

Approximately 1.6 billion litres of potable water are produced daily on average in Ireland. The largest treatment plant in Ireland is that at Ballymore Eustace serving approximately 500,000 people.

Unaccounted for water is a significant problem in the water distribution system in Ireland. In 2009, the average level of UFW is estimated at more than 41% which is high by international standards. The Water Services Investment Programme for 2010-2012 has a major focus on water conservation allowing for approximately 1% of the network to be renewed annually.

Investment in Infrastructure In Ireland approximately €600 million per year is being invested in water and wastewater infrastructure. The key elements in a very broad sense are:

The Water Services Investment Programme (WSIP) has been investing about €400 million per annum;

7 This refers to the total capacity of wastewater treatment works in Ireland at secondary treatment standards or better.

Pollution load is measured in kg BOD or in population equivalent. Volume capacities are measured in m3 per day.


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The local authorities provide ‘matching funds’ of approximately €100 million funded through significant user contributions, development levies and borrowings based on the ability to repay these loans mainly through the latter two sources and revenue from non-domestic water customers; and

The Rural Water Programme (RWP) has been investing about €100 million.

The amounts mentioned above are high level averages and the actual amounts fluctuate from year to year. The average annual Exchequer spend for the last decade is in the order of €550 million. This amount is lower in the year 2011 reflecting overall public spending concerns and a reported ability to obtain lower prices than expected for planned investments. The WSIP and the RWP are funded from the DECLG with the former closely controlled by the department while the latter sees considerable managerial responsibility allocated to the local authorities.

For the WSIP, in the 10 year period leading up to the current WSIP 2010-2012, there has been a major focus on wastewater treatment capacity and standards. In the current plan, the focus has switched to issues of water conservation in response to a perceived unacceptably high level of unaccounted for water (UFW). A number of changes were introduced from previous plans including the introduction of an annual review, the ending of an automatic rollover from one WSIP to the next of schemes not commenced and the discontinuation of the Serviced Land Initiative in response to a decline in demand for this approach due to the wider economic downturn. These changes allowed the WSIP to be more streamlined while at the same time allowing greater flexibility through the annual review mechanism. The view was expressed by stakeholders that the current WSIP is the most evidence based plan to date.

The Rural Water Programme’s main focus has been on upgrading Group Water Schemes’ (GWS) infrastructure in order to respond to a 2002 judgment against Ireland by the European Court of Justice (ECJ). The National Committee on Rural Water Services is closely involved in the RWP alongside the DECLG. There are other smaller parts of the RWP such as the Small Public Water and Sewerage Schemes element. In the allocation for 2011, approximately €28.5m was allocated for small schemes including the Remedial Action List and GWSs were allocated €56.5m.

Figure 7: Preparation of the Water Service Investment Programme

Figure 7: shows the basic steps followed in preparing the WSIP. The local authorities are the entities which manage the procurement of infrastructure assets for water and wastewater under the WSIP. As such they are responsible for the identification of needs and for proposing these needs to the DECLG. In the initial process of the identification of needs at local authority level, the professional engineering staff or the County or City Manager will make an initial proposal either to the full Council or to a Strategic Policy Committee. At this stage other projects can be added to the list being submitted to the DECLG for inclusion in the WSIP. Figure 8 shows the different elements which impact on the assessment of needs as carried out by the local authorities.


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Figure 8: Assessment of Needs

The DECLG collates and appraises all the identifications of needs as expressed by the local authorities and ranks each contract or scheme8 on the basis of priorities which are clearly set out in advance. The current plan’s priorities are set as:

Water conservation proposals;

Environmental objectives including responding to ECJ rulings, satisfying environmental regulations and requirements of the EPA and compliance with the Water Framework Directive; and

Economic objectives including supporting strategic and sustainable development of hubs and gateways under the National Spatial Strategy and works to support employment creation.

These priorities can vary from one WSIP to another. Within the constraints of the overall 6 year funding envelope as set out in the National Development Plan, the WSIP on a three year detailed look forward basis sets out which contracts and schemes have been selected to advance to contract stage. The DECLG assesses the proposals, evaluates them according to a scoring system, prioritises them and makes a recommendation to the

8 A scheme may have several separate contracts

WSIP 2010- 2012

Assessment of Needs

EPA Drinking water. Urban Waste Water

Reports Work on RAL and waste water

priorities

NSS / Developing areas

Shellfish Pollution Reduction Plans

Freshwater Pearl Mussels Plans

Forfas Reports

Enterprise needs of gateways and Hubs

River Basin Management Plans : priorities for first cycle

Figure 9: Water Services Investment Programme


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Minister, based on commitments already entered into and new projects. The plan is then published. The pace of the delivery of the plan is determined by the funding resources available both nationally and locally. Exchequer capital resources are determined through the annual Estimates process. The DECLG bid for funding for the coming year from the Department of Public Expenditure and Reform is based on the progress on the relevant WSIP and requirements of the RWP. The capital allocations are then published as part of the Estimates process in the run up to the Budget. Local funding resources are determined through the local authority estimates process.

In the less detailed look forward in the WSIP, projects are selected which should proceed to planning stage. Projects are assessed on a case by case basis to determine the level of ‘matching funds’ required from the local authority to allow the project to proceed to contract.

Figure 10 shows the five basic steps from conception to completion of a project. In the WSIP 2010-2012, those projects which are at the stages of ‘Brief to Consultants’ or ‘Preliminary Report’ are mentioned as projects in planning. Those expected to move to Contract Documents stage in the life of the plan are set out in detail in the plan, with detailed costing.

Figure 10: Basic Project Steps

The inclusion of a contract or scheme in the plan does not mean that it will be executed or even started in the period of the plan. It has happened that significant elements of each WSIP are carried forward to the next plan. This can arise due to a variety of factors including delays in the planning or procurement process, resource constraints (either human resource or availability of matching funds) or it can happen that larger schemes are not approved for moving to contract stage if sufficient Exchequer funds are not made available during the life of the plan. The comprehensive review undertaken as part of the development of the WSIP 2010-2012, required a review of all projects which had not substantially advanced against programme priorities, and those of a lower priority were removed from the programme. This was in contrast to previous programmes where projects were only added, and none were removed. It is worth noting that in order to proceed to contract, projects in excess of €5m have to be approved by the DECLG and for projects with a value of over €30 million it is necessary to consult with the National Development Finance Agency (NDFA). Projects of value in excess of €50m require a full cost benefit analysis. The local authority needs to be assured that it has sufficient matching funds to fulfil its funding obligations.

The local authorities are also the entities responsible for the preparation of the Strategic Rural Water Plans in their service areas for supplying rural water needs in their county and upgrading water quality. These relate primarily to the upgrade in the infrastructure of the GWSs in response to the 2002 ECJ judgment mentioned


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above. Rural Water Liaison Officers in the local authorities (although funded directly by the DECLG) prepare an identification of needs which is approved by the relevant local authority Director of Services. These are submitted to the DECLG on an annual basis and using a similar, if less formal approach to that of the WSIP are assessed for approval of funding in the relevant year’s RWP.

The process of submitting projects for funding both under the WSIP and the RWP can be characterised as a competitive or bidding process, where the projects in each local authority are competing for funds with other local authorities and indeed with other projects in their own areas. At a high level, affordability is assessed within the multi-annual capital envelope set by DPER (and as can be modified from time to time by the Department of Finance) and the prioritisation of investment is bound by this envelope on an annual basis. As such, projects that have been included in the WSIP and RWP may not receive funding approval during the life of the WSIP. Political input can occur at Council (or Strategic Policy Committee level of the Council) at Ministerial level or at Government level. As noted above, larger projects even if included in a WSIP will still need to be approved by DECLG in accordance with the Government approved capital appraisal guidelines (Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector, 2005). It is not unfair also to characterise the process of seeking funds for water infrastructure as a process of bidding between government departments within an overall national funding envelope but the justification of a project by a local authority must be on the basis of a well developed case within a strategic framework. It has been observed by at least one stakeholder that in the past, in the allocation of capital funds, “it was widely assumed that each of the thirty-four local authorities must be satisfied to some extent, rather than national spatial planning taking precedence”. On the other hand, stakeholders have stated that the most recent WSIP is the most evidence based to date.

Customer Service and Billing Customer service can be regarded as two separate services. The first deals with all matters relating to payment for service while the second deals with matters related to service levels or technical issues.

Each local authority operates its own procedures with regards to customer service and there is no standard approach to this across the local authorities. Larger local authorities operate contact centres which deal with general queries, frequently asked questions and are able to take payment for services. The smaller local authorities may not have dedicated contact centres rather having staff members take queries directly on published telephone numbers.

For non-domestic water meter customers, local authorities have generally activated the billing and CRM module of their finance applications (e.g. Agresso, Oracle, Integra, JD Edwards) and process customer billing in this way. Meter readings are taken at regular intervals and are fed into the billing systems. Subsequent queries can be dealt with by staff members on the telephone, by email or by post. Enforcement is a key issue and there is evidence of substantial arrears in almost all local authorities for non-domestic water charges.

For new connections, most local authorities have clearly set out processes and procedures for customers to follow. These are handled by the engineering staff who will either execute or supervise the connection to the water and/or sewer network provided the appropriate payment has been made.

For ongoing technical queries, there is no standard approach across the country. Larger authorities have central numbers but will tend to refer callers with detailed technical queries to the technical staff directly who may be at a control centre, managing office or in the field. Some local authorities will publish extensive lists of phone numbers including mobile numbers on their websites for service users to contact. Caretakers/Curators are often the first line of contact for water consumers and their mobile numbers may be well known in the community. These contacts will not generally be logged in any central system. Overall, there is no central system for logging calls, allocating job numbers or tracking whether the problems have been resolved and if this has been reported back to the user of the service. Individual local authorities may indeed have fully or partially activated such an approach but there is no overall reporting system for this. It does not generally seem to be possible for the customer service representative who is called by a service user to interrogate any of the technical systems (e.g. GIS, workflow management, job order system, real time network information system etc) to give immediate feedback to a caller on the likely progress of a query.


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An informal element of customer service exists in the form of the ability of the residents of a local authority to approach a councillor in order to raise a particular issue. This aspect of local democracy may not feature as a formal element of a customer service strategy, but is a method by which residents and businesses make contact with, and expect a reaction from the local authorities.

The overall effect of the strategies mentioned above is to encourage frequent contact by customers of the local authority and frequently short circuiting business processes. This may have the effect of also shortening the time taken to resolve issues but at the same time rendering it difficult or impossible to track the number and type of complaints and queries and whether they can be resolved and how long it takes to do so.

In the UK where water services have been subject to economic and quality of service regulation there has been an expanding definition of what constitutes the quality of service to customers. In part it is about water quality; in part it is about responsiveness to billing and other customer enquiries. The regulated water companies in the UK are subject to a range of customer performance measures (see Indicators of Performance below).

In England and Wales these measures are used to create an aggregate measure of performance for customers called the Overall Performance Assessment (OPA.) Water companies’ OPA scores are used by the regulator in part to set prices, companies performing well on the OPA were rewarded with additional revenues from customers by the regulator. More recently regulators have introduced the Service Incentive Mechanism which gives regulated companies rewards on a sliding scale depending upon their performance on a range of customer service metrics.

Finance This section includes reference to both operating expenditure (“OPEX”) and capital expenditure (“CAPEX”) and the sources of funding for each.

OPEX Funding – Summary The diagram below summarises the Income & Expenditure figures for 2010 from the unaudited Annual Financial Statements (AFS) submitted by the local authorities. A more detailed breakdown of local authority Income & Expenditure from 2008 through to 2010 is reflected in Figure 16. Note: All values referenced in this section are net of inter-authority contributions.

Figure 11: OPEX Funding Summary (Source – Unaudited Annual Financial Statements - 2010)


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Direct Income (OPEX) The main sources of direct income to fund OPEX, as outlined in the local authority Annual Financial Statements (“AFS”) are 1) Local Government Funding (Grant Income per the AFS) and 2) Income from the provision of goods and services. This latter source of revenue includes income from non-domestic customers relating to the provision of water and waste services and income from other sources (e.g. agency services). It is also worth noting that some authorities receive inter-authority contributions, i.e. payment from another authority relating to the provision of water services to that authority. As an inter-authority contribution received in from one authority will be met with an outgoing expenditure from another authority, this source of income is not reflected in the figures quoted below.

Figure 12: Direct Income to Fund OPEX €m (2008 – 2010 Actuals plus 2011 Budget)

Note: The income split for 2011 has been extrapolated based upon 2010 unaudited AFS actuals as the breakdown was not available in the

budgetary figures provided by Local Government Finance. The inter-authority contributions have also been excluded from the 2011 figures

using 2010 as the basis for extrapolation.

As reflected in Figure 11, the direct income received by local authorities is insufficient to meet their expenditure requirements and consequently other sources of funding are required to fund the expenditure gap. These other sources of funds are discussed later in this section.

Non Domestic Charges:

As referenced above, non domestic revenue is incorporated within the Income from the Provision of Goods and Services in the AFS. However, based on our discussions with members of the Stakeholder Group, the following points are worth noting in relation to non domestic charges and the resulting revenues:

The DECLG and local authority management have indicated that the current rates charged to non-domestic customers do not necessarily reflect the full economic cost of providing water services to those customers;

The rates which are charged vary quite significantly from local authority to local authority (2010 & 2011 - Kildare = €1.75 per cubic metre, Wicklow = €3.04 per cubic metre). This reflects the absence of an economic regulator for the establishment of non domestic water charges;

The overall commercial collection rate for 2010 as per the unaudited AFS was 52%, with significant variations per authority. However as commercial debtors are not aged, it is not possible to determine what portion of payments received in 2010 related to 2010 invoices, versus the portion which relates to pre 2010 debts. Prior to transferring any such debts to the Water Utility a detailed exercise should be undertaken by the authorities to identify what debts are actually collectible versus those which have remained unpaid for an extended period and may be irrecoverable. In addition, in calculating any future rates for non-domestic customers, Irish Water may need to take into account likely levels of bad debt.

0 50 100 150 200 250 300

2008

2009

2010

2011

Grant Income Income from the Provision of Goods & Services


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Figure 13: Commercial Collection Rates (2010)

OPEX Expenditure The total OPEX expenditure for 2010 was €715m. In the unaudited Annual Financial Statements (AFS) submitted by the relevant local authorities for 2010, this expenditure amount is broken down against a number of predefined headings such as “Operation & Maintenance of Water Supply”, “Operation & Maintenance of Waste Water Treatment” etc. However as this breakdown does not provide sight of salary, energy and other costs, an alternate view of OPEX expenditure was sought.

A number of local authorities were asked, for this report, to re-categorise their 2010 operational expenditure against alternate headings. The chart below reflects an extrapolation of the responses received from the 17 local authorities who reverted against the €715m total spend figure. The results of this extrapolation are that the four main cost buckets of spend across the authorities are staff costs (26%), repairs and maintenance including DBO (26%), agency services (12%) and other (21%) which would include central management charges.

Figure 14: Breakdown of OPEX Expenditure for 2010

Note: The DKM Construction Review and Outlook 2009 report identified repair and maintenance expenditure on water and sanitary

services for 2009 as €491.3m and estimated that it would be €480.4m for 2010. These figures differ significantly to the repair and

maintenance values (include DBO) reported by the local authorities in the above exercise (€185m for 2010). It was not within the remit of

this report to reconcile this difference, though it may be partly related to cost classifications.

A small number of local authorities have advised that the current level of operational expenditure should be viewed as constrained expenditure, i.e. fiscal constraints have reduced the levels of OPEX expenditure incurred. On this basis OPEX in the coming years may need to be in excess of current budgeted levels if Irish Water is to provide a water service capable of meeting all future regulatory requirements and consequently in our financial analysis referenced in Section 8 below PwC has assumed a €60m OPEX backlog which will need to be met by Irish Water. In addition, it should be noted that, based on current trends, the OPEX requirement will continue to increase as the asset base is increased.

0%

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Carlo

w

Cavan

Cla

re

Cork

Donegal

Fin

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Dun …

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y

Kerr

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Leitrim

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rd

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Mayo

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Monaghan

Nort

h …

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Roscom

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Slig

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South

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rford

0% 20% 40% 60% 80% 100%

2010

Staff Costs (exc. Central Mgt Charges)

Repairs & Maintenance including DBO

Agency Services

Rates and other LA Charges

Consumables

Energy

Other (inc. Central Mgt Charges)


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Funding Gap It is clear from the above information sourced from the AFS submitted by the local authorities that the direct income currently received from what is classified as grant income and income from the provision of goods is not sufficient to meet the operational expenditures of the local authorities (funding gap of €451m in 2010).

Figure 15: Income & Expenditure €m (Source – Annual Financial Statements - 2011 figures are budget)

Other Income The DECLG have advised that the OPEX funding gap (direct income less expenditures) of €451m in 2010 would have been met from other sources of funds including the general purpose grant. In accordance with the Local Government Act 1998, a general purpose grant is provided each year to the local authorities. The purpose of this grant is to provide top-up funding to local authorities to assist them bridge the gap between other income sources and the cost of the services they provide. In 2010 this general purpose grant amounted to €870m.

(800)

(600)

(400)

(200)

-

200

400

600

2008 2009 2010 2011

Total Direct Income Total Expenditure Other Income (to fund gap)

It is clear that in the absence of domestic water charges and full recovery on non-domestic customers, that significant levels of government funding will be required going forward to meet future operational expenditure. With the creation of Irish Water consideration will need to be given as to how this entity will be funded and, in the absence of domestic charges, whether a portion of the general purpose grant which is currently given to the local authorities will thereafter be provided directly to the new entity for the purposes of funding operational expenditures.


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The table below summarises the Income & Expenditure reported by the Authorities in their Annual Financial Statement (AFS) for 2008 through to 2010 less inter-authority contributions.

Figure 16: Income & Expenditure (2008 – 2010)

Note 1: As referenced on the previous phase, we are advised by the DECLG that the gap between direct income and expenditure is met by other sources of income including the general purpose grant provided by Government to the local authorities.

Note 2: The income from the collection of water and waste charges in the above table should not be compared directly against the expenditure related to the collection of water and waste charges. From a review of the unaudited 2010 AFS it would appear that some authorities have allotted some or all of their income from water and waste treatment against this heading rather than split it across the respective headings (Operation & Maintenance of Water Supply, Operation & Maintenance of Waste Water Treatment).

2008 2009 2010

31-Dec-2008 31-Dec-2009 31-Dec-2010

Actuals Actuals Unaudited Actuals

Income

Grant Income 37,843,688 47,025,866 41,728,006

Operation & Maintenance of Water Supply 7,477,387 8,834,853 11,376,140

Operation & Maintenance of Waste Water Treatment 8,507,916 13,026,563 7,103,096

Collection of Water & Waste Water Charges 50,857 38,535 -

Operation & Maint of Public Conveniences 85,582 20,454 77,317

Admin of Group and Private Installations 20,681,428 23,377,121 21,664,398

Support to Water Capital Programme 299,955 230,507 240,159

Agency & Recoupable Services 740,563 1,497,833 1,266,896

Income from Provision of Goods and Services 236,119,427 236,281,128 221,410,099



Collection of Water & Waste Water Charges 23,048,629 25,245,302 22,386,644

Operation & Maint of Public Conveniences 186,848 274,591 236,902

Admin of Group and Private Installations 688,476 588,240 575,519

Support to Water Capital Programme 978,102 1,383,203 1,186,909

Agency & Recoupable Services 9,779,150 7,724,982 6,741,609

Total Income 273,963,115 283,306,994 263,138,105

Expenditure

OPEX 699,124,073 705,494,357 714,559,744



Collection of Water & Waste Water Charges 20,644,283 29,548,702 35,157,088

Operation & Maint of Public Conveniences 6,714,675 7,162,358 6,850,637

Admin of Group and Private Installations 27,915,710 31,329,184 27,055,990

Support to Water Capital Programme 18,824,795 20,685,990 22,119,031

Agency & Recoupable Services 12,963,550 6,433,201 7,743,824

Total Expenditure 699,124,073 705,494,357 714,559,744

Funding Gap (Direct Income less Expenditure) (425,160,958) (422,187,363) (451,421,639)


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Existing Sources of funding- CAPEX

Figure 17: CAPEX Funding-Overview (2010)

The CAPEX spend in 2010 per appendix 6 of the unaudited consolidated AFS was €517m (down from €672m in 2009). Feedback from the Stakeholder Group indicates that part of the decrease in CAPEX spend related to efficiencies in driving down costs as opposed to a substantive change in the level of CAPEX activity (i.e. value for money improvements); however a very small number of individual local authorities have advised that had it been possible to increase the department annual budget that additional CAPEX programmes may have been initiated.

CAPEX Funding There are four main sources of funding to meet the CAPEX requirement. The main source of funding is direct government grants for approved capital expenditure projects (Water Services Investment Programme and Rural Water Programme) representing 67% of the total in 2010 (see Figure 19 below). The next source of funding is non-mortgage loans (18% in 2010) taken out by the local authorities via the housing financing agency or directly with the banks (subject to a €200m per annum limit on any deterioration of the general government local balance for the Local Government sector). The final sources of funds are other income such as development levies, significant user contributions and transfers from their revenue or other capital accounts (referred to as internal transfers).

Figure 18: CAPEX Movement €m (2010)

Source: Appendix 6 of the unaudited 2010 consolidated AFS

Direct Government

Grant

€408m

Non-Mortgage Loans

€111m

Other Income

€47m

CAPEX

€517m

Transfers from other

Capital or Revenue

Accounts

€45m

Opening CAPEX

funding balance

-€84m

Closing Balance

€11m

(84)

566

14

31

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11

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Balance as at 01/01/2010

Income Transfers To & From Revenue

Internal Transfers Capital Expenditure 2010

Balance as at 31/12/10


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Figure 19: Percentage breakdown of CAPEX funding (exc. opening and closing balances but including transfers)

The makeup of funding for future CAPEX will need to be defined by Irish Water, however it is again clear that the current level of government funding for OPEX and CAPEX is significant, amounting to €901m (€42m+€451m+€408m) per the unaudited 2010 AFS.

In Section 8 of this report reference is made to a number of funding scenarios which have been run covering the period up to 2030, reflecting the funding requirement of Irish Water and how this requirement could be met from a number of different sources including Government Funding, Third Party Borrowings, Non Domestic Charges and Domestic Charges. In the scenarios explored we have assumed that CAPEX funding requirements will remain significant throughout the period modelled due to the following factors:

Government have spent €4.2bn on the Water Services Investment Programme and €1bn on the Rural Water Programme between 2000 and 2010;

The local authorities have also provided additional funding of circa €90m per annum to fund CAPEX programmes (sourced from Table 6.1 of the Value for Money Review 2007-2009), though this value would vary year on year (see Figure 20 below);

The average expenditure between 2000 and 2009 (Table 6.1 of the Value for Money Review 2007-2009) was €557m p.a.

Figure 20: NDP Expenditure Trends €m (2000 – 2009)

There are a number of major capital expenditure programmes planned for future years before taking into account basic asset renewal. In addition to the metering programme, and the Greater Dublin Strategic Water Supply Project, the forecast costs resulting from investment required under Greater Dublin Strategy Drainage Study are also very large.

The “Assessment of Needs” submitted by local authorities in response to Circular L6/09 (i.e. in respect of

prioritised contracts that they wished to advance to construction over the period 2010 - 2012 and prioritised schemes for inclusion/retention in the Programme at planning stage) came to €6.5bn. This was subsequently reduced by €1.7bn.

Priority 1 waste water discharge requirements for 2015 from the River Basin Management Plans are included in the above figures, but the costs of Priority 1 for 2016-2021 and Priority 2 and 3 are not reflected.

In relation to asset replacement, the industry benchmark is to replace 1% of the network per annum to remain at a standstill; however in an Irish context this percentage would likely be higher due to the level of catch-up required.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

WSIP RWP Non-Exchequer


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Taking the above into account, we have assumed in our analysis that there will be a requirement for an annual CAPEX investment of €600m (before efficiencies and the metering programme). We have also made assumptions in relation to the cost of that metering programme and assumed an additional €500m CAPEX backlog which will start being discharged from 2015 (spread over 5 years).

Assets & Liabilities

Assets: The last valuation of water infrastructure assets was in 2003, and thereafter the assets have been depreciated on a straight line basis. PwC understand that a further revaluation of assets was meant to have been undertaken in 2008, but that this was subsequently postponed. If these assets are however (depending upon the model chosen) to be transferred to Irish Water, then a further revaluation of these assets will be required.

From Note 1 to the 2010 unaudited AFS the NPV of the water infrastructure assets as at 31/12/2010 amounted to €11.5bn, and broke down as follows:

Gross Fixed Assets: €19.4bn as at 31/12/10 Accumulated Depreciation: €7.9bn Net Book Value: €11.5bn (€11.4bn in 2009)

Liabilities: Prior to any transfer of liabilities to a new water company, detailed verification work would need to be undertaken with the respective local authorities to validate the value of any water and wastewater related loans which they may want to see transferred to Irish Water. In addition, and subject to a determination being made by the CSO / Eurostat on whether Irish Water would be off the GGB, there may be an additional benefit to the Government where such a transfer takes place and debts are moved from the Local Authorities to Irish Water.


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Staffing As of July 2011 the total number of Whole Time Equivalents (WTEs) within the local authority was 30, 9679, with an estimated 4,049 WTEs directly engaged in water and waste water services. These numbers have been trending downwards in recent years due to various initiatives implemented at National and Local Government levels to reduce costs.

This section sets out an overview of the:

Water services organisations within both the local authorities and the Department;

Relevant recent National and Local Government initiatives regarding staff; and

Current staffing levels.

Water and Wastewater Organisation within the local authorities and the Department The Department is responsible for developing and implementing Government policy in the area of water and waste water services, ensuring we meet our EU obligations, that we have a modern statutory framework for the sector, sourcing funds for investment in the Water Services Programme and managing the capital and current funding programmes and monitoring the expenditure of these funds by the local authorities.

At a Departmental level, water and waste water services are organised under the following groupings: Water Services Policy; Water Quality; Water Services Investment Programme and Water Inspectorate. Appendix 4 provides an overview of the Department’s organisational structure and key functions of each section.

Under this organisation structure, the Department, in addition to managing the investment programmes, plays an advisory role to the local authorities who have responsibility for the provision of water and waste water services within their relevant localities.

Organisational structures for the delivery of water and waste services differ from one local authority to another. Appendix 4 contains examples of organisational structures for Dublin City Council and Cavan County Council providing an urban and rural example. The figures illustrate the key functions within each local authority’s water services department. The two structures are significantly different, however, it should be noted that based on WTE numbers Dublin City Council’s water services section is approximately ten times the size of the equivalent within Cavan County Council10.

The variety in organisation structures across the local authorities for the delivery of water services is as a result of differing local circumstances e.g. whether the local authority is urban or rural based, the scope of its services and the scale of the area it serves.

Furthermore, the entitlement of the local authorities to structure their own organisations to fit local circumstances is enshrined under section 159 of the Local Government Act, 2001. The local authorities are, however, subject to departmental control on staff numbers, pay and grades under a control framework introduced in 2009.

One consequence of the variety in organisation structures is that a particular role in one organisation structure does not necessarily directly equate to a similarly titled role in another organisation structure. Depending on the model chosen and desired levels of process standardisation, this could pose implementation concerns due to the substantial work required to harmonise roles.

Although local authorities are subject to public service guidance on grades, salaries and terms & conditions, staff entitlements are not standardised, e.g. disparities exist between local authorities with regards to annual

9 Source: Department of Environment, Community and Local Government, June Quarterly Survey for the years 2007-2011.

This information is returned to the Department by the local authorities. 10 Source: Office for Local Authority Management, Survey July 2011. This information is returned to OLAM by the local

authorities.


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leave. As with the previous point in the paragraph above, and for similar reasons, these irregularities or local anomalies could pose implementation concerns.

A point, however, which should be noted regarding the current water services organisation set up is that it allows for agility in the response to emergencies, e.g. during the 2010-11 winter freeze, staff from roads sections were called upon to work with water services staff. A move away from a local authority delivered service could mean a loss of this type of cross function resourcing and is a risk that would need to be managed by Irish Water.

Initiatives to Reduce Staffing Cost and Improve Efficiencies As mentioned in the introduction above, total staff numbers within the local authorities (including water and waste water services) have been falling in recent years. This has been largely due to initiatives undertaken at National and Local Government levels to reduce public service staffing numbers and improve efficiencies across the public service. Amongst these initiatives are the:

Suspension of Public Sector pay increases under “Towards 2016 – Review and Transitional Agreement” (September 2008);

Application of a pension levy for all public sector employees (March 2009);

Introduction of a moratorium on recruitment and promotion within the Public Service (March 2009);

Introduction of the Incentivised Scheme for Early Retirement (ISER) (April 2009);

Introduction of the Incentivised Career Break Scheme (September 2009);

The Public Sector Agreement 2010-2014 (June 2010); and

The Local Government Efficiency Review Group’s report and recommendations (July 2010).

Appendix 5 contains a brief overview of these initiatives.

Current Staffing Levels As of July 2011 the total number of WTEs working across the local authorities was 30, 967, down 14% from 36,177 in 200711. Over this period, a significant reduction has occurred in the area of temporary/ contract WTEs, i.e. falling by 64% from 4,846 in 2007 to 1,732 in 2011. Permanent12 WTEs fell by 7% from 31,331 to 29,235 during the same period.

Of the 2011 30,967 WTEs within the local authorities, our best estimate is that 3,63013 front line WTEs are directly engaged in water services. This figure is made up of 3,401 permanent front line WTEs and 22914 indirect frontline WTEs. It should be noted that this estimate is based on data reported to the Office of Local Authority Management by the local authorities. However, an accurate assessment of the number of WTEs engaged in water would require a detailed audit.

It should also be noted that the 3,630 figure relates solely to those WTEs engaged in the front line provision of water services. Comparable figures for back office WTEs supporting water services are not available. Typical back office services might include: finance, HR, IT and legal services. Dublin City Council were able to provided us with a rough estimate that these back office WTEs amounted to approximately 7% of their total figure for water and waste water services WTEs. The Local Government Efficiency Review Group Report estimated a national average for back office staff across the local authorities to be 16%15. As Dublin City Council is amongst the largest of the local authorities it is likely that they have achieved economies of scale in this regard.

11 Source: Department of Environment, Community and Local Government, June Quarterly Survey for the years 2007-2011.

This information is returned to the Department by the local authorities. 12 “Permanent” includes managerial, clerical/admin, professional/ technical, outdoor, fulltime fire-fighters, incentive career

break, and supernumerary positions. 13 Office for Local Authority Management - Survey, July 2011. This information is returned to OLAM by the local authorities. 14 Indirect WTE refers to DBOs and resident engineers not directly employed by the Council. 15 Local Government Efficiency Review Group Report, 2010, page 63


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Based on the conservative estimate of 16% support staff, our best estimate of total WTEs engaged in water and waste water services is 4, 27816.

Front Line WTEs

Support WTEs (16% of Total

WTE’s)

Total

Direct 3,401 648 4,049

Indirect (incl. DBOs)

229 N/A 229

Total 3,630 648 4,278

Figure 21: WTE’s engaged in Water and Waste Water Services

Data regarding the age profile of water and waste water staff was not available. Again, Dublin City Council was able to provide us with rough data regarding the age profile of their water and waste water services staff. This shows that approximately 20% of staff are aged 40 or younger, with 51% of staff aged 50 or older.

Similarly, Dublin City Council provided us with rough data regarding the projected retirement pattern for Dublin City Council’s Water and Waste Water Services Divisions for the period 2010-2020. The average expected yearly decrease in headcount as a result of retirement for this period is 15 staff per annum.

No conclusions can be drawn from the above statistics provided by Dublin City Council as they are not necessarily reflective of the water service nationally.

At a Departmental level, current staff numbers are approximately 6117, divided as follows across the four functions:

Water Services Policy – 6;

Water Quality – 11;

Water Services Investment Programme and Rural Water Programme – 26; and

Water Inspectorate – 18 (of whom 7 are not involved in water services).

Marketing and Communications Each local authority has its own strategy for branding, marketing and communications which will reflect the full range of services it provides. There is no clear national strategy for marketing and communications for water services reflecting that responsibility is with each local authority.

There are some initiatives at a national level such as the website taptips.ie giving advice on water saving to consumers. The EPA also has taken the initiative to develop and launch bathingwater.ie as an information service to bathers on marine water quality.

Generally, local authorities do not brand their water services distinctly from other services. For water services, particularly for interruptions to service, communications are issued in the mass media. However, the study did not find evidence of a national or regional branding, consumer information, consumer awareness (other than for water saving) or communication plan in relation to water and wastewater services.

Communications with non-domestic customers are more developed given the opportunity for including material with bills. However, this is to a limited audience and would be included in the wider remit of services and charges to businesses. There has been considerable work by local authorities to activate their websites for water services issues. For instance it is common that key forms and procedures can be downloaded directly by customers and there is often a FAQ page for water and wastewater issues. They have also been active at times of

16 I.e. [(3,401 permanent WTEs + 648 related back office WTEs) and 229 indirect WTEs] 17 Source: Department of Environment, Community and Local Government.


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urgent need such as in recent cold spells in communicating through the mass media and their websites and contact phone numbers to their customers.

MIS/IT Management information systems (MIS) and information and communication technology (ICT) are used by Irish city and county councils to serve the full remit of their obligations of which water and wastewater services are only one service. In general, their MIS are fully integrated across all services but on the other hand there is no suite of MIS dedicated to water and wastewater services.

Each local authority implements and runs its own systems although there is in some areas a considerable degree of commonality. In addition, the Local Government Management Agency (LGMA) provides a high degree of support to the local authorities both individually and in groups of local authorities to design, implement and run MIS.

Twenty six of the local authorities have implemented a version of Agresso as their financial management system. The Cork city and county councils have implemented a system based on JD Edwards. One local authority uses Integra, and five local authorities in the greater Dublin area have implemented MIS based on Oracle. These are generally regarded as high quality and industrial standard financial management systems and can offer features beyond purely financial management.

Communications with non-domestic customers are more developed given the opportunity for including material with bills. However, this is to a limited audience and would be included in the wider remit of services and charges to businesses. There has been considerable work by local authorities to activate their websites for water services issues. For instance it is common that key forms and procedures can be downloaded directly by customers and there is often a FAQ page for water and wastewater issues. They have also been active at times of urgent need such as the recent cold spells in communicating their contact numbers to their customers through the mass media and their websites.

Twenty nine of the local authorities have recently implemented a common human resource and payroll system (CORE).

For Asset Management, there is no common standard for asset registers either for above or below ground assets. A Geographic Information System (GIS) was implemented for water networks in the early part of the previous decade called the Complete Information System but since then each local authority was responsible for keeping this system up to date and the usage has been variable. There is no such system nationally for wastewater network assets.

The DECLG has implemented a web enabled Project Control System (PCS) which local authorities are required to use in order to access funds from the WSIP. There has been good take up of this system but for capital expenditure outside the WSIP, it is not a requirement to use this system.

Supervision, Control and Data Acquisition (SCADA) systems are implemented by each local authority as deemed appropriate, but there is no common standard nationally. However, PwC understand that a common protocol for all SCADA systems exists. Telemetry and remote control systems are implemented on a case by case basis.

A Performance Management System (PMS) was developed and implemented by the DECLG and subsequently web enabled. All DBO contracts for treatment plants use this system and in some but not all cases, local authorities use this system themselves for their treatment plants.

There is no common workflow or job management system in use in Ireland for water and wastewater services. The study did not find evidence of widespread use of advanced field force management systems used by the local authorities for water and wastewater services. Similarly there is no common standard for stock control or spares management. There are a number of systems in use for procurement and some areas use a common


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systems platform. However, the study did not find evidence that this has resulted in a national procurement strategy for consumables.

The LGMA operates an imaging system developed in house called iDocs and this has been taken up by a number of local authorities. It has been reported that this is used mainly in the planning process and is not dedicated to water and wastewater services. The LGMA also developed and implemented a system for controlling Road Openings and this has been widely taken up by local authorities.

It has been noted that there is a trend towards an increased use of shared services. The CORE system is perhaps the first one to be implemented on a centrally hosted basis with common procedures throughout the adopting local authorities. In that sense it may be a model for future implementation of shared services.

To implement a shared service requires a shared concept, generally developed by the LGMA and agreed with by the CCMA so that a sufficient number of local authorities will take up and implement the system in question.

Overall, there are a number of high quality industry standard MIS applications in use in Local Government in Ireland, particularly in relation to financial management and payroll/HRM. However, there is no central strategy towards a common suite of utility management systems dedicated for water and wastewater services. The increasing use of shared services is a collaborative approach between the LGMA and CCMA and is implemented on a case by case basis. Individual local authorities have implemented some very good systems but they tend not to be integrated into a suite of utility management systems. The greater Dublin area would appear to have the greatest level of standardisation across MIS reflecting the higher population densities, the level of shared water and wastewater assets and their history of having been a single authority in the not too distant past.

Current Initiatives

Domestic Water Metering and Charging The EU Programme of Financial Support for Ireland (28 July 2011) states that the ‘Government will prepare proposals .......with a view to start charging during the EU/IMF Programme period.’ The programme for government 2011 -2016 states that ‘the objective is to install water meters in every household in Ireland and move to a charging system that is based on use above the free allowance’. Since then the DECLG has been working on a cost benefit analysis of this objective, not finalised at the time of writing.

The point has been made that universal domestic metering is a theoretical rather than a practical proposition and it is quite probable that a minority of domestic customers will continue for the foreseeable future on an unmetered basis. The EU/IMF requirements do not mention metering.

If implemented as suggested, this will be a major undertaking and therefore has to be rigorously and transparently justified. In addition, it is a large and complex project and does not stop once the meters have been installed. Meters have to be replaced/recalibrated on a regular basis depending on the chosen technologies. There are major logistical issues and customer cooperation and awareness will be critical to the success of the initiative. The complexity and size of the project will require a high level of project management, procurement skills and management focus.

Tariff design is an important element and is normally the purview of an economic regulator. As it is likely that some customers will not be metered, a tariff scheme incorporating unmetered supply will be required. Also, if there is to be a free allowance element to the tariff structure this will need to be reviewed in light of the overall tariff design in the context of the ‘fair funding model’ as suggested by the programme for government.

Greater Dublin Strategic Water Supply Project Dublin City Council has been carrying out studies on behalf of the Dublin Region local authorities and the DECLG as to how best to provide drinking water for the region into the future. The Dublin Region (Water Supply Area) includes the following local authority areas: Dublin City, Dún Laoghaire Rathdown, Fingal, South


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Dublin, part of County Wicklow (including Bray Town Council), part of County Kildare, and part of County Meath.

It has been widely reported that the greater Dublin area has a low level of strategic reserve in terms of the balance between supply and demand for potable water. At times of increased demand (e.g. during recent very cold winters when pipe bursts both on the network and on customers’ premises caused demand to spike) and at times of constrained resources such as after a prolonged dry spell, these local authorities have had to introduce water demand reduction measures. These measures have included water cut-offs and reduced pressure management schemes. The argument has been put forward that in order to address the current situation and to address future growth in demand, a strategic investment in water supply infrastructure is required. The current proposals, developed after a long period of analysis and consultation, is to take water from the Shannon and to deliver it to the greater Dublin area via a strategic stored water resource in the midlands. The cost of this project has been estimated at more than €500 million over a period of approximately 5 years.

It is significant that the main sponsor for this project has been Dublin City Council even though the project has major regional and even national significance. While the DECLG and other local authorities have participated in the process, there is no central entity driving this project. This is not to suggest that the main players have been passive in the process – quite the contrary. However, the lack of a central champion to drive projects of a major national or regional priority is an issue which could result in a delay to this or other similar projects.

If this project is to be implemented, the scale of the investment is of the order of magnitude of one year’s full capital investment in water and wastewater services in Ireland. While there are other examples of infrastructure and services being shared between local authorities, this initiative would be the largest inter-local authority project of its kind in Ireland.

Cost Reduction Initiatives and Shared Services The Local Government Efficiency Review Group report covers all activities in local government services in Ireland. It identified a number of areas of potential savings in water services as follows:

‘The total annual value of the savings identified above is €5 million in short to medium-term operational costs (with possible additional savings of €30 million in the long term).’

Its review was in the context of the current organisation of water services and did not include or preclude further possible developments such as the implementation of Irish Water.

There are specific proposals in development with regards to shared services in respect of water services. In particular these refer to inspection, monitoring and enforcement as required by the River Basin Management Plans and the Water Framework Directive. Other wider shared services are also in evidence such as the CORE human resource management system facilitated and implemented by the Local Government Management Agency. Other specific initiatives for shared services in water services would be collaborative between local authorities, often facilitated by the LGMA and City and County Managers Association


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Indicators of Performance Based upon the 2010 unaudited AFS actuals, annual returns for the UK Water Companies (England and Wales - June Returns to Ofwat; Scottish Water - Annual Return to the Water Industry Commission; Northern Ireland Water - Annual Return to the Northern Ireland Authority for Utility Regulation), and Irish customer/connection number extrapolations made on foot of the 2010 preliminary census results, a comparison has been made against a number of other water utilities in the UK under the following headings:

Operational Expenditure;

Debtor Collection %;

Leakages %;

Staff Numbers;

Km piping; and

Regulatory Capital Value.

UK Water Company Abbreviation

Anglian ANH Welsh Water WSH Northumbrian (Essex & Suffolk) NES Severn Trent SVT South West SWT Southern SRN Thames TMS United Utilities NWT Wessex WSX Yorkshire YKY Scottish Water SCOTTISH Northern Ireland Water NI Note: The Irish Water Services data used in these benchmarks is a consolidation of the 34 local authorities. Benchmarking against UK water companies can provide broad indicators of over or under performance. It is not recommended however that these benchmarks should be used for comparisons at a local authority specific level given variations in size, population etc. between any one local authority and the UK comparators.

OPEX Comparison While PwC have been advised that current operational expenditure is constrained by funding limitations, it would nevertheless appear that the total current expenditure divided by the number of domestic and non domestic connections, is significantly higher than the UK comparators. Taking Northern Ireland as an example, current OPEX spend per connected property in this State is circa €162 higher than in the equivalent cost in Northern Ireland. Ireland is about average for the number of water connections per length of network, suggesting that population dispersal is not a major factor in the benchmarks mentioned above. Other factors, such as the very large number of water and wastewater plants in Ireland may be involved. One way or another, these comparisons would indicate that there are significant opportunities to reduce increase efficiency and reduce costs over time when Irish Water is established. A national water company which has control of both revenue and expenditures (and consequently can leverage centralised purchasing, standardised technology/equipment, multi-year framework contracts, shared services etc.) would be in a much stronger position to drive these efficiencies.


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Figure 22: OPEX per connected property (domestic & non domestic) (Euro)

Note: The number of connected properties assumed in the above chart was 1.52m (which was derived from (a) the number of non-vacant

dwellings per the 2011 census multiplied by an extrapolation of the number of houses connected to the public mains per the 2006 census

plus (b) 200,000 representing the number of non domestic customer meters.) This number would include local authority owned flat

complexes.

Figure 23: Water OPEX per connection (Euro)

Note: The number of Water connections assumed in the above chart was 1.52m (see above for further detail)

Figure 24: Sewerage OPEX per connection (Euro)

Note: The number of sewerage customers assumed in the above chart was 1.29m (which was derived from (a) the number of non-vacant

dwellings per the 2011 census multiplied by an extrapolation of the number of houses connected to public waste schemes per the 2006

census plus (2) the number of non domestic customers, 68% of whom were assumed to have a waste connection.)

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Debtor Collection Comparison Debtors are not currently aged by the local authorities and consequently while the overall collection rate for non domestics as identified within the AFS was 52% (see chart below for individual authority collection rates in 2010), this collection rate is a simple calculation reflecting the value actually collected in the year divided by value due to be collected (current plus arrears). Consequently it is not clear from the information currently available how much of the collections in any one year relates to prior year balances versus current year debts.

Figure 25: Commercial Collection Rates in Irl (2010)

Note: Sourced from 2010 consolidated unaudited AFS for Water Services.

Accepting this comparison deficiency it is still worth highlighting that the combined domestic and non domestic collection rate across each of the UK comparison companies were in excess of 70% in 2009-10, as against the 2010 non domestic collection rate of 52% in Ireland. Consequently, there would appear to be indicative support suggesting that having a single entity which is responsible for invoicing and collection should result in improved debtor collection rates, whether that be via the investment or utility model.

Figure 26: Collection Rates

Note: The ROI collection rate has been sourced from the collated 2010 unaudited AFS results and only relates to non domestics, as against

the comparator data which combines domestic and non domestic.

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Leakages Comparison Figure 27 below reflects water leakage estimates for the various local authorities compared against their UK counterparts. Again there are clear differences evident, with the % leakage in the UK being less than 30%, and the percentage leakage in Ireland across the vast majority of the authorities ranging between 30%-60% (6 authorities were below 30%). The average leakage rate in Ireland across all the authorities was 41% (this would be expected to reduce as Phase III of the Water Conservation Programme is rolled out).

Figure 27: Percentage Leakage

Clearly one of the key objectives of Irish Water will be to address this issue and it is likely that either the Investment or Public Utility models would be effective in this regard.

Staffing Comparison While human resource issues are covered in more detail in the staffing section above, the 2011 direct and indirect staffing numbers for Ireland have been compared against the UK Water Companies (2009-10). Indirect staff refers to DBOs and resident engineers not directly employed by the local authorities.

As can be seen below the Irish local authorities have a higher percentage of direct employees than most of the other water companies (with the exception of Northern Ireland), who have adopted a flexible operating model leveraging external service providers. The total number of employees per thousand customers served is 1.21 WTE for Ireland (see Figure 29 below), which is circa 25% above the median of UK Water Companies (excl SVT) at 0.97 WTE (i.e. TMS). In addition, the number of total employees per water connection in Ireland is higher than in most UK Water Companies (see Figure 30 below).

This would indicate that the current staffing levels are well above current UK benchmarks. Ireland is about average for the number of water connections per length of network, suggesting that other factors, such as the very large number of water and sources in Ireland may be involved.

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Figure 28: Number of Direct & Indirect Staff (exc. SVT)

Note: The ROI Direct and Indirect WTE numbers were sourced from the Office for Local Authority Management Survey, July 2011. In

addition, it has been assumed that 16% of total staff will be Corporate (Report of the Local Government Efficiency Review Report 2010

(pg 63) and consequently the survey numbers have been grossed up in this amount for direct staff.

Figure 29: Total Employees per thousand customers served (exc. SVT)

Note: See above for further details in relation to the customer numbers which have been assumed in these charts. Irl staff numbers are

WTE.

Figure 30: Total number of direct and indirect employees per thousand water connections (domestic plus non- domestic)

(exc. SVT)

Note: The ROI Direct and Indirect WTE numbers were sourced from the Office for Local Authority Management Survey, July 2011. The number of properties with a water connection assumed in the above chart was 1.52m (which was derived from (a) the number of non-vacant

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Piping Comparison Figure 31 below has been prepared based upon information received from DECLG suggesting there are circa 25,000 km of water mains in Ireland. A comparative figure for sewerage cannot be provided as the km of sewers nationally is not reliably known.

The results of this comparison indicate that Ireland at 16.4km is currently below the UK average of 17.66km per thousand connections.

Figure 31: km water pipe per thousand water connection

Conclusion When the 2010 data for the local authorities is compared against the UK Water Companies, the results indicate that the current model for providing water services has not achieved the potential levels of efficiency and service delivery for customers evidenced by the data from UK water companies.

Operating expenditure per connection place Ireland as the most expensive to operate versus Northern Ireland, Scotland and England & Wales. This suggests that even when compared to regions in countries with a population dispersal pattern similar to Ireland’s, that our operating expenditure is high. As part of this study PwC expected to be able to undertake a more detailed comparison of cost and performance data for the Irish industry, however the information for the sector is not collected in a manner that makes a more granular comparison feasible at this stage – the fact that this data is not readily accessible for analysis indicates that financial comparison of performance which has been a key driver of efficiency in the UK has not been a priority for local authorities to date.

Collection rates for water charges are by far the lowest in Ireland as against all the comparators. International experiences demonstrates that improved collection rates also tend to improve the ability of the utility to access funding in the markets as lenders and finance providers can see the utility being better positioned to fund its activities.

The average leakage rate of 41% in Ireland is higher than any of the comparators. While individual councils in Ireland compare more favourably with the average, there is a wide variation in performance across the country.

A comparison of employee numbers is made difficult by the different business models used by the water service organisations included in the comparison, particularly when considering the scope of services and the use of outsourcing. In general the other comparators have a greater scope of service (e.g. customer service and billing for domestic customers) but also make greater use of outsourcing. Given these limitations it can be concluded from the data available that the total numbers employed in the Irish Water sector are significantly above their comparators in the UK and that the ratio of direct to total staff is one of the highest.

The number of customers per length of network is about average suggesting that the dispersal of population in Ireland does not represent a valid reason for a higher operating cost.

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Over time these benchmarks would indicate that significant operational savings could be made by a new national water company, debtor collection rates should improve and the percentage leakage levels should decrease provided appropriate investments are made.

While PwC recognise the high level nature of the benchmarking that has been presented here, it is clear that a new National water company will have a gap to close in terms of cost efficiency relative to its UK counterparts. Should it achieve the benchmark levels set by the UK water companies, the overall funding requirement for should decline.

Summary Assessment of the Current Provision of Water and Wastewater Services The current model for water service provision has been operating under significant constraints. It would appear that low levels of funding and an inability to access alternative sources of funding in the past have resulted in a backlog of investment and maintenance in the water services infrastructure.

Nevertheless, significant positive views of the current model came across very clearly in our discussions with the various stakeholders:

The value of having a local body accountable to the local community for the provision of water services;

The operational effectiveness of the current locally based maintenance teams with water engineers who “know their assets” and the associated asset maintenance regimes; and

The ability to draw on the wider resources of the local authorities in times of great need for water services, such as occurred during the cold weather events in the last two winters.

The key findings from our assessment of the current environment are set out overleaf.


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Key Findings on Current Provision of Water and Wastewater Services

Leadership and coordination of water services nationally is fragmented with a range of actors able to influence

and control directions, including the 34 local authorities (both the professional staff and the councillors), the

DECLG,, the EPA, , the CCMA, the NFGWS, and others;

The EPA represents a classic structure for technical and environmental regulation of water and wastewater

services. However, there is no independent regulation of prices for non-domestic water customers;

Local authorities are unable to achieve benefits of scale as they are generally too small. While there would be

potential in the greater Dublin region for more shared resources, this opportunity is limited in the rest of the

country;

Moves towards increased shared services are welcome but those which are planned are limited to inspection,

monitoring and enforcement (it is not clear whether local authorities can delegate this entirely to a regional

structure given the legal liability that would remain with the officers of the local authority). The implementation of

shared services and the degree of integration is driven organically and collaboratively with implications for the

speed of implementation and degree of coverage of the associated MIS;

Unaccounted for water is a significant problem in the water distribution system in Ireland with the average level

estimated at more than 41% which is very high by international standards. UFW is also highly variable across the

country;

The OPEX expenditure for water services in Ireland is very high compared with benchmarks for UK water

companies, when measured against cost per connection and per customer;

The current funding model for water services is not sustainable. It is clear that the direct income currently received

by the local authorities is not sufficient to meet the operational expenditures of the authorities and that alternate

income sources within the local authorities have been used to fund the gap;

Although not possible to quantify, it is apparent that there is a significant compliance gap in relation to the

provisions of the Water Framework Directive which may require several hundred million euro of additional

capital investment annually in the years to 2027 in addition to the approximately €600m CAPEX currently

invested annually;

Collection levels for the current non-domestic charges, at 52% are very low compared to UK water companies. It

may also be the case that full cost recovery for non-domestic water customers is not being achieved in setting these

water charges. Both of these issues contribute to the funding gap referred to above;

Overall staffing levels, although difficult to determine precisely, are significantly higher than benchmark

equivalents in UK water companies when viewed against the number of employees per customer served and per

number of water connections. It should be noted that there is considerable outsourcing of activities in the UK and

a range of functions carried out in the UK not carried out in Ireland (e.g. customer service and billing for domestic

customers). For these reasons, detailed like for like comparisons are difficult;

There is no central strategy towards a common or national suite of IT systems dedicated for water and

wastewater services. Individual local authorities have implemented some very good systems but they tend not be

integrated into a suite of utility management systems. Instead, local authorities’ systems serve the full range of

services they provide and do not achieve the level of integration/specialisation as would be seen in a large well run

modern dedicated water and wastewater utility;

There is no central strategy towards a common or national suite of IT systems dedicated for water and

wastewater services. Individual local authorities have implemented some very good systems but they tend not be

integrated into a suite of utility management systems. Instead, local authorities’ systems serve the full range of

services they provide and do not achieve the level of integration/specialisation as would be seen in a large well run

modern dedicated water and wastewater utility; and

While Councillors provide a valuable service, the voice of the customer is not represented in a formal structure

within the provision of water services.


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The current model for water services provision faces a number of significant challenges, largely as a result of the diffuse and fragmented nature of the service:

Relative difficultly in development of strategically important national water services projects versus the development of local projects;

Difficulty in implementing river basin management within the local authority structure (river basin boundaries are rarely the same as local authority boundaries);

Significant overhead in the management of water services, given the number of authorities and the small scale of operations in many of them. This issue is acknowledged by the local authorities who have put in place some initiatives to reduce/control costs through shared services provision;

Inability to rationalise the use of water sources as they are largely developed on a local authority by local authority basis; and

Difficulty in promoting projects of a national or regional priority e.g. strategic water resources and metering.

PwC have prepared an analysis of the Strengths Weaknesses, Opportunities and Threats (SWOT) of the current environment for water service provision. This is set out overleaf. This analysis draws extensively on inputs from stakeholders consulted during the study.


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Strengths Weaknesses

Services are managed by bodies that are close to

customers and are democratically elected. Water

sector development can be consistent with Local

Authority Development Plans);

An experienced local workforce familiar with the

assets and the operating conditions;

Central co-ordination and prioritisation of major

project capital expenditure plans;

Track record of successful delivery of capital projects

and providing continuity of service, delivering to a

growing population;

Clear accountability for water and wastewater quality;

Ability to mobilise local resources at times of need

(e.g. exceptionally cold winters);

A significant majority of local authorities use the same

financial system which supports consistent

management reporting.

Strategic planning (as envisaged by the 2007 Act) has not been

implemented;

Duplication of management cost across the large number of local

authorities. Most authorities are below the minimum scale

required for the economic provision of water services;

Long term underinvestment in assets as a result of limited available

funding;

Variability in the service provided to water services customers

across Ireland;

Absence of consistent policies, processes and standards including

standards for customer services;

Local authority boundaries do not reflect river basins so integrated

river basin management is difficult to implement;

Limited asset data and asset registers to support strategic planning;

Limited transparency of funding sources;

Low recovery rates of non-domestic water charges and significant

arrears;

Current funding regime exposed to variations in development levy

income;

Limited ability to access alternative sources of funding for water

services (e.g. capital markets);

Apart from representation provided by Councillors, there is no

statutory “voice of the customer”, or right of appeal;

Absence of/ inconsistent application of industry standard utility IT

e.g. workflow management, GIS, CRM etc;

Variable performance in compliance with operational standards at

waste water treatment plants.

Opportunities Threats

Cost reduction through exploitation of economies of

scale, procurement efficiencies for a national

programme of work, changes in work practices, field

force management, multi-skilling, energy

management, fleet management, water network

pressure management, rationalisation of water

sources, standardisation of technology;

Improved collection of non-domestic tariffs;

Introduction of domestic charges for water services;

Rationalisation within existing structure (shared

services, river basin management, technology / MIS);

Improve staff utilisation by operating across local

authority boundaries;

Standardisation of technology in treatment plants;

Improve customer service to international standards.

Current government funding position may limit ability to access

other funding opportunities for water services. Inability to provide

matching funds for projects;

Backlog of investment can result in greater levels of asset failures

and quality compliance issues ;

The introduction of customer charging is likely to increase

customer expectations of quality of service while delivery of

improved quality of service may not necessarily be deliverable in

the near term;

Sufficiency of water resources to supply the Greater Dublin area;

specific large projects for water supply in Greater Dublin and water

metering;

Outstanding investment for wastewater treatment required for

urban areas and for smaller rural and coastal locations;

Major investment in water and wastewater infrastructure required

to meet WFD and normal asset management requirements;

Much of the know-how for capital project delivery is with

contractors and consultants. Important to ensure retention and

transfer of this knowledge in any changes proposed;

Under current organisational arrangements, there is a risk of

failure to achieve environmental objectives for water quality as set

out in the river basin management plans.

Figure 32: SWOT of the current environment for water service provision


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Overall, it is our assessment that the current local authority based service provision model is highly unlikely to achieve the efficiencies and quality of service that have been achieved elsewhere in the water sector through amalgamations. The local authorities have investigated opportunities for co-ordinated action. However the likely efficiencies suggested are small compared with the nearly 40% reduction in operating costs seen in Scotland post amalgamation. Fragmented local authority-based provision will perpetuate the management of sub scale water providers, inability to secure large scale procurement efficiencies and the ability to deliver efficiency through planning field work over a larger customer base/geographical area.

Efficiency Benefits of Consolidation Experience in water sector reorganisations globally (see Section 4) suggests that the creation of larger organisations or single utilities can give rise to a wide range of efficiency benefits, in particular:

More efficient use of water resources. At present in Ireland many water sources are developed to provide water needs within local authority boundaries and as a result sources that could serve customers across local authority boundaries are not exploited for the wider population. Typically this approach will lead to a sub optimal usage of water resources when compared with resources usage planning and exploitation on a river basin or national level. Optimised resources usage will tend to reduce operating costs (for example electricity usage in pumping water around the system as it can be sourced more easily) and in the longer term the capital costs will be reduced as a result of more efficient resource development. Given the current situation in Ireland, efficient use of existing resources is an important priority;

Optimisation of the use of water and wastewater treatment facilities. As with water resources, considering how water and wastewater are treated at a national level and planning the use of treatment works at that level rather than at a local authority level could lead to different usage patterns for the works, saving on energy costs and possibly in the longer term saving on capital expenditure if better treatment works usage can delay future investment that would be required to provide more treatment capacity;

Greater opportunity to take advantage of procurement efficiencies. An important benefit of creating a larger water company will be its ability to achieve procurement efficiencies. The larger company will have a greater workload and requirements for materials than any single local authority and would be better placed in the markets to secure cost reductions for scale orders of plant and equipment;

More effective use of field operatives. Larger water organisations have the opportunity to better manage and deploy field staff. Operating over a broader service area both geographically and in terms of customer numbers means that the field force can be more fully utilised. Also a larger water organisation is able to support the cost for investing in scheduling and dispatch systems which can be used to optimise the deployment of the field force in delivering further efficiencies;

Ability to invest in systems to support the more efficient use of resources. Many larger water organisations have invested in information technology to deliver improved business performance. Typically this investment will be in work management systems, business performance management systems and SCADA and automated controls systems. These systems investments tend to be large and require a larger organisation to fund the investment and secure the benefits over a larger portfolio of assets and operations;

Reduction in overheads. The consolidation of head office functions which are duplicated in the current local authority model is a clear benefit of bringing water services providers together;

Increased specialisation in all aspects of operation and capital programming. A typical local authority senior engineer may build one medium or large water treatment plant in his career. His equivalent in a UK water company might be managing four such programmes simultaneously;

Less reliance on consultants with increased core skills due to scale;

Economies of scale in billing and collection.


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4. Overview of Relevant Models from other Jurisdictions


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4. Overview of Relevant Models from other Jurisdictions

Introduction As part of this study PwC have undertaken a high level analysis of the organisational structures for water and sewerage companies around the world. The aim of the review was to assess whether international experience will allow us to identify any useful models or precedents for the organisation of Irish Water.

In this section PwC summarise some of the key findings from our review of other models used internationally for the provision of water services.

Our choice of countries has been based on presenting a wide selection of experiences from around the world. It is highly selective and is not intended to be a comprehensive review. Our aim was to investigate the characteristics of a reasonable sample of countries’ experience.

In choosing countries to consider PwC have largely focussed on water sector organisational models:

From elsewhere within the European Union;

That provide water services in environments with similar geographical/operating environment challenges to those that would be faced by Irish Water;

Have faced similar changes in their organisational structure to those proposed for Irish Water at some stage in their evolution; and

Where some of the specific proposals for Ireland have also been applied in that model (for example roll out of metering, proposals for inclusion of free allowances in tariff structures etc).

Based on these criteria the countries PwC have considered are shown in Figure 33 below.

Country Rationale for inclusion

Scotland Public sector owned national supplier of water and sewerage services, with a history of amalgamations of local authority provided water services, most recently with the merger of three local authority providers into Scottish Water in 2002.

England and Wales Private sector owned and maintained water service with a past history of sector reorganisation while in the public sector. Useful experiences of the introduction of economic regulation, the development of river basin management and also innovative financing structures for water service provision.

Wales for specific consideration of ownership structures that focus on mutual ownership of the assets by the customers of the business.

Northern Ireland Public sector owned national water utility on the island of Ireland, a recent example of water sector reform with attempted introduction of customer charging and economic regulation.

Berlinwasser Central European experience of reorganisation and headcount reduction in the provision of water services.

French municipal contracting structures

To demonstrate the range of approaches to private sector outsourcing that municipalities have used in the French model.

Netherlands Ministry of Roads and Water

As an example of where major roads investment and water sector investments are managed together by a single State entity.

South Africa (Johannesburg Water)

An example of where free allowances for water services are also made for customers.

Belgium (Flanders) An example of the model for wastewater service provision on an aggregated


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Country Rationale for inclusion

Aquafin regional basis.

Belgium (Flanders) Pidpa

An example of a water services system that make provision for “free allowances” for water to customers. This is also a company organised along intercommunal lines.

New South Wales Water As an example of a sector with significant fragmentation of provision in rural New South Wales and is considering how the sector should be reorganised to improve efficiency.

Sofia Water PPP structure

To demonstrate another model for water services provision.

Denmark An example of a country where all water services are provided by intercommunal companies

Figure 33: Countries chosen as international comparators for Irish Water

The country reviews are provided in Appendix 8 to this report. The country reviews in the appendix take two forms: for the UK water companies PwC have provided details against each of the key activities of a water company18 - there is a significant amount of detail available about these companies and this is captured in summary form in the appendix.

For the other case studies PwC has focused on the aspects of that case study that are relevant to the structure of Irish Water. The remainder of this section of our report describes key findings form the country reviews on a summary basis.

Key Observations

Much of water services provision is based on municipal arrangements... Our review demonstrates that there is a mix of models for ownership and delivery of water services across our sample of countries. There is a mixture of public and private owned and operated models and also whether the owner/operator is national or regional.

There remain models of municipal provision of water services (e.g. France, Belgium, Netherlands, Italy and the US). At the same time, there is also national provision of water services in Scotland and Northern Ireland and large regional statutory water companies in England & Wales several of which have service populations similar to or greater than Ireland’s.

In recent years the municipal models for the provision of services have however faced reform to address some of the perceived limitations of the models. Specific limitations are felt to be:

That municipal activities in the water sector do not exploit the economies of scale believed to exist in the sector, so municipal provision tends to be sub scale and therefore higher cost to users; and

Even while the municipality may remain responsible for delivery the expertise for water services provision/customer management/ asset management etc are well developed in the private sector so there is a trend towards outsourcing of activities.

...But there is a significant move towards aggregation There is significant evidence of the benefits of bringing together local authority provision of water services. This approach is actively being considered currently in New South Wales as a method for cascading best practice across the industry. It is also the case throughout the near continent of Europe that where municipal models have been in existence since the 1800’s there has been considerable movement towards the integration of contiguous municipal water services to achieve economies of scale. Legal structures exist to facilitate this

18

Namely: Legislative arrangements, Economic and Funding Situation, Regulation, Leadership and coordination, Operations, Asset Management and Capital Programme, Customer Service and billing, Finance & Funding


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cooperation in countries such as Germany, Belgium and France and are frequently used. Pidpa and Antwerp Water Works referred to in the case studies are examples of municipal cooperation to achieve scale in the provision of water services. It is also a principle in those countries that municipalities are free to delegate the provision of water services for instance to large private companies which themselves might bring some benefits of scale. This is common in France where a small number of large water service providers dominate the market.

When Scottish Water was created in 2002 from three regional authorities it was required to demonstrate significant efficiencies when compared with the regional authority based provision it replaced – it was required to demonstrate operating cost efficiencies of 40% between 2002 and 2006 and to deliver £30million of merger savings on a £1bn turnover business19. In England and Wales the key driver behind the reorganisation of the

sector in 1973 was to support the effective development of integrated river basin management. The evolution of the number of bodies involved in water service provision in England and Wales is shown in Figure 34 below.

1956 1970

Local authorities

County Borough councils 53 29

Borough councils 177 17

Urban District Councils 295 9

Rural District Councils 358 9

Sub total 883 64

Joint Boards 42 101

Statutory Companies 90 33

Misc 15 -

TOTAL 1,030 198

Figure 34: Water undertakings in England and Wales 1956 to 1970

Currently (post privatisation and some mergers between statutory water companies) there are 20 main companies providing water services in England and Wales. Aggregation has been achieved through three main mechanisms:

Creation of single utilities: as in Scotland, England and Wales and Northern Ireland;

By municipalities combining their activities: as with Berlinwasser and the Intercommunal Model in Flanders; and

By outsourcing arrangements that allow international utility services companies to provide services and aggregate operations. Models exist in many European countries to allow municipalities to coalesce their water and/or wastewater operations to achieve some economy of scale. This happens on a cooperative and organic basis.eg Belgium, France etc.

While water service provision is a public responsibility there can be roles for private sector expertise There is a market for the outsourced provision of many of the activities undertaken by water companies. Private sector contractors are willing to take on a range of activities which is why PPP contracts similar to the ones in Sofia have been successfully let. The Irish DBO contracts, also demonstrate the applicability of private sector outsourcing for specific activities in the Irish context. There is a parallel in Scotland to the use of DBO’s although in Scotland the main comparable model has been DBFO (Design Build Finance Operate).

In Scotland and Northern Ireland, both of which are public sector owned national utilities, much of the capital programme delivery is outsourced to the private sector (as it is in this State). Scottish Water developed the Scottish Water Solutions joint venture with United Utilities and others providers to ensure Scottish Water retained access to the skills and expertise and also number of staff required to deliver its major capital works programme

19

Dr John Hargreaves “ Organisational Change & the Transformation of Performance at Scottish Water”


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When Northern Ireland Water was initially considering the introduction of customer charging, it procured a customer service outsourced provider (the Crystal alliance) to develop and run billing systems and customer contact arrangements. One of the main reasons for this outsourcing arrangement was that Northern Ireland Water did not have these skills in house not having undertaken billing previously.

A mix of the municipal model with private sector involvement is also a feature of the European approach to water services provision – Berlinwasser is in part owned by RPWC and Veolia with the municipal government owning the majority of the company and in much of France water services are procured from the private sector via a range of contracting structures. In Flanders the inter-communal Aquafin company has also made use of international private sector partners in the past to ensure access to appropriate skills.

There is limited experience of water services being combined with other utilities or roads provision In the period post the privatisation of the England and Wales water companies, some companies started to adopt a multi-utility strategy in which the water company would seek to provide water and either gas or electricity (or both) services. PwC make this observation in the context of the Department’s requirement of our study to consider the role of other state agencies in the provision of water services.

The merger of water and electricity distribution in the North West of England created United Utilities and the Hyder Group in Wales provided water and electricity distribution services. The jointly owned Utility Model is no longer used in the UK. The multi utilities have divested and have become focussed water services companies largely as investors have tended to value the focussed single utility more highly than the multi utility. In some German cities there are city municipal services companies which can encompass water (but not wastewater), gas, electricity, transport and even kindergartens. For the multi-utility element of these companies the focus is on the local networks and they may be bulk purchasers of water, gas and electricity.

In the Netherlands the Ministry of Transport, Public works and Water management (Rijkswaterstaat) combines the strategic planning of the provision of roads with water services. This was driven largely by the need post war for significant road construction and repair and the water service providers having a good track record of delivering major infrastructure projects. The Rijkswaterstaat also works with regional water companies to deliver water services. This model is the closest existing comparator to the Investment model proposed for Irish Water that PwC have found. However the Rijkswaterstaat does not have the duties of customer billing and metering that are proposed for the investment model – the Ministry is funded through the public sector purse.

Sector governance and regulation has been an important factor in successful water service provision The two basic types of regulation of the pricing for water services are either by contract or by an independent statutory regulator of price.

The UK models for water service provision have made extensive use of economic regulation and incentivising on the companies to improve service and ensure efficient costs. The England and Wales companies are subject to economic regulation by Ofwat, In Northern Ireland the combined utility regulator NIAUR20 is responsible for

regulation and the Water Industry Commission is responsible for regulating Scottish Water. In these models there are separated responsibilities for environmental regulation and abstraction management (the Environment Agency, SEPA, and Northern Ireland Environment Agency.) In addition the models make use of customer representation bodies (such as Watervoice in England and Wales) to counteract some of the concerns regarding quality of service etc and to ensure the customer views are represented.

Economic regulators are not widely used in the sector internationally. However the roles of economic regulation are often performed by contractual arrangements between the water service provider and the location government authority. In a number of countries increasing emphasis is being placed on water sector regulation. For example in the Middle East, water sector regulation has been developed to monitor the efficiency and quality of delivery. The environmental regulation roles are undertaken by a variety of bodies elsewhere.

20 Northern Ireland authority for Utility Regulation


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‘Regulation by contract’ means that in the basic contract between the water services entity and (typically) the municipality or association of municipalities, the pricing formula is set out including any periodic reviews. This then is implemented by the parties and in the case of dispute may be referred to dispute resolution or the courts. Berlinwasser has a basic contract with the city of Berlin (and had one even prior to part privatisation) which sets out the pricing policies but this is open to challenge in the courts, with the municipal auditor and with the competition authority. The French PPP models similarly have pricing formulae depending on which contract model is used and this price is rebased every time the contract is re-tendered. As the French contracts tend to be rather long duration there can be periodic renegotiation of prices depending on changed circumstances.

The use of an Environmental Protection Agency is rather standard although the range of powers and duties may vary from one jurisdiction to another.

Since privatisation in England and Wales the combination of economic regulation and efficiency by the companies has lead to a significant reduction in operating costs as shown in Figure 35 below.

Figure 35: Trends in operating costs for the England and Wales water companies

This has been combined with a focus on customer service as well. Ofwat monitors and incentivises companies around a wide range of customer service metrics including:

Risk of low water pressure;

Unplanned interruptions;

Drinking water quality based on Drinking Water Inspectorate’s Operational Performance Index (OPI);

Properties at risk of sewer flooding;

Flooding incidents;

Response to billing contacts;

Response to written complaints;

Billing of metered customers;

Telephone contact;

Assessed customer service;

Sewage treatment works consent compliance;

Satisfactory sludge disposal;


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Category 1 & 2 pollution incidents (sewage);

Category 3 pollution incidents (sewage);

Category 1 & 2 pollution incidents (water);

Water restrictions; and

Leakage.

These are combined into a weighted index of performance for the companies called the overall performance index (OPA). The performance of the companies at each price review (PR) is summarised in the figure below. What is clear from the graph is the significant improvements in OPA scores and therefore quality of service to customers between the 1999 price review and 2004 with water and sewerage companies moving from being in the range of 50%-90% compliant with OPA to all being above 80%.

Figure 36: England and Wales water companies, overall performance assessment

There are some limited examples of the use of free allowances of water In Johannesburg there is provision for a free allowance for water up to 25 litres per person per day. This is regulated through the use of prepayment water meters and flow restrictors, reflecting the applicability of this model to a situation more representative of a developing country solution (it tends to be applied more in areas where there is a high level of poverty). The free allowance is funded by increased charges levied on business/commercial customers and also on higher consumption domestic customers.

In Flanders, Pidpa (the company that serves 65 municipalities with water services) also operates a free allowance scheme of c41 litres per person a day. The scheme is funded through charges to other customers. Wastewater does not have a free allowance. There is however a standing charge for water. Numbers resident at


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a property are verified annually by reference to the register of identity cards (which would not be an option in Ireland).

Implications for Irish Water

Based on the high level review of international experience PwC draw the following conclusions:

There is a range of models for providing water services some of which are based on the Utility Model and others which are more focussed on municipal provision. There is little evidence of arrangements similar to the Agency Model being used in the water sector.

There is fragmentation in the provision of water services in particular in continental Europe. However, the fragmented nature of water service provision is being addressed in most countries by the amalgamation of municipal water services in contiguous municipalities, and by the creation of utilities or intercommunal structures. Much of the European Academic work into economics of scale in the water sector identifies economies of scale21. Creation of larger bodies for the provision of water

services, often outside of municipal control, is a key trend in the industry such as Aquafin in Belgium being a government owned company delivering wastewater treatment and trunk sewerage;

Combining water services provision with other infrastructure provision or utility services has become more uncommon as there has been less emphasis on multi Utility Models. The main multi-utility companies that were recreated in the UK (Hyder and United Utilities) have been broken up in recent years so that the management teams can focus on specific activities e.g. water or electricity. Although Germany has multi-utility city owned companies including water services, the only one with a population similar to Ireland’s (Berlin) has a dedicated integrated water and wastewater company and not a multi-utility. Investors have tended to value the focussed single utility more highly than the multi utility;

In the Netherlands major projects for road and water are under the control of a Government Agency but this is not a combined water and roads services organisation;

Where single function utilities have been created in England, Wales and Scotland, there has been good performance in terms of cost reduction and also an improvement to the quality of service provided to customers. This has been in part driven by regulation that has focussed on economic efficiency, environmental preservation and ensuring good outcomes for customers;

Strong sector governance and regulation has been an important part of environmental management and economic regulation has been balanced with approaches to customer representation. Where larger regional municipal water service organisations have been set up, they tend to have an explicit contract for services with the municipality(ies) where pricing formulae are set out along with the potential for periodic reviews. The UK makes use of a statutory regulator for water services pricing as do a number of other countries, particularly those implementing sector reform e.g. the Gulf States; and

As Berlinwasser shows, it is important to ensure that the utility is appropriately sized in terms of number and skills of staff to undertake the work required – this avoids inefficiency and painful ongoing restructuring once the organisation is created. Aquafin also demonstrates the benefits of right sizing the organisation from the outset.

21 See Table 4 in “Quo Vardis Efficiency Analysis in Water Distribution – A Comparative literature review” by Hirschhausen,

et al. 2009


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5. Options for Reform


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5. Options for Reform

Overview of Options The Terms of Reference (ToR) for this study set out two principal options for consideration in examining the optimal organisational form for water services delivery in Ireland. PwC have allocated the expressions Agency Model and Public Utility Model to these definitions as in the following table.

Model Description in the Terms of Reference

Agency Model

A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment.

Public Utility Model

A water company which would be a self funding water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging.

Figure 37: Agency and Public Utility Models

The Terms of Reference also required consideration of variants of the above two models. Two potential variants were identified:

The Minimal Change Model; and

The Intercommunal Model.

All four models are described below.

It should be noted that these definitions refer to the Target Operating Models for these options, which could take some years to achieve. It should be assumed that interim arrangements would be required for the period of transition to the Target Operating Model in each scenario.


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Agency Model The diagram below provides an overview of the Agency Model. A more detailed definition is set out at Appendix 8.

Figure 38: Agency Model

In the Agency Model, Irish Water would be allocated full responsibility by statute for the provision of water and wastewater services and would therefore become the Water Services Authority for the full country. Local authorities would become agents of Irish Water for operation and maintenance of the water services and for small capital projects in their regions. This agency relationship would be provided for in statute. The detailed terms and conditions of agency arrangements would be settled following consultation between Irish Water and local authorities.

Some key executive roles currently undertaken (or planned to be undertaken) by the DECLG would transfer to Irish Water (for example strategic planning for the sector). The DECLG would retain policy functions. The local authorities would continue to carry out the day to day operations under agency arrangements as described above.

With the implementation of a national domestic charging system, it would be necessary to establish an economic regulator for water pricing and consumer protection, to reflect the natural monopoly status of water services, to ensure high standards of performance and to ensure that consumer needs are met. PwC understand that the economic regulator would be the CER, and the regulated entity would be Irish Water (and not the 34 local authorities). The economic regulator would set the parameters using its price setting powers to agree the rolling capital programme to allow Irish Water to achieve the required levels of service. Affordability would be a key criterion in this evaluation, particularly if there is a continuing contribution from the Exchequer to Irish Water.

The legal framework for the Agency Model would be significantly different from today’s institutional framework. A Water Services Amendment Act would be required. Irish Water would by statute be allocated full responsibility for all aspects of water services planning and delivery, at national, regional and local levels. The

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role of local authorities in water service provision acting as agents of Irish Water would be provided for in legislation.

Leadership and control of water service provision would be the responsibility of Irish Water. Local authorities would be free to organise local level activities as they chose within the constraints of their agency arrangements with Irish Water. This could involve, for example, groups of local authorities working together using River Basis Areas as the basic unit of operations. Local authorities would deliver water services as agents of Irish Water, exercise executive control over their operations staff and would execute as agents of Irish Water for capital projects of a value below a certain threshold to be defined. Irish Water would exercise a supervision and control role over the performance of the local authorities through the agency arrangements which would specify the services and service quality levels to be provided by the local authority and the fees to be paid by Irish Water to the local authority concerned. Irish Water would take a national leadership role and have implementation responsibility in strategic planning, billing and collection, water metering and execution of larger capital projects with a value over a certain threshold to be defined of a national or regional significance. The Water Services Investment Plan and the Rural Water Programme would be subsumed into Irish Water. Execution of the large scale projects under the capital programme would be managed by Irish Water operating from shared regional offices staffed by engineers from the various local authorities.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent a significant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with Group Water Schemes would not novate to Irish Water – in this scenario it is assumed they would remain with the GWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

The remaining operations functions including other wastewater treatment works, water treatment, water networks, wastewater networks, sludge management and other services would be carried out by the local authorities acting as agents of Irish Water. The agency arrangements could be viewed as output based funding models for operations, where funding would be on the basis of service levels and quality targets achieved. This approach would focus management attention on ensuring continuous improvement.

Irish Water would become a single point of contact for customer service and billing. Technical queries would be handled by Irish Water but passed to the relevant local authority for the provision of any related technical or maintenance services. This process would need to be supported by the integration of local authority management information systems under the control of Irish Water.

Irish Water would implement any domestic metering programme and would take over the non-domestic metering programme.

The local authorities would retain their own financial management and human resource management systems and keep detailed accounts of expenditure for water services in order to report to Irish Water. In addition, Irish Water would have its own financial management and human resource management systems for its staff and expenditures and to oversee the expenditure by local authorities. Local authorities would not continue to have treasury functions for water services as this function would reside with Irish Water.

Tariff structures for domestic and non-domestic customers would be determined by the Regulator on a national basis, based on predetermined criteria, in response to proposals from Irish Water.

Irish Water would take a strong lead for the development and implementation of integrated management information systems on a national basis. This would be a fully integrated suite of management systems to allow state of the art utility management practices and a high standard of customer care. Local authorities would be obliged to use these systems.

The position and role of the Group Water Schemes would not be substantially changed. They would continue to work closely with the local authorities. The Rural Water Programme would be managed by Irish Water in a manner not dissimilar to the manner in which it is currently run by the DECLG.

Irish Water would have a strong centralised financial control and treasury function. Asset ownership (together with any associated liabilities such as local authority CAPEX borrowings) would vest in Irish Water and it would have ownership of the revenue streams. In this capacity it would have the ability to borrow funds and, subject to


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detailed legal and financial review, it may be possible that these borrowings would be outside the general government balance sheet.

Irish Water would have control over marketing and communications including functions such as water conservation awareness and enhancing willingness to pay. This would reflect the importance of this function particularly at a time of reform in the water sector and the introduction of domestic water charges.

The environmental regulator for Irish Water would be the Environmental Protection Agency. Irish Water would have responsibility for ensuring environmental compliance and be subject to quality regulation by the EPA. Local authorities would be required to support Irish Water in executing its environmental obligations through the agency arrangements. The environmental regulator for the Group Water Schemes would also be the EPA.

The Agency Model is considered a viable option and is assessed in the evaluation of models presented later in this Section.


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Public Utility Model The diagram below provides an overview of the Public Utility Model. A more detailed description is set out at Appendix 8.

Figure 39: Public Utility Model

Under the Public Utility Model, Irish Water would be the water services authority and the single point of contact for all customers. It would be a single integrated organisation delivering all water services currently provided by the local authorities. Local authorities would no longer have a function in the provision of water and wastewater services.

There are several examples in Ireland in other utility sectors, including gas, electricity and telecoms, of such a full Public Utility Model. The model is used for water services in many other jurisdictions.

The legal framework for a full Public Utility Model would be significantly different from today’s institutional framework. A new Water Services Act would be required. Irish Water would by statute be allocated full responsibility for all aspects of water services planning and delivery, at national, regional and local levels. Local authorities would no longer have a role in water service provision (except insofar as Irish Water may subcontract responsibilities to them on an interim or long term basis). There would also need to be a number of changes in the abstraction and environmental protection regime to support the implementation of the model.

Some key executive roles currently undertaken (or planned to be undertaken) by the DECLG would transfer to Irish Water (for example strategic planning for the sector). The DECLG would retain policy functions.

With the implementation of a national domestic charging system, it would be necessary to establish an economic regulator for water pricing and consumer protection, to reflect the natural monopoly status of water services, to ensure high standards of performance and to ensure consumer needs are met. PwC understand that the economic regulator would be CER, and the regulated entity would be Irish Water. The economic regulator would set the parameters using its price setting powers to agree the rolling capital programme to allow Irish

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Water to achieve the required levels of service. Affordability would be a key criterion in this evaluation, particularly if there is a continuing contribution from the Exchequer to Irish Water.

Irish Water would have clear and centralised leadership and control of all aspects of the provision of water services. While day to day operations would be decentralised to operational units, best determined on the basis of river basin districts or large subdivisions thereof, there would be centralised policies, procedures and systems. The Irish Water core management team would cover all aspects of water and wastewater utility management.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent a significant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with Group Water Schemes would not novate to Irish Water – in this scenario it is assumed they would remain with the GWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

Irish Water would have responsibility for all aspects of operations and maintenance of water and wastewater services currently undertaken by local authorities. It would also be responsible for all aspects of asset management and capital programming. The Economic Regulator would set the parameters using its price setting powers to agree the rolling capital programme to allow Irish Water to achieve the required levels of service. Affordability would be among the key criteria in this evaluation, particularly if there is a continuing contribution from the Exchequer to Irish Water. Irish Water would have a central capital planning function and would need to consider setting up regional offices, not only for capital programme implementation but also for managing regional operations.

Tariff structures for domestic and non-domestic customers would be determined by the Regulator on a national basis, based on predetermined criteria, in response to proposals from Irish Water.

Irish Water would have a strong centralised financial control and treasury function. Asset ownership would vest in Irish Water and it would have ownership of the revenue streams. In this capacity it would have the ability to borrow funds and (subject to detailed legal and financial review), it may be possible that these borrowings would be outside the general government balance.

Irish Water would implement and manage all customer service, billing and collection including enforcement of collection. It would implement any domestic metering programme and would take over the non-domestic metering programme.

Many of the resources required by Irish Water for management of the water and wastewater systems would transfer from the local authorities to Irish Water. This process will have to be carefully managed so that all legal requirements e.g. labour agreements, TUPE would be observed. Interim arrangements would be necessary to allow this to happen in the optimum manner.

Irish Water would have control over marketing and communications including functions such as water conservation awareness and enhancing willingness to pay. This would reflect the importance of this function particularly at a time of reform in the water sector and the introduction of domestic water charges.

Irish Water would develop and implement integrated management information systems on a national basis. This would be a fully integrated suite of management systems to allow state of the art utility management practices and a high standard of customer care.

The environmental regulator for Irish Water would be the Environmental Protection Agency.

The position and role of the Group Water Schemes would change in that the roles currently played by the local authorities would have to be reallocated. The regulatory function would pass to the EPA although the EPA may request that Irish Water execute some aspects of regulation on its behalf. The day to day assistance currently provided by the local authorities and the support of the Rural Water Liaison Offices would be reallocated to Irish Water.

River Basin Governance would be implemented and facilitated by the use of river basin districts which would also act as the operational units of Irish Water.


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The customer experience would be that for all financial and technical queries, they would interact with a centralised function in Irish Water. This centralised contact management function would have the ability to interrogate the operational systems in the company, allocate job orders and respond to customers either resolving their queries or giving an indication when it could be resolved. There will be close management of the process of resolving complaints with this subject likely to be of keen interest to the economic regulator and the EPA.

The Public Utility Model is considered a viable option and is assessed further in the next section.


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Minimal Change Model The Minimal Change Model would envisage keeping the local authorities as the Water Service Authorities and allocating additional or new tasks to Irish Water as well as transferring certain executive functions of the DECLG to Irish Water, which would become the Water Service Authority. It would take as a starting point the retention of the operation and maintenance services in the local authorities (and therefore the bulk of the existing personnel) while trying to achieve more benefits of scale.

Figure 40: Minimal Change Model

In this model, the basic legal frameworks as set out in the Water Services Act 2007 would substantially remain intact with some key executive roles currently undertaken (or planned to be undertaken) by the DECLG transferring to Irish Water. The DECLG would retain policy functions. The local authorities would continue to be responsible for the day to day operations. However, Irish Water would be allocated certain statutory functions outlined above, such as strategic planning and major capital projects, and as such there would be a shared statutory role between Irish Water and the local authorities.

Leadership and control would be shared between the local authorities and Irish Water. Local authorities would continue to exercise executive control over their operations staff. In their statutory role, they would execute capital projects of a value below a certain threshold to be defined. Irish Water would exercise an oversight role over the performance of the local authorities. Irish Water would also take a leadership role in strategic planning, billing and collection, water metering and execution of larger capital projects with a value over a certain threshold to be defined and of a national or regional significance. The Water Services Investment Plan and the Rural Water Programme would be subsumed into Irish Water. Execution of the capital programme would be managed by shared regional offices staffed by engineers from the various local authorities in a model not dissimilar to that of the regional design offices of the National Roads Authority currently.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent a significant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with Group Water Schemes would not novate to Irish Water - – in this scenario it is assumed they would remain with the GWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

The remaining operations functions including other wastewater treatment works, water treatment, water networks, wastewater networks, sludge management and other services would remain the responsibility of the

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local authorities. Irish Water would supervise the delivery of operations services by the local authorities, but the authorities would have the statutory responsibility and liability for the services.

Billing and collection, and enforcement of collection along with the associated customer service function, would be undertaken by Irish Water acting in a statutory role of service provider on behalf of the local authorities. Technical queries would continue to be handled directly by the local authorities.

The local authorities would retain their own financial management and human resource management systems to keep detailed accounts of expenditure for water services. Irish Water would have its own financial management and human resource management systems for its staff and expenditures. Local authorities would continue to have treasury functions as would Irish Water. The local authorities would retain ownership of the assets. While Irish Water would collect water charges, the revenues would be owned by the local authorities.

With the implementation of a national domestic charging system, it would be necessary to establish an economic regulator for water pricing, to reflect the natural monopoly status of water services. Under the Minimal Change Model, it may be necessary to regulate 34 individual local authorities plus Irish Water. Tariff structures for domestic and non-domestic customers would be determined by the Regulator, based on predetermined criteria.

Irish Water would have a significant level of control over marketing and communications to reflect the importance of this function particularly at a time of reform in the water sector and the introduction of domestic water charges.

Irish Water would over time lead the development and implementation of integrated management information systems on a national basis but this would be in collaboration with the local authorities. This MIS would have to be integrated with the various systems in place in the local authorities.

The position and role of the Group Water Schemes would not be substantially changed. They would continue to work closely with the local authorities and the local authorities would continue as their front line regulator. The Rural Water Programme would be managed by Irish Water in a manner not dissimilar to that currently exercised by the DECLG.

There would be an enhancement to the current trend towards shared services between the local authorities. For instance, the shared service envisaged under plans for River Basin Governance would be facilitated.

The customer experience would be that for all billing queries, they would interact with Irish Water while for all service and technical queries they would interact with the local authorities.

The Minimal Change Model is not considered a viable option and is excluded from further consideration for the following key reasons:

It is likely that Irish Water would be unable to borrow in the markets as it would not provide an appropriate structure recognisable to lenders in the water sector. Therefore, the Government would continue to be relied on to fund water services needs to the extent not met by domestic and non-domestic water charges;

The complex interfaces that would exist between the national body and local authorities would slow decision making and effective delivery, because statutory responsibility and authority would be split between the local authorities and Irish Water;

It is unlikely that significant economies of scale could be achieved because the roles and responsibilities of the local authorities would remain largely unchanged;

Accountability for water service provision would not be clear. For example, there would be a significant disconnect between responsibility for technical / maintenance service provision and the collection of water service charges;

It would be difficult to implement price regulation because of the large number of diverse water services authorities; and

The customer service experience would be fragmented between billing being dealt with by Irish Water and local authorities handling detailed queries on technical service issues.

Overall, PwC consider that this model could not address the main objectives of the reform programme.


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Intercommunal Model An approach adopted in several parts of Europe where municipalities have retained the basic obligation to provide water services but wanted to agglomerate to achieve economies of scale is to establish intercommunal companies. This would require several municipalities to set up a new company, owned by the municipalities and to which the participating municipalities would delegate the provision of water and/or wastewater services.

In the Irish context, this might result in city and county councils within a River Basin Area setting up companies. There are seven such areas fully or partly in the State but for reasons of economies of scale, it might be that three such companies would be set up covering:

1. The Eastern River Basin Area, plus that part of the Northern River Basin Area roughly corresponding to county Louth

2. The South Eastern & South Western River Basin 3. Those parts of the Shannon, Western, North Western river basin areas in the Republic.

Labels such as South Water, West Water and East Water could be allocated to these companies. The approximate scale of each might be:-

East: Area approximately 10,000 km2 Population 1.8 million +

South: Area approximately 25,000 km2 Population 1.3 million +

West: Area approximately 35,000 km2 Population 1.0 million +

Figure 41: Intercommunal Model

Within the framework of this variant there are two scenarios. The first is that these three companies would execute the roles of the local authorities within the wider framework of the Agency Model. Irish Water would have SLAs with the three intercommunal companies.

Another scenario is that each of these companies would become smaller versions of the full Public Utility Model above with the full set of utility functions. Each would be a regulated entity and each would bill domestic and non-domestic customers.

The Intercommunal Model is not considered a viable option and has been excluded from further consideration for the following reasons:

The intercommunal model, involving three or more separate organisations, could not achieve the potential for efficiency and cost reduction in operations and capital investment that consolidation into a


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single national company could achieve. It is worth noting that a single national company would still be smaller than the average sized water services company in the UK.

There would be a substantial extra and complex layer in the organisation and management of water services, with no obvious source of additional revenues to fund such reforms;

As there is little precedent for this kind of organisation in Ireland, and as the scale of each organisation would be smaller than that of a national company, it is not clear that the companies would be easily able to access funds from the bond markets;

Each of the Intercommunal companies would be regulated separately and it is to be expected that there would be a wide variation in operating costs per connection across the country, because of the different characteristics of population dispersal. Unless a standard level of water charges were to be introduced nationally, it is likely that customers outside the East region would be required to pay substantially more than those in the East. It should be noted that the variation between the cheapest water charges and the most expensive in Germany is approximate a factor of 6, while in France it is approximately 7 and in the UK in the range of 2-3. Given the very different range of asset types and population dispersal, the range of water prices in Ireland might be closer to the ranges for France and Germany than the UK.

If a standard level of charges were introduced nationally, depending on the tariff set be the Regulator, there is a risk that, for companies outside the East region, revenues would fall well short of operating costs. In this scenario, the shortfall would have to be funded by Government subvention, by borrowing or by some form of regional equalisation scheme. If the level of revenue was less than 50% of operating costs for the region, it is unlikely that any borrowings undertaken by the Intercommunal companies outside the East Region would be determined by the CSO / Eurostat to be excluded from the General Government Balance (GGB).

The continued fragmentation of the sector would be a substantial disadvantage. It is worth noting that both Northern Ireland and Scotland adopted variations on this approach only to reverse the decision in favour of a larger national unitary water services entity within a relatively short timescale because the regional models did not deliver the levels of efficiency or customer service consistent with international standards. Studies of the Danish Water sector have indicated that their fragmented structure results in organisations operating at sub optimal scale: “part of the inefficiency is caused by an inoptimal scale of production (scale inefficiency)”22;

Duplication of activity would exist among the three companies, and the creation of three management teams (one for each region) would be inherently more costly than a single national management team. Procurement, billing and collection activities would be replicated three times, and investment would be required in three separate sets of ICT systems. Implementation of ICT / MIS – crucial to the achievement of efficiencies - would be slower and more reliant on legacy systems than in a single national company;

For benchmarking, there would be no advantage to have having three companies; the regulator would

still have to look outside Ireland for comparators. It would make little sense to compare say the East region (Greater Dublin) with the West (mainly rural);

As the organisations would be municipally owned and as their creation would be by amalgamation of existing services rather than the creation of a new highly centralised organisation, the scrutiny of the intercommunal companies by local authorities could be severely diluted;

It is probable that the shareholding in the capital structure and voting rights would be in proportion to assets contributed and population served. There would therefore be competing interests on the board and among the shareholders. Complex decision making/ dispute resolution mechanisms would be needed to ensure fairness and equity between participating local authorities. Agreement on the implementation of leadership and operating structures for each organisation would be required before any benefits of scale could be delivered;

22 See Regulation, Organisation and Efficiency: Benchmarking of Publicly and Privately Owned Utility Companies Rasmus Lomberg ,2005 http://regulation.upf.edu/ecpr-05-papers/rlonborg.pdf


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As the intercommunal companies would be formed from the existing water services departments, changes in work practices would be organic and incremental, and would need to be implemented to reflect arrangements in each of the local authorities;

The model has the potential to be complex, involving a significant transfer of staff without realising the benefits of changed operating procedures or the introduction of new management methods in a reasonable timeframe;

A core staff would have to be retained in each local authority to ensure compliance by the Intercommunal company with regulatory and legal requirements, and;

Very large schemes such as the greater Dublin regional water supply project would continue to have to straddle regions, perpetuating project development and execution risks, and making the projects difficult to finance.


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Models Selected for Further Evaluation From the analysis outlined above, the two potential models were carried forward for more detailed evaluation:-

The Agency Model; and

The Public Utility Model.

A brief summary outline of the key similarities and differences between the two models is set out in the table below.

Feature Public Utility Model Agency Model

Legal and Institutional Framework

Irish Water is the single Water Services Authority with full responsibility for all aspects of the delivery of water services.

Irish Water is the single Water Services Authority with full responsibility for all aspects of the delivery of water services.

All water services currently provided by the local authorities are provided by Irish Water.

Local authorities continue to undertake many of the tasks currently undertaken by them, acting as agents of Irish Water.

The contracting entity with the end customer is Irish Water.

The contracting entity with the end customer is Irish Water.

Regulation The regulated entity is Irish Water. The regulated entity is Irish Water.

Economic regulator is CER. Environment regulator for Irish Water is EPA. Environment regulator for GWS is also the EPA.

Economic regulator is CER. Environment regulator for Irish Water is EPA. Environment regulator for GWS is also the EPA.

Leadership and Coordination

Irish Water has sole responsibility for leadership and the control of water services.

Irish Water responsible for centralised leadership and coordination of water services, acting through agency agreements with the local authorities in some matters.

Operations Irish Water delivers operational services directly or through third party outsourcing agreements.

Local authorities act as agents for Irish Water to deliver specified operational services.

Current DBOs transferred to Irish Water and future DBOs managed by Irish Water.

Current DBOs transferred to Irish Water and future DBOs managed by Irish Water.

Irish Water provides assistance and technical support to GWS.

Local authorities acting as agents of Irish Water provide assistance and technical support to GWS.

Asset Management and Capital Programme

Irish Water prepares a capital investment programme based on national economic and social needs.

Both asset management and capital programmes developed and delivered by Irish Water.

Irish Water prepares a capital investment programme based on national economic and social needs.

Both asset management and capital programmes developed and delivered by Irish Water, except for smaller scale capital projects which would be delivered by the local authorities under agency arrangements.

Customer Billing and Service

Customer billing conducted by Irish Water (but may be outsourced).

Customer billing conducted by Irish Water (but may be outsourced).

Customer service delivered by Irish Water (but may be outsourced).

Customer service delivered by local authorities acting as agents of Irish Water.

Centralised national customer contact centre provided by Irish Water (but may be outsourced).

Centralised national customer contact centre provided by Irish Water (but may be outsourced).


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Feature Public Utility Model Agency Model

Finance Management and Funding

Irish Water owns all of the water assets and liabilities and is a self funding independent commercial entity with the capacity to borrow in the markets against the asset based revenue streams.

Irish Water owns all of the water assets and liabilities (and related business assets) and is a self funding independent commercial entity with the capacity to borrow in the markets against the asset based revenue streams.

Local authorities have no involvement in water finance and funding.

Irish Water pays local authorities for the delivery of certain water services on the basis of agency arrangements. These payments are reflected as income in the local authorities’ accounts and as expenditure in Irish Water’s accounts.

Irish Water’s borrowings are not constrained by General Government Balance (GGB) limits (to be confirmed).

Irish Water’s borrowings are not constrained by General Government Balance (GGB) limits (to be confirmed).

Asset Ownership All of the water assets and related business assets owned by Irish Water. Arrangements for use of business assets agreed with local authorities.

All of the water assets and related business assets are owned by Irish Water.

People All water services staff are Irish Water employees (except small cohort remaining in Dept.). Staff transferring to Irish Water retains their existing terms and conditions on transfer.

Irish Water recruits its own staff, and existing local authority staff would continue to be employees of the local authorities to deliver services under the agency arrangements.

Irish Water can determine pay terms and conditions for new staff, having regard to Government Policy.

Irish Water can determine pay terms and conditions for its own new staff, having regard to Government policy. Local authorities determine their own staffing needs.

Marketing and Communication

Irish Water responsible for Marketing and Communications.

Irish Water responsible for Marketing and Communications.

MIS & IT Irish Water implements a fully integrated set of national MIS/IT systems for water services.

Irish Water implements national systems as far as feasible. Local authorities continue to be responsible for aspects of their systems shared between water and other services.

Customer Experience

All customers billed by Irish Water. All customers billed by Irish Water.

The economic regulator in cooperation with National Consumer Agency will protect consumer interests.

The economic regulator in cooperation with National Consumer Agency will protect consumer interests.

A single call centre deals with all customer queries and service requests. Service delivered by Irish Water.

A single call centre deals with customer queries and service requests. Service delivered by the relevant local authority under an SLA with Irish Water.

Figure 42: Agency and Public Utility Models – Summary Comparison

The assessment of these two potential models for Irish Water is described in the next section.


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6. Evaluation Process


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6. Evaluation Process

Objectives for Reform Based on our understanding of government policy and key stakeholder requirements PwC have identified six key objectives for the creation of Irish Water. For each objective a set of evaluation criteria has been agreed with the DECLG which allows an assessment of how well the models will deliver on the objectives.

The six objectives for creating Irish Water are:

Financially sustainable water services: a key aspect of the reform of the public sector in Ireland in

support of EU/IMF commitments is to reduce the requirement for public sector funding. A financially sustainable water service will deliver a more cost effective service, driving out cost through the elimination of duplicated services and the establishment of a more integrated service delivery model. Stability of revenue from customer charges aligned with a reducing cost base will improve profitability thus strengthening Irish Water’s ability to secure funding from external lenders

Improving Ireland’s water services infrastructure: as our description of the current status of water services in Ireland demonstrates, there is a backlog of investment to be undertaken on the system. There is also a national need to maintain headroom in the security of water supplies. The new structure for Irish Water needs to be able to deliver cost effective investment in a timely manner.

Ensuring Environmental Standards: there is a need to ensure that we can meet our environmental obligations such as those set out in the EU’s Water Framework Directive. Significant funding23 will be

required to address this in the coming years’ obligations.

Delivering improved outcomes for customers: the introduction of customer charging will raise customer expectations of the quality of water services. Irish Water will need the capability to deliver improved customer outcomes across a broader range of measures than used previously. The entity will need to have clear capabilities to deliver for customers and also have appropriate regulation and incentivising to focus on customer requirements.

Strong governance with clear accountabilities: a critical success factor for many water sector reform projects is the clear identification of roles and responsibilities for the key players in the sector. Stakeholders need to be clear on their obligations and have the resources to deliver against these obligations.

Support other aspects of water reform in Ireland: the water sector in Ireland is considering and evaluating a number of policy initiatives at the time this report is being prepared including the introduction of charging, a proposed near universal roll out of water meters, implementation of strategic planning, development of river basin management governance etc. It is important that the new structure for Irish Water supports these developments and does not create institutional blocks to the reform programme.

Promote efficiency: efficiency has been a key driver in the reform programme for water services in Ireland and is a major theme in Government policy statements. The evaluation of efficiency presented is both in terms assessing whether the proposed model will be efficient but also the extent to which the implementation process for the preferred model can be efficient as well.

23 The amount is not possible to calculate, but a view expressed to PwC by certain stakeholders is that it could create an

investment burden of up to €20bn


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Guiding Principles In conducting the analysis of options for the delivery of water services, PwC were guided by the following principles, established through consultation with the Department and other stakeholders, as well as through our experience of the water sector internationally. They should not be considered as an indication of future Government policy.

The model proposed should facilitate the implementation of the Government decision to establish a new State owned water utility company to take over responsibility from the separate local authorities for Ireland’s water infrastructure and to drive new investment.;

The model proposed should be based on the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision;

The model proposed should take into account existing proposals for structural reforms impacting on the water sector, including:

The commitments in the Programme for National Recovery 2011-2016 including NewERA;

The introduction of a fair funding model comprehending the metering of households and a charging regime to include a free allowance;

The establishment of an independent economic regulator for water;

The recommendations of the Local Government Efficiency Review Group and of the Value for Money Study of the Water Services Investment Programme; and

The governance requirements for the implementation of the River Basin Management Plans.

The model proposed should be designed to become self funding over time;

The model should reflect best practice internationally in the water and utilities industries;

The model proposed should, where it is the most practical and cost-effective option, leverage the capabilities and resources of existing state agencies in order to avoid duplication and waste;

The transition to the new model should be designed to ensure that the inherent merits of the existing water service are retained while Irish Water is free to establish a fresh culture, ways of working and appropriate staffing arrangements;

The model should facilitate competition within the water services sector insofar as practicable; and

The model proposed will be based on a State agency. Privatisation should not be a consideration.


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Evaluation Criteria A set of evaluation criteria was developed by the consultancy team in consultation with the DECLG. These are derived from the objectives and guiding principles which were identified and described above. In addition, criteria related to implementation considerations have been included. A more detailed explanation of each criterion is set out at Appendix 9. They are set out in the following table:

Objective Criterion

Financially sustainable water

services Capacity to optimise use of available funds

Capacity to support strategic long term capital funding and fund priority requirements

Potential to be self funding in the long term

Ability to borrow in the markets

Improving Ireland’s water

services infrastructure Ability to support effective investment in infrastructure (timeliness and value for money)

Effectiveness in facilitating implementation of national strategies for water services

Effectiveness in supporting implementation of rural water strategy and relationship with group water sector

Ensuring environmental

standards are met Clarity of responsibility for the delivery of environmental compliance

Ability to deliver on obligations in River Basin Management Plans

Delivering improved outcomes

for customers Ability to provide improved levels of service for customers

Ability to deliver reduced levels of leakage

Ability to improve security of supply

Effectiveness in serving local needs and requirements

Strong governance with clear

accountabilities Effectiveness in delivering statutory requirements

Alignment of responsibility, authority and accountability for charging, operations, and other activities

Ease of implementing effective regulation (economic, environmental and technical)

Support other aspects of water

reform in Ireland Effectiveness in the delivery of the metering programme

Compatibility with evolving water governance

Effectiveness in the introduction of water charging

Compatibility with the New Era model

Promote efficiency Ability and speed in achieving potential for efficiency and cost reduction in operation and investment

Ability to achieve economies of scale

Ease of implementation of ICT / MIS

Consistency with plans for the implementation of operational river basin management

Effectiveness in integrating water services with the planning regime

Ability to attract and retain appropriate skills and know how in the sector

Implementation

Considerations Ease of implementation

Impact of new model on the local authorities

Impact on Ireland’s Economy Impact of new model on Public Service staffing numbers

Impact of new model on General Government Balance

Figure 43: Evaluation Criteria


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Assessment of Options In assessing the options, it was deemed appropriate to use a qualitative methodology for the comparative assessment of the Agency Model against the Public Utility Model, taking into account the relative merits of each option against each of the criteria. In both cases, it was assumed that the models proposed would be implemented as efficiently and effectively as possible. The evaluation was based on:

International practice;

Available metrics; and

The experience of the consultants.

The following table summarises the main advantages related to each model. A more detailed description of the considerations related to each model is set out at Appendix 11. In considering the case for each objective, PwC have assessed which option, in their opinion, represents greater merit for Irish Water, relative to each other.

Key:

This Model has Greater Merit

Objective Public Utility Model Agency Model

Financially sustainable water services

Recognised business structure familiar to lenders who could place reliance on revenue streams and cash flows. Irish Water is likely to have significant borrowing capacity.

Unique business model in the water sector, unfamiliar to lenders. Control over costs more fragmented. Irish Water has less direct control over net income. Irish Water’s borrowing capacity would be less certain.

Opportunity to design and implement a fit-for-purpose operating model resulting in greater cost efficiencies and economies of scale arising from the more highly integrated organisation, processes and systems. This would allow Irish Water to become self-funding in a significantly shorter period of time.

Longer time required to achieve cost efficiency and economies of scale – more difficult to transform practices, processes and systems across 34 separate local authorities. Would take longer to achieve self-funding status.

Can optimise the mix of capital, maintenance and operations expenditure as fully responsible for all funding and resources.

More difficult to optimise the mix of capital, maintenance and operations expenditure due to split of ownership and responsibility for capital and operations expenditure between Irish Water and the local authorities.

Well positioned to fund strategic priority capital projects due to borrowing capacity, cost efficiencies and integrated strategic planning capability.

Greater reliance on Government to fund strategic priority capital projects as ability to borrow externally will be curtailed by the fragmented nature of the model.

Improving Ireland’s Water Services Infrastructure

Integration of investment planning and delivery in one organisation - more effective in delivering infrastructure.

Reliance on local authorities may limit effectiveness – potential for conflicts in priorities of local authorities between water services and other local projects, and slower decision making.

Ensuring Environmental Standards are Met

Operating regions aligned with River Basin Areas – facilitates River Basin Management planning and operations.

Requires cooperation between local authorities to operate on a river basin basis.

Uniformity in reporting to the EPA – single point of interface.

Reporting to the EPA would involve the review and consolidation of reporting from 34 separate local authorities.

Delivering improved outcomes for customers

Improved water service quality would be the singular focus for management to deliver.

Improvements more difficult to achieve under agency arrangements with local authorities.

Responsibility for billing, customer support and the delivery of customer service resides in a single organisation.

Service delivery responsibility (local authorities) is separate from billing and support (Irish Water).

Better able to respond to security of supply issues due to integrated structure and responsibilities and access to deeper pool of resources nationwide.

Response to security of supply issues would rely on interfaces between Irish Water and the local authorities - this may be difficult to manage especially when there are disputes over the use of resources.

Local needs met by mobile workforces supported by modern IT systems. Risk of losing close connection to local needs.

Local needs met by local authority workforce with a good understanding of local infrastructure. Local connection would be retained.


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Strong Governance with Clear Accountability

Irish Water, which will be designed on a fit-for-purpose basis, will be fully accountable and responsible, and will have full control of the funding and resourcing required to meet compliance requirements.

Accountability and responsibility dispersed. Risk that local authorities would be unable to commit to service levels or quality demanded by Irish Water based on the level of funding provided. Difficult for Irish Water to meet statutory commitments.

A single body clearly accountable to the regulators for efficiency and quality of service performance.

Irish Water would have to account to the economic and environmental Regulators for up to 34 different agencies varying in scale and characteristics from Dublin City Council to Leitrim County Council.

Suitable scale utility to benchmark against water utilities in the UK.

Scale of local authorities generally not suitable for benchmarking against UK water utilities.

Support Other Aspects of Water Reform in Ireland

Irish Water can determine the pace of reform and is fully accountable and responsible for the outcomes.

Requirement for Irish Water to involve all 34 separate local authorities could lead to slower implementation of the reforms than one may reasonably expect to see in a single entity.

Promoting Efficiency

Designed on a fit-for-purpose basis, it effectively facilitates the integration of smaller scale water operations to achieve economies of scale.

Does not readily facilitate the integration of smaller scale water operations due to the existence of 34 separate local organisations with local decision-making responsibility. Tends to perpetuate the fragmentation of water services.

Readily facilitates the pooling of resource nationally for more efficient work planning, as well as the procurement benefits that arise from operating at a larger scale.

Pooling of resources nationally and achieving procurement efficiencies not easily facilitated by a structure incorporating 34 separate local authorities.

Irish Water has integrated decision making to achieve the benefits of bringing operations, asset management and capital programmes together.

Responsibility for decisions on the capital programme separate from responsibility for decisions on operations and maintenance, which in turn are reliant on decision making of 34 separate local authorities.

Public Utility Model has proven efficiency gains of 40% over a 5 year period in Scotland and 3% per annum in England and Wales.

The Agency model could not expect to achieve the levels of efficiency achieved within UK water companies within similar timescales. The levels of efficiency improvement projected by the Local Government Efficiency Review Group24 for a range of initiatives under current local authority structures is €35 million i.e. 0.5% (in total – not annually).

Irish Water can introduce a more variable cost base, determining the most appropriate resourcing mix of permanent staff, contract staff, and outsourcing.

Local authorities are restricted in resourcing options due to their public service status. Any resourcing efficiency improvements would have to be conducted on an authority by authority basis.

Irish Water is outside the Government restrictions on pay and numbers and has greater commercial freedom.

Local authorities are constrained by Government restrictions on pay and numbers.

There is one management information system for the company, with an integrated approach to the development, collection and analysis of financial and management information.

Any national management information systems dependent upon different sources of data for each local authority operating on different IT systems. The integration challenge is significant. Ensuring consistency of data and reporting across the authorities poses significant challenges.

Staff is no longer aligned with specific local authorities and could be readily organised on a River Basin basis.

Implementation of River Basin management relies on inter-local authority cooperation and would require a substantial reorganisation of local authority staff.

Does not have a local community connection and may perform less well in ensuring effective integrated planning.

Preserves the local alignment of regional planning and the granting of planning consents for construction and ensures that projects are integrated with local planning processes.

A single water utility company has the scale to develop and train existing staff and attract key talent, thus allowing it optimise the skills base of the organisation.

Less scope for career development of water sector staff given the fragmentation of skills and roles and the level of mobility of staff across the local authorities.

24 Local Government Efficiency Review


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Fit-for-purpose design aligned with end-to-end ownership of water services based on a service delivery culture and a singular focus on water will provide a more efficient operation.

The 34 local authorities focus on a diverse range of services with water services accounting for less than 15% of total whole time equivalent (“WTE”) staff.

Implementation Considerations

A complex implementation challenge involving a radical change in the organisation of the sector and significant transfers of staff from the local authorities to new roles in Irish Water.

Represents less of an implementation challenge as it involves less of a change to the sector, avoiding the significant transfer of staff from the local authorities to Irish Water.

Impact on Ireland’s Economy

All staff is excluded from public service staffing numbers.

Most staff continues to be part of public service staffing complement.

Irish Water’s borrowings are outside the General Government Balance (to be confirmed).

Water services borrowings are included in the General Government Balance for the foreseeable future (to be confirmed).

Figure 44: Advantages of Public Utility and Agency Model

As can be seen from the above summary, the Public Utility Model provides advantages over the Agency Model against the majority of the criteria. The exceptions primarily relate to:-

The risk of losing the advantages provided by the local presence and local knowledge of the local authorities; and

The probability of a less complex implementation with lesser industrial relations challenges because the changes envisaged under the Agency Model would be less radical.

The Agency model assessed in Figure 44 above assumes significant elements of regional shared service for operations (see Appendix 8) – probably on a River Basin Management basis – to increase the level of efficiency compared to the current environment. In this scenario the shared services would be based on cooperation between the 34 local authorities, each of whom would have an agency arrangement with Irish Water. A variation on this model was considered, where water services are provided by regional groupings of local authorities, rather than by individual local authorities. In this scenario, Irish Water would have agency arrangements with say 8 bodies (e.g. on river basin basis) or 5 (based on proposed structure) rather than 34. This would be similar to the Intercommunal Model, as outlined in Section 5. It is clear that this variant would simplify the structure to some extent, and it would have some advantages over the scenario where 34 bodies are providing water services. However, when assessed against the criteria outlined in Figure 44 above, it is considered that the advantage outlined therein for the Utility Model would still apply.


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Conclusion on Assessment of Options

Our conclusion is that the Public Utility Model as described in Section 5 should be the recommended form of

organisation structure for the delivery of water services in Ireland. The key reasons for this conclusion, as outlined in the above analysis, are that as a Public Utility Model:

Irish Water has the opportunity to leverage best practice and design, build and implement a fit for purpose operating model which will deliver water services in the most efficient and effective manner in Ireland;

Irish Water control all assets, revenues and costs, and consequently it is better positioned to leverage economies of scale, drive operational excellence, reduce operating costs and optimise the lending capacity of the company;

Irish Water’s external borrowing capacity would be higher than that of the Agency Model, enabling it become self-funding sooner thus reducing the burden on the Exchequer to provide capital and current funding with consequent positive impact on the GDP / debt ratio;

Irish Water would have end-to-end direct responsibility for, and authority over all assets, revenues, costs and resources associated with the delivery of water services in Ireland, thus enabling it better implement national strategies and not be curtailed by local authority boundaries or non-water related activities;

Irish Water, with one decision making authority as opposed to the involvement of 34 local authorities, would be a more coherent and integrated organisation structure with clear lines of accountability, authority and responsibility which would enable it optimise River Basin planning and management, support aspects of water reform on a timely basis and deliver integrated response models to ensure security and quality of supply;

Irish Water would deliver consistent and transparent service quality and be better positioned to more rapidly deploy its resources through a national customer service centre;

Irish Water would have a single delivery structure, resulting in a more efficient cost base and a lower unit cost of delivery;

Irish Water would represent a single entity for Regulators to regulate, as opposed to the complexity and time required to regulate 34 separate local authorities;

Irish Water would have the critical mass to attract key talent, thus allowing it optimise the skills capability of the organisation;

Irish Water reduces public service numbers through the expectation of a gradual reduction of headcount over time;

Irish Water will present opportunities to staff dedicated to water services. Increased specialisation will provide routes for career development and enhanced job satisfaction; and

Irish Water takes the water sector outside the restrictions on pay and numbers and gives greater commercial freedom, within the limitations of a regulated entity.


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Recommended Option for Irish Water Our recommendation, therefore, is to adopt the Public Utility Model as the target operating model for Irish Water. Given the importance of water as a scarce national resource, increasing emphasis internationally on managing this resource better, there will be a national approach to water provision while retaining the benefits of local delivery through regional offices and more efficient river basin management.

This model is the one which we believe is most likely to achieve the efficiency benefits outlined on page 64. This recommendation also best responds to the issues raised through the stakeholder consultations.

In the next section, PwC describe the recommended model in more detail, including the financial implications.

Clearly, the transition to the Public Utility Model will create significant risks and challenges which must be addressed. Chief among these are:

Ensuring that Irish Water is appropriately staffed in terms of numbers and skills with a mix of existing local authority staff and external expertise;

Ensuring the smooth transfer of staff from local authorities to Irish Water;

Maintaining the detailed knowledge of local infrastructure currently held by local authority water services staff;

Managing any risks related to the impact on other local authority operations;

Ensuring the continuity of effective local service provision, including support of the Group Water Schemes;

Ensuring effective integration of Irish Water into the city/county and regional planning processes;

Ensuring responsiveness to the needs of new and developing businesses;

Putting in place structures to facilitate an element of competition in the market; and

Minimising the risks associated with national dependence on a single company for continuity of public utility services.

The recommended transition strategy which PwC believe would most effectively address these issues is set out in Section 9.


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7. Assessment of Potential Role for an Existing State Agency


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7. Assessment of Potential Role for an Existing State Agency

The Terms of Reference for the review required that the consultants “should also consider the possibility/desirability of assigning responsibility for water services provision, or part thereof, to an existing state agency”. In this section PwC set out their assessment of the options available in this regard.

Irish Water Requirements Setting up and operating a publicly owned regulated water utility will require very specific systems, resources and expertise in many diverse areas including:

Strategy and planning;

Corporate Services;

Finance and funding;

Asset Management and Engineering;

Procurement of major Infrastructure;

Project management;

Network management;

Customer service / Call Centres;

Billing / Collection; and

Workforce management.

Marketing and Communication

Regulation both environmental/technical and economic

Leadership

Operations of extended networks and treatment plants (i.e. from source to disposal)

Relevant State Agencies There are a number of existing state agencies which could bring many of these and other capabilities and systems to Irish Water. Examples of these agencies include (but are not limited to):

Bord Gáis Eireann;

ESB;

Bord na Mona;

Railway Procurement Agency;

National Roads Authority;

Coillte;

An Post;

CIE companies;

Dublin Airport Authority;

National Development Finance Agency; and

National Treasury Management Agency.

At a time of significant transformation and rationalisation in the public sector, it would clearly make sense to ensure that the needs of the new model for water service delivery are met through capabilities which already exist in the public sector where it is the most practical and cost-effective option.

PwC see two scenarios in which capabilities which already exist in the public sector could be involved in water service provision:-

(a) Embedding the new Irish Water company in an existing State agency;


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(b) If another State agency were successful in procurement processes to outsource aspects of the new water service either in the set-up phase or thereafter.

A critical consideration in this assessment is that scenario (a) could be achieved by statute whereas scenario (b) would depend on the outcome of any relevant public procurement process.

Therefore, PwC has confined our consideration to the scenario in which Irish Water is embedded in an existing State agency.

Use of an Existing State Agency The existing State agencies which, in our view, would come under consideration as having the potential to incorporate a new water utility are:

Bord Gáis Eireann;

Bord na Mona;

ESB; and

National Roads Authority.

In this scenario, Irish Water would become a new division or subsidiary of one of the above agencies. It would report to a “group” management team but would have its own dedicated management structures and staffing.

In fulfilling this role, the State agency would be required to:

Appoint a management team and establish the governance structure to lead the integration of Irish Water

into the State agency;

Establish a programme management office and project teams to develop a detailed implementation plan and manage the integration of existing water services from the 34 local authorities to Irish Water. Where specialist water expertise is not available internally, appoint a ‘management partner’ to establish the structures and operations required to support the provision of water services;

Manage and support the process to establish the legislation for the transfer to Irish Water of the water assets, liabilities and staff;

Complete detailed due diligence of the existing water and waste water service provided by the 34 local authorities, capturing details on water services operations, staff, assets and liabilities;

Conduct a detailed valuation exercise on the existing asset base;

Develop the strategy for Irish Water ensuring it is compliant with all relevant legislation and business requirements and consistent with the tariff structures defined by the economic regulator;

Define and implement the operating model for Irish Water, to cover the provision of infrastructure planning, investment, management, maintenance and emergency service; customer service; and back office support functions and identify key resources and expertise required to deliver against this strategy, identifying opportunities to integrate these as much as possible within its own organisation;

Develop a multi-year business plan including detailed financial projections on revenue, cost, investment and funding and define operational metrics for managing and tracking performance of the business;

Implement the full suite of end-to-end financial processes and services (metering, invoicing, collections, purchasing, disbursements, accounting, reporting, budgeting, treasury, tax, compliance, etc) required to support Irish Water operations;

Implement the full suite of HR processes and services (recruitment and staffing, compensation and benefits, performance management, payroll, staff development, employee relations, etc) required to support the new headcount. In addition HR would manage the on-boarding of all transferring employees from the local authorities, transitioning them to new roles;


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Implement the full suite of MIS systems required to support the operations of a fully integrated water utility including metering, customer billings, transactional processing, management reporting, infrastructure tracking, customer service call centre, workforce management, remote monitoring, etc;

Implement workforce management tools and methodologies to appropriately and efficiently staff ongoing and emergency maintenance and service requirements;

Manage the relationship with the economic regulator ensuring the finances of Irish Water are compliant with defined tariff structures. In addition, they would develop the relationships with external funders and Government and establish the mechanisms required to source c. €10.2bn of funding for capital investment programmes in the period to 2030. In sourcing this debt, they would need to ensure appropriate ring fencing was in place, as required, to optimise the level of funding available to both its own operation and Irish Water;

Develop the procurement strategy for Irish Water, leveraging the benefits associated with the increased level of Irish Water spend. Appoint category managers with expertise in the sourcing of water services goods and services;

Negotiate and agree service level agreements with each of the 34 local authorities to provide staff and support to Irish Water during the transition phase of activities to Irish Water; and

Establish a customer service call centre to respond to emergency calls, customer complaints, queries, service requests, etc.

In all cases, where specific water and waste water expertise is required, it would be necessary to identify and appoint key staff – these may be sourced from local authorities and/or the marketplace. In those situations where support services are currently outsourced by the State agency, these arrangements would be extended to cover the additional requirements of Irish Water.

It should be noted that where regulation requires ring-fencing of existing activities with those of Irish Water, many of the above services would need to be established on a standalone basis within the existing state agency, impacting the degree to which synergies could be leveraged.

In this regard, we also considered the approach adopted by other countries in establishing multi-utility companies. In both Welsh Water and United Utilities (England), the water utility was initially integrated with the electricity utility but was subsequently separated out into individual utilities due to difficulties in managing multi-utility companies and the limited opportunity for operational synergies where water and electricity operations needed to be ring-fenced for regulatory purposes. They were broken up by investors and management to allow a focus on the provision of a single service.

There is no doubt that existing state agencies have certain capabilities and systems which could meet certain requirements of the new water authority. However, there are also a number of operational limitations and in many cases the existing state agency would need to make investments equivalent to those of a standalone Irish Water utility.

The following sets out some of the main advantages and disadvantages of locating Irish Water in one or other of the existing state agencies:


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Embedding Irish Water in an Existing State Agency Advantages Disadvantages

Accelerated implementation timescale;

Provide experience in managing a regulated utility;

Effective governance structures already in place;

Potential to share back office systems and resources;

Potential to share call centres, customer support and

billing systems;

Provide accelerated route to the implementation of utility

systems;

Could provide strategy development and planning,

engineering, project management, network management

and procurement skills;

Could provide financial and treasury capabilities;

Potential to leverage borrowing power of the existing

utility;

Potential to benefit from existing utility brand; and

Potential to utilise existing regional / mobile workforces.

As compared to a green field scenario for Irish Water there

could be less flexibility in setting up the terms and conditions

for new members of the workforce, and in determining the

most appropriate resourcing mix;

Risk of increasing national dependence on a single utility,

thereby increasing the bargaining power of the workforce;

Existing utilities would need to bring in water industry

knowledge / experience;

Risk of impacting negatively on the borrowing power of the

existing utility, because lenders will take account of the whole

organisation, and any issues in one business area could

influence lending decisions related to the other;

Risk of diverting the attention of management from existing

strategies with competing priorities;

Funding of the new utility may have to be kept separate from

the existing state agency’s funding. Perceived or real cross-

subsidisation could pose issues for the regulators;

Potential constraint on the flexibility of Irish Water to shape its

own strategy and culture;

Risk of impacting negatively on the brand of the existing utility;

Differences in the requirements for skills, process and systems

between water and energy/roads could prove to be significant

with potentially significant costs for the relevant state agency to

address these;

Risk of impacting negatively on business as usual as the

organisation redefines its operating model and structures;

The level of external support required to plan, manage and

execute the integration of Irish Water into an existing utility;

Many of the potential benefits of having Irish Water integrated

with another State agency could be limited by the fact that

regulators will want the different regulated businesses (e.g.

water and energy) ring fenced and separated for regulatory

purposes. This would make integration more difficult;

Some of the State agencies concerned are already required to

maintain separation of their supply and network businesses.

This is likely to limit the potential to exploit existing facilities

and capabilities in the integration of Irish Water;

Impact on the balance sheets, headcount and operational

footprint of some State agencies arising from the significant

scale of Irish Water;

The potential implications for Irish Water and the


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Advantages Disadvantages

ESOP/ESOT’s of existing State agencies on the transfer in of

water assets;

The fate of the relevant State agencies is uncertain due to

current reviews. Integration of Irish Water could impact their

potential for restructuring or cause the need for extensive

strategic restructuring within the state agency at the same time

as Irish Water is being implemented; and

Recent examples (such as Welsh Water, the former United

Utilities and Hyder Group) indicate that multi utilities tend not

to achieve the synergies anticipated.

Figure 45: Embedding Irish Water in an Existing State Agency

The implementation of Irish Water will be a very complex transformation, requiring significant focus and investment in the years ahead as the water and waste water activities of 34 separate local authorities are separated out and integrated into one public utility entity. With pressure on public finances, security of supply and water quality, attention will be focused on implementing an Irish Water, which is capable of securing investment funding, realising operating efficiencies and securing the supply of quality water on a national basis at the earliest possible time.

There is a clear opportunity to establish a new fit-for-purpose organisation, based on international best practice and structured to deliver an efficient and effective service to domestic and non-domestic customers. The single Water Utility Model is recognised in capital markets as an investment grade structure, with funding packages designed specifically for this purpose. Precedence points to the efficiencies that have been delivered in relation to the operating costs of standalone water utilities in the UK ranging from 2-3% per annum in England and Wales and up to 40% over 5 years in Scotland and to the improvement in the quality of service provided to customers.

Alternatively, there is an opportunity to leverage the structure, expertise and governance of an existing State agency. This may provide some marginal acceleration of the implementation timescale, but would not in our view significantly shorten it, since the critical path will be determined by the preparation of essential legislation, the lengthy and complex implementation and planning activities outlined above, and by the speed of the transfer of assets, staff and responsibilities from local authorities to the new utility. The experience referred to above from the UK would indicate that multi-utility models have not been successful due to the difficulties in managing a multi-utility business and the limited opportunity for operational synergies where activities need to be ring-fenced for regulatory purposes.

Whilst our analysis has indicated that there would be a number of potential advantages, in our view these are outweighed by the disadvantages, in particular:

The potential impact on the borrowing power of both Irish Water and the existing State agency;

The constraints on integration and sharing imposed by the requirement to ring-fence the water service from other regulated businesses, and the requirement to maintain separation of the networks and supply businesses in some of the existing State agencies;

The need for a fully focused management team to drive through the establishment of Irish Water over the next six years, managing the transition of activities from 34 local authorities to Irish Water, implementing water charges, and managing an evolving regulatory regime;

The potential implications for Irish Water and the ESOP/ESOT’s of existing Semi States on the transfer in of water assets;

The uncertainty surrounding the future ownership of the state agencies concerned following recent Government considerations to sell some State assets; and

The level of synergies which could be leveraged in the provision of water services by State agencies currently constrained by the separation of their own regulated activities.


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Consequently, on balance, PwC see no compelling reason to assign responsibility for water services provision to another State agency.

Unless these issues could be satisfactorily addressed, based on the factors outlined above, the information to hand and our experience of the water and utilities sector nationally and internationally, it is our recommendation that Irish Water should be established as a separate company in its own right.

As regards other means of potential involvement for the existing State agencies, PwC has recommended elsewhere in this document that Irish Water procures a management partner through a competitive tendering process as soon as possible after January 2012. The role of a management partner would be to support the:

Set up and management of the new organisation;

National initiatives to be undertaken (e.g. billing, metering); and

Design and management of the transition to a fully operational utility.

It is envisaged that a number of the State agencies listed above could be suitable candidates for this role, either on their own or in partnership with the private sector. However, PwC expect that public procurement considerations will dictate that the partner would have to be selected through a public tendering process open to the private sector as well as the State agencies.


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8. Recommended Target Operating Model


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8. Recommended Target Operating Model

Legal and Institutional Framework Irish Water will be a State body set up under statute and in conformity with the Code of Practice for the Governance of State Bodies. The Minister will appoint the Board.

The governance arrangements applying to Irish Water should be consistent with the Code of Conduct for the governance of State Bodies and OECD principles on good corporate governance by ensuring there is an efficient and effective legal and regulatory framework in place, with high standards of transparency and disclosure.

The company will employ its own staff and it is usual to provide in statute for the terms and conditions, including superannuation rights, of the staff who will be designated to transfer to Irish Water from local authorities and the DECLG. The company will also have the freedom to commercially contract for third party provided services (outsourcing) as determined appropriate by the management and Board if necessary.

One of the early tasks of the Board will be to decide on its organisation structure and recruit the Chief Executive and Senior Management team. The remuneration package of the Chief Executive will need to be agreed with the Ministers for ECLG and PER.

The Board's statutory powers will have all the characteristics of a commercial body with powers to borrow, enter into PPPs, joint ventures and set up subsidiaries.

As its staff will no longer be employees of the local authorities, they will not count for public service numbers. As a consequence, the macroeconomic effect of setting up Irish Water will be that public service numbers will reduce thus reducing current obligations on the Exchequer and also Debt/GDP ratio.

The primary legal issues arising and outline of the main legislative changes required to give effect to the recommended organisational form are set out in Section 10 below.


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Summary of Proposed Industry Structure The main bodies and their relationships in the target operating model are shown in Figure 46 below.

Figure 46: The Overall Structure for the Public Utility Model

The roles and responsibilities of the main participants in the sector are summarised in the table below:

Participant Responsibilities

EU Set policy that impacts water services at a pan European level.

DECLG Set national water policy having regard to other national policies (Programme for Government, NewEra etc.)

Set water pricing framework;

Play a national role in determining the legal and regulatory framework for the sector, in line with our EU obligations; and

Look after legislation and policy in relation to the management of the abstraction licensing process.

EPA Environmental regulation of Irish Water

River Basin Management Planning

Abstraction management; and

Testing and monitoring (Irish Water and GWS).

Commission for Energy Regulation (CER)

Economic regulation (price reviews, tariff design, assess efficiency of Irish Water etc);

Ensures that Irish Water provides customers with a good quality service at a fair and efficient price;

Regulating the domestic and non-domestic tariffs;

Funding

Sources

(incl.

lenders)

Suppliers

(incl.

DBO’s)

Environ.

Reg., EPA



End

Customers

Econ. Reg.,

CER

Irish Water

GWS

GWS

GWS

EU


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Protects the interests of consumers by keeping charges as low as possible;

Enables the sector to develop in line with overall national economic and social needs;

Enables service providers to develop in a sustainable and financially viable manner;

Setting challenging efficiency and performance targets for water service providers and monitoring their performance in that regard and taking action, including enforcement, to ensure the overall statutory objectives for the sector are met; and

Making sure the water service providers deliver the best for consumers and the economy and the environment in the long term.

National Consumer Agency

(Planned to Merge with Competition Authority)

To develop a representative view of what water sector customers would expect of the water service in Ireland.

Irish Water Licensed water company, subject to economic, quality of service and environmental regulation;

Provider of water and waste water services to household, commercial and industrial water customers in Ireland (not served by Group water schemes);

Localised catchment management focused on source protection

Abstraction;

Water treatment;

Water conservation;

Waste water treatment;

Water and sewerage network operation;

Management/operation of combined sewer overflows;

Sludge disposal;

Asset operation and maintenance;

Investment planning and delivery;

Asset management;

Billing and collection;

Customer relationship management;

Respond to requests for new connections;

Execution of abstraction management plans;

Water resource planning;

HR;

MIS; and

Obligation to supply water and wastewater services where reasonable and economic to do so.

Group water schemes25 To provide the water services they are expected to provide by their members/customers;

To comply with environmental regulation as determined by the EPA;

Will interact with Irish Water to receive bulk water supplies where these are currently sourced from local authorities; and

Should retain opportunity to convert to or merge in with Irish Water if required.

GWS customers To receive water services from GWS providers subject to environmental regulation from the EPA; and

To pay water charges in line with their GWS providers’ payment policies.

DBO To provide services to Irish Water and the group water schemes as required in their contracts.

25 There may be benefit in allowing group water schemes the option to transfer their assets and operations to Irish Water as

part of the new legislative arrangements.


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Lenders To provide finance to the water sector in Ireland on terms as determined by market conditions.

Customers To receive water services subject to economic, environmental and quality of service regulation from Irish Water; and

To pay water charges in line with Irish Water’s payment policies.

Figure 47: Water Services: Key Roles and Responsibilities

Body Role

OPW Fluvial (and sea) flooding protection.

Local Authorities Local planning consents;

Stormwater management (with NRA);

Storm sewers; Septic Tanks.

Figure 48: Other bodies: key roles and responsibilities

While the tables above will be self explanatory in most respects, there are some ‘boundary’ issues which merit some clarification. For instance, it could be argued that the issue of septic tanks should be transferred to Irish Water on the basis that Irish Water could then better assess which areas should be served with new sewers and would have more control on the potential for groundwater protection. On balance PwC have suggested that this function should remain with the local authorities on the basis that it is not related to a network related public provision of wastewater services and is more linked to housing planning issues than utility management. Equally, the interlinks between Irish Water, the Local Authorities, the NRA and the OPW in respect of run off or stormwater will need detailed consideration, particularly in the context of combined sewer overflows. The allocation of roles in abstraction may also merit further consideration.

The transformation planning for implementing the target operating model will also need to consider the roles of other bodies to the extent they are impacted by the creation of Irish Water including for example:

ESB: through its involvement with certain water courses and reservoirs;

The bodies responsible for management of inland water ways; and

The Department of Agriculture Fisheries and Food.

The implementation planning phase of the new operating model should involve consultation with the CCMA/local authorities and others on the boundaries of roles and responsibilities outlined in Figure 47 and Figure 48. Where some roles remain for the local authorities (for example responsibility for environmental and water quality monitoring and reflecting the principles of the Water Framework Directive), arrangements to support their ongoing activities will need to be put in place in order to achieve the goal of financial sustainability. One option which could be considered would be to introduce an abstraction charge (particularly for larger volume abstractions) which could generate funds to support the local authorities in fulfilling these roles. This would have to be explored in more detail in the implementation phase.


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Regulation A typical independent economic regulator for the water sector would be expected to ensure that water service authorities provide domestic and commercial customers with a good quality service in a fair and efficient and effective manner and offering value for money, by:-

Making sure that the companies provide customers with a good quality service at a fair and efficient price;

Regulating the prices charged to the consumer, based on a set of charging principles which:-

o Protect the interests of consumers by keeping charges as low as possible; o Enable the sector to develop in line with overall national economic and social needs; and o Enable service providers to develop in a sustainable and financially viable manner;

Setting challenging efficiency and performance targets for water service providers and monitoring their performance in that regard and taking action, including enforcement, to ensure the overall statutory objectives for the sector are met;

Making sure the water service providers deliver the best outcomes for consumers and the economy and

the environment in the long term;

Customer consultation on major policy issues e.g. on the criteria for determining the level of charges and changes in the levels of charges.

In the interests of ease of implementation and also cost effectiveness of regulation the role of economic regulator for Irish Water should be allocated to the CER. Given Government policy on the need to rationalise the number of State agencies, and the recommendations of the Review Body for Sate Agencies (McCarthy), PwC formed the view that the best alternative to creating a new regulatory body for the economic regulation of the water sector was to assign the regulatory responsibilities to an existing economic regulator. PwC formed the view that the Commission for Energy Regulation had the closest strategic fit in this regard, as distinct from regulators in the telecoms or transport sectors. The EPA has separate independent functions to discharge and in line with international practice PwC recommend keeping the activities of the EPA – technical and environmental regulation- separate from economic regulation.

One of the initial roles of the CER would be to consider the structure of the initial tariff for Irish Water for when customer charging is introduced and also to establish the regime for economic and quality of service regulation.

Figure 49: Regulation


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The EPA will continue in its role as environmental regulator: however PwC expect it primarily to focus its relationships on Irish Water rather than the local authorities in respect of water services, recognising the reallocation of roles to Irish Water. The EPA will be the environmental/technical regulator of the Group Water Schemes although it will have the option to request that front line regulation be undertaken by Irish Water or even in some circumstances, albeit limited, by the local authorities.

PwC also recommend the establishment of a body with responsibility for the representation of the view of water and sewerage customers, with a similar remit to the Consumer Council for Water (CCW) in the England and Wales system. The role of that organisation is focussed on ensuring the customer complaints are responded to by the water companies. In effect the CCW acts as a further level of escalation for a customer complaint if the customer feels the water company has not responded quickly or effectively. The CCW also lobbies companies on behalf of customers on major local or cross industry water customer service issues. This important role could be taken on by an existing body, for example the National Consumer Agency (NCA). The respective roles of CER and the NCA in relation to customer complaints and other matters would need to be clarified during the implementation planning phase.

Leadership and Coordination PwC would expect Irish Water to have a Board composed of executive and non executive members in order to provide appropriate governance. PwC also recommend the creation of a Board advisory panel in particular during the early years of the creation of Irish Water to allow representation of the views of key stakeholders in Irish Water – this could include for example customer representatives or local authorities.

The structure of the management team will be a matter for the Board and Chief Executive. However, PwC would expect the executive structure to be established based on the roles identified in the organisation chart shown below. These are the roles typically undertaken by the leadership of a water and sewerage company.

On some occasions for smaller water companies the “back office roles” IT, finance and HR can be combined in some form. In the case of Irish Water PwC would suggest the roles remain separated given the volumes of work to be expected (in HR in managing the transfer of staff, and in IT with the IT investment programme that will be required to implement the MIS). There may be benefits in splitting Asset Management and the Capital Programme responsibilities. However it is noted that a number of water companies have these roles combined to support lifecycle asset care policies.

A specific function of Monitoring and Evaluation is shown. This would be the primary contact point for both the economic and technical/environmental regulators.

One further consideration which may need to be borne in mind when structuring Irish Water is the potential for future retail competition (see Section 8).

Figure 50: Typical Organisation Chart for a Water Utility

Managing Director

Operations Services

Asset Mgt.

Engineering Finance IT & MIS

Human Resources

Customer Services &

Billing

Marketing & Comms

Executive Support

Monitoring and Evaluation


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Operations

Consideration of a regional structure In our assessment of the Public Utility Model for Irish Water PwC recommended that the Utility retain some regional focus to supervise and support the local customer interface but also to support river basin management. The theme of a regional structure for some of the operations of Irish Water has been a consistent part of stakeholder feedback and also proposals for the reorganisation of Irish Water in the past. The river basins in Ireland are shown in the figure below.

The ultimate decision regarding the number of operating regions should be made by the management of Irish Water. There could be 3-7 operating regions, if the mid-point were adopted e.g. 5 operating regions they could be:

South Western;

South Eastern;

Western (with part of North Western roughly corresponding to Donegal allocated to Western Region);

Shannon (with the remaining part of North Western allocated to Shannon region - including parts of counties Cavan, Monaghan, Longford and Leitrim); and

Eastern (That part of Neagh-Bann region in the Republic allocated to Eastern Region, including parts of counties Louth, Meath and Monaghan).

In terms of delivery of operations, management should be empowered to develop the model they wish to use for Irish Water.

Figure 51: River Basins of Ireland


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The operational restructuring of Irish Water away from local authority boundaries should be a route to the delivery of operational efficiencies, allowing greater flexibility in workforce management and deployment. Systems to support efficient workforce management which involve, for example, mobile dispatch are all being deployed in leading utilities throughout Europe, leading to reduced numbers of depots, spares and reduced working capital. Such systems would facilitate specialised crews providing a speedy response to problems, drawing on resources nationwide to assist where required.

By reflecting River Basin Management Planning districts in the operational organisation model, monitoring and enforcement, data collection and target setting can be reflected from the RBMPs to the operating region. This will allow greater transparency in reporting and in assessing whether targets can and have been achieved.

There are a number of opportunities open to management regarding delivery models and the use of in-sourced or outsourced labour as demonstrated in the figure below. PwC recommend that the customer billing and collections activity is outsourced as there is likely to be a need to have the activity well established to support the introduction of billing and experience shows there is significant preparatory work to be undertaken with regards to household data capture and cleansing customer records to ensure successful billing. As has been identified elsewhere in this report, other state agencies may feel they have the experience and competencies to compete to run some of the activities Irish Water may need to outsource.

Operating Distrct Management

Water Treatment

Outsource elements to Contractors or

LA's

Own staff (e.g. mobile mtce)

DBO's

Wastewater Treatment


LA's

DBO's

Own staff e.g. mobile mtce

Water Resources Water Networks


LA's

Own specialist teams (leakage)

Framework contracts

Cooperation with GWS

Wastewater Networks


LA's

Own specialist teams (jetting)

Framework contracts

Sludge

Specialist Subcontractors

Quality, Labs etc

Figure 52: Operations Services


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Asset Management and Capital Programme Most of our stakeholder soundings indicated that there will be continued long term investment in the water and wastewater infrastructure in Ireland to address sustained under investment in the assets to date. The current WSIP 2010-2012 and the Value for Money review on the previous WSIP highlight these issues. There is evidence to suggest an immediate backlog of required investment of the order of €500 million and in addition there are the requirements to fulfil obligations under the Water Framework Directive.

The immediate focus will be on compliance with ECJ rulings on water and wastewater treatment. However, there will be an increasing focus on water conservation and strategic water resources. Other issues include a significant number of small WWTP’s which are not compliant with treatment standards, localised issues of quality and security of water supply. Investments will also be needed to drive efficiencies in the business.

As part of its operating model, Irish Water will need to deploy leading sector practices in terms of capital expenditure allocation and delivery, it will also need to develop leading practice asset management to be able to deliver the required investment and efficiently and effectively as possible.

A typical expected process for asset management planning and approval is shown below.

Figure 53: Typical Asset Planning and Approval Process

Irish Water will require heavy initial investment in collecting and maintaining asset information with a visible asset register being built and maintained including asset performance, condition and criticality grading according to standard methodology. In addition there will also need to be a national high quality, reliable and granular GIS system for both water and wastewater assets (mainly underground/invisible assets). This would need to be linked to the River Basin Management GIS and the Development Planning GIS systems. Local Authority Development Plans and Regional Development Plans would form a key input as would National Spatial Plans (Hubs/Gateways) as would inputs from other agencies such as the IDA/Enterprise Ireland and research agencies such as Forfás.

The management team for Irish Water should also have commercial freedom to determine which aspects of the capital expenditure and asset management process they outsource to third party providers. As a typical minimum, setting the strategy and investment planning is retained in-house by utility companies in the water sector – other aspects of delivery are outsourced or provided on a mixed model.


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Customer Service and Billing Customer service and billing will be a new activity for Irish Water in whatever organisational form it takes. The model for customer billing should be based on the following principles:

Irish Water would have a Customer Charter outlining its service level commitments;

There should be a single point of contact for all customers for billing and technical queries;

Customer Service Representatives (CSRs) may specialise in dealing with financial and technical queries;

Complete record of all interactions with the customer to be available rapidly to the CSR including notes of

all phone conversations, emails, scanned letters, payment history and this to be kept up to date in real time (this will require investment in systems);

CSR’s specialising in dealing with financial queries to be empowered to close off as many queries on the first contact as reasonably possible. This may include discretion to waive small items of payment;

Technical staff in the field or office that are approached by customers to refer the customers to the central process. Every contact with the customers to be logged and handled in this way, even for rural locations;

CSR’s dealing with technical queries to have visibility on the GIS, real time operating information, workflow management systems as well as whether complaints/queries have been made by customers for related or the same issue;

Centralised and integrated customer contact centre (note with application of advanced ICT it is not necessary for all CSR’s to be in one location to implement a centralised and integrated contact centre); and

The customer experience is that a high proportion of issues will be resolved satisfactorily on the first contact. Other issues not resolved on first contact will be tracked through the system and the customer kept informed on progress.

In addition the quality of customer services delivered by Irish Water should be regulated by the economic regulator (possibly using incentive mechanisms if the regulator felt that was to be appropriate.) The customer representative body will also have a role in monitoring the customer service performance of Irish Water.


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Funding Requirements and Financial Arrangements For the Public Utility Model a high level assessment was undertaken in relation to what the financial position of the business might be and in particular the likely funding requirements, based upon a number of assumptions made and sensitivities chosen. Given the commercially sensitive nature of aspects of this assessment, some of the specific assumptions and the detailed findings have been redacted from this section of report.

General Assumptions A number of assumptions have been made as part of the high level assessment:

In all cases an assumption has been made in the models that the following funding requirement26 will be covered:

o The operating costs of Irish Water as a utility; o Funding for capital expenditure and the replacement of existing assets; o Cost of any borrowing to fund Irish Water.

A 90% collection rate has been assumed in terms of any domestic and non domestic charges.

New OPEX costs have been assumed in relation to leakage detection / sampling compliance, the Ringsend DBO, the North Dublin Waste Water Treatment Plant and the Greater Dublin Strategic Water Supply projects. These new costs total €65m per annum and come on line on a staged basis between 2014 and 2020.

Transitional costs are included in OPEX between the period January 2012 and June 2013. These costs are to fund activities including hiring a management team and setting up a programme office for the transition. Other new OPEX costs included in the model include the funding of a regulator from 2014 and the transfer of some departmental staff to Irish Water.

An OPEX backlog, previously referenced in the Finance section of Chapter 3, has been included in the model totalling €60m. This backlog has been spread over a 3 year period 2015-2017.

OPEX efficiency rates of 2%, starting in 2015 for 11 years, and 1% for the remainder of the model.

This appears to be consistent with our analysis of the saving made by England and Wales water companies (see Section 3) and Scottish Water (see Appendix 7). The OPEX starting base used was the 2011 budget, adjusted for inter-authority contributions;

Meter reading costs have been included in the model.

Additional OPEX efficiencies relating to the introduction of metering;

For capital expenditure PwC has assumed:

o An annual CAPEX requirement of €600m before efficiencies and metering programme.

o Efficiency gains of 1% have been assumed from 2014 onwards. These efficiency gains relate to having a Water Utility in place which has central control of all assets and investment decisions; can operate across local authority boundaries; can leverage the combined spend of the CAPEX program to negotiate supplier rates and has dedicated staff with specific expertise in managing capital investments. The accumulative effect of this by 2030 is 17%. The accumulated efficiency rate is applied to the base CAPEX spend of €600m in 2011. A

26

The funding requirement is an estimate of what the utility will need to support its OPEX and CAPEX activities. Our scope

of work does not specifically include the evaluation of how that funding requirement should be met (government support,

customer charges etc).


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spend of €500m, spread over 5 years from 2015 to 2019, to address part of the CAPEX back log for Irish Water.

o Metering capital costs and replacements costs.

All numbers are expressed in real terms.

All valid local authority water and waste services related assets and liabilities will transfer to Irish Water (see Chapter 3: Assets & Liabilities). The value of the assets transferred will be based on the regulatory capital value.

The number of domestic households has been derived based upon the 2010 census results for non-vacant dwellings multiplied by 77% (an extrapolated percentage of houses connected to public mains based upon the 2006 census results). In addition it has been assumed that the number of domestic households will start to increase from 2014.

In relation to VAT;

o PwC has not made any assumptions in relation to the rate of VAT chargeable for water and waste water services. The provision of water by local authorities is an exempt activity as a result of an EU derogation obtained by Ireland. As a result, the local authorities are not entitled to reclaim relief on input VAT on their purchases.

o As the derogation is only available in situations where water is provided by local authorities,

Irish Water, as a taxable entity, would be required to charge VAT for water services. The rate of VAT applicable would be determined by the Department of Finance. Irish Water would however be entitled to reclaim input VAT on their purchases.

o For the purposes of the scenarios presented, as we do not have a detailed breakdown of the

input VAT paid by the local authorities in recent years, we have not assumed any recovery of input VAT. Any such recovery of input VAT by Irish Water will reduce the level of funding required.

Key Findings The key findings are as follows:

Depending upon how the funding requirements of Irish Water are met, there will be significant variations in any resulting charges for customers.

The financial analysis undertaken also indicates that under certain scenarios, and subject to certain assumptions, Irish Water could become a self-financing utility as early as 2018.

One of the primary tests for determining whether or not Irish Water would be treated as on or off the General Government Balance Sheet (GGB) is whether the sales generated by Irish Water (excluding any Government grant income or subsidies) would be more than 50% of the operating costs including depreciation and interest. We sought to apply this test to a number of the scenarios explored, and in each instance the percentage of sales to operating costs was above the 50% threshold. Consequently, while the CSO / Eurostat will make the final determination in this regard, and may indeed take other tests/factors into account, there would nevertheless appear to be indicative support for the contention that Irish Water’s borrowings could be deemed to be outside the GGB. This benefit would also extend to any liabilities transferred from the local authorities to Irish Water as discuss in Chapter 3: Assets & Liabilities.

Staffing The management team of Irish Water will determine the staffing and skills required for the new organisation. Following a detailed staffing audit and managed process, the appropriate staff from the local authorities will


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transfer to Irish Water with recognition of relevant labour law requirements. Irish Water Management may determine that the transfer of staff required from local authorities will be carried out on a phased basis. A key principle for the staff management in Irish Water is that the organisation will have the freedom to hire appropriately from the open market at market rates on a basis similar to other semi-state organisations. It would be expected at the outset, for example, that the specific skills required for the new management team would need to be recruited from the market, with existing candidates from national or local government also free to apply. All new staff employed will be employees of Irish Water. As regards staff numbers, clearly the ultimate requirement will depend on many factors, not least of which will be management’s strategy regarding outsourcing. Taking into account the variety of resourcing strategies employed by UK water companies, benchmarks (see Section 3) would suggest that total WTE numbers required by Irish Water, when Irish Water has fully taken over all water services from the local authorities (i.e. in 2018), will be significantly lower than the 4,278 deployed today. Reduction in staffing requirements would be achieved over the period to 2018 by designing a fit-for-purpose operating model; eliminating all existing duplication of activity; consolidating work locations and creating centres of expertise; driving synergies through the delivery of a national as against local service; leveraging technology to automate activity and remotely manage operations; rationalise roles and responsibilities of staff; leveraging flexibility of external expertise; etc. The actual staffing numbers required will need to be determined by Irish Water management during the initial set-up phase. In the context of reducing headcount and constraints on expenditure in the local authorities, Irish Water will be able to present opportunities not otherwise available to staff dedicated to water services. Increased specialisation will provide routes for career development as well as enhancing job satisfaction. Standardised HR structures and methodologies of operation will allow for sideways moves for interested personnel where the individual would like to take advantage of this. An increased emphasis on training and development and the introduction of new systems at an accelerated pace will provide both challenges and opportunities. As Irish Water will be a public sector body, considerable protection will be provided by law for staff transferring to Irish Water from local authorities. The smooth transition of staff from local authorities to Irish Water will involve discussions with staff and the unions. Potential transition issues may include:

Full and complete identification of water staff within the local authorities;

TUPE (statutory transfer) issues associated with bringing together parts of 34 organisations into a single organisati0n;

Comparability of similarly titled roles across local authorities;

Harmonisation of the terms and conditions for new Irish Water employees and local authority transferees; and

Staff concerns regarding personal terms and conditions, pension entitlements, location, etc. It may also be desirable that some staff currently engaged in the regulation of Group Water Schemes be transferred from local authorities to the EPA, once the new regulatory arrangements are in place.

Marketing and Communications Irish Water should have a strong brand presence similar to the retail arms of gas, electricity and telecoms utilities in Ireland. As part of marketing and communications Irish Water will have a requirement to ensure customer awareness of:

Water conservation;

Need for payment for water services; and

Cooperation with the metering programme.


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In addition the organisation will want to develop communications strategies for response to emergency situations or issues of water demand exceeding supply in any area.

MIS/IT Experience of the water industry elsewhere suggests that strong centralised MIS will be required that will be supported by state of the art ICT systems. This is an essential ingredient to support a professional customer service, to drive efficiency in operations and capital expenditure, to generate procurement savings, to allow standardisation of policies and procedures (Standard Operating Procedures – SOPs), and to report to the regulator(s).

Figure 54: Typical water company MIS systems structures

Integration into Regional and Local Planning Irish Water would take account of the Local Development Plans and Regional Planning Guidelines in assessing its investment priorities. It would also be appropriate to provide an ongoing forum where local authorities can input to the asset management process of Irish Water and particularly the priority and timeline for key schemes to support local and entrepreneurial development, as the planning horizons for Irish Water may be longer than the current three year cycle for the WSIP and one year cycle for the RWP. The current mechanism for the annual review of the WSIP may provide a framework for this. In addition, state agencies such as IDA, HSE and


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others should be consulted in the capital investment prioritisation process and have a forum where they can raise urgent requirements such as responding to a potential significant inward investment for job creation or public health protection measures.

The process by which Irish Water would itself be subject to planning regulations (e.g. construction of treatment plants, pumping stations and road openings for laying and/or repairing pipes) is an implementation issue to be considered in detail at a later stage.

The Role of Competition in the Provision of Water Services During the course of our discussions with key stakeholders in relation to the reform of the Irish Water sector the matter was raised as to whether the provision of water services in Ireland should be based on competitive markets.

Traditionally the supply of water services has been considered to be monopolistic in nature, largely because of the large capital investments involved in developing water sources, treatment and transportation. Duplication of such investment for different suppliers would be an inefficient use of resources.

Competition could take two forms:

1. The introduction of competition “in the market” in which there may be competing water sources, treatment companies or retailers selling water services to customers; or

2. “Competition for the market” where there is a competition for a contract to provide water and/or sewerage services. This second approach is commonly used in the water sector with PPP contracts27 used

globally, the concession models used in France and the DBO contracts that are in place and operating in Ireland currently.

In recent years limited competition “in the market” for water and sewerage retail services have been introduced in Scotland for non-household customers (who can chose from three alternative water supply companies in addition to Scottish Water) and there is a number of upstream water rights trading schemes operating in Australia28, the US and Southern America.

Generally the application of a competitive model is not widespread as yet. There is as yet no drive for the introduction of competition into water service provision from the EU. It is being discussed for water companies in England29. However, firm proposals are not in place as yet.

Given the challenges facing the water and sewerage sector in Ireland at present (with a focus on supporting the introduction of charging, introducing regulation to ensure cost efficiency and also ensuring funding to address the investment challenge), PwC do not consider that the introduction of competition into the market should be regarded as a priority at this time. However, our model will bring a single focus to the sector which will be regulated independently, allow for greater transparency, enable comparisons to take place with performance in other countries and also internal comparisons. PwC suggest, that once Irish Water is well established as a self funding utility the Government and Regulators may wish to assess international experience of the introduction of competition in water and sewerage services to identify whether Ireland could benefit from competitive markets in the water sector at a later date. With this in mind, PwC recommend that, when undertaking the detailed design of the new organisational structure for Irish Water, the possibility of future retail competition should be taken into account.

27 Public Private Partnership: for example the Sofia Water contract described earlier in this report. 28 See for example: http://www.environment.gov.au/water/publications/action/case-studies/murray.html#trade 29 It is our understanding that the Welsh Assembly is yet to be convinced of the benefits of water competition for Wales, see

for example http://www.waterbriefing.org/index.php/home/regulation-and-legislation/item/3842-welsh-assembly-publishes-strategic-policy-position-statement-on-water. Ofwat’s assessment can be found at http://www.ofwat.gov.uk/competition/review/

http://www.waterbriefing.org/index.php/home/regulation-and-legislation/item/3842-welsh-assembly-publishes-strategic-policy-position-statement-on-water

http://www.waterbriefing.org/index.php/home/regulation-and-legislation/item/3842-welsh-assembly-publishes-strategic-policy-position-statement-on-water


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Competition for the market and the procurement of major works, capital delivery, operations and also relating to customer services (billing call centres etc) could be an important feature of Irish Water. Procurement of services competitively will allow access to private sector expertise and also the tender process in such cases should also give indicators of the efficient level of costs. The UK and parts of continental Europe have relied heavily on such outsourcing models.

The option therefore of creating Irish Water as a competitive company in a liberalised water industry is not taken forward in this study for further consideration, as the sector has other challenges which have largely been addressed by using the Public Utility Model in other jurisdictions.


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9. Transition Strategy


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9. Transition Strategy

The preferred Public Utility Model represents a major change with significant implications for the water industry in Ireland and its many stakeholders. Clearly, the transition approach adopted will be crucial in successfully achieving the objectives of the reform. Some of the key challenges faced include:

Ensuring that the implementation of the Public Utility Model secures the benefits of putting the model in place;

Ensuring that Irish Water is appropriately staffed in terms of numbers and skills with a mix of existing local authority staff and external expertise;

Ensuring the smooth transfer of staff from local authorities (and other bodies, where appropriate) to Irish Water;

Maintaining the detailed knowledge of local infrastructure currently held by local authority water services staff;

Ensuring the continuity of effective local service provision, including support of the Group Water

Schemes;

Achieving the required shift in managerial and staff culture from a local authority environment to a culture with the features of a commercial entity;

Integrating the various processes, systems, ways of workings, cultures etc;

Minimising the risks associated with national dependence on a single company for continuity of public utility services; and

Ensuring that mechanisms are put in place to identify and address legacy issues such as historical commitments on tariffs agreed with large customers, existing loans and other liabilities, regularising land purchase, wayleaves and other property issues.

The transition strategy recommended is a phased approach leading to a full transfer of water services from the local authorities to Irish Water over a period of up to 6 years. Overall, PwC envisage a step by step change at a pace driven by Irish Water management (who may wish to effect the implementation over a shorter timeframe), based on the objective of achieving maximum efficiencies and achieving a self-funding status for the water service as quickly as is practical.

The phased approach is recommended over a ‘Big Bang’ approach, as it allows Irish Water design, build and implement a ‘fit for purpose’ organisation structure to deliver water services without the constraints of the existing local authority model. It also allows Irish Water to control the development of water services during the transition period through agency arrangements with the local authorities. Consequently, it is most likely to deliver efficiencies earlier, reduce the risk of failure and maintain security of supply throughout the transition period.

The key phases suggested are as follows:

Phase Task Name

20162012 2013 2014 20172015

Q3 Q3 Q2Q1 Q1 Q2 Q4Q3 Q1Q4 Q3Q4 Q4Q1Q3 Q2 Q4Q3Q2Q4 Q2Q1Q2 Q1

1PMO - planning and

preparation.

2 Set Up and Launch Irish Water

3 Interim Agency Arrangements

4Phased Trasfer of Staff and

Operations

5 Utility Model Fully Operational

Figure 55: Phased Approach


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The timescales proposed are based on the view that 18 months is the minimum period within which the required legislation could be enacted and the necessary interim agency arrangements with local authorities could be put in place. Following this a period of stability is required to enable Irish Water to establish its operational capabilities in terms of organisation, processes and systems, and to be in a position to commence the transfer of staff and operations from the local authorities. It is envisaged that this transfer would take place on a phased basis over a three year period to ensure a smooth transfer of skills expertise and knowledge. However, the pace of this transition would be a matter for Irish Water, the Department and the local authorities.

The key features of the strategy proposed are:

Pending the enactment of the enabling legislation establishing a corporate body, The Minister would appoint an interim board in Q1 2012 to commence making the necessary preparations to establish the formal statutory company. From that date it would (supported by a Programme Management Office (PMO)):

Plan, design and commence implementation of the long term organisational, governance and staffing arrangements, including arrangements for the appointment of a Chief Executive;

Take over responsibility for the metering project and the customer billing project;

Take over other DECLG responsibilities (national projects and strategic planning)

Consult regarding the interim agency arrangements with the local authorities which would come into effect on 1st July 2013 (see below);

Assist the DECLG with the preparation of a new Water Services Bill to establish Irish Water on a statutory basis; and

Select a Management Partner to support the management of Irish Water through the set up and

initial phase of operations.

It is envisaged that the PMO would become part of Irish Water on its establishment;

Irish Water would acquire statutory responsibility for water services on 1st July 2013 following enactment of the Water Services Bill. From that date:

Local authorities would be appointed by Ministerial Order as agents of Irish Water with responsibility for operational and maintenance services for a period of up to 5 years;

Ownership of water services infrastructure assets would transfer by Ministerial Order from local authorities to Irish Water;

Irish Water would manage and monitor the performance of the local authorities under the agency arrangements;

Irish Water would continue to build up its own staffing and capabilities; and

The terms and conditions for statutory transfer of staff from local authorities would be finalised. Existing terms and conditions would apply unless agreed otherwise;

During this period, Irish Water would also put in place regional management structures based on the River Basins, and would incorporate the staffing requirements for regional management and operations into the local authority agency arrangements;

Commencing on January 2015 it is envisaged that Irish Water would, by Ministerial Order(s), take over the water operations of the local authorities on a phased basis. The pace of transition of operations, and the unwinding of interim agency arrangements, would be determined by Irish Water management, in consultation with the DECLG and local authority management based on:

Progress in building Irish Water’s own capacity, resources and systems;

Progress in the development of national solutions;

Priority opportunities available to achieve economies of scale; and

The performance of the local authorities in meeting their obligations under the Agency arrangements.


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It is envisaged that transfer of all water services activities from local authorities to Irish Water will have been completed by 1st January 2018 at the latest. However, Irish Water would have the possibility of entering new longer term agreements with the local authorities for specific services.

During the period of transition, the local authorities will continue to play an important role. This will include:-

Entering into agency arrangements to provide quality and compliant services to Irish Water, including service changes as required, with the attendant additional governance burden;

Supporting the due diligence of the existing structures to be carried out by Irish Water – including assets, staff, funding commitments, expertise, systems, locations;

Cooperating in the introduction of improvements in systems and procedures across the water service;

Supporting strategic planning and adopt the culture and operating procedures to operate cross county bounds;

Cooperating in transition planning;

Planning for phased re-deployment or transfer of staff to Irish Water;

Ensuring effective knowledge transfer where required – especially in relation to local needs;

Ensuring business as usual – continuity of quality water service;

Putting processes in place to track and monitor services provided and expenditure incurred, for the purpose of invoicing Irish Water; and

Supporting drives for cost efficiency e.g. procurement, leverage of central services.

In order to achieve the timescales set out above, PwC would recommend that:

The PMO should be set up as soon as possible to drive the various activities required to set up Irish Water. The transition activities would be organised in a series of workstreams, each potentially involving a number of organisations, such as the DECLG, the local authorities, the EPA, etc. The workstreams would include, for example:

Legal: drafting new legislation to establish Irish Water as a new body and defining how existing legislation would need to be changed, and what revisions to statutory duties for the bodies included in the creation of Irish Water would be required;

Governance: workstream to develop and finalise implementation of the industry governance in particular supporting the implementation of the regulatory regime and upstream governance arrangements;

Organisational: creating and implementing the structures for Irish Water Board, Management team and organisation;

Human resources: identifying the short and medium term staffing requirements for Irish Water, and developing strategies as to how they will be met;

Stakeholder management: given the complexity of potential asset and people transfer from the local authorities and other bodies (e.g. the DECLG) to Irish Water a workstream will be required to manage and control that process;

Systems: specification and sourcing of the IT/MIS systems and IT service providers required in the initial of Irish Water operations;

Business Strategy / Planning: putting in place initial business strategy policies and plans for Irish Water; developing resourcing strategy and selecting a management partner;

Finance: identifying and implementing the financial systems, processes and controls to effectively manage and report upon the performance of Irish Water; define and establish finance function structure;

Operations: documentation of scope and quantum of existing local authority operations and maintenance services; agreeing general principles for service levels and payment with 34 local authorities; concluding interim agency arrangements with 34 individual local authorities; defining key processes and procedures for Day 1 operations under interim agency arrangements;

Asset Management; selecting asset valuation partner, completing due diligence on local authority assets and liabilities; agreeing asset transfer valuation with the local authorities, DECLG and other funders; completing due diligence on DBOs ;


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Environmental Regulation: defining and agreeing EPA role and responsibilities; defining and agreeing changes to environmental monitoring and reporting processes and systems;

Economic Regulation: defining and agreeing CER water regulatory role and responsibilities;

Defining and agreeing economic and financial regulatory reporting processes and systems;

Facilities: Acquiring and fitting accommodation and facilities ready for occupation; and

Programme Management: Managing and coordinating the overall transition programme.

A Management Partner should be procured through a competitive tendering process. The partner could be in place by January 2013. The partner organisation should be experienced in managing utilities and in particular in managing utilities in the water industry. It is anticipated that the partner would provide an interim management team, comprising primarily second line management resources to support the Irish Water Executive Team in managing Irish Water for a period of up to 5 years from January 2013. Its role would be to support the Executive Management Team in:

Set-up of the new organisation and ensuring operational readiness by 1st July 2013;

Management of Irish Water in the transition period to 1st January 2018;

Implementation and management of the customer database;

Implementation and management of billing and metering;

Implementation and management of other national initiatives;

Implementation and management of back office facilities required for Irish Water including finance, Procurement, HR, IT etc.;

Design and implementation of the new operational approach for Irish Water including: regional structures, the role of outsourcing, skills requirements etc.;

Asset management, including the initial definition of the asset register for Irish Water in support of asset transfer;

Strategic planning for water services infrastructure;

Identification, planning and managing the delivery of efficiencies in the infrastructure, systems and services of Irish Water;

Supervising and coordinating the operations of the local authorities operating under agency arrangements;

Building Irish Water’s own capabilities; and

Managing the phased transition of staff and operations from local authorities to Irish Water in the period from 1st January 2015 to 31st December 2017.

An outline implementation plan is set out below. A more detailed plan will be provided in the next phase of the consultancy engagement.


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Figure 56: Implementation Plan

2012 2013 2014 2015 2016 2017 2018

Key Milestones Jan July Jan July Jan July Jan July Jan July Jan July Jan July

Project Management Office (PMO) Established x

Interim Board and Management Team appointed x

Irish Water CEO in place x

Other Key Irish Water Executives in Place x

Tender for Management Partner Issued x

Management Partner in Place x

Regulator appointed x

Regulator's Water Team in Place x

Metering Programme Commenced x

Legislation in Enacted x

Irish Water acquires statutory powers and responsibility x

Agency Arrangements in place with Local Authorities x

Assets Ownership Transferred to Local Authorities x

Metering Programme Completed x

Non- Domestic Billing commenced x

Phased Transfer of Staff and Operations to Irish Water Begins x

Transfer of Staff and Operations to Irish Water Completed x


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10. Implementation Considerations - Legal


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10. Implementation Considerations - Legal

Primary Legal Issues The primary legal issues arising from the Public Utility Model, and which will need to be addressed as follows, are:

Primary legislation will be required:

to establish Irish Water as the sole national water services authority30,

to establish the economic regulator, and

to clarify responsibilities and the relationships between the various actors in the Irish water sector.

The legislation should contemplate and provide for the transfer to Irish Water the water sector assets and liabilities, and the water sector employees, of the local authorities; and

The establishing legislation must provide for elements of the transitional regime recommended.

Primary Legislation

Establishing Irish Water The legislation establishing Irish Water will revise the arrangements contemplated by the Water Services Act 2007. Other water services legislation will also need to be amended to transfer functions to Irish Water. 31

A new Irish Water will have to be established as a body corporate (either a statutory body or a statutory company). More recently commercial state bodies corporate have been established as, or converted into, companies incorporated under the Companies Acts32 but subject to the specific legislation33 and such a corporate form would be well recognised and understood. The legislation would provide for setting up of a private or public limited company incorporated under the Companies Act, the shares of which would be held by, or on behalf of, one or more Ministers of Government and/or an agency such as NewEra.

The principal functions (objects) of Irish Water would be set out in the legislation which would require that those objects and other relevant provisions of the legislation be reflected in the constitutional documents of the new company. In line with equivalent legislation, the legislation could provide that these documents and any amendments to them, and the exercise of certain powers by Irish Water (e.g. borrowing powers), would be subject to prior approval by one or more Ministers34.

Such legislation would also provide for the responsibilities of Irish Water in terms of the services being provided, including in respect of its obligations under legislation such as the Water Framework Directive.

Given that this entity would be the subject of specific legislation, one issue that should be considered is the degree to which such specific legislation should restrict the powers of the new entity to carry on activity other than water services. To the extent such restrictions are included in primary legislation, then they would only be

30 While PwC note that Section 27 of the Water Services Act 2007 contemplates the Minister prescribing a person

performing a function, PwC did not believe that this approach would be advisable or possible given the overall restructuring inherent in the utility proposal. This section may have relevance in the transitional period.

31 E.g. Water Services Act 1942 32 E.g. EirGrid plc 33 Such entities are generally described as “statutory companies”. 34 Such approval would be in addition to any approvals or requirements contemplated by the Companies Acts.


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capable of being changed by new primary legislation – this may be thought to be unduly onerous. It may be desirable, with a view to the longer term, to provide in the legislation for Irish Water to have a power to engage in any business activity with the prior Ministerial approval.

Irish Water would also need to be given the powers currently available to local authorities as water service authorities in order to undertake its functions (e.g. powers to install pipes, powers to charge extended to domestic supply etc).

Establishing the regulatory framework Under the Public Utility Model the legislation will provide for the role of economic water regulator by conferring additional statutory functions on the Commission for Energy Regulation, perhaps restyled as the “Commission for Utility Regulation”. 35 The environmental regulator of Irish water will be the EPA and Irish water will be subject to water quality regulations by the EPA. A consideration that will need to be taken into account will be the relationship between such an economic regulator and the environmental regulator (the Environmental Protection Agency) and to what extent each such regulator should take into account the views of the other regulator. The experience of the inter-relationships between other regulators with shared or concurrent responsibilities for a single statutory process, such as the role of the EPA and An Bord Pleanála in respect of land use and development, may be of assistance in this context. PwC would expect the EPA would also have environmental oversight of the Group Water schemes.

PwC would expect that the regime for economic regulation of Irish Water would include the following elements (which are common in utility regulatory regimes):

the delineation of overall functions of the regulator and its duties as to the manner in which its functions are carried out and any matters to which it must have regard in carrying out those functions;

a licensing regime under which the regulator would grant a licence to and monitor the performance of the licence by Irish Water;

provision for the regulation of the terms and conditions (including the tariffs) of services to be provided by Irish Water;

a regime for infrastructure approvals (which will be superseded by the strategic infrastructure regime

where relevant);

the regulator’s role in relation to security of supply and in relation to emergencies affecting supply;

the regulator’s role in relation to the protection of customers in their dealings with Irish Water which may include monitoring service provision and, at the option of the customer, the resolution of disputes between the customer and Irish Water. The regulator could also have a role in setting measures to protect vulnerable customers;

the regulator’s powers to give directions, modify licences etc.; and

any residual power of the Minister to give general policy directions to the regulator.

Clarification of responsibilities and allocation of roles This, to some extent, has been addressed above. There will be a number of different actors in the water sector and the rights and responsibilities of each will need to be clearly delineated in the legislation. The other issue is to ensure that each responsibility is imposed on the person best placed to assume and manage such responsibility, and this report contains recommendations in regard to this issue.

That said, it must be recognised, particularly in the context of regulators, that an over-rigid demarcation could be to the detriment of overall supervision. The views of the environmental regulator are likely to be highly relevant to the considerations of the economic regulator and vice versa. The legislation needs to provide such a framework whereby such views can and will be taken into account sensibly.

It seems unlikely that the current role and powers of the Minister in respect of the water services would be undertaken in the future by any one person. The creation of Irish Water would address in part the aspects of the role directed at coordination of a sector with multiple water authorities. The Minister would retain only the

35 See the Gas (Interim) (Regulation) Act 2002 as an example the legislation extending the functions of CER to become the

regulator of the gas sector.


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roles of policy and legislation. Some other aspects of the Minister’s role would be undertaken in the future by the economic regulator and/or the environmental regulator of the sector.

Statutory Transfer The legislation establishing Irish Water will need to provide for the transfer to Irish Water of the assets and liabilities of the local authorities in respect of water services and for Irish Water to take over the employment of employees of the local authorities engaged in the water services business or for a framework to facilitate such a transfer36.

In the present circumstances, where the local authorities carry on many other activities and have assets, liabilities and employees outside the scope of the water services area, it would be desirable to facilitate in the legislation one or more transfer schemes which would specify or describe the assets and liabilities (whether by exclusion or otherwise) and employees to transfer. Such plans would become effective on a date or dates to be specified by the Minister by order. Such an arrangement would provide clarity to all parties as to what was being transferred and, if wished, could be adapted to facilitate a transitional arrangement whereby Irish Water would take a transfer of operational assets, liabilities and employees of the local authorities on a phased basis (e.g. river basin area by river basin area) when it was in a position to absorb those businesses and undertake them directly, discontinuing the transitional agency arrangements with those local authorities.

It is usual in the case of statutory transfer between state agencies/bodies for the terms and condition of transferring employees to be fully preserved (save to the extent they are agreed to be changed with the recognised trade unions and staff associations concerned) and for there to be considerable consultation with employees and their representatives well in advance of the transfer.37

Transitional Regime While it is possible that the foregoing might be effected in one step, it is more realistic, to expect that there will be some transitional arrangements. Such arrangements could include having the local authorities continue performing the functions but on an agency or similar basis for Irish Water. The terms of such an agency would need to be contemplated by the legislation and the rights and responsibilities of each party during such transitional period set out, including:

The right for Irish Water to approve works (other than presumably emergency works);

The funding relationship;

The power of Irish Water to give directions, and to step-in, in relation to how the functions by the local authority are being carried out; and

The limits of the responsibility of the local authorities having regard to their status as agents for so long as they are acting within the scope of their authority as such.

36 Such as by means of a scheme affected pursuant to the legislation. 37 The protections afforded to employees on such a transfer would usually exceed those afforded by TUPE legislation


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