Standing Orders under Section 60(3) of the Northern Ireland Act 1998 have provided for the establishment of the Public Accounts Committee. It is the statutory function of the Public Accounts Committee to consider the accounts and reports of the Comptroller and Auditor General laid before the Assembly.

The Public Accounts Committee is appointed under Standing Order No. 56. It has the power to send for persons, papers and records and to report from time to time. Neither the Chairperson nor Deputy Chairperson of the Committee shall be a member of the same political party as the Minister of Finance and Personnel or of any junior minister appointed to the Department of Finance and Personnel.

The Committee Members were appointed by the Assembly on 24 January 2000. They will continue to be Members of the Committee for the remainder of the Assembly, unless it orders otherwise. The Chairperson Billy Bell and Vice-Chairperson Sue Ramsey were previously appointed on 15 December 1999. The full membership of the Committee is as follows:-

• Mr Billy Bell (Ulster Unionist Party, Lagan Valley) (Chairperson)
• Ms Sue Ramsey (Sinn Fein, Belfast West) (Deputy Chairperson)
• Ms Pauline Armitage (Ulster Unionist Party, East Londonderry)
• Mr Roy Beggs Jnr (Ulster Unionist Party, East Antrim)
• Mr Mervyn Carrick (Democratic Unionist Party, Upper Bann)
• Mr Seamus Close (Alliance Party, Lagan Valley)
• Mr John Dallat (Social Democratic and Labour Party, East Londonderry)
• Mr David Hilditch (Democratic Unionist Party, East Antrim)
• Mr Donovan McClelland (Social Democratic and Labour Party, South Antrim)
• Ms Jane Morrice (Northern Ireland Women's Coalition, North Down)
• Mr Danny O'Connor (Social Democratic and Labour Party, East Antrim)

All publications of the Committee (including press notices) are on the internet at archive.niassembly.gov.uk/accounts.htm

All correspondence should be addressed to The Clerk of the Public Accounts Committee, Room 371, Parliament Buildings, Stormont, BELFAST, BT4 3XX. The telephone number for general inquiries is: 028-9052-1532. The Committee's e-mail address is: michael.rickard@niassembly.gov.uk

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Introduction

Our Principal Conclusions and Recommendations

General Findings

The Accuracy of Water Service's Estimate of Leakage

The Action Taken by Water Service to Reduce Leakage to an Acceptable Level

Robustness of Water Service's Calculation of the Economic Level of Leakage

The Action Taken by Water Service to Postpone the Need for New Sources

The Action Taken by Water Service to Encourage Customers to Use Water More Efficiently

Proceedings of the Committee Relating to the Report

Minutes of Evidence (Thursday 28th February 2002)

Mr N Hamilton, Permanent Secretary of the Department for Regional Development
Mr R Martin, Chief Executive of the Water Service
Mr J Kelly, Director of Operations of the Water Service

Provision of Additional Information from Mr Nigel Hamilton,
Permanent Secretary of the Department for Regional Development

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1. The Public Accounts Committee met on 28 February 2002 to consider the Comptroller and Auditor General's report on "Water Service: Leakage Management and Water Efficiency" (NIA 49, Session 2000-2001). Our witnesses were:

• Mr Nigel Hamilton, Accounting Officer, Department for Regional Development
• Mr Robert Martin, Accounting Officer, Water Service
• Mr John Kelly, Director of Operations, Water Service
• Mr John Dowdall, Comptroller and Auditor General (C&AG)
• Mr Leo O'Reilly, Treasury Officer of Accounts, Department of Finance and Personnel

2. Treating water for public consumption is expensive and losing treated water through leakage or inefficient use by customers is a waste of a valuable resource. Water Service loses some 250 million litres of water a day as a result of leakage. This is equivalent to 37 per cent of the treated water put into the distribution system and is amongst the worst levels of leakage in the United Kingdom. The C&AG's report examined the action taken by Water Service to reduce wastage and specifically, what impact a reduction in wastage might have on the planned new source at Hog Park Point, which was expected to cost £72.5 million.

3. In taking evidence, the Committee focussed on a number of issues raised in the C&AG's report. These were:

• The accuracy of Water Service's estimate of leakage;
• The action taken by Water Service to reduce leakage to an acceptable level;
• The robustness of Water Service's calculation of the economic level of leakage;
• The action taken by Water Service to postpone the need for new sources; and
• The action taken by Water Service to encourage customers to use water efficiently.

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4.1. We welcome the action taken by Water Service to improve measurement by updating estimates of consumption and undertaking to review these annually. We also welcome the development of district meter areas and the opportunity to produce night flow data which this provides. We recommend that night flow data produced from district meter areas should be used in future to validate estimates of leakage in line with OFWAT's recommended best practice.

Main report, paragraph 8.

4.2. Water Service has spent £22 million on leakage reduction over the past four years yet leakage has continued to increase each year. It is hoped that the new leakage infrastructure which the Water Service has been developing in recent years will begin to pay for itself by contributing to leakage reduction and we will expect full and effective use to be made of this system to produce tangible results in terms of lower leakage levels. Given the poor performance to date and the fact that a further £25 million is to be spent over the next four years, we recommend that Water Service should assure itself that its processes and procedures for addressing leakage are working effectively to ensure that best use is being made of the very substantial resources being devoted to this area.

Main report, paragraph 13.

4.3. The accurate calculation of the economic level of leakage is of key importance in assessing what level of resources should be allocated to leakage reduction. In England and Wales, this calculation would be validated by OFWAT as regulator of the industry. We suggested to the Accounting Officer that, since there is no regulator in Northern Ireland, the Department should submit Water Service's calculations of its revised ELL to OFWAT in the same way. We are pleased that the Accounting Officer agreed to this proposal and would like to be kept informed of the outcome of that exercise in due course.

Main report, paragraph 15.

4.4. We strongly welcome the Department's assurances that the economic level of leakage would be achieved before there was any question of moving to a new source such as Hog Park Point. However, we are concerned that it is considering spending to enhance the capacity of existing sources before the ELL is reached. We are convinced that it does not make economic sense to spend taxpayer's money to increase the supply of water into a system which is going to allow 37 per cent of that water to leak away. We recommend, therefore, that before Water Service finalises its decision to enhance the capacity of existing sources, it must be able to demonstrate that this will provide a cheaper means of meeting future demand than reducing leakage by an equivalent margin.

Main report, paragraph 18.

4.5. We note the Accounting Officer's undertaking to review the current policy on supply pipe repairs. However, given that supply pipe leakage is a very significant proportion of total leakage, which can be addressed without the need for expensive mains replacement, we recommend that Water Service carries out a reappraisal of this policy without delay. Such an appraisal should be based on accurate leakage and costing data and should take proper account of any long term capital spending to increase supply, whether this involves new sources or the enhancement of existing sources of supply. We also recommend that action should be taken at an early stage to remove any legislative obstacle to a free or subsidised repair policy, to avoid any delay in implementing such a policy, should the review show it to be economically justified.

Main report, paragraph 21.

4.6. Hippo bags are a cheap and potentially effective means of reducing household consumption by reducing the amount of water used to flush toilets. They have the added advantage of drawing attention to the need to conserve water and the practical steps which the ordinary consumer can take to achieve this. We recommend that Water Service should do much more to publicise them and should ensure that all consumers, particularly the elderly, have easy access to them together with advice about installation and suitability for different size cisterns.

Main report, paragraph 23.

4.7. Raising awareness of the need for water efficiency is a key factor in achieving long term efficiency gains and, in the absence of metering as a deterrent to wastage, it is all the more important that consumers are educated and encouraged to conserve water. We consider that Water Service had not given a sufficiently high priority to this area and too much reliance has been placed on the passive provision of leaflets rather than proactive promotional activity. We would agree strongly with the Accounting Officer's acceptance that more should be done to inform the general public of the need to conserve water and the ways in which this can be achieved. We recommend that Water Service should take a much more dynamic and enthusiastic approach to this area and that this approach should be set out in a formal education and information strategy.

Main report, paragraph 24.

4.8. Metered charging makes customers more aware of the amount of water they are using since, the more they use, the more they pay. We recognise that metering of domestic properties is not currently an option for Water Service, but with the developing proposals for the funding of Water Service, this situation may change. We recommend that, in developing future proposals, account should be taken of the effect of metering in discouraging waste.

Main report, paragraph 25.

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5.1 We recognise that the Water Service has had particular problems over recent decades including uncertainty over how its increasing capital funding requirements are to be met together with an ageing infrastructure which contributes to leakage problems. Nevertheless, we think it is clear that Water Service had not addressed the question of leakage with the priority it deserved in the 1990's and, as a consequence of this, the supply system in the twenty-first century is under more strain than if it had been properly managed. The C&AG's report identified a number of worrying issues and the fact that the most recent statistics show that leakage is still increasing, indicates that Water Service is by no means on top of this problem. It was, however, clear from the evidence at the session, that there has been a substantial shift in Water Service's strategic thinking since the C&AG's report was published. We particularly welcome:

• improvement of basic data and the undertaking to review this annually;
• the revision of the economic level of leakage and the undertaking to submit this to OFWAT for validation; and
• the assurances that the economic level of leakage would be achieved before there was any question of moving to a new source.

We are conscious that the final outcomes in these areas will only become clear when Water Service publishes its review of the Water Resource Strategy. We await the outcome of this exercise with interest and would like to receive a copy of the consultation paper when it is available.

5.2 We see our recommendations in this report as particularly timely in the light of the important announcement on the 2nd May about large scale new funding to address the infrastructure backlog in Northern Ireland. It is essential that these funds are used wisely. Water Service will need to demonstrate a more vigorous approach to the use of any additional finances which we hope will be made available.

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6. Leakage cannot be measured directly, but must be estimated by deducting the amount of water consumed by users from the total amount of water put into the distribution system. The balancing figure is regarded as leakage. Whereas Water Service can measure accurately the amount of water produced, consumption must be estimated because no domestic and only some non-domestic consumers in Northern Ireland are metered. To ensure an accurate measure of leakage, therefore, estimates of consumption need to be as accurate and up-to-date as possible. The C&AG reported, however, that estimates of consumption used by Water Service in current leakage calculations, have not been updated since 1992 and appeared to be out of step with more up-to-date UK figures. The Department told us that Water Service is currently completing a review of its Water Resource Strategy which includes updated estimates of consumption figures. The Accounting Officer indicated that these will be updated annually and that Water Service intends to continue to refine its mechanisms for estimating consumption.

C&AG's report, paragraphs 1.13-1.32 and Minutes of Evidence, paragraphs 25-26 and 44-46.

7. Because of the inherent risk of inaccuracy in measuring leakage, the Office of Water Services (OFWAT), which regulates the water industry in England and Wales, recommends that figures derived using the "water balance" method outlined above, are reconciled to "night flow" data as a test of their accuracy. Night flows are an alternative measure of leakage which is derived by measuring the flow of water into district meter areas at night, when customers' use is at a minimum and the principal component of any flow is leakage. At the time of the C&AG's report Water Service did not have night flow data and consequently did not carry out a reconciliation. We asked if this data was now available and Water Service told us that it intends to establish 1018 district meter areas which will be capable of producing night flow data and 800 of these are now in place.

C&AG's report, paragraphs 1.16-1.18 and Minutes of Evidence, paragraphs 31-33.

8. An accurate measure of leakage is fundamental to its proper management, allowing reduction targets to be set and the impact of leakage reduction activity to be assessed. We welcome the action taken by Water Service to improve measurement by updating estimates of consumption and undertaking to review these annually. We also welcome the development of district meter areas and the opportunity to produce night flow data which this provides. We recommend that the night flow data produced from district meter areas should be used in future to validate estimates of leakage in line with OFWAT's recommended best practice.

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9. The C&AG reported that in 1998-99, 253 million litres of water per day, representing some 37 per cent of all treated water, was lost as a result of leakage. When asked if this was considered to be an acceptable level of leakage the Department conceded that it was not and indicated that Water Service wants to make a major effort over the next few years to substantially reduce this level. The ultimate objective is to reduce leakage by half but it is unlikely that the economic level of leakage would be achieved before 2006.

C&AG's report paragraphs 1.2-1.3 and Minutes of Evidence, paragraphs 14-17 and 182-186.

10. The Accounting Officer stated that Water Service had continued to implement its leakage reduction plan, for example there had been considerable investment in a new infrastructure of district-metered areas with telemetry links which would provide information to identify the location of leaks. Water Service has spent £22 million on leakage reduction over the past four years and now intends to intensify its leakage plan with £25 million being made available over the next four years to reduce leakage to economic levels. We noted from the C&AG's report, that the leakage reduction action plan covering the period from 1998-1999 to 2002-2003 had a target to achieve a short term economic level of leakage of 197 litres a day by 2000-2001. We asked the Accounting Officer what the levels of leakage were in 1999-2000 and 2000-2001. Information subsequently provided to the Committee by letter indicated that rather than decreasing, leakage had increased to 286 million litres a day in 2000-2001.

C&AG's report, paragraph 2.19 and Minutes of Evidence, paragraphs 8, 93, 209 and 263-264 and Appendix 1.

11. We questioned Water Service closely on the real cost to the taxpayer of 37 per cent leakage. Their response was that, because capital costs are already committed, this can only be estimated in terms of marginal cost, giving a figure of about £2 million a year. We understand why Water Service might take this view, since leakage reductions in the short term are marginal to the overall problem. However, looked at from the broad perspective of the taxpayer, the fact is that over the years, Water Service has tolerated exceptionally high levels of leakage. Consequently it has needed to install capacity to supply 37 per cent more water than is actually used. That is why we suggested that a better assessment of the real long-term cost of leakage would be 37 per cent of the total cost of treating and delivering water. Based on the Accounting Officer's figure for total expenditure of £255 million this gives a cost of leakage of some £47 million a year.

Minutes of Evidence, paragraphs 114-139.

12. Throughout the hearing, both the Department and Water Service emphasised the fragile state of the distribution system, and the lack of adequate funding to replace it, as mitigating factors in the high level of leakage. We were told that the recently updated Asset Management Plan indicated the need to spend £600 million on mains replacement over the next ten years. It was also pointed out, however, that because adequate funding is not available for the totality of Water Service's responsibilities, a hierarchy of priorities has been established which rates infrastructure replacement as fifth in a list of five which also includes, in order of priority: public health, EU Directives on drinking water; EU Directives on waste water and new housing and industrial requirements. The Accounting Officer told us that more demanding leakage targets could be set but unless a programme for replacement of the water main network can be funded, they are unlikely to be achieved. Water Service told us that since 1995, 23 per cent of its budget was spent on mains replacement compared with 77 per cent on other priorities. We asked the Treasury Officer of Accounts if he was satisfied with the current level of funds provided to Water Service to address leakage. We were told that whilst the level of funding to any part of the public sector was a matter for the Executive and the Assembly, there was a general acknowledgement that the level of funding provided, particularly for infrastructure, had not been at a level sufficient to address the needs of the water industry.

Minutes of Evidence, paragraphs 60, 70,101 and 189-193.

13. We welcome the Departments unequivocal acknowledgement that the existing level of leakage is not acceptable and Water Service's statement of its intention to reduce leakage to economic levels by 2006. We recognise the funding problems facing Water Service and note that water main replacement has been given a low priority in allocating limited capital funds. Nevertheless, in addition to 23 per cent of the capital budget, Water Service has spent £22 million on this area over the past four years with apparently no effect and the fact that leakage has increased rather than reduced is very disappointing. We note that Water Service has been establishing district meter areas and telemetry links in recent years and the Department provided us with an example of how this is being used to identify leaks. It is hoped that this new leakage infrastructure will now begin to pay for itself in identifying leaks for repair at the earliest opportunity. We will expect Water Service to make full and effective use of this new system to produce tangible results in terms of leakage reduction. Given the poor performance to date and the fact that a further £25 million is to be spent over the next four years, we recommend that Water Service should assure itself that its processes and procedures for addressing leakage are working effectively to ensure that best use is made of the very substantial resources being devoted to this area.

Minutes of Evidence, paragraphs 14-15, 25-26 and 32-33.

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14. Even if it were possible to eliminate leakage completely, it is unlikely that this would make economic sense. It costs money to repair leaks and the more leaks are repaired, and the harder it becomes to find more leaks, the more expensive this becomes. The approach adopted by the water industry in the United Kingdom, is to reduce leakage only to the point where it becomes more costly than increasing supply in other ways, such as building a new reservoir. This is known as the economic level of leakage (ELL). Water Service calculated an ELL in 1997 which ignored the £72 million cost of a proposed new source at Hog Park Point on Lough Neagh. Consequently this understated the potential for reducing leakage and Water Service agreed to revise and update the ELL as part of its review of the Water Resource Strategy. Water Service told us that this exercise was not yet complete but that the review would be published for consultation in two or three months. We are surprised that Water Service's initial calculation of an ELL did not take account of the significant capital cost of a new source that was being planned at that time, since this would have tended to understate the potential for economic leakage reduction. However, we welcome the review currently underway and trust that, since it is being carried out according to OFWAT best practice, it will take full account of any planned capital spend to increase supply.

C&AG's report, paragraphs 2.1-2.26, Minutes of Evidence, paragraphs 61-63 and 87.

15. The accurate calculation of the ELL is of key importance in assessing what level of resources should be allocated to leakage reduction and what targets should be set. In England and Wales, the ELL would be validated by OFWAT, as regulator of the industry, to ensure that the calculation has been carried out properly and that the information used is capable of giving an accurate result. Historically, where OFWAT has not considered an ELL to be sufficiently robust it has imposed a mandatory leakage reduction target. We suggested to the Accounting Officer that since there was no regulator in Northern Ireland, the Department should submit Water Service's calculations of OFWAT for validation. We are pleased that the Accounting Officer agreed to this proposal and we would like to be kept informed of the outcome of that exercise in due course.

Minutes of Evidence, paragraphs 66-68.

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16. In a situation where demand for water is in danger of exceeding supply, a water provider has two possible approaches to meeting increased demand: increasing supply (by building a new source or enhancing existing sources) and lowering demand by reducing leakage. The concept of the economic level of leakage was developed to provide a means of ensuring the optimum balance between these two approaches and it is currently regarded as best practice within the United Kingdom water industry. Using this methodology, leakage is reduced to the point where further reduction would be more costly than increasing supply and at this point, options such as new sources can be considered. In this way, demand and supply can be balanced at the lowest cost to the taxpayer and the need for new sources can be postponed, often indefinitely.

C&AG's report, paragraphs 2.1-2.3

17. In essence this means that new sources should not be provided before leakage is reduced to the economic level. We were surprised, therefore, that Water Service had told the C&AG that the new source at Hog Park Point might be required before the ELL was achieved. We questioned Water Service on how decisions were made concerning the choice between investment in leakage reduction and investment in new sources. We were told that "required" did not mean "physically in place", but that plans would need to be put in motion to ensure the timely provision of the new source when it was needed. The ELL would have been achieved well ahead of a new source. Water Service told us that, as an alternative to a new source, consideration is being given to increasing supply by enhancing capacity at existing sources on Lough Neagh. Water Service explained that capital investment was required at these sources to comply with EU quality standards and it appeared sensible to take this opportunity to augment these sources as a means of increasing supply which would be cheaper than Hog Park Point.

C&AG's report, paragraph 4.21 and Minutes of Evidence, paragraphs 59-63, 70-75 and 205-230.

18. We strongly welcome the Department's assurances that the economic level of leakage would be achieved before there was any question of moving to a new source such as Hog Park Point. We are concerned, however, at the distinction which both Water Service and the Department are making between spending to increase supply through a new source and spending to increase supply through enhancement of existing sources. Enhancement may provide better value for money than the "big bang" solution of the new source, but the real question is whether it provides better value for money than reducing leakage. Water Service has made much of its approach to prioritising capital expenditure with infrastructure replacement being fifth in a list of five and we understand this. We are less assured, however, of the soundness of Water Service's approach to making expenditure decisions involving a choice between leakage reduction and increases in supply. Industry best practice indicates that so long as leakage is above the economic level, value for money is not achieved by increasing supply. This would apply either to the provision of a new source or spending additional monies on enhancing existing sources. We are convinced that it does not make economic sense to spend taxpayer's money to increase the supply of water into a system which is going to allow 37 per cent of that water to leak away. We recommend, therefore, that before Water Service finalises its decision to enhance the capacity of existing sources, it must be able to demonstrate that this will provide a cheaper means of meeting future demand than reducing leakage by an equivalent margin.

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19. Efficient use of water is complementary to leakage reduction as a means of reducing demand and avoiding the need for expensive new sources of supply. In England and Wales, water companies are obliged by law to promote efficient use by their customers and all companies prepare water efficiency plans which are subject to approval by OFWAT. OFWAT has identified the key elements of an acceptable water efficiency plan as:

• an active approach to leakage including leakage on customers supply pipes;
• an information and education strategy;
• a metering programme which reflects the balance between supply and demand; and
• arrangements for monitoring the outcome of the plan.

C&AG's report, paragraphs 3.1-3.3.

20. Leakage from customers' "supply" pipes accounts for almost a fifth of total leakage and Water Service has the highest level of supply pipe leakage in the United Kingdom. All water companies in England and Wales provide free or subsidised repair for domestic customers and they have reduced leakage from this source by 23 per cent in recent years. Water Service had decided against a free repair service on the grounds that it would not be cost-effective. However, the C&AG reported that the economic appraisal of this policy undertaken by Water Service was fundamentally flawed and recommended that a further review should be undertaken. The Accounting Officer told us that he would review the current policy but this would be in the longer term because there were bigger gains to be made throughout the distribution network and there was a legislative barrier to such a policy which would require a ministerial decision to remove.

C&AG's report, paragraphs 3.4-3.14 and Minutes of Evidence, paragraphs 241-257.

21. We note the Accounting Officer's undertaking to review the current policy on supply pipe repairs. However, given that losses from supply pipes is a very significant proportion of total leakage, which can be addressed without the need for expensive mains replacement, we recommend that Water Service carries out a reappraisal of this policy without delay. Such an appraisal should be based on accurate leakage and costing data and should take proper account of any long term capital spending to increase supply, whether this involves new sources or the enhancement of existing sources of supply. We also recommend that action should be taken at an early stage to remove any legislative obstacle to a free or subsidised repair policy, to avoid any delay in implementing such a policy, should the review show it to be economically justified.

22. Most water companies in the United Kingdom have comprehensive customer information strategies and many have conducted media campaigns to promote water efficiency. Water Service issued a "Using Water Wisely" leaflet to every household in 2001 and told us that it planned to do this again in 2002. It has also produced a range of leaflets which are available at various public buildings. It had not produced a water efficiency plan until April 2000, when the C&AG's audit was underway and we asked the Accounting Officer if this had been prompted by the audit investigation. Water Service told us that their plan had been prompted by the drought in 1995. If this is the case, we are disappointed that it took five years to produce a plan, and amazed that its publication coincided with the Audit Office investigation.

C&AG's report, paragraphs 3.15-3.17 and Minutes of Evidence, paragraphs 239-240.

23. Flushing toilets can account for one third of household consumption and the installation of cistern devices such as "Hippo" bags, which reduce the amount of water flushed, can reduce consumption by as much as 10 litres per property per day. The C&AG reported that Water Service had issued relatively few of these devices compared with England and Wales and we asked why more had not been done to promote their use. Water Service questioned the effectiveness of Hippos as a means of reducing consumption, on the grounds that only a small proportion of those consumers who received them, would actually install them. Hippo bags are a cheap and potentially effective means of reducing household consumption. They have the added advantage of drawing attention to the need to conserve water and the practical steps which the ordinary consumer can take to achieve this. We recommend that Water Service should do much more to publicise them and should ensure that all customers, particularly the elderly, have easy access to them together with advice about installation and suitability for different size cisterns.

C&AG's report, paragraphs 3.19-3.21 and Minutes of Evidence, paragraphs 138-141.

24. Raising awareness of the need for water efficiency is a key factor in achieving long term efficiency gains and, in the absence of metering as a deterrent to wastage, it is all the more important that consumers are educated and encouraged to conserve water. We consider that Water Service has not given a sufficiently high priority to this area and too much reliance has been placed on the passive provision of leaflets rather than proactive promotional activity. For example, most committee members had never heard of Hippo bags before reading the C&AG's report. We would strongly agree with the Accounting Officer's acceptance that more should be done to inform the general public of the need to conserve water and the ways in which this can be achieved. We recommend that Water Service takes a much more dynamic and enthusiastic approach to this area and that this approach should be set out in a formal education and information strategy.

Minutes of Evidence, paragraphs 155-156.

25. Efficiency measures are less effective if customers pay a standard charge for water which is unrelated to consumption. Metered charging makes customers more aware of what they are using since, the more they use, the more they pay. Water Service told us that experiments have shown that installing meters tends to reduce domestic consumption by 10 per cent. We recognise that metering of domestic properties is not currently an option for Water Service, but with the developing proposals for the funding of Water Service, this situation may change. We recommend that in developing future proposals, account should be taken of the effect of metering in discouraging waste.

C&AG's report paragraph 3.29 and Minutes of Evidence, paragraphs 48-54 and 104-106.

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Mr John Dowdall, Comptroller and Auditor General (C&AG) was examined

Mr Leo O'Reilly, Treasury Officer of Accounts was examined.

The Comptroller and Auditor General's report on Water Service: Leakage Management and Water Efficiency" (NIA 49), Session 2000-2001 was considered.

Mr N Hamilton, Permanent Secretary of the Department for Regional Development, Mr R Martin, Chief Executive of the Water Service, and Mr J Kelly, Director of Operations of the Water Service, were examined.

* * * *

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Mr John Dowdall, Comptroller and Auditor General (C&AG) was further examined

Draft Report (Water Service: Leakage Management and Water Efficiency) proposed by the Chairman, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Introduction read and agreed to

Para 1 read and agreed to

Para 2 read and agreed subject to amendment

Para 3 read and agreed to

Paras 4.1 to 5.2 postponed

Paras 6 to 22 read and agreed to

Paras 23 to 25 read and agreed subject to amendment

Paras 4.1 to 5.2 read and agreed subject to changes to be made to reflect amendments agreed in paras 6-27

* * * *

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Witnesses:
Mr N Hamilton ) Permanent Secretary of the
Department for Regional
Development
Mr R Martin ) Chief Executive of the
Water Service
Mr J Kelly ) Director of Operations of the
Water Service

Also present:
Mr J Dowdall ) Comptroller and Auditor General
Mr L O'Reilly ) Treasury Officer of Accounts,
Department of Finance and
Personnel

1.

The Chairperson: Welcome Mr Hamilton from the Department for Regional Development; and Mr Martin and Mr Kelly from Water Service. The Committee also welcomes Mr O'Reilly from the Department of Finance and Personnel, and his team; and Mr John Dowdall, the Comptroller and Auditor General. Mr Hamilton, would you formally introduce your team?

2.

Mr N Hamilton: Mr Robert Martin is the chief executive and agency accounting officer for Water Service, and Mr John Kelly is director of operations.

3.

The Chairperson: A month ago, the Minister for Regional Development announced that there was a water shortage and that the Silent Valley reservoirs were one third full. That shocked many people, including myself. It is therefore timely that we are dealing with a report by the Comptroller and Auditor General on water leakage management and the efficient use of water.

4.

The island of Ireland is one of the wettest parts of the world, yet it seems that our reservoirs are only one third full in winter. I cannot help but think that had more been done earlier to reduce leakage and wastage we would not be in this position. We want to explore what measures you are taking to improve the situation.

5.

It is important to have reliable information on levels of leakage, so that action can be taken to reduce it to acceptable levels. Paragraph 1.32 states that Water Service's current estimates of the various components of consumption used to calculate leakage are not sufficiently robust. What have you done to improve those estimates, and what effect has that had on the estimate of leakage?

6.

Mr N Hamilton: Since the Northern Ireland Audit Office report was published, Water Service has introduced three major plans. The first is the asset management plan, which is a very detailed estimate of the state of the whole Water Service infrastructure in respect of capital and operational needs. We would like to come back and explain further what that will entail.

7.

Secondly, Water Service has advanced a new water resource strategy using the methodology outlined by OFWAT and the Environment Agency in England and Wales and employing a consultant who worked for OFWAT. That strategy has required us - working with the consultant - to update all our estimates of supply, demand and leakage, and to set leakage targets using the most robust methodology. For example, we have assessed the requirement in 15 water resource zones in Northern Ireland.

8.

Thirdly, we have further implemented the water leakage plan. The report says that Water Service was identifying several district-metered areas so as to assess flows into those areas. The areas comprise 500 to 1,500 properties. We have established 84% of the district-metered areas, which gives us a much more robust indication of water distribution into and out of those areas. It also enables us to cover approximately 80% of all properties in Northern Ireland by way of night flow so that we can assess the amount of water in those areas. We can then reconcile our estimates of consumption and usage with demand.

9.

Notwithstanding that, there are areas where need and usage have to be estimated, because every household is not metered. However, the plans and the infrastructure in place will help Water Service to assess - in a much more robust way - the amount of water going into the system and the amount of water being used.

10.

Mr J Kelly: Water Service is clear about the volume of water being put into the distribution system from water treatment plants. All water leaving treatment plants is metered accurately. The problem is how to balance that with information about how water is being used by domestic or commercial/industrial customers. The water unaccounted for is termed as leakage.

11.

Water Service had to estimate the per capita consumption in every household in Northern Ireland because all domestic customers are not metered. This is achieved by taking samples, through test meters, so that we can build up data on the per capita consumption.

12.

If, as in some European countries, 100% of domestic water consumption is metered, then an accurate indication of actual usage can be obtained. If the metered consumption from the commercial sector is added to that, then accurate information on the overall level of leakage from any distribution system can be obtained.

13.

If we cannot have domestic metered information, we must rely on estimates based on the test meter results. The information from the metered consumption of the commercial, industrial and agricultural sectors is accurate.

14.

The Chairperson: In 1998, 253 million litres of treated water - 37% of the distribution input - was lost through leakage. Do you consider that to be an acceptable level of leakage? If not, what is the acceptable level?

15.

Mr N Hamilton: We do not consider that level of leakage to be acceptable. We are working towards the economic level of leakage (ELL); the point at which investment does not produce any further benefits. The latest information from OFWAT, and from the House of Commons Select Committee on Public Accounts last November, is that even when the ELL is reached, the level of leakage is unlikely to fall below 19% or 20%. Water Service wants to make a major effort over the next few years to substantially reduce the level of leakage.

16.

The Chairperson: Is your target to reduce the leakage by half?

17.

Mr N Hamilton: That is the ultimate objective. The speed of delivery of that objective is resource dependent.

18.

The Chairperson: Paragraph 2.13 of the report states that Water Service has a pressure management policy. The consultants identified scope for further pressure reduction and recommended a review. What has been done, and what impact has it had on your scope for reducing leakage?

19.

Mr J Kelly: Pressure management is a factor that can influence leakage. In a flat topography situation, systems can be operated at low pressure. Leakage from low-pressure systems is less than that from high-pressure systems. Northern Ireland's topography includes drumlins and mountains and higher pressures are required to provide water to customers who live in such places. Consequently, there is a direct relationship between pressure and leakage within the network.

20.

In a normal water system demand peaks at breakfast time and teatime. During the evening and night, pressure builds up because water demand has decreased. Higher water pressure at night generates additional leakage. Therefore night-time water pressure needs to be managed. However, people must be able to draw off water at adequate pressure at all times. For example, the Fire Service needs to be able to make use of water supplies in an emergency. Consequently, Water Service has developed a series of pressure management areas, which involves installing pressurereducing valves (PRVs) into the distribution network. The PRVs take account of the varying pressure during the day and especially at night when the pressure is reduced and contribute to lowering the level of leakage in the system.

21.

We need to take account of commercial organisations with night-time working and the Fire Service. Their requirements are managed within the pressure management policy. Water Service has installed 500 PRVs across Northern Ireland and that will extend further. This will make a significant contribution to reducing leakage.

22.

The Chairperson: Since the Minister made his statement about the Silent Valley reservoir being one-third full we have not had a single dry day. Has the situation there improved?

23.

Mr N Hamilton: Yes, it has improved considerably. We have a chart showing average rainfall since September 2001, which we will leave with the Committee. The period from September to Christmas was the driest in the Mournes area for around 30 years. The good news is that the figure is now around 60%, which is a considerable improvement. However, this time last year it was around 97%.

24.

The Chairperson: That is good news.

25.

Ms Ramsey: Paragraph 1.32 of the report states that the estimates of consumption produced in 1992 had not been updated until the review of 2001. You mentioned the three-part plan that you have put in place, however, are you now updating data on a regular basis or are you going to leave it for another nine?

26.

Mr N Hamilton: No, the water resource strategy will provide significant baseline data with all of the information regarding supply and demand, including an important figure on water balance. The figures will be updated annually across Northern Ireland and for each of the 15 resource zones in which Water Service is working. Mr Martin and his senior management team will monitor leakage figures in the district metering areas monthly.

27.

Mr Martin: Water Service agrees that current levels of leakage are too high. I emphasise that this is not a simple issue. We have a multitude of leaks from a system that is, in some parts, Victorian. Many parts of the system have been in place since before the local government re-organisation in 1973.

28.

If you take two A4 sheets of paper and very closely pinprick them, you will get some idea of the size of the leaks we are talking about when the system is under pressure. Consider the 25,000 kilometres of water mains in Northern Ireland - which is the distance between here and the Falkland Islands - and that will give you some idea of what we are trying to find. It is a very complex issue, and one that we are seriously addressing.

29.

Ms Ramsey: My question is not about leakage; it is about the data on water consumption. The estimates were produced in 1992 and had not been updated by 2001. I understand that Water Service will update the figures annually: have they been updated this year?

30.

Mr N Hamilton: They will be included in the water resource strategy that we are about to complete, and that will be published for public consultation in the next few months.

31.

Ms Ramsey: Paragraph 1.16 of the report mentions OFWAT, the regulator in England and Wales. OFWAT requires companies to test the accuracy of leakage estimate by night-flow data, which you mentioned earlier. Paragraph 1.17 states that when the audit was carried out night-flow data was not available. Would you elaborate on what you said? Is the data available now, and is it being used, taking into consideration what OFWAT has said?

32.

Mr J Kelly: The night-flow data is one of two processes for identifying leakage - the other is called the integrated model. Minimum night flow relates to the additional flows that are available through the night due to reduced demand from the general public. It is measured by taking information from each districtmetered area. Water Service plans to put 1,018 of those in place, of which over 800 have now been established. Approximately three quarters of those established are linked directly to our telecommunications system.

33.

We can get 15-minute readings continuously 24 hours a day from district metered areas with established telemetry links. The minimum night flow in a district can now be read continuously through the night. That information can be compared with the minimum night flow from the previous night or from a past week to reveal a trend. This provides a speedy indication as to whether leakage in a district is increasing. If so, leakage detection teams can be sent to determine where the leakage is and our in-house teams or contractors can then repair the leak. The installation of telemetry linked to the district metered areas will rapidly identify leakage through the minimum nightflow process.

34.

Ms Ramsey: I commend you for your answer. Has it had any effect on the level of leakage?

35.

Mr J Kelly: It has had an effect on the response time to repair leaks.

36.

Ms Ramsey: Has it had an effect on the actual level of leakage?

37.

Mr J Kelly: It influences the level of leakage downwards. Minimum night flow and the related information is only one aspect of leakage. For example, the extent of leakage in a network depends on a series of factors. One is the length of the network - the longer the network, the greater is the potential for leakage. Another factor is the age and type of pipe work laid. Local councils using a variety of materials laid more than 75% of the network before 1973. Influencing factors also include workmanship, traffic volumes on particular roads and, more particularly, the impact of severe weather, as we have seen over the last two winters.

38.

Ms Ramsey: Could the Committee have a copy of the estimated downward trend of leakage?

39.

Mr J Kelly: Yes.

40.

Mr N Hamilton: The other major noteworthy factor is that addressing leakage is a very capital-intensive activity. Water Service wants to do everything possible to assess the network and put leakage detection teams in as soon as possible, but the most significant issue is whether we can invest in the new pipes.

41.

The Chairperson: Are you referring the matter to politicians then?

42.

Ms Ramsey: Is this your bid for additional funds?

43.

Ms Hamilton: It brings us back to the question of funding priorities.

44.

Ms Ramsey: Paragraph 1.26 of the report states that 45% of all non-household users are not metered. Paragraph 1.25 says that your estimated consumption is much lower than the average in England. Would you explain the difference in the consumption figures between here and England?

45.

Mr N Hamilton: Water Service takes a sample of 5,000 properties and estimates the consumption per household. The average consumption in Northern Ireland is approximately 145 litres per person, and we can provide the Committee with a table of figures. In England and Wales consumption ranges from 131 to 175 litres per person, and Northern Ireland is in the bottom third of that range. The estimate is based on a sample that we take, and there is a difference between urban and rural areas. We also want to try to improve our estimates, so that we have the most accurate measure of consumption.

46.

If the Northern Ireland figure were at the top end of the range, it would automatically reduce the leakage figure by approximately 49 megalitres per day, which is the balancing figure.

47.

The Chairperson: What do you recommend?

48.

Mr N Hamilton: We are trying to be honest in saying that, on the basis of our sample, the figure is 145 litres per person. However, we want to continue to refine our mechanisms for estimating consumption.

49.

Ms Ramsey: Is there a case for increased metering?

50.

Mr N Hamilton: If every household were metered, Water Service would have a better estimate of the total amount of water being used by each household. However, that would be expensive, because not only would we have to install meters, we would have to read them. That takes us into wider issues about the purpose of metering and charging.

51.

The Chairperson: Are you talking about nondomestic metering?

52.

Mr N Hamilton: Yes, we have a high level of metering for non-domestic consumers.

53.

The Chairperson: Forty five per cent of nondomestic users are not metered?

54.

Mr N Hamilton: Yes. We are also seeking to identify whether there are other non-domestic users.

55.

The Chairperson: I just wanted to clarify that point.

56.

Mr N Hamilton: I am sorry if that point was confusing. I was talking about a metering policy in general.

57.

Mr McClelland: The report left me totally confused about your Departments' economic rationale. Obviously, in the private sector, decisions about capital investment are based on certain criteria. This is also true in the public sector when people are developing a methodology in cases such as this.

58.

Page 35 of the report deals with the concept of the economic level of leakages (ELL). It appears that decisions are based on cost and marginal cost - the cost of increased supply to offset losses is set against the marginal cost of increased investment in leakage control. That is relatively straightforward. The last sentence on page 67 confuses me.

"Water Service has emphasised, however, that in its view a new source may be required before the ELL is achieved."

59.

I find it difficult to understand what comes first. Page 35 states that the cost of both options should be considered. However, on page 67 Water Service is suggesting that it proceed with the cost of investment to achieve the ELL. The options are mutually exclusive. Water Service cannot have it both ways. My fear is that the Department will proceed with new capital investment and then look for an economic argument to justify it. That is illogical. You cannot have it both ways.

60.

Mr N Hamilton: We have a clear hierarchy of priorities when it comes to making decisions about capital investment. The first priority is to address public health improvement issues. The second priority is driven by EU Directives on drinking water; we must invest in water treatment works to ensure that we meet EU parameters. That requires very substantial investment. The third priority is the EU Directives on waste water, where again, there are parameters and standards to be met. Then, we want to facilitate new housing development and new industrial development. The fifth priority involves ageing infrastructure. However, only when we have met public health and drinking water issues can we begin to address the infrastructure issues that my colleagues referred to earlier.

61.

I assure Mr McClelland that in the last six months we have pulled all of this together in the revision of the water resources strategy. Since the previous strategy in 1992, water quality has been treated as a major priority. The new water resource strategy has employed the OFWAT methodology to identify the cost of capital investment, economic levels of leakage and leakage targets. Having worked closely with the consultants, we are now in the position to ask whether it is right that we proceed, as had been intended originally, with what might be called a single "big bang" solution - a new resource - or whether there is a better economic approach to this with a different strategy that would help us achieve the economic level of leakage before we have to invest in any new source.

62.

Our conclusion is that it will probably take us about four years to reach our economic level of leakage. However, a better value for money approach is likely to arise from a strategy that enhances the existing sources, because we need to invest in the existing sources to improve the quality of the water, rather than move to a new source of supply in the immediate future.

63.

That report, as I said, is almost complete, and will be the subject of a public consultation. We are satisfied that the methodology we have used will address that point. We will take the economic level of leakage issue, the need for capital investment and our leakage targets and put them together. That will drive our strategic approach.

64.

Mr McClelland: I thank Mr Hamilton for his detailed response, but it did not answer the question. I understand that there is a hierarchy of priorities; that is common sense. However, I cannot understand why there are two different definitions in the document. The criterion for making a decision is set out on page 35 - the marginal cost of leakages set against the marginal cost of investment. On page 67 we find the decision made to achieve the ELL. The Department cannot have it both ways. If that issue cannot be resolved now, it might be useful to have an answer in writing.

65.

Would you agree that, as there is no regulator in Northern Ireland to calculate the ELL, there is a greater obligation on the Department to manage that efficiently? Would you be prepared to submit your calculations to those bodies in England and Wales that have regulators for examination?

66.

Mr N Hamilton: As I said earlier, we use OFWAT methodology to calculate the ELL, and we have used the consultant who was employed by OFWAT to do it. We would be happy to ensure that our methodology is absolutely - [Interruption].

67.

Mr McClelland: I am going to push the permanent secretary on this, because that is not the question that I asked. My question was about whether you would be prepared to submit your calculations to the bodies in England and Wales. The answer that I am getting is that you liaise with OFWAT. Would you be prepared to submit your calculations to those bodies for external examination?

68.

Mr N Hamilton: I would be happy for OFWAT to be asked to confirm our methodology.

69.

Mr McClelland: Thank you very much, Mr Hamilton.

70.

Mr N Hamilton: I am concerned that I did not answer your question about ELL.

71.

Mr J Kelly: I want to clarify the last sentence on page 67, which was referred to - that,

"a new source may be required before the ELL is achieved."

72.

Water Service has adopted a twin-track approach; while exploring future water resource needs, it has also rolled out its leakage reduction programme. Future water resource needs tend to take many years, and hence the word "required" does not actually mean "physically in place". It means that the procedures would need to have been embarked on to arrive at a new source at some point in the future. Therefore, we would have achieved the economic level of leakage well ahead of any new source. It refers to going through the planning processes and the construction process.

73.

Mr N Hamilton: This report may well indicate that a single new source is not the most economic option.

74.

Mr McClelland: I understand that, and that is not what I am trying to get at. I am concerned about the methodology that you are using in your economic decision-making. I reiterate what I said before; in reading the document several times, it appeared that Water Service was making a decision and then scratching around for an economic rationale for doing so, rather than having an economic rationale first.

75.

Mr N Hamilton: The decision will come out of the rationale and the methodology. I assure Mr McClelland of that.

76.

Mr McClelland: Thank you.

77.

Mr Carrick: I welcome your response to the Chairperson's opening question about the asset management plan, the advancing of the new water resource strategy and the implementation of the water leakage plan. I welcome them since they indicate that the recommendations in the Comptroller and Auditor General's report have been taken seriously and are being addressed. In so far as that goes, I welcome it.

78.

Why did it take so long for the penny to drop? Would you agree that that type of action should have been taken long ago? Did technical experts in Water Service not fully understand the good sense of achieving the economic level of leakage earlier? What reason did Water Service advance for not recognising the economic argument of reducing demand and wastage before having to resort to building a new source?

79.

Mr J Kelly: Water Service has had an active leakage programme since the mid 1980s. Those programmes were founded on Report 26, which was the national document - the water bible - on leakage. The active programme - as distinct from the passive programme, where burst water mains would be repaired on the surface but no other work is carried out - has been pursued. However, the active leakage programme has depended totally on funding and resourcing in-house teams.

80.

Throughout the 1980s and the 1990s Water Service depended on the resources available, which were principally staff and capital investment. When the drought of 1995 occurred it was recognised across the water industry, prompted by OFWAT and its interests, that more attention should be given to leakage. That was competing with the desire to improve water quality and waste water effluent returns. The drought of 1995 and the freeze of 1995/96 prompted intense interest in England, Wales and Northern Ireland. The concept of the economic level of leakage (ELL) was, in essence, only born in the post-1995 drought period.

81.

By autumn 1997 only two water companies in the world, which were both English, had developed ELLs. The concept was rolled out across the rest of the privatised industry and in 1998, Water Service recruited the consultants who had advised the House of Commons Committee to develop the Water Service ELL. That was being developed as the Northern Ireland Audit Office (NIAO) scrutiny was being initiated.

82.

We alerted the NIAO to the fact that the ELL would be reviewed as part of the overall water resources strategy, and that has been the case. There will be a revised lower ELL identified in the water resource strategy, which will be published shortly. There has been active interest in leakage reduction since the mid 1980s but it has been heavily dependent on the resources available.

83.

Mr Carrick: Obviously they were not sufficiently robust until the 1995 drought and the big freeze.

84.

Mr J Kelly: Yes.

85.

Mr N Hamilton: English and Welsh water companies, through privatisation, had major investment from 1995-96 onwards. However, the latest information from OFWAT, which was published in November, showed that even after considerable investment 18 of the 24 companies had not achieved their economic level of leakage.

86.

Mr Carrick: Paragraph 2.25 of the report states that Water Service accepted that it should revise its original calculation of the economic level of leakage to take account of the new source. Has the review been completed? What is the revised economic level of leakage?

87.

Mr N Hamilton: That is the water resource plan, which I referred to earlier. It is almost complete, and it will identify a realistic economic level of leakage and our water needs over the next 30 years, building on the estimates of what we could achieve over the next 5 years.

88.

Mr Carrick: When will it be published?

89.

Mr N Hamilton: It will be published for consultation in two or three months. It is a significant document on future supply, sources and capital investment.

90.

Mr Carrick: Paragraph 2.21 of the report states that leakage reduction targets were lower than those set by OFWAT for England and Wales. The targets were based on 97 calculations of the economic level of leakage that you accepted should be revised. Will you now accept that your leakage reduction targets should have been more demanding and more in line with what was set for England and Wales? Has a new leakage reduction plan been established that will incorporate the new economic level of leakage? What is your timetable to achieve that?

91.

Mr N Hamilton: Water Service would love to be able to set more challenging targets for leakage over the next two or three years. We would love to have done that in the past year or two. However, as the report indicates, such targets are directly related to funding. Water Service could set targets, but unless we can fund a leakage programme and a programme for the replacement of the water main network, they are unlikely to be realistically achieved. I said earlier that our water leakage plan and particularly our districtmetered areas give us more capacity to develop the leakage plan. We will intensify the work on water leakage.

92.

As I said earlier, water leakage is the fifth of five priorities. The asset management plan, which is a detailed estimate of the state of the network, suggests that over the next ten years we will need to spend £600 million on water main replacement. During the past five years, we have been able to spend only £80 million. The calculations suggest that at that level of investment, it will take approximately 50 years to replace the water main network, which is significant. The level of leakage reduction, particularly the substantive gains that are made, are directly proportionate to the money that we can spend. Having said that, we want to intensify our leakage plan. For example, we are about to let a new contract, and that will mean that after April, we will have approximately 50 external contractors' employees chasing leakage.

93.

Mr J Kelly: There are difficulties in setting a demanding leakage target as it is dependent on investment in the infrastructure, particularly the investment necessary to set up the district metered areas, establish meters in the water main network and establish the telemetry links that will provide information and identify the location of the leaks. Three or four years ago, there was not much point in setting demanding targets when the information that would allow us to find the leaks was unavailable.

94.

Mr N Hamilton: There have been some changes over the past nine or ten years, particularly in the need for capital investment. Silent Valley is the largest water source in Northern Ireland, and even in the early 1990s, the water from the Silent Valley reservoir flowed through tunnels and in a conduit to Belfast. The conduit was not piped the whole way; it was partly open, and there was ingress of other water. That was partly the cause of the cryptosporidium outbreak.

95.

We had to relay the complete conduit - the work has been finished and cost £35 million. It addresses a major public health issue and will save money. Until the advent of the EU Directives on drinking water, all water coming from the Silent Valley reservoir had minimal treatment. The water was very good and we have been drinking it for years. However, the EU Directives now require Water Service to treat the water. We are about to begin a £25 million contract to produce a new treatment plant in the Silent Valley, the annual running costs of which will be approximately £4 million. Untreated water, which flowed freely until the mid-1990s, has cost us £60 million in investment, £4 million for treatment and £1 million to pump, simply because quality standards have changed. That work had to be done.

96.

Mr Carrick: Are more robust standards and targets inhibited only by budgetary constraints?

97.

Mr N Hamilton: More robust standards and targets would be set if the funding was available, particularly capital investment, to address the problems in the waterwork.

98.

Mr Carrick: Is funding the only reason?

99.

Mr N Hamilton: No.

100.

Mr J Kelly: Water Service is trying to address a more demanding standard by identifying £25 million in the next four years to contribute to the reduction of leakage to the economic level of leakage.

101.

Mr N Hamilton: Since 1995, we have been able to allocate only 23% of our budget to improve the water main network. The remaining 77% has had to be spent on higher priorities. Underfunding is a major issue.

102.

Mr Carrick: Figure 6 on page 36 shows an interesting set of statistics. The economic levels of leakage calculated by your consultants for service reservoirs and distribution mains are higher than the actual levels of leakage. Are you spending too much in repairs to leaks in those areas, or does it reflect inaccuracies in your calculations?

103.

Mr J Kelly: It relates to the information in the data. Service reservoir leakage accounts for less than 3% in the overall network. Usually, trunk main leakage accounts for 22%, with 55% in the general water main network. There would be a further 20% in the customers' pipework, for which Water Service has no responsibility.

104.

Mr Carrick: People will have more incentive to use water efficiently if they have to pay for it. Paragraph 3.29 of the report states that metering can reduce consumption, particularly for non-domestic uses such as garden sprinkler systems. Has metering in Great Britain contributed to a more efficient use of water?

105.

Mr J Kelly: The information in OFWAT documents indicates that the per capita consumption is lower in households with meters than in those without. Prior to domestic metering, some privatised companies carried out tests. A meter was installed in almost every household in the Isle of Wight, and pilot surveys showed that there was an initial decrease in water consumption.

106.

However, there was a slight rise after a year or 18 months. People used less water initially, conscious that they had a meter, but when they got used to having it, they reverted back to around 90% of their pre-metering consumption. The findings from the pilot exercises and from OFWAT's information are that metered domestic households use less water than non-metered ones.

107.

The Chairperson: You said that the water strategy will be published within the next two or three months. Will that strategy include a revised assessment of the need for a new source at Hog Park Point?

108.

Mr N Hamilton: Yes. We have been working closely with consultants on alternatives. We have been considering whether that is the most appropriate solution, or whether a different strategy would be to enhance existing resources, which could prove to be better value for money and be more efficient.

109.

Mr Close: Are you moving away from the idea of spending £72 million on a single source?

110.

Mr N Hamilton: We, and our consultants, are seriously challenging whether the previously advocated solution of a single source costing £72 million is the best approach, because we are employing the very latest OFWAT methodology in that assessment.

111.

Mr Close: Is the balance changing?

112.

Mr N Hamilton: The emerging conclusion seems to be that an enhancement of a smaller number of sources is likely to provide better value for money. That is because we are not only dealing with quantum, we are also dealing with quality. As we treat almost all the water that comes from our various sources, it does not make good economic sense to have a large number of sources. They all have to have treatment plants, pumping arrangements and conduits. We have 57 separate sources now - we had 159 in 1973. It is more likely that a strategy with a smaller number of sources, perhaps involving the use of more water from those sources, would prove to be better value for money. It is likely to be one of the conclusions in the report, which will be subject to public consultation.

113.

Mr Close: I agree with that approach. Having read the NIAO report, I am especially delighted to see that there appears to be a degree of enlightenment as regards that matter. I would remind everyone that we all here to represent taxpayers. I have made that point many times, and I reiterate it as often as possible because taxpayers are always thinking about how their money is being spent.

114.

We must concentrate on the actual costs, and I am trying to get my head round the cost of leakage. Figure 2 on page 23 shows that 253 million litres of water were lost every day in 1998-99. The taxpayer would be interested in the cost of producing that wasted water. I do not see figures in the report that I can directly link to that cost. I can only make assumptions, and you can tell me if I am wrong. Water and sewerage costs are approximately £195 million per annum. Is that right? I have taken that figure from your accounts of 31 March 2001.

115.

Mr N Hamilton: In the current financial year, our operation budget is £145 million and our capital budget is £110 million.

116.

Mr Close: Is your total expenditure £195 million per year?

117.

Mr N Hamilton: No, it is £255 million.

118.

Mr Close: I assume that the figure includes water and sewerage?

119.

Mr Martin: Yes.

120.

Mr Close: Is it fair to say the breakdown would be 50:50?

121.

Mr Martin: We would accept that for the purposes of the argument.

122.

Mr Close: Therefore water production costs between £100 million and £125 million per annum. The loss is 37%; therefore between £37 million and £53 million of taxpayer's money per annum is lost.

123.

Mr N Hamilton: No.

124.

Mr Close: Tell me where my simple calculations are going wrong.

125.

The Chairperson: It seems a simple calculation.

126.

Mr J Kelly: Nothing is simple when it comes to leakage. The cost of the additional water is calculated on the basis of the marginal cost. For example, the water treatment plan at Killylane currently serves part of Antrim and Larne. There is a capital cost in constructing that plant and an operational cost in the day-to-day production of the water. The difference in production of 100 megalitres and 110 megalitres of water per day is costed on the basis of the marginal cost difference. The plant and the employees are still there. The difference is in the additional electricity, chemicals, sludge treatment and disposal for those 10 megalitres. Therefore the cost of that leakage is determined by the marginal cost, which is approximately 6 pence to 7 pence per cubic metre. Using the marginal cost, we are talking about £2 million a year.

127.

Mr Close: It strikes me that you can produce an argument to satisfy your outcome and produce the answer you require. Water costs a certain amount of money to produce. Every day we produced 692 megalitres of water for 1998-99. That is fact. I am not talking about marginal or additional; it is the amount produced per day for consumption in Northern Ireland. We have already mentioned figures for the cost of producing water per year. Thirty-seven per cent of that is - in my words - being wasted through leakage. Are we in agreement so far?

128.

Mr N Hamilton: Leakage in that sense means that it is unaccounted for.

129.

Mr Close: Yes. The cost for that must be 37% of the cost of production. I am not referring to marginal costings. I accept your point that if additional production is generated then marginal costing is introduced. This leakage is, however, from the overall global figure.

130.

Mr N Hamilton: The methodology for costing is used by OFWAT and the water industry. The economic level of leakage itself is a moving target because it is the point at which investment produces no further benefits. Therefore the costing of the leakage is as Mr Kelly outlined. That is the recognised methodology for assessing the impact and the cost of the leakage.

131.

Mr Close: It worries me that it is all a moving target, because by adjusting water pressure the level of leakage can be adjusted. By adjusting what you refer to as background leakage the overall level in your economic level of leakage can be adjusted. I am taking basic black and white figures - the cost of producing just under 700 megalitres of water per day is £x; the leakage is 37% of that; therefore the cost of the leakage must be 37% of £x. I see heads shaking but it is a pretty simple equation.

132.

Mr Martin: Undoubtedly it is a simple equation, but it is not a simple issue.

133.

Mr Close: I accept that.

134.

Mr Martin: As has already been pointed out it is a marginal cost. For this example let us take Dunore Point. Dunore Point requires the same manning, the same plant, the same operation - all of those factors - whether it produces 90 megalitres a day or 110 megalitres a day.

135.

We regularly have to increase production from Dunore Point, for example, to supplement the Silent Valley reservoir whenever it is in distress, as it has been recently. The marginal cost of increasing production is the electricity, chemicals and other costs associated with the simple production of water. It is calculated as a marginal cost across the industry. That is the costing that Mr Kelly has just outlined; it is not a proportionate cost.

136.

Mr Close: That figure reduces the apparent cost to the taxpayer. Leakage is not a marginal cost; it is absolute. Leakage accounts for 37% of the water produced.

137.

Mr N Hamilton: That is an assessment. The leakage figure of 37% is the balance between the water that we know is going into the system and our best estimate of the water that is coming out of the system. That is why we consider leakage to be unacceptably high, and we are keen to ensure that we reduce it. Leakage of 37% is not acceptable. Having said that, the latest information that we have, for example, shows that in 1999-2000 our figure for leakage was 38% and Scotland's was 36%. We take no comfort from that, and we are not being complacent. We are simply trying to set the figure in context. Addressing leakage in the way that we have outlined is important, because it will benefit the Northern Ireland taxpayer.

138.

Mr Close: I accept that totally. However, my point is that if you use the system of marginal costing of the leakage, you will get a lower figure for the cost of leakage to the taxpayer. Therefore, it gives a different justification for the money spent on trying to control that leakage. In the figures that you have given, which are based on marginal cost, the cost is a few million. According to my figures the cost is substantially higher - £30 million to £50 million per annum - and that gives you a different basis on which to operate.

139.

To say that £100,000 or £120,000 per day in Northern Ireland is being wasted creates a different scenario about when it becomes economically viable to do different things. For example, you referred to the capital cost of installing meters. I want to make it absolutely clear that the installation of meters does not mean additional cost to the consumer for water consumption per se. Meters can be installed solely to ensure better, more effective and efficient use of water - in other words, as a deterrent to wastage. If we had the figures, for example, for the cost of installing a meter in each house to compare with my figures of £36 million to £50 million a year lost through wastage, meter installation might prove to be economical. Meters might help us to control the amount of water that is being used. That is the point behind my question.

140.

However, it moves us neatly to the other aspect, which is the way in which water is used or wasted. On 4 February, when the potential water shortages in Northern Ireland became public knowledge, I questioned the Minister. At that time the Minister advocated the use of hippo bags to reduce the amount of water used to flush toilets. Paragraph 3.21 on page 54 of the report says that the Department has issued 30,000 of them.

141.

First, over what time span were those hippo bags issued? Secondly, although 30,000 might appear to be an awful lot of hippo bags, about four million were issued in England and Wales. Our 30,000 represents about 5% of all households; in England and Wales that proportion is about 20%. You shake your head.

142.

Mr N Hamilton: That is not the information that we have.

143.

Mr Close: That is the information I have.

144.

Mr J Kelly: Hippo bags were issued to customers as part of an overall water efficiency plan. The Water Service's water efficiency plan was rolled out from May 2000 onwards. Prior to that, Water Service issued hippo bags for three or four years. They were incorporated into the water efficiency plan because they are a recognised measure that contributes to reduced water consumption. They are only one measure in the water efficiency plan.

145.

There is also a requirement to increase awareness among the general public as to the use that water should be put to. There is a need to alert various sectors of the community, particularly industrial, agricultural, commercial and so on, to the opportunity to reduce water consumption in their own premises. We have initiated a series of water audits to allow various sectors to audit their premises, and hence contribute to reducing their water usage and, indeed, the cost of their water. There are a series of measures in the water efficiency plan, including the hippo bags.

146.

Hippo bags have been issued to some 30,000 households. However, not all 30,000 households have installed them as we would have liked. It would take around 40,000 hippo bags to reduce water consumption by one megalitre per day. On that basis, even the 600,000 households across Northern Ireland would contribute only 20 megalitres a day. Hippo bags are a small part of the overall strategy to raise awareness, reduce consumption and hence contribute to the overall desire to conserve water.

147.

Mr Close: I accept everything you say. However, the Department has been rather slow in getting to that point if only 7,500 to 10,000 hippo bags are issued per year. If you went onto the street and produced a hippo bag, over 90% of people would not know what it was. They have never seen one. I understand that an estimated 10 litres per property per day can be saved in England and Wales.

148.

Mr N Hamilton: No. It is three litres -

149.

Mr Close: I understood that the figures in the report were cleared by the Department and were correct. Am I right?

150.

Mr N Hamilton: Hippo bags save an estimated average of three litres per flush.

151.

Mr Close: That is a big difference. The figure here is 10 litres per property per day.

152.

Mr J Kelly: The installation of a hippo in a nine-litre cistern reduces capacity to about six litres. It saves three litres per flush. Modern cisterns that are being brought in across the United Kingdom generally hold six litres. In essence, modern cisterns take the opportunity to reduce the water used through flushing and do not require hippo bags. Older cisterns hold nine litres. The hippo bag reduces that by three litres. The amount of water saved depends on how many times the cistern is flushed in a day. In some cases, that could be up to 10 litres per day.

153.

Mr Close: Can flushing a toilet account for one third of household water consumption?

154.

Mr N Hamilton: Yes.

155.

Mr Close: I stress that more could be done on that one issue. I totally accept that there are other issues to be looked at, but the hippo bag is a very simple idea. It is my impression, and possibly that of the great general public, that there has been a lack of urgency. You are running to catch up and have missed the bus in making people aware of how important it is to use water wisely.

156.

Mr N Hamilton: At the beginning of 2001 we sent a water leaflet to every property in Northern Ireland, and we will do the same this month as part of the hippo bag strategy. We want to roll out the efficiency plan across all sectors. However, we accept that there is more we can do to encourage people to conserve and use water wisely. We have brought along some packs for Members so that you can see what is available. We will put them in all Government offices and public buildings, but we accept the point that we need to do more.

157.

Mr Close: I am trying to think of a watery comparison for shutting the stable door after the horse has bolted. A lot of the things that you are going to do are on the back of information from the Mourne reservoirs, which are 60% full, whereas this time last year they were 97% full. It seems to be reactive. If this had been a more proactive campaign, where the public were bombarded with a torrent of information rather than a reactive drip now, the situation could have been avoided, and we would not be in the position we are in today. We would not have been told on 4 February 2002 about the possibility of water shortages in the summer.

158.

Mr N Hamilton: This is not just a reaction, as the information we provided -

159.

Mr Close: The leaflets have not been there over a prolonged period. There are only 30,000 hippo bags.

160.

Mr N Hamilton: The leaflets were sent to every household in 2001, and we are repeating that. Therefore, our strategy pre-dated the problems we had in the Silent Valley.

161.

Mr Close: You waited until the twenty-first century to do this, and that happened in the twentieth century.

162.

Mr Martin: As we pointed out, the problem with the Silent Valley was that the autumn rainfall there was substantially below average. It was an unusually dry period. The Silent Valley is a large balancing reservoir, which balances rainfall from one time of the year to when it will be required. If it had been a normal year, the Silent Valley would not have been at 30-something per cent. The impact of all the hippo bags that we could produce would not have been substantial in comparison to the Silent Valley, which holds 20,000 million litres of water.

163.

The Chairperson: Mr Close raised the issue of meters in domestic properties; do you have the costs for installing meters?

164.

Mr J Kelly: It would cost approximately £120 million to install meters in domestic properties. However, I stress that that is an approximate cost.

165.

The Chairperson: How much would it cost per household?

166.

Mr J Kelly: There are over 600,000 households at £200 per household.

167.

Mr Beggs: Some of the figures are difficult to visualise or understand, particularly when you talk about megalitres and millions of megalitres. Figure 3 in the Audit Office report shows leakage in the different divisional areas. I find it astounding that 515 litres of water per property per day are leaked in the southern area. I can visualise 515 litres of milk sitting on my doorstep or being spilt on my doorstep, but it is astounding to have that as an average figure for each property. Would you accept that that is above the economic level of leakage?

168.

Mr J Kelly: Undoubtedly that is the case. However, there are several ways to measure leakage. OFWAT has discounted the method of measuring leakage by percentage, but recommends the method Mr Beggs referred to of measuring leakage in litres per property per day or cubic metres per kilometre per day. Both methods are used in the industry to measure leakage and to compare one company area with another. However, the two methods can provide a different picture. The litres per property per day method will provide a different picture in a rural area as compared to a densely populated urban area. On the other hand, the cubic metres per kilometre per day method is a truer reflection because it reflects leakage along the entire length of the network. In Northern Ireland we have twice the length of network per head of population than England and Wales and, given that longer network, there is greater opportunity for leakage. The latter method shows that the average figure for leakage in England and Wales is 10 cubic meters per kilometre per day and in Northern Ireland it is 10·3 cubic meters per kilometre per day, almost identical.

169.

Therefore, using the cubic meters per kilometre per day method, the average leakage in Northern Ireland is similar to that in the English and Welsh privatised companies. To clarify what 10 cubic metres per kilometre per day of water means: the distance between the City Hall and Shaftesbury Square is about one kilometre, and ten cubic meters per day is equivalent to a single domestic tap running continuously. Admittedly, there are 25,000 kilometres of water mains, but perhaps the man in the street can visualise that concept of wastage.

170.

Mr Beggs: Your figures put a gloss on the situation. Using the litre per property per day method, each of the Northern Ireland Water Service divisions comes out worse than all their English counterparts. Figure 4 of the Northern Ireland Audit Office's report, detailing comparative leakage performance in the UK, uses the cubic metres per kilometre per day measurement and shows that the eastern division of Water Service is the second worst in the UK. Do you accept that leakage in Northern Ireland is among the worst in the United Kingdom? You say that you do not have as much money as the English companies, but surely if the leakage is above economic levels, and it is costing more to produce the water than to fix the leaks, would we not be wiser to spend money fixing the leaks?

171.

Mr N Hamilton: We appreciate that leakage levels in Northern Ireland are unacceptable and among the worst in comparison with England and Wales. We have accepted that from the outset of today's hearing.

172.

However, the long-term solution of the leakage problem is an investment issue. At the outset I referred to our asset management plan, which shows that the amount of investment in the whole water and sewerage network, above and below ground, should be something in the order of £3 billion over the next 20 years. That means that we need to invest £150 million of capital expenditure in Northern Ireland per year, which is about 50% on average more than we have available at the moment. Our current funding is higher than it was five, six, or seven years ago.

173.

In England and Wales the privatised companies have been able to put a huge amount of additional resources into solving the problem of leakage. We have had to prioritise the amount of money we can put into solving that problem.

174.

Mr Beggs: Figure 6 breaks down the mains network. Leakage from the communication pipes in particular is significantly above the economic level. It is estimated that in 1997-98 there was 73·4 megalitres per day of leakage, while the economic level is 41·5. That is a significant difference. Has the Department applied for additional funding to address that problem? Major savings could be made.

175.

Mr N Hamilton: Officials from the Department of Finance and Personnel will confirm that the Department continually bids for additional funding for all its activities. The Department accepts that the water main network is fragile. A classic example is what happened immediately after the big thaw of December 2000, which Mr Martin may elaborate on. It illustrates the difficulties that the Department faces.

176.

Mr Martin: We have provided Members with a graph showing that during the winter of 2000-01 there was a significant increase in the amount of water that was being distributed. Uncharacteristically low temperatures over a lengthy period caused 343 burst pipes; it was probably the worst period of freeze/thaw for 20 years, and the amount of water in distribution increased by about 78 million litres per day. The burst pipes showed the nature of the fragile network that we are seeking to manage. It gives me no pleasure to know that there is a substantial amount of water unaccounted for. That is not part of my remit. I would like to use the money that the Department receives to improve water supplies, water quality and the waste water treatment works. I would like to spend it on the networks because that would enable the Department to meet the economic level of leakage that was discussed this morning.

177.

The same problems occurred during Christmas 2001-02. They were not as severe, but the graph clearly shows the peak in both years. It shows the recovery period available to the Department to bring water back into distribution at acceptable levels. It required a great deal of effort and work.

178.

I emphasise what I said at the beginning. The Department is not dealing with an easily identifiable gusher that it can fix and thus cure the leakage problem. Under pressure, the Department is dealing with a multitude of small leaks, which are difficult to detect, on a network that is 25,000 kilometres long. It is a serious problem.

179.

Mr N Hamilton: Mr Beggs referred to the southern division. There was a huge increase in unaccounted-for water between December 2000 and January 2001. Ninety-five per cent of the burst pipes in the southern division occurred in iron water mains that were over 30 years old. Unfortunately, that is the nature of the problem that the Department is dealing with. The aging water main system, which has approximately six million joints, is adversely affected by extreme weather conditions. That is why we used the phrase "the fragile state of the network".

180.

Mr Beggs: Figure 7 shows that the leakage reduction plans set targets to reduce leakage to 210 megalitres per day in 1999-00, and to reach an economic level of leakage of 197 megalitres per day by 2000-01. What were the leakage figures in those years? Did the Department achieve its targets?

181.

Mr Martin: The short answer is that we did not achieve our targets for the reason that I have just demonstrated. The impact of the extra water in distribution, as shown in the graph, was substantial, and we had a significant period of recovery. We were trying to deal with additional leakage in the system. The fact is that we are still above the target level. We did not achieve our target and we are still above that level. It is not because of the lack of effort going into trying to identify the leaks and to deal with them.

182.

Mr Beggs: Can you tell us what your estimated leakage was over the period?

183.

Mr Martin: The only way that you can do that is to look at the graph and to notice that supply went up from 712 megalitres to 788 megalitres in a period of days.

184.

Mr N Hamilton: It increased by 11% in two or three days, simply because of the freeze during December 2000.

185.

Mr Beggs: I accept what you are saying, but it would be useful if you could put a figure on what you estimate the leakage was over those two periods. If you could forward that figure to us, that would be fine.

186.

Mr Martin: It would be prudent to do that, because it is not immediately obvious.

187.

Mr Beggs: It will highlight for everyone the importance of addressing this problem.

188.

Finally, I see from paragraph 2.22 that in 1998-99 you intended to reduce leakage by 3%. That seems quite an unambitious target in comparison with England and Wales, which were attempting much more substantial reductions, and yet we have found that there has been a 9% increase. The Comptroller and Auditor General recommended that you should improve the monitoring of performance against annual leakage reduction targets. What systems have you put in place to achieve that?

189.

Mr N Hamilton: First, as the Audit Office report indicates, progress on leakage is directly proportionate to the amount of funding available for the network. Secondly, through our water leakage plan, we now have monthly monitoring figures in terms of distribution, so that we know the amount of water that goes in. We still have to estimate the use of that water and we are monitoring that on a monthly basis. However, this is not going to be achieved over a year or two. The nature of the industry is one of intensive capital investment. It is going to take three or four years. We believe that we will not achieve the economic level of leakage throughout the whole of Northern Ireland before, perhaps, 2006.

190.

Mr Beggs: Can I ask the treasury accounting officer to comment on the fact that Water Service is saying that it needs more funds to address leakage? It says that it needs sophisticated detection systems to enable it to identify leakages. Are you satisfied with the current level of funding that is being given to Water Service to address leakage?

191.

Mr O'Reilly: The level of funding allocated to any part of the public sector is ultimately a matter for the Executive and the Assembly. However, the Minister of Finance and Personnel has previously acknowledged that there has been a pattern of underinvestment in the Province in this area of public sector infrastructure, and, indeed, in others. The reasons for that relate to the priority previously given to the funding in this particular area vis-à-vis other areas. There are also issues concerning the access to alternative sources of funding that were available to the privatised water companies in England and Wales following privatisation in 1989, and for the future.

192.

The Administration and the Executive will wish to look at sources of funding for the water industry from mainstream public expenditure, but also from possible alternative sources of funding, such as publicprivate partnerships. There are already a few small examples in which that type of funding has been used.

193.

The general point is that there is a clear acknowledgement that the level of funding and capital investment provided, particularly for new Water Service infrastructure, has not been at a level sufficient to address the needs of the water industry. That needs to be addressed in the future.

194.

Mr Dallat: Some references were made to the quality of water. I am sure it has not escaped your notice, Mr Hamilton, that we are all surrounded by bottled water. Is it that bottled water is fashionable, or does that suggest displeasure at the quality of the drinking water?

195.

Mr N Hamilton: I am not responsible for the provision of water to the Committee!

196.

Mr Dallat: It is a strong endorsement for you if you see carafes of tap water lying around the room. We recently changed our supplier of bottled water.

197.

Mr N Hamilton: The point is serious. Bottled water is fashionable, especially as we travel across Europe and other places where people prefer bottled water. I live on the Silent Valley line and happily drink that water, and will continue to do so.

198.

Mr Dallat: I accept your recommendation. I understand that during direct rule it was not just the water that leaked - there was little investment in Water Service. Is it true that those resources were used for other purposes?

199.

Mr N Hamilton: During the 1990s, Water Service was considerably underfunded. For example, if you compare us to England and Wales, between 1991 and 1999 the English and Welsh water companies invested approximately £24·6 billion. During the same time we invested £477 million, which is 1·9% of what was invested in England and Wales. The normal Barnett comparison is 2·7%. Recently the amount of capital that is available to us has increased from about £30 million in 1992 to £110 million this year. As I said earlier, our estimate is that we will need investment of £3 billion over the next 20 years, which is an average of £150 million per year.

200.

Mr Dallat: Do you agree that not only did the water leak, but the funds were also siphoned off?

201.

Mr N Hamilton: I cannot comment as to whether the funds were siphoned off - I can only say that insufficient funds were available to Water Service.

202.

The Chairperson: Have the funds increased since the Assembly was established?

203.

Mr N Hamilton: Yes.

204.

Mr Dallat: I get the impression that you now accept that we cannot continue to put money into a system that pumps out water that goes nowhere.

205.

Mr N Hamilton: We have accepted that the leakage levels are too high and that we need further action to address that.

206.

Mr Dallat: Do you agree that trying to blow up a balloon that has a hole in it is not a good idea?

207.

Mr N Hamilton: I am not sure what you mean.

208.

Mr Dallat: Do you accept that it is not a good idea to simply pump more water into a system that leaks?

209.

Mr N Hamilton: We accept that we need an approach to water and sewerage investment that will address all the priorities, such as public health, meeting the Directives and replacing the network. All of those are important if we are to achieve our objectives.

210.

Mr Dallat: That is my point. Since the Audit Office report was published, and listening to you this morning, I get the impression that you accept that there should be greater emphasis on plugging the leaks, rather than applying for astronomical sums of money to build new systems that leak like sieves.

211.

Mr N Hamilton: We are increasing the amount of money that we put directly into leakage detection. A sum of £22 million was spent over four years, and that will go up to £25 million and will continue to rise because we want to address leakage. We want our new water resource strategy to include a solution that gives value for money as well as the most efficient and effective strategy; that asks whether we should have a single new source or a smaller number of existing sources that would give better value for money with an enhancement.

212.

Mr Dallat: That is the point that I am trying to get to. Can you now assure the Committee that you will have achieved those new economic levels of leakage before new capital investment is required? Can we now say for certain that the Hog Park Point project is off?

213.

Mr N Hamilton: We cannot say that for certain because we are waiting for the final report. As I said, that report will be the subject of public consultation. Ultimately, the final decision will be up to Ministers and the Assembly in the future. We will use, and are using, the latest appropriate methodology. That methodology incorporates a consideration of the need for new capital as well as the leakage targets et cetera, along the lines that the Northern Ireland Audit Office indicated in its report.

214.

Mr Dallat: Do you accept that the manner in which you run Water Service will largely determine what decisions are left to the Assembly? If the leaks are not plugged, we may be put in a position where we have no choice.

215.

Mr N Hamilton: It is not an either/or situation. Obviously, we must try to meet all our objectives, depending on the amount of resources that we can allocate to each of those objectives.

216.

Mr Dallat: So I can assume that the economic level of leakage will be met before you need new capital investment?

217.

Mr N Hamilton: No.

218.

Mr Dallat: Right. Let us then move on.

219.

Mr N Hamilton: Sorry. Mr Dallat, if you are asking whether the economic level of leakage will be achieved in relation to the audit report before there is any question of bringing a new source such as Hog Park Point, the answer to that is most certainly "Yes."

220.

Mr Dallat: The level will be reached?

221.

Mr N Hamilton: The level would have to be reached before we would go anywhere near a new source.

222.

Mr Dallat: That is important. I am sorry for pursuing that at length.

223.

Mr Martin: I want to emphasise that the alternatives that are being investigated are also capitalintensive. We must meet quality standards, which are not currently being met, because of EU Directives. The modifications and alterations to our plants are going to be expensive, and at the same time - this issue was raised earlier - while those modifications are being undertaken, the opportunity arises to augment those plants. That is the alternative that is being considered.

224.

Mr Dallat: It is all a question of balance?

225.

Mr N Hamilton: Yes. It is the opportunity to bring the quality issue and the quantity issue together. To illustrate the point, we currently have two sources of water from Lough Neagh - at Dunore Point and Castor Bay. We need capital investment at both of those in order to meet quality standards. Therefore, it seems sensible that if there must be capital investment in those sources, we should also thoroughly investigate the enhancement of those sources as an alternative source for additional water rather than go for what I called a single "big bang" solution for a brand new source.

226.

Mr Dallat: I have three questions leading on from what you have just said. Can you give any indication of what the new sources are that you are planning, how much they will cost and when you intend to build them? I ask you to deal with those three questions separately, please. The first one is "What new sources are you planning?"

227.

Mr N Hamilton: We are not planning new sources per se. I was trying to indicate earlier that a more efficient means of operating in relation to water quality and quantity is to reduce the number of sources. In 1999, we had 57 sources. It would be more efficient to try to reduce that number to around 40, because water needs to be treated in all of those sources. So, the only new source in our capital programme was Hog Park Point, which we have already discussed.

228.

Mr Dallat: I picked up from Mr Martin that you said that you would augment your supplies.

229.

Mr N Hamilton: By enhancing existing sources, rather than new sources.

230.

Mr Martin: Castor Bay and Dunore Point both require additional installations to improve quality. While that quality installation and modification is being undertaken, clearly the opportunity arises to modify the plants so that we can increase the take from those sources. They are not new sources; it is augmentation of existing sources. That is the alternative that will be considered as part of the strategy.

231.

Mr Hilditch: The water companies in England are postponing the need to look for hugely expensive new sources by putting money into leakage reduction. Are you taking the same approach?

232.

Mr N Hamilton: Yes. We are using the same methodology in any assessment of new sources. We are not replacing as much of the water main network as we would like to, because of the resource problem, but we certainly will not look at new sources such as Hog Park Point until we reach our economic level of leakage.

233.

Mr Martin: It is important to re-establish our previous priorities. We had to meet the public health requirements and the demand created by European Directives in relation to water and waste water. Otherwise, Northern Ireland would face infraction proceedings in the European courts. We also had to provide additional resources for mains replacement. Our asset management plan is likely to show mains replacement costing approximately £600 million. That is a vast amount of money, and so we had to prioritise and deal with quality first, then waste water treatment, and then mains. We have provided some mains replacement, but nowhere near enough.

234.

Mr N Hamilton: There have been major requirements regarding sewage. For example, Members may recall the Dickensian sewage treatment system in Duncrue Street, Belfast, which also included the disposal of sludge at sea. The EU directive required that to stop, and therefore we had to invest £100 million in the new Duncrue sewerage works and the adjacent incinerator.

235.

That is just an example of something that had to be done to meet EU Directives. However, there is a problem ahead of us, and that is the Belfast sewerage system. We estimate that we will have to spend £100 million to replace the Belfast sewerage system. We have done a detailed analysis. In fact, there have been recent examples of parts of it collapsing, not least outside the Department for Regional Development's headquarters.

236.

The Chairperson: Is that not a separate issue? You might have to come back.

237.

Mr N Hamilton: Yes. Nevertheless, our priorities should be public health, then drinking water and then sewerage and waste water treatment, but those requirements drive the priority with regard to the use of funding.

238.

The Chairperson: It comes back to funding, in other words.

239.

Mr Hilditch: Paragraph 3.17 states that you published the water efficiency plan 2000 during the audit that was carried out by the Comptroller and the Auditor General. To what extent was that action prompted by that audit investigation, and why had you not taken action earlier, given the importance of water efficiency?

240.

Mr J Kelly: That initiative was prompted by the drought of 1995, when, along with the water companies in England and Wales, we undertook to raise awareness about the use of water. OFWAT, in its regulation of the English and Welsh privatised companies, has now made it a statutory requirement that those companies must raise public awareness of the use of water through efficiency plan initiatives, for example. Therefore, our action was not prompted by the audit inquiry, but by the drought of 1995, alongside the line that was taken by the water industries in England and Wales.

241.

Mr Close: Once again, value for money is key. I am pleased that capital expenditure will be examined closely before we spend money on a new source that could leak up to of 37% of its water. That is a valuable point. If any of us were asked to say how to allocate resources, we certainly would not want to allocate them in such a way that 37% would be wasted.

242.

In dealing with the efficient use of water, we must address the idea of a free repair service. Is Water Service satisfied that there are no legislative obstacles to such a provision?

243.

Mr N Hamilton: There is a legislative obstacle - we could not provide such a service under the current legislation. A second issue is whether that would represent value for money, not least because, if we had the statutory authority, Water Service would have to enter private property to carry out work. It would then have to accept liability for any work that was involved in the repair, such as digging up people's gardens to repair pipes. It would also cost Water Service money. As I said earlier, resources are scarce. We would have to be satisfied that our return from providing that facility would represent value for money.

244.

The Chairperson: Have you done any done any research on that?

245.

Mr N Hamilton: Yes, and we will review that policy.

246.

Mr J Kelly: Some approximate figures for the potential cost have been calculated. It would be in excess of £0·5 million. However, we do not know what the take-up rate for a free repair service would be. Companies in England and Wales have taken a variety of approaches. Some offer free repairs, provided that the defect occurs with the first 15 metres of the customer's pipework. Others offer a single repair in the lifetime of the pipe. In other words, the company will repair one defect, but it will not repair any further faults. Other companies will carry out free repairs, provided that they can be carried out within three to four hours. Any work done after those three or four hours will be charged at an hourly rate of between £15 and £20.

247.

The approach taken by a privatised company will depend on the company itself and on the importance that it places on the contribution of the leaks from each customer's pipework. For example, in the south-east of England, which has been subject to more frequent hosepipe bans, some of the smaller companies take a very rigorous approach to offering free repairs, compared to companies further north.

248.

Mr Close: Will the Department be making recommendations to change the legislation here to enable Water Service to carry out free repairs? Viability and economics change over time.

249.

Mr N Hamilton: If, in the fullness of time, we thought that that had a contribution to make, we would consider it. However, it is a matter for the Minister.

250.

Mr Close: Do you not think that we should be forearmed and have the preparatory work done for such a change?

251.

Mr N Hamilton: We are trying to achieve our economic level of leakage by 2006, and we think that there are bigger gains to be made throughout our distribution network before we consider that.

252.

Mr Close: My point is that it would not cost very much to change the legislation. Does the Department recommend that the legislative barrier be cleared away so that, if it became economically viable, there would be no barrier to providing such a service?

253.

Mr N Hamilton: That is a matter for the Minister.

254.

Mr Close: Has the Department expressed any views on that to the Minister?

255.

Mr N Hamilton: That is a policy issue.

256.

Mr Close: Has the Department expressed any views? Has this been drawn to the Minister's attention?

257.

Mr N Hamilton: The Minister is aware of the issues in the audit report. However, that is a policy issue.

258.

Mr Close: Is the Minister aware that there is a legislative impediment?

259.

The Chairperson: Mr Close, that is something that you should ask the Minister.

260.

Mr Close: I would not have to if he were already aware of it.

261.

Mr N Hamilton: The Minister is aware of all the issues raised in the audit report, and also of those matters that we are here to discuss today.

262.

The Chairperson: I support the audit report, by the way. I want to ask one more question, and to apologise to Ms Ramsey because I should have told her that Ms Armitage is present. However, she does not want to ask questions because she is not feeling well. The Committee extends its best wishes to her.

263.

Ms Ramsey: I want to congratulate Mr Hamilton. He has taken every opportunity to talk about the underfunding of the Department of the Environment. However, I would not argue with that.

264.

On page 14 of the report it states that in 1994 consultants for Water Service produced a water resource strategy, which was adopted by the Department. However, leakage continued. In 1996, additional funding was given to the Department in order to reduce leakage. With that funding a leakage action plan was produced, though in 1998-99 leakage increased by 9%. I am conscious that you may not have the relevant figures to hand, but can you inform the Committee how much additional money was given, and how that money was spent?

265.

Throughout the session you have talked about a new water resource strategy. There was, however, a strategy in place that had been developed by Water Service. Why is there a new strategy in place? Did the previous one fail? If so, why do you think it failed?

266.

The Chairperson: Please try to answer those questions as briefly as possible.

267.

Mr N Hamilton: The Department will uncover the information in relation to the first question and will send it to the Committee.

268.

The previous water resource strategy was drawn up in 1992. Since then there have been significant changes, not least with regard to EU requirements about drinking water and waste water, which fundamentally change the nature of the business. Along with the Department's concerns about the fragility of the network, that is why it was so important that the water resource strategy be updated.

269.

Ms Ramsey: Will the other information be sent to the Committee?

270.

Mr N Hamilton: Yes.

271.

The Chairperson: That concludes the questions. Thank you for coming along. You must accept that the Department's performance to date has been uninspiring. It does not inspire the public to save water when so many leakages have occurred. However, the Committee has been encouraged by your answers today, and by your positive response. Thank you for that. The Committee will look forward to big improvements in the future.

272.

Mr N Hamilton: Thank you.

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Thank you for your letter of 5 March with which you enclose a transcript of the evidence given to the Committee on 28 February on this subject.

As you requested, I enclose a transcript with several minor alternations to ensure the accuracy of the evidence and information which my colleagues and I provided during the Hearing.

During the Hearing I agreed to provide the Committee with some further information, as follows:

Page 13/14 - Downward trend of leakage. The Committee requested further information on the estimated downward trend in leakage in relation to night flow monitoring and the effect on the response times to leaks. I attach, as Annexes 1 and 2, graphs which have been extracted from our Telemetry Data Management System which is used to monitor flows in the water distribution system. These graphs demonstrate the reductions in leakage achieved by setting up district metered areas, and having continuous monitoring of flows via telemetry links to enable rapid identification and repairs of bursts.

Page 48 - Number of Hippo bags in use in England and Wales. For the avoidance of any confusion, I should confirm that both the figures quoted are correct. The NIAO Report indicated, and the Department accepts, that the 30,000 Hippos issued in Northern Ireland equates to only 5% of households while over 4 million devices (equivalent to 20% of households) had been issued in England and Wales. The Committee might wish to be aware however of information available to the Department that the National Audit Office has carried out a survey and found that only 6% of respondents in England and Wales who had Hippos are continuing to use them.

Page 51 - Water saved by installation of Hippo bags. I would want to confirm, contrary to the impression which may have given to the Committee, that the Department accepts the figures referred to by Mr Close. I apologise for any confusion which I may have given. Hippo bags can save up to 3 litres per flush if they are installed correctly in larger cisterns and evidence from water companies in England and Wales estimate savings of around 10 litres per property per day.

Page 53 - Issue of leaflets. As we advised the Committee, Water Service issued water efficiency leaflets to all properties in 2001. There was also a leaflet drop in 2000. A further leaflet drop commenced on 25 February 2002 and is due to be completed, by postal delivery, on 13 April 2002.

Page 63/64 - Estimates of leakage over New Year periods. The estimated level of leakage for the year 1999/00 was 267 million litres per day. The comparable figure for 2000/01 was 286 million litres per day. The increase in leakage in 2000/01 was a direct result of the freeze/thaw over the 2001 New Year period when an additional 76 million litres of water per day had to be put into the distribution system to maintain supplies. Freeze thaw conditions over the 2001/2002 New Year period, although not as severe as the 2000/01 incident also led to an increase in leakage of 21 million litres per day between December 2001 to January 2002.

Page 69/70 - Capital expenditure. I attach, as Annex 3 details of capital expenditure for the 10 year period between 1991/92 and 2000/01. Detailed expenditure by category for each of the last 6 years is also included. In summary, during the period 1995/96 -2001/02

(a) 166 million which is 35% of the total capital budget was spent on water treatment works, service reservoirs and trunk mains to improve the quantity and quality of the drinking water;

(b) 182 million, 39% of the total capital budget, was spent on the waste water treatment works and sewer networks to improve standards in respect of sewage discharges; and

(c) £107 million, only 23% of the total capital budget was spent on the water distribution network.

Pages 88-90 - Additional expenditure on leakage from 1996 to 1998/99. Additional expenditure for leakage commenced in 1996 when Water Service redirected £600,000 from its capital works programme into the provision of the leakage infrastructure. This was increased to £1.5 million in 1997/98 and £2.15 million in 1998/99. It was recognised that long-term leakage reduction requires the establishment of an appropriate leakage monitoring infrastructure and the deployment of extra resources for detection and repair. Since 1999/00, Water Service has deployed leakage contractors to supplement its in-house resources in the detection and repair of leaks.

I hope that this information clarifies the outstanding points from the Hearing. Should you require any further information, perhaps you could let me know and I will arrange to have it provided as soon as possible.

ANNEX 1

The graph above indicates the flow into a district area. At Point A a burst occurs and an alarm is activated on the Telemetry System. Water Service Staff identify, locate and repair the leak within 4 hours. At Point B flow returns to normal.