Water costs not off kilter for utility set-up

The €86 million paid for consultancy services by Irish Water since its establishment is not off kilter with common practice in the establishment of new utility companies, according to a number of people with knowledge of the area.

What has to be borne in mind, according to John Mullins, a former chief executive of Bord Gáis, is that the setting up of Irish Water is one of the largest projects undertaken by the State since its inception in the 1920s. It is like setting up the ESB, only bigger.

Water and sewage systems that were operated by 34 separate local authorities using some 4,000 staff are bring brought under centralised control while a totally new metering and billing system is being introduced and, crucially, a proper inventory of the assets involved is being established for the first time.

There are approximately 1,000 water systems around the State being brought under the new company’s control. It will have about 1.8 million customers, 1.6 million of whom will be domestic users.

The assets involved have an estimated value of €11 billion, but there is no reliable record for many of them and limited information as to their condition, an Oireachtas committee was told this week. Because some of the infrastructure falls below what is required under EU law, the system is expected to require several hundred million euro in additional capital expenditure in the period to 2027.

Competitive market
Mullins, who has set up energy investment fund Amarenco Solar since leaving Bord Gáis in December 2012, was a consultant with Coopers and Lybrand in the UK in the 1990s.

He worked on a project in England to allow people to switch electricity suppliers that had a value of £100 million. “That was in 1998.” Spends of such scale are relatively common in the utility sector.

The insertion of new IT systems into large businesses such as utility companies involves specialist people who are not the type of individuals you would have on your staff. “These people move around the world working on projects. Pricing is by way of tenders and you are in competition with other software companies. It is a very competitive market.”

In Scotland, £200 million was spent creating a new billing system when three separate water utilities were combined into one, he says.

When he worked in Bord Gáis he was very impressed by its procurement system. The people involved had worked in both the public and private sectors and there was “fairly arduous process” involved. The company, he points out, has been investing in major new assets, on a regular basis, for a long period of time.

“Great care is put into public tendering because you can be challenged.”

Profit margins
Independent TD for Wicklow, Stephen Donnelly, was a strategic management consultant with the international business consultancy group McKinsey, prior to getting elected.

Consulting involves “a market-based pricing model”, he says, with consultants charging prices that maximise their profit margins, but in a sustainable way.

“Is there a competitive market in Dublin? Yes. Because it is a global market . . . especially for the big stuff. If you are talking €50 million, then you are going to do an international tender.”

Consultants charge the price the market will bear. “It is just like selling ice cream. Try selling ice cream in Bray for €50 million a cone and see how you get on.”

The fact that the barriers to entry to the consultancy market are low ensures that it is a competitively-priced business, he says. “A lot of the time they are the best people around at what they are selling. So they get good money. But they work very hard, and you can be let go at any time.”

He says that his income as a TD is “a fraction” of what he earned during his time as a consultant with McKinsey.

Standard practice
In his submission to the Joint Committee on the Environment, Culture and the Gaeltacht on Tuesday, Irish Water chief executive John Tierney gave a detailed outline of what he and his colleagues have been up to, and why they spent what they did on consultants.

The use of outside expertise to set up the systems needed by the new utility company “is standard practice for utilities internationally and is seen as the most efficient practice both in terms of delivery and also of cost management.”

To put in place five major information systems, Irish Water procured “global specialist expertise” and secured fixed price, lump sum contracts where payment will only happen “when we have a proven deliverable”, said Tierney. Most of the teams engaged to create the new infrastructure, were already in place having worked for other clients on similar tasks.

According to Tierney, there were nine “lots” of tenders, for which 96 pre-qualification submissions were received, leading to three to six invitations to tender for each lot.

Tierney’s submission includes a timeline, starting April 2012, when it was announced that Bord Gáis had been selected to establish Irish Water. It shows that presentations and updates were made to troika representatives in October 2012 and February, April, July and October 2013. There were also important and regular dealings with the Department of the Environment, Community and Local Government.

Micro-manage
Despite the scale of the project, however, it appears that the Minister, Phil Hogan, had very little knowledge of how the new body's budget was being spent until the current controversy. He defended his lack of knowledge, saying: "I don't micromanage any State company no more than any other minister. That's why we have the Commission for Energy Regulation."

According to Tierney, a major part of the cost of setting up Irish Water is building an “asset management system” to allow for the management of “a large spatially distributed asset base by knowing where they are located; their condition; the service they are providing; and where maintenance costs are arising.”

By setting up Irish Water and the systems being put in place by the consultants, the new utility aims to create efficiencies of about €1.1 billion in the 2015 to 2021 period. Tierney says there will be operating expenditure savings of €600 million, and capital expenditure efficiencies of €500 million.

A spokeswoman for the company said the savings would come out of a total capital spend expected to be in the region of €3.1 billion to 2021.

In his submission, Tierney said this €1.1 billion in savings, combined with the introduction of domestic water charges, would save the Exchequer €2 billion in total, when compared with what would have occurred if Irish Water was not established.

'Eye-watering'
The former chief executive of Northern Ireland Water, Trevor Haslett, describes the €600 million in savings from operational efficiencies as an "eye watering figure".

In Northern Ireland the process of centralising 26 different councils began in the mid-1990s and led to the creation of NI Water in 2007. Achieving savings is a difficult process, he warns, and is subject to the law of diminishing returns. “Standardising takes time.”

Irish Water is being put in place very quickly, he says. He was not able to comment on the capital spend savings because the overall size of the capital budget was not known at the time of the interview.

Haslett says making savings through more efficient asset management means fixing things before they are broken, but that so much of the Irish system is already so in need of repair that the “needs to be fixed now” agenda will probably dictate activity at Irish Water for quite some years.

On consultancy and pricing, he says tendering ensures you get the market price.

The bigger issue, as he sees it, is whether the product purchased was the one that the company needed.

Another issue, in his experience, is finding out afterwards that modifications are needed, which usually involves giving yet more money to the same consultants.