Irish Water: Phase 1 Report Appendices

www.pwc.com/ie Draft

Irish Water: Phase 1 Report Appendices

Irish Water: Phase 1 Report

PwC of 79

Table of Contents

Appendix 1: Terms of Reference ......................................................................... 3

Appendix 2: Water Policy Context ...................................................................... 5

Appendix 3: Legislative Summary ..................................................................... 7

Appendix 4: Water Organisation Charts ...........................................................13

Appendix 5: Public Sector Staffing Initiatives ................................................... 17

Appendix 6: Water Staffing .............................................................................. 19

Appendix 7: Review of International Experience ............................................. 20

Appendix 8: Definition of Options .................................................................... 63

Appendix 9: Evaluation Criteria........................................................................ 71

Appendix 10: Performance Data for UK Water Companies ............................ 74

Appendix 11: Assessment of Options ................................................................. 76


PwC of 79

Appendix 1: Terms of Reference

Consultancy Services for Water Utility

Introduction The 34 city and county councils are responsible for the production, distribution and monitoring of drinking water from over 900 public water supplies and for the provision of public waste water services. The councils are also responsible for the supervision of any group and private water supplies in their areas and for the carrying out of various water-related inspection and enforcement activities.

The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF requires, inter alia, that by the end of 2011, the Government will have undertaken an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility. The Programme for National Recovery 2011-2016, indicates that the Government will create Irish Water, a new State company that will take over key water/waste water functions from the 34 existing local authorities.

This independent assessment, will guide the implementation of this strategy, identifying the optimum role and functions of the proposed company. Against the backdrop of the Government decision to establish Irish Water, the assessment should determine the most effective assignment of functions and structural arrangements for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision.

The study will be undertaken in two parts. Part I to identify the optimum organisational structure and Part II to examine in detail the legal, financial and organisational issues together with an implementation timetable.

Phase I – Options Consideration 1. The deliverable for Phase I of the study is an interim report indicating the recommended optimal

organisational form for water services delivery in Ireland, distinguishing if appropriate, between short-term, medium and longer term options.

2. In examining the optimal organisational structure for the sector, the study should have regard to the proposed structural reforms impacting on the sector, including the commitments in the Programme for National Recovery 2011-2016 including NewERA, the introduction of a fair funding model comprehending the metering of households and a charging regime to include a free allowance, the establishment of an independent Economic Regulator for water, the recommendations of the Local Government Efficiency Review Group and of the Value for Money Study of the Water Services Investment Programme1 as well as the governance requirements for the implementation of the River Basin Management Plans.

3. The study should consider two principal forms of potential company structure for Irish Water:

A water company which would be a self-financing water utility in a regulated environment, responsible for operation, maintenance and investment in all water services infrastructure, customer billing, charging; and

A company charged mainly with investment in the sector (strategic planning, delivery of projects of a regional/national priority, national metering programme) with local authorities operating as agents of the company, retaining their operational responsibilities and for delivery of smaller scale investment.

1 Unpublished – and outline of this report is attached at Appendix II


PwC of 79

The study should contrast these organisational forms, or variants thereof, with current arrangements across a number of parameters e.g. governance, value for money, financial viability, statutory compliance, efficiency, level of service, cost to consumers, infrastructure investment; leakage rates etc. Relevant examples of best practice internationally should be outlined. The examination should involve a SWOT analysis of the current delivery structures, including an examination of the performance of local authorities in recent years in the provision of water services - based largely on published information, including financial data, environmental reports (including inspection and enforcement activities) and other available service indicators.

4. The resulting recommendation should provide a broad indication of the role and functions that Irish Water should have and the rationale for assigning these functions to the company (e.g. water services infrastructure delivery, roll-out of metering programme, operation of existing plant, ownership of assets, implementation of river basin management plans, etc). The review should also consider the possibility/desirability of assigning responsibility for water services provision, or part thereof, to an existing state agency. The review will need to have regard to the outcome of a cost-benefit analysis of the funding options for the metering programme being carried out by the Department which is to be completed by end-April 2011.

Phase II – Implementation Strategy Phase II of the study will focus on the detailed implementation issues involved in the creation of a new company in line with recommendations made in Phase I of the study. It will recommend transitional arrangements together with a timeframe, taking account of the need for continued delivery of a critical public service during and following a restructuring process.

This will involve an examination of the issues that would arise from the consolidation of water services provision from the local authorities to a water company. This should include consideration of:

governance and organisational structures, including the relationship of the company with the Department, the proposed water Regulator, the Environmental Protection Agency, regional delivery structure, local authorities and the rural water sector, and staffing requirements;

the approach to future infrastructural delivery;

the approach to service delivery, having regard to, inter alia, the impact of regulation, environmental/public health standards and technological advances on service requirements;

primary legal issues arising including issues of ownership and control of assets, and an outline of main

legislative changes required to give effect to the recommended organisational form;

funding requirements of a new company, including the scope for accessing private finance, valuation of existing water services infrastructure and any further options of relevance to revenue generation; and

the re-assignment of the inspection and enforcement functions which currently rest with local authorities.


PwC of 79

Appendix 2: Water Policy Context

The Programme for Government contains a number of commitments in relation to reforming the institutional arrangements governing the water sector in Ireland. In addition, in preparing our report, we also had regard to the commitments in the agreement with the EU/IMF, the report of the Review Group on State Assets and Liabilities, and other government policies which are directly relevant and important in this regard.

Programme for Government The Programme for Government, published in March 2011 provides:

“To achieve better quality water and environment we will introduce a fair funding model to deliver clean and reliable water. We will first establish a new State owned water utility company to take over responsibility from the separate local authorities for Ireland’s water infrastructure and to drive new investment. The objective is to install water meters in every household in Ireland and move to a charging system that is based on use above the free allowance”.

There is a commitment to prepare a new National Development Plan for the period 2012-2017 setting down the public investment priorities over the period and this is expected to be published in September.

In order to ensure that public enterprise plays a full role in Ireland’s economic recovery, the Government has committed to creating a holding company to manage the state’s holdings of the semi-states, and to coordinate investment in key priority areas identified by the Government, including energy, water and forestry.

There is to be a Strategic Investment Bank that will become a provider of finance to large capital projects, a conduit for venture capital and a lender to SMEs.

New Economy and Recovery Authority (NewERA) The Programme for Government also contains the following which are relevant to the water sector:

The Government will put in place a parallel, commercially-financed investment programme in key networks of the economy to support demand and employment in the short-term, and to provide the basis for sustainable, export-led jobs and growth for the next generation.

Under the NewERA plan, streamlined and restructured semi-states will make significant additional investments, over and above current plans, over the next four years in “next generation” infrastructures in energy, broadband, forestry and water. These investments – and the accompanying semi-state restructuring process – will be financed and pro-actively managed by a New Economy and Recovery Authority (NewERA), which will absorb the National Pension Reserve Commission. Subject to finalisation in the National Development Plan, we propose to make additional investments in the following areas:

A new water network: The new Government will create Irish Water, a new State company that will take over the water investment maintenance programmes of the 34 existing local authorities. It will supervise and accelerate the planned investments needed to upgrade the State’s inefficient and leaking water network which proved so unreliable during the recent harsh weather conditions.


PwC of 79

EU/IMF Also of importance is the Programme of Financial Support for Ireland agreed between the Government and the EU/IMF( December 2010). The Programme requires, inter alia, that by the end of 2011, the Government will have undertaken an independent assessment of the transfer of responsibility for water services provision from the local authorities to a water utility.

The assessment is required to determine the most effective structure(s) for delivering high quality competitively priced water services to customers (domestic and non-domestic) and for infrastructure provision. In particular, the review is required to consider whether a national water utility would be more efficient and cost effective than the existing implementation and operation structures across the 34 city and county councils. This review is also to cover the legal framework and financial and economic dimensions as well as organisational issues, having regard to international experience and relevant examples of best practice.

Report of the Review Group on State Assets and Liabilities The report of Review Group on State Assets and Liabilities was issued by the Government in April 2011 and a large number of recommendations are being variously considered. The report contained the following references to the water sector:

“In 2009, the Special Group on Public Service Numbers and Expenditure recommended that the Irish water industry should be comprehensively restructured. The National Recovery Plan 2011-2014 provides for the introduction of a scheme for metering and charging for domestic water. A commercialised water industry that might eventually emerge from this reform would be a natural monopoly and would have to be subject to economic regulation.

It has been suggested that the Environmental Protection Agency (EPA), which currently has responsibility for water quality and compliance with EU directives, would be a suitable body to undertake this task. The Review Group feels that such an aggregation of responsibilities would not be appropriate and that responsibility for economic regulation in the water industry should be assigned to a body distinct from the EPA. In Northern Ireland, a single Regulator is responsible for electricity, gas and water. The technical challenges of regulation in these three sectors coincide to a large degree.

The Review Group recommended that, in the event that a customer financed water industry structure emerges, this monopoly should be regulated through expanding the role of the Commission for Energy Regulation rather than through the establishment of yet another sector Regulator."

The report also makes a number of recommendations in relation to economic regulation which are also relevant to designing new institutional arrangements for the water sector. The Group paid particular attention to questions of market design and the Regulatory reforms necessary to underpin competition and appropriate levels of investment, especially in those sectors where there are natural monopolies subject to statutory regulation. The water sector is also relevant in this regard. The Group indicated that recommendations are intended to enhance the competitiveness of the sectors of the economy where state bodies are active. They also recommended:(1) Changes in the governance of state bodies while they remain in public ownership to enhance efficiency and performance and (2) A review of Regulatory arrangements and a new structure for the oversight of Regulatory agencies.

At time of writing ,various measures to give effect to the recommendations in the Review Group’s report were being considered which when settled will further influence the shape of the sector.

Other Relevant Government Policies Other relevant Government policies on the public service relate to pay and numbers. Under these policies, any new agency will have to be set up in a way that ensures that:

No additional posts are created in the public service

There is no additional cost on the Exchequer.


PwC of 79

Appendix 3: Legislative Summary

1. Legislative Framework in respect of the Water Services Sector

The current legislative framework in respect of the water services sector is outlined briefly in this Appendix.

2. EU Legislative Framework

There is a comprehensive range of legislative provisions at EU level that require member states to implement national Regulatory frameworks for the planning and delivery of water services.

2.1 The Water Framework Directive

The Water Framework Directive (2000/60/EC) (the “Framework Directive”) establishes a framework for long-term sustainable water management through focusing on integrated planning and promoting sustainable water use.

A key innovation of the Framework Directive is the focus on river basins and requirements for river basin management plans, rather than a focus on arbitrary administrative or political boundaries. It applies to all waters, including rivers and lakes, estuaries (transitional waters), coastal waters and groundwater, and their dependent wildlife and habitats. The Framework Directive provides an overarching framework and programme to deliver long-term protection of water, and its objectives include the improvement and maintenance of water bodies of lesser status attaining “good status” by 2015, and those retaining good status or better where such status exists at present.

The Directive was transposed into Irish law by the European Communities (Water Policy) Regulations 2003, as amended (the “2003 Water Regulations”).

Key aspects of the Water Framework Directive include:

use of river basin management plans – river basin districts comprise the administrative areas’ for co-ordinated implementation of the Framework Directive. A total of eight river basin districts having been identified for the island of Ireland, three of which share cross-border waters with Northern Ireland, four of which are within the state of Ireland and one is entirely within Northern Ireland;

identification of an appropriate competent authority with responsibility for making river basin management plans setting out water quality objectives for each water body within the river basin district. This role is assigned to the constituent councils of each river basin district by the 2003 Water Regulations; in each case with one council designated to act as the coordinating authority for that district;

providing for a maximum of three river basin planning cycles up to 2027 to achieve the water quality objectives specified; and

requiring each river basin district to establish a programme of measures to ensure the water quality

objectives of the river basis management plans are met.


PwC of 79

2.2 The Drinking Water Directive

The Drinking Water Directive (98/83/EC) and related national regulations, set out the quality and monitoring requirements for portable water supplies. The objective of the Drinking Water Directive is to protect human health from the adverse effects of any contamination of water intended for human consumption by ensuring that it is wholesome and clean. It applies to water intended for drinking, cooking, food preparation or other domestic purposes supplied from a distribution network, from a tanker, in bottles or in containers which must comply with the standards set out in the Drinking Water Directive.2 Water providers have an information and advisory duty towards the public. Member States must monitor the quality of the drinking water mainly at the tap inside private and public premises and report the results at three yearly intervals to the EC.

The Drinking Water Directive is transposed into Irish law by the European Communities (Drinking Water) (No. 2) Regulations, 2007 (S.I. No 278 of 2007) (the “Drinking Water Regulations”). These regulations prescribe quality standards to be applied and related supervision and enforcement procedures in relation to supplies of drinking water, including requirements as to sampling frequency, methods of analysis, the provision of information to consumers and related matters. Under the Drinking Water Regulations a water service authority must:

ensure any water it provides is wholesome and clean and meets prescribed quality standards;

measure compliance with the parametric values in accordance with a prescribed sampling and analysis regime;

monitor compliance of all drinking water supplies in its functional area ; and

take appropriate remedial action (or ensure that action is taken) to restore the quality of non-compliant supplies.

2.3 Urban Waste Water Treatment Directive

The Urban Waste Water Treatment Directive (91/271/EEC) (“Waste Water Directive”) and related national regulations prescribe the collecting systems and treatment standards for waste water from centres of population based on the size of the centres and the sensitivity of the receiving waters to which treated waste water and storm overflows discharge. It requires biennial reporting to the EC on the disposal of waste water and sludge. Two key aspects of the Waste Water Directive are the requirement to have secondary treatment of wastewater in place in agglomerations above a certain size, and the need to provide nutrient reduction in addition to secondary treatment for discharges to designated sensitive waters.

The Waste Water Directive was transposed into Irish law by the Urban Waste Water Treatment Regulations 2001 (S.I. No 254 of 2001), as amended. These Regulations set specific standards to be achieved for waste water treatment plants, and set out a monitoring regime by local authorities of discharges from waste water treatment plants including the transmission of results to the EPA.

2.4 Other relevant European legislation

In addition to the directives mentioned above, there are a range of other European directives which also impact on the planning and delivery of water services in Ireland, including the Groundwater Directive (80/68/EEC)3, the Shellfish Directive (2006/113/EC), the Nitrates Directive (91/676/EEC), the Bathing Water Directive (2006/7/EC), the Dangerous Substances Directive (2006/11/EC), the Freshwater Fish Directive (2006/44/EC), the Sewage Sludge Directive (86/278/EEC), the Habitats Directive (92/43/EEC) and the Birds Directive (2009/147/EC).]

2 It does not apply to supplies serving less than ten cubic meters or 50 people unless the water is supplied as part of commercial or public

activity. Bottled spring and mineral waters are dealt with separately under Directive 80/777/EC and subsequent amendments relating to

the exploitation and marketing of natural mineral waters.


PwC of 79

3. Current national legislative framework

The Water Services Act 2007 (the “2007 Act”) sets out a legislative framework governing functions, standards, obligations, and practices in relation to planning, management and delivery of water services and practices in relation to planning, management and delivery of water services, waste water collection and treatment services.

3.1 Roles under the national legislative framework

The 2007 Act confers powers and responsibilities on different persons.

Role of the Minister under the 2007 Act

Under the 2007 Act, the Minister for Environment, Community and Local Government4 (the “Minister”) has a general duty to facilitate the provision of safe and efficient water services and water services infrastructure. As part of this high-level duty, the Minister has overall responsibility for:

the supervision and monitoring of the performance by water services authorities of their functions under the 2007 Act; and

the planning and supervision of investment programmes for the provision of water services.

The 2007 Act sets out the principles and policies to which the Minister shall have regard and of which he must take full account in carrying out his or her duties under the 2007 Act, including the principle of recovery of the costs of water services as provided for in the Framework Directive, development plans, regional or spatial guidelines and waste management plans and relevant river basin management plans or programmes of measures under the Framework Directive.

The 2007 Act confers a number of powers on the Minister to facilitate the provision of safe and efficient water services and water services infrastructure, including the power to:

provide guidance to water services authorities in relation to the performance of their functions under the 2007 Act;

to monitor and compare water services authorities in carrying out their functions;

specify standards, issue guidelines, codes of practice or directions in relation to the provision of water services (including in relation to pricing mechanisms and procurement) and grant or refuse approval to water services authorities to award contracts;

direct a water services authority in relation to, among other things, the drawing up or implementation of water services strategic plans, acquisition of land (for the purposes of its functions under the 2007 Act), procurement of water services infrastructure; the provision of water services jointly with one or more other water services authorities and licensing of water services providers; and

make regulations to require water services authorities to provide specified water services to specified classes of “agglomerations” (areas of sufficiently concentrated population or economic activities), areas or consumers.

4 Previously referred to as the Minister as the Minister for Environment, Heritage and Local Government.


PwC of 79

Role of water services authorities under the 2007 Act

Authority to provide water services is given to Ireland’s 34 City and County Councils (29 County and 5 City), each of which is designated as a water services authority under the 2007 Act.

A water services authority may provide water services, in accordance with prescribed standards and public policy, for domestic and non-domestic requirements in its functional area. Alternatively, water services authorities may, subject to the requirements of the 2007 Act and, if applicable, the State Authorities (Public Private Partnership Arrangements) Act 2002, enter into an agreement or arrangement with another person in relation to the provision of water services in part or all of its functional area. The 2007 Act also authorises two or more water services authorities to enter into an agreement or arrangement for the purpose of one or more of them or jointly carrying out any or all of their functions under the 2007 Act, in any or all of their respective areas or any part of them.

While the exercise of the powers conferred on water services authorities is generally at the discretion of the individual authority, water services authorities must comply with directions issued by the Minister and any regulations prescribed by the Minister requiring a water services authority to provide specified water services to specified agglomerations, areas or consumers.

Some important features of the 2007 Act relating to water services authorities are as follows:

water services authorities must ensure that their services are provided in a manner consistent with national policy and in accordance with prescribed standards. They are required to take full account of specified aspects of public policy when exercising powers, including planning and development, sustainable management of water resources, protection of human health and the environment and national and EU Regulatory requirements including a river basin management plan or programme of measures under the Water Framework Directive;

it provides a range of powers for a water services authority, such as metering, monitoring of water services, acquisition of premises and wayleaves and provides water services authorities with the power to deliver water supplies, i.e. to abstract water, store it, treat it and supply it for drinking or any other purpose, or to purchase it for onward supply;

it also provides for the provision, operation or maintenance of sewers, waste water collection networks and waste water treatment plants by water service authorities;

it provides for a strategic planning process to be carried out by water services authorities which when commenced, is intended to facilitate sustained improvement in the management and operation of water services infrastructure; and

it confers powers in relation to the licensing and supervision of group water schemes. In this context it should be noted that under the Drinking Water Regulations water services authorities supervise all other drinking water supplies in their functional area.

Role of the EPA in relation to water services

In addition to the general supervisory function conferred on the Minister under the 2007 Act, the EPA is tasked with:

reporting to the European Commission for the purpose of the Water Framework Directive and other coordination functions under the 2003 Water Regulations;

monitoring compliance of water intended for human consumption supplied by a “sanitary authority”

(meaning, since the enactment of the 2007 Act, a water services authority), or any person acting jointly with it or on its behalf, with the Drinking Water Regulations. Key features of the Drinking Water Regulations in this regard include that monitoring of all supplies is a function of water services authorities, but their monitoring programmes are subject to approval by the EPA, the EPA’s powers of


PwC of 79

enforcement to ensure that water services authorities comply with their monitoring obligations and the powers of the EPA and the water services authorities to intervene directly in the case of non-compliance to carry out remedial works and to recover costs from the supplier;

licensing or certifying discharges to aquatic environment from sewage systems owned, managed or operated by water services authorities under the Waste Water Discharge (Authorisation) Regulations 2007;

licensing trade discharges to waters under the Environmental Protection Agency Act 1992 (the “EPA Act”) and implementing regulations. Integrated Pollution Prevention Control (IPPC) licenses are issued by the EPA for designated categories of industry under the EPA Act and implementing regulations which includes trade effluent discharges from these industries. Water services authorities’ license discharge of trade effluents from non-IPPC licensed industries to public sewers within their functional area under the Water Pollution Acts.

Other water services providers under the 2007 Act

The 2007 Act contemplates the introduction of a licensing regime in respect of water services provided by persons other than a water services authority.5

Currently, any person can provide water services in Ireland provided that the water services provided comply with the applicable national and European quality standards6. On or after such date as the Minister may prescribe by regulations, a person (other than a water services authority or a person acting jointly with it or on its behalf) may not provide water for human consumption from a tanker or otherwise provide water services, except in accordance with a water services licence. An exception is made for bottled water provided in the ordinary course of business. Additionally, the Minister may, by regulations, specify a threshold below which a water services licence will not be required, either based on numbers of people to which water services are provided or a volumetric equivalent.

It will be an offence for any person other than a water services authority to provide services other than in accordance with the terms of a water services licence.

The water services authorities are designated as the licensing authorities and the 2007 Act prescribes the matters to which water services authorities must have regard when granting or reviewing a water services licence.

3.2 Other applicable national legislation

A wider national framework

Water services authorities operate within the broader framework of a range of national legislation which also impact on the planning and delivery of water services, which include:

the Planning and Development Act 2000, which provides for planning and sustainable development;

European Communities (Environmental Assessment of Certain Plans and Programmes) Regulations 2004 and the Planning and Development (Strategic Environmental Assessment) Regulations 2004 which require that the environmental consequences of certain plans and programmes, including developments plans and local area plans are identified and assessed during their preparation and before their adoption;

5 The relevant sections of the 2007 Act which provide for licensing of other water services providers have not yet been commenced.

6 For example, if water is supplied for human consumption it must be “wholesome and clean” and meet the requirements of the European

Communities (Drinking Water) (No. 2) Regulations 2007. However there is an exemption in relation to a supply of water which constitutes an individual supply of less than 10 cubic metres a day on average or serves fewer than 50 persons, and is not supplied as part of a commercial or public activity. An exemption also exists where a supply of water is used exclusively for purposes in respect of which the relevant supervisory authority is satisfied that the quality of the water has no influence, either directly or indirectly, on the health of the consumers concerned.


PwC of 79

the Waste Management Acts 1996 and 2001 and related regulations which prescribe the legal framework for the management of waste, for example the treatment and disposal of sludges arising from water and waste water treatment plants; and

Local Government (Water Pollution) Acts, 1977 and 1990 and supporting regulations which set out key provisions for the prevention of water pollution.

Other national legislation

Other legislation (much of which is transposing European legislation), which inform the statutory functions and powers of water services authorities, include the European Communities Environmental Objectives (Groundwater) Regulations, 2010, the European Communities (Good Agricultural Practice for Protection of Waters) Regulations 2010, the European Communities Environmental Objectives (Surface Waters) Regulations 2009, the Waste Water Discharge (Authorisation) Regulations 2007; the European Communities (Waste Water Treatment) (Prevention of Odours and Noise) Regulations 2005, the Urban Waste Water Treatment Regulations 2001 and 2004, the Waste Management (Use of Sewage Sludge in Agriculture) (Amendment) Regulations 2001, the Waste Management (Use of Sewage Sludge in Agriculture) Regulations 1998 and the European Communities (Quality of Surface Water Intended for the abstraction of Drinking Water) Regulations 1989.]


PwC of 79

Appendix 4: Water Organisation Charts

Water Services

Policy

Water

QualityWater Inspectorate Water Services Investment

Water Pricing Policy

Sludge Management Policy

Urban Wastewater Treatment

LA Management Information

Questionnaire

Water Services Bill

Water Services Legislation

Septic Tanks & other on-site

wastewater treatment systems

Water Conservation

Rainwater Harvesting

EU Water Framework Directive

North/South Co-ordination

International Matters/EU Water

Directors

Water Pollution Acts and

Regulations

Estimates

Bathing Waters Directive

Groundwater Directive

UWWT Directive (transposition)

Co-ordination

Dumping at Sea

Marine Strategy Framework

Directive

OSPAR Convention

Dangerous Substances Directive

Nitrates Directive

Agri-Environment Integration

Detergents

Wetlands

Shellfish Waters Directive

Professional Services for the

national infrastructure programme

in water services.

Advice on procurement of

services and contracts,

particularly in respect of Public

Private Partnership projects.

Supervision of implementation of

Rural Water Programme.

Professional Advice on water

quality programme including the

implementation of EU directives

on Nitrates, Water Framework

incl. River Basin Management

Plans, Groundwater, Marine

Strategy, Constructed Wetlands

(i) Shellfish Directive

implementation (ii) Bathing Water

Directive implementation (iii)

Marine Strategy Framework

Directive implementation.

Foreshore licensing.

General: Treatment Process

Technology, Environmental

standards for freshwater and

marine water quality and waste

water discharges, EU, CEN and

national committees, PAS boards,

Procurement, Contract

management, Dispute resolution.

Water Services Investment

Programme

Development of multi-annual

programme

Financial scheme

management – payments to

local authorities, estimates,

appropriation accounts, Public

Accounts Committee briefing

etc, reporting on EU funding,

Programme management –

monitoring of activity,

approval of budgets and key

project stages.

Rural Water Programme

Policy and Programme

administration, including

financial management.

Project Management for

independent Study on Transfer of

water services functions to Irish

Water

Figure 1 Department of Environment, Community and Local Government - Water Services Organisational Structure7

7 Source: Department of Environment, Community and Local Government


PwC of 79

ProductionNetwork

Management

Maintenance/

Administration

Planning &

Asset

Management

Mainlaying

& Projects

Support

Systems

Ballymore

Eustace

(WTP)

Water Quality

Needs

Assessment

Forward

Planning

Pressure

Control and

Distribution

Demand and

Network

Management

Non-

Domestic

Metering

Network

Modelling

Maintenance

North City

Maintenance

South City

Maintenance/

Trades

Fleet

Management

Vocational

Training

3rd

Party Claims

Head Office

Building

Management

Administration

Local Admin

Health and

Safety

Planning

Development

Control

10 day GIS

Records

GIS

Records

Plumbing

Inspectors

Asset

Management

Mainlaying

Licence Work

Stores/

Materials

Fitters shop

Marrowbone

Lane Depot

Telemetry

GIS Systems

PC systems

Instrumentati

on

Figure 2 Dublin City Council – Water Services Organisational Structure8

8 Source: Dublin City Council


PwC of 79

Waste Water

Treatment

Network

Management

Planning

Service

Pollution

Control

Mechanical

SupportMainlaying

Manage

operations

contract

Maintenance

of public

network

River

cleaning

Rodent

Control

Road Gully

cleaning

Emergency

flood

response

Planning

applications

Development

Control

Policy

development

GDSDS

model

IT

EPA licence

ERBD

RMCEI

FOG

Trade

effluent

licences

Pollution

incidents

Flow

monitoring

Rainguages

Consolidated

charges

Tanker waste

Emergency

planning

Pumping

stations

Drainage

fleet

GPS

Signage

New sewers

Repairs to

pipes/gullies/

manholes

Minor flood

relief

schemes

Local

Admin

Senior

management

Health and

safety

Staff Training

Secretariat

Customer

Relations

Strategic

Planning &

Project

Management

Corporate

Support

WSIP

Project

support

Flood

Resiliance

Project

management

Design

ERBD

regional

coordination

PMDS

Corp.

emergency

planning

Project

procurement

Admin

Finance

HR

Legal

IT

CRM

Facilities

Fleet mgt.

Procurement

Rates

Loan

Charges

Central

Laboratory

Service

Support

Bad Debts

Accident/

Liability

Claims

Figure 3 Dublin City Council – Waste Water Services Organisational Structure9

9 Source: Dublin City Council


PwC of 79

Capital Maintenance

Water

Services

Investment

Programme

Rural Water

Capital

Programme

Plant

Management

Water

Conservation

(incl. leak

detection)

Caretaking

Rural Water

Programme (incl.

Small Schemes

Water Metering

Water and Waste

Water

Laboratory/

Testing

Administration

Capital and

Maintenance

Programme

administration

Water Charges &

Collection

Rural Water

Administration

Figure 4 Cavan County Council – Water and Waste Services10

10

Source: Cavan County Council


PwC of 79

Appendix 5: Public Sector Staffing Initiatives

National and Local Government Initiatives to Reduce Staffing Costs and Improve Efficiencies Recent National and Local Government initiatives to reduce staffing costs and improve efficiencies include:

Suspension of Public Sector pay increases under “Towards 2016 – Review and Transitional Agreement” (September 2008);

Application of a pension levy for all public sector employees (March 2009);

Introduction of a moratorium on recruitment and promotion within the Public Service (March 2009);

Introduction of the Incentivised Scheme for Early Retirement (ISER) (April 2009);

Introduction of the Incentivised Career Break Scheme (September 2009)

The Public Sector Agreement 2010-2014 (June 2010); and

The Local Government Efficiency Review Group’s report and recommendations (July 2010).

The Pension Levy was introduced in March 2009 via the Financial Emergency Measures in the Public Interest Act 2009, which was originally enacted by the Oireachtas in February 2009. It applies to all persons in receipt of a government pension and is payable on all taxable income paid to that person from public funds. The rates at which the levy was charged at were revised in July 2009.

The Moratorium on Recruitment and Promotion with the Public Service was introduced in March 2009. The Moratorium provides for the filling of vacancies through staff redeployment and, in exceptional circumstances, through recruitment. Under both scenarios the sanction of the Minister for Finance is required.

The Incentivised Career Break Scheme (ISER) ISER was announced in April 2009. The purpose of the ISER was “to facilitate the permanent, structural reduction in the numbers of staff serving in the civil service, local authorities, health sector and non-commercial state bodies, with associated restructuring of organisation and operations, in as timely a manner as possible.” The scheme was open from May to September 2009.

The Public Sector Agreement (aka “Croke Park Agreement”) sets out a series of undertakings between the Public Service and the Government designed to “ensure that the Irish Public Service continues its contribution to the return to economic growth and economic prosperity to Ireland, while delivering excellence to the Irish People” 11. Chapter 5 of the Agreement relates to Local Government. Some key points made in the Agreement in relation to this sector include:

Rationalisation of State Agencies within the Local Government sector will be crucial in reducing internal boundaries and simplifying the delivery of services. There is also an expectation that there should be greater uptake of shared services, in particular in the areas of finance, payroll and HR. The objective of such organisational restructuring is to promote coherency in policy making and service delivery and to realise cost savings. 12

An agreed redeployment scheme is also set out. The scheme aims to absorb surplus staff across the

sector and provide career development opportunities for volunteering staff. In this regard, the Agreement states that “extremely flexible redeployment arrangements must be viewed as the corollary to arrangements that do not provide for compulsory redundancy”13. The specific terms of redeployment are also set out in the Agreement.

11

Public Service Agreement – 2010-2014, June 2010, page 2 12

Public Service Agreement – 2010-2014, June 2010, page 35 &36 13

Public Service Agreement – 2010-2014, June 2010, page 38


PwC of 79

With regards to improving productivity, the Agreement states “Better management and standardisation of annual and sick leave, and family friendly policies, including flexitime, will be necessary to manage continuity of service and peak demands and to effect pay bill savings. Other flexibility is possible through eliminating demarcation.”14

The development and implementation of a competency framework for all grades in Local Authorities and the recognition of performance (both good and poor) is also recommended.

The Local Government Efficiency Review Group was asked to review the cost base, expenditure of and numbers employed in local authorities. The Group reported its findings in July 2010. A selection of the report’s staffing and organisational related points are listed below:

The average Local Authority staffing ratio per 1000 population is 7.6 with urban authorities having higher staffing levels. The Review Group suggested that “A possible approach to realising such efficiencies might be to consider delivery of corporate service functions on a joint basis across two contiguous local authorities. A scale efficiency of 10% across selected local authorities through joint administrative arrangements or otherwise would release 170 WTEs for redeployment elsewhere.15”

The report also suggests the consideration of clustering of local authorities to achieve greater scale efficiencies. The list below illustrates the Review Group’s suggested clustering16:

- Mayo Roscommon - Sligo Leitrim - Waterford City & County

- North Tipp South Tipp

- Cavan Monaghan - Longford Westmeath - Limerick City & County

- Carlow Kilkenny

- Laois Offaly - Galway City & County

Delivery of water services along the River Basin Plan will, the Review Group believes, be challenging as the responsibility for implementation “is assigned amongst too many organisation and no single body has ultimate responsibility17.” However, the Review Group believes that there are advantages in taking this regional approach, including:

Improvements in efficiencies and cooperation;

Building and retaining expertise in identified areas which all water services can avail of

exploitation of economies of scale and potential cross boundary efficiencies;

Strengthening the capacity to plan and deliver strategically important projects and broaden the strategic context for locally delivered programmes;

Minimising duplication of resources and reducing the administrative burden; and

Improving service delivery.

14

Public Service Agreement – 2010-2014, June 2010, page 38 15

Local Government Efficiency Review Group, July 2010, page 62 16

Local Government Efficiency Review Group, July 2010, page 63 17

Local Government Efficiency Review Group, July2010, page 124


PwC of 79

Appendix 6: Water Staffing

Current Staffing Levels The table below illustrates the trend in permanent and temporary/ contract WTEs across the local authorities over the period 2007-201118.

2007 2008 2009 2010 2011 % 2007-11 Change

Permanent 31,331 31,676 31,340 30,038 29,235 -7%

Temporary/ Contract 4,846 5,566 2,477 1,978 1,732 -64%

Total 36,177 37,243 33,816 32,016 30,967 -14%

The table below shows the numbers of WTEs directly involved in water services and 201119. The data is divided between permanent WTEs and temporary/ contract WTEs.

Permanent Temporary/ Contract

Total

Engineers 513 38 551

Admin staff 306 41 347

Technicians 247 33 280

Caretakers 690 19 708

General Service Support 178 1 179

Plumbers/Craftsmen 296 17 313

Water Conservation Operatives 104 104

Water Inspectors 106 106

General Operatives 786 22 808

Other 175 60 235

Total 3,401 229 3,630

18

Source: Department for Environment, Community and Local Government, June Quarterly Survey for the years 2007-2011. This information is returned to the Department by the local authorities.

19 Source: Office for Local Authority Management, Survey July 2011. This information is returned to OLAM by the local authorities.


PwC of 79

Appendix 7: Review of International Experience

Scottish Water

Descriptive Statistics Statistic Scottish Water (2009-10)

Water network size (km) 47,301

Sewage network size (km) 50,086

Number of employees 1,634

Area served (km2) 79,976

Turnover (£) 1,124 million

Legal and institutional structures

Background Scottish Water was created by the Water Industry (Scotland) Act 2002. It brought together three regional water authorities to create a single state owned body, ultimately controlled by the Scottish Parliament. On its creation Scottish Water became the monopoly provider of water and sewerage services to domestic and commercial customers in Scotland. A brief history of the water sector in Scotland is shown below:


PwC of 79

The institutional structure of Scottish Water is outlined below:

Figure 5 – Institutional Structure (J)

The Water Services etc. (Scotland) Act 2005 introduced competition into the water sector in Scotland. The Act gives business customers the ability to choose which licensed supplier supplies its water and sewerage services. Competition was introduced on 1 April 2008 and applies to business customers only, including commercial

pre 1996 •Water and sewerage managed at a local level

1996 •Three Regional Councils set up (North, East, West)

2002

•Scottish Water created by Water Industry (Scotland) Act 2002. •Single state owned body, ultimately controlled by Scottish Parliament. •Monopoly provider of water and sewerage services to domestic and commercial customers in Scotland.

2006

•Water Services (Scotland) Act 2005 mandates opening of commercial sector provision to competition . •New wholsale and network business, Business Stream, is created by Scottish Water to compete in the

market to provide services to business customers.

2008

•Competition in the commercial sector starts. •Domestic provision remains a monopoly under Scottish Water.

Scottish Water

Drinking Water Quality

Regulator

Waterwatch Scotland

Scottish Ministers

Scottish Environment

Protection Agency

The Scottish Parliament

Water Industry Commission for

Scotland


PwC of 79

organisations such as schools and hospitals. A new body, the Central Market Agency (CMA) was established to administer the competitive water and sewerage service markets in Scotland.

The 2005 Act also obliged Scottish Water to separate its wholesale and network business from its retail function. The separate retail function became a wholly owned subsidiary called Business Stream. Business Stream is now responsible for providing retail services to business customers, while Scottish Water remains the sole supplier to residential customers. An outline of the market structure and key stakeholders is shown below:

Figure6 – Industry structure

The responsibilities of the CMA include:

Keeping a register of which licensed suppliers provide for which business customers.

Transferring customer information between licensed suppliers, so that changing a water supplier is as simple as possible to encourage competition.

Calculating how much money is owed by the suppliers to Scottish Water for wholesale services.

The CMA is owned by its members (the suppliers and Scottish Water). It is funded by the WICS through contributions from licensees. It retains its independence from the suppliers, WICS and Scottish Water by being an independent company.

Why was it created? There were two main drivers behind changes in the Scottish water sector:

The need to substantially increase investment in the water and sewerage networks, while ensuring that charges remain affordable; and

Worries that inefficiencies in Scotland, highlighted by the private sector market in England and Wales would lead to the opening up of the Scottish market to competition unless a credible alternative could be found.

It was decided that the levels of investment and efficiency savings needed could only be effectively managed and achieved within a single structure; a single Scottish water authority.


PwC of 79

The rationale behind the creation of Scottish Water was that it would:

Enable efficiencies in operating and capital investment expenditure to be achieved;

Provide a consistent approach to customers across Scotland in terms of charges and additional services;

Enable the organisation to compete for the retention of customers in border areas open to potential cross-border competition;

Allow a more consistent and strategic approach to investment planning and procurement so that environmental and quality objectives could be met more effectively.

It was also believed by the Scottish Executive that a larger body would be better placed than the three smaller authorities, in terms of economies of scale, critical mass and brand strength, to compete for business across Scotland and elsewhere in the UK. 20

During the process of creating Scottish Water, the Scottish Executive also identified the potential disadvantages that might arise from moving to a single authority. The most significant of these was the difficulty in regulating the authority in the absence of any direct comparisons in Scotland, and the risk that efficiency savings would not be achieved. As a result, Scottish Water is benchmarked, where possible, against water companies in England and Wales.

There was also a risk that local responsiveness would be lost. Local responsiveness is maintained through WaterWatch Scotland, which has regional panels based on local authority boundaries that represent consumer concerns, although Scottish Water itself does not operate on a regional structure.

Regulation

Obligations and duties The Scottish water industry is monitored and managed by a range of different bodies:

The primary role of the Water Industry Commission for Scotland (WICS) is to promote the interests of customers of the Scottish water authorities and to advise the Scottish Executive about levels of water charges. The Commissioner is responsible for regulating the economic and customer service performance of the water authorities.21

The Scottish Environment Protection Agency (SEPA) are responsible for environmental protection and improvement.

The Scottish Parliament holds Scottish Water and Ministers to account and regularly calls executives to its committees to give progress updates.

Scottish Ministers set the objectives for Scottish Water and appoint the Chair and Non-executive Directors.

Scottish Water are responsible for providing water and waste water services to household customers and wholesale Licensed Providers. They deliver the investment priorities of Ministers within the funding allowed by WICS.

The Drinking Water Quality Regulator (DWQR) is responsible for protecting the public by ensuring compliance with drinking water quality regulations. The DWQR is able to monitor drinking water, investigate possible breaches of regulations and enforce compliance.22

Waterwatch Scotland are responsible for representing the interests of Scottish Water customers.

20 A.The Scottish Executive. ‘Water Services Bill – The Executive’s Proposal’. (year unspecified). p1-12

21 A. The Scottish Parliament Information Centre. ‘Research Paper: Water Industry (Scotland) Bill’. 2001 (p6) 22 A. The Scottish Parliament Information Centre. ‘Research Paper: Water Industry (Scotland) Bill’. 2001 (p8)


PwC of 79

Scottish Water Minister

Price Control Process WICS has a statutory duty to promote the interests of customers. They set charge caps for water and sewerage services that deliver Ministers’ objectives for the water industry at the lowest reasonable overall cost.

The cap setting process, detailed in a Final Determination document, takes place every five years. It includes limits on the amount Scottish Water can charge households and limits on the amount Scottish Water can charge licensed retail suppliers in return for wholesale services. It also determines the price caps for retail suppliers when they supply services to non-domestic customers. The non-domestic cap is set at the price which customers would have been charged if Scottish Water was still providing services directly.

Price caps are set using the Retail Price Index (RPI), plus or minus a percentage that reflects the targets of efficiency and quality that have been set. In setting charge caps, WICS aims to give Scottish Water a level of revenue that covers all of its operating, capital and financing costs, taking account of the level of borrowing that is made available by the Scottish Government.

The factors that contribute to the price caps are:

Allowed rate of return;

PPP spend;

Allowed operational expenditure;

Growth and;

Chargeable customer base.

The Final Determination of price caps has been set for the period 2010-15. Prices are set to rise at 5% below the rate of inflation. The caps challenge Scottish Water to improve its efficiency further and deliver all of the charging and revised investment objectives of the Scottish Government. Objectives include Drinking water quality, Environmental improvement, Customer Service, Capital maintenance, Growth and an Efficiency challenge.

Leadership & Coordination The management structure of Scottish Water is shown below. The Chief Executive reports directly to the Scottish Water Minister. The Minister took a strong presence within Scottish Water in its initial years, but decisions are unlikely to be escalated to ministerial level currently unless they are of an exceptional nature, such as disaster recovery scenarios.

Figure 7 - Management structure

Non Executive Board The Board comprises five executive and eight non-executive members. The non-executive members include former Directors of utilities companies, a Chief Executive from the engineering and construction industry, a banking Chief Executive and a Union President.

Chief Executive

Asset Management Director

Commercial Director

Director of Human Resources and Development

Customer Service Delivery Director

Finance Director Director of

Innovation and Technology

Director of Communications


PwC of 79

Operations

Delivery Model The majority of Scottish Water’s operations are delivered in house. However, partnership structures and outsourcing are also used extensively. Operations are coordinated centrally, rather than within the original regional structures, and management is functionally driven, with separate teams working on water and sewerage.

Operating Costs Scottish Water was given an initial operating cost savings challenge of 40% in the period from 2001-2007. They claim to have met this challenge while improving overall service to customers. This was achieved primarily through a major IT restructuring (see IT section).

Scottish Water’s major goal is to reach the upper quartile water industry performance by 2013-14 by improving productivity. This will be achieved through:

Driving process compliance to the core of the business;

Championing first time resolution of customer issues, and;

Realising fully the benefits from the use of information and technology.23

Asset Management and Capital Programme

Delivery model Around 30% of Scottish Water’s capital programme is undertaken by contractors or through partnerships. Scottish Water Solutions Limited (SWS) was formed in September 2003 by Scottish Water to manage and deliver around 70% of its Quality & Standards II (Q&S II) Capital Investment Programme 2002-2006. Its creation was in direct response to the Water Industry Commissioner’s request that Scottish Water deliver its total Investment Programme for £0.5bn less than the inherited £2.3bn forecast cost.

SWS is a limited company within a publicly owned organisation (see structure below). The partners in the scheme bring expertise to the Scottish water industry, particularly in the fields of asset management, engineering, programme management and construction.

SWS has no employees and is operated by seconded staff from Scottish Water and each of the partner companies. All of SWS’s activity is directed towards supporting Scottish Water deliver its Capital Investment Programme.

23 H. Scottish Water. ‘Business Plan Draft 2’. 2009 (p12)


PwC of 79

Figure 8 - Scottish Water Solutions ownership structure (SWS website)

Capital Expenditure One of the drivers for the creation of Scottish Water was the large scale investment needed in Scotland’s water infrastructure. A high level of capital expenditure was therefore required. In the period following its creation, Scottish Water entered into an intensive scheme of Quality and Standards (Q&S) capital investment (see below).

Figure 9 – Capital investment24

24 Scottish Water. ‘Annual Report 2009-10’. 2010 (p10)


PwC of 79

During 2010-15, Scottish Water is expected to invest more than £2.5 billion in its assets. The investment is intended to improve drinking water quality and the environment, provide cleaner beaches and rivers, provide better service for customers and create a more sustainable water industry. Current and future capital investment is driven by requirements set out in the EU Directives on drinking water quality and on appropriate standards of treatment for wastewater discharges to the environment.25

During 2010-15 Scottish Water also aims to deliver their Q&SIIIb (capital investment) objectives including the delivery of an overall efficiency of £274m (12.3%) against the cost base that was used to build their estimates.

Scottish Water aims to achieve capital efficiencies by reducing both internal and contractor costs (management, feasibility, design and construction) as a result of the improved definition of maintenance and enhancement programmes.

Scottish Water’s capital projects are procured based on target cost with a pain/gain arrangement; the commercial arrangements ensure that continuous market testing of costs is undertaken through tendered projects and, where the target cost cannot be agreed within partnership contracts, projects are also let to the market. There are mechanisms in the procurement strategy to protect Scottish Water from losses in the event of non-delivered outputs through parent company guarantees.26

Customer Service & Billing

Background A 2001 Scottish Parliament research paper states that ‘the need for continued high investment in the Scottish water and sewerage infrastructure, and the implications of EU and UK competition rules mean that the ability for Scottish Water to generate new sources of funding is crucial.’ 27

The original three regional water providers in Scotland could only generate revenue through borrowing, directly charging their domestic and non-domestic customers for water and/or sewerage services supplied and central Government grants. Scottish Water has the power to levy charges on customers (levels as agreed by the Commissioner) or to make agreements with individual customers. This means that, for example, a company with nationwide outlets no longer has to negotiate charging agreements with three different organisations.

The Water Industry (Scotland) Bill enables Scottish Water to obtain information from local authorities which could help it develop a charging scheme. Such information includes council tax, council water charges, non-domestic water and sewerage rates and non-domestic rates.

When Scottish Water was formed there were large pricing differences across the country as a result of historic charging rates. One of the major initial targets of Scottish Water was to introduce a unified charging structure across the whole service area.

Charging Domestic customers are charged either on a metered or unmetered basis. Unmetered customers are charged a standard rate linked to their council tax band. Payment for unmetered customers is collected by local councils on behalf of Scottish Water.

Metered customers pay a fixed annual fee for their connection, based on the size of their connection pipe, and a fixed property and roads drainage charge based on their council tax band. They then pay volumetric rates for their water and waste water services. Only a very small number of properties are metered in Scotland, primarily due to the favourable non-metered rates and the public perception that metering is indicative of the private sector entering the water industry.

25 The Scottish Government. ‘Building a Hydro Nation – A Consultation’. 2010 (p2)

26 Scottish Water. ‘Business Plan Draft 2’. 2009 (p19)

27 The Scottish Parliament Information Centre. ‘Research Paper: Water Industry (Scotland) Bill’. 2001 (p15-22)


PwC of 79

Commercial water services can be provided by a range of businesses (see Figure ) that purchase on a wholesale basis from Scottish Water. Commercial customers receiving services from the Scottish Water owned company Business Stream may be metered or unmetered. Unmetered customer charges are based on council rates for their property. All payments are made directly to Business Stream rather than via councils.

Domestic customers For properties with non-metered supply the person liable for council tax is responsible for paying water bills. Local authorities collect the water and sewerage charges in their area on behalf of Scottish Water. Although council tax and water & sewerage charges are shown separately on household bills, the debt is combined such that people cannot pay their council tax but refuse to pay any water charges for which they are liable.28

A key feature of the arrangements for charging domestic customers is the link between charges and the Council Tax band of the property served. Those living in higher banded properties, who tend to be better off, pay more for their water and sewerage services than those in lower banded properties.

The Scottish Executive have proposed that regardless of how competition develops the principle of higher banded properties paying more than lower banded properties should be maintained. Similar provisions for meters are proposed, so that in future the standing and volumetric charges levied on those choosing to use meters are based on the combination of average charges and the Council Tax band ratio of the property served.29

Commercial customers Each licensed provider is charged by Scottish Water for the supply of water and sewerage services to the premises registered to the licensed supplier. The charging methodology varies depending on whether the premises is metered or un-metered.

Scottish Water is responsible for installing meters. The meter installation programme equipped all unmeasured non-household supply points with meters by April 2009. As a result of the meter installation programme, many customers moved from assessed charges based on the rateable value30 of their premises, to charges based on their actual usage. This change was undertaken on a phased basis.

In 2009/10, the phased introduction meant that the wholesale charge was based on a combination of:

Assessed meter size (related to the rateable value of the premises) and the assessed volume of

consumption (67% of the overall charge); and

Actual tariff meter size and the actual volume recorded on the meter (33% of overall charge).

In future years, the phasing did not apply. The overall charge is now entirely based on the actual tariff meter size and volume.

Where the licensed supplier believes that the assessed meter size and/or assessed volume consumption at a supply point are not reflective of usage, they may request a re-assessment provided they have sufficient supporting evidence.

Safety nets Exemption from Council Tax does not give exemption from water charges. Council Benefits do not currently pay for water charges, although the Scottish government has subsidised this in the past. The permanent Water Charges Reduction Scheme, a reduction of up to 25% introduced by the Scottish Government at 1st April 2006,

28 A.The Scottish Parliament Information Centre. ‘Research Paper: Water Industry (Scotland) Bill’. 2001 (p18)

29 The Scottish Executive. ‘Water Services Bill – The Executive’s Proposal’. (p22)

30 Rateable Value of a premises’ supply point: Each supply point will be assigned a Rateable Value based on the April 2000 rates

revaluation, although it may be re-valued depending on individual circumstances. The Rateable Value is the basis for levying Property

and Roads Drainage Charges, and also a basis for Water and Foul Sewerage Charges.


PwC of 79

is applied automatically to households with 2 or more adults which are in receipt of Council Tax Benefit and are not already in receipt of discounts. The Disabled Banding Reduction exists for properties that have been altered to meet the needs of a disabled person.

As mentioned above, whilst council tax and water & sewerage charges are shown separately on household bills, the debt is combined such that people cannot pay their council tax but refuse to pay any water charges for which they are liable. If people on 100% council tax benefit fall into arrears with their water charges, their arrears would still be classified as combined council tax and water charges debt.31

Customer service WICS monitors and reports on Scottish Water’s customer service performance in providing service to customers. It also sets targets for improvement. A points-based system, the Overall Performance Assessment (OPA), is used to monitor performance.

The OPA was originally developed by Ofwat to compare the customer service performance of the companies in England and Wales. Since 2002, Scottish Water's OPA score has more than doubled, increasing from 132 to 291 in 2009-10. They now aim to at least match the OPA scores of the leading companies in England and Wales by 2013-14.

England and Wales are to stop using the OPA as a performance indicator in 2011 in favour of an incentive driven system, the Service Incentive Mechanism (SIM). It is not clear whether Scotland plans to follow.

Cost per household Scottish Water have compared likely household bills in Scotland with those projected for England and Wales. Figure XX below shows past movements in the average household bill for Scotland and for England and Wales, as well as proposed average bills up to 2015.

Figure 10 Comparison of average household bills in Scotland and in England and Wales32

31 A. The Scottish Parliament Information Centre. ‘Research Paper: Water Industry (Scotland) Bill’. 2001 (p18)

32 H. WICS. ‘Cost Performance Analysis 2008-9’. 2009 (p7)


PwC of 79

Finance

Background The Water Industry (Scotland) Act states that ‘Scottish Water must exercise its functions so as to secure that, taking one year with another, its income is not less than sufficient to meet its expenditure.’ 33

Provisions were included in the Act to enhance water authority powers to enter into various forms of contractual agreements. These permit the water authority to enter into any form of Private Finance Initiative (PFI) and Public Private Partnership (PPP) agreements. It provides the power to enter into various types of joint venture, either with the intention to serve customers through the venture or to be part of a venture formed for the purposes of serving customers not currently served by the authority. It also provides a power for the authority to contract with third parties to lay water mains and service pipes.34

On the creation of Scottish Water a Regulatory Capital Value (RCV) was defined for the new body by a basic combination of the values of the three original organisations. These three values are unlikely to have been reached using the same methods.

Income Income from customers is of the order of £1bn/yr. Predicted increases are based on the Retail Price Index (RPI). However, Scottish Water have frozen their prices for domestic customers for the coming year.

Financeability Scottish Water has a £564m requirement for borrowing in the 2010-14 period, with annual increases of between £117 and £149m per annum. The profile of forecast borrowing is subject to an annual limit of available Scottish Government borrowing of less than £150m.35 The Scottish Government is, at present, the only provider of capital and the sole holder of equity.36

With increasing pressures on Scottish Government public expenditure, there is uncertainty over the level of borrowing that may be available for Scottish Water in 2010-14 and beyond. If funds cannot be secured through available Scottish Government borrowing, then Scottish Water will pursue other sources of finance.

During 2002-2009 Scottish Water had sufficient access to Scottish Government borrowing to finance their capital investment programme. However, their borrowing allowance for 2009/10 was limited such that the full costs of completing the current investment plan were planned to be financed by non-government borrowing from April 2010.

Scottish Water has the ability to take loans from its commercial arm, Scottish Water Business Stream (SWBS) Holdings Ltd. However, Scottish Water does not have access to the commercial equity market. It was therefore felt necessary to create a temporary government loan facility (up to £50m) to cover unexpected costs such as emergencies. In 2010 this was replaced by a growing savings account, or ‘gilts buffer’, financed by Scottish Water by outperforming their Regulatory targets.

The buffer is invested in index-linked, gilt-edged securities, in which excess cash arising from outperformance on capital or operating costs are held. This gilts buffer is intended to maintain the pressure on Scottish Water to improve its performance, by ensuring that good performance in one period could not be used to pay for poor performance in another period. Savings held in the buffer are to be returned to customers in the form of reduced prices if they are not used within four years.

33 C. Act of Parliament. ‘Water Industry (Scotland) Act 2002’. 2002 (p22)

34 A. The Scottish Executive. ‘Water Services Bill – The Executive’s Proposal’. (p15)

35 H. Scottish Water. ‘Business Plan Draft 2’. 2009 (p18)

36 http://www.watercommission.co.uk/UserFiles/Documents/Final%20Determination%20document.pdf


PwC of 79

WICS ensures that Scottish Water meets the appropriate industry investment grades as part of the Price Determination. The following financial ratios are used (2010-15 Price Determination):

Assumed range of financial ratios during Regulatory control period37

Financial ratio Average assumed value in this Final Determination

Norm for investment grade

Our intention to maintain

FFO/debt 12.5% Around 13.0% 11% to 13%

RCF/debt 12.5% Around 8.0% 11% to 13%

Cash interest cover 3.4 Around 3.0 >3.0

Cash interest cover I (capital charges: adjusted

1.6 Around 1.6 1.5 to 2.0

Cash interest cover II (actual capital maintenance expenditure)

2.1 Around 2.0 2.0 to 2.5

Forecast ratios 2010/11 2011/12 2012/13 2013/14

Cash interest cover 3.50 3.52 3.48 3.46

Funds from operations to debt 13.3% 13.3% 12.9% 12.7%

Gearing 55% 56% 56% 56%

PPPs/PFIs Scottish Water is dependent on PFI contracts for the performance of around 50% of its wastewater services. In some cases these contracts, established in the late 1990s, are inadequately incentivised and structured to ensure delivery of objectives.38 Total PFI costs are in the region of £140m/yr.

HR On the creation of Scottish Water, all employees of the three water boards became employees of the new entity. In the period between 2001 and 2002, generous voluntary redundancy packages were introduced, costing Scottish Water £80m. No compulsory redundancies were made as a matter of policy.

An Employee Council was created in ‘genuine partnership’ with Unions and employees to help manage change. As a result Scottish Water was able to reduced staff by over 2500 (from over 5600 employees in 2002) with no industrial action.

Scottish Water currently has over 1,634 employees (2010). Scottish Water Solutions has no employees- it has about 550 seconded staff from its partner bodies. Around 60 of these come from Scottish Water (2010).

The creation of Scottish Water removed previous constraints on outsourcing by giving the authorities and Scottish Water additional powers to make agreements with third parties.39 However Scottish Water state that they ‘only out source where (they) understood costs and outputs.’40

37 http://www.watercommission.co.uk/UserFiles/Documents/Final%20Determination%20document.pdf

38 Scottish Water. ‘Business Plan Draft 2’. 2009 (p20)

39 The Scottish Executive. ‘Water Services Bill – The Executive’s Proposal’. (year unspecified) (p15)

40 Dr Jon Hargreaves (CEO). ‘Organisational Change & the Transformation of Performance at Scottish Water’. 2007


PwC of 79

Marketing & Communications

Corporate Communications Scottish Water releases the following documents annually:

Annual Report and Accounts

Delivery Plan

Water Quality Report

WICS releases a Price Setting document every five years, which is released in iterative draft form up to five years in advance of final release. The following documents are issued annually:

Scottish Water Solutions Annual Return (not up to date on WICS site)

Scottish Water’s Annual Return

Annual WICS Report

Speeches, minutes, press releases, information notes and consultation responses are issued as required. Key legislation, reports and corporate governance documents are also published where relevant.

Consumer Marketing and Communications Scottish Water’s first line of communication with customers is their website. They also provide a 24hr customer helpline and a 24hr emergency helpline.

Scottish Water run long and short term publicity campaigns around issues relating to conserving water resources and keeping waste water free of other waste products,41 although it is not legislated that they should do so. It is not clear how much Scottish Water spends on Marketing and Communications.

MIS/IT Scottish water has undergone a phased restructuring of its MIS capabilities since its formation:

41 http://www.scottishwater.co.uk/portal/page/portal/SWE_PGP_NEWS/SWE_PGE_NEWS/INFO_HUB_CAMP

2002-2006

•IT functions from three original bodies consolidated into one, using a rapid strategy planning methodology and involving employees

•40% cost savings by re-designing systems from scratch •No outsourcing, but some legacy contracts maintained •Voluntary redundancy packages

2006-2008

•Ongoing improvements to systems to reduce operating costs •Establish business as usual

2008-present

•Outsourcing of applications and infrastructure support •Further cost reductions achieved through contracting process


PwC of 79

Scottish Water inherited three MSI systems for performing internal functions and customer processing functions. There was limited system overlap. On the formation of Scottish Water the three systems initially ran in parallel, before being transitioned to a single system made up of the most effective parts of the three. The decision making process was rapid, with a series of intensive employee workshops over the course of 8 weeks in 2002 leading to a full MIS transition plan and specification.

In the period 2002-6 Scottish Water was tasked with making 40% savings to running costs. The majority of this was to come from MIS. During that time period every system was entirely decommissioned and rebuilt in line with a more efficient operational model.

Since 2008 Scottish Water has outsourced much of its MIS/ICT services capability, using Tata Consultancy Services for applications management and support Fujitsu for service desk, desktop and infrastructure and BT for mobile, data, voice and networks. Scottish Water expects that the eight year, £28m Fujitsu contract will generate savings of 20%.

Scottish Water uses the following MIS/IT platforms for its key functions:

Working Asset Management: AMT Sybex

Finance: PeopleSoft (Oracle)

Billing: Custima Utilities

CRM: Oracle

GIS: Small World (GE)

Telemetry/SCADA: Various


PwC of 79

England and Wales Water Sector

Descriptive Statistics Statistic Thames Water

(2009-10) Welsh Water (2009-10)

Wessex Water (2009-10)

Southwest Water (2009-10)

Northumbria Water (2009-10)

Water network size (km)

31,507 27,126 11,460 15,042 25,555

Sewage network size (km)

68,335 18,370 17,229 9,221 16,059

Number of employees

4,910 226 1,744 1,199 2,856

Area served (km2) 5,000 20,779 10,000 11,140 9,400

Turnover (£m) 1593 681.8 434 438 623

Legal and institutional structure An overview of the history and development of the water sector in England and Wales is shown below:4243

42 http://www.ofwat.gov.uk/industryoverview/history/

43 Emanuele Lobina. UK Water privatisation - a briefing. 2001.

pre 1950

• Over 1000 organisations dealing with water and waste water. • Areas controlled similar to local government boundaries.

1950-1970

• Water distribution organisations reduced to 198, including local authorities, joint boards and privately owned water companies.

• Over 1,300 sewerage and sewerage disposal authorities, mostly run by individual local authorities.

1965

• 29 river authorities created in 1965 to organise water resources management .

1973

• 10 regional water authorities created, with areas defined by river basins. • Authorities take overall responsibility for water supply, sewage disposal and river basin management. • Number of employees reduced from 80,000 to 50,000 by 1989. • Regulated by profit cap with maximum return rate of 5%.

1989

• Water Act 1989 privatises the 10 water authorities’ water supply and sewerage functions. • River functions transfered to newly created National Rivers Authority (later subsumed within the Environment Agency ).

1991

• Creation of Water Services Regulation Authority (Ofwat). • Defra and the Drinking Water Inspectorate given mandate to regulate drinking water quality. • Creation of Consumer Council for Water.


PwC of 79

It should be noted that privatisation was initially proposed by the Thatcher government in 1984, but due to a strong public campaign against the idea the plans were shelved. After the 1987 election the plans were revised and implemented.

The privatisation of the industry was accompanied by:

The raising of capital by floating parent companies on the London Stock Exchange

A one-off injection of public capital

The write off of £4.95 billion government debt

The provision of capital tax allowances44

Why was it created? It was felt that the privatisation of the water industry would:

Improve efficiency

Make more private finance sources available to finance the large investments needed in infrastructure

Create competition

However, it is felt by some that the privatisation was an ideological policy on the part of the Thatcher government. Reduced capacity for public sector borrowing meant that regional water authorities were finding it increasingly difficult to raise the investment they required.

Data from OFWAT45 states that service quality and efficiency has improved from the early 1990s until 2010:

Network pressure has improved substantially: The share of "properties at risk of low pressure" declined from 1.33% in 1990-95 to 0.01% in 2009-10.

Supply interruptions have declined: The share of properties subject to unplanned supply interruptions of 12 hours or more declined from 0.33% to 0.06% during the same period.

The number of written complaints not responded to within ten working days has declined from 21% to less than 1%.

Leakage has been reduced from 5,112 megaliters per day in 1994-95 to less than 3,281 megaliters per day in 2009-10

44 http://www.ofwat.gov.uk/industryoverview/history/privatisation

45 http://www.ofwat.gov.uk/regulating/reporting/rpt_los_2009-10.pdf


PwC of 79

Regulation

Figure 11 – Working Structure of England and Wales Water Industry

Obligations and duties The Water Services Regulatory Authority (Ofwat) is the government appointed Regulator

through Defra. They set legally-binding standards and report annually on progress. Ofwat regulates in four main areas:

Finance and economics

Environmental impact

Drinking water quality

Health and safety

The Drinking Water Inspectorate (DWI) provides independent assurance that drinking water quality is acceptable to consumers.46

The Environment Agency and Natural England regulate environmental impact, including water and waste water.

The Consumer Council for Water (CCW) represents consumers in England and Wales. They replaced WaterWatch in 2005.

46 http://dwi.defra.gov.uk/about/index.htm


PwC of 79

Price Control Process Water and Sewerage company priorities in England and Wales are decided through a process of price regulation based on consultation with the public, customers, and other groups with wide interests. The priorities are driven by the ‘Price Review’ process, which is led by Ofwat and the water companies and occurs on a five yearly cycle. The main outputs of the Review are:

Limits on the prices water and sewerage companies can charge for the coming five year period

Research objectives for the industry

Agreement on major investment programmes to improve services and protect the environment47

Ofwat has a duty to make sure that companies have enough money to finance their operations. The price limits set are therefore no higher than is necessary to allow the businesses to operate efficiently. Ofwat determines price limits by working out how much revenue each company must collect from its customers to:

Finance its day to day spending

Finance its capital investment programme

Reward outperformance in the previous five-year period

Continue to finance previous capital investment through the return the company earns on its Regulatory capital value (RCV)

Pay tax it is liable for

The sum of these costs is the revenue requirement for any given water and sewerage company. Ofwat also calculates the base year revenue that the company would expect to receive without any change in prices.48

Leadership & Coordination The water industry in England and Wales is made up of a range of different sizes and types of organisation. The principal variation is that in some areas water and waste water disposal services are provided by the same organisation, but in others areas separate organisations provide the two functions. Business models also differ. It is therefore difficult to generalise about the organisational structure, finances and operations of these organisations. Five examples will be used to demonstrate the models in the sector:

Thames Water is a for-profit business and the UK’s largest provider of water and sewerage services, largely in urban areas. Thames Water has 8.8m water customers and 14m sewerage customers.

Dwr Cymru Cyfyngedig (Welsh Water), a not-for-profit business that provides water and sewerage services, largely in rural areas, to 3m customers.

Wessex Water is a for-profit business that provides water services to 1.3m customers and sewage services to 2.7m customers.

Southwest Water is a for-profit business that provides water and sewerage services around 1.6m people

Northumbrian Water is a for-profit business that provides services to a population of around 2.6m people.

47 Water UK. Water Industry Finance and Investment Overview. 2009 (http://www.water.org.uk/home/policy/positions/finance-and-

investment/overview-2009.pdf) 48 http://www.ofwat.gov.uk/pricereview/setting


PwC of 79

Management Structure

Figure 12 – Management Structure of England and Wales Water Industry

Non Executive Board The typical non executive board is made of highly experienced professionals from the banking sector, the engineering and constructing sector, the utilities sector and the legal sector. A common factor is that the majority of executives have experience of large scale capital investment projects.

Operations

Delivery Model Across the England and Wales water sector a range of operations delivery models are used. The majority of companies use a mixture of insourced and outsourced provision. A marketplace has evolved specifically to provide operations services for water companies. Major players include Serco, Siemens, GE, WS Atkins and Veolia.

Welsh Water in particular has focussed on outsourcing its operations in order to reduce operating costs. In 2008 outsourcing made up 85% of Welsh Water’s operating and capital costs, leaving the company with a core ‘skeleton’ staff of around 230.49


Delivery Model As with operations delivery, companies in England and Wales use a combination of insourced and outsourced provision. Particularly interesting models include:

Southern Water’s 4D consortium of United Utilities, Costain and MWH which delivers their capital works

programme.

United Utilities Contracted Solutions partnership with Welsh Water.

49 http://www.dwrcymru.com/eng/library/company_reports/2008/dcc_regulatory_accounts_2008.pdf

Managing Director

Finance Director Operations and

Construction Director

Regulation and Scientific Services

Director (Northumbria only)

Planning and Asset Management

Director (Wessex only)

Compliance and Sustainability

Director (Wessex only)


PwC of 79

Capital Expenditure Water and sewerage in England and Wales were privatised largely to allow private investment in to renew the sector’s infrastructure. All water and sewage companies in England and Wales have invested substantially in capital since their creation, partly due to Regulatory pressure and partly due to the efficiencies that can be generated from the investments in the longer term.

In 2008 the water industry in England and Wales had total turnover of £9bn. £4.9bn of this (53%) was spent on Capital Expenditure. 50 An overview of investment in the sector over time is shown below:

Figure 13 Capital investment in the England and Wales water industry51


Background Water and sewerage companies (WASCs) in England and Wales provide water and sewerage services to businesses and domestic properties. Historically water has been unmetered, but due to the benefits of accurate data for billing and planning metering has become a priority for many companies.

Southern Water has started a Universal Metering Programme. It proposes to switch almost all of its customers to metered charges by 2015. Overall the number of metered customers in England and Wales was expected to have reached 37% by March 2010 (Water UK). The Water Industry Act 1991 gives water companies the right to meter all new properties, newly connected properties or newly divided properties.

50 http://www.water.org.uk/home/policy/positions/finance-and-investment/overview-2009.pdf

51 http://www.water.org.uk/home/policy/positions/finance-and-investment/overview-2009.pdf


PwC of 79

Domestic customers Unmetered properties are generally charged flat rates for water and sewerage services plus a variable rate based on the rateable value of the property. Metered water is charged at a flat rate, to cover the reading and maintenance of the meter, plus a volumetric rate for the water used. Sewerage is not directly metered, but it is generally assumed that the total metered amount of water, minus a fixed estimated loss percentage, is returned as waste. This is then charged on a volumetric rate.

Some companies also offer ‘assessed charges’ for properties where it would be expensive or impractical to install a meter. The assessed charge is based on the occupancy of the building, with differing flat rates for single, double and multiple occupancy.

Commercial customers Non-households may also be metered or unmetered. Unmetered properties are charged based on the rateable value of the property plus a fixed charge. Metered non-households are charged for water and sewerage services on the basis of the amount of water they use, and the amount of waste water they discard. Tariffs for small business users are usually the same as for domestic properties.

Larger non-households are metered and pay for water through a fixed charge (which depends on the size of the meter) plus a volumetric rate. Non households are also charged for the disposal of trade effluent based on a volumetric rate and the nature of the waste. Companies have different approaches to charging for surface water drainage and highway drainage.

It should be noted that charges for customers who use more than 50 Ml water (250 Ml in Wales) are not subject to price limits set by Ofwat. 52

Safety nets WaterSure is a national scheme coordinated by Ofwat. It allows certain metered customers to have their bills capped. The intention is to make sure that these customers do not reduce how much water they use as a result of being worried about how they will pay their bill.

To qualify for help under the WaterSure scheme, a bill payer or someone living in their property must be in receipt of atleast one of the following:

Council tax benefit

Housing benefit

Income Support

Income-based Jobseeker’s Allowance

Working Tax Credit

Child Tax Credit (except families in receipt of the family element only)

Pension Credit

Income-related Employment and Support Allowance

In addition the bill payer must:

Be responsible for three or more children under the age of 19 and in full-time education living in the property, or

Have (or someone living in the property must have) a medical condition which requires significant additional use of water. Examples of medical conditions include weeping skin diseases (such as psoriasis), Chrohn’s disease or ulcerative colitis.53

Welsh Water Assist is a scheme based on expanding WaterSure to unmetered customers and reducing the capped charge. Customers still have to meet the other criteria for the WaterSure tariff.

52 http://www.ofwat.gov.uk/nonhousehold/yourwaterbill/hownonhousehold/

53 http://www.ofwat.gov.uk/consumerissues/assistance/watersure/


PwC of 79

Customer service The Overall Performance Assessment (OPA) was originally developed by Ofwat to compare the customer service performance of the companies in England and Wales. The Operational Performance Indicator (OPI), which feeds into the OPA, scores performance across a range of activities that affect customer service, including environmental performance.

Over the past two years, Ofwat have worked with a stakeholder group to develop and pilot new measures of service to replace the OPI. They have developed two new ways to measure and financially incentivise the improvement of the consumer experience.

The ‘quantitative measure’ reflects the number of complaints and telephone contacts that the companies receive.

The ‘qualitative measure’ reflects how satisfied consumers are with the quality of service they receive from their company.

Together with other smaller incentives these ‘consumer experience measures’ form the Service Incentive Mechanism (SIM). The SIM be used in place of the OPI from 2011.

Finance

Approach to Financing and Debt Ofwat has a duty to ensure that efficient companies can continue to finance their functions. However, a company's choice of capital structure is essentially a matter for the company and the capital markets. Ofwat seeks to ensure that a company’s customers are not exposed to undue risk as a result. 54

Thames Water actively maintains a broad portfolio of debt, diversified by source and maturity and designed to ensure the Company has sufficient available funds for operations.

Welsh Water aims to offer a secure, low risk investment to long-term investors. By building and maintaining a strong financial position, they intend to keep their borrowing costs low, enabling them to finance future investment in the business efficiently, whilst retaining the scope to return money to customers and keep bills affordable.

In 2009/10 Wessex Water issued a £50m index linked bond and refinanced £150m of bank facilities that had reached their maturity date. This provided enough capacity for their financial needs for the coming year.

Financeability As privately held companies, water companies in England and Wales have access to a full range of financial instruments. They have the ability to sell equity and take on debt as they see fit. The majority of companies are held by larger parent bodies in the same industry, by private equity firms or, increasingly, by overseas investment funds such as sovereign wealth funds. Shares are also held by individuals and UK investment funds.

Water specific debt instruments have been designed, including equity geared structures, index-linked bonds and RBS’s Artisan facility.

PPPs/PFIs The water industry in England and Wales does not appear to make use of PPPs or PFIs.

54 http://www.ofwat.gov.uk/publications/commissioned/rpt_com_100305cepabulk.pdf


PwC of 79

HR As mentioned above, there has been a movement towards increased outsourcing in England and Wales over the past decade. However, in recent years there has been a move back to in sourced provision, with Welsh Water in particular taking on increasing functions in-house.


Corporate communications The WASCs in England and Wales publish the following documents on an annual basis:

Regulatory Accounts

Annual Report and Financial Statements

Customer marketing and communications Many WACs in England and Wales are increasingly pushing to move towards an online model for customer communications. It is now possible to log meter readings, pay bills, log issues (such as leaks and repair works) and track the progress of issues in the region via company websites. However, the primary method for communication is still post and direct contact through call centres.

MIS/IT WASCs in England and Wales have invested in the last 10 years in GIS and WAM systems. Most of the main WASCs use SAP for financials and often for billing. Some also use SAP for capital project management, however Maximo and other systems are also deployed.

There is an increasing use of field force automation through systems such as Click Schedule. With the potential reform of retail services in the England and Wales industry there are a number of companies refreshing their CRM systems to ensure that they hold appropriate customer data.


PwC of 79

Northern Ireland Water

Descriptive Statistics Statistic NI Water

Water network size (km) 26,067 (2009)

Sewage network size (km) 14,320 (2009)

Number of employees 1,579 (2009)


Turnover (£m) 332 (2008-9)

Legal and institutional structure

Background Northern Ireland Water (NI Water) is a Government Owned Company (GoCo); a statutory trading body owned by central government (The Northern Ireland Assembly) but operating under company legislation. It was created in 2007.

A brief history of the development of the sector is shown here:

pre 1973

•Water supply and sewerage services were originally provided by local authorities.

1973

•Responsibility for water and sewerage services transferred to central government as part of the creation of the Northern Ireland Assembly in 1973.

1996

•Water and sewerage services provided by the NI Department for Regional Development under the name of Northern Ireland Water Services.

2007

•Under the Water and Sewerage Services (Northern Ireland) Order 2006, responsibility for water supply and sewerage services transferred to Northern Ireland Water, a government-owned company.


PwC of 79

Figure 13 – Institutional Structure of Scottish Water

Why was it created? NI Water was created as a GoCo with the intention of improving efficiencies by introducing corporate and commercial pressures into the NI water sector. It was hoped that service levels could be improved and costs to consumers reduced through:

Commercial incentive structures for management staff

Accountability to shareholders

Direct answerability to paying customers

Regulation by an independent economic Regulator

Regulation

Obligations and duties The Northern Ireland Authority for Utility Regulation (NIAUR) is responsible for making sure

that charges are fair and service standards high. It is made up of three branches; Regulatory Finance; Comparative Efficiency & Performance and; Network Regulation. Their main Regulatory tool is the price setting process. The Price Control process in Northern Ireland is closely aligned to the Price Review processes in England and Wales.

The Water Management Unit (WMU) is a Unit within the Northern Ireland Environment Agency which has responsibility for the protection of the aquatic environment. It achieves this through a number

Northern Ireland Water

Water Management Unit (WMU)

The Consumer Council

Environment and Heritage

Service

Drinking Water Inspectorate

Department for Regional

Development

Northern Ireland Authority for

Utility Regulation

Northern Ireland

Environment Agency

Environment and Heritage

Service

Department of Enterprise, Trade and

Investment (DETI)

Northern Ireland

Executive


PwC of 79

of activities including; Monitoring water quality; Preparing water quality management plans; Controlling effluent discharges; Taking action to combat or minimise the effects of pollution; and Supporting environmental research.

The Consumer Council is an independent body that promotes and protects the interests of all consumers in Northern Ireland.

The Drinking Water Inspectorate is responsible for regulating drinking water quality in Northern Ireland. It is a unit within the Environment and Heritage Service.

The Northern Ireland Department of the Environment, operating through the Environment and Heritage Service, is responsible for Environmental regulation. Its responsibilities are similar to those of the Environment Agency in England and Wales.55

Price Control Process The Price Control process in Northern Ireland is closely aligned to the Price Review processes in England, Wales and Scotland.

The Utility Regulator began setting price limits for NI Water from 1 April 2010 with the remit of protecting customers served by a monopoly provider. They must also ensure that NI Water is able to finance its functions, including meeting its environmental obligations, both immediately and in the future. However, as will be discussed later, domestic charging has yet to be introduced.

Leadership & Coordination

Management team

Non-Executive board The Non-Executive Board consists of five members. It is made up of high ranking ex-civil servants (with experience across various industries), a trade union leader and a former banking CEO.

55 http://www.water.org.uk/home/policy/positions/legislation

Chief Executive

Director of Finance & Economic Regulation

Director of Asset

Management

Director of Customer

Service

General Counsel and

Company Secretary

Director of Engineering & Procurement

Head of Internal Audit

Head of Business

Improvement

Chief Information

Officer

Director of Corporate

Affairs


PwC of 79

Operations

Delivery Model NI Water delivers the majority of its day to day operations internally through direct labour. Some maintenance is outsourced to local framework contractors.

Operating Costs On its creation Northern Ireland Water was inherited a target of reducing its operating costs by 40% by 2009/10 against a baseline of performance in 2003/4, i.e. over a seven year period. A reduction of 12.5% was achieved over the first 4 years to 2007, leaving 27.5% to be gained over the three years to March 2010. It is not clear whether this target has been met.

Cost per household Northern Ireland water does not currently charge domestic customers. Water charges for households are paid directly to NI Water by the Northern Ireland government. The cost to NI Water of providing services to 795,000 households is £330 per household. See Billing section for further detail and information about business charges.


Delivery Method The majority of NI Water’s capital programme and Asset Management has been undertaken through PPPs.

The original 2007 proposed capital works programme has been reviewed at each stage of its development by Halcrow, a firm of engineers. Halcrow perform a ‘reporter review’ role on behalf of OFWAT for the capital works programmes of a number of water companies in England and Wales.56

Capital Expenditure It has been estimated that Northern Ireland Water requires total investment of over £3 billion by 2020. £1.1 billion was proposed to be spent on services for the 5 year period up to 2007/08.57 Around £210m of capital engineering projects were delivered during 2009/10. 36% of this capital programme was targeted at water projects while 64% was targeted at wastewater projects.

In 2007 the Northern Ireland Asset Management Plan (“NIAMP3”) was devised to define capital investment requirements over the coming 3 year period. The plan was devised by a cross sector group including United Utilities, EC Harris and ICS Consulting. NIAMP3 formed the basis for the company’s capital investment needs in the first regulated business plan (PC10).58

During the reporting period 2009/10 NI Water has completed:

A Corporate Asset Register (CAR) and;

A Strategic Capital Investment Manager and Unit Cost Database tools to prioritise, optimise and cost capital investment.

56 http://www.niwater.com/siteFiles/resources/HTMLFiles/Information_Management/Business_Plan_2007_2010_Full_version.pdf

57 http://www.niwater.com/investandimprove.asp

58 http://waterprojectsonline.com/case_studies/2010/Overview_Strategic_AMP_NI_Water_2010.pdf


PwC of 79


Background On its creation, NI water proposed to start charging domestic customers. However, a public campaign against charging has meant that households have yet to be charged. The current Northern Ireland government was elected on the promise that domestic charges would not be introduced. NI Water will not issue bills to domestic customers in 2011/12. Bills for all domestic customers are being paid in bulk by the Department for Regional Development.

The originally proposed domestic payment system was outsourced under a 7 year contract in 2006. The contract to provide charging services was terminated in 2009.59

Domestic customers As a result of the decision to defer domestic charges in full for the 2011/12 year, metered customers will not be charged. Under a charged system it was proposed that metered customers would receive a basic water allowance uncharged and then pay a rate on consumption above this level. As it is not possible to offer a volumetric domestic allowance to unmeasured customers, unmeasured water and sewerage charges would be billed at one half of the full charge that the property would incur if it was charged based on its council tax band.

NI Water provides a discretionary service for the de-sludging of septic tanks, domestic treatment plants and cesspools. Each domestic customer is entitled to one free tank empty in any 12 month period.

Commercial customers There are three charges for non-domestic customers in Northern Ireland: water, sewerage and trade effluent. Measured water and sewerage charges are paid by occupiers of nondomestic properties at which a water meter has been installed. If a meter is installed in a non-domestic property, measured charges will be payable for the property.

There are two elements to measured water charges:

A flat charge based on the diameter of the supply pipe serving the property; and

A volumetric charge, based on the consumption recorded on the water meter, less a domestic allowance, where applicable.

The flat charges for each charging meter are determined by the diameter of the water supply pipe. If the size of the customer’s supply pipe is not recorded and cannot be determined by the customer then NIW will assess a notional pipe size according to the size of the meter or the internal diameter of the communication pipe; whichever is the lesser. The customer will then be charged accordingly.

The volumetric charge is calculated on the volume as recorded by the meter. Customers using in excess of 100,000m³ of water per annum and who have implemented a range of water efficient practices can apply for a large user tariff.

Sewerage is charged in the same manner. There are two elements to measured sewerage charges:

A flat charge based on the diameter of the supply pipe serving the property; and

A volumetric charge based on the consumption recorded on the water meter less that volume not returned to the sewer less the domestic allowance were applicable.

For unmetered customers there are two elements to water and sewerage charges:

A flat charge applied to all unmeasured properties; and

A variable charge based on the property valuation. The valuation is the Net Annual Valuation (NAV) assigned to the premises in the Land and Property Services (LPS) Non-Domestic Net Annual Value List.

59 http://news.bbc.co.uk/1/hi/northern_ireland/7819685.stm


PwC of 79

Trade effluent charges are payable in addition to the sewerage and sewage disposal charges.60

It should be noted that NI Water attracted media attention in 2011 by overcharging non-domestic customers by around £1.8m over several years. This was as a result of inaccurate information about pipe diameters at commercial properties.61

Safety nets Northern Ireland Water proposes to work with customers to negotiate a reasonable payment arrangement. Customers experiencing payment difficulties (currently only commercial customers) can contact NI Water to discuss alternative arrangements such as smaller, more frequent payments.

If a non-domestic customer fails to honour a reasonable payment arrangement, in accordance with normal commercial practice, NI Water will initiate action to disconnect the service to protect the company and other customers from unrecoverable losses.

Billing system NI water contracted out its domestic billing in 2006, awarding a seven-year, £70m contract to the Xansa-led Crystal Alliance to provide a new customer billing and contacts system.62 However, due to charges for domestic customers being put off, this contract was terminated in 2010, costing NIW up to £3m.63

Customer service Northern Ireland Water has a record of poor customer service in crises. During the winter of 2009/10 40,000 homes and businesses were left without water for extended periods. NI Water was not able to communicate key messages to customers, with as little as 1% of customer calls being answered.64

Finance

Approach to Debt and Financing Northern Ireland Water’s working capital requirements are met from a committed working capital facility of £20m and from available positive cash balances. Interest is accrued on the working capital facility at floating interest rates based on London Interbank Offer Rates (LIBOR).

Financeability On its establishment Northern Ireland Water was lent £1.6bn by the Northern Ireland Government. NI Water gained £500m in share capital in 2007-8.65

PPPs/PFIs NI Water has three major PPPs in place:

Project Alpha – Drinking Water Services Contract for the Greater Belfast area.

Project Omega – Wastewater Treatment and Sludge Disposal for all of NI Water’s wastewater treatment sludges has been brought into operation in March 2010.

Kinnegar Wastewater Treatment

60 http://www.niwater.com/siteFiles/resources/scheme%20of%20charges1112.pdf

61 http://www.belfasttelegraph.co.uk/news/local-national/northern-ireland/niw-overcharged-by-up-to-18m-16001598.html

62 http://www.computerweekly.com/Articles/2006/01/19/213786/Northern-Ireland-Water-Service-awards-16370m-billing.htm

63 http://www.bbc.co.uk/news/uk-northern-ireland-11432297

64 http://www.guardian.co.uk/uk/2010/dec/29/northern-ireland-water-shortage

65 http://www.niwater.com/siteFiles/resources/annual%20report%20and%20accounts%202008-09.pdf


PwC of 79

HR Northern Ireland Water employs 1600 people (2009)66 divided by skill sets into seven different groups or directorates. The HR Function within NI Water is currently undergoing significant transformation, including a pay & grading review, a flexible working review, a terms & conditions review, an HR process review and new HR IT system implementation.


Corporate communications Northern Ireland Water publish their corporate communications via their website. Regularly released documents include:

Annual Reports

Strategic Business Plans (for three year periods)

Annual Drinking Water Reports

Scheme of Charges (for each tax year)

However, many of these documents are not up to date online. In particular there has been no Annual Report released online since 2008-9.

Consumer marketing and communications In their initial attempts to introduce domestic billing Northern Ireland Water found it necessary to undertake a high profile consumer communications campaign. Due to the various anti-charges campaigns (already discussed) these efforts failed to have the desired impact. NI Water’s consumer communications also failed, as mentioned above, during the major water leakages in the winter of 2010.

MIS/IT Northern Ireland Water uses billing (for non-domestic customers) and customer care systems from Echo Managed Services via RapidExtra.67

In 2010 Innogistoc delivered a new GIS system to NI Water based on Cartology.NET web GIS software. The system provides real time intranet access to the Corporate Asset Register (CAR), NI Water’s recently developed Geospatial Warehouse based on Oracle 10g. 68

NI Water are seeking tenders for the supply and delivery of GSM Data Loggers, Analytical Software and Stand-Alone GSM Loggers.69

66 http://www.niwater.com/siteFiles/resources/annual%20report%20and%20accounts%202008-09.pdf

67 http://www.rapidxtra.co.uk/homepage.asp

68 http://www.innogistic.co.uk/news-item/innogistic-delivers-new-ground-breaking-web-gis-for-northern-ireland-water/175

69 http://www.niwater.com/goodsmatserv.asp


PwC of 79

Denmark: Experience of Water Reform

Facts and Figures

Water and waste water services in Denmark are provided by 325 companies operating in 98 municipalities. Water consumption is very low in Denmark, just 114 litres per person per day, and is falling further. In 2009 consumption of water fell by 3.8% relative to the previous year. One reason for low consumption is high prices. As of 2009, domestic bills were on average 60% higher than bills in England and Wales70. Water leakage is also very low, at a similar level to the Netherlands, 1.7 m3/km/day. Domestic use accounts for 66% of total consumption with industry and agriculture taking the second and thirds largest shares of consumption respectively.

Pricing

Consumer bills are high in Denmark. In 2009 the average household bill for water and waste services was €618 compared to just €388 in England and Wales. The bill is built up of three elements: water; waste-water and taxes. In Denmark almost half the bill is for waste-water and only 22% is for water. The remaining 30% is attributable to taxes.

Structure and performance of water sector prior to reform

Prior to reform, Denmark’s water and waste-water providers were not centrally regulated. Local government municipalities were responsible for collecting waste-water and water for use was supplied by many small fragmented user-owned groups and some municipalities. Pricing was self-governed by a “break-even” approach, where water providers set prices to cover cost of operation and new investment but did not make profits.

The success of privatization in improving efficiency of the water sector in Britain inspired political impetus for reform in Denmark. Danish policy-makers believed large efficiency savings could be made which would lower customer bills. This would be achieved by privatization, competition and price regulation.

Outline of reform process

The liberalising reforms were opposed by local government municipalities and an organisation representing water providers – the Danish Water and Waste Water Association (DANVA). The municipalities opposed reform for fear of losing tax revenue from local levies on water. DANVA opposed the reform because they believed that introducing a profit incentive would increase consumer bills.

Given the opposition to reform, the legislative process has been long and drawn out. The final compromise bill was passed by the Danish Parliament in May, 2009. The reform created:

A centralized water regulator;

Incentive-base price regulation;

Performance benchmarking;

Mandatory corporatisation.

There was little debate regarding the benefits of merging municipal water services providers as the focus was on creating economic regulation. Studies of the Danish Water sector have indicated that the fragmented structure results in organisations operating at sub optimal scale: “part of the inefficiency is caused by an inoptimal scale of production (scale inefficiency)”71

70

Sources: Ofwat; DANVA; Bank of England (exchange rates) 71

See Regulation, Organisation and Efficiency: Benchmarking of Publicly and Privately Owned Utility Companies Rasmus Lomberg ,2005 http://regulation.upf.edu/ecpr-05-papers/rlonborg.pdf


PwC of 79

The impacts of the reforms are yet to be fully realised. It will be a number of years before an effective evaluation the policies in terms of changes to efficiency. For now at least, Denmark still has a long way to go before its water bills fall to the lower levels common in other parts of Europe.


PwC of 79

Germany: Berlinwasser

In Germany, the municipality is clearly stated in the basic legal framework of the country as the provider of water and wastewater services. In addition, while it is possible for the municipality to make a profit on the provision of water services, the provision of wastewater services is done on the basis of full cost recovery by the municipality. Municipalities vary in size from the very small serving tens of people to the largest, Berlin, serving 3.4 million people.

It is relatively unusual in Germany for water and wastewater services to be provided by the same entity. In cities, it would be common to see a profitable city utility company (Stadtwerke) providing water, retail gas, retail electricity and even transport services, while the municipality might directly provide the wastewater services. The water services would have been delegated to the city utility company by the municipality.

Berlin is unusual in that it has a dedicated water and wastewater utility, Berlinwasser, serving the city, which is at once a city municipality and a federal state. It provides a very high standard of service to the population with high technical standards of water quality, wastewater treatment and leakage figures in the low single figure percent (compared to a reported average of 41% in Ireland).

Prior to German reunification in 1990, both East and West Berlin had their own integrated water and wastewater companies. In fact the German Democratic Republic (East Germany) had a highly structured water and wastewater sector with 16 integrated regional water and wastewater service providers. After reunification, these structures were effectively abolished. The west German model, now the given model for all Germany, establishes the municipality as the service provider.

The decision was taken in the early 1990’s to integrate the two Berlin companies in a single new company under the ownership of the city. At that time the infrastructure on the west side of the city was excellent including full treatment and disposal of wastewater sludge within the city bounds. Water consumption was in the region of 130 litres per capita per day (l/c/d). On the east side, the infrastructure was in poor condition with basic treatment technology, high rates of leakage (30%+) and consumption was in the region of 300 l/c/d. Throughout the city there was effective universal metering although tariffs on the eastern side were low.

In 1990’s there was an extensive investment programme which raised the treatment standards for water and wastewater for the entire city, reduced leakage on the eastern side of the city to western levels and substantially raised tariffs on the eastern side. The resulting change in customer behaviour, combined with the collapse of much of the heavy industry in the east caused demand on the eastern side to reduce dramatically so that today it is in the region of 110 l/h/d throughout the city. Personnel numbers at time of integration were about 11,000 and are less than 4,500 today. The reduction in headcount was achieved substantially through natural attrition. The effect on the age profile is that it has increased steadily.

In the late 1990’s, the city disposed of 49.9% of the company to private partners namely the large German electricity concern RWE and Veolia the large French water utility. Water prices are high in Berlin by international standards although apparently broadly in line with similar rates in that part of Germany. Technical standards of service are high. With a total turnover of more than €1.3 billion, the company has continued to invest in its infrastructure over €270 million per annum, although that level of investment has decreased slightly annually in recent years to the current level. Personnel costs have been steady, with reductions in headcount offset by wage inflation.


PwC of 79

French Models for private sector provision of water services

In France the municipality is the provider of water and wastewater services but is free to delegate the provision of some or all of these services to private sector entities. This model has been in place, although continually evolving, since the 1800’s.

Municipalities, or Communes, vary in size from the very small serving tens of people to the very large such as Paris with a population of two million. In addition, there is the possibility for municipalities to come together for the special purpose of water and/or wastewater services.

The principal models of private sector provision for water and wastewater services in France are:

Concession – a long term arrangement with the private contractor taking over the operation, maintenance (including capital maintenance and network extension) of water treatment, wastewater treatment, network management for water and wastewater and billing & collection revenues. This model usually envisages significant capital expenditure during the period of the contract, sometimes up to 30 years.

Affermage – sometimes referred to as a Leasing or Lease contract (although specifically not a finance lease). This is similar to the concession model although there is no up-front or substantial ongoing capital expenditure required. This model has been popular in France in recent decades as much of the basic infrastructure was considered to be in place or could be procured directly by the municipality. The Affermage contractor has responsibility for water and wastewater treatment, network management and repair and customer billing & collection.

Gérance – literally a ‘management’ contract, this is more often translated as an Operation & Maintenance (O&M) contract. With a typical duration of around 5 years and limited to the O&M of individual installations such as treatment plants, the O&M contractor is responsible for ongoing and routine maintenance but not generally capital maintenance.

Régie Interessée – this model might most usefully be translated as a ‘profit share management services’ contract is less used in France nowadays but is more often used in developing or emerging economies.

Prestation de service – provision of specialist services. This is very common also in Ireland and many other countries and refers to the range of services purchased by the water and wastewater utility.

A key aspect of the above approaches is that ownership of the infrastructure remains with the municipality although for concession, affermage and gérance the contractor would have exclusive use of the relevant assets for the duration of the contract. While normal public contracting procedures are followed, the elected Mayor in a position to influence or even decide the choice of contracting strategy. At the end of the contract, the municipality may decide to issue a new tender and contract using public competition or may decide to take the operations back into direct municipal control.

The Irish approach to DBOs involves typically an O&M period of 20 years. The O&M arrangements are prima facie similar to Gérance contracts as they relate to individual installations. However, with the longer duration (20 years versus typical 5 years) and the addition of a capital maintenance fund, the Irish model might be regarded as an enhanced Gérance model. Specialist services contracting would be widely used in Ireland. None of the models of Concession, Affermage or Regie Interessée are used in Ireland.


PwC of 79

Netherlands - Combined Water and Roads Ministry

Statistic Rijkswaterstaat

Water network size (km) Unreported

Sewage network size (km) Unreported

Number of employees 9,202 (2009)


Turnover (£m) 2,168 (2009)

Background Water management in the Netherlands is a national priority due to the area of the country below sea level and the use of waterways as a means of goods transportation. Historically water resources and sewerage were managed locally, but since the Second World War the sector has developed into a centralised government authority sitting above 10 government owned regional companies. The amalgamation of water companies was largely undertaken in order to take advantage of economies of scale that were seen elsewhere in Europe.

Roads and Water utility overlap The Ministry of Transport, Public Works and Water Management of the Netherlands (Rijkswaterstaat) is the current incarnation of a combined water and transport ministry that has been in existence since responsibility for road infrastructure was placed with the Water Ministry after the Second World War. It made sense to combine water management and roads within the same ministry in the Netherlands given the strong links between the two as means of transport and as the major strategic infrastructures in the country.

Rijkswaterstaat is the executive arm of the Dutch Ministry of Infrastructure and the Environment. It is responsible for the design, construction, management and maintenance of the main infrastructure facilities in the Netherlands.72 Its overarching goals are ‘dry feet’, clean and sufficient water and a quick and safe flow of traffic.

As a government agency, Rijkswaterstaat agrees management and maintenance plans for the water and transport networks with the Ministry of Infrastructure and the Environment. It then receives an ‘agency fee’ for the works it agrees that it will undertake, and the associated organisational costs. Rijkswaterstaat can make a profit or a loss from the agency fee, depending on how efficiently it operates and how effectively it contracts out to the private sector.

Investment in new infrastructure is also managed by Rijkswaterstaat, and is paid for through a central government Infrastructure Fund. Rijkswaterstaat cannot make a profit or a loss from this funding.

Rijkswaterstaat consults extensively with NGOs, private companies and other areas of central and local government in order to maintain a water and transport infrastructure sector that is collaborative and targeted at providing the best possible overall service for the Netherlands. Half of Rijkswaterstaat’s projects are PPPs.

Benchmarking Water consumption in the Netherlands is one of the lowest in developed countries (124 litres per capita per day). Water leakage in the distribution network is one of the lowest in the world at 6%. One way in which this has been achieved is through an internal benchmarking system between regional water companies. It is legislated in the Netherlands that private companies cannot provide drinking water to the public. Benchmarking was brought in 1997 to promote best practice and improve efficiencies in the absence of a directly competitive market.

72

http://www.rijkswaterstaat.nl/en/about_us/

http://www.rijkswaterstaat.nl/en/about_us/


PwC of 79

Johannesburg Water

Statistic Johannesburg Water

Water network size (km) 9,800

Sewage network size (km) 920

Number of employees 2,687


Turnover (£m) 3.4

Background Water and sewerage services in the Johannesburg region were historically the responsibility of 13 local authorities. These were ultimately amalgamated into four autonomous metropolitan local councils in 1996. These councils became responsible for water and sewerage, although the autonomy of the authorities led to duplication of roles, uncertainty over finances, competition for resources and weak governance.

Johannesburg Water (JW) was established as a corporation in 2001. It was made up of five municipal council water administrations with differing operational structures. The aim of the corporatized structure was to improve the financial viability and flexibility of the water service by making the new organisation a legally separate entity from the City Council, which remains the owner of JW.

Meter reading and revenue collecting was originally kept under the control of the City Council, with all other operations and capital projects being under the control of JW. Responsibility for readings and collection has since been gradually transferred to JW. A body called the Contract Management Unit (CMU) acts as a quasi-Regulator and as the intermediary body between the Council and the management of JW.

In order to assure best practice in the new organisation, international managers were brought in to oversee the transition. A five year contract was awarded to a joint venture formed by the Suez Group of France and their subsidiaries in South Africa and the United Kingdom—Water and Sanitation South Africa and Ondeo Services UK, respectively. The remit of the contract was to establish the levels of efficiency gains associated with private sector management.

Free allocation of water A key element of the JW model is the ‘free allocation’ of water that is allowed to all metered domestic properties. The South African Constitution, under the Bill of Rights, states that access to water is a basic right for all. “Basic provision” is defined as 25 litres per person per day, available within 200 metres.

JW offers a free allocation of 6 kilolitres of water per month. This would need to be doubled to 12 kilolitres per month in order to meet the World Health Organisation’s minimum standard of 5o litres per person per day. However, in poorer areas up to 75% of metered households do not go above the 6 kilolitre free allocation. This is to some extent the result of the prepaid nature of the metering system, whereby the water supply is cut off at the free allocation limit if it is not topped up. Householders do not wish to go above the limit and risk having no water.

The free allocation of water is cross-subsidised through increased charges to businesses and high usage domestic connections. However, JW has had issues with the levels at which higher price gradients should be applied. Low income domestic properties are often inadvertently impacted; particularly those that farm small areas of land for subsistence purposes but do not have additional income to pay volumetric water charges.


PwC of 79

Deemed consumption In poorer areas of the city that are unmetered, water is billed at a flat ‘deemed consumption’ rate. This flat rate is charged to all domestic and non-domestic customers, and is adjusted depending on the level of poverty in the area. The rate is not linked to actual consumption, which may be much lower or much higher than the deemed consumption.

Non-payment and the introduction of prepaid metering Water charging in Johannesburg theoretically predates the creation of JW. However, the socio-political history of the region, mass migrations to urban areas, understaffing and poor governance meant that customer data was scarce and inaccurate and payment levels low. To combat this, JW undertook an extensive period of prepaid meter installation, particularly in poorer areas of the city, where non-payment was thought to be more likely.

In order to promote uptake of new meters, JW offered a free installation service, with the added incentive that the installing technicians would also undertake any plumbing repairs on the property. However, in tandem with this was an offer to put payment plans in place to allow the householders to pay off several years of fixed charges in arrears, on which interest was being charged. Public support for the scheme was not high, with several protests taking place73. JW has the right to cut off supply to those who do not pay, or refuse to have meters installed. Objections to the scheme are ongoing.

73

http://www.news24.com/SouthAfrica/News/Water-meters-spark-protest-20040915


PwC of 79

Flemish Region Wastewater: Aquafin

The Flemish region (Flanders) has a population of about 6 million in the north of Belgium. The provision of water services and local sewerage is a municipal function. In many parts of the region, water services have been delegated to municipally owned companies, usually covering the areas of several municipalities. Pidpa, covered elsewhere in this report is an example of that kind of intercommunal company.

Wastewater treatment and the construction and operation of trunk sewers is a function of Aquafin nv, a company set up by the Flemish region in 1990 to undertake this function. At that time, about one third of domestic sewage was collected and not all of that was treated to a high standard. In 1990, the Flemish government established Aqaufin with the express purpose to pre-finance, construct and operate new wastewater treatment facilities and new trunk sewerage to address this situation. The region retained ownership of 51% of the company and invited an industrial partner, Severn Trent plc of the UK to take 20% of the shareholding and placed 29% with institutional investors in Belgium. The industrial partner also provided under commercial terms a substantial number of person-years of managerial and technical input over a period of 5 years to start the company and provide key technical, commercial and managerial inputs.

In 1994, the staff and assets of the VMM were transferred to Aquafin. By that time, Aquafin had established its own business culture and was on track to implement the ambitious investment and operations targets set for it by the Flemish region. At that time and since then, the VMM has retained a function more classically associated with Environmental Protection Agencies, namely technical and environmental regulation. The Aquafin staff were recruited on personnel contracts similar to those that would apply in the private sector, reflecting its status as a limited company. The VMM staff who transferred would have been on pay structures and contracts similar to those enjoyed in the public sector in Flanders. Today the numbers employed in Aquafin are in total 971 of which 89 are residual staff who transferred in 1994 and 882 are Aquafin employees. However, at the time of transfer, the staff numbers of Aquafin employees and VMM personnel would have been of the same order of magnitude.

Both grades of personnel (VMM contract and Aquafin employees) work side by side in the company and the VMM staff are integrated into the day to day operations of the company. However, the VMM staff were not compelled to transfer their contracts of employment to Aquafin. The numbers of VMM staff has steadily declined as all new hires were direct employees of Aquafin.

Between its foundation in 1990 and the end of 2010, Aquafin has delivered projects worth €2.8 billion and has put a further €380 million worth of projects to tender and has a portfolio of approximately €1 billion worth of projects in feasibility or design stage. It has a turnover of €362 million although it does not bill end customers directly. It is worth noting that over the two decades since it started, the pace of investment has not declined and it not projected to decline in the foreseeable future.

At the end of 2010, Aquafin was responsible for the operation of 247 wastewater treatment plants. To transport the wastewater to the treatment plants, Aquafin was responsible for the management of 4,735 km of regional collector sewers of which 3,555 km of sewers were procured by Aquafin and 1,180 km taken over from VMM. Aquafin manages 1174 regional pumping stations and storage and settling basins, of which 956 pumping stations were constructed by the company itself. In 2010, 232 treatment plants (94.7%) were in compliance with all of the emission standards imposed. Aquafin enjoys a high reputation in the wastewater sector and this success contrasts sharply with the situation in Flanders in 1990.

In 2006, the shareholding held by the private shareholders, both institutional shareholders (29%) and the industrial partner (20%) were acquired by the Flemish region and today Aquafin is 100% publicly owned.


PwC of 79

Flemish Region Water - Pidpa water

The provision of water services in Flanders remains a municipal function although since the mid-late 1800’s there has been a process of the creation of larger municipal companies serving more than one municipality. For instance, there are several water companies in the Flemish region including Antwerp Water Works (AWW), the TMVW and Pidpa each serving hundreds of thousands of people in up to several tens of municipalities.

Pidpa serving 65 municipalities and also serving the province and Antwerp Water Works is not untypical. It has a population served of 1.17 million through almost 500,000 domestic connections and 16,500 non-domestic connections. Approximately 90% of domestic customers are metered and there is effectively 100% metering of non-domestic customers. It serves 65 municipalities around Antwerp and also takes and delivers water from the Antwerp Water Works.

For domestic customers there is a ‘free’ allowance of 15 m3 of water per resident for each domestic connection annually. This amounts to approximately 41 litres per person per day. The typical standing charge for a domestic customer is €57.889 per year although a lower amount of €19.272 applies to certain categories of customers who live in certain classes of social housing. VAT at 6% applies in addition to these amounts. The information regarding numbers of residents at each address is updated annually from the national register (Belgium operates an identity card system where every resident registers his/her address with the authorities).

Pidpa invoices its customers directly not only for the water it supplies but also on behalf of the wastewater authorities (municipal and supra-municipal) for wastewater services. It has a universal water tariff of €1.2653 per m3 (1000 litres) plus VAT at 6% but the wastewater charge varies across its 65 municipalities. One such municipality is Aartselaar where the total charge is €3.4176 per m3 (plus VAT at 6%). However, the free allowance does not apply to the wastewater charge, reflecting that the wastewater charge is collected on behalf of the municipal and supra-municipal authorities while the water charges are collected on behalf of the water company itself.

Pidpa can be regarded essentially as an intercommunal company although it has municipal and provincial shareholders as well as being part owned by AWW. The company is profitable.

There are three bases for customers to request a reduced bill for wastewater services:

Social: on a mean tested basis, the wastewater charge can be covered by the social welfare system.

Ecological: if particular water conservation technology is deployed by domestic or non-domestic customers.

Economic: if the customer can demonstrate that less wastewater is produced than water used.

Pidpa also provides specialist wastewater network or septic tank services to 28 of the 65 municipal areas served. Generally however, the municipalities operate and maintain the town sewers. Major wastewater treatment works and trunk sewers are constructed and operated by Aquafin, a company owned fully by the Flemish region. This split of responsibility is reflected in the municipal and supra-municipal charging structure.


PwC of 79

Non-Metropolitan New South Wales

Background

History Historically water and sewerage services for the 1.8m people in New South Wales (NSW) have been provided by over 100 local providers, most of which are general purpose local government councils. The size of the networks controlled ranges from 200 to over 65,000 connections.

Control and Regulatory structures are in place to monitor water providers, but the majority of utilities managing their development and day to day operations using the NSW Government’s ‘Best practice management of water supply and sewerage guidelines’ document. No legislation is in place to mandate compliance with these guidelines.

Pricing is set for large authorities , but smaller authorities set their own pricing structures.

Issues An inquiry was commissioned by the NSW Office of Water in 200874 to identify the most effective arrangements for the long term provision of cost effective and sustainable water supply and sewerage services in NSW. Key issues to be addressed were how to:

Protect or enhance council revenue schemes

Protect or enhance council capital expenditure

Maintain or enhance job opportunities

Provide ongoing access to specialised skills

Adopt an independent and sustainable pricing mechanism

Put in place best practice governance

Encourage a more commercial focus

Attract and retain skilled staff

Put in place effective Regulatory incentives and sanctions

The enquiry was directed by the principal that ‘customers of local water utilities are entitles to benefit from professionalism, cost effective service standards and Regulatory safeguards and objectives.’ The new model would therefore:

Respond professionally to challenges

Be financially self sufficient

Be able to comply with increasingly stringent environmental and public health standards

Implement cost effective service standards

One of the primary concerns that lead to the commissioning of the report was the low level of performance of smaller local providers. Of the utilities with 200 to 1,500 connections, only 53% comply with Best Practice standards for water, and 44% for sewerage.

74 http://www.water.nsw.gov.au/Urban-water/Local-water-utilities/Local-Water-Utility-Inquiry/default.aspx


PwC of 79

Proposed solutions The Inquiry was undertaken by The Hon. Ian Armstrong OBE and Dr. Colin Gellatly AO.75 It was recommended that:

Governance should be improved by combining the current water utilities into 32 regional groups largely based on existing working relationships between local government bodies rather than on water catchment areas.

The organisational structure of the new bodies should be one of:

‘Binding alliance’, whereby a separate legal entity (Alliance Entity) is created to govern the strategic direction and coordinate resources and skills across several partners. Service levels are agreed between partners and the Alliance Entity.

Council owned regional water corporation, whereby council assets are transferred entirely to a new

entity.

Maintain current structure (for larger utilities not being merged).

Regulation should be strengthened, with greater levels of reporting and monitoring coordinated by a Regulator with the necessary enforcement powers.

Pricing should be based on utilities’ business and financial plans and should be approved by an independent body.

Red tape should be reduced at State Government level, with more transparent reporting and Regulatory structures.

Consumer protection should be improved through the mandatory introduction of ‘Energy and Water Ombudsmen’ by local water utilities.

The skills shortage could be mitigated through a combination of:

Offering incentives to communities within smaller water utilities to undertake training.

Increased sharing of skilled workers between utilities.

Increasing the size of local water utilities to reduce duplication of roles.

Providing greater training opportunities for existing staff.

Outsourcing skills to the private sector.

Investing in training and development organisations.

Implementation The New South Wales government Office of Water placed the Inquiry on public exhibition in 2009 and sought submissions to guide their response. They are now undertaking further research and investigation before making a decision on the actions that will be taken.

75

http://www.water.nsw.gov.au/Urban-water/Local-water-utilities/Local-Water-Utility-Inquiry/default.aspx


PwC of 79

Sofia Water PPP

Background Sofia Water (Sofiyska Voda) was created in 2000 as part of a 25 year Concession Agreement, initially with United Utilities. The agreement gives the operating company the role of operating and maintaining Sofia’s Water and Sewerage System (WSS) in order to provide services to Sofia’s 1.3m residents. The WSS assets remain the property of the City of Sofia. All newly constructed facilities funded by Sofia Water are also property of the City.76

The PPP Sofia Water was created in order to bring capital investment into the sector through a PPP. Over €31m of funding has been provided by the European Bank for Reconstruction and Development (EBRD). Mott MacDonald was appointed technical advisor by the EBRD to monitor the disbursement of the funds before and during the first 6 years of operation. Mott MacDonald’s scope included the appraisal of technical issues, commercial risk allocation, capital investment and operational compliance.77

Under the PPP the operating company was granted shares in Sofia Water, and given the right to collect charges from customers. The original structure of Sofia Water is shown in the operating model shown below:

Figure 14 Operating model78

The Regulator for Sofia Water is the State Commission for Energy and Water Regulation.

In 2010 the original operating company, United Utilities, sold its share of Sofia Water to Veolia Water. The shareholder capital is now divided between the Municipality of Sofia (22.9 %) and Veolia Water (77.1 %), who also bought out the shares held by the EBRD.

76

http://www.sofiyskavoda.bg/en/about/default.aspx 77 http://www.mottmac.com/projects/?id=8251 78

http://www.hoganlovells.com/files/News/5b70c83a-8d39-4bb8-a586-00bf93a65e88/Presentation/NewsAttachment/4097889f-0891-44b4-85ad-8be693374e46/600RichardTemple_HoganHartson_WaterPPPsisCEE_BucharestandSofiaWaterProjects.pdf

http://www.sofiyskavoda.bg/en/about/default.aspx

http://www.mottmac.com/projects/?id=8251




PwC of 79

Success of PPP A 2010 survey gave Sofia Water an 88.3% customer satisfaction rating.79 In its first 10 years the company replaced 220km of water mains and added 4,000 houses to their network. However, the company has been heavily criticised for under-investing in the upgrade and maintenance of infrastructure. In 2010 an average of 60% of pumped water did not reach customers. In some regions water losses are as high as 90%.80

In order to collect data about losses, charge accurate rates and manage demand, Sofia Water put in place a telemetric station for water network monitoring and installed water meters in all new buildings.81

79

http://www.seenews.com/news/latestnews/foronedecadesofiyskavodahasreplaced220kmofwatermains31march2011-102425/ 80

http://www.thebulgariannews.com/view_news.php?id=118116 81

http://www.seeurope.net/files2/pdf/rgn1207/3_Not_Abbreviations_Only.pdf

http://www.seenews.com/news/latestnews/foronedecadesofiyskavodahasreplaced220kmofwatermains31march2011-102425/

http://www.thebulgariannews.com/view_news.php?id=118116

http://www.seeurope.net/files2/pdf/rgn1207/3_Not_Abbreviations_Only.pdf


PwC of 79

Appendix 8: Definition of Options

Function Minimal Change Model Agency Model Utility Model

Legal and institutional framework (structure of company, governing law, rights and obligations etc)

Local Authorities remain the primary WSA’s for the provision of services but under the control and oversight of Irish Water.

Irish Water is allocated by statute certain functions, including strategic planning, managing the overall national investment programme, delivery of projects of a regional / national priority, billing and collection, water metering, overall allocation and control of funds for operations and capital investment by Local Authorities.

Irish Water also has a supervisory role in overseeing operations and maintenance as managed by the Local Authorities, setting targets and measuring performance and reports nationally on how WSAs are performing not only on Regulatory requirements (levels of service) but also on internal performance benchmarks (KPI’s).

Irish Water is a combination of ‘supra-shared service and supervisory organisation’ for the sector.

Performance of Local Authorities is managed through either an agency for capital expenditure or service level agreement (SLA) for operations and maintenance services.

Irish Water is the WSA but with a long term commitment to outsourcing substantial elements of day to day operations and maintenance to the Local Authorities.

Irish Water is allocated by statute full responsibility for all aspects of water services planning and delivery, at national, regional and local levels.

Irish Water also has a supervisory role in overseeing operations and maintenance as managed by the Local Authorities, setting targets and measuring performance and reports nationally on how Irish Water is performing not only on Regulatory requirements (levels of service) but also on internal performance benchmarks (KPI’s).

Performance of Local Authorities is managed through either an agency for capital expenditure or service level agreement (SLA) for operations and maintenance services.

Irish Water becomes a fully integrated national WSA.

Irish Water is allocated by statute full responsibility for all aspects of water services planning and delivery, at national, regional and local levels.

Local Authorities no longer have a role in water service provision (except insofar as Irish Water may subcontract responsibilities to them on an interim or long term basis).


PwC of 79


The contracting entity with the end customer is Irish Water. The day to day service is provided by the Local Authority.

The contracting entity with the end customer is Irish Water. The day to day service is provided by the Local Authority.

The contracting entity with the end customer is Irish Water.

Regulation (number of authority and duties etc)

For both domestic and non-domestic tariffs will require economic regulation.

Irish Water is the regulated entity. However, SLAs and agency agreements between Irish Water and Local Authorities are likely to require detailed scrutiny and the approval of the Economic Regulator.

Local Authorities to continue as front line technical Regulators of GWS’s.

Economic Regulator will set pricing policy in the sector, and approve/disapprove proposals from Irish Water. It will need full visibility at each LA level and will make determinations on prices accordingly.

The probability is that there will be an equalisation system on a regional or national basis. However this will be a matter to be determined by the Regulator.

Irish Water will be the entity to manage on a day to day basis the implementation of overall price and service regulation, as approved by the Regulator. Irish Water will devolve these obligations by SLA to the Local Authorities.

Irish Water will have additional powers for control of water abstraction.


Irish Water is the regulated entity.

Local Authorities to continue as environmental Regulator for Group Water Schemes.

Economic Regulator will set pricing policy in the sector, and approve/disapprove proposals from Irish Water, and will make determinations on prices accordingly.

There is unlikely to be a need for an equalisation system on a regional or national basis as uniform national tariff structure will apply. However this will be a matter to be determined by the Regulator.

Irish Water will be the entity to manage on a day to day basis the implementation of overall price and service regulation, as approved by the Regulator.



Irish Water is the regulated entity.

EPA to be the environmental Regulator for Group Water Schemes.

Economic Regulator will set pricing policy in the sector, and approve/disapprove proposals from Irish Water, and will make determinations on prices accordingly.

There is unlikely to be a need for an equalisation system on a regional or national basis as uniform national tariff structure will apply. However this will be a matter to be determined by the Regulator.

Irish Water will be the entity to manage on a day to day basis the implementation of overall price and service regulation, as approved by the Regulator.



PwC of 79


Leadership & Coordination (relationships between stakeholders, responsibility of board, management etc)

The Minimal Change Model will see leadership in the sector remain with the Local Authorities for most of their existing functions (e.g. water service provision locally- operations and maintenance, small capital works). Irish Water will assume a national leadership role for functions including overall strategy, capital planning and execution of larger capital schemes, allocation and management of operations and capital budgets currently managed by DECLG. Collaborative approach. Increased levels of shared services for asset management (perhaps on a Regional Office basis – as per LG Efficiency Review).

Governance Model for River Basins will set out further possibilities for coordination primarily on inspection, sampling and testing shared services between Local Authorities under the direction of Irish Water.

The speed of reform is driven by Irish Water through the power of the purse but this is also dependent on the cooperation of the Local Authorities.

Irish Water core management team mainly focused on investment (strategic planning), billing and collection and associated customer service, water metering and managing some outsourced activities and the agency/SLA’s to Local Authorities.

Irish Water will have a clear strategic direction and control but will delegate day to day operations and maintenance to the LA’s on a long term contractual basis (SLA’s). Irish Water will have step in rights in those cases where LA’s fail to perform to standard as set out in SLA’s.

Irish Water may require LA’s to work to River Basin Areas as the basic unit of operations.

The speed of reform is driven by Irish Water in consultation with the local authorities.

Irish Water core management team mainly focused on investment (strategic planning), billing and collection and associated customer service, water metering and managing some outsourced activities and the agency/SLA’s to Local Authorities.

Single organisation operating within a clear strategic framework but also directly responsible for delivery. Clear centralised leadership and coordination. Mandated centralised policies and procedures.

Decentralised operations on river basin basis.

The speed of reform is driven by Irish Water.

Irish Water core management team focused on all aspects of water and wastewater utility.


PwC of 79


Operations Local Authorities retain the statutory role for the operation of water and wastewater services.

SLA’s are in place with Irish Water to allow Irish Water to oversee operations and maintenance and measure performance through Levels of Service and KPI’s. Up to 34 different SLAs required. Each one to be agreed and possibly approved by the Economic Regulator.

Significant elements of shared service for operations likely to be introduced – probably on a River Basin Management basis, with the main focus on inspection sampling and monitoring.

Current DBO’s for WWTP’s and WTP’s novate to Irish Water. Future DBO’s managed by Irish Water. O&M element of DBO for GWS remain with GWS. Current O&M elements of DBO’s with GWS’s do not novate to Irish Water.

Irish Water has full responsibility for water and wastewater operations.

Local Authorities have a substantial and long term role in water / wastewater operations under Agency Agreements incorporating SLAs.

Significant elements of shared service for operations likely to be introduced – probably on a River Basin Management basis, with the main focus on inspection sampling and monitoring.

Some key activities can be outsourced (e.g. billing & collection, WWTP O&M through DBO model or from a range of other contracting approaches).

Current DBO’s for WWTP’s and WTP’s novate to Irish Water. Future DBO’s managed by Irish Water. O&M element of DBO for GWS remain with GWS which will be supervised by local authorities. Current O&M elements of DBO’s with GWS’s do not novate to Irish Water.

Irish Water has full responsibility for water and wastewater operations.

Local Authorities have no role in water / wastewater operations.

Irish Water decides which arrangements are the most effective to put in place to meet its national, regional and local objectives. Likely to be a regionalised structure based on River Basin Management areas.

Some key activities can be outsourced (e.g. billing & collection, WWTP O&M through DBO model or from a range of other contracting approaches).

Current DBO’s for WWTP’s and WTP’s novate to Irish Water. Future DBO’s managed by Irish Water. O&M element of DBO for GWS remain with GWS which will be supervised by Irish Water. Current O&M elements of DBO’s with GWS’s do not novate to Irish Water.


Irish Water prepares a capital investment programme for shareholder approval, consistent with its strategy, based on national economic and social needs. This translates into a Short and medium term (currently it is 3/6 yrs) financial envelope within which project priorities are determined.

Irish Water prepares a capital investment programme for shareholder approval, consistent with its strategy, based on national economic and social needs. This translates into a 3/5 year financial envelope within which project priorities are determined. Long term (20-30 year) strategic planning also done by Irish Water.

Irish Water prepares a capital investment programme for shareholder approval, consistent with its strategy, based on national economic and social needs. This translates into a 3/5 year financial envelope within which project priorities are determined. Long term (20-30 year) strategic planning also done by Irish Water.


PwC of 79


These arrangements are supplemented by national/regional asset management shared services and a greater degree of control and evidence based prioritisation by Irish Water.

Some functions currently exercised by DECLG are enhanced and transferred to Irish Water including implementation of the strategic planning as envisaged by Water Services Act 2007.

Execution of capital projects up to a certain threshold to be implemented by Local Authorities on an agency basis.

Asset Management Planning (AMP) process will be a national process and managed centrally taking into account needs assessment but also all other factors as per modern AMP process. Procurement controlled from centre, Delegation of tasks to regional offices e.g. on a river basin basis.

Execution of capital projects up to a certain threshold to be implemented by Local Authorities on an agency basis.

Asset Management Planning (AMP) process will be a national process and managed centrally taking into account needs assessment but also all other factors as per modern AMP process. Procurement controlled from centre, Delegation of tasks to regional offices e.g. on a river basin basis.


Irish Water to manage and execute billing and collection, water metering programme and enforcement of collection.

Open question of arrears prior to establishment of Irish Water – probably will stay with Local Authorities.

Likely to outsource the billing, collection and customer contact centre for billing. Likely to retain ownership of business processes, call centre scripts, enforcement of collection.

Technical customer service will remain with LA’s. Irish Water may have central number which will refer customers to the LA’s for technical issues.




Technical customer service will remain with LA’s. Irish Water may have central number which will refer customers to the LA’s for technical issues.




Likely to be centralised technical customer contact centre integrated with an overall workflow management system.


PwC of 79


Finance Management & Funding

Asset ownership

Irish Water will be financially accountable to the Minister and the Oireachtas for all monies disbursed by it. It will have the overall responsibility for the allocation and control of capital and current funds. Local Authorities will also have detailed financial management & control systems as well as developed treasury management functions in place based on guidelines for reporting to Irish Water for all expenditure by Local Authorities. The Regulator will need to have full visibility on the financial information of Irish Water and the Local Authorities water services. Particular attention will be paid to potential for cross subsidy within the Local Authorities between services and to the SLAs.

Asset ownership could remain with Local Authorities. Therefore ‘asset heavy’ part of the balance sheet likely not to be with Irish Water.

Funding long term from revenues from customers (domestic and non-domestic) to achieve full cost recovery for both Opex and Capex. Viability funding gap while revenues are building up year on year will need to be provided for (possibly from exchequer).

Irish Water will be financially accountable to the Minister and the Oireachtas for all monies disbursed by it. It will have the overall responsibility for the allocation and control of capital and current funds. Local Authorities will also have detailed financial management & control systems as well as developed treasury management functions in place based on guidelines for reporting to Irish Water for all expenditure by Local Authorities. The Regulator will need to have full visibility on the financial information of Irish Water and the Local Authorities water services. Particular attention will be paid to potential for cross subsidy within the Local Authorities between services and to the SLAs.

All assets to be transferred to Irish Water.


Irish Water will have all the characteristics of a commercial state body, with a strong central function. It will manage its own borrowings within the overall limits prescribed by statute and should be able to do so in a manner like other commercial State bodies, that it is not brought within overall GGBS limits, thus reducing the current burden on the Exchequer.

Local Authorities ultimately have no involvement in water finance and funding.

All assets to be transferred to Irish Water.


People Most existing staff remaining with Local Authorities, with pay, numbers and conditions determined by DECLG. Local Authorities will retain executive control on organisation and delivery of service for operations and maintenance and capital works below a certain threshold.

Variations in approach from LA to LA with some coordination provided by shared services.

Most existing staff remaining with Local Authorities, with pay, numbers and conditions determined by DECLG. Local Authorities will retain executive control on organisation and delivery of service for operations and maintenance and capital works below a certain threshold.

Variations in approach from LA to LA with some coordination provided by shared services.

Irish Water will be a commercial State Body, operating more flexible arrangements in relation to the number of staff, their terms and conditions and recruitment and retention of staff.


PwC of 79


As a new organisation, Irish Water will need new staff for a corporate services function, planning, engineering and management of operations as well as HR, marketing. It is possible that personnel would move from DECLG to Irish Water for AMP.

As a new organisation, Irish Water will need new staff for a corporate services function, planning, engineering and management of operations as well as HR, marketing. It is possible that personnel would move from DECLG to Irish Water for AMP.

As a new organisation, it will need new staff for a corporate services function, planning, engineering and management of operations as well as HR, regulatory, marketing etc. In line with existing practice across the public service, existing staff engaged on water activities would transfer to Irish Water.

The issues arising would be addressed in the statute governing the establishment of Irish Water.


Irish Water will determine the branding, marketing and communications strategies for the water sector, particularly for billing and collection, water conservation awareness etc.

Irish Water could provide general support to Local Authorities for local water conservation awareness and potentially act as a shared service for purchasing marketing & communications services (advertising, agencies etc). End customers would have brand awareness of Irish Water but also be made aware that technical issues would be dealt with by the Local Authorities.

Irish Water brands and markets itself as the national water authority takes lead role for clear branding and communications, willingness to pay, water conservation, etc

Irish Water brands and markets itself as the national water authority takes lead role for clear branding and communications, willingness to pay, water conservation, etc.

MIS/IT Enhanced approach to shared services on an organic basis

Specific initiatives could include:

Web PCS

Web PMS (Irish Water to drive implementation)

Linkages to EPA requirements (EDEN, WISE)

Ultimately could lead to Irish Water facilitating a super shared service for MIS, designing and hosting all applications specific to water and

Irish Water to set out and drive implementation of a fully integrated MIS for the water and wastewater sector. LA’s to use systems as developed by Irish Water and hosted centrally. However in addition, LA’s will maintain their own systems to act as Agents of Irish Water including all their own finance and HRM systems.

Irish Water to set out and drive implementation of a fully integrated MIS for the water and wastewater sector.


PwC of 79


wastewater sector.

Customer Experience

All customers (domestic and non-domestic) are billed by Irish Water and interact with Irish Water on these issues.

All consumers report faults or other technical issues to Local Authorities. Ultimately Irish Water could offer a single contact point but would refer all technical issues to relevant LA.

Overall, consumer interest will be developed and protected by the Water Regulator‘s oversight of Irish Water.


All consumers report faults or other technical issues to Local Authorities. Ultimately Irish Water could offer a single contact point but would refer all technical issues to relevant LA.

Overall, consumer interest will be developed and protected by the Water Regulator‘s oversight of Irish Water.


All consumers report faults or other technical issues to Irish Water.

Overall, consumer interest will be developed and protected by the Water Regulator’s oversight of Irish Water, Water.

Note the Inter communal Model is not described in detail, as it s characteristics would be similar to those of the Agency Model but with a smaller number of agents (i.e. 3 – 7), or alternatively based on the Utility Model with multiple companies (i.e. 3 – 7).


PwC of 79

Appendix 9: Evaluation Criteria

Objectives Evaluation criteria Explanation

Financially sustainable water services

Capacity to optimise use of available funds.

Will either model be better or worse at facilitating decisions about the allocation of funds to projects or between opex and capex and then supporting the execution of those decisions successfully?

Capacity to support strategic long term capital funding and fund priority requirements.

Is either of the models better able to secure funding for capital programmes or priority projects?

Potential to be self funding in the long term.

Which of the organisational structures for Irish Water will be better able to be self funding in the future i.e. be more likely to secure revenues from customer charges and loans from the lender community.

Ability to borrow in the markets. The ability to secure finance from lenders at a reasonable rate is influences by whether they recognise the business model they are lending to either from other sectors or from other countries. Therefore the “recognised model” can often facilitate lending.

Improving Ireland’s water services infrastructure

Ability to support effective investment in infrastructure (timeliness and value for money) .

Is either of the models better placed to support the in investment programme in Ireland’s water infrastructure?

Effectiveness in facilitating implementation of national strategies for water services.

Will either model perform better in supporting the implementation of national strategies for water services, either in the design or execution of the work associated with the strategies?

Effectiveness in supporting the rural water strategy and the group water sector.

Which model will more effective in supporting the implementation of the rural water strategy and developing an effective relationship with the group water sector?

Ensuring environmental standards

Clarity of responsibility for the delivery of environmental compliance.

Which model will facilitate environmental compliance most successfully, in particular giving environmental Regulators the clear point of accountability for compliance issues?

Delivering improved outcomes for customers

Ability to provide improved levels of service for customers.

Do either of the models have a greater ability to deliver improved outcomes for customers?

Ability to deliver reduced levels of leakage.

Do either of the models have a greater ability to deliver reduce water leakage?

Ability to improve Security of supply. Is either of the models more likely to deliver security of supply of water services?


PwC of 79


Effectiveness in serving local needs and requirements.

Which model is more likely to be able to reflect and respond to local requirements regarding water services?

Strong governance with clear accountabilities

Effectiveness in delivering statutory requirements.

Are either of the models for Irish Water better able to deliver compliance with water sector related legislation and obligations?

Alignment of responsibility, authority and accountability for charging, operations, and other activities.

Which of the models is better able to ensure clear responsibility for delivery of obligations?

Ease of implementing effective regulation (economic, environmental and technical).

Do the models differ in terms of ease and effectiveness with which they can be regulated?

Support other aspects of water reform in Ireland

Effectiveness in the delivery of the metering programme.

Does either model provide an advantage in relation to the metering programme?

Compatibility with evolving water governance.

Does either model provide an advantage in relation to river basin management?

Effectiveness in the introduction of water charging.

Does either model provide an advantage in relation to water charging?

Compatibility with the New Era model. Does either model provide an advantage in relation to New Era?

Promote efficiency Ability and speed in achieving of potential for efficiency and cost reduction in operation and investment.

Which model is better able to support an efficiency programme for Irish water services?

Ability to achieve economies of scale. Which model is likely to best take advantage of cost reduction through economies of scale?

Ease of implementation of ICT / MIS. Given the importance of management information systems in the running of the water sector which of the two models is better able to support the successful implementation and use of MIS?

Consistency with plans for the implementation of operational river basin management.

Are there differences between the models in terms of being able to successfully implement integrated river basin management?

Effectiveness in integrating water services with the planning regime.

A key benefit of the existing Local Authority arrangements for water services provision is its integration with the local authority planning permissions regime and also regional planning. Does either of the models better preserve this benefit?

Ability to attract and retain appropriate skills and know how in the sector.

Does either of the models perform better in terms of attracting and retaining appropriate staff and offering


PwC of 79


them careers?

Implementation Considerations

Ease of implementation. Which of the model is easier to implement? Is the implementation risk associated with either model too great to consider adopting the model?

Impact on local authorities. Does either of the models for Irish Water impact the efficiency of Local Authorities in delivering their other duties (e.g. loss of critical mass?).

Impact on Ireland’s Economy

Impact of new model on Public Service staffing numbers.

The degree to which either model can support a reduction in Public Service staffing numbers.

Impact of new model on General Government Balance.

The impact which the adoption of either model would have on the level of borrowings in the General Government’s Balance.


PwC of 79

Appendix 10: Performance Data for UK Water Companies

England and Wales The most significant reductions in operating costs in the England and Wales water sector were in the period from 1994 to 2001, where industry operating costs were reduced from c£3.15bn to c2.65bn82 representing a decrease of 3% per annum. Operating costs have started to increase subsequently largely as a result of increasing energy costs and pension service costs both of which are driven by factors external to managerial control to some degree.

This industry wide figure however does not tell the full story in terms of the significant improvements in quality of service that have been achieved by water and sewerage companies over the same period as well.

Improving performance of the England and Wales Water companies

Compliance with water quality Regulatory standards, England

and Wales companies

Total number of breaches of water quality standards

1994 99.28% 25,171

1995 99.45% 17,341

1996 99.70% 9,107

1997 99.75% 7,434

1998 99.78% 6.245

1999 99.82% 5,148

2000 99.83% 4,475

2001 99.86% 4,054

In effect the England and Wales companies achieved improved operating cost performance and improved quality of service simultaneously. In part this was driven by efficiency in addition the increases in capital expenditure that were taking place in the sector at the time.

82

In 2003-04 constant prices from Figure 7.1.1a in “The development of the Water Industry in England and Wales” Published by Ofwat and Defra in 2005.


PwC of 79

Scotland In Scotland, in the period directly after the creation of Scottish Water, the Regulator set the new business significant operating costs efficiency targets, based on using the Regulatory benchmarks for Scottish Water. In effect Scottish Water was set a target of reducing operating costs between 2002/03 and 2005/06 of 37%. The table below summarises the targets set for Scottish Water:

Operating cost targets set and achieved by Scottish Water83

2002/03 2003/04 2004/05 2005/06 TOTAL

Scottish Water’s projected operating costs £387m £399m £411m £423m £1,621m

Operating costs set by Regulator £304m £277m £266m £265m £1,112m

Saving £83m £122m £145m £158m £509m

Saving as a percentage 21% 31% 35% 37% -

What Scottish Water achieved 15% 25% 32% 39% -

A similar efficiency challenge was applied to Scottish Water in terms of capital expenditure as shown below

Capital expenditure targets set and achieved by Scottish Water84

2002/03 2003/04 2004/05 2005/06 TOTAL

Scottish Water’s projected capital expenditure £545m £572m £786m £808m £2,711m

Capital expenditure set by Regulator £472m £463m £595m £568m £2,098m

Saving £73m £109m £191m £241m £613m

Saving as a percentage 14% 20% 25% 31% -

What Scottish Water achieved 3% 9% 21% 32% -

83

Figures are shown in nominal term: sourced from Water Industry Commission “Costs and Performance report 2003-06 Detailed Findings 84

Figures are shown in nominal term: sourced from Water Industry Commission “Costs and Performance report 2003-06 Detailed Findings


PwC of 79

Appendix 11: Assessment of Options

Financially Sustainable Water Services Under both models, Irish Water would own the assets and have the asset security to support the

borrowing required to fund investment in a long term sustainable manner. However, the Utility Model would have a more recognised business structure that finance providers would understand. In agreeing loan facilities, lenders take significant comfort in the security and stability of revenue streams, the transparency over the cost model and the strength of the asset base. In the UK, lenders have developed funding products specifically for the water sector85. Under the Utility Model, ownership and responsibility for the assets and the related costs and revenue streams are clear. Under the Agency Model, because control over costs is more fragmented, Irish Water’s control over net income is less clear;

In both models, Irish Water would be responsible for ensuring that the available funds for capital expenditure are prioritised and allocated effectively and for optimising between the planning and delivery of capital expenditure, maintenance expenditure and operating expenditure. Under the Utility Model, Irish Water would be in a better position to optimise the mix of capital, maintenance and operations expenditure than under the Agency Model, due to the complexities associated with operating under agency arrangements with local authorities in the latter model; and

The Utility Model as proposed, will be designed to achieve greater cost efficiencies (see below) than the Agency Model through greater economies of scale arising from more highly integrated organisation, processes and systems. As the Utility Model, will better meet the funding criteria than the Agency Model, the Utility Model is capable of becoming self-funding in a significantly shorter period of time.

Improving Ireland’s Water Services Infrastructure Under the Agency Model, Irish Water would have a clear remit to support effective investment in

infrastructure. However, its reliance on local authorities for delivery of part of the work associated with the infrastructure may limit the effectiveness of that investment for a range of reasons including for example:

Conflicts in priorities for local authorities between water services and other local projects; and

Slower decision making because of the interface between Irish Water and 34 local authorities.

The Utility Model has the integration of investment planning and delivery in one organisation which is proven to be more effective in delivering infrastructure; and

Both models have advantages over current provision of water services in terms of the implementation of national strategies as both the Agency Model and Utility Model are national bodies. The Utility Model would have an additional advantage in the implementation of national strategies as, being an integrated body it would not need to rely on and interface with the local authorities for delivery of part of its remit.

Ensuring Environmental Standards are Met Environmental standards are set independently of whichever delivery model is chosen and the EPA under the Water Framework Directive is a key driver of this. The standards to be achieved will be the same whether the Agency or Utility model will be adopted. There is an argument to say that environmental standards will have be met in both scenarios and the issue is more whether they can be achieved in a reasonable timeframe and at what cost. The Utility Model does demonstrate a number of advantages in this regards including:

Under the Utility Model, Irish Water could align its operating regions with River Basin Districts, facilitating alignment of River Basin Management Planning and operations.

85

For example some banks have created specific lending facilities for the water sector such as the Royal Bank of Scotland’s Artesian Facility which is used by a number of players in the UK water sector.


PwC of 79

The Utility Model would be able to introduce a greater level of uniformity in reporting to the EPA than the Agency Model, as there would be a unique point of interface.

Under the agency model, agency arrangements with the Local Authorities would have to be explicit about the level of environmental information to be collected and reported but the legal liability for non-compliance would rest primarily with Irish Water. This disconnect would not be present in the Utility Model.

Delivering Improved Outcomes for Customers Improvements in service levels to customers tend to be driven by management and regulation rather

specifically than by business models. The Utility Model is likely to be stronger in delivering customer service improvements because it would be the singular focus for management to deliver improved service quality and because the Utility company would have direct control of manpower and assets;

Under the Utility Model, responsibility for billing, customer support and the delivery of customer service

would reside in one organisation whereas under the Agency Model, while service delivery would be undertaken by the local authorities, billing and support would reside with Irish Water;

Both models would have a focus on improved delivery of capital expenditure and maintenance so it is expected that there would be little difference between the models in delivering reduced leakage;

We would expect both models to provide a greater focus on security of supply than the current arrangements. In both the Utility Model and the Agency Model, Irish Water would have the capability to engage in national strategic planning. This planning capability would mean that water projects of national importance would be developed centrally rather than in the fragmented current structure for water services in Ireland. The Utility Model has one key advantage over the Agency Model in maintaining security of supply in that it would be designed fit for purpose to respond more effectively to national security of supply issues than the fragmented nature of the Agency Model. It would have a deeper portfolio of nationwide operating and investment resources available and would not have to rely on the successful operation of the interface between the Irish Water and the local authorities, which could become difficult to manage particularly if there are disputes or conflicts over the use of resources; and

Any model for the provision of water services which retains a role for local authorities is likely to have a closer connection to local needs and requirements. The Agency Model, with its use of the local authorities as delivery agents, therefore would be stronger than the Utility Model in this regard. The single utility is often associated with large national call centres for customer contact and a mobile field force not necessarily locally based. If the Utility Model were the chosen model for Irish Water, an appropriate regional structure should be implemented, preferably based on river basins. This would need to be supported by efficient workforce management systems involving mobile dispatch to ensure local servicing is optimised.

Strong Governance with Clear Accountabilities There is no reason to believe that either model would be unable to deliver the statutory requirements for

a water and sewerage company in Ireland. The key challenges would be whether the models are able to deliver the required level of compliance economically and efficiently and in a manner that is financially sustainable in the longer term (which are covered by other evaluation criteria);

Under both models, Irish Water would have legal responsibility for water service delivery, and control of the funding to support that delivery. Under the Agency Model, Irish Water will need to allocate their water services budget across 34 separate local authorities. As there is a minimum fixed cost required to sustain each local authority water service, there is a risk that the level of funding available may not be sufficient to provide the required level of service in each local authority. Under the Utility Model, the structures required to deliver the required level of service nationally can be designed on a fit for purpose basis, minimising the level of structural investment required, better positioning Irish Water deliver against its service requirements; A key success factor for the sector and the consumer is the ability of the Regulator to measure the performance of Irish Water. The Utility Model would provide Regulators with a single point of accountability and responsibility for the monitoring of environmental compliance. Under the Agency model, Irish Water would have to assess and manage the performance of 34 separate


PwC of 79

local authorities against economic and environmental regulations and requirements before accounting to the respective Regulator for its overall performance; and

The creation of a single Utility would create a body of a suitable scale to benchmark against water utilities in the UK in particular where regulation has been important in driving down costs and also improving the quality of service for a number of years. In the UK there is a data set of water company costs and performance (the June Returns and Annual Returns86) that would facilitate comparison if similar data were collected for Irish Water. The Utility Model would also create a single body clearly accountable to the Regulator for efficiency and quality of service performance. While retaining the local authority structure under the Agency Model would allow the Regulator to benchmark between the local authorities, such benchmarking would be comparing practices within Ireland rather than drawing on experience of best practices internationally.

Support other Aspects of Water Reform in Ireland There is potentially little difference between the models in terms of supporting the delivery of the

metering programme for domestic customers in Ireland. Under both models, the programme would be delivered directly by Irish Water rather than at local authority level. The Utility Model structure has previously delivered domestic metering programmes in the water sector (for example in England and Wales87);

Under the Agency Model Irish Water would be responsible for ensuring that programmes of national importance are planned, procured and managed successfully. The key challenge for water reform under the Agency Model is the requirement to involve and coordinate the activities of 34 separate local authorities towards common objectives, resulting in slower implementation of the reforms relative to the centralised decision making and planning capability of a single Utility Model;

There is no evidence to suggest that either model would be more or less effective in supporting the

introduction of domestic charging; and

There appears to be no distinction between the models in relation to NewEra insofar as can be determined based on current information about the New Era proposition.

Promoting Efficiency The Agency Model is likely to drive efficiency mainly in the capital programme, as that is its primary area

of influence. The Utility Model is likely, in addition, to deliver greater cost efficiency through designing and implementing a fit for purpose structure, leveraging best practice and the economies of scale of a national organisation. In addition, the Utility Model would provide greater efficiencies through the elimination of duplication and overlap in the back office functions (HR, Finance etc.);

Operating efficiencies of up to 40% have been achieved in a relatively short number of years on operating expenditure in Scotland by virtue of integration of services into a national utility. Efficiency gains of 3% per annum were achieved by water companies in England and Wales between 1994 and 2001 (see Appendix 10). The levels of efficiency improvement projected by the Local Government Efficiency Review Group88 for a range of initiatives under current local authority structures is €35 million i.e. 0.5% (in total – not annually);

Under the Utility Model, Irish Water has the ability to introduce a more flexible cost base, determining the most appropriate resourcing mix of permanent staff, contract staff, and outsourcing;

Under the Utility Model efficient and effective national management information systems can be developed to support monitoring and management of performance. Under the Agency Model any national management information systems would be dependent upon different sources of data for each local authority operating on different IT systems. The integration challenge would be significant. In addition, ensuring consistency of data and reporting across the authorities would potentially pose significant challenges;

The river basins of Ireland are not well aligned with the boundaries of local authorities. Successful implementation of operational river basin management would require water and sewerage operations to be organised and deployed on a river basin basis. The Agency Model with its reliance on local authority support would face significant challenges in implementing this as it would require a substantial

86

For the type of data collected, see: http://ofwat.gov.uk/regulating/junereturn/jrlatestdata/ 87

See Figure 4, metering penetration in England and Wales : in The Walker Review of Charging for Water Services http://www.defra.gov.uk/publications/2011/03/26/walker-water-review-pb13336/ 88

Local Government Efficiency Review


PwC of 79

reorganisation of local authority staff. This would be more easily implemented in the Utility Model where staff would no longer be aligned with specific local authorities;

The existence of economies of scale in the provision of water services has been subject to much research (both academic and commercial89.) There is evidence that small scale water companies (for example below one million population equivalent) tend to demonstrate higher unit costs than larger companies. The Utility Model would more effectively facilitate the integration of smaller scale water operations in Ireland achieving the benefits of bringing operations, asset management and capital programmes together (allowing efficiency through comparing operating and capital solutions to issues in water and sewerage service provision). In addition the Utility Model would more easily facilitate the pooling of resource nationally facilitating more efficient work planning, as well as the procurement benefits that arise from operating at a larger scale. It would be significantly more difficult to deliver these benefits under the Agency Model as it would tend to perpetuate the fragmentation of water services;

Both models could facilitate competition within the market for water services delivery. Under the Utility Model, competition could be generated by competitive tendering to outsource various services at a national or regional level. Under the Agency Model, the opportunity to generate competition for operations and maintenance would be more at the local level than the national level, thus not capturing the full potential benefits of a larger procurement wallet. However, over time it could be envisaged that, under the Agency Model, limited competition could be generated amongst local authorities, and also between local authorities and the private sector for aspects of the services covered under the local authority agency arrangements;

Both models could also facilitate competition at the retail level, although this would not be envisaged in the short term;

Regional planning and the granting of planning consents for construction is a local authority responsibility. The Agency Model would preserve local alignment and ensure that projects were integrated with local planning processes. The Utility Model would not have a local connection in the same manner which means it may be less efficient in ensuring effective integrated planning. In countries where large or national water utilities operate they tend to develop specialist teams responsible for local authority liaison to manage a successful integrated planning process. Existing utility bodies, such as the ESB, Bord Gais and the National Transport Authority feed into the national, local and regional planning processes in this manner;

A single water utility company would have the advantage of being able to offer staff of all grades water sector careers, with associated skills development and training support. This would be of interest to those that wish to focus their careers in the water sector. The Agency Model has less capacity to support the career development of water sector staff given the fragmentation of skills and roles and the level of mobility of staff across the local authorities;

We understand that much of the current water sector labour force would value the “public service ethos” that is associated with the provision of water services in the local authority model. It would be important to maintain this commitment into the new model for Irish Water;

Of relevance to the assessment is the experience of the rail sector in Britain which has some similarities

to the Agency Model for Irish Water, with central coordination being provided by the UK Department for Transport and Network Rail, with operations, CAPEX and maintenance being performed by a wide range of third party service providers. The efficiency of the UK rail industry has just been reviewed and the key barrier to efficiency in the sector is identified as fragmentation, “Having multiple industry players, together with misaligned incentives ... has made it difficult to secure cooperative effort at operational interfaces or active industry engagement in cross-industry activities which need to be undertaken for the common good”90. The report continues to state that this is a key barrier to efficiency in the provision of rail services in the UK;

The Agency Model would represent less of an implementation challenge as it represents less of a change to the sector when compared with the Utility Model. Avoiding the significant transfer of staff from the local authorities to Irish Water in particular would make the Agency Model easier to bring into being and possibly in a shorter time scale than would be expected for implementing the Utility Model; and

The Utility Model, with end-to-end ownership based on a service delivery culture and a singular focus on water is likely to provide a more efficient operation than the Agency Model, where water would be just one of the diverse services provided by local authorities.

89

See for example: Fraquelli, G and Moiso, V. “Cost Efficiency and Economies of Scale in the Italian Water Industry” or Stone and Webster “Investigation into Evidence for Economies of Scale in the Water and Sewerage industry in England and Wales.” (2004.) 90

Department for Transport (2011)“Realising the potential of GB rail: Report of the Rail Value for money study”

Irish Water: Phase 1 Report Appendices

Documents

Transcript of Irish Water: Phase 1 Report Appendices