Irish Water split from Ervia inevitable to protect Government accounts
John FitzGerald: Shortages show why water utility should have followed ESB template
The proposed water ownership referendum, like much else with Irish Water, is about solving a political problem, not addressing any fundamentals about our water supply. Photograph: Rui Vieira/PA Wire
The ESB was set up 90 years ago as a State-owned company to ensure a reliable supply of electricity to the people of Ireland and continues to fulfil this role today. A key feature of the ESB’s success has been the fact that, while it is owned by the State, it operates independently. This independence is underpinned by earning all its own income through charging electricity users.
As a consequence, the ESB’s borrowings are not considered to be part of Government borrowings, and the resulting debt is not part of the Government debt. This independence has meant that, even when the government had massive financial difficulties, as in the 1980s, the ESB was able to continue a very ambitious investment programme.
Bord Gáis Energy (BGE), and its successor, Ervia, is a younger company. It is also owned by the State, and it too was very successful over the past 35 years in developing the gas grid for Ireland. As with the ESB, until recently all its revenue came from the payments of gas users: there was no State subsidy. This allowed the company to determine and implement its independent investment programme, even when the State was in financial difficulties.
BGE looked like a good candidate to run Irish Water because of its success in the gas sector. However, this turned out to be a disaster for the company, not because they were not up to the job, but because they were not allowed to do the job. If they had been permitted to hire just the staff they needed, and raise independent income through charges, we would be in a very different position today.
However, the Oireachtas decided otherwise and the company, now called Ervia, has found itself hamstrung in the management of the vital business of providing Ireland with an adequate and safe water supply and sewage system. Because Irish Water is largely reliant on payments from the exchequer, the borrowing needed to fund the very large investment programme is classified as government borrowing. As a result, the company is limited in how much it can invest in fixing and developing the very seriously inadequate network which it has inherited.
This summer’s drought has cruelly exposed the impact of past inadequate investment in our water system. If Irish Water had been established as originally envisaged as an independent commercial State company, with its own source of funding, then it would have been able to invest twice what it does at present. It could have borrowed more independently, and added the State’s funding injection to a healthy revenue stream from customers.
Climate change is expected to increase the number of dry summers, at least in the east of the country. However, investing in additional water capacity will now be part of the Government’s borrowing requirement.
Much less attention has been paid to the possible damage of its Irish Water subsidiary to Ervia’s continuing role in managing and funding the vital gas network.
Whereas in the past BGE was free to borrow where necessary to fund investment, today there is danger that the independence of the combined company to invest in gas distribution could be compromised by the limited independent income for water services.
Because Ervia is responsible for both water and gas, there is the risk that the company’s gas borrowings could be classified in future as government borrowing. If this were to happen, not only would it compromise the pace of future gas investment, but the historic debts BGE incurred to develop the gas grid would be added to the national debt. As well as seriously impacting on Ervia’s gas operations, this would also make the Government’s ongoing budgetary arithmetic much more difficult.
To protect the gas network, and the Government’s budget, it is now necessary to separate the management of the water and gas networks into two separate companies. This would halt the contagion from the water sector into gas.
So while the separation into two companies might make a referendum on public ownership of Irish Water a bit simpler, a more compelling reason is to safeguard the capacity of the gas network to continue to invest at its required pace.
The proposed water ownership referendum, like much else with Irish Water, is about solving a political problem, not addressing any fundamentals about our water supply. It addresses the extreme unlikelihood that Irish Water would ever be privatised, rather than putting energy into the real shortcomings of how we provide our citizens with an adequate, safe and reliable water supply.