Irish Water may ease State debt by €3bn

The establishment of Irish Water could give the Government an extra €500 million "leeway" in the 2015 budget, according to Prof John FitzGerald of the Economic and Social Research Institute.

It may also help ease the national debt, by the order of something approaching 2 per cent of gross national product, the economist believes.

The creation of the new utility company “has big implications for the State’s budget in 2015,” said Prof FitzGerald, who is working on a paper for the ESRI that will examine the effect of the utility on the national finances.

Income stream
The criteria under which Irish Water is being established, including the existence of an income stream from water charges that funds its operating costs, mean its liabilities do not form part of the national debt as measured by a number of international bodies, and the bond markets.

They also mean that any increased borrowing by the utility for capital investments on water and sewage infrastructure will not increase the national debt.

This means the utility could “ramp up” planned investment in water infrastructure without affecting the budget deficit.

The approximately €500 million per annum that Irish Water expects to raise from the application of water charges to domestic and non-domestic service users, means that a “leeway” of this size will open up in the annual budgets of the Department of Finance.

This is because costs associated with the water service that now form part of national budgets will be paid for by Irish Water, which is outside the budget process, and so this cost will “disappear” from the budget accounts.

Transfer
Also, the transfer of water assets from 34 local authorities to Irish Water is likely to produce a net €3 billion reduction in the national debt, Prof FitzGerald said.

While the shifting of debt from the Government to the State-owned utility is “an accountancy trick” on one level, it has important implications for “how the outside world sees us”.

Write-down
While the details have yet to be worked out, Prof FitzGerald believes that the net effect of the transfer of water assets to the new utility company will be a write-down in the national debt of approximately €3 billion.

This will help Ireland’s debt sustainability and could well have a positive affect on the interest rate Ireland pays.

The assets to be acquired by Irish Water are likely to be worth substantially more than the value that will be used when they are being transferred.

Using a full value for the assets would substantially increase the size of the proposed water charge, because of the need to service the resulting debt.

Reduced cost
The transfer of the assets at a reduced cost has been the norm in the UK for this reason, Prof FitzGerald said.

Prof FitzGerald and ESRI economist Edgar Morgenroth made a submission to the Department of the Environment in February 2012 on the establishment and funding of Irish Water.

Prof FitzGerald was a member of an independent review panel that the Executive in Northern Ireland established to look at aspects of Northern Ireland Water in 2007 and 2008.