COMMITTEE FOR REGIONAL DEVELOPMENT
Committee Office Room 402
Parliament Buildings
Belfast
BT4 3XX
Tel: 02890 521970
Fax: 02890 525927
Email committee.regionaldevelopment@niassembly.gov.uk
Conor Murphy, MP MLA
Minister for Regional Development
Clarence Court
10-18 Adelaide Street
Belfast
BT2 8GB
11 October 2007
Review of Water and Sewerage: Independent Panel’s Strand 1 Report
Dear Conor,
1. At its meeting of 5 September 2007 a consultation process was agreed whereby the Committee would have an opportunity to consider the Independent Panel’s Strand 1 report on the Review of Water and Sewerage, and provide its views to you in person at the Committee meeting of 10 October 2007, and in writing on 11 October 2007.
2. In preparation for its meeting with you, and as part of the consultation process, the Committee sought the views of the Northern Ireland Authority for Utility Regulation (NIAUR), the Consumer Council (CCNI) and Northern Ireland Water (NIW) on Monday 8 October 2007, and the Independent Panel and Victor Hewitt of the Economic Research Institute of Northern Ireland (ERINI) on Tuesday 9 October 2007. The Committee also considered the Strand 1 report at its meeting of 10 October 2007. These meetings, together with the Committee’s reading and consideration of the Strand 1 report have informed the Committee’s views. This letter reflects the Committee’s views as agreed by the Committee on 10 October 2007.
3. The Committee recognised the scope and scale of the task facing the Independent Panel in addressing the issues delineated in the Strand 1 report, and the challenging timescale within which this was to be achieved. The Committee expressed its appreciation for this work when it met with the panel at its meeting of 9 October 2007, and would reiterate this appreciation of the panel’s efforts to you.
4. The Committee also wishes to recognise the time and effort of NIAUR, CCNI, NIW and Victor Hewitt of ERINI in sharing their views on the Strand 1 report with the Committee at its meetings of 8 and 9 October 2007.
5. The Committee welcomes the Strand 1 report in general terms, and believes that it represents an important, early, first step forward in finding a solution to both protect the most vulnerable in our society from poverty and hardship, and ensures that all the households and enterprises in Northern Ireland have clean, safe and reliable drinking water and sewerage services, that are provided in an efficient, sustainable, fair and transparent manner.
6. Following consideration of the discussion and recommendations contained within the report, the Committee is of the view it requires the additional information and the further consideration, detailed below, and it considers that it is not possible at this time for it to make a definitive decision on the proposals contained within the report. Its view is that the challenges posed by the Review of Water and Sewerage can only be addressed once Strand 1 and Strand 2 have been completed. The paragraphs which follow set out the Committee’s current thinking on the key recommendations within the Strand 1 report together with its issues of concern, however it wishes to reserve a final view until it has had an opportunity to consider the additional information identified below, and the outcome of the Strand 2 report.
Ring fencing a contribution from the regional rate
7. In general, the Committee agreed with the recommendation that in 2008/09 a figure, reflecting the historic cost contribution already paid in the regional rate for water and sewerage services should be taken from the regional rates, with the balance coming from the Northern Ireland block. This amount should be ring-fenced, if that is technically possible, for allocation to NIW.
8. The Committee heard views that the figure of £109m per annum was conservative, and although it recognises that there may be public expenditure consequences to increasing this sum, it is of the view that before it could form an informed opinion on the exact amount to be ring-fenced from the regional rate, it would need to see consideration of other amounts calculated using alternative, less conservative methodologies.
9. In addition, it is the Committee’s view that in 2009/10 this amount should also be taken from the regional rating revenues. The method of assessment is an area where the Committee has concerns, as explored below. A variety of views were expressed within the Committee on the principle of using capital values as the basis for charging. The Committee will reserve its opinion on the use of capital values as the charging base until December when the work on the affordability tariff will be complete.
10. The Committee considered in some detail the panel’s recommendations that the domestic metering programme should cease and that there should be no volumetric charging. A variety of views were expressed on these issues in the Committee.
Billing and collection
11. The panel’s report recommends an end to the current proposal for a separate water and sewerage charge and that billing and collection should be done through the rates bill with water and sewerage costs clearly delineated and quantified on the face of the bill. In principle, the Committee is in agreement with this.
12. The panel also proposes that the billing and collection be undertaken by the Land and Property Services (LPS) agency (formerly the Rates Collection Agency). This recommendation is made by the panel, and endorsed by the CCNI on the assumption that one single billing and collection mechanism would yield efficiencies and therefore reduce costs to water customers. The panel’s report contains no consideration of the full costs of varying or exiting, as necessary, the Xansa (Crystal Alliance) contract in respect of billing and collection, or the full capital and revenue costs and the technical feasibility of transferring billing and collection to LPS by 2009/10.
13. The Committee is of the view that clear evidence is needed from LPS that it could provide billing and collection services for water charges more efficiently, and as effectively, as the existing Xansa (Crystal Alliance) arrangements, on the grounds that failure to do so would increase the cost to water customers.
14. The technical feasibility of the recommendation that householders’ payments for water and sewerage services could be calculated and clearly and separately identified on the rates bill is a key issue for the Committee. In particular, it would require further information on the proposed handling of the more than 100,000 households with septic tanks, and therefore not connected to the sewerage network, and those customers currently billed on a non-domestic basis but with a domestic water allowance.
Increased efficiencies
15. The Strand 1 report recommends that NIW’s operational cost (opex) efficiency target should be raised from 22% to 40% for the period ending 2009/10 on the basis that the evidence (consultancy reports) reviewed by the panel all agrees that there is substantial scope for opex efficiencies in NIW. The Committee supports the principle that the interests of water customers are best served by making NIW as efficient as possible as quickly as possible. There are concerns in relation to the achievability of this target because of the risks for customers and the Department of a failure to do so.
16. The Committee heard from the panel that 25 water undertakers (1 public and 24 private) had achieved opex efficiencies in excess of 22% and that the view of the panel was that NIW would also. However, NIAUR informed the Committee that while it believed that opex efficiencies of the order of 40% were achievable for NIW, it was unsure that this could be achieved within the timescale indicated in the panel’s recommendation. NIW was of the view that opex efficiencies of 40% were not practical.
17. The Committee hopes that the 40% efficiency target is achievable but it requires a clearer understanding of the implications for customers of achieving this target, in terms of service levels, planned investment and so forth, and also of the implications of a failure of NIW to meet this target in terms of increased charges or an impact on the Departmental budget. In the first instance, the Committee would like to see some consideration of these issues in the context of a range of efficiency targets from the current 22% to the recommended 40%, and has decided that it would be more appropriate to wait for this information.
Water poverty and an affordability tariff
18. A clear issue of concern for the Committee since its first consideration of the issue of water reform has been water poverty and the affordability tariff. The Committee welcomes the panel’s comments on an affordability tariff and its ongoing work on water poverty and the enhanced affordability tariff. It is of the view that until that work is completed, it is not in a position to form a firm view on the adequacy or otherwise of affordability measures to address the implications of the panel’s recommendations as contained in the Strand 1 report.
19. Discussions with the panel at the Committee meeting of 9 October 2007 have revealed that the panel may face resource and capacity constraints in completing its work on water poverty and affordability measures. The Committee is of the view that the additional resources necessary to complete this vital work be made available to the panel.
The impact on the Department for Regional Development budget: transfer of road drainage costs, part waiver of the dividend and any impairment charge
20. The panel’s report makes a number of recommendations which may have an impact on the Department’s budget. The Committee agrees that the cost of roads drainage should not be paid for by water customers. Since its first Committee meeting in May 2007, the Committee has been briefed by the Department on a range of in year and future year pressures it faces on the resource and capital budgets, in particular on the structural roads maintenance budget. Therefore, it is the view of the Committee that it would not be prudent for it to endorse any recommendation which may place additional unquantified pressures on the Departmental budget. For this reason, the Committee has decided that the budgetary and accounting implications of the recommendations, in relation to the transfer of road drainage costs, the waiver of a proportion of the dividend on equity and any potential impairment charge this may attract, be clearly identified and considered before any agreement is reached on the transfer of these costs to the Departmental budget. There may also be other, as yet unidentified, costs to the Department arising from the recommendations in the Strand 1 report. It is the view of the Committee that should the Executive decide to accept the Strand 1 report recommendations then the necessary additional budgetary cover, identified by the Department, be agreed at Executive level.
Department for Finance and Personnel and HM Treasury consent
21. Following on from the points made above, the Committee notes the absence of a clear indication that the Department for Finance and Personnel (DFP) and HM Treasury (HMT) have or will give their support and consent to the recommendations in the Strand 1 report. The Committee is of the view that it cannot endorse the recommendations in the Strand 1 report until it is clear that such recommendations are technically feasible within the existing public expenditure framework and government budgeting and accounting guidance in the first instance.
22. There will be clear implications for public expenditure available to all public services in Northern Ireland arising from the recommendations in the report. Although this is not strictly a matter of concern for the Committee for Regional Development, it is a matter of concern for the Assembly as a whole and the people of Northern Ireland who use these public services. In the current budget and economic climate, the Committee would like to see discussion and debate on the costs and opportunity costs of the panel’s recommendations as part of the process of consideration of the Strand 1 report.
Other issues
23. The Committee endorses the panel’s recommendation that NIAUR would have a role in approving any proposed disposal of surplus assets in the period after 2009/10. Prior to that, the Committee is of the view that in principle customers should not be paying for unproductive assets. Neither is it prudent to engage in an unplanned or ‘fire sale’ approach to the disposal of surplus assets.
24. The Committee welcomes the panel’s recommendation that NIW reviews its capital expenditure (capex) efficiency targets with a view to submitting more challenging targets for NIAUR to consider. The Committee recommends that decisions on capex efficiency targets be guided and informed by the regulator’s views.
25. The Committee noted with interest the panel’s ongoing work in relation to an equity based and a debt financed model, in particular the potential impact on NIW’s financing costs with concomitant changes in costs to customers. It recognises that this work is at an early stage, and looks forward to considering it in greater detail in the panel’s Strand 2 report.
26. The Committee notes that some of the panel’s recommendations may have workforce implications, in particular any increased opex efficiency targets, the fundamental review of the Xansa (Crystal Alliance) contract, and the recommendation for the transfer of billing and collection to LPS. It is the view of the Committee that any decision to endorse the recommendations in the panel’s Strand 1 report should be informed by clear and quantified consideration of the workforce implications and any impact on service delivery arising from same.
27. The panel has informed the Committee that the report and its recommendations are supported by and drawn on technical and evidential appendices; however it was not possible within the time frame of delivery of the Strand 1 report to produce these supporting appendices for consideration by the Committee or the stakeholders. The Committee recommends that these appendices and any supporting evidence be made available to it and others as part of the process of consideration of the Strand 1 report.
28. Finally, the Committee reiterates support for the ongoing work of the Independent Panel, recognises the importance of, and the challenge posed by, the review and is happy to make itself available to the panel as this work progresses. In addition, the Committee asks that you respond to its concerns as expressed in this letter and bring the Committee’s views to the attention of the Executive in its consideration of the Strand 1 report. The Committee has agreed to make itself available to meet with you for further engagement on the Strand 1 report and on the review as it progresses.