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Irish Water:Phase 1 Report

2nd November 2011

Irish Water: Phase 1 Report

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Private and ConfidentialMr. Mark GriffinAssistant SecretaryDepartment of Environment, Community and Local GovernmentCustom HouseDublin 1

2nd November 2011

Dear Mark,

In accordance with your instructions as confirmed in our contract dated 10th June2011, we now include our second interim report which reports uponrecommendations for the optimal organisational form for water services delivery inIreland.

We draw your attention to important comments regarding the scope and process ofour work set out immediately following this letter.

This is an interim report, which based on our review of information provided byDECLG ("Department") officials and local authorities, meetings with a range ofstakeholders agreed with the Department, our review of international experiencewith the establishment of structures to provide water services and the experienceof our team, recommends an organisational form for water services in Ireland. Ourfinal report will in addition, include issues associated with the implementation ofthe model, as selected by the Department for delivery of water services in Ireland.Our comments in this interim report are subject to amendment or withdrawal; ourdefinitive findings and conclusions will be those set out in the final report.

You may not make copies of this report available to other persons except for thepurpose of assessing the optimal structure for water services delivery in Ireland.We will not accept any duty of care, (whether in contract, tort (includingnegligence) or otherwise) to any person other than you, except under thearrangements described in the Contract between us.

Yours faithfully

Garrett CroninPartner

T: 01 7928807F: 01 7926766


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Important Message

Important message to any person not authorised to have access to this report

Any person who is not an addressee of this report or who is not receiving this report directly from anaddressee for the purpose of assessing the optimal structure for water services delivery in Ireland is notauthorised to have access to this report.

Should any unauthorised person obtain access to this report, by reading this report such person acceptsand agrees to the following terms:

1. The reader of this report understands that the work performed by PricewaterhouseCoopers wasperformed in accordance with instructions provided by our addressee client and was performedexclusively for our addressee client's use.

2. The reader of this report acknowledges that this report was prepared at the direction of our addresseeclient and may not include all procedures deemed necessary for the purposes of the reader.

3. The reader agrees that PricewaterhouseCoopers, its partners, principals, employees and agents neitherowe nor accept any duty or responsibility to it, whether in contract or in tort (including withoutlimitation, negligence and breach of statutory duty), and shall not be liable in respect of any loss, damageor expense or whatsoever nature which is caused by any use the reader may choose to make of thisreport, or which is otherwise consequent upon the gaining of access to the report by the reader. Further,the reader agrees that this report is not to be referred to or quoted, in whole or in part, and not todistribute the report without PricewaterhouseCoopers' prior written consent.


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Scope Process

Purpose of theStudy

To undertake an independent assessment of the transfer of responsibility for water services provision fromthe local authorities to a water utility and to recommend the most effective assignment of functions andstructural arrangements for delivering high quality competitively priced water services to customers(domestic and non-domestic) and for infrastructure provision; in particular to examine two principal formsof potential company structure (or variants of those forms) for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible foroperation, 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 aregional/national priority, national metering programme) with local authorities operating as agents ofthe company, retaining their operational responsibilities and for delivery of smaller scale investment.

Scope of ourWork

This report covers phase 1 of the engagement and includes;

An assessment of current water and wastewater services in Ireland;

An overview of relevant models from other jurisdictions;

Recommendations on the optimal organisational form for water services delivery in Ireland;

Recommended target operating model, including financial and funding considerations;

Assessment of the potential role for an existing State agency;

Transition strategy; and

Legal considerations in the implementation of the recommendations.

ApproachAdopted

The approach to conducting Part I of the study has been to:

Assess the strengths and weaknesses of the current model for provision of water services in Ireland toidentify the challenges that would need to be addressed by a new model for water service delivery,without losing the positive aspects of the current model;

Review the Models for Water Service Provision Internationally to identify trends and lessons to belearned for water sector reform in Ireland;

Take Soundings from Stakeholders in the sector regarding the changes they feel would best deliverimproved services for Ireland and the implementation challenges for any new model;

Identify potential operating models for Irish Water and Evaluate those Models against a set ofEvaluation Criteria based on Policy Requirements for water reform in Ireland;

Describe the Recommended Operating Model and its financial, legal, organisational, staffing,environmental and other implications; and

Develop a High Level Transition Strategy designed to minimise the delay in achieving the benefitswhile managing the implementation risks of the recommended operating model.

Sources ofInformation

Information was received through:-

Consultation stakeholders (listed in Section 1), some of whom also made written submissions;

Information provided on request by the DECLG, the local authorities and the LGMA;

Publically available information;

Research on international best practice.

PwC have not audited or independently validated any of the information provided.

ManagementRepresentations

We have shown a draft of this report to the Department sponsors and to the extent that we considerappropriate, we have incorporated their comments in this report.


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Table of Contents1. Executive Summary ........................................................................................................................... 10

Background .................................................................................................................................................................................... 10

Purpose of the Study...................................................................................................................................................................... 10

Approach .........................................................................................................................................................................................11

Strengths and Weaknesses of the Current Model .........................................................................................................................11

International Experience............................................................................................................................................................... 13

Stakeholder Soundings .................................................................................................................................................................. 13

Operating Models Considered....................................................................................................................................................... 13

Operating Model Recommended for Irish Water......................................................................................................................... 15

Regulation ...................................................................................................................................................................................... 16

Potential Role for an Existing State Agency ................................................................................................................................. 16

Financial Analysis ...........................................................................................................................................................................17

Transition....................................................................................................................................................................................... 18

Next Steps ...................................................................................................................................................................................... 19

2. Introduction and Overview ................................................................................................................ 21

Background .................................................................................................................................................................................... 21

Objectives and Scope of the Study ................................................................................................................................................ 21

Policy Context ................................................................................................................................................................................22

Challenges Facing Water Provision in Ireland .............................................................................................................................23

Objectives of Reform Programme.................................................................................................................................................24

Consultation Process .....................................................................................................................................................................25

3. Overview of Current Provision of Water and Wastewater Services in Ireland.................................... 27

Overview......................................................................................................................................................................................... 27

Legislative Framework ..................................................................................................................................................................28

Economic and Funding Situation..................................................................................................................................................30

Regulation ......................................................................................................................................................................................32

Leadership and Coordination........................................................................................................................................................33

Operations...................................................................................................................................................................................... 35

Asset Management and Capital Programme ................................................................................................................................36

Customer Service and Billing ........................................................................................................................................................40

Finance ........................................................................................................................................................................................... 41

Staffing ...........................................................................................................................................................................................49

Marketing and Communications................................................................................................................................................... 51

MIS/IT............................................................................................................................................................................................52

Current Initiatives.......................................................................................................................................................................... 53

Indicators of Performance............................................................................................................................................................. 55

Summary Assessment of the Current Provision of Water and Wastewater Services ................................................................. 61

4. Overview of Relevant Models from other Jurisdictions ...................................................................... 67

Introduction ................................................................................................................................................................................... 67

Key Observations ...........................................................................................................................................................................68


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Implications for Irish Water.......................................................................................................................................................... 73

5. Options for Reform............................................................................................................................. 75

Overview of Options ...................................................................................................................................................................... 75

Agency Model................................................................................................................................................................................. 76

Public Utility Model ....................................................................................................................................................................... 79

Minimal Change Model .................................................................................................................................................................82

Intercommunal Model...................................................................................................................................................................84

Models Selected for Further Evaluation .......................................................................................................................................87

6. Evaluation Process.............................................................................................................................90

Objectives for Reform....................................................................................................................................................................90

Guiding Principles ......................................................................................................................................................................... 91

Evaluation Criteria.........................................................................................................................................................................92

Assessment of Options...................................................................................................................................................................93

Conclusion on Assessment of Options ..........................................................................................................................................96

Recommended Option for Irish Water ......................................................................................................................................... 97

7. Assessment of Potential Role for an Existing State Agency .................................................................. 99

Irish Water Requirements .............................................................................................................................................................99

Relevant State Agencies.................................................................................................................................................................99

Use of an Existing State Agency ..................................................................................................................................................100

8. Recommended Target Operating Model ........................................................................................... 106

Legal and Institutional Framework ............................................................................................................................................ 106

Summary of Proposed Industry Structure.................................................................................................................................. 107

Regulation .....................................................................................................................................................................................110

Leadership and Coordination....................................................................................................................................................... 111

Operations.....................................................................................................................................................................................112

Asset Management and Capital Programme ...............................................................................................................................114

Customer Service and Billing .......................................................................................................................................................115

Funding Requirements and Financial Arrangements.................................................................................................................116

Staffing ..........................................................................................................................................................................................119

Marketing and Communications................................................................................................................................................. 120

MIS/IT.......................................................................................................................................................................................... 120

Integration into Regional and Local Planning.............................................................................................................................121

The Role of Competition in the Provision of Water Services ..................................................................................................... 122

Annex 1 to Section 8 - Detailed Financial Workings ...............................................................................124

9. Transition Strategy...........................................................................................................................139

10.Implementation Considerations - Legal ............................................................................................145

Figure 1: Phased Transition Strategy.......................................................................................................................................... 18


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Figure 2: Participants in Consultation Process...........................................................................................................................25

Figure 3: Overview of Current Industry Structure..................................................................................................................... 27

Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)........................................................................................................................................................................... 31

Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)...........................................................................................................................................................................32

Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study).............................................................................32

Figure 7: Preparation of the Water Service Investment Programme ....................................................................................... 37

Figure 8: Assessment of Needs ....................................................................................................................................................38

Figure 9: Water Services Investment Programme .....................................................................................................................38

Figure 10: Basic Project Steps ......................................................................................................................................................39

Figure 11: OPEX Funding Summary (Source – Unaudited Annual Financial Statements - 2010) ......................................... 41

Figure 12: Direct Income to Fund OPEX €m (2008 – 2010 Actuals plus 2011 Budget)...........................................................42

Figure 13: Commercial Collection Rates (2010)..........................................................................................................................43

Figure 14: Breakdown of OPEX Expenditure for 2010...............................................................................................................43

Figure 15: Income & Expenditure €m (Source – Annual Financial Statements - 2011 figures are budget) ...........................44

Figure 16: Income & Expenditure (2008 – 2010) .......................................................................................................................45

Figure 17: CAPEX Funding-Overview (2010) .............................................................................................................................46

Figure 18: CAPEX Movement €m (2010) ....................................................................................................................................46

Figure 19: Percentage breakdown of CAPEX funding (exc. opening and closing balances but including transfers)............ 47

Figure 20: NDP Expenditure Trends €m (2000 – 2009)........................................................................................................... 47

Figure 21: WTE’s engaged in Water and Waste Water Services ............................................................................................... 51

Figure 22: OPEX per connected property (domestic & non domestic) (Euro)..........................................................................56

Figure 23: Water OPEX per connection (Euro) ..........................................................................................................................56

Figure 24: Sewerage OPEX per connection (Euro) ....................................................................................................................56

Figure 25: Commercial Collection Rates in Irl (2010)................................................................................................................ 57

Figure 26: Collection Rates........................................................................................................................................................... 57

Figure 27: Percentage Leakage....................................................................................................................................................58

Figure 28: Number of Direct & Indirect Staff (exc. SVT) ...........................................................................................................59

Figure 29: Total Employees per thousand customers served (exc. SVT) ..................................................................................59

Figure 30: Total number of direct and indirect employees per thousand water connections (domestic plus non- domestic)

(exc. SVT) .......................................................................................................................................................................................59

Figure 31: km water pipe per thousand water connection.........................................................................................................60

Figure 32: SWOT of the current environment for water service provision ..............................................................................64

Figure 33: Countries chosen as international comparators for Irish Water ............................................................................68

Figure 34: Water undertakings in England and Wales 1956 to 1970........................................................................................69

Figure 35: Trends in operating costs for the England and Wales water companies ................................................................71

Figure 36: England and Wales water companies, overall performance assessment .............................................................. 72

Figure 37: Agency and Public Utility Models ............................................................................................................................. 75

Figure 38: Agency Model.............................................................................................................................................................. 76

Figure 39: Public Utility Model .................................................................................................................................................... 79

Figure 40: Minimal Change Model..............................................................................................................................................82

Figure 41: Intercommunal Model ................................................................................................................................................84

Figure 42: Agency and Public Utility Models – Summary Comparison ...................................................................................88

Figure 43: Evaluation Criteria.....................................................................................................................................................92

Figure 44: Advantages of Public Utility and Agency Model ......................................................................................................95

Figure 45: Embedding Irish Water in an Existing State Agency............................................................................................. 103

Figure 46: The Overall Structure for the Public Utility Model................................................................................................. 107

Figure 47: Water Services: Key Roles and Responsibilities ..................................................................................................... 109

Figure 48: Other bodies: key roles and responsibilities ........................................................................................................... 109

Figure 49: Regulation ..................................................................................................................................................................110

Figure 50: Typical Organisation Chart for a Water Utility...................................................................................................... 111

Figure 51: River Basins of Ireland .............................................................................................................................................112

Figure 52: Operations Services ...................................................................................................................................................113

Figure 53: Typical Asset Planning and Approval Process ........................................................................................................114

Figure 54: Typical water company MIS systems structures ....................................................................................................121

Figure 55: Funding Requirement per annum (Euro) ............................................................................................................... 125

Figure 56: Non Domestic Charges (2014 – 2030) adjusted for bad debts (Euro Excl. VAT)................................................. 126

Figure 57: Domestic Charges (2014 – 2030) including and excluding a free allowance (Euro Excl. VAT) ......................... 126


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Figure 58: Revenue requirement per customer comparisons Irish Water (Scenario 1) and England and Wales companies

(Euro per Customer excl. VAT)....................................................................................................................................................127

Figure 59: Scenario 1: Sales as a % of Operating Costs (2014 – 2030)................................................................................... 129

Figure 60: Funding Requirement per annum (Euro)................................................................................................................131

Figure 61: Non Domestic Charges (2014 – 2030) adjusted for bad debts .............................................................................. 132

Figure 62: Domestic Charges (2014 – 2030) (Euro Excl. VAT) ............................................................................................... 132

Figure 63: Scenario 2: Sales as a % of Operating Costs (2014 – 2030) .................................................................................. 134

Figure 64: Funding Requirement per annum (Euro) ............................................................................................................... 135

Figure 65: Scenario 3: Sales as a % of Operating Costs (2014 – 2030) ...................................................................................137

Figure 66: Phased Approach ...................................................................................................................................................... 139

Figure 67: Implementation Plan ................................................................................................................................................ 143


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1. Executive Summary


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1. Executive Summary

BackgroundThe delivery of high quality water and waste water services and the need to meet ever-increasing demands forwater, while ensuring security of supply and responsiveness to the needs of commercial and domesticconsumers, poses a significant challenge to the State.

Water and wastewater services cost approximately €1.2bn per annum, of which around €1bn is funded by theGovernment, with other sources, including non-domestic water charges, contributing just over €200m.

There has been a substantial and historic under-investment in water and wastewater services in Ireland andwhile there has been significant investment in the last decade, a recent review carried out by Department ofEnvironment, Community and Local Government (“DECLG”) indicates that there is still a substantial backlogof capital investment. With an ageing and poor quality infrastructure in some areas, substantial investmentwill be required to bring the standard of the water network up to the needs of a modern economy.

The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU.It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach tomanaging water quality on a river basin basis; with the aim of maintaining and improving water quality. Fullcompliance with the Water Framework Directive has not been costed but is likely to run to several billion euroover the period to 2027.

Given the wider economic context in which Ireland finds itself, sourcing funds to meet all of these requirementswill be a difficult challenge.

It is against this background that this study has been commissioned.

Purpose of the StudyCurrently, 34 city and county councils are responsible for the production, distribution and monitoring ofdrinking water and for the provision of public waste water services in the Republic of Ireland. In the context ofrecent Government announcements concerning the creation of Irish Water, PwC was selected by the DECLG to:

a) Undertake an independent assessment of the transfer of responsibility for water services provision from thelocal authorities to a water utility;

b) Recommend the most effective assignment of functions and structural arrangements for delivering highquality competitively priced water services to customers (domestic and non-domestic) and forinfrastructure provision.

In particular the study was required to examine two principal forms of potential company structure (or variantsof those forms) for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible foroperation, maintenance and investment in all water services infrastructure, customer billing, charging(the Public Utility Model); and

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

A privatised water utility is outside the scope for consideration.


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This report is the outcome of Part I of the study which was concerned with recommending the optimalorganisational form for water services delivery in Ireland. Part II will focus on the detailed implementationissues involved in the creation of a new company in line with the recommendations made in Part I, subject totheir being accepted.

ApproachThe approach to conducting Part I of the study has been to:

1. Assess the strengths and weaknesses of the current model for provision of waterservices in Ireland to identify the challenges that would need to be addressed by a new modelfor water service delivery, without losing the positive aspects of the current model;

2. Review the Models for Water Service Provision Internationally to identify trends andlessons to be learned for water sector reform in Ireland;

3. Take Soundings from Stakeholders in the sector regarding the changes they feel would bestdeliver improved services for Ireland and the implementation challenges for any new model;

4. Identify potential operating models for Irish Water and Evaluate those Models against a setof Evaluation Criteria based on Policy Requirements for water reform in Ireland;

5. Describe the Recommended Operating Model and its financial, legal, organisational,staffing, environmental and other implications; and

6. Develop a High Level Transition Strategy designed to minimise the delay in achieving thebenefits while managing the implementation risks of the recommended operating model.

Strengths and Weaknesses of the Current ModelA SWOT analysis was developed for the current provision of water services in Ireland. The key conclusionswere that:-

The current model for water service provision has been operating under significant constraints. Ourstudy indicates that low levels of funding and an inability to access alternative sources of funding in thepast have resulted in a backlog of investment and maintenance in the water services infrastructure.Nevertheless, significant positive views of the current model came across very clearly in discussions withthe various stakeholders, in particular:-

o The value of having a local body accountable to the local community for the provision of waterservices;

o The operational effectiveness of the current locally based maintenance teams with water engineerswho “know their assets” and the associated asset maintenance regimes;

o The ability to draw on the wider resources of the local authorities in times of great need for waterservices, such as occurred during the cold weather events in the last two winters.

Efficiency levels do not compare well against international benchmarks. Some of the key metricsinclude:-

o Operating expenditure per connection is more than twice the average of UK water companies;o The level of “Unaccounted for Water” (largely due to leakage) at 41% is very high against

international benchmarks (although this would be expected to reduce as Phase III of the WaterConservation Programme is rolled out);

o Staffing levels are higher than comparable UK water companies on an employee per populationserved basis;

o The collection level for non-domestic water charges which averages 52% in 2010 is particularlylow.


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Ireland is about average for the number of water connections per length of network, suggesting thatpopulation dispersal is not a major factor in the benchmarks mentioned above. Other factors, such as thevery large number of water and wastewater plants in Ireland may be involved. One way or another, thesecomparisons would indicate that there are significant opportunities to increase efficiency and reducecosts over time once Irish Water is established.

Income currently received by the local authorities from the provision of goods and services from thirdparties and from Local Government Funding, for operational expenditure in relation to the provision ofwater services is not sufficient to meet their needs. It was estimated that there was a funding gap of€451.2m in 2010 which was met from other sources of funds including the general purpose grantreceived by the local authorities from DECLG;

The dependence on the Exchequer for Capital funding has in the past constrained investment in thesector. While approximately €600m is provided annually in capital investment, it is estimated that thereis currently a backlog of approximately €500m for essential projects. This figure is derived from DECLGdata on schemes in local authority needs assessment not included in the Water Services InvestmentProgramme 2010-2012. According to the Department and other stakeholders, this still leaves asignificant compliance gap in relation to the provisions of the EU Water Framework Directive which mayrequire several hundred million euro of further capital investment annually in the years to 2027;

The study concluded that many of the issues identified above arise from a combination of factors including:-

Fragmented leadership and coordination with a range of stakeholders able to influence and controldirections; including the 34 local authorities, the DECLG, the EPA, the CCMA the NFGWS and others;

Difficulty in exploiting economies of scale, particularly as the water service is organised on the basis ofcounty boundaries;

Relative difficulty in implementing policies and projects of national importance; An ageing and poor quality network; and Historical underinvestment in the water service.

The structures required to deliver an efficient and effective water service in Ireland, operating under theconstraints of available funding are not in place. The fragmented nature of the current model result insignificant levels of duplication across the 34 local authorities with limited sharing of resource, cooperation onstrategic initiatives or coordinated operational planning in place. The introduction of customer charges willcreate the need for increased levels of regulatory management, which under the current model will result infurther duplication of support structures.

Overall, it is our assessment that the current local authority based service provision model is highly unlikely toachieve the efficiencies and quality of service that have been achieved internationally in the water sectorthrough amalgamations. The local authorities have investigated opportunities for co-ordinated action.However the likely efficiencies suggested are small compared with the nearly 40% reduction in operating costsseen in Scotland post amalgamation. Fragmented local authority-based provision will perpetuate themanagement of sub scale water providers, inability to secure large scale procurement efficiencies and the abilityto deliver efficiency through planning field work over a larger customer base/geographical area.

A self-funding water service will require significant levels of external funding. Optimal external funding isbased on the ‘investment grade’ of individual companies, which is driven by the size of the organisation, thefocus and experience of the management team, the stability and efficiency of back office and frontlineoperational execution and for regulated entities, the ability to comply efficiently and effectively with economicand environmental regulatory requirements. In addition, since the level of external funding available isnormally based on earnings, the extent to which operating costs are reduced through the rationalisation,consolidation and simplification of the delivery model increases the level of borrowings available to thecompany.

Consequently, the ability to optimise the level of external funding is best achieved by a single water company,with authority to centrally manage the delivery of water services in Ireland.


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International ExperienceWe have reviewed relevant models for water service provision in a number of countries, including Scotland,England, Wales, Northern Ireland, Germany, France, Netherlands, South Africa, Australia, and Bulgaria werereviewed.

Our review pointed to fragmentation in the provision of water services in particular in continental Europe.However, the fragmented nature of water service provision is being addressed in most countries either by theamalgamation of municipal water services, the creation of utilities or the use of intercommunal structures (seebelow). Creation of larger bodies for the provision of water services, often outside of municipal control, is a keytrend in the industry.

Our research demonstrated that most of the models identified are based on the Public Utility Model. Thereis little evidence of arrangements similar to the Agency Model being used in the water sector. Anotherapproach found to be in common use is the Intercommunal Model, where several municipalities jointly setup a company to which they delegate the provision of water services.

Our research identified very few examples of the combination of water services provision with otherinfrastructure provision (e.g. roads) or utility services (such as gas or electricity). Multi-utility companies whichwere created in the UK a number of years ago were broken up in recent years to allow management teams tofocus on specific activities e.g. water or electricity. The research indicates that investors have tended to valuethe focussed single utility model more highly than the multi-utility model.

Where single function utilities have been created, the evidence indicates that there has been good performancein terms of cost reduction and improvement to the quality of service provided to customers. Theseimprovements have been driven in part by regulation that has focussed on economic efficiency, environmentalpreservation and ensuring good outcomes for customers.

Stakeholder SoundingsPwC met with a wide range of stakeholders in the sector to obtain a cross section of views on the current waterservice and on potential future models for the water sector. These included representatives of local authoritycouncillors and management, professional bodies, representatives of employers and of the unions, regulators,semi-state utilities and relevant government departments and agencies (see Section 2). A number of theseorganisations also made formal submissions to the PwC team.

A number of key messages were consistent across the stakeholder groups consulted. These included:-

The need for increased efficiency and value for money in the sector; The desirability of moving to a River Basin structure for managing water services; The need for improved water quality and greater security of supply in the coming years; The importance of obtaining increased funding to meet the increasing demands of customers; The benefits of transferring responsibility for water services to a single state agency; and The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of

water services;

All of the information and views provided by stakeholders were taken into account in the analysis conducted bythe PwC team.

Operating Models ConsideredIn line with the Terms of Reference, two primary models were considered – these were termed the PublicUtility Model and the Agency Model. In addition, two possible variant models were identified – these weretermed the Minimal Change Model and Intercommunal Model. The models are summarised below:-

The Public Utility Model: Under the Public Utility Model, Irish Water would be a Public Utility andwould become the water services authority and the single point of contact for all customers. It would be asingle integrated commercial Semi-state body corporate operating on a regional structure delivering all


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water services currently provided by the local authorities, and most of those currently provided by theDECLG (with the exception of policy and legislation). The regions would be structured around riverbasins rather than local authority boundaries. Irish Water would own the entire infrastructure for waterservices including all assets, liabilities, income and expenditure. All water service staff would beemployed by Irish Water. BGE and ESB represent similar examples of this model in Ireland.

In this scenario, local authorities would no longer have a function in the provision of water andwastewater services.

The Agency Model: Under the Agency Model, a new state agency, Irish Water would be allocated fullresponsibility by statute for the provision of water and wastewater services and would therefore becomethe Water Services Authority for the full country. Similar to the Public Utility Model, Irish Water wouldown the entire infrastructure for water services including all assets, liabilities, income and expenditure.Irish Water would also take over most of the responsibilities of the DECLG, and undertake large capitalprojects and projects of national importance (including metering and domestic charging).

In this scenario, local authorities (or groupings of local authorities) would be designated by statute asagents of Irish Water for operation and maintenance of the water services and for small capitalprojects in their regions. They would operate under the control of Irish Water on the basis of agencyarrangements under which they would be paid by Irish Water for services provided. Staff required foroperation and maintenance would continue to be employed by the local authorities.

The Minimal Change Model: The Minimal Change Model would envisage retaining the localauthorities as the Water Service Authorities. Irish Water would take over certain executive functions ofthe DECLG, including responsibility for large capital projects and projects of national importance. Inthis scenario, the operation and maintenance of the water service (and therefore the bulk of the existingpersonnel) would remain with the local authorities. Ownership of the assets would be retained by thelocal authorities, and they would continue to be financially responsible for the operation andmaintenance of water services in their respective regions. Improvements in efficiency would be achievedthrough local authorities cooperating to achieve economies of scale.

The Intercommunal Model: This approach, as outlined above, has been adopted in several parts ofEurope. In this scenario, local authorities would retain the basic obligation to provide water services butwould agglomerate to achieve economies of scale by setting up intercommunal companies to which theywould delegate responsibility for the operation and maintenance of water services. In Ireland, this wouldinvolve three or more separate water companies each serving a different region.

Evaluation MethodologyPwC deemed it appropriate to use a qualitative methodology for the comparative assessment of the alternativemodels, taking into account the relative merits of each option against a set of evaluation criteria developed by usand reviewed with the DECLG and the stakeholder group referenced above. The criteria took into account themain objectives of the water services reform programme, which were identified as:-

Creation of a financially sustainable water service: Improving Ireland’s water services infrastructure; Ensuring environmental standards are met; Delivering improved outcomes for customers; Ensuring strong governance with clear accountabilities; Supporting other aspects of water reform in Ireland; and Promoting efficiency in water services.

The evaluation was carried out with reference to international practice, and based on the available metrics andon the experience of the consultants. The views expressed by stakeholders were also taken into consideration.


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Operating Model Recommended for Irish WaterOur study recommends the Public Utility Model as the most appropriate operating model for the provision ofwater services in Ireland in the future. Under this model, Irish Water would be a Public Utility with fullresponsibility for the water cycle from abstraction to waste water treatment and sludge disposal.

The key factors leading to this conclusion are:-

The scope to design, build and implement a fit-for-purpose focussed utility which is subject to regulationand is proven to achieve greater efficiencies and economies of scale in the provision of water servicesthan any of the alternative models.

Irish Water will operate under one single coherent integrated organisation structure (as against 34separate organisations today), with clear lines of accountability, authority and responsibility and afocused and experienced management team to facilitate timely decision making and efficient andeffective consistent delivery;

The Public Utility model is the most attractive proposition to lenders and is understood by investors wholend to the water sector in other countries. Its capacity to borrow on the international markets would bea key factor in enabling the company become financially sustainable;

This model will also have the effect of reducing and ultimately eliminating the burden on the Exchequerto provide capital and current funding to the water sector, with consequent positive impact on the State’sGDP /Debt ratio;

Under the Public Utility Model, Public Service staff numbers would be reduced with the transfer of staffto a new commercial semi-state agency. Based on comparative benchmarks (see Section 3), it isenvisaged that the total number of employees required for Irish Water when fully operational (i.e. from2018) would be significantly lower than the approximately 4,300 involved in water services today. Thiswould result from designing a fit-for-purpose operating model, eliminating existing duplication ofactivity. consolidating work locations and creating centres of expertise, driving synergies throughnational/regional management of service delivery, leveraging technology to automate activity andremotely manage operations, rationalising roles and responsibilities of staff and leveraging the flexibilityof external expertise;

The Public Utility will also be the most effective model for delivery of national strategies and managingissues across local authority boundaries. This will make the organisation better able to respond tosecurity of supply issues as it will be able to plan water resources at a national level;

The Public Utility will be best positioned to introduce and manage nationwide customer charges andcustomer service provision from a single location; and

Irish Water as a Public Utility will be a single entity for the economic and environmental regulators toregulate, being of a similar scale to compare/benchmark against UK water companies to assess efficiencyand quality of service. The Public Utility Model will be best placed to more efficiently and effectivelymonitor, manage and report compliance with regulatory requirements.

Transferring responsibility for water services from the local authorities to a new model as described willfacilitate the achievement of critical mass, economies of scale and a simplified operating model, which are notpossible under the existing fragmented institutional framework. Other benefits of the approach recommendedinclude:-

Facilitating greater efficiency and effectiveness in asset management and capital programme executionand in managing the supply chain to optimise value for money. Effective strategic planning on a nationaland regional basis will be of particular importance for the water metering programme and for regionalwater resource planning;

Enabling more efficient use of water resources;


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Optimising the use of water and wastewater treatment facilities; Facilitating increased standardisation of technology, modern procurement methods and increased

purchasing power; Supporting the implementation of the Water Framework Directive and best international practice in river

basin management; Enabling more effective use of field operatives; Facilitating reduction in overheads through consolidation of head office functions; Reducing reliance on consultants, with increased in house core skills due to scale; Facilitating economies of scale in billing and collection; Introducing 21st century operating practices throughout the country, as well as integrated best-in-class

ICT and management information systems; and Presenting opportunities not otherwise available to staff dedicated to water services. Increased

specialisation will provide routes for career development and training as well as enhancing jobsatisfaction.

Irish Water will face challenges in achieving the benefits as set out above but there are recent examples ofsimilar successes following consolidation in Scotland and England. In the period from 1994 to 2001, operatingcosts for water services in England and Wales were reduced from c£3.15bn to c2.65bn representing a decreaseof 3% per annum. In Scotland, efficiencies of around 40% were achieved over the period from 2002 to 2006.

It is recognised that retention of the local touch which local authorities can offer today, including liaison withGroup Water Schemes, will be an important element of implementation as will be the ability to respond flexiblyin times of urgent need such as happened in recent cold snaps.

RegulationPwC have recommended that the Environmental Protection Agency would be the environmental and technicalregulator for Irish Water, and that it would also become the regulator for Group Water Schemes, a rolecurrently played by the local authorities.

It is recommended that the role of the Commission for Energy Regulation (CER) be expanded to include waterregulation, as this role would fit well with its existing responsibilities for regulating energy utilities. In this rolethe CER, in cooperation with the National Consumer Agency would be responsible for protecting the interestsof the consumer.

Potential Role for an Existing State AgencyIn the establishment of Irish Water, there is a clear opportunity to establish a new fit-for-purpose organisation,based on international best practice and structured to deliver an efficient and effective service to domestic andnon-domestic customers. The single Water Utility Model is recognised in capital markets as an investmentgrade structure, with funding packages tailored specifically for this purpose. Precedence points to theefficiencies that have been delivered in relation to the operating costs of standalone water utilities in the UK asoutlined above, and to the improvement in the quality of service provided to customers.

Alternatively, it may be possible to leverage the structure, expertise and governance of an existing State agency,and clearly there is some merit in considering this. This approach may provide some marginal acceleration ofthe implementation timescale, but would not in our view significantly shorten it, since the critical path will bedetermined by the preparation of essential legislation, the lengthy and complex implementation programme,and by the speed of the transfer of assets, staff and responsibilities from local authorities to the new utility.

Few examples of multi-utilities exist internationally on this scale. Experience indicates that multi-utilitymodels have not been successful due to the need to maintain management focus. In the cases of Welsh Waterand United Utilities (England), the water utility was initially integrated with the electricity utility but wassubsequently separated out into individual utilities due to difficulties in managing multi-utility companies andthe limited opportunity for operational synergies where water and electricity operations needed to be ring-fenced for regulatory purposes. They were broken up by investors and management to allow a focus on theprovision of a single service.


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Whilst our analysis has indicated that there would be a number of potential advantages in embedding IrishWater in an existing State agency (see page 102), in our view these are outweighed by the disadvantages, inparticular:

The potential impact on the borrowing power of both Irish Water and the existing State agency; The constraints on integration and sharing imposed by the requirement to ring-fence the water service

from other regulated businesses, and the requirement to maintain separation of the networks and supplybusinesses in some of the existing State agencies;

The need for a fully focused management team to drive through the establishment of Irish Water over thenext six years, managing the transition of activities from 34 local authorities to Irish Water,implementing water charges, and managing an evolving regulatory regime;

The potential implications for Irish Water and the ESOP/ESOT’s of existing Semi States on the transferin of water assets;

The uncertainty surrounding the future ownership of the state agencies concerned following recentGovernment considerations to sell some State assets; and

The international experience indicating the likelihood of failure to achieve significant synergies andefficiencies due mainly to the constraints imposed by the separation of the different regulated activities.

Consequently, on balance, PwC see no compelling reason to assign responsibility for water services provision toanother State agency. Based on the analysis conducted, PwC concluded that, unless the above issues could besatisfactorily addressed, Irish Water should be established as a separate company in its own right.

A number of State agencies could, however, be suitable candidates, either on their own or in partnership withthe private sector, to provide outsourced services to Irish Water. PwC has recommended that Irish Waterprocures a management partner through a competitive tendering process as soon as possible after January2012. The role of a management partner would be to support the:

Set up and management of the new organisation; National initiatives to be undertaken (e.g. billing, metering); and Design and management of the transition to a fully operational utility.

It is envisaged that a number of State agencies could be suitable candidates for this role, either on their own orin partnership with the private sector. However, PwC expect that public procurement considerations willdictate that the partner would have to be selected through a public tendering process open to the private sectoras well as the State agencies.

Financial AnalysisFor the Public Utility Model PwC undertook a high level assessment of what the financial position for thebusiness might be and in particular the likely funding requirements. A number of scenarios were run on thesenumbers, with varying assumptions in relation to Government subvention, the level of external funding and thecharges to be applied. The detailed workings behind each scenario are set out in Annex 1 to Section 8. Threeillustrative scenarios are described below:-

Scenario 1: This scenario is based on the assumption that Government funding will cease after 2022. Inthis situation, the net annual funding requirement from domestic and non-domestic customer charges(after taking into account bad debt assumptions) is c. €920m in 2015, increasing to c. €963m by 2020.Government funding of €2.1bn would be required for the period from 2015 to 2022;

Scenario 2: This scenario is based on the assumption that Government funding will cease after 2018. Inthis situation, the net annual funding requirement from domestic and non-domestic customer charges(after bad debts) would be higher at c. €1,020m in 2015, increasing to c €1,063m by 2020. Governmentfunding would amount to €900m for the period.

Scenario 3: This scenario, assumes a fixed domestic charge in the mid-range of UK water companycharges for the period through to 2030. In this situation, the funding from domestic and non-domesticcustomers (after bad debts) is c. €880m in 2015, increasing to c. €923m by 2020. As domestic charges


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could not be flexed to offset changes in funding requirements or assumptions around bad debts in thisscenario, Government funding of c. €3.1bn would be required in the period through to 2030.

If a Free Allowance along the lines of that outlined in recent Government policy statements were to beintroduced, the cost of this Free Allowance in 2015 would be €122m, thus reducing total funding required fromdomestic and non-domestic customers by between 12% and 13%. This €122m would have to be funded byGovernment.

The financial analysis undertaken indicates that, in the scenarios explored, subject to certain assumptions, IrishWater could become a self-financing utility as early as 2018, depending on how quickly Government wishes tocease funding and on the level of water charges imposed. Our analysis indicated that in the scenarios explored,Irish Water could achieve a borrowing capacity of up to €2.9bn by 2030.

A key factor in evaluating the merits of the new operating model is the possibility that the borrowings of IrishWater could be outside the General Government Balance (GGB). We conducted an analysis on each of thescenarios outlined above and, subject to confirmation by the CSO / Eurostat, it would appear that adetermination could be made that Irish Water’s borrowings would be deemed to be outside the GGB.

TransitionA phased transition strategy has been proposed which would commence on 1st January 2012 and see completionof the transfer of responsibilities for water service from the local authorities to Irish Water by the end of 2017.The phased approach is recommended over a ‘Big Bang’ approach, as it allows Irish Water design, build andimplement a ‘fit for purpose’ organisation structure to deliver water services without the constraints of theexisting local authority model. It also allows Irish Water control the development of water services during thetransition period through agency arrangements with the local authorities. Consequently, it is most likely todeliver efficiencies earlier, reduce the risk of failure and maintain security of supply throughout the transitionperiod. This is illustrated in Figure 1 below.

Figure 1: Phased Transition Strategy

It is envisaged that passing the required legislation will take up to 18 months, during which time interimarrangements will need to be put in place within the DECLG to design and implement the new organisationalstructures, and the Irish Water CEO and Senior Executive Team will be selected. From that point (July 2013),local authorities would be appointed as agents of Irish Water with responsibility for operational andmaintenance services for a period of up to 5 years. This transition period would allow Irish Water to build itsown capabilities and determine the most appropriate resourcing mix of permanent staff, contract staff andvarious types of outsourcing arrangements.

Commencing in January 2015, Irish Water would take over the water operations of the local authorities on aphased basis. The pace of transition of operations, and the unwinding of interim agency arrangements, wouldbe determined by Irish Water management, in consultation with the DECLG and local authority management.It is envisaged that this transition would be completed by the end of 2017 at the latest.

This phased approach to transition would allow Irish Water to set up and develop organically as a new utilitywith its own culture, structure and resourcing, taking on board the resources and skills it requires from the local


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authorities in a planned and manageable way while ensuring the retention of valuable local knowledge. It isdesigned to minimise the delay in achieving the benefits while effectively managing the implementation risks.

To ensure a smooth and speedy transition, it is recommended that a Management Partner for Irish Watershould be procured through a competitive tendering process. The partner could be in place by January 2013.The partner organisation should be experienced in managing utilities and in particular within the waterindustry. It is anticipated that the partner would provide an interim management team, comprising primarilysecond line management resources to support the Irish Water Executive Team in managing Irish Water for aperiod of up to 5 years from January 2013.

Next StepsOn approval of the recommended operating model and transition strategy for Irish Water, Part II of the studywill focus on the detailed implementation issues involved in the creation of a new company, and on the issuesthat would arise from the consolidation of water services provision from the local authorities to Irish Water.

To achieve the timescales outlined above, it would be important to commence the detailed planning andpreparation as soon as possible but no later than the first quarter of 2012. It is recommended that aProgramme Management Office would be set up within the DECLG to manage and coordinate this process assoon as is practicable.


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2.Introduction andOverview


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2. Introduction and Overview

Background

Currently, 34 city and county councils are responsible for the production, distribution and monitoring ofdrinking water from over 900 public water supplies and for the provision of public waste water services.Investment by the 34 city and county councils in water services is guided by the River Basin ManagementPlanning process completed in 2010 and priorities are set out in the Department of Environment Communityand Local Government’s Water Services Investment Programme 2010 – 2012. The councils are also responsiblefor the supervision of any group and private water supplies in their areas and for the carrying out of variouswater-related inspection and enforcement activities. The Environmental Protection Agency continues to havestatutory responsibility for the supervision of the quality of water and waste water services.

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 thetransfer of responsibility for water services provision from the local authorities to a water utility. In theProgramme for National Recovery, 2011-2016, the Government signalled its intention to create a new Statecompany to take over key water/waste water functions from the 34 existing local authorities. The programmeenvisages that:

“Irish Water will supervise and accelerate the planned investments needed to upgrade the State’sinefficient and leaking water network. The objective is to install water meters in every household inIreland and move to a charging system that is based on use above the free allowance. Thus, IrishWater would become a major State monopoly requiring separate independent regulation to promoteefficiency and competitiveness in the consumer interest and the general economic interest.”

The programme also contains commitments in relation to the NewERA plan under which streamlinedrestructured semi-States will make significant additional investments, over and above current plans, over thenext four years in “next generation” infrastructures including water. These investments – and theaccompanying semi-state restructuring process – will be financed and pro-actively managed by a New Economyand Recovery Authority (New ERA), which will absorb the National Pension Reserve Commission.

Against the backdrop of the EU/IMF agreement and the Government decision to establish Irish Water, PwCwas commissioned to carry out an independent assessment of the transfer of responsibility for water servicesprovision from the local authorities to a water utility.

This is an Interim Report on the assessment carried out. The purpose of this report is to provide a broadindication of the role and functions that Irish Water should have and the rationale for assigning these functionsto the company.

The Final Report will outline additional detailed information regarding implementation and transitionalarrangement issues.

Objectives and Scope of the StudyThe objectives of the study, as outlined in the Terms of Reference from the Department of the Environment,Community and Local Government are as follows:

a) To undertake an independent assessment of the transfer of responsibility for water services provision fromthe local authorities to a water utility

b) To recommend the most effective assignment of functions and structural arrangements for delivering highquality competitively priced water services to customers (domestic and non-domestic) and forinfrastructure provision.


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The scope of the study includes water and waste water. It is required to address the legal framework andfinancial and economic dimensions as well as organisational issues, having regard to international experienceand relevant examples of best practice.

The study is required to examine two principal forms of potential company structure for Irish Water:

A water company which would be a self funding water utility in a regulated environment, responsible foroperation, 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 aregional/national priority, national metering programme) with local authorities operating as agents ofthe company, retaining their operational responsibilities and for the delivery of smaller scale investment.

The terms of reference require that the study contrast these organisational forms, or variants thereof, withcurrent 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.The study is also to consider the possibility/desirability of assigning responsibility for water services provision,or part thereof, to an existing state agency.

A copy of the Terms of Reference for the project is contained in Appendix 1.

Policy ContextThe study has taken due account of Government policies in the area of water services. The key policies include:

Commitments in the Programme for Government in relation to the water sector in Ireland such as:-

o The establishment of a new State body Irish Water,o A fair and efficient funding model for charging for domestic water,o The installation of water meters in every household in Ireland, ando A move to a charging system that is based ‘on use above a free allowance’.

The Programme for Government also provides that Irish Water, a new State company, will take over thewater investment maintenance programmes of the 34 existing local authorities. It will supervise andaccelerate the planned investments needed to upgrade the State’s inefficient and leaking water networkwhich has proved so unreliable during the recent harsh weather conditions.

The report of the Local Government Efficiency Group which was published in July 2010 and which, inaddition to general recommendation on achieving greater costs and efficiencies in the Local Governmentsector, made a number of specific recommendations in relation to the water sector, including that anenhanced regional office approach be developed at river basin level for infrastructure delivery andimplementation of the River Basin Management Plans.

The National Development Plan, 2007-2013, ‘Transforming Ireland’, which sets down current nationalpriorities for investment in national physical infrastructure, including the Water Services InvestmentProgramme and the Rural Water Programme. A new National Development Plan is expected to bepublished shortly which will set out new national priorities for infrastructural development, includingwater.

The Programme of Financial Support for Ireland agreed between the Government and the EU/IMF inDecember 2010;

The report of the Review Group on State Assets and Liabilities; and

Other relevant policies on pay and staff numbers.

Appendix 2 contains a high level description of the relevant policies referred to above.


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Challenges Facing Water Provision in IrelandIn the period since the year 2000 there has been very substantial progress in a number of areas in the provisionof water and wastewater services in Ireland. Between 2000 and 2010, the Exchequer has invested almost€5.2bn in the Water Services Investment Programme and the Rural Water Programme. Approximately twothirds of this was to address a substantial compliance gap under the Urban Waste Water Treatment Directive.In the period 2000-2009 there has been an increase of 3.7 million population equivalent in secondarywastewater treatment capacity and of one million population equivalent in water treatment capacity.

In recent years the Rural Water Programme has invested approximately €100 million per annum to effectimprovements in the quality of water supplied in rural areas, particularly for Group Water Schemes in responseto a European Court of Justice judgement in 2002. As a result, many of the Group Water Schemes have seensubstantial improvements in water quality and a professionalization of the management of those schemesthrough the introduction of Design, Build, Operate contracts, sometimes on a bundled basis.

However, there has been a substantial and historic under-investment in water and wastewater services inIreland and while there has been significant investment in the last decade, a recent review of investment inwater services carried out by DECLG indicates that there is still a substantial backlog of capital investment.With 34 local authorities providing water services, there is a high degree of fragmentation in the provision ofthe services which inhibits the achievement of benefits of scale and the introduction of the kinds ofstandardisation of technology and procedures which can drive efficiency. The current WSIP 2010-2012 and theValue for Money review on the previous WSIP highlight these issues. It is estimated that there is currently abacklog of required investment for essential projects of approximately €500m. This figure is derived fromDECLG data on preparation of the WSIP 2010-2012. In addition there are the requirements to fulfil obligationsunder the Water Framework Directive.

There is increasing emphasis on the use of River Basins, not least in the Water Framework Directive. Countyand city boundaries do not generally coincide with River Basin Districts leading to a potential disconnect in thisregard.

There are high levels of unaccounted for water in the distribution system both in the public network and on thewater user side (see Section 3). Estimated at an average of 41%, this is high by international standards. Ageingand poor quality infrastructure and a legacy of under-investment have been reported as the reasons behind thissituation. This will require substantial investment to bring the standard of the water network up to the needs ofa modern economy.

The proposed water metering programme1 and the proposed strategic water supply from the Shannon to theGreater Dublin Area have each been reported to cost over €500 million. Full compliance with the WaterFramework Directive has not been costed but is likely to run to a cost of several billion euro over the period to2027. In addition, funding will be needed for ongoing improvements to the infrastructure. Given the widereconomic context in which Ireland finds itself, sourcing funds to meet all these requirements will be a difficultchallenge.

The Water Framework Directive (WFD) is a key initiative aimed at improving water quality throughout the EU.It applies to rivers, lakes, groundwater, and coastal waters. The Directive requires an integrated approach tomanaging water quality on a river basin basis; with the aim of maintaining and improving water quality. It alsorequires that management plans be prepared on a river basin basis and specifies a structured approach todeveloping those plans. It requires a programme of measures for improving water quality be brought into effectby 2012 at the latest. River Basin Management Plans are to be prepared and renewed in six year cycles and thefirst plans cover the period to 2015.

The river basins approach adopts natural geographical areas in contrast to current water management systemswhich are based on the administrative boundaries of local authorities. To give effect to the Directive, EightRiver Basin Districts have been identified on the island of Ireland for the purpose of implementing the

1 See for example The Irish Academy of Engineering and Engineers Ireland (2011) “Delivering Ireland’s Water services forthe 21

stCentury” page 13 “ a budget of €500m is required to achieve universal metering of the domestic sector.

International evidence suggests the cost is more likely to approach Euro1bn.”


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Directive. Four of the districts are wholly within the State (Eastern, South Eastern, South Western andWestern), three are shared with Northern Ireland (Shannon, Neagh Bann, and North Western), and one iswholly within Northern Ireland (North Eastern).

The introduction of domestic charges for water and wastewater will change Irish consumers to customers. Itshould be expected that they will become more demanding and less forgiving as they begin to pay separately forwater services. Keeping customers informed, responding to their queries and complaints and demonstratingvalue for money will be a key issue in this sector in the coming years.

Objectives of Reform ProgrammeUnderstanding the objectives for the creation of Irish water is a critical part of this study. Irish Water is beingcreated to serve a clear purpose. The key objectives for the development of Irish Water can be identified fromGovernment statements and the content of the main policy documents outlined above. Based on our review ofthe policy content PwC understand that the reform is intended to achieve:

Financially sustainable water services: a key aspect of the reform of the public sector in Ireland insupport of EU/IMF commitments is to reduce the requirement for public sector funding. A financiallysustainable water service will deliver a more cost effective service, driving out cost through theelimination of duplicated services, waste, and the establishment of a more integrated service deliverymodel. Stability of revenue from customer charges aligned with a reducing cost base will improveprofitability thus strengthening Irish Water’s ability to secure funding from external lenders.

Improving Ireland’s water services infrastructure: as our description of the current status ofwater services in Ireland demonstrates, there is a backlog of investment to be undertaken on the system.There is also a national need to maintain headroom in the security of water supplies. The new structurefor Irish Water needs to be able to deliver cost effective investment in a timely manner.

Ensuring Environmental Standards: There is a need to ensure that can meet our environmentalobligations such as those set out in the EU’s Water Framework Directive2. Significant funding will be

required to address this in the coming years.

Delivering improved outcomes for customers: the introduction of customer charging will raisecustomer expectations of the quality of water services (e.g. better quality drinking water, improved waterpressure, fewer leaks, etc). Irish Water will need the capability to deliver improved customer outcomesacross a broader range of measures than used previously. The entity will need to have clear capabilitiesto deliver for customers and also have appropriate regulation and incentivisation to focus on customerrequirements.

Strong governance with clear accountabilities: a critical success factor for many water sectorreform projects is the clear identification of roles and responsibilities for the key players in the sector.Stakeholders need to be clear on their obligations and have the resources to deliver on these.

Support other aspects of water reform in Ireland: the Government is considering and evaluatinga number of policy initiatives at the time this report was being prepared including the introduction ofcharging, the creation of an economic regulator, a proposed near universal roll out of water meters,implementation of strategic planning, development of river basin management governance etc. It isimportant that the new structure for Irish Water supports these developments and does not createinstitutional blocks to the reform programme.

Promote efficiency: efficiency has been a key driver in the reform programme for water services inIreland and is a major theme in Government policy statements. The evaluation of efficiency presented isboth in terms assessing whether the proposed model will be efficient but also the extent to which theimplementation process for the preferred model can be efficient as well.

2 Which some stakeholders in Ireland estimate could create an investment burden of an additional E20bn


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The objectives outlined above were used to help determine the criteria for the assessment of potentialorganisational models for Irish Water. The criteria used are set out in Section 6.

Consultation ProcessAs part of the information gathering work, a comprehensive consultation programme was carried out. The listof participants in the consultation process was determined by the DECLG which included the following:

Association of County and City Councils;

Association of Municipal Authorities of Ireland;

Bord Gáis;

Bord na Mona;

Chambers Ireland;

City and County Managers Association;

Comhar;

Commission for Energy Regulation;

Competition Authority;

Construction Industry Federation;

Department of Environment, Community and Local

Government;

Department of Public Expenditure and Reform;

Department of Transport;

Engineer’s Ireland;

Environmental Protection Agency;

ESB;

Forfás/National Competitiveness Council;

IBEC;

ICTU;

Local Authorities Members Association;

Local Government Management Authority;

National Consumer Agency;

National Pension Reserve Fund;

National Roads Authority;

National Rural Water Services Committee;

National Treasury Management Agency; and

Office of Public Works.

Figure 2: Participants in Consultation Process

Participants were provided the opportunity to share their views of the current situation regarding waterprovision in Ireland. They were also asked for their views on potential new models for the sector.

Overall the consultation programme proved to be a valuable process which enabled PwC to obtain the views of abroad range of key stakeholders. A number of key messages were consistent across the stakeholder groupsconsulted. These included:-

The need for increased efficiency in the sector; The desirability of moving to a River Basin structure for managing water services; The need for improved water quality and greater security of supply in the coming years; The importance of obtaining increased funding to meet the increasing demands of customers; The benefits of transferring of responsibility for water services to a single state agency; and The need to retain the local skills, knowledge and responsiveness in any new model for the delivery of

water services.

These views have been taken into consideration in the analysis of options and the development of proposals forthe new model for water services delivery.


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3.Overview of CurrentProvision of Water andWastewater Servicesin Ireland


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3. Overview of Current Provisionof Water and WastewaterServices in Ireland

OverviewUnder the existing institutional arrangements governing the water sector in Ireland, there are 34 city andcounty councils (‘water service authorities’) responsible for the production, distribution and monitoring ofdrinking water from over 900 public water supplies and for the provision of over 1,000 public waste waterservices.

The industry is structured as shown in the figure below:

Figure 3: Overview of Current Industry Structure

The diagram above presents a schematic of the key actors in the provision, control, finance and regulation ofwater services in Ireland today. The DECLG is responsible for setting policy and plays a role in controlling andmanaging the capital expenditure programme. Crucially, it allocates funding on an annual basis for operationsand on a rolling basis for capital expenditure to the local authorities.

The EU sets the wider context enacting such important directives as the Water Framework Directive and theUrban Waste Water Treatment Directive. It also has a monitoring function and can pursue legal cases againstmember countries of the EU for failure to execute the directives. These directives are transposed into Irish law.The EPA is the technical and environmental regulator for drinking water and wastewater services and plays akey role in the preparation of River Basin Management Plans. It has a key role in monitoring and enforcementof standards although it may delegate sampling and analysis to local authorities.


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The local authorities are the Water Services Authorities. As such they have the primary responsibility for theprovision of the public water and wastewater services. They procure services and infrastructure from the supplychain including the use of the Design, Build, and Operate (DBO) model for some treatment plants.

In addition to funding from the DECLG, they are able to raise income from development levies, non-domesticwater charges, significant user contributions and by borrowing with the approval of the DECLG. Non-domesticcustomers and domestic consumers receive a service of drinking water and/or wastewater collection andtreatment. Non-domestic customers are currently billed for this service directly.

Group Water Schemes are voluntary cooperatives providing potable water to customers in some ruralcommunities. They are important actors in the totality of the provision of water services and are representednationally by the National Federation of Group Water Supplies.

Investment by the local authorities in water services is guided by the policies and procedures of the DECLG,including the River Basin Management Planning process. Investment in the sector is primarily under twoprogrammes namely the:-

Water Services Investment Programme (WSIP); Rural Water Programme (RWP).

For the WSIP each local authority presents an assessment of needs on the basis of which (and other factors) theDECLG prepares the WSIP on a three year basis. The RWP is an annual programme under which funds areallocated to local authorities for smaller public water schemes. The local authorities are also responsible for thesupervision of any group water schemes and private water supplies in their areas and for the carrying out ofvarious water-related inspection and enforcement activities. The Environmental Protection Agency hasstatutory responsibility for the supervision of the quality of water and waste water services delivered by thelocal authorities.

An important source of information for this part of the report has been the Value for Money study on the WSIP2007-2009 from the DECLG.

Legislative Framework

GeneralThe legislative environment in respect of water services:

Sets the framework within which participants in the sector must operate;

Delineates the roles of participants in the sector including in respect of:

o the regulation and supervision of the provision of water services;

o the provision of water services; and

Sets standards in accordance with which participants in the sector must operate.

All aspects of the legislative environment, but in particular the framework and the standards, are shaped byapplicable EU legislation.

The Framework – Water Framework Directive3 (the “Directive”)The Directive establishes a framework for the protection of waters in order to protect and restore clean wateracross the EU and ensure its long-term, sustainable use. With this aim the Directive requires that waters bemanaged on the basis of their natural units’ river basins so that they at least reach ‘good’ status by 2015.Management of waters on this basis requires:

3Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 established a framework forCommunity action in the field of water policy.


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Designation of competent authorities;

Environmental and economic analysis of river basins by those authorities; and

Development and implementation of river basin management plans including a programme ofmeasures to meet the objectives of the Directive.

This Framework has a number of implications worth noting here:

The need for co-ordination between any national or local water authorities within the river basincatchment area;

The requirement to charge a price for water services (from which Ireland has received, to date, a partialderogation) which reflects the cost of providing the services (including environmental and resourcecosts as well as operation, maintenance and development costs) creating an incentive for the efficientuse of water resources (subject to potential derogations of which Ireland availed to date in respect ofdomestic charging); and

The requirement, in order to prepare cost-effective river basin management plans, to carry out aneconomic as well as an environmental analysis of the river basin including estimating the costs ofimplementing different possible measures and making forecasts of long-term water demand based onfuture population and economic scenarios.

The Framework is the main prism; there are other influences including National Spatial Strategy, economicconsiderations etc.

Roles of Participants – Water Services Act 2007 (the “Act”)The precise roles of sector participants are designated and shaped by a body of legislation with the Act at itscentre. The roles of the Minister, the water services authorities and the EPA, and the interaction between thoseroles, are the key elements of the operational and regulatory framework.

The Act confers a significant role on the Minister who has a general duty to facilitate the provision of safe andefficient water services and water services infrastructure in accordance with relevant EU legislation includingthe Water Framework Directive. For this purpose the Minister has overall responsibility (subject to the role ofthe EPA in relation to drinking water) for the supervision and monitoring of the performance by water servicesauthorities of their functions and the planning and supervision of investment programmes for the provision ofwater services. The Minister has very broad powers to direct and guide water services authorities in theperformance of their functions and to define those functions. He may, for example, make regulations requiringwater services authorities to provide specified water services to specified classes of agglomerations, areas orconcerns. He may also compare the performances of water services authorities and require coordinationbetween them by directing two or more authorities to carry out functions jointly.

The Act authorises each of Ireland’s 34 City and County Councils (29 County and 5 City) to provide waterservices, and includes provisions (not yet commenced) for those authorities to licence and supervise theprovision of water services by other persons (not yet commenced), in its functional area. An authority mayprovide water services, in accordance with prescribed standards and public policy, in its functional area.Alternatively, it may, subject to the requirements of the 2007 Act, enter into an arrangement with anotherperson in relation to the provision of such water services in part or all of its functional area. The 2007 Actauthorises two or more water services authorities to enter into an arrangement for the purpose of one or moreof them or jointly carrying out any or all of their functions under the 2007 Act. While the exercise of the powersconferred on water services authorities is generally at the discretion of the individual authority, water servicesauthorities must comply with directions issued, and any regulations prescribed, by the Minister.


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Standards – Drinking Water Regulations4 and Urban Waste WaterRegulationsThe EPA plays a key role in relation to the preparation of river basin management plans required by the WaterFramework Directive. It also has a supervisory and monitoring role in relation to drinking water quality andlicensing discharges to aquatic environments from sewage systems owned by water services authorities anddischarges to waters by certain trades (IPPC licences).

The Drinking Water Regulations prescribe quality standards to be applied to supplies of drinking water andrelated supervision and enforcement procedures. The Urban Waste Water Regulations prescribe specificstandards for waste water treatment plans and related monitoring procedures. Compliance with theserequirements has driven, and it is our view that it will continue to drive investment in water servicesinfrastructure. It is also worth noting that Water Services Strategic Plans will have to be completed in thecontext of River Basin Management Plans.

The allocation of roles to sector participants has a number of implications worth noting here:

Responsibility for the sector is allocated between a significant number of parties, including a number ofparties in respect of each river basin district, and accordingly considerable coordination is requiredbetween those parties particularly, but not exclusively, in the context of the Water Framework Directive;and

The role of the Minister, and also, in the context of the Water Framework Directive, the EPA, wouldappear to be particularly important in achieving this coordination. Certainly the Minister has broadpowers to require coordination between water services authorities if he considers that necessary.

A more complete description of the legislative framework is incorporated in Appendix 3.

Economic and Funding Situation

Overview of Current Economic SituationThe current Government funding situation is shaped by characteristics of the wider economic and politicalenvironment both in Ireland and across the EU. In several aspects, the Irish economy has represented anexaggerated version of typical Western economic trends over the last two decades. Sustained growth in the Irisheconomy, particularly in the services sector, outstripped that seen in several other Western economies duringthe 1990s. However, as elsewhere, doubts about the sustainability of much of this growth were expressed duringthe bursting of the dotcom bubble and the global slowdown through 2001.

Irish growth continued, but was increasingly reliant on a construction and related property boom through the2000’s, again outstripping growth rates seen in several major Western markets. The property boom was fuelledby a combination of factors, including: i) low interest rates; ii) a “light-touch” approach to the regulation of Irishfinancial institutions, most of which amassed a very significant property exposure; iii) pro-cyclical taxationpolicies; and iv) a buoyant consumer confidence. The net effect was net inward migration, strong employmentgrowth in construction and construction-related sectors and strong growth in capital tax revenues.

Tax receipts on capital in Ireland were €3.4 billion in 2006, or 6% of total Irish tax receipts that year. Thiscompared with a typical figure in the UK of barely double that absolute value, or less than 1% of total UK taxreceipts.5 The Irish state increased its public expenditure broadly in line with receipts.

Early in 2008, however, it was clear that the Irish property boom was drawing to an accelerated end.

The effect on public finances was devastating, as the loss of more than €2.5 billion in capital tax revenues fromthe peak coincided with significant losses in employment-related taxes and rising social welfare costs.

4European Communities (Drinking Water) (No. 2) Regulations 2007

5CSO; EIU August 2011


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Consumer confidence, which derived to a significant extent from the property boom, weakened rapidly andfinal demand fell across a wide range of domestic sectors again with negative implications for consumption-based taxes and employment in domestically-traded services. This situation has been exacerbated by incometax increases.

The Exchequer ran an operating deficit of close to €25 billion in 2009, which was reduced to €19 billion in 2010through the implementation of a radical programme of cuts in public expenditure and the imposition of verysignificant income tax increases. An additional deficit reduction of €15 billion is targeted before end-2014.

These problems, which are very significant in their own right, are compounded by the commitment of the IrishExchequer to guarantee the vast majority of deposits in six Irish banks and building societies in 2009. Thiscommitment was required to prevent the outflow of deposits from the banks and building societies, most ofwhich had a very significant exposure to the Irish property boom and a heavily impaired loan book. Two banks(AIB and Anglo Irish Bank) and two building societies (EBS and Irish Nationwide) are now in nationalownership. Bank recapitalisation (before taking account of the upfront funding of a State-owned bad bank, i.e.NAMA) has required circa €70 billion from the Irish Exchequer to date. This is more than twice the nationaltax take in 2010.

A loss of market confidence in the ability of the Irish State to manage this combination of issues resulted in theacceptance of an EU/ IMF programme of €85 billion in financial support in December 2010.

The package is broadly reliant on a number of austerity conditions over its 2011-2014 loan draw-down period,including a €5 billion increase in annual tax receipts, and a €10 billion fall in annual state spending (including€3 billion on capital spend and €3 billion on grants, subsidies, and procurement).

Implications for Water ServicesAs shown in Figure 4 – Figure 6 overleaf, to date the Water sector in Ireland has a high level of dependency onGovernment funding for both operating costs and capital expenditure. During the construction and relatedproperty boom, funding of the water service was heavily dependent on development levies which, in the contextof the current economic climate, have all but disappeared. Given the funding landscape described here, theexisting funding arrangements are unlikely to be sustainable in the longer term. Irish Government Finances arehighly constrained for new capital expenditure and operating cost subvention. These Capital and Revenueconstraints on Government finances provide a backdrop for the establishment of an Irish Water utility whichwill raise charges for the supply of fresh and waste water services to both the commercial and residentialsectors, and that has the ability to raise debt finance on foot of its net revenue streams and tangible asset base.

Figure 4 : Funding sources for water sector operating expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)


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Figure 5 : Funding sources for water sector capital expenditure in Ireland (Source – Unaudited Annual Financial

Statements 2010)

Figure 6: NDP Expenditure Trend €ms 2000 – 2009 (Source VFM Study6)

Sourced from Table 6.1 of the Value for Money Review (2007-2009)

RegulationThere are several levels of regulation in relation to the provision of water and wastewater services in Ireland.This study focuses on two aspects of regulation namely economic and environmental/technical regulation.

Economic RegulationThe provision of water and wastewater services can be regarded as a natural monopoly situation as the availableoptions for most consumers/customers are practically very limited. Currently in Ireland there are no directcharges for the provision of water and wastewater services to domestic customers on an ongoing basis. Irelandis unusual if not unique in the OECD in not having a separately identified charging system for domesticcustomers.

Non-domestic customers pay water charges on the basis of metered consumption according to prices set bytheir local authority. This is usually a combination of a flat standing charge and a metered charge based onactual volumes used. There is an established methodology for the assessment of what represents full cost

6 Non-Exchequer is “estimated matching funds” associated with the actual annual Exchequer spend on these programmes

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recovery of non-domestic water charges. This involves assumptions about how the cost is spread between non-domestic customers and other users of the services and on rates of unaccounted for water (UFW) and how thisis handled. There is an obligation on local authorities that they should have full cost recovery on non-domesticcustomers but there is no separate entity which directly monitors or enforces this obligation. In that sense,local authorities are self regulating for prices for non-domestic water service. Feedback from our stakeholdermeetings indicated that some local authorities may be failing to impose charges resulting in full cost recoveryaccording to the applied methodology. There is a wide variation in the levels of charges across the country (e.g.2010 & 2011 - Kildare = €1.75 per cubic metre, Wicklow = €3.04 per cubic metre) and there are substantialarrears for non-domestic customers (52% collection rate).

Connection charges apply for both water and wastewater services for both new domestic consumers and non-domestic customers. These are generally applied on a cost recovery basis and vary from case to case dependingon the local authority and the expense incurred in executing the connection. The policies as regards connectioncharges are set by each local authority.

Technical and Environmental RegulationFor technical/environmental regulation, the main entity setting out and enforcing standards is theEnvironmental Protection Agency (EPA). The EPA is there, through its regulatory licensing and monitoringregimes, to protect the consumer in terms of quality of drinking water. The EPA in Ireland follows a ratherstandard model which would be easily recognisable across the OECD countries. Some of the EPA’s mainfunctions as they would relate to water and wastewater include licensing and permitting (particularly ofwastewater discharges), monitoring, inspection, enforcement, environmental planning, strategic environmentalassessment and waste management with particular attention to wastewater sludge, insofar as the water sector isconcerned. The EPA has a major role in developing the River Basin Management Plans. Drinking waterstandards are also monitored and enforced by the EPA, who maintain a Remedial Action List of watertreatment plants where specific actions are required of the Water Service Authority to bring the standard oftreatment up to required norms.

The technical/environmental regulation of Group Water Schemes (GWS) is delegated by the Water Services Act2007 to the local authorities, who also provide a number of other roles for the GWSs including Rural WaterLiaison Officers and ongoing day-to-day technical support. GWSs regulate their own pricing structures.

It is worth noting that in comparison with other utility sectors, the technical regulation of water and wastewaterservices is extensive with no equivalent of the EPA in the telecoms, gas or electricity sectors. The EPA thereforerepresents a substantial commitment to the achievement of better technical standards for water services.

The ConsumerWithin the current institutional framework for the water sector, there are no developed arrangements to protectthe consumer, whether domestic or nondomestic, as in other sectors and in line with OECD and EU policies on‘Better Regulation’. Local authorities are responsible for determining the level of non domestic charges, basedon guidelines from the Department. Across the local authorities, there is no developed system of redress for theconsumer or consumer charter of rights. There are no statutory rights of appeal or independent appealsmechanisms.

It can be concluded, therefore, that there is no independent economic regulation of the sector with theconsumer interest at heart. Equally, it can be said that there is no effective representation of the consumervoice. This contrasts sharply with other utility sectors such as for telecoms, electricity and gas where there arewell established independent regulators.

Leadership and CoordinationAs mentioned previously, the local authorities are defined in the 2007 Water Services Acts as the WaterServices Authorities and as such the city and county managers, their respective directors of services and theirprofessional staff are the leaders for the provision of water and wastewater services in Ireland. There are 34local authorities with a very considerable variation in size, ability to leverage economy of scale, achieve


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specialisation in water services and geographical distribution of population served. In some areas, notably inthe greater Dublin area, there is a considerable sharing of knowledge and resources. However, within thestructures of local democracy in Ireland, the city and county managers report to their councils so ultimately thecouncillors are also leaders for the provision of these services. The interplay between city/county manager andthe council (or its strategic policy committee) has been reported to be a key element of the existing structure. Itallows a local democratic accountability but can have other effects such as influencing the setting of non-domestic water charges.

Thought leadership comes from a number of sources. The CCMA is an important forum for sharing ideas,knowledge and for agreeing joint initiatives including shared services. The directors of services for waterservices would also have similar fora for sharing knowledge methods and approaches. It should be noted thatthe engineering consultants also have played a very important role in the roll out of infrastructure and otherinitiatives. Many local authorities would have acknowledged that they did not possess the in-house skills tomanage many of the larger infrastructure projects and would have engaged consultants to assist theseimplementations.

The DECLG is much more than simply a department responsible for policy but also has a considerableexecutive function especially in the design and execution of the Water Services Investment Programme and theRural Water Programme. With particular reference to the WSIP, the DECLG can get into the fine detail of theindividual projects and is involved at several stages in issuing approvals to proceed. For larger projects, theNational Development Finance Agency (NDFA) must be consulted for advice. The DECLG also providesconsiderable coordination functions including sponsoring numerous initiatives from its own budget such as theRural Water Liaison Officers and the Water Services National Training Group. In addition, in the design andexecution of the River Basin Management Plans, it plays a key role with the EPA notably in encouraging all therelevant councils to approve the River Basin Management Plans which encompass all or part of their territory.

The Group Water Schemes provide potable water services to a considerable number of households in ruralIreland. Each scheme is essentially a cooperative run by a voluntary committee. These schemes would generallyreceive a considerable level of support both technical and administrative from the local authorities. Theleadership of these schemes rests with the committees but it would be readily acknowledged that importantleadership has been provided from the DECLG, not least in addressing the deficits set out in the 2002 judgmentof the European Court of Justice and from the EPA in developing the Remedial Action List (RAL). Theimplementation of the grouped DBO’s could not have happened without the support and intervention of theDECLG along with the National Federation of Group Water Schemes. The National Rural Water ServicesCommittee (NRWSC) provides input and direction on the design and selection of projects and schemes forinclusion on the annual Rural Water Plan. As such it is an important actor in the overall capital programme.

The Environment Protection Agency (EPA) also provides thought leadership on a range of issues (along withthe DECLG) such as River Basin Management Plans, monitoring, inspection and enforcement, the RAL forwater treatment etc. In the case of River Basin Management Plans, the DECLG and EPA were drivers of theprocess to complete this but the local authorities in each River Basin had to approve each plan – this wasinefficient requiring multiple council approvals for each plan and in some cases, councils had to approveseparate plans if they straddled the border of two, or even three River Basin Districts. This process of requiringmultiple approvals before a single RBMP is an example of the fragmentation of the provision of water services.

The Local Government Management Authority (LGMA) provides an important guidance, coordination,sponsoring and implementation function in respect of Management Information Systems. However, in order toimplement a new system there is a process of consultation with the CCMA to get a sufficient number of localauthorities to participate and contribute budgets. It does not follow that all local authorities would participatein the implementation of a new system. For instance, when rolling out the CORE human resource managementsystem, 29 of the 34 local authorities implemented the system and procedures while 5 (including some of thelarger authorities) did not.

It can be seen that the leadership and coordination is rather diffuse and fragmented with a range of actors ableto influence and control directions, including:

The 34 local authorities


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o The city/county manager and the professional staffo The elected council or its strategic policy committee

DECLG NFGWS EPA LGMA CCMA and others including NRWSC.

This multiplicity of water service providers and other actors in the provision of water services can hinder theachievement of the benefits of scale which are discussed in the SWOT analysis below.

OperationsEach local authority is responsible for the provision of water services in their region and each is tasked with theresponsibility to organise its operations to provide that service. The larger local authorities may have adedicated Director of Services for Water while the smaller authorities may ascribe several services includingwater to a single Director of Services. Below the level of City or County Manager and Director of Services, thereis no standard mandated organisation structure for the provision of water and wastewater services. It is anobligation on each local authority to set its own structures to deliver the services and City and County Managershave considerable freedom to design their respective organisational structures.

There is a practice in a number of countries to use river basin districts as an operational area. County and cityboundaries in Ireland do not generally reflect river basin boundaries. Therefore river basins are not used asoperational areas. The River Basin Districts which have been defined as part of Ireland’s obligations under theWater Framework Directive generally comprise several local authorities a number of whom have territory inmore than one River Basin District. There are 8 River Basin Districts on the island of Ireland, 7 of which arewholly or partly in the Republic.

There are a number of entities which exist to enhance the cooperation between local authorities on operationalissues. The Water Services Training Group (WSTG) is an initiative to coordinate the training for the personnelactive in the sector. In addition, it seeks to set out some standard operating procedures (SOPs). However, this isnot done on a comprehensive basis. SOPs are regarded not only as facilitators of increased efficiency and adocumentation of the collected know-how of an organisation but are also a key facilitator of quality assurance.A fragmentation in this regard may also be regarded as an inhibitor to efficiency and quality assurance.

The City and County Managers Association (CCMA) also has a water services committee which acts as aplatform for knowledge sharing and agreeing joint initiatives. Generally the detailed interaction between thelocal authorities and the DECLG is concerned with capital projects but there are instances of the DECLG actingas a coordinator or even as prime mover on operational matters, e.g. the Performance Management System.The Local Government Management Agency also provides some benchmarking services. For water services thisincludes comparisons of unaccounted for water (UFW) and collection of charges from the non-domestic sector.

In addition, a process of rationalisation of local authorities is also planned as evidenced by recent statements bythe Minister regarding the amalgamation of authorities in Limerick and Tipperary.

Local authorities do not operate Group Water Schemes (GWS) but do provide ongoing technical support as amatter of routine to GWSs. This is particularly the case for those GWSs which have implemented a Design BuildOperate (DBO) contract either on a standalone or bundled basis. DBO contracts for GWSs are structured asDesign & Build (D&B) Contracts with the Local Authorities and Operation & Maintenance contracts with theGWSs. Local Authorities project manage the D&B phase while the GWSs manage (with ongoing assistance fromthe Local Authorities) the O&M phase, which can be up to 20 years.

There is a trend towards the use of shared services for some of the obligations of local authorities. Examples ofshared services include the implementation and management of a new Human Resource Management system(CORE) and the adoption of River Basin Management Plans. These shared services are characterised by acollaborative, organic approach between local authorities. The pace of implementation of these shared servicesis set by the local authorities. In a number of areas this is on the basis of the Regional Authorities, eight innumber, which are also responsible for regional development plans. These Regional Authorities do not coincide


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with River Basin Districts. The mismatch between city/county boundaries and River Basin Districts can makethe process of River Basin Management planning somewhat unwieldy and an updated governance model is indevelopment. The Greater Dublin region has been able to achieve more than the rest of the country in terms ofshared services and plans for shared services. This may reflect that Dublin county was in the not too distantpast a unitary authority and the degree to which there is a significant level of shared asset base (e.g. large watertreatment plants serving two or more local authorities).

Each local authority is responsible for the implementation of utility management MIS including workflowmanagement, field force management, computerised maintenance management systems, stock control,procurement, geographic information systems (GIS), customer relationship management, telemetry andSupervision, Control, Automation and Data Acquisition (SCADA) systems. While there is some commonality insome areas e.g. GIS, the implementation of even the GIS system is highly dependent on the commitment ofeach local authority to this. Each local authority, generally with the support of engineering consultants, choosesits own treatment technologies for water and wastewater treatment. Procurement contracts for operations arealmost exclusively let on city or county basis. Staff from one local authority does not generally cross the relevantcity or county boundary to work in other local authority areas.

In times of pressing need or emergency, local authorities do have the ability to deploy staff from one service toanother. It has been reported for instance that during periods of extreme cold weather, local authorities wereable to deploy staff from the roads and other services to support urgent work for water services. This is animportant facility to consider when designing any future structures for the provision of water services.

Local authorities are each responsible for the provision of water services in their respective service areas. It canbe reasonably concluded that with 34 local authorities each with a statutory duty and liability, there isfragmentation in the provision of back office services. Economies of scale across city/county bounds are limitedto shared services which are being developed on a collaborative and organic basis but do not necessarily includeall local authorities.

Asset Management and Capital ProgrammeAccording to the DECLG, there are approximately 25,000 km of public water supply distribution network inIreland together with a significant wastewater network. There does not appear to be a clear understanding ofthe overall length of the sewer network. There are 952 separate public water supplies serving 87.5% of thepopulation with the remainder of the population being served primarily by Group Water Schemes or small orindividual supply schemes.

For wastewater treatment, there are 482 agglomerations of greater than or equal to 500 population equivalentwith 67% of the population connected to a public waste water network. The great majority of the rest of thepopulation is served by septic tank or small scale wastewater treatment facilities. For the public wastewatertreatment, two plants (one in each of Dublin and Cork) treat 55% of the wastewater. The total capacity forwastewater treatment7 in public systems in 2009 was approximately 40,000 kg BOD which equates roughly to a

population equivalent of 3.7 million. The capacity of treatment works was approximately 492,000 m3 per day.

Approximately 1.6 billion litres of potable water are produced daily on average in Ireland. The largest treatmentplant in Ireland is that at Ballymore Eustace serving approximately 500,000 people.

Unaccounted for water is a significant problem in the water distribution system in Ireland. In 2009, the averagelevel of UFW is estimated at more than 41% which is high by international standards. The Water ServicesInvestment Programme for 2010-2012 has a major focus on water conservation allowing for approximately 1%of the network to be renewed annually.

Investment in InfrastructureIn Ireland approximately €600 million per year is being invested in water and wastewater infrastructure. Thekey elements in a very broad sense are:

7This refers to the total capacity of wastewater treatment works in Ireland at secondary treatment standards or better.Pollution load is measured in kg BOD or in population equivalent. Volume capacities are measured in m3 per day.


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The Water Services Investment Programme (WSIP) has been investing about €400 million per annum; The local authorities provide ‘matching funds’ of approximately €100 million funded through significant

user contributions, development levies and borrowings based on the ability to repay these loans mainlythrough the latter two sources and revenue from non-domestic water customers; and

The Rural Water Programme (RWP) has been investing about €100 million.

The amounts mentioned above are high level averages and the actual amounts fluctuate from year to year. Theaverage annual Exchequer spend for the last decade is in the order of €550 million. This amount is lower in theyear 2011 reflecting overall public spending concerns and a reported ability to obtain lower prices than expectedfor planned investments. The WSIP and the RWP are funded from the DECLG with the former closelycontrolled by the department while the latter sees considerable managerial responsibility allocated to the localauthorities.

For the WSIP, in the 10 year period leading up to the current WSIP 2010-2012, there has been a major focus onwastewater treatment capacity and standards. In the current plan, the focus has switched to issues of waterconservation in response to a perceived unacceptably high level of unaccounted for water (UFW). A number ofchanges were introduced from previous plans including the introduction of an annual review, the ending of anautomatic rollover from one WSIP to the next of schemes not commenced and the discontinuation of theServiced Land Initiative in response to a decline in demand for this approach due to the wider economicdownturn. These changes allowed the WSIP to be more streamlined while at the same time allowing greaterflexibility through the annual review mechanism. The view was expressed by stakeholders that the currentWSIP is the most evidence based plan to date.

The Rural Water Programme’s main focus has been on upgrading Group Water Schemes’ (GWS) infrastructurein order to respond to a 2002 judgment against Ireland by the European Court of Justice (ECJ). The NationalCommittee on Rural Water Services is closely involved in the RWP alongside the DECLG. There are othersmaller parts of the RWP such as the Small Public Water and Sewerage Schemes element. In the allocation for2011, approximately €28.5m was allocated for small schemes including the Remedial Action List and GWSswere allocated €56.5m.

Figure 7: Preparation of the Water Service Investment Programme

Figure 7: shows the basic steps followed in preparing the WSIP. The local authorities are the entities whichmanage the procurement of infrastructure assets for water and wastewater under the WSIP. As such they areresponsible for the identification of needs and for proposing these needs to the DECLG. In the initial process ofthe identification of needs at local authority level, the professional engineering staff or the County or CityManager will make an initial proposal either to the full Council or to a Strategic Policy Committee. At this stage


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other projects can be added to the list being submitted to the DECLG for inclusion in the WSIP. Figure 8 showsthe different elements which impact on the assessment of needs as carried out by the local authorities.

Figure 8: Assessment of Needs

The DECLG collates and appraises all the identifications of needs as expressed by the local authorities andranks each contract or scheme8 on the basis of priorities which are clearly set out in advance. The current plan’spriorities are set as:

Water conservation proposals; Environmental objectives including responding to ECJ rulings, satisfying environmental regulations and

requirements of the EPA and compliance with the Water Framework Directive; and Economic objectives including supporting strategic and sustainable development of hubs and gateways

under the National Spatial Strategy and works to support employment creation.

Figure 9: Water Services Investment Programme

8 A scheme may have several separate contracts


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These priorities can vary from one WSIP to another. Within the constraints of the overall 6 year fundingenvelope as set out in the National Development Plan, the WSIP on a three year detailed look forward basis setsout which contracts and schemes have been selected to advance to contract stage. The DECLG assesses theproposals, evaluates them according to a scoring system, prioritises them and makes a recommendation to theMinister, based on commitments already entered into and new projects. The plan is then published. The paceof the delivery of the plan is determined by the funding resources available both nationally and locally.Exchequer capital resources are determined through the annual Estimates process. The DECLG bid for fundingfor the coming year from the Department of Public Expenditure and Reform is based on the progress on therelevant WSIP and requirements of the RWP. The capital allocations are then published as part of theEstimates process in the run up to the Budget. Local funding resources are determined through the localauthority estimates process.

In the less detailed look forward in the WSIP, projects are selected which should proceed to planning stage.Projects are assessed on a case by case basis to determine the level of ‘matching funds’ required from the localauthority to allow the project to proceed to contract.

Figure 10 shows the five basic steps from conception to completion of a project. In the WSIP 2010-2012, thoseprojects which are at the stages of ‘Brief to Consultants’ or ‘Preliminary Report’ are mentioned as projects inplanning. Those expected to move to Contract Documents stage in the life of the plan are set out in detail in theplan, with detailed costing.

Figure 10: Basic Project Steps

The inclusion of a contract or scheme in the plan does not mean that it will be executed or even started in theperiod of the plan. It has happened that significant elements of each WSIP are carried forward to the next plan.This can arise due to a variety of factors including delays in the planning or procurement process, resourceconstraints (either human resource or availability of matching funds) or it can happen that larger schemes arenot approved for moving to contract stage if sufficient Exchequer funds are not made available during the life ofthe plan. The comprehensive review undertaken as part of the development of the WSIP 2010-2012, required areview of all projects which had not substantially advanced against programme priorities, and those of a lowerpriority were removed from the programme. This was in contrast to previous programmes where projects wereonly added, and none were removed. It is worth noting that in order to proceed to contract, projects in excessof €5m have to be approved by the DECLG and for projects with a value of over €30 million it is necessary toconsult with the National Development Finance Agency (NDFA). Projects of value in excess of €50m require afull cost benefit analysis. The local authority needs to be assured that it has sufficient matching funds to fulfilits funding obligations.


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The local authorities are also the entities responsible for the preparation of the Strategic Rural Water Plans intheir service areas for supplying rural water needs in their county and upgrading water quality. These relateprimarily to the upgrade in the infrastructure of the GWSs in response to the 2002 ECJ judgment mentionedabove. Rural Water Liaison Officers in the local authorities (although funded directly by the DECLG) preparean identification of needs which is approved by the relevant local authority Director of Services. These aresubmitted to the DECLG on an annual basis and using a similar, if less formal approach to that of the WSIP areassessed for approval of funding in the relevant year’s RWP.

The process of submitting projects for funding both under the WSIP and the RWP can be characterised as acompetitive or bidding process, where the projects in each local authority are competing for funds with otherlocal authorities and indeed with other projects in their own areas. At a high level, affordability is assessedwithin the multi-annual capital envelope set by DPER (and as can be modified from time to time by theDepartment of Finance) and the prioritisation of investment is bound by this envelope on an annual basis. Assuch, projects that have been included in the WSIP and RWP may not receive funding approval during the lifeof the WSIP. Political input can occur at Council (or Strategic Policy Committee level of the Council) atMinisterial level or at Government level. As noted above, larger projects even if included in a WSIP will stillneed to be approved by DECLG in accordance with the Government approved capital appraisal guidelines(Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector, 2005). Itis not unfair also to characterise the process of seeking funds for water infrastructure as a process of biddingbetween government departments within an overall national funding envelope but the justification of a projectby a local authority must be on the basis of a well developed case within a strategic framework. It has beenobserved by at least one stakeholder that in the past, in the allocation of capital funds, “it was widely assumedthat each of the thirty-four local authorities must be satisfied to some extent, rather than national spatialplanning taking precedence”. On the other hand, stakeholders have stated that the most recent WSIP is themost evidence based to date.

Customer Service and BillingCustomer service can be regarded as two separate services. The first deals with all matters relating to paymentfor service while the second deals with matters related to service levels or technical issues.

Each local authority operates its own procedures with regards to customer service and there is no standardapproach to this across the local authorities. Larger local authorities operate contact centres which deal withgeneral queries, frequently asked questions and are able to take payment for services. The smaller localauthorities may not have dedicated contact centres rather having staff members take queries directly onpublished telephone numbers.

For non-domestic water meter customers, local authorities have generally activated the billing and CRMmodule of their finance applications (e.g. Agresso, Oracle, Integra, JD Edwards) and process customer billing inthis way. Meter readings are taken at regular intervals and are fed into the billing systems. Subsequent queriescan be dealt with by staff members on the telephone, by email or by post. Enforcement is a key issue and thereis evidence of substantial arrears in almost all local authorities for non-domestic water charges.

For new connections, most local authorities have clearly set out processes and procedures for customers tofollow. These are handled by the engineering staff who will either execute or supervise the connection to thewater and/or sewer network provided the appropriate payment has been made.

For ongoing technical queries, there is no standard approach across the country. Larger authorities have centralnumbers but will tend to refer callers with detailed technical queries to the technical staff directly who may beat a control centre, managing office or in the field. Some local authorities will publish extensive lists of phonenumbers including mobile numbers on their websites for service users to contact. Caretakers/Curators are oftenthe first line of contact for water consumers and their mobile numbers may be well known in the community.These contacts will not generally be logged in any central system. Overall, there is no central system for loggingcalls, allocating job numbers or tracking whether the problems have been resolved and if this has been reportedback to the user of the service. Individual local authorities may indeed have fully or partially activated such anapproach but there is no overall reporting system for this. It does not generally seem to be possible for thecustomer service representative who is called by a service user to interrogate any of the technical systems (e.g.


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GIS, workflow management, job order system, real time network information system etc) to give immediatefeedback to a caller on the likely progress of a query.

An informal element of customer service exists in the form of the ability of the residents of a local authority toapproach a councillor in order to raise a particular issue. This aspect of local democracy may not feature as aformal element of a customer service strategy, but is a method by which residents and businesses make contactwith, and expect a reaction from the local authorities.

The overall effect of the strategies mentioned above is to encourage frequent contact by customers of the localauthority and frequently short circuiting business processes. This may have the effect of also shortening thetime taken to resolve issues but at the same time rendering it difficult or impossible to track the number andtype of complaints and queries and whether they can be resolved and how long it takes to do so.

In the UK where water services have been subject to economic and quality of service regulation there has beenan expanding definition of what constitutes the quality of service to customers. In part it is about water quality;in part it is about responsiveness to billing and other customer enquiries. The regulated water companies in theUK are subject to a range of customer performance measures (see Indicators of Performance below).

In England and Wales these measures are used to create an aggregate measure of performance for customerscalled the Overall Performance Assessment (OPA.) Water companies’ OPA scores are used by the regulator inpart to set prices, companies performing well on the OPA were rewarded with additional revenues fromcustomers by the regulator. More recently regulators have introduced the Service Incentive Mechanism whichgives regulated companies rewards on a sliding scale depending upon their performance on a range of customerservice metrics.

FinanceThis section includes reference to both operating expenditure (“OPEX”) and capital expenditure (“CAPEX”) andthe sources of funding for each.

OPEX Funding – SummaryThe diagram below summarises the Income & Expenditure figures for 2010 from the unaudited AnnualFinancial Statements (AFS) submitted by the local authorities. A more detailed breakdown of local authorityIncome & Expenditure from 2008 through to 2010 is reflected in Figure 16. Note: All values referenced in thissection are net of inter-authority contributions.

Figure 11: OPEX Funding Summary (Source – Unaudited Annual Financial Statements - 2010)


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Direct Income (OPEX)The main sources of direct income to fund OPEX, as outlined in the local authority Annual FinancialStatements (“AFS”) are 1) Local Government Funding (Grant Income per the AFS) and 2) Income from theprovision of goods and services. This latter source of revenue includes income from non-domestic customersrelating to the provision of water and waste services and income from other sources (e.g. agency services). It isalso worth noting that some authorities receive inter-authority contributions, i.e. payment from anotherauthority relating to the provision of water services to that authority. As an inter-authority contributionreceived in from one authority will be met with an outgoing expenditure from another authority, this source ofincome is not reflected in the figures quoted below.

Figure 12: Direct Income to Fund OPEX €m (2008 – 2010 Actuals plus 2011 Budget)

Note: The income split for 2011 has been extrapolated based upon 2010 unaudited AFS actuals as the breakdown was not available in the

budgetary figures provided by Local Government Finance. The inter-authority contributions have also been excluded from the 2011 figures

using 2010 as the basis for extrapolation.

As reflected in Figure 11, the direct income received by local authorities is insufficient to meet their expenditurerequirements and consequently other sources of funding are required to fund the expenditure gap. These othersources of funds are discussed later in this section.

Non Domestic Charges:

As referenced above, non domestic revenue is incorporated within the Income from the Provision of Goods andServices in the AFS. However, based on our discussions with members of the Stakeholder Group, the followingpoints are worth noting in relation to non domestic charges and the resulting revenues:

The DECLG and local authority management have indicated that the current rates charged to non-domestic customers do not necessarily reflect the full economic cost of providing water services to thosecustomers;

The rates which are charged vary quite significantly from local authority to local authority (2010 & 2011 -Kildare = €1.75 per cubic metre, Wicklow = €3.04 per cubic metre). This reflects the absence of aneconomic regulator for the establishment of non domestic water charges;

The overall commercial collection rate for 2010 as per the unaudited AFS was 52%, with significantvariations per authority. However as commercial debtors are not aged, it is not possible to determinewhat portion of payments received in 2010 related to 2010 invoices, versus the portion which relates topre 2010 debts. Prior to transferring any such debts to the Water Utility a detailed exercise should beundertaken by the authorities to identify what debts are actually collectible versus those which haveremained unpaid for an extended period and may be irrecoverable. In addition, in calculating any futurerates for non-domestic customers, Irish Water may need to take into account likely levels of bad debt.

0 50 100 150 200 250 300

2008

2009

2010

2011

Grant Income Income from the Provision of Goods & Services


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Figure 13: Commercial Collection Rates (2010)

OPEX ExpenditureThe total OPEX expenditure for 2010 was €715m. In the unaudited Annual Financial Statements (AFS)submitted by the relevant local authorities for 2010, this expenditure amount is broken down against a numberof predefined headings such as “Operation & Maintenance of Water Supply”, “Operation & Maintenance ofWaste Water Treatment” etc. However as this breakdown does not provide sight of salary, energy and othercosts, an alternate view of OPEX expenditure was sought.

A number of local authorities were asked, for this report, to re-categorise their 2010 operational expenditureagainst alternate headings. The chart below reflects an extrapolation of the responses received from the 17 localauthorities who reverted against the €715m total spend figure. The results of this extrapolation are that the fourmain cost buckets of spend across the authorities are staff costs (26%), repairs and maintenance including DBO(26%), agency services (12%) and other (21%) which would include central management charges.

Figure 14: Breakdown of OPEX Expenditure for 2010

Note: The DKM Construction Review and Outlook 2009 report identified repair and maintenance expenditure on water and sanitary

services for 2009 as €491.3m and estimated that it would be €480.4m for 2010. These figures differ significantly to the repair and

maintenance values (include DBO) reported by the local authorities in the above exercise (€185m for 2010). It was not within the remit of

this report to reconcile this difference, though it may be partly related to cost classifications.

A small number of local authorities have advised that the current level of operational expenditure should beviewed as constrained expenditure, i.e. fiscal constraints have reduced the levels of OPEX expenditure incurred.On this basis OPEX in the coming years may need to be in excess of current budgeted levels if Irish Water is toprovide a water service capable of meeting all future regulatory requirements and consequently in our financialanalysis referenced in Section 8 below PwC has assumed a €60m OPEX backlog which will need to be met byIrish Water. In addition, it should be noted that, based on current trends, the OPEX requirement will continueto increase as the asset base is increased.

0%

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Funding GapIt is clear from the above information sourced from the AFS submitted by the local authorities that the directincome currently received from what is classified as grant income and income from the provision of goods is notsufficient to meet the operational expenditures of the local authorities (funding gap of €451m in 2010).

Figure 15: Income & Expenditure €m (Source – Annual Financial Statements - 2011 figures are budget)

Other IncomeThe DECLG have advised that the OPEX funding gap (direct income less expenditures) of €451m in 2010 wouldhave been met from other sources of funds including the general purpose grant. In accordance with the LocalGovernment Act 1998, a general purpose grant is provided each year to the local authorities. The purpose ofthis grant is to provide top-up funding to local authorities to assist them bridge the gap between other incomesources and the cost of the services they provide. In 2010 this general purpose grant amounted to €870m.

It is clear that in the absence of domestic water charges and full recovery on non-domestic customers, thatsignificant levels of government funding will be required going forward to meet future operational expenditure.With the creation of Irish Water consideration will need to be given as to how this entity will be funded and, inthe absence of domestic charges, whether a portion of the general purpose grant which is currently given to thelocal authorities will thereafter be provided directly to the new entity for the purposes of funding operationalexpenditures. See Section 8 in this report referencing a number of funding scenarios which have been run forIrish Water.

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The table below summarises the Income & Expenditure reported by the Authorities in their Annual FinancialStatement (AFS) for 2008 through to 2010 less inter-authority contributions.

Figure 16: Income & Expenditure (2008 – 2010)

Note 1: As referenced on the previous phase, we are advised by the DECLG that the gap between direct incomeand expenditure is met by other sources of income including the general purpose grant provided byGovernment to the local authorities.

Note 2: The income from the collection of water and waste charges in the above table should not be compareddirectly against the expenditure related to the collection of water and waste charges. From a review of theunaudited 2010 AFS it would appear that some authorities have allotted some or all of their income from waterand waste treatment against this heading rather than split it across the respective headings (Operation &Maintenance of Water Supply, Operation & Maintenance of Waste Water Treatment).

2008 2009 2010

31-Dec-2008 31-Dec-2009 31-Dec-2010

Actuals Actuals Unaudited Actuals

Income

Grant Income 37,843,688 47,025,866 41,728,006

Operation & Maintenance of Water Supply 7,477,387 8,834,853 11,376,140

Operation & Maintenance of Waste Water Treatment 8,507,916 13,026,563 7,103,096

Collection of Water & Waste Water Charges 50,857 38,535 -

Operation & Maint of Public Conveniences 85,582 20,454 77,317

Admin of Group and Private Installations 20,681,428 23,377,121 21,664,398

Support to Water Capital Programme 299,955 230,507 240,159

Agency & Recoupable Services 740,563 1,497,833 1,266,896

Income from Provision of Goods and Services 236,119,427 236,281,128 221,410,099



Collection of Water & Waste Water Charges 23,048,629 25,245,302 22,386,644

Operation & Maint of Public Conveniences 186,848 274,591 236,902

Admin of Group and Private Installations 688,476 588,240 575,519

Support to Water Capital Programme 978,102 1,383,203 1,186,909

Agency & Recoupable Services 9,779,150 7,724,982 6,741,609

Total Income 273,963,115 283,306,994 263,138,105

Expenditure

OPEX 699,124,073 705,494,357 714,559,744



Collection of Water & Waste Water Charges 20,644,283 29,548,702 35,157,088

Operation & Maint of Public Conveniences 6,714,675 7,162,358 6,850,637

Admin of Group and Private Installations 27,915,710 31,329,184 27,055,990

Support to Water Capital Programme 18,824,795 20,685,990 22,119,031

Agency & Recoupable Services 12,963,550 6,433,201 7,743,824

Total Expenditure 699,124,073 705,494,357 714,559,744

Funding Gap (Direct Income less Expenditure) (425,160,958) (422,187,363) (451,421,639)


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Existing Sources of funding- CAPEX

Figure 17: CAPEX Funding-Overview (2010)

The CAPEX spend in 2010 per appendix 6 of the unaudited consolidated AFS was €517m (down from €672m in2009). Feedback from the Stakeholder Group indicates that part of the decrease in CAPEX spend related toefficiencies in driving down costs as opposed to a substantive change in the level of CAPEX activity (i.e. valuefor money improvements); however a very small number of individual local authorities have advised that had itbeen possible to increase the department annual budget that additional CAPEX programmes may have beeninitiated.

CAPEX FundingThere are four main sources of funding to meet the CAPEX requirement. The main source of funding is directgovernment grants for approved capital expenditure projects (Water Services Investment Programme andRural Water Programme) representing 67% of the total in 2010 (see Figure 19 below). The next source offunding is non-mortgage loans (18% in 2010) taken out by the local authorities via the housing financing agencyor directly with the banks (subject to a €200m per annum limit on any deterioration of the general governmentlocal balance for the Local Government sector). The final sources of funds are other income such asdevelopment levies, significant user contributions and transfers from their revenue or other capital accounts(referred to as internal transfers).

Figure 18: CAPEX Movement €m (2010)

Source: Appendix 6 of the unaudited 2010 consolidated AFS

(84)

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Figure 19: Percentage breakdown of CAPEX funding (exc. opening and closing balances but including transfers)

The makeup of funding for future CAPEX will need to be defined by Irish Water and a number of fundingscenarios are included in Section 8 (Funding Requirements and Financial Arrangements). However it is againclear that the current level of government funding for OPEX and CAPEX is significant, amounting to €901m(€42m+€451m+€408m) per the unaudited 2010 AFS.

In Section 8 of this report PwC detail a number of illustrative funding scenarios which have been run coveringthe period up to 2030, reflecting the funding requirement of Irish Water and how this requirement could bemet from a number of different sources including Government Funding, Third Party Borrowings, Non DomesticCharges and Domestic Charges. In these scenarios we have assumed that CAPEX funding requirements willremain significant throughout the period modelled due to the following factors:

Government have spent €4.2bn on the Water Services Investment Programme and €1bn on the RuralWater Programme between 2000 and 2010; with a provision of €435m set aside for 2011;

The local authorities have also provided additional funding of circa €90m per annum to fund CAPEXprogrammes (sourced from Table 6.1 of the Value for Money Review 2007-2009), though this value wouldvary year on year (see Figure 20 below);

The average expenditure between 2000 and 2009 (Table 6.1 of the Value for Money Review 2007-2009)was €557m p.a.

Figure 20: NDP Expenditure Trends €m (2000 – 2009)

There are a number of major capital expenditure programmes planned for future years before taking intoaccount basic asset renewal. In addition to the metering programme, and the Greater Dublin StrategicWater Supply Project (see Page 23), the forecast costs resulting from investment required under GreaterDublin Strategy Drainage Study are also very large.

The “Assessment of Needs” submitted by local authorities in response to Circular L6/09 (i.e. in respect ofprioritised contracts that they wished to advance to construction over the period 2010 - 2012 andprioritised schemes for inclusion/retention in the Programme at planning stage) came to €6.5bn. This wassubsequently reduced by €1.7bn.

Priority 1 waste water discharge requirements for 2015 from the River Basin Management Plans areincluded in the above figures, but the costs of Priority 1 for 2016-2021 and Priority 2 and 3 are not reflected.

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In relation to asset replacement, the industry benchmark is to replace 1% of the network per annum toremain at a standstill; however in an Irish context this percentage would likely be higher due to the level ofcatch-up required.

Taking the above into account, we have assumed in our models that there will be a requirement for an annualCAPEX investment of €600m (before efficiencies and the metering programme). We have also madeassumptions in relation to the cost of that metering programme and assumed an additional €500m CAPEXbacklog which will start being discharged from 2015 (spread over 5 years). Consequently, between 2013 and2030 we have assumed that Irish Water will have a total CAPEX spend of €10.2bn.

Assets & Liabilities

Assets:The last valuation of water infrastructure assets was in 2003, and thereafter the assets have been depreciatedon a straight line basis. PwC understand that a further revaluation of assets was meant to have beenundertaken in 2008, but that this was subsequently postponed. If these assets are however (depending uponthe model chosen) to be transferred to Irish Water, then a further revaluation of these assets will be required.

From Note 1 to the 2010 unaudited AFS the NPV of the water infrastructure assets as at 31/12/2010 amountedto €11.5bn, and broke down as follows:

Gross Fixed Assets: €19.4bn as at 31/12/10Accumulated Depreciation: €7.9bnNet Book Value: €11.5bn (€11.4bn in 2009)

Regulatory Capital Value (RCV)

The RCV is a measure primarily used by Ofwat in the UK to set price limits at a level which will enable a UKWater Company to finance the proper execution of its functions. The RCV is also widely used by the investmentcommunity as a proxy for the market value of a regulated business.

In Section 8 below PwC set out a potential RCV valuation range for the water infrastructure assets, based oncertain assumptions, for the purposes of modelling future funding requirements

Liabilities:For the purpose of this report, the local authorities were asked to quantify the value of loans which they haverelating to water and waste services. 19 local authorities responded to this request and the sum of loansoutstanding came to €182m for 2010. Extrapolating this value out across the rest of the local authorities, PwCestimated that in 2010 there were outstanding loans associated with water and waste water services of circa€326m.

Prior to any transfer of assets and liabilities to a new water company, further detailed verification work wouldneed to be undertaken with the respective local authorities to validate these loan values and agree the liabilitieswhich will may transfer to Irish Water. In addition, and subject to a determination being made by the CSO /Eurostat on whether Irish Water would be off the GGB, there may be an additional benefit to the Governmentwhere such a transfer takes place and debts are moved from the Local Authorities to Irish Water.


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StaffingAs of July 2011 the total number of Whole Time Equivalents (WTEs) within the local authority was 30, 9679,

with an estimated 4,049 WTEs directly engaged in water and waste water services. These numbers have beentrending downwards in recent years due to various initiatives implemented at National and Local Governmentlevels to reduce costs.

This section sets out an overview of the:

Water services organisations within both the local authorities and the Department; Relevant recent National and Local Government initiatives regarding staff; and Current staffing levels.

Water and Wastewater Organisation within the local authoritiesand the DepartmentThe Department is responsible for developing and implementing Government policy in the area of water andwaste water services, ensuring we meet our EU obligations, that we have a modern statutory framework for thesector, sourcing funds for investment in the Water Services Programme and managing the capital and currentfunding programmes and monitoring the expenditure of these funds by the local authorities.

At a Departmental level, water and waste water services are organised under the following groupings: WaterServices Policy; Water Quality; Water Services Investment Programme and Water Inspectorate. Appendix 4provides an overview of the Department’s organisational structure and key functions of each section.

Under this organisation structure, the Department, in addition to managing the investment programmes, playsan advisory role to the local authorities who have responsibility for the provision of water and waste waterservices within their relevant localities.

Organisational structures for the delivery of water and waste services differ from one local authority to another.Appendix 4 contains examples of organisational structures for Dublin City Council and Cavan County Councilproviding an urban and rural example. The figures illustrate the key functions within each local authority’swater services department. The two structures are significantly different, however, it should be noted thatbased on WTE numbers Dublin City Council’s water services section is approximately ten times the size of theequivalent within Cavan County Council10.

The variety in organisation structures across the local authorities for the delivery of water services is as a resultof differing local circumstances e.g. whether the local authority is urban or rural based, the scope of its servicesand the scale of the area it serves.

Furthermore, the entitlement of the local authorities to structure their own organisations to fit localcircumstances is enshrined under section 159 of the Local Government Act, 2001. The local authorities are,however, subject to departmental control on staff numbers, pay and grades under a control frameworkintroduced in 2009.

One consequence of the variety in organisation structures is that a particular role in one organisation structuredoes not necessarily directly equate to a similarly titled role in another organisation structure. Depending onthe model chosen and desired levels of process standardisation, this could pose implementation concerns due tothe substantial work required to harmonise roles.

Although local authorities are subject to public service guidance on grades, salaries and terms & conditions,staff entitlements are not standardised, e.g. disparities exist between local authorities with regards to annual

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

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


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leave. As with the previous point in the paragraph above, and for similar reasons, these irregularities or localanomalies could pose implementation concerns.

A point, however, which should be noted regarding the current water services organisation set up is that itallows for agility in the response to emergencies, e.g. during the 2010-11 winter freeze, staff from roads sectionswere called upon to work with water services staff. A move away from a local authority delivered service couldmean a loss of this type of cross function resourcing and is a risk that would need to be managed by Irish Water.

Initiatives to Reduce Staffing Cost and Improve EfficienciesAs mentioned in the introduction above, total staff numbers within the local authorities (including water andwaste water services) have been falling in recent years. This has been largely due to initiatives undertaken atNational and Local Government levels to reduce public service staffing numbers and improve efficiencies acrossthe public service. Amongst these initiatives are the:

Suspension of Public Sector pay increases under “Towards 2016 – Review and TransitionalAgreement” (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).

Appendix 5 contains a brief overview of these initiatives.

Current Staffing LevelsAs of July 2011 the total number of WTEs working across the local authorities was 30, 967, down 14% from36,177 in 200711. Over this period, a significant reduction has occurred in the area of temporary/ contractWTEs, i.e. falling by 64% from 4,846 in 2007 to 1,732 in 2011. Permanent12 WTEs fell by 7% from 31,331 to29,235 during the same period.

Of the 2011 30,967 WTEs within the local authorities, our best estimate is that 3,63013 front line WTEs aredirectly engaged in water services. This figure is made up of 3,401 permanent front line WTEs and 22914

indirect frontline WTEs. It should be noted that this estimate is based on data reported to the Office of LocalAuthority Management by the local authorities. However, an accurate assessment of the number of WTEsengaged in water would require a detailed audit.

It should also be noted that the 3,630 figure relates solely to those WTEs engaged in the front line provision ofwater services. Comparable figures for back office WTEs supporting water services are not available. Typicalback office services might include: finance, HR, IT and legal services. Dublin City Council were able to providedus with a rough estimate that these back office WTEs amounted to approximately 7% of their total figure forwater and waste water services WTEs. The Local Government Efficiency Review Group Report estimated anational average for back office staff across the local authorities to be 16%15. As Dublin City Council is amongstthe largest of the local authorities it is likely that they have achieved economies of scale in this regard.

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

12 “Permanent” includes managerial, clerical/admin, professional/ technical, outdoor, fulltime fire-fighters, incentive careerbreak, and supernumerary positions.

13 Office for Local Authority Management - Survey, July 2011. This information is returned to OLAM by the local authorities.14 Indirect WTE refers to DBOs and resident engineers not directly employed by the Council.15 Local Government Efficiency Review Group Report, 2010, page 63


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Based on the conservative estimate of 16% support staff, our best estimate of total WTEs engaged in water andwaste water services is 4, 27816.

Front LineWTEs

Support WTEs(16% of Total

WTE’s)

Total

Direct 3,401 648 4,049

Indirect (incl.DBOs)

229 N/A 229

Total 3,630 648 4,278Figure 21: WTE’s engaged in Water and Waste Water Services

Data regarding the age profile of water and waste water staff was not available. Again, Dublin City Council wasable to provide us with rough data regarding the age profile of their water and waste water services staff. Thisshows that approximately 20% of staff are aged 40 or younger, with 51% of staff aged 50 or older.

Similarly, Dublin City Council provided us with rough data regarding the projected retirement pattern forDublin City Council’s Water and Waste Water Services Divisions for the period 2010-2020. The averageexpected yearly decrease in headcount as a result of retirement for this period is 15 staff per annum.

No conclusions can be drawn from the above statistics provided by Dublin City Council as they are notnecessarily reflective of the water service nationally.

At a Departmental level, current staff numbers are approximately 6117, divided as follows across the fourfunctions:

Water Services Policy – 6; Water Quality – 11; Water Services Investment Programme and Rural Water Programme – 26; and Water Inspectorate – 18 (of whom 7 are not involved in water services).

Marketing and CommunicationsEach local authority has its own strategy for branding, marketing and communications which will reflect the fullrange of services it provides. There is no clear national strategy for marketing and communications for waterservices reflecting that responsibility is with each local authority.

There are some initiatives at a national level such as the website taptips.ie giving advice on water saving toconsumers. The EPA also has taken the initiative to develop and launch bathingwater.ie as an informationservice to bathers on marine water quality.

Generally, local authorities do not brand their water services distinctly from other services. For water services,particularly for interruptions to service, communications are issued in the mass media. However, the study didnot find evidence of a national or regional branding, consumer information, consumer awareness (other thanfor water saving) or communication plan in relation to water and wastewater services.

Communications with non-domestic customers are more developed given the opportunity for includingmaterial with bills. However, this is to a limited audience and would be included in the wider remit of servicesand charges to businesses. There has been considerable work by local authorities to activate their websites forwater services issues. For instance it is common that key forms and procedures can be downloaded directly bycustomers and there is often a FAQ page for water and wastewater issues. They have also been active at times of

16 I.e. [(3,401 permanent WTEs + 648 related back office WTEs) and 229 indirect WTEs]17 Source: Department of Environment, Community and Local Government.


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urgent need such as in recent cold spells in communicating through the mass media and their websites andcontact phone numbers to their customers.

MIS/ITManagement information systems (MIS) and information and communication technology (ICT) are used byIrish city and county councils to serve the full remit of their obligations of which water and wastewater servicesare only one service. In general, their MIS are fully integrated across all services but on the other hand there isno suite of MIS dedicated to water and wastewater services.

Each local authority implements and runs its own systems although there is in some areas a considerabledegree of commonality. In addition, the Local Government Management Agency (LGMA) provides a highdegree of support to the local authorities both individually and in groups of local authorities to design,implement and run MIS.

Twenty six of the local authorities have implemented a version of Agresso as their financial managementsystem. The Cork city and county councils have implemented a system based on JD Edwards. One localauthority uses Integra, and five local authorities in the greater Dublin area have implemented MIS based onOracle. These are generally regarded as high quality and industrial standard financial management systems andcan offer features beyond purely financial management.

Communications with non-domestic customers are more developed given the opportunity for includingmaterial with bills. However, this is to a limited audience and would be included in the wider remit of servicesand charges to businesses. There has been considerable work by local authorities to activate their websites forwater services issues. For instance it is common that key forms and procedures can be downloaded directly bycustomers and there is often a FAQ page for water and wastewater issues. They have also been active at times ofurgent need such as the recent cold spells in communicating their contact numbers to their customers throughthe mass media and their websites.

Twenty nine of the local authorities have recently implemented a common human resource and payroll system(CORE).

For Asset Management, there is no common standard for asset registers either for above or below groundassets. A Geographic Information System (GIS) was implemented for water networks in the early part of theprevious decade called the Complete Information System but since then each local authority was responsible forkeeping this system up to date and the usage has been variable. There is no such system nationally forwastewater network assets.

The DECLG has implemented a web enabled Project Control System (PCS) which local authorities are requiredto use in order to access funds from the WSIP. There has been good take up of this system but for capitalexpenditure outside the WSIP, it is not a requirement to use this system.

Supervision, Control and Data Acquisition (SCADA) systems are implemented by each local authority asdeemed appropriate, but there is no common standard nationally. However, PwC understand that a commonprotocol for all SCADA systems exists. Telemetry and remote control systems are implemented on a case bycase basis.

A Performance Management System (PMS) was developed and implemented by the DECLG and subsequentlyweb enabled. All DBO contracts for treatment plants use this system and in some but not all cases, localauthorities use this system themselves for their treatment plants.

There is no common workflow or job management system in use in Ireland for water and wastewater services.The study did not find evidence of widespread use of advanced field force management systems used by thelocal authorities for water and wastewater services. Similarly there is no common standard for stock control orspares management. There are a number of systems in use for procurement and some areas use a common


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systems platform. However, the study did not find evidence that this has resulted in a national procurementstrategy for consumables.

The LGMA operates an imaging system developed in house called iDocs and this has been taken up by anumber of local authorities. It has been reported that this is used mainly in the planning process and is notdedicated to water and wastewater services. The LGMA also developed and implemented a system forcontrolling Road Openings and this has been widely taken up by local authorities.

It has been noted that there is a trend towards an increased use of shared services. The CORE system is perhapsthe first one to be implemented on a centrally hosted basis with common procedures throughout the adoptinglocal authorities. In that sense it may be a model for future implementation of shared services.

To implement a shared service requires a shared concept, generally developed by the LGMA and agreed with bythe CCMA so that a sufficient number of local authorities will take up and implement the system in question.

Overall, there are a number of high quality industry standard MIS applications in use in Local Government inIreland, particularly in relation to financial management and payroll/HRM. However, there is no centralstrategy towards a common suite of utility management systems dedicated for water and wastewater services.The increasing use of shared services is a collaborative approach between the LGMA and CCMA and isimplemented on a case by case basis. Individual local authorities have implemented some very good systemsbut they tend not to be integrated into a suite of utility management systems. The greater Dublin area wouldappear to have the greatest level of standardisation across MIS reflecting the higher population densities, thelevel of shared water and wastewater assets and their history of having been a single authority in the not toodistant past.

Current Initiatives

Domestic Water Metering and ChargingThe EU Programme of Financial Support for Ireland (28 July 2011) states that the ‘Government will prepareproposals .......with a view to start charging during the EU/IMF Programme period.’ The programme forgovernment 2011 -2016 states that ‘the objective is to install water meters in every household in Ireland andmove to a charging system that is based on use above the free allowance’. Since then the DECLG has beenworking on a cost benefit analysis of this objective, not finalised at the time of writing.

The cost of implementing a universal metering programme has been variously estimated to be in the region of€500 million18 and more recently (by the DECLG) in the order of €350-€400 million. Also, the point has beenmade that universal domestic metering is a theoretical rather than a practical proposition and it is quiteprobable that a minority of domestic customers will continue for the foreseeable future on an unmetered basis.The EU/IMF requirements do not mention metering.

If implemented as suggested, this will be a major undertaking and therefore has to be rigorously andtransparently justified. In addition, it is a large and complex project and does not stop once the meters havebeen installed. Meters have to be replaced/recalibrated on a regular basis depending on the chosentechnologies. There are major logistical issues and customer cooperation and awareness will be critical to thesuccess of the initiative. The complexity and size of the project will require a high level of project management,procurement skills and management focus.

Tariff design is an important element and is normally the purview of an economic regulator. As it is likely thatsome customers will not be metered, a tariff scheme incorporating unmetered supply will be required. Also, anyfree allowance element of a tariff structure will need to be reviewed in light of the overall tariff design in thecontext of the ‘fair funding model’ as suggested by the programme for government.

18 See for example The Irish Academy of Engineering and Engineers Ireland (2011) “Delivering Ireland’s Water services forthe 21

stCentury” page 13 “ a budget of €500m is required to achieve universal metering of the domestic sector.

International evidence suggests the cost is more likely to approach Euro1bn.”


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Greater Dublin Strategic Water Supply ProjectDublin City Council has been carrying out studies on behalf of the Dublin Region local authorities and theDECLG as to how best to provide drinking water for the region into the future. The Dublin Region (WaterSupply Area) includes the following local authority areas: Dublin City, Dún Laoghaire Rathdown, Fingal, SouthDublin, part of County Wicklow (including Bray Town Council), part of County Kildare, and part of CountyMeath.

It has been widely reported that the greater Dublin area has a low level of strategic reserve in terms of thebalance between supply and demand for potable water. At times of increased demand (e.g. during recent verycold winters when pipe bursts both on the network and on customers’ premises caused demand to spike) and attimes of constrained resources such as after a prolonged dry spell, these local authorities have had to introducewater demand reduction measures. These measures have included water cut-offs and reduced pressuremanagement schemes. The argument has been put forward that in order to address the current situation and toaddress future growth in demand, a strategic investment in water supply infrastructure is required. The currentproposals, developed after a long period of analysis and consultation, is to take water from the Shannon and todeliver it to the greater Dublin area via a strategic stored water resource in the midlands. The cost of this projecthas been estimated at more than €500 million over a period of approximately 5 years.

It is significant that the main sponsor for this project has been Dublin City Council even though the project hasmajor regional and even national significance. While the DECLG and other local authorities have participatedin the process, there is no central entity driving this project. This is not to suggest that the main players havebeen passive in the process – quite the contrary. However, the lack of a central champion to drive projects of amajor national or regional priority is an issue which could result in a delay to this or other similar projects.

If this project is to be implemented, the scale of the investment is of the order of magnitude of one year’s fullcapital investment in water and wastewater services in Ireland. While there are other examples of infrastructureand services being shared between local authorities, this initiative would be the largest inter-local authorityproject of its kind in Ireland.

Cost Reduction Initiatives and Shared ServicesThe Local Government Efficiency Review Group report covers all activities in local government services inIreland. It identified a number of areas of potential savings in water services as follows:

‘The total annual value of the savings identified above is €5 million in short to medium-term operational costs(with possible additional savings of €30 million in the long term).’

Its review was in the context of the current organisation of water services and did not include or precludefurther possible developments such as the implementation of Irish Water.

There are specific proposals in development with regards to shared services in respect of water services. Inparticular these refer to inspection, monitoring and enforcement as required by the River Basin ManagementPlans and the Water Framework Directive. Other wider shared services are also in evidence such as the COREhuman resource management system facilitated and implemented by the Local Government ManagementAgency. Other specific initiatives for shared services in water services would be collaborative between localauthorities, often facilitated by the LGMA and City and County Managers Association


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Indicators of PerformanceBased upon the 2010 unaudited AFS actuals, annual returns for the UK Water Companies (England and Wales -June Returns to Ofwat; Scottish Water - Annual Return to the Water Industry Commission; Northern IrelandWater - Annual Return to the Northern Ireland Authority for Utility Regulation), and Irishcustomer/connection number extrapolations made on foot of the 2010 preliminary census results, acomparison has been made against a number of other water utilities in the UK under the following headings:

Operational Expenditure; Debtor Collection %; Leakages %; Staff Numbers; Km piping; and Regulatory Capital Value.

UK Water Company Abbreviation

Anglian ANHWelsh Water WSHNorthumbrian (Essex & Suffolk) NESSevern Trent SVTSouth West SWTSouthern SRNThames TMSUnited Utilities NWTWessex WSXYorkshire YKYScottish Water SCOTTISHNorthern Ireland Water NI

Note: The Irish Water Services data used in these benchmarks is a consolidation of the 34 local authorities.Benchmarking against UK water companies can provide broad indicators of over or under performance. It isnot recommended however that these benchmarks should be used for comparisons at a local authority specificlevel given variations in size, population etc. between any one local authority and the UK comparators.

OPEX ComparisonWhile PwC have been advised that current operational expenditure is constrained by funding limitations, itwould nevertheless appear that the total current expenditure divided by the number of domestic and nondomestic connections, is significantly higher than the UK comparators. Taking Northern Ireland as an example,current OPEX spend per connected property in this State is circa €162 higher than in the equivalent cost inNorthern Ireland. Ireland is about average for the number of water connections per length of network,suggesting that population dispersal is not a major factor in the benchmarks mentioned above. Other factors,such as the very large number of water and wastewater plants in Ireland may be involved. One way or another,these comparisons would indicate that there are significant opportunities to reduce increase efficiency andreduce costs over time when Irish Water is established. A national water company which has control of bothrevenue and expenditures (and consequently can leverage centralised purchasing, standardisedtechnology/equipment, multi-year framework contracts, shared services etc.) would be in a much strongerposition to drive these efficiencies.


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Figure 22: OPEX per connected property (domestic & non domestic) (Euro)

Note: The number of connected properties assumed in the above chart was 1.52m (which was derived from (a) the number of non-vacant

dwellings per the 2011 census multiplied by an extrapolation of the number of houses connected to the public mains per the 2006 census

plus (b) 200,000 representing the number of non domestic customer meters.) This number would include local authority owned flat

complexes.

Figure 23: Water OPEX per connection (Euro)

Note: The number of Water connections assumed in the above chart was 1.52m (see above for further detail)

Figure 24: Sewerage OPEX per connection (Euro)

Note: The number of sewerage customers assumed in the above chart was 1.29m (which was derived from (a) the number of non-vacant

dwellings per the 2011 census multiplied by an extrapolation of the number of houses connected to public waste schemes per the 2006

census plus (2) the number of non domestic customers, 68% of whom were assumed to have a waste connection.)

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Debtor Collection ComparisonDebtors are not currently aged by the local authorities and consequently while the overall collection rate for nondomestics as identified within the AFS was 52% (see chart below for individual authority collection rates in2010), this collection rate is a simple calculation reflecting the value actually collected in the year divided byvalue due to be collected (current plus arrears). Consequently it is not clear from the information currentlyavailable how much of the collections in any one year relates to prior year balances versus current year debts.

Figure 25: Commercial Collection Rates in Irl (2010)

Note: Sourced from 2010 consolidated unaudited AFS for Water Services.

Accepting this comparison deficiency it is still worth highlighting that the combined domestic and non domesticcollection rate across each of the UK comparison companies were in excess of 70% in 2009-10, as against the2010 non domestic collection rate of 52% in Ireland. Consequently, there would appear to be indicative supportsuggesting that having a single entity which is responsible for invoicing and collection should result in improveddebtor collection rates, whether that be via the investment or utility model.

Figure 26: Collection Rates

Note: The ROI collection rate has been sourced from the collated 2010 unaudited AFS results and only relates to non domestics, as against

the comparator data which combines domestic and non domestic.

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Leakages ComparisonFigure 27 below reflects water leakage estimates for the various local authorities compared against their UKcounterparts. Again there are clear differences evident, with the % leakage in the UK being less than 30%, andthe percentage leakage in Ireland across the vast majority of the authorities ranging between 30%-60% (6authorities were below 30%). The average leakage rate in Ireland across all the authorities was 41% (this wouldbe expected to reduce as Phase III of the Water Conservation Programme is rolled out).

Figure 27: Percentage Leakage

Clearly one of the key objectives of Irish Water will be to address this issue and it is likely that either theInvestment or Public Utility models would be effective in this regard.

Staffing ComparisonWhile human resource issues are covered in more detail in the staffing section above, the 2011 direct andindirect staffing numbers for Ireland have been compared against the UK Water Companies (2009-10). Indirectstaff refers to DBOs and resident engineers not directly employed by the local authorities.

As can be seen below the Irish local authorities have a higher percentage of direct employees than most of theother water companies (with the exception of Northern Ireland), who have adopted a flexible operating modelleveraging external service providers. The total number of employees per thousand customers served is 1.21WTE for Ireland (see Figure 29 below), which is circa 25% above the median of UK Water Companies (exclSVT) at 0.97 WTE (i.e. TMS). In addition, the number of total employees per water connection in Ireland ishigher than in most UK Water Companies (see Figure 30 below).

This would indicate that the current staffing levels are well above current UK benchmarks. Ireland is aboutaverage for the number of water connections per length of network, suggesting that other factors, such as thevery large number of water and sources in Ireland may be involved.

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Figure 28: Number of Direct & Indirect Staff (exc. SVT)

Note: The ROI Direct and Indirect WTE numbers were sourced from the Office for Local Authority Management Survey, July 2011. In

addition, it has been assumed that 16% of total staff will be Corporate (Report of the Local Government Efficiency Review Report 2010

(pg 63) and consequently the survey numbers have been grossed up in this amount for direct staff.

Figure 29: Total Employees per thousand customers served (exc. SVT)

Note: See above for further details in relation to the customer numbers which have been assumed in these charts. Irl staff numbers are

WTE.

Figure 30: Total number of direct and indirect employees per thousand water connections (domestic plus non- domestic)

(exc. SVT)

Note: The ROI Direct and Indirect WTE numbers were sourced from the Office for Local Authority Management Survey, July 2011. Thenumber of properties with a water connection assumed in the above chart was 1.52m (which was derived from (a) the number of non-vacant

dwellings per the 2011 census multiplied by an extrapolation of the number of houses connected to the public mains per the 2006 censusplus (b) 200,000 representing the number of non domestic customer meters.)

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Piping ComparisonFigure 31 below has been prepared based upon information received from DECLG suggesting there are circa25,000 km of water mains in Ireland. A comparative figure for sewerage cannot be provided as the km ofsewers nationally is not reliably known.

The results of this comparison indicate that Ireland at 16.4km is currently below the UK average of 17.66km perthousand connections.

Figure 31: km water pipe per thousand water connection

ConclusionWhen the 2010 data for the local authorities is compared against the UK Water Companies, the results indicatethat the current model for providing water services has not achieved the potential levels of efficiency and servicedelivery for customers evidenced by the data from UK water companies.

Operating expenditure per connection place Ireland as the most expensive to operate versus NorthernIreland, Scotland and England & Wales. This suggests that even when compared to regions in countrieswith a population dispersal pattern similar to Ireland’s, that our operating expenditure is high. As partof this study PwC expected to be able to undertake a more detailed comparison of cost and performancedata for the Irish industry, however the information for the sector is not collected in a manner thatmakes a more granular comparison feasible at this stage – the fact that this data is not readilyaccessible for analysis indicates that financial comparison of performance which has been a key driverof efficiency in the UK has not been a priority for local authorities to date.

Collection rates for water charges are by far the lowest in Ireland as against all the comparators.International experiences demonstrates that improved collection rates also tend to improve the abilityof the utility to access funding in the markets as lenders and finance providers can see the utility beingbetter positioned to fund its activities.

The average leakage rate of 41% in Ireland is higher than any of the comparators. While individualcouncils in Ireland compare more favourably with the average, there is a wide variation in performanceacross the country.

A comparison of employee numbers is made difficult by the different business models used by the waterservice organisations included in the comparison, particularly when considering the scope of servicesand the use of outsourcing. In general the other comparators have a greater scope of service (e.g.customer service and billing for domestic customers) but also make greater use of outsourcing. Giventhese limitations it can be concluded from the data available that the total numbers employed in theIrish Water sector are significantly above their comparators in the UK and that the ratio of direct tototal staff is one of the highest.

The number of customers per length of network is about average suggesting that the dispersal ofpopulation in Ireland does not represent a valid reason for a higher operating cost.

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Over time these benchmarks would indicate that significant operational savings could be made by a newnational water company, debtor collection rates should improve and the percentage leakage levels shoulddecrease provided appropriate investments are made.

While PwC recognise the high level nature of the benchmarking that has been presented here, it is clear that anew National water company will have a gap to close in terms of cost efficiency relative to its UK counterparts.Should it achieve the benchmark levels set by the UK water companies, the overall funding requirement forshould decline.

Summary Assessment of the Current Provision of Waterand Wastewater ServicesThe current model for water service provision has been operating under significant constraints. It wouldappear that low levels of funding and an inability to access alternative sources of funding in the past haveresulted in a backlog of investment and maintenance in the water services infrastructure.

Nevertheless, significant positive views of the current model came across very clearly in our discussions withthe various stakeholders:

The value of having a local body accountable to the local community for the provision of water services; The operational effectiveness of the current locally based maintenance teams with water engineers who

“know their assets” and the associated asset maintenance regimes; and The ability to draw on the wider resources of the local authorities in times of great need for water

services, such as occurred during the cold weather events in the last two winters.

The key findings from our assessment of the current environment are set out overleaf.


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Key Findings on Current Provision of Water and WastewaterServices

Leadership and coordination of water services nationally is fragmented with a range of actors able to influence

and control directions, including the 34 local authorities (both the professional staff and the councillors), the

DECLG, , the EPA, , the CCMA, the NFGWS, and others;

The EPA represents a classic structure for technical and environmental regulation of water and wastewater

services. However, there is no independent regulation of prices for non-domestic water customers;

Local authorities are unable to achieve benefits of scale as they are generally too small. While there would be

potential in the greater Dublin region for more shared resources, this opportunity is limited in the rest of the

country;

Moves towards increased shared services are welcome but those which are planned are limited to inspection,

monitoring and enforcement (it is not clear whether local authorities can delegate this entirely to a regional

structure given the legal liability that would remain with the officers of the local authority). The implementation of

shared services and the degree of integration is driven organically and collaboratively with implications for the

speed of implementation and degree of coverage of the associated MIS;

Unaccounted for water is a significant problem in the water distribution system in Ireland with the average level

estimated at more than 41% which is very high by international standards. UFW is also highly variable across the

country;

The OPEX expenditure for water services in Ireland is very high compared with benchmarks for UK water

companies, when measured against cost per connection and per customer;

The current funding model for water services is not sustainable. It is clear that the direct income currently received

by the local authorities is not sufficient to meet the operational expenditures of the authorities and that alternate

income sources within the local authorities have been used to fund the gap;

Although not possible to quantify, it is apparent that there is a significant compliance gap in relation to the

provisions of the Water Framework Directive which may require several hundred million euro of additional

capital investment annually in the years to 2027 in addition to the approximately €600m CAPEX currently

invested annually;

Collection levels for the current non-domestic charges, at 52% are very low compared to UK water companies. It

may also be the case that full cost recovery for non-domestic water customers is not being achieved in setting these

water charges. Both of these issues contribute to the funding gap referred to above;

Overall staffing levels, although difficult to determine precisely, are significantly higher than benchmark

equivalents in UK water companies when viewed against the number of employees per customer served and per

number of water connections. It should be noted that there is considerable outsourcing of activities in the UK and

a range of functions carried out in the UK not carried out in Ireland (e.g. customer service and billing for domestic

customers). For these reasons, detailed like for like comparisons are difficult;

There is no central strategy towards a common or national suite of IT systems dedicated for water and

wastewater services. Individual local authorities have implemented some very good systems but they tend not be

integrated into a suite of utility management systems. Instead, local authorities’ systems serve the full range of

services they provide and do not achieve the level of integration/specialisation as would be seen in a large well run

modern dedicated water and wastewater utility;

There is no central strategy towards a common or national suite of IT systems dedicated for water and

wastewater services. Individual local authorities have implemented some very good systems but they tend not be

integrated into a suite of utility management systems. Instead, local authorities’ systems serve the full range of

services they provide and do not achieve the level of integration/specialisation as would be seen in a large well run

modern dedicated water and wastewater utility; and

While Councillors provide a valuable service, the voice of the customer is not represented in a formal structure

within the provision of water services.


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The current model for water services provision faces a number of significant challenges, largely as a result of thediffuse and fragmented nature of the service:

Relative difficultly in development of strategically important national water services projects versus thedevelopment of local projects;

Difficulty in implementing river basin management within the local authority structure (river basinboundaries are rarely the same as local authority boundaries);

Significant overhead in the management of water services, given the number of authorities and the smallscale of operations in many of them. This issue is acknowledged by the local authorities who have put inplace some initiatives to reduce/control costs through shared services provision;

Inability to rationalise the use of water sources as they are largely developed on a local authority by localauthority basis; and

Difficulty in promoting projects of a national or regional priority e.g. strategic water resources andmetering.

PwC have prepared an analysis of the Strengths Weaknesses, Opportunities and Threats (SWOT) of the currentenvironment for water service provision. This is set out overleaf. This analysis draws extensively on inputsfrom stakeholders consulted during the study.


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Strengths Weaknesses

Services are managed by bodies that are close to

customers and are democratically elected. Water

sector development can be consistent with Local

Authority Development Plans);

An experienced local workforce familiar with the

assets and the operating conditions;

Central co-ordination and prioritisation of major

project capital expenditure plans;

Track record of successful delivery of capital projects

and providing continuity of service, delivering to a

growing population;

Clear accountability for water and wastewater quality;

Ability to mobilise local resources at times of need

(e.g. exceptionally cold winters);

A significant majority of local authorities use the same

financial system which supports consistent

management reporting.

Strategic planning (as envisaged by the 2007 Act) has not been

implemented;

Duplication of management cost across the large number of local

authorities. Most authorities are below the minimum scale

required for the economic provision of water services;

Long term underinvestment in assets as a result of limited available

funding;

Variability in the service provided to water services customers

across Ireland;

Absence of consistent policies, processes and standards including

standards for customer services;

Local authority boundaries do not reflect river basins so integrated

river basin management is difficult to implement;

Limited asset data and asset registers to support strategic planning;

Limited transparency of funding sources;

Low recovery rates of non-domestic water charges and significant

arrears;

Current funding regime exposed to variations in development levy

income;

Limited ability to access alternative sources of funding for water

services (e.g. capital markets);

Apart from representation provided by Councillors, there is no

statutory “voice of the customer”, or right of appeal;

Absence of/ inconsistent application of industry standard utility IT

e.g. workflow management, GIS, CRM etc;

Variable performance in compliance with operational standards at

waste water treatment plants.

Opportunities Threats

Cost reduction through exploitation of economies of

scale, procurement efficiencies for a national

programme of work, changes in work practices, field

force management, multi-skilling, energy

management, fleet management, water network

pressure management, rationalisation of water

sources, standardisation of technology;

Improved collection of non-domestic tariffs;

Introduction of domestic charges for water services;

Rationalisation within existing structure (shared

services, river basin management, technology / MIS);

Improve staff utilisation by operating across local

authority boundaries;

Standardisation of technology in treatment plants;

Improve customer service to international standards.

Current government funding position may limit ability to access

other funding opportunities for water services. Inability to provide

matching funds for projects;

Backlog of investment can result in greater levels of asset failures

and quality compliance issues ;

The introduction of customer charging is likely to increase

customer expectations of quality of service while delivery of

improved quality of service may not necessarily be deliverable in

the near term;

Sufficiency of water resources to supply the Greater Dublin area;

specific large projects for water supply in Greater Dublin and water

metering;

Outstanding investment for wastewater treatment required for

urban areas and for smaller rural and coastal locations;

Major investment in water and wastewater infrastructure required

to meet WFD and normal asset management requirements;

Much of the know-how for capital project delivery is with

contractors and consultants. Important to ensure retention and

transfer of this knowledge in any changes proposed;

Under current organisational arrangements, there is a risk of

failure to achieve environmental objectives for water quality as set

out in the river basin management plans.

Figure 32: SWOT of the current environment for water service provision


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Overall, it is our assessment that the current local authority based service provision model is highly unlikely toachieve the efficiencies and quality of service that have been achieved elsewhere in the water sector throughamalgamations. The local authorities have investigated opportunities for co-ordinated action. However thelikely efficiencies suggested are small compared with the nearly 40% reduction in operating costs seen inScotland post amalgamation. Fragmented local authority-based provision will perpetuate the management ofsub scale water providers, inability to secure large scale procurement efficiencies and the ability to deliverefficiency through planning field work over a larger customer base/geographical area.

Efficiency Benefits of ConsolidationExperience in water sector reorganisations globally (see Section 4) suggests that the creation of largerorganisations or single utilities can give rise to a wide range of efficiency benefits, in particular:

More efficient use of water resources. At present in Ireland many water sources are developed to providewater needs within local authority boundaries and as a result sources that could serve customers acrosslocal authority boundaries are not exploited for the wider population. Typically this approach will lead to asub optimal usage of water resources when compared with resources usage planning and exploitation on ariver basin or national level. Optimised resources usage will tend to reduce operating costs (for exampleelectricity usage in pumping water around the system as it can be sourced more easily) and in the longerterm the capital costs will be reduced as a result of more efficient resource development. Given the currentsituation in Ireland, efficient use of existing resources is an important priority;

Optimisation of the use of water and wastewater treatment facilities. As with water resources, consideringhow water and wastewater are treated at a national level and planning the use of treatment works at thatlevel rather than at a local authority level could lead to different usage patterns for the works, saving onenergy costs and possibly in the longer term saving on capital expenditure if better treatment works usagecan delay future investment that would be required to provide more treatment capacity;

Greater opportunity to take advantage of procurement efficiencies. An important benefit of creating alarger water company will be its ability to achieve procurement efficiencies. The larger company will have agreater workload and requirements for materials than any single local authority and would be better placedin the markets to secure cost reductions for scale orders of plant and equipment;

More effective use of field operatives. Larger water organisations have the opportunity to better manageand deploy field staff. Operating over a broader service area both geographically and in terms of customernumbers means that the field force can be more fully utilised. Also a larger water organisation is able tosupport the cost for investing in scheduling and dispatch systems which can be used to optimise thedeployment of the field force in delivering further efficiencies;

Ability to invest in systems to support the more efficient use of resources. Many larger water organisationshave invested in information technology to deliver improved business performance. Typically thisinvestment will be in work management systems, business performance management systems and SCADAand automated controls systems. These systems investments tend to be large and require a largerorganisation to fund the investment and secure the benefits over a larger portfolio of assets and operations;

Reduction in overheads. The consolidation of head office functions which are duplicated in the currentlocal authority model is a clear benefit of bringing water services providers together;

Increased specialisation in all aspects of operation and capital programming. A typical local authoritysenior engineer may build one medium or large water treatment plant in his career. His equivalent in a UKwater company might be managing four such programmes simultaneously;

Less reliance on consultants with increased core skills due to scale;

Economies of scale in billing and collection.


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4.Overview of RelevantModels from otherJurisdictions


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4. Overview of Relevant Modelsfrom other Jurisdictions

IntroductionAs part of this study PwC have undertaken a high level analysis of the organisational structures for water andsewerage companies around the world. The aim of the review was to assess whether international experiencewill allow us to identify any useful models or precedents for the organisation of Irish Water.

In this section PwC summarise some of the key findings from our review of other models used internationallyfor the provision of water services.

Our choice of countries has been based on presenting a wide selection of experiences from around the world. Itis highly selective and is not intended to be a comprehensive review. Our aim was to investigate thecharacteristics of a reasonable sample of countries’ experience.

In choosing countries to consider PwC have largely focussed on water sector organisational models:

From elsewhere within the European Union; That provide water services in environments with similar geographical/operating environment

challenges to those that would be faced by Irish Water; Have faced similar changes in their organisational structure to those proposed for Irish Water at some

stage in their evolution; and Where some of the specific proposals for Ireland have also been applied in that model (for example roll

out of metering, proposals for inclusion of free allowances in tariff structures etc).

Based on these criteria the countries PwC have considered are shown in Figure 33 below.

Country Rationale for inclusion

Scotland Public sector owned national supplier of water and sewerage services, with a historyof amalgamations of local authority provided water services, most recently with themerger of three local authority providers into Scottish Water in 2002.

England and Wales Private sector owned and maintained water service with a past history of sectorreorganisation while in the public sector. Useful experiences of the introduction ofeconomic regulation, the development of river basin management and alsoinnovative financing structures for water service provision.

Wales for specific consideration of ownership structures that focus on mutualownership of the assets by the customers of the business.

Northern Ireland Public sector owned national water utility on the island of Ireland, a recent exampleof water sector reform with attempted introduction of customer charging andeconomic regulation.

Berlinwasser Central European experience of reorganisation and headcount reduction in theprovision of water services.

French municipalcontracting structures

To demonstrate the range of approaches to private sector outsourcing thatmunicipalities have used in the French model.

Netherlands Ministry ofRoads and Water

As an example of where major roads investment and water sector investments aremanaged together by a single State entity.

South Africa(Johannesburg Water)

An example of where free allowances for water services are also made forcustomers.

Belgium (Flanders) An example of the model for wastewater service provision on an aggregated


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Country Rationale for inclusion

Aquafin regional basis.

Belgium (Flanders)Pidpa

An example of a water services system that make provision for “free allowances” forwater to customers. This is also a company organised along intercommunal lines.

New South Wales Water As an example of a sector with significant fragmentation of provision in rural NewSouth Wales and is considering how the sector should be reorganised to improveefficiency.

Sofia Water PPPstructure

To demonstrate another model for water services provision.

Denmark An example of a country where all water services are provided by intercommunalcompanies

Figure 33: Countries chosen as international comparators for Irish Water

The country reviews are provided in Appendix 8 to this report. The country reviews in the appendix take twoforms: for the UK water companies PwC have provided details against each of the key activities of a watercompany19 - there is a significant amount of detail available about these companies and this is captured insummary form in the appendix.

For the other case studies PwC have focused on the aspects of that case study that are relevant to the structureof Irish Water. The remainder of this section of our report describes key findings form the country reviews ona summary basis.

Key Observations

Much of water services provision is based on municipalarrangements...Our review demonstrates that there is a mix of models for ownership and delivery of water services across oursample of countries. There is a mixture of public and private owned and operated models and also whether theowner/operator is national or regional.

There remain models of municipal provision of water services (e.g. France, Belgium, Netherlands, Italy and theUS). At the same time, there is also national provision of water services in Scotland and Northern Ireland andlarge regional statutory water companies in England & Wales several of which have service populations similarto or greater than Ireland’s.

In recent years the municipal models for the provision of services have however faced reform to address someof the perceived limitations of the models. Specific limitations are felt to be:

That municipal activities in the water sector do not exploit the economies of scale believed to exist in thesector, so municipal provision tends to be sub scale and therefore higher cost to users; and

Even while the municipality may remain responsible for delivery the expertise for water servicesprovision/customer management/ asset management etc are well developed in the private sector so thereis a trend towards outsourcing of activities.

...But there is a significant move towards aggregationThere is significant evidence of the benefits of bringing together local authority provision of water services.This approach is actively being considered currently in New South Wales as a method for cascading bestpractice across the industry. It is also the case throughout the near continent of Europe that where municipalmodels have been in existence since the 1800’s there has been considerable movement towards the integrationof contiguous municipal water services to achieve economies of scale. Legal structures exist to facilitate this

19Namely: Legislative arrangements, Economic and Funding Situation, Regulation, Leadership and coordination,Operations, Asset Management and Capital Programme, Customer Service and billing, Finance & Funding


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cooperation in countries such as Germany, Belgium and France and are frequently used. Pidpa and AntwerpWater Works referred to in the case studies are examples of municipal cooperation to achieve scale in theprovision of water services. It is also a principle in those countries that municipalities are free to delegate theprovision of water services for instance to large private companies which themselves might bring some benefitsof scale. This is common in France where a small number of large water service providers dominate the market.

When Scottish Water was created in 2002 from three regional authorities it was required to demonstratesignificant efficiencies when compared with the regional authority based provision it replaced – it was requiredto demonstrate operating cost efficiencies of 40% between 2002 and 2006 and to deliver £30million of mergersavings on a £1bn turnover business20. In England and Wales the key driver behind the reorganisation of the

sector in 1973 was to support the effective development of integrated river basin management. The evolution ofthe number of bodies involved in water service provision in England and Wales is shown in Figure 34 below.

1956 1970

Local authorities

County Borough councils 53 29

Borough councils 177 17

Urban District Councils 295 9

Rural District Councils 358 9

Sub total 883 64

Joint Boards 42 101

Statutory Companies 90 33

Misc 15 -

TOTAL 1,030 198

Figure 34: Water undertakings in England and Wales 1956 to 1970

Currently (post privatisation and some mergers between statutory water companies) there are 20 maincompanies providing water services in England and Wales.

Aggregation has been achieved through three main mechanisms:

Creation of single utilities: as in Scotland, England and Wales and Northern Ireland; By municipalities combining their activities: as with Berlinwasser and the Intercommunal Model in

Flanders; and By outsourcing arrangements that allow international utility services companies to provide services and

aggregate operations. Models exist in many European countries to allow municipalities to coalesce theirwater and/or wastewater operations to achieve some economy of scale. This happens on a cooperativeand organic basis.eg Belgium, France etc.

While water service provision is a public responsibility there can beroles for private sector expertiseThere is a market for the outsourced provision of many of the activities undertaken by water companies. Privatesector contractors are willing to take on a range of activities which is why PPP contracts similar to the ones inSofia have been successfully let. The Irish DBO contracts, also demonstrate the applicability of private sectoroutsourcing for specific activities in the Irish context. There is a parallel in Scotland to the use of DBO’salthough in Scotland the main comparable model has been DBFO (Design Build Finance Operate).

In Scotland and Northern Ireland, both of which are public sector owned national utilities, much of the capitalprogramme delivery is outsourced to the private sector (as it is in this State). Scottish Water developed theScottish Water Solutions joint venture with United Utilities and others providers to ensure Scottish Waterretained access to the skills and expertise and also number of staff required to deliver its major capital worksprogramme

20 Dr John Hargreaves “ Organisational Change & the Transformation of Performance at Scottish Water”


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When Northern Ireland Water was initially considering the introduction of customer charging, it procured acustomer service outsourced provider (the Crystal alliance) to develop and run billing systems and customercontact arrangements. One of the main reasons for this outsourcing arrangement was that Northern IrelandWater did not have these skills in house not having undertaken billing previously.

A mix of the municipal model with private sector involvement is also a feature of the European approach towater services provision – Berlinwasser is in part owned by RPWC and Veolia with the municipal governmentowning the majority of the company and in much of France water services are procured from the private sectorvia a range of contracting structures. In Flanders the inter-communal Aquafin company has also made use ofinternational private sector partners in the past to ensure access to appropriate skills.

There is limited experience of water services being combined withother utilities or roads provisionIn the period post the privatisation of the England and Wales water companies, some companies started toadopt a multi-utility strategy in which the water company would seek to provide water and either gas orelectricity (or both) services. PwC make this observation in the context of the Department’s requirement of ourstudy to consider the role of other state agencies in the provision of water services.

The merger of water and electricity distribution in the North West of England created United Utilities and theHyder Group in Wales provided water and electricity distribution services. The jointly owned Utility Model isno longer used in the UK. The multi utilities have divested and have become focussed water services companieslargely as investors have tended to value the focussed single utility more highly than the multi utility. In someGerman cities there are city municipal services companies which can encompass water (but not wastewater),gas, electricity, transport and even kindergartens. For the multi-utility element of these companies the focus ison the local networks and they may be bulk purchasers of water, gas and electricity.

In the Netherlands the Ministry of Transport, Public works and Water management (Rijkswaterstaat) combinesthe strategic planning of the provision of roads with water services. This was driven largely by the need postwar for significant road construction and repair and the water service providers having a good track record ofdelivering major infrastructure projects. The Rijkswaterstaat also works with regional water companies todeliver water services. This model is the closest existing comparator to the Investment model proposed forIrish Water that PwC have found. However the Rijkswaterstaat does not have the duties of customer billing andmetering that are proposed for the investment model – the Ministry is funded through the public sector purse.

Sector governance and regulation has been an important factor insuccessful water service provisionThe two basic types of regulation of the pricing for water services are either by contract or by an independentstatutory regulator of price.

The UK models for water service provision have made extensive use of economic regulation and incentivisingon the companies to improve service and ensure efficient costs. The England and Wales companies are subjectto economic regulation by Ofwat, In Northern Ireland the combined utility regulator NIAUR21 is responsible for

regulation and the Water Industry Commission is responsible for regulating Scottish Water. In these modelsthere are separated responsibilities for environmental regulation and abstraction management (theEnvironment Agency, SEPA, and Northern Ireland Environment Agency.) In addition the models make use ofcustomer representation bodies (such as Watervoice in England and Wales) to counteract some of the concernsregarding quality of service etc and to ensure the customer views are represented.

Economic regulators are not widely used in the sector internationally. However the roles of economicregulation are often performed by contractual arrangements between the water service provider and thelocation government authority. In a number of countries increasing emphasis is being placed on water sectorregulation. For example in the Middle East, water sector regulation has been developed to monitor theefficiency and quality of delivery. The environmental regulation roles are undertaken by a variety of bodieselsewhere.

21 Northern Ireland authority for Utility Regulation


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‘Regulation by contract’ means that in the basic contract between the water services entity and (typically) themunicipality or association of municipalities, the pricing formula is set out including any periodic reviews. Thisthen is implemented by the parties and in the case of dispute may be referred to dispute resolution or thecourts. Berlinwasser has a basic contract with the city of Berlin (and had one even prior to part privatisation)which sets out the pricing policies but this is open to challenge in the courts, with the municipal auditor andwith the competition authority. The French PPP models similarly have pricing formulae depending on whichcontract model is used and this price is rebased every time the contract is re-tendered. As the French contractstend to be rather long duration there can be periodic renegotiation of prices depending on changedcircumstances.

The use of an Environmental Protection Agency is rather standard although the range of powers and duties mayvary from one jurisdiction to another.

Since privatisation in England and Wales the combination of economic regulation and efficiency by thecompanies has lead to a significant reduction in operating costs as shown in Figure 35 below.

Figure 35: Trends in operating costs for the England and Wales water companies

This has been combined with a focus on customer service as well. Ofwat monitors and incentivises companiesaround a wide range of customer service metrics including:

Risk of low water pressure; Unplanned interruptions; Drinking water quality based on Drinking Water Inspectorate’s Operational Performance Index (OPI); Properties at risk of sewer flooding; Flooding incidents; Response to billing contacts; Response to written complaints; Billing of metered customers; Telephone contact; Assessed customer service; Sewage treatment works consent compliance; Satisfactory sludge disposal;


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Category 1 & 2 pollution incidents (sewage); Category 3 pollution incidents (sewage); Category 1 & 2 pollution incidents (water); Water restrictions; and Leakage.

These are combined into a weighted index of performance for the companies called the overall performanceindex (OPA). The performance of the companies at each price review (PR) is summarised in the figure below.What is clear from the graph is the significant improvements in OPA scores and therefore quality of service tocustomers between the 1999 price review and 2004 with water and sewerage companies moving from being inthe range of 50%-90% compliant with OPA to all being above 80%.

Figure 36: England and Wales water companies, overall performance assessment

There are some limited examples of the use of free allowances ofwaterIn Johannesburg there is provision for a free allowance for water up to 25 litres per person per day. This isregulated through the use of prepayment water meters and flow restrictors, reflecting the applicability of thismodel to a situation more representative of a developing country solution (it tends to be applied more in areaswhere there is a high level of poverty). The free allowance is funded by increased charges levied onbusiness/commercial customers and also on higher consumption domestic customers.

In Flanders, Pidpa the company that serves 65 municipalities with water services also operates a free allowancescheme of c41 litres per person a day. The scheme is funded through charges to other customers. Wastewater


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does not have a free allowance. There is however a standing charge for water. Numbers resident at a propertyare verified annually by reference to the register of identity cards (which would not be an option in Ireland).

Implications for Irish Water

Based on the high level review of international experience PwC draw the following conclusions:

There is a range of models for providing water services some of which are based on the Utility Modeland others which are more focussed on municipal provision. There is little evidence of arrangementssimilar to the Agency Model being used in the water sector.

There is fragmentation in the provision of water services in particular in continental Europe.However, the fragmented nature of water service provision is being addressed in most countries by theamalgamation of municipal water services in contiguous municipalities, and by the creation of utilitiesor intercommunal structures. Much of the European Academic work into economics of scale in thewater sector identifies economies of scale22. Creation of larger bodies for the provision of water

services, often outside of municipal control, is a key trend in the industry such as Aquafin in Belgiumbeing a government owned company delivering wastewater treatment and trunk sewerage;

Combining water services provision with other infrastructure provision or utility services has becomemore uncommon as there has been less emphasis on multi Utility Models. The main multi-utilitycompanies that were recreated in the UK (Hyder and United Utilities) have been broken up in recentyears so that the management teams can focus on specific activities e.g. water or electricity. AlthoughGermany has multi-utility city owned companies including water services, the only one with apopulation similar to Ireland’s (Berlin) has a dedicated integrated water and wastewater company andnot a multi-utility. Investors have tended to value the focussed single utility more highly than the multiutility;

In the Netherlands major projects for road and water are under the control of a Government Agencybut this is not a combined water and roads services organisation;

Where single function utilities have been created in England, Wales and Scotland, there has been goodperformance in terms of cost reduction and also an improvement to the quality of service provided tocustomers. This has been in part driven by regulation that has focussed on economic efficiency,environmental preservation and ensuring good outcomes for customers;

Strong sector governance and regulation has been an important part of environmental managementand economic regulation has been balanced with approaches to customer representation. Where largerregional municipal water service organisations have been set up, they tend to have an explicit contractfor services with the municipality(ies) where pricing formulae are set out along with the potential forperiodic reviews. The UK makes use of a statutory regulator for water services pricing as do a numberof other countries, particularly those implementing sector reform e.g. the Gulf States; and

As Berlinwasser shows, it is important to ensure that the utility is appropriately sized in terms ofnumber and skills of staff to undertake the work required – this avoids inefficiency and painful ongoingrestructuring once the organisation is created. Aquafin also demonstrates the benefits of right sizingthe organisation from the outset.

22 See Table 4 in “Quo Vardis Efficiency Analysis in Water Distribution – A Comparative literature review” by Hirschhausen,et al. 2009


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5.Options for Reform


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5. Options for Reform

Overview of OptionsThe Terms of Reference (ToR) for this study set out two principal options for consideration in examining theoptimal organisational form for water services delivery in Ireland. PwC have allocated the expressions AgencyModel and Public Utility Model to these definitions as in the following table.

Model Description in the Terms of Reference

AgencyModel

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

PublicUtilityModel

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

Figure 37: Agency and Public Utility Models

The Terms of Reference also required consideration of variants of the above two models. Two potential variantswere identified:

The Minimal Change Model; and The Intercommunal Model.

All four models are described below.

It should be noted that these definitions refer to the Target Operating Models for these options, whichcould take some years to achieve. It should be assumed that interim arrangements would be required for theperiod of transition to the Target Operating Model in each scenario.


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Agency ModelThe diagram below provides an overview of the Agency Model. A more detailed definition is set out atAppendix 8.

Figure 38: Agency Model

In the Agency Model, Irish Water would be allocated full responsibility by statute for the provision of water andwastewater services and would therefore become the Water Services Authority for the full country. Localauthorities would become agents of Irish Water for operation and maintenance of the water services and forsmall capital projects in their regions. This agency relationship would be provided for in statute. The detailedterms and conditions of agency arrangements would be settled following consultation between Irish Water andlocal authorities.

Some key executive roles currently undertaken (or planned to be undertaken) by the DECLG would transfer toIrish Water (for example strategic planning for the sector). The DECLG would retain policy functions. The localauthorities would continue to carry out the day to day operations under agency arrangements as describedabove.

With the implementation of a national domestic charging system, it would be necessary to establish aneconomic regulator for water pricing and consumer protection, to reflect the natural monopoly status of waterservices, to ensure high standards of performance and to ensure that consumer needs are met. PwC understandthat the economic regulator would be the CER, and the regulated entity would be Irish Water (and not the 34local authorities). The economic regulator would set the parameters using its price setting powers to agree therolling capital programme to allow Irish Water to achieve the required levels of service. Affordability would be akey criterion in this evaluation, particularly if there is a continuing contribution from the Exchequer to IrishWater.

The legal framework for the Agency Model would be significantly different from today’s institutionalframework. A Water Services Amendment Act would be required. Irish Water would by statute be allocated fullresponsibility for all aspects of water services planning and delivery, at national, regional and local levels. The


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role of local authorities in water service provision acting as agents of Irish Water would be provided for inlegislation.

Leadership and control of water service provision would be the responsibility of Irish Water. Local authoritieswould be free to organise local level activities as they chose within the constraints of their agency arrangementswith Irish Water. This could involve, for example, groups of local authorities working together using RiverBasis Areas as the basic unit of operations. Local authorities would deliver water services as agents of IrishWater, exercise executive control over their operations staff and would execute as agents of Irish Water forcapital projects of a value below a certain threshold to be defined. Irish Water would exercise a supervision andcontrol role over the performance of the local authorities through the agency arrangements which would specifythe services and service quality levels to be provided by the local authority and the fees to be paid by Irish Waterto the local authority concerned. Irish Water would take a national leadership role and have implementationresponsibility in strategic planning, billing and collection, water metering and execution of larger capitalprojects with a value over a certain threshold to be defined of a national or regional significance. The WaterServices Investment Plan and the Rural Water Programme would be subsumed into Irish Water. Execution ofthe large scale projects under the capital programme would be managed by Irish Water operating from sharedregional offices staffed by engineers from the various local authorities.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent asignificant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with GroupWater Schemes would not novate to Irish Water – in this scenario it is assumed they would remain with theGWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

The remaining operations functions including other wastewater treatment works, water treatment, waternetworks, wastewater networks, sludge management and other services would be carried out by the localauthorities acting as agents of Irish Water. The agency arrangements could be viewed as output based fundingmodels for operations, where funding would be on the basis of service levels and quality targets achieved. Thisapproach would focus management attention on ensuring continuous improvement.

Irish Water would become a single point of contact for customer service and billing. Technical queries would behandled by Irish Water but passed to the relevant local authority for the provision of any related technical ormaintenance services. This process would need to be supported by the integration of local authoritymanagement information systems under the control of Irish Water.

Irish Water would implement any domestic metering programme and would take over the non-domesticmetering programme.

The local authorities would retain their own financial management and human resource management systemsand keep detailed accounts of expenditure for water services in order to report to Irish Water. In addition, IrishWater would have its own financial management and human resource management systems for its staff andexpenditures and to oversee the expenditure by local authorities. Local authorities would not continue to havetreasury functions for water services as this function would reside with Irish Water.

Tariff structures for domestic and non-domestic customers would be determined by the Regulator on a nationalbasis, based on predetermined criteria, in response to proposals from Irish Water.

Irish Water would take a strong lead for the development and implementation of integrated managementinformation systems on a national basis. This would be a fully integrated suite of management systems to allowstate of the art utility management practices and a high standard of customer care. Local authorities would beobliged to use these systems.

The position and role of the Group Water Schemes would not be substantially changed. They would continue towork closely with the local authorities. The Rural Water Programme would be managed by Irish Water in amanner not dissimilar to the manner in which it is currently run by the DECLG.

Irish Water would have a strong centralised financial control and treasury function. Asset ownership (togetherwith any associated liabilities such as local authority CAPEX borrowings) would vest in Irish Water and it wouldhave ownership of the revenue streams. In this capacity it would have the ability to borrow funds and, subject to


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detailed legal and financial review, it may be possible that these borrowings would be outside the generalgovernment balance sheet.

Irish Water would have control over marketing and communications including functions such as waterconservation awareness and enhancing willingness to pay. This would reflect the importance of this functionparticularly at a time of reform in the water sector and the introduction of domestic water charges.

The environmental regulator for Irish Water would be the Environmental Protection Agency. Irish Waterwould have responsibility for ensuring environmental compliance and be subject to quality regulation by theEPA. Local authorities would be required to support Irish Water in executing its environmental obligationsthrough the agency arrangements. The environmental regulator for the Group Water Schemes would also bethe EPA.

The Agency Model is considered a viable option and is assessed in the evaluation of modelspresented later in this Section.


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Public Utility ModelThe diagram below provides an overview of the Public Utility Model. A more detailed description is set out atAppendix 8.

Figure 39: Public Utility Model

Under the Public Utility Model, Irish Water would be the water services authority and the single point ofcontact for all customers. It would be a single integrated organisation delivering all water services currentlyprovided by the local authorities. Local authorities would no longer have a function in the provision of waterand wastewater services.

There are several examples in Ireland in other utility sectors, including gas, electricity and telecoms, of such afull Public Utility Model. The model is used for water services in many other jurisdictions.

The legal framework for a full Public Utility Model would be significantly different from today’s institutionalframework. A new Water Services Act would be required. Irish Water would by statute be allocated fullresponsibility for all aspects of water services planning and delivery, at national, regional and local levels. Localauthorities would no longer have a role in water service provision (except insofar as Irish Water maysubcontract responsibilities to them on an interim or long term basis). There would also need to be a number ofchanges in the abstraction and environmental protection regime to support the implementation of the model.

Some key executive roles currently undertaken (or planned to be undertaken) by the DECLG would transfer toIrish Water (for example strategic planning for the sector). The DECLG would retain policy functions.

With the implementation of a national domestic charging system, it would be necessary to establish aneconomic regulator for water pricing and consumer protection, to reflect the natural monopoly status of waterservices, to ensure high standards of performance and to ensure consumer needs are met. PwC understand thatthe economic regulator would be CER, and the regulated entity would be Irish Water. The economic regulatorwould set the parameters using its price setting powers to agree the rolling capital programme to allow Irish


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Water to achieve the required levels of service. Affordability would be a key criterion in this evaluation,particularly if there is a continuing contribution from the Exchequer to Irish Water.

Irish Water would have clear and centralised leadership and control of all aspects of the provision of waterservices. While day to day operations would be decentralised to operational units, best determined on the basisof river basin districts or large subdivisions thereof, there would be centralised policies, procedures andsystems. The Irish Water core management team would cover all aspects of water and wastewater utilitymanagement.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent asignificant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with GroupWater Schemes would not novate to Irish Water – in this scenario it is assumed they would remain with theGWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

Irish Water would have responsibility for all aspects of operations and maintenance of water and wastewaterservices currently undertaken by local authorities. It would also be responsible for all aspects of assetmanagement and capital programming. The Economic Regulator would set the parameters using its pricesetting powers to agree the rolling capital programme to allow Irish Water to achieve the required levels ofservice. Affordability would be among the key criteria in this evaluation, particularly if there is a continuingcontribution from the Exchequer to Irish Water. Irish Water would have a central capital planning function andwould need to consider setting up regional offices, not only for capital programme implementation but also formanaging regional operations.

Tariff structures for domestic and non-domestic customers would be determined by the Regulator on a nationalbasis, based on predetermined criteria, in response to proposals from Irish Water.

Irish Water would have a strong centralised financial control and treasury function. Asset ownership would vestin Irish Water and it would have ownership of the revenue streams. In this capacity it would have the ability toborrow funds and (subject to detailed legal and financial review), it may be possible that these borrowingswould be outside the general government balance.

Irish Water would implement and manage all customer service, billing and collection including enforcement ofcollection. It would implement any domestic metering programme and would take over the non-domesticmetering programme.

Many of the resources required by Irish Water for management of the water and wastewater systems wouldtransfer from the local authorities to Irish Water. This process will have to be carefully managed so that alllegal requirements e.g. labour agreements, TUPE would be observed. Interim arrangements would be necessaryto allow this to happen in the optimum manner.

Irish Water would have control over marketing and communications including functions such as waterconservation awareness and enhancing willingness to pay. This would reflect the importance of this functionparticularly at a time of reform in the water sector and the introduction of domestic water charges.

Irish Water would develop and implement integrated management information systems on a national basis.This would be a fully integrated suite of management systems to allow state of the art utility managementpractices and a high standard of customer care.

The environmental regulator for Irish Water would be the Environmental Protection Agency.

The position and role of the Group Water Schemes would change in that the roles currently played by the localauthorities would have to be reallocated. The regulatory function would pass to the EPA although the EPA mayrequest that Irish Water execute some aspects of regulation on its behalf. The day to day assistance currentlyprovided by the local authorities and the support of the Rural Water Liaison Offices would be reallocated toIrish Water.

River Basin Governance would be implemented and facilitated by the use of river basin districts which wouldalso act as the operational units of Irish Water.


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The customer experience would be that for all financial and technical queries, they would interact with acentralised function in Irish Water. This centralised contact management function would have the ability tointerrogate the operational systems in the company, allocate job orders and respond to customers either resolvingtheir queries or giving an indication when it could be resolved. There will be close management of the process ofresolving complaints with this subject likely to be of keen interest to the economic regulator and the EPA.

The Public Utility Model is considered a viable option and is assessed further in the nextsection.


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Minimal Change ModelThe Minimal Change Model would envisage keeping the local authorities as the Water Service Authorities andallocating additional or new tasks to Irish Water as well as transferring certain executive functions of theDECLG to Irish Water, which would become the Water Service Authority. It would take as a starting point theretention of the operation and maintenance services in the local authorities (and therefore the bulk of theexisting personnel) while trying to achieve more benefits of scale.

Figure 40: Minimal Change Model

In this model, the basic legal frameworks as set out in the Water Services Act 2007 would substantially remainintact with some key executive roles currently undertaken (or planned to be undertaken) by the DECLGtransferring to Irish Water. The DECLG would retain policy functions. The local authorities would continue tobe responsible for the day to day operations. However, Irish Water would be allocated certain statutoryfunctions outlined above, such as strategic planning and major capital projects, and as such there would be ashared statutory role between Irish Water and the local authorities.

Leadership and control would be shared between the local authorities and Irish Water. Local authorities wouldcontinue to exercise executive control over their operations staff. In their statutory role, they would executecapital projects of a value below a certain threshold to be defined. Irish Water would exercise an oversight roleover the performance of the local authorities. Irish Water would also take a leadership role in strategicplanning, billing and collection, water metering and execution of larger capital projects with a value over acertain threshold to be defined and of a national or regional significance. The Water Services Investment Planand the Rural Water Programme would be subsumed into Irish Water. Execution of the capital programmewould be managed by shared regional offices staffed by engineers from the various local authorities in a modelnot dissimilar to that of the regional design offices of the National Roads Authority currently.

Current DBO contracts with the local authorities would novate to Irish Water. This would represent asignificant proportion of the volume of wastewater treated in Ireland today. DBO contracts held with GroupWater Schemes would not novate to Irish Water - – in this scenario it is assumed they would remain with theGWSs, as the arrangements for the transfer of these assets from a private GWS to the state would be complex.

The remaining operations functions including other wastewater treatment works, water treatment, waternetworks, wastewater networks, sludge management and other services would remain the responsibility of the


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local authorities. Irish Water would supervise the delivery of operations services by the local authorities, but theauthorities would have the statutory responsibility and liability for the services.

Billing and collection, and enforcement of collection along with the associated customer service function, wouldbe undertaken by Irish Water acting in a statutory role of service provider on behalf of the local authorities.Technical queries would continue to be handled directly by the local authorities.

The local authorities would retain their own financial management and human resource management systemsto keep detailed accounts of expenditure for water services. Irish Water would have its own financialmanagement and human resource management systems for its staff and expenditures. Local authorities wouldcontinue to have treasury functions as would Irish Water. The local authorities would retain ownership of theassets. While Irish Water would collect water charges, the revenues would be owned by the local authorities.

With the implementation of a national domestic charging system, it would be necessary to establish aneconomic regulator for water pricing, to reflect the natural monopoly status of water services. Under theMinimal Change Model, it may be necessary to regulate 34 individual local authorities plus Irish Water. Tariffstructures for domestic and non-domestic customers would be determined by the Regulator, based onpredetermined criteria.

Irish Water would have a significant level of control over marketing and communications to reflect theimportance of this function particularly at a time of reform in the water sector and the introduction of domesticwater charges.

Irish Water would over time lead the development and implementation of integrated management informationsystems on a national basis but this would be in collaboration with the local authorities. This MIS would have tobe integrated with the various systems in place in the local authorities.

The position and role of the Group Water Schemes would not be substantially changed. They would continue towork closely with the local authorities and the local authorities would continue as their front line regulator. TheRural Water Programme would be managed by Irish Water in a manner not dissimilar to that currentlyexercised by the DECLG.

There would be an enhancement to the current trend towards shared services between the local authorities. Forinstance, the shared service envisaged under plans for River Basin Governance would be facilitated.

The customer experience would be that for all billing queries, they would interact with Irish Water while for allservice and technical queries they would interact with the local authorities.

The Minimal Change Model is not considered a viable option and is excluded from furtherconsideration for the following key reasons:

It is likely that Irish Water would be unable to borrow in the markets as it would not provide anappropriate structure recognisable to lenders in the water sector. Therefore, the Government wouldcontinue to be relied on to fund water services needs to the extent not met by domestic and non-domesticwater charges;

The complex interfaces that would exist between the national body and local authorities would slowdecision making and effective delivery, because statutory responsibility and authority would be splitbetween the local authorities and Irish Water;

It is unlikely that significant economies of scale could be achieved because the roles and responsibilitiesof the local authorities would remain largely unchanged;

Accountability for water service provision would not be clear. For example, there would be a significantdisconnect between responsibility for technical / maintenance service provision and the collection ofwater service charges;

It would be difficult to implement price regulation because of the large number of diverse water servicesauthorities; and

The customer service experience would be fragmented between billing being dealt with by Irish Waterand local authorities handling detailed queries on technical service issues.

Overall, PwC consider that this model could not address the main objectives of the reform programme.


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Intercommunal ModelAn approach adopted in several parts of Europe where municipalities have retained the basic obligation toprovide water services but wanted to agglomerate to achieve economies of scale is to establish intercommunalcompanies. This would require several municipalities to set up a new company, owned by the municipalitiesand to which the participating municipalities would delegate the provision of water and/or wastewater services.

In the Irish context, this might result in city and county councils within a River Basin Area setting upcompanies. There are seven such areas fully or partly in the State but for reasons of economies of scale, it mightbe that three such companies would be set up covering:

1. The Eastern River Basin Area, plus that part of the Northern River Basin Area roughly corresponding tocounty Louth

2. The South Eastern & South Western River Basin3. Those parts of the Shannon, Western, North Western river basin areas in the Republic.

Labels such as South Water, West Water and East Water could be allocated to these companies. Theapproximate scale of each might be:-

East: Area approximately 10,000 km2 Population 1.8 million + South: Area approximately 25,000 km2 Population 1.3 million + West: Area approximately 35,000 km2 Population 1.0 million +

Figure 41: Intercommunal Model

Within the framework of this variant there are two scenarios. The first is that these three companies wouldexecute the roles of the local authorities within the wider framework of the Agency Model. Irish Water wouldhave SLAs with the three intercommunal companies.

Another scenario is that each of these companies would become smaller versions of the full Public UtilityModel above with the full set of utility functions. Each would be a regulated entity and each would billdomestic and non-domestic customers.

The Intercommunal Model is not considered a viable option and has been excluded fromfurther consideration for the following reasons:

The intercommunal model, involving three or more separate organisations, could not achieve thepotential for efficiency and cost reduction in operations and capital investment (see page 65) that


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consolidation into a single national company could achieve. It is worth noting that a single nationalcompany would still be smaller than the average sized water services company in the UK.

There would be a substantial extra and complex layer in the organisation and management of waterservices, with no obvious source of additional revenues to fund such reforms;

As there is little precedent for this kind of organisation in Ireland, and as the scale of each organisationwould be smaller than that of a national company, it is not clear that the companies would be easily ableto access funds from the bond markets;

Each of the Intercommunal companies would be regulated separately and it is to be expected that therewould be a wide variation in operating costs per connection across the country, because of the differentcharacteristics of population dispersal. Unless a standard level of water charges were to be introducednationally, it is likely that customers outside the East region would be required to pay substantially morethan those in the East. It should be noted that the variation between the cheapest water charges and themost expensive in Germany is approximate a factor of 6, while in France it is approximately 7 and in theUK in the range of 2-3. Given the very different range of asset types and population dispersal, the rangeof water prices in Ireland might be closer to the ranges for France and Germany than the UK.

If a standard level of charges were introduced nationally, depending on the tariff set be the Regulator,there is a risk that, for companies outside the East region, revenues would fall well short of operatingcosts. In this scenario, the shortfall would have to be funded by Government subvention, by borrowingor by some form of regional equalisation scheme. If the level of revenue was less than 50% of operatingcosts for the region, it is unlikely that any borrowings undertaken by the Intercommunal companiesoutside the East Region would be determined by the CSO / Eurostat to be excluded from the GeneralGovernment Balance (GGB) (see page 128).

The continued fragmentation of the sector would be a substantial disadvantage. It is worth noting thatboth Northern Ireland and Scotland adopted variations on this approach only to reverse the decision infavour of a larger national unitary water services entity within a relatively short timescale because theregional models did not deliver the levels of efficiency or customer service consistent with internationalstandards. Studies of the Danish Water sector have indicated that their fragmented structure results inorganisations operating at sub optimal scale: “part of the inefficiency is caused by an inoptimal scale ofproduction (scale inefficiency)”23;

Duplication of activity would exist among the three companies, and the creation of three managementteams (one for each region) would be inherently more costly than a single national management team.Procurement, billing and collection activities would be replicated three times, and investment would berequired in three separate sets of ICT systems. Implementation of ICT / MIS – crucial to theachievement of efficiencies - would be slower and more reliant on legacy systems than in a single nationalcompany;

For benchmarking, there would be no advantage to have having three companies; the regulator wouldstill have to look outside Ireland for comparators. It would make little sense to compare say the Eastregion (Greater Dublin) with the West (mainly rural);

As the organisations would be municipally owned and as their creation would be by amalgamation ofexisting services rather than the creation of a new highly centralised organisation, the scrutiny of theintercommunal companies by local authorities could be severely diluted;

It is probable that the shareholding in the capital structure and voting rights would be in proportion toassets contributed and population served. There would therefore be competing interests on the boardand among the shareholders. Complex decision making/ dispute resolution mechanisms would beneeded to ensure fairness and equity between participating local authorities. Agreement on theimplementation of leadership and operating structures for each organisation would be required beforeany benefits of scale could be delivered;

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


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As the intercommunal companies would be formed from the existing water services departments,changes in work practices would be organic and incremental, and would need to be implemented toreflect arrangements in each of the local authorities;

The model has the potential to be complex, involving a significant transfer of staff without realising thebenefits of changed operating procedures or the introduction of new management methods in areasonable timeframe;

A core staff would have to be retained in each local authority to ensure compliance by the Intercommunalcompany with regulatory and legal requirements, and;

Very large schemes such as the greater Dublin regional water supply project would continue to have tostraddle regions, perpetuating project development and execution risks, and making the projects difficultto finance.


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Models Selected for Further EvaluationFrom the analysis outlined above, the two potential models were carried forward for more detailed evaluation:-

The Agency Model; and The Public Utility Model.

A brief summary outline of the key similarities and differences between the two models is set out in the tablebelow.

Feature Public Utility Model Agency Model

Legal andInstitutionalFramework

Irish Water is the single Water Services Authority withfull responsibility for all aspects of the delivery of waterservices.

Irish Water is the single Water Services Authority withfull responsibility for all aspects of the delivery of waterservices.

All water services currently provided by the localauthorities are provided by Irish Water.

Local authorities continue to undertake many of thetasks currently undertaken by them, acting as agents ofIrish Water.

The contracting entity with the end customer is IrishWater.

The contracting entity with the end customer is IrishWater.

Regulation The regulated entity is Irish Water. The regulated entity is Irish Water.

Economic regulator is CER. Environment regulator forIrish Water is EPA. Environment regulator for GWS isalso the EPA.

Economic regulator is CER. Environment regulator forIrish Water is EPA. Environment regulator for GWS isalso the EPA.

Leadership andCoordination

Irish Water has sole responsibility for leadership andthe control of water services.

Irish Water responsible for centralised leadership andcoordination of water services, acting through agencyagreements with the local authorities in some matters.

Operations Irish Water delivers operational services directly orthrough third party outsourcing agreements.

Local authorities act as agents for Irish Water to deliverspecified operational services.

Current DBOs transferred to Irish Water and futureDBOs managed by Irish Water.

Current DBOs transferred to Irish Water and futureDBOs managed by Irish Water.

Irish Water provides assistance and technical supportto GWS.

Local authorities acting as agents of Irish Waterprovide assistance and technical support to GWS.

AssetManagement andCapitalProgramme

Irish Water prepares a capital investment programmebased on national economic and social needs.

Both asset management and capital programmesdeveloped and delivered by Irish Water.

Irish Water prepares a capital investment programmebased on national economic and social needs.

Both asset management and capital programmesdeveloped and delivered by Irish Water, except forsmaller scale capital projects which would be deliveredby the local authorities under agency arrangements.

Customer Billingand Service

Customer billing conducted by Irish Water (but may beoutsourced).

Customer billing conducted by Irish Water (but may beoutsourced).

Customer service delivered by Irish Water (but may beoutsourced).

Customer service delivered by local authorities actingas agents of Irish Water.

Centralised national customer contact centre providedby Irish Water (but may be outsourced).

Centralised national customer contact centre providedby Irish Water (but may be outsourced).


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Feature Public Utility Model Agency Model

FinanceManagement andFunding

Irish Water owns all of the water assets and liabilitiesand is a self funding independent commercial entitywith the capacity to borrow in the markets against theasset based revenue streams.

Irish Water owns all of the water assets and liabilities(and related business assets) and is a self fundingindependent commercial entity with the capacity toborrow in the markets against the asset based revenuestreams.

Local authorities have no involvement in water financeand funding.

Irish Water pays local authorities for the delivery ofcertain water services on the basis of agencyarrangements. These payments are reflected as incomein the local authorities’ accounts and as expenditure inIrish Water’s accounts.

Irish Water’s borrowings are not constrained byGeneral Government Balance (GGB) limits (to beconfirmed).

Irish Water’s borrowings are not constrained byGeneral Government Balance (GGB) limits (to beconfirmed).

Asset Ownership All of the water assets and related business assetsowned by Irish Water. Arrangements for use ofbusiness assets agreed with local authorities.

All of the water assets and related business assets areowned by Irish Water.

People All water services staff are Irish Water employees(except small cohort remaining in Dept.). Stafftransferring to Irish Water retains their existing termsand conditions on transfer.

Irish Water recruits its own staff, and existing localauthority staff would continue to be employees of thelocal authorities to deliver services under the agencyarrangements.

Irish Water can determine pay terms and conditions fornew staff, having regard to Government Policy.

Irish Water can determine pay terms and conditions forits own new staff, having regard to Government policy.Local authorities determine their own staffing needs.

Marketing andCommunication

Irish Water responsible for Marketing andCommunications.

Irish Water responsible for Marketing andCommunications.

MIS & IT Irish Water implements a fully integrated set ofnational MIS/IT systems for water services.

Irish Water implements national systems as far asfeasible. Local authorities continue to be responsiblefor aspects of their systems shared between water andother services.

CustomerExperience

All customers billed by Irish Water. All customers billed by Irish Water.

The economic regulator in cooperation with NationalConsumer Agency will protect consumer interests.

The economic regulator in cooperation with NationalConsumer Agency will protect consumer interests.

A single call centre deals with all customer queries andservice requests. Service delivered by Irish Water.

A single call centre deals with customer queries andservice requests. Service delivered by the relevant localauthority under an SLA with Irish Water.

Figure 42: Agency and Public Utility Models – Summary Comparison

The assessment of these two potential models for Irish Water is described in the next section.


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6.Evaluation Process


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6. Evaluation Process

Objectives for ReformBased on our understanding of government policy and key stakeholder requirements PwC have identified sixkey objectives for the creation of Irish Water. For each objective a set of evaluation criteria has been agreedwith the DECLG which allows an assessment of how well the models will deliver on the objectives.

The six objectives for creating Irish Water are:

Financially sustainable water services: a key aspect of the reform of the public sector in Ireland insupport of EU/IMF commitments is to reduce the requirement for public sector funding. A financiallysustainable water service will deliver a more cost effective service, driving out cost through theelimination of duplicated services and the establishment of a more integrated service delivery model.Stability of revenue from customer charges aligned with a reducing cost base will improve profitabilitythus strengthening Irish Water’s ability to secure funding from external lenders

Improving Ireland’s water services infrastructure: as our description of the current status ofwater services in Ireland demonstrates, there is a backlog of investment to be undertaken on the system.There is also a national need to maintain headroom in the security of water supplies. The new structurefor Irish Water needs to be able to deliver cost effective investment in a timely manner.

Ensuring Environmental Standards: there is a need to ensure that we can meet our environmentalobligations such as those set out in the EU’s Water Framework Directive. Significant funding24 will be

required to address this in the coming years’ obligations.

Delivering improved outcomes for customers: the introduction of customer charging will raisecustomer expectations of the quality of water services. Irish Water will need the capability to deliverimproved customer outcomes across a broader range of measures than used previously. The entity willneed to have clear capabilities to deliver for customers and also have appropriate regulation andincentivising to focus on customer requirements.

Strong governance with clear accountabilities: a critical success factor for many water sectorreform projects is the clear identification of roles and responsibilities for the key players in the sector.Stakeholders need to be clear on their obligations and have the resources to deliver against theseobligations.

Support other aspects of water reform in Ireland: the water sector in Ireland is considering andevaluating a number of policy initiatives at the time this report is being prepared including theintroduction of charging, a proposed near universal roll out of water meters, implementation of strategicplanning, development of river basin management governance etc. It is important that the new structurefor Irish Water supports these developments and does not create institutional blocks to the reformprogramme.

Promote efficiency: efficiency has been a key driver in the reform programme for water services inIreland and is a major theme in Government policy statements. The evaluation of efficiency presented isboth in terms assessing whether the proposed model will be efficient but also the extent to which theimplementation process for the preferred model can be efficient as well.

24 The amount is not possible to calculate, but a view expressed to PwC by stakeholders is that it could create aninvestment burden of up to €20bn


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Guiding PrinciplesIn conducting the analysis of options for the delivery of water services, PwC were guided by the followingprinciples, established through consultation with the Department and other stakeholders, as well as throughour experience of the water sector internationally. They should not be considered as an indication of futureGovernment policy.

The model proposed should facilitate the implementation of the Government decision to establish a newState owned water utility company to take over responsibility from the separate local authorities forIreland’s water infrastructure and to drive new investment.;

The model proposed should be based on the most effective assignment of functions and structuralarrangements for delivering high quality competitively priced water services to customers (domesticand non-domestic) and for infrastructure provision;

The model proposed should take into account existing proposals for structural reforms impacting onthe water 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 Programme; and The governance requirements for the implementation of the River Basin Management Plans.

The model proposed should be designed to become self funding over time; The model should reflect best practice internationally in the water and utilities industries; The model proposed should, where it is the most practical and cost-effective option, leverage the

capabilities and resources of existing state agencies in order to avoid duplication and waste; The transition to the new model should be designed to ensure that the inherent merits of the existing

water service are retained while Irish Water is free to establish a fresh culture, ways of working andappropriate staffing arrangements;

The model should facilitate competition within the water services sector insofar as practicable; and The model proposed will be based on a State agency. Privatisation should not be a consideration.


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Evaluation CriteriaA set of evaluation criteria was developed by the consultancy team in consultation with the DECLG. These arederived from the objectives and guiding principles which were identified and described above. In addition,criteria related to implementation considerations have been included. A more detailed explanation of eachcriterion is set out at Appendix 9. They are set out in the following table:

Objective Criterion

Financially sustainable water

servicesCapacity to optimise use of available funds

Capacity to support strategic long term capital funding and fund priorityrequirements

Potential to be self funding in the long term

Ability to borrow in the markets

Improving Ireland’s water

services infrastructureAbility to support effective investment in infrastructure (timeliness and value formoney)

Effectiveness in facilitating implementation of national strategies for water services

Effectiveness in supporting implementation of rural water strategy andrelationship with group water sector

Ensuring environmental

standards are metClarity of responsibility for the delivery of environmental compliance

Ability to deliver on obligations in River Basin Management Plans

Delivering improved outcomes

for customersAbility to provide improved levels of service for customers

Ability to deliver reduced levels of leakage

Ability to improve security of supply

Effectiveness in serving local needs and requirements

Strong governance with clear

accountabilitiesEffectiveness in delivering statutory requirements

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

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

Support other aspects of water

reform in IrelandEffectiveness in the delivery of the metering programme

Compatibility with evolving water governance

Effectiveness in the introduction of water charging

Compatibility with the New Era model

Promote efficiency Ability and speed in achieving potential for efficiency and cost reduction inoperation and investment

Ability to achieve economies of scale

Ease of implementation of ICT / MIS

Consistency with plans for the implementation of operational river basinmanagement

Effectiveness in integrating water services with the planning regime

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

Implementation

ConsiderationsEase of implementation

Impact of new model on the local authorities

Impact on Ireland’s Economy Impact of new model on Public Service staffing numbers

Impact of new model on General Government Balance

Figure 43: Evaluation Criteria


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Assessment of OptionsIn assessing the options, it was deemed appropriate to use a qualitative methodology for the comparativeassessment of the Agency Model against the Public Utility Model, taking into account the relative merits of eachoption against each of the criteria. In both cases, it was assumed that the models proposed would beimplemented as efficiently and effectively as possible. The evaluation was based on:

International practice; Available metrics; and The experience of the consultants.

The following table summarises the main advantages related to each model. A more detailed description of theconsiderations related to each model is set out at Appendix 11. In considering the case for each objective, PwChave assessed which option, in their opinion, represents greater merit for Irish Water, relative to each other.

Key:

This Model has Greater Merit

Objective Public Utility Model Agency Model

Financiallysustainablewater services

Recognised business structure familiar to lenderswho could place reliance on revenue streams andcash flows. Irish Water is likely to have significantborrowing capacity.

Unique business model in the water sector, unfamiliarto lenders. Control over costs more fragmented. IrishWater has less direct control over net income. IrishWater’s borrowing capacity would be less certain.

Opportunity to design and implement a fit-for-purpose operating model resulting in greater costefficiencies and economies of scale arising from themore highly integrated organisation, processes andsystems. This would allow Irish Water to becomeself-funding in a significantly shorter period of time.

Longer time required to achieve cost efficiency andeconomies of scale – more difficult to transformpractices, processes and systems across 34 separatelocal authorities. Would take longer to achieve self-funding status.

Can optimise the mix of capital, maintenance andoperations expenditure as fully responsible for allfunding and resources.

More difficult to optimise the mix of capital,maintenance and operations expenditure due to split ofownership and responsibility for capital and operationsexpenditure between Irish Water and the localauthorities.

Well positioned to fund strategic priority capitalprojects due to borrowing capacity, cost efficienciesand integrated strategic planning capability.

Greater reliance on Government to fund strategicpriority capital projects as ability to borrow externallywill be curtailed by the fragmented nature of the model.

ImprovingIreland’sWater ServicesInfrastructure

Integration of investment planning and delivery inone organisation - more effective in deliveringinfrastructure.

Reliance on local authorities may limit effectiveness –potential for conflicts in priorities of local authoritiesbetween water services and other local projects, andslower decision making.

EnsuringEnvironmentalStandards areMet

Operating regions aligned with River Basin Areas –facilitates River Basin Management planning andoperations.

Requires cooperation between local authorities tooperate on a river basin basis.

Uniformity in reporting to the EPA – single point ofinterface.

Reporting to the EPA would involve the review andconsolidation of reporting from 34 separate localauthorities.

Deliveringimprovedoutcomes forcustomers

Improved water service quality would be thesingular focus for management to deliver.

Improvements more difficult to achieve under agencyarrangements with local authorities.

Responsibility for billing, customer support and thedelivery of customer service resides in a singleorganisation.

Service delivery responsibility (local authorities) isseparate from billing and support (Irish Water).

Better able to respond to security of supply issuesdue to integrated structure and responsibilities andaccess to deeper pool of resources nationwide.

Response to security of supply issues would rely oninterfaces between Irish Water and the local authorities- this may be difficult to manage especially when thereare disputes over the use of resources.

Local needs met by mobile workforces supported bymodern IT systems. Risk of losing close connectionto local needs.

Local needs met by local authority workforce with agood understanding of local infrastructure. Localconnection would be retained.


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StrongGovernancewith ClearAccountability

Irish Water, which will be designed on a fit-for-purpose basis, will be fully accountable andresponsible, and will have full control of the fundingand resourcing required to meet compliancerequirements.

Accountability and responsibility dispersed. Risk thatlocal authorities would be unable to commit to servicelevels or quality demanded by Irish Water based on thelevel of funding provided. Difficult for Irish Water tomeet statutory commitments.

A single body clearly accountable to the regulatorsfor efficiency and quality of service performance.

Irish Water would have to account to the economic andenvironmental Regulators for up to 34 differentagencies varying in scale and characteristics fromDublin City Council to Leitrim County Council.

Suitable scale utility to benchmark against waterutilities in the UK.

Scale of local authorities generally not suitable forbenchmarking against UK water utilities.

Support OtherAspects ofWater Reformin Ireland

Irish Water can determine the pace of reform and isfully accountable and responsible for the outcomes.

Requirement for Irish Water to involve all 34 separatelocal authorities could lead to slower implementation ofthe reforms than one may reasonably expect to see in asingle entity.

PromotingEfficiency

Designed on a fit-for-purpose basis, it effectivelyfacilitates the integration of smaller scale wateroperations to achieve economies of scale.

Does not readily facilitate the integration of smallerscale water operations due to the existence of 34separate local organisations with local decision-makingresponsibility. Tends to perpetuate the fragmentationof water services.

Readily facilitates the pooling of resource nationallyfor more efficient work planning, as well as theprocurement benefits that arise from operating at alarger scale.

Pooling of resources nationally and achievingprocurement efficiencies not easily facilitated by astructure incorporating 34 separate local authorities.

Irish Water has integrated decision making toachieve the benefits of bringing operations, assetmanagement and capital programmes together.

Responsibility for decisions on the capital programmeseparate from responsibility for decisions on operationsand maintenance, which in turn are reliant on decisionmaking of 34 separate local authorities.

Public Utility Model has proven efficiency gains of40% over a 5 year period in Scotland and 3% perannum in England and Wales.

The Agency model could not expect to achieve the levelsof efficiency achieved within UK water companieswithin similar timescales. The levels of efficiencyimprovement projected by the Local GovernmentEfficiency Review Group25 for a range of initiativesunder current local authority structures is €35 millioni.e. 0.5% (in total – not annually).

Irish Water can introduce a more variable cost base,determining the most appropriate resourcing mix ofpermanent staff, contract staff, and outsourcing.

Local authorities are restricted in resourcing optionsdue to their public service status. Any resourcingefficiency improvements would have to be conductedon an authority by authority basis.

Irish Water is outside the Government restrictionson pay and numbers and has greater commercialfreedom.

Local authorities are constrained by Governmentrestrictions on pay and numbers.

There is one management information system for thecompany, with an integrated approach to thedevelopment, collection and analysis of financial andmanagement information.

Any national management information systemsdependent upon different sources of data for each localauthority operating on different IT systems. Theintegration challenge is significant. Ensuringconsistency of data and reporting across the authoritiesposes significant challenges.

Staff is no longer aligned with specific localauthorities and could be readily organised on a RiverBasin basis.

Implementation of River Basin management relies oninter-local authority cooperation and would require asubstantial reorganisation of local authority staff.

Does not have a local community connection andmay perform less well in ensuring effectiveintegrated planning.

Preserves the local alignment of regional planning andthe granting of planning consents for construction andensures that projects are integrated with local planningprocesses.

A single water utility company has the scale todevelop and train existing staff and attract keytalent, thus allowing it optimise the skills base of theorganisation.

Less scope for career development of water sector staffgiven the fragmentation of skills and roles and the levelof mobility of staff across the local authorities.

25 Local Government Efficiency Review


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Fit-for-purpose design aligned with end-to-endownership of water services based on a servicedelivery culture and a singular focus on water willprovide a more efficient operation.

The 34 local authorities focus on a diverse range ofservices with water services accounting for less than15% of total whole time equivalent (“WTE”) staff.

ImplementationConsiderations

A complex implementation challenge involving aradical change in the organisation of the sector andsignificant transfers of staff from the localauthorities to new roles in Irish Water.

Represents less of an implementation challenge as itinvolves less of a change to the sector, avoiding thesignificant transfer of staff from the local authorities toIrish Water.

Impact onIreland’sEconomy

All staff is excluded from public service staffingnumbers.

Most staff continues to be part of public service staffingcomplement.

Irish Water’s borrowings are outside the GeneralGovernment Balance (to be confirmed).

Water services borrowings are included in the GeneralGovernment Balance for the foreseeable future (to beconfirmed).

Figure 44: Advantages of Public Utility and Agency Model

As can be seen from the above summary, the Public Utility Model provides advantages over the Agency Modelagainst the majority of the criteria. The exceptions primarily relate to:-

The risk of losing the advantages provided by the local presence and local knowledge of the localauthorities; and

The probability of a less complex implementation with lesser industrial relations challenges because thechanges envisaged under the Agency Model would be less radical.

The Agency model assessed in Figure 44 above assumes significant elements of regional shared service foroperations (see Appendix 8) – probably on a River Basin Management basis – to increase the level of efficiencycompared to the current environment. In this scenario the shared services would be based on cooperationbetween the 34 local authorities, each of whom would have an agency arrangement with Irish Water.

A variation on this model was considered, where water services are provided by regional groupings of localauthorities, rather than by individual local authorities. In this scenario, Irish Water would have agencyarrangements with say 8 bodies (e.g. on river basin basis) or 5 (based on proposed structure page 113) ratherthan 34. This would be similar to the Intercommunal Model, as outlined in Section 5.

It is clear that this variant would simplify the structure to some extent, and it would have some advantages overthe scenario where 34 bodies are providing water services. However, when assessed against the criteriaoutlined in Figure 44 above, it is considered that the advantage outlined therein for the Utility Model would stillapply.


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Conclusion on Assessment of Options

Our conclusion is that the Public Utility Model as described in Section 5 should be the recommended form oforganisation structure for the delivery of water services in Ireland. The key reasons for this conclusion, asoutlined in the above analysis, are that as a Public Utility Model:

Irish Water has the opportunity to leverage best practice and design, build and implement a fit forpurpose operating model which will deliver water services in the most efficient and effective manner inIreland;

Irish Water control all assets, revenues and costs, and consequently it is better positioned to leverageeconomies of scale, drive operational excellence, reduce operating costs and optimise the lendingcapacity of the company;

Irish Water’s external borrowing capacity would be higher than that of the Agency Model, enabling itbecome self-funding sooner thus reducing the burden on the Exchequer to provide capital and currentfunding with consequent positive impact on the GDP / debt ratio;

Irish Water would have end-to-end direct responsibility for, and authority over all assets, revenues,costs and resources associated with the delivery of water services in Ireland, thus enabling it betterimplement national strategies and not be curtailed by local authority boundaries or non-water relatedactivities;

Irish Water, with one decision making authority as opposed to the involvement of 34 local authorities,would be a more coherent and integrated organisation structure with clear lines of accountability,authority and responsibility which would enable it optimise River Basin planning and management,support aspects of water reform on a timely basis and deliver integrated response models to ensuresecurity and quality of supply;

Irish Water would deliver consistent and transparent service quality and be better positioned to morerapidly deploy its resources through a national customer service centre;

Irish Water would have a single delivery structure, resulting in a more efficient cost base and a lowerunit cost of delivery;

Irish Water would represent a single entity for Regulators to regulate, as opposed to the complexityand time required to regulate 34 separate local authorities;

Irish Water would have the critical mass to attract key talent, thus allowing it optimise the skillscapability of the organisation;

Irish Water reduces public service numbers through the expectation of a gradual reduction ofheadcount over time;

Irish Water will present opportunities to staff dedicated to water services. Increased specialisation willprovide routes for career development and enhanced job satisfaction; and

Irish Water takes the water sector outside the restrictions on pay and numbers and gives greatercommercial freedom, within the limitations of a regulated entity.


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Recommended Option for Irish WaterOur recommendation, therefore, is to adopt the Public Utility Model as the target operating model for IrishWater. Given the importance of water as a scarce national resource, increasing emphasis internationally onmanaging this resource better, there will be a national approach to water provision while retaining the benefitsof local delivery through regional offices and more efficient river basin management.

This model is the one which we believe is most likely to achieve the efficiency benefits outlined on page 65. Thisrecommendation also best responds to the issues raised through the stakeholder consultations.

In the next section, PwC describe the recommended model in more detail, including the financial implications.

Clearly, the transition to the Public Utility Model will create significant risks and challenges which must beaddressed. Chief among these are:

Ensuring that Irish Water is appropriately staffed in terms of numbers and skills with a mix of existinglocal authority staff and external expertise;

Ensuring the smooth transfer of staff from local authorities to Irish Water; Maintaining the detailed knowledge of local infrastructure currently held by local authority water

services staff; Managing any risks related to the impact on other local authority operations; Ensuring the continuity of effective local service provision, including support of the Group Water

Schemes; Ensuring effective integration of Irish Water into the city/county and regional planning processes; Ensuring responsiveness to the needs of new and developing businesses; Putting in place structures to facilitate an element of competition in the market; and Minimising the risks associated with national dependence on a single company for continuity of public

utility services.

The recommended transition strategy which PwC believe would most effectively address these issues is set outin Section 9.


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7.Assessment of PotentialRole for an ExistingState Agency


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7. Assessment of Potential Rolefor an Existing State Agency

The Terms of Reference for the review required that the consultants “should also consider thepossibility/desirability of assigning responsibility for water services provision, or part thereof, to an existingstate agency”. In this section PwC set out their assessment of the options available in this regard.

Irish Water RequirementsSetting up and operating a publicly owned regulated water utility will require very specific systems, resourcesand expertise in many diverse areas including:

Strategy and planning; Corporate Services; Finance and funding; Asset Management and Engineering; Procurement of major Infrastructure; Project management; Network management; Customer service / Call Centres; Billing / Collection; and Workforce management. Marketing and Communication Regulation both environmental/technical and economic Leadership Operations of extended networks and treatment plants (i.e. from source to disposal)

Relevant State AgenciesThere are a number of existing state agencies which could bring many of these and other capabilities andsystems to Irish Water. Examples of these agencies include (but are not limited to):

Bord Gáis Eireann; ESB; Bord na Mona; Railway Procurement Agency; National Roads Authority; Coillte; An Post; CIE companies; Dublin Airport Authority; National Development Finance Agency; and National Treasury Management Agency.

At a time of significant transformation and rationalisation in the public sector, it would clearly make sense toensure that the needs of the new model for water service delivery are met through capabilities which alreadyexist in the public sector where it is the most practical and cost-effective option.

PwC see two scenarios in which capabilities which already exist in the public sector could be involved in waterservice provision:-

(a) Embedding the new Irish Water company in an existing State agency;


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(b) If another State agency were successful in procurement processes to outsource aspects of the new waterservice either in the set-up phase or thereafter.

A critical consideration in this assessment is that scenario (a) could be achieved by statute whereas scenario (b)would depend on the outcome of any relevant public procurement process.

Therefore, PwC has confined our consideration to the scenario in which Irish Water is embedded in an existingState agency.

Use of an Existing State AgencyThe existing State agencies which, in our view, would come under consideration as having the potential toincorporate a new water utility are:

Bord Gáis Eireann; Bord na Mona; ESB; and National Roads Authority.

In this scenario, Irish Water would become a new division or subsidiary of one of the above agencies. It wouldreport to a “group” management team but would have its own dedicated management structures and staffing.

In fulfilling this role, the State agency would be required to:

Appoint a management team and establish the governance structure to lead the integration of Irish Waterinto the State agency;

Establish a programme management office and project teams to develop a detailed implementation planand manage the integration of existing water services from the 34 local authorities to Irish Water. Wherespecialist water expertise is not available internally, appoint a ‘management partner’ to establish thestructures and operations required to support the provision of water services;

Manage and support the process to establish the legislation for the transfer to Irish Water of the waterassets, liabilities and staff;

Complete detailed due diligence of the existing water and waste water service provided by the 34 localauthorities, capturing details on water services operations, staff, assets and liabilities;

Conduct a detailed valuation exercise on the existing asset base;

Develop the strategy for Irish Water ensuring it is compliant with all relevant legislation and businessrequirements and consistent with the tariff structures defined by the economic regulator;

Define and implement the operating model for Irish Water, to cover the provision of infrastructureplanning, investment, management, maintenance and emergency service; customer service; and back officesupport functions and identify key resources and expertise required to deliver against this strategy,identifying opportunities to integrate these as much as possible within its own organisation;

Develop a multi-year business plan including detailed financial projections on revenue, cost, investmentand funding and define operational metrics for managing and tracking performance of the business;

Implement the full suite of end-to-end financial processes and services (metering, invoicing, collections,purchasing, disbursements, accounting, reporting, budgeting, treasury, tax, compliance, etc) required tosupport Irish Water operations;

Implement the full suite of HR processes and services (recruitment and staffing, compensation andbenefits, performance management, payroll, staff development, employee relations, etc) required tosupport the new headcount. In addition HR would manage the on-boarding of all transferring employeesfrom the local authorities, transitioning them to new roles;


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Implement the full suite of MIS systems required to support the operations of a fully integrated water utilityincluding metering, customer billings, transactional processing, management reporting, infrastructuretracking, customer service call centre, workforce management, remote monitoring, etc;

Implement workforce management tools and methodologies to appropriately and efficiently staff ongoingand emergency maintenance and service requirements;

Manage the relationship with the economic regulator ensuring the finances of Irish Water are compliantwith defined tariff structures. In addition, they would develop the relationships with external funders andGovernment and establish the mechanisms required to source c. €10.2bn of funding for capital investmentprogrammes in the period to 2030. In sourcing this debt, they would need to ensure appropriate ringfencing was in place, as required, to optimise the level of funding available to both its own operation andIrish Water;

Develop the procurement strategy for Irish Water, leveraging the benefits associated with the increasedlevel of Irish Water spend. Appoint category managers with expertise in the sourcing of water servicesgoods and services;

Negotiate and agree service level agreements with each of the 34 local authorities to provide staff andsupport to Irish Water during the transition phase of activities to Irish Water; and

Establish a customer service call centre to respond to emergency calls, customer complaints, queries,service requests, etc.

In all cases, where specific water and waste water expertise is required, it would be necessary to identify andappoint key staff – these may be sourced from local authorities and/or the marketplace. In those situationswhere support services are currently outsourced by the State agency, these arrangements would be extended tocover the additional requirements of Irish Water.

It should be noted that where regulation requires ring-fencing of existing activities with those of Irish Water,many of the above services would need to be established on a standalone basis within the existing state agency,impacting the degree to which synergies could be leveraged.

In this regard, we also considered the approach adopted by other countries in establishing multi-utilitycompanies. In both Welsh Water and United Utilities (England), the water utility was initially integrated withthe electricity utility but was subsequently separated out into individual utilities due to difficulties in managingmulti-utility companies and the limited opportunity for operational synergies where water and electricityoperations needed to be ring-fenced for regulatory purposes. They were broken up by investors andmanagement to allow a focus on the provision of a single service.

There is no doubt that existing state agencies have certain capabilities and systems which could meet certainrequirements of the new water authority. However, there are also a number of operational limitations and inmany cases the existing state agency would need to make investments equivalent to those of a standalone IrishWater utility.

The following sets out some of the main advantages and disadvantages of locating Irish Water in one or otherof the existing state agencies:


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Embedding Irish Water in an Existing State AgencyAdvantages Disadvantages

Accelerated implementation timescale;

Provide experience in managing a regulated utility;

Effective governance structures already in place;

Potential to share back office systems and resources;

Potential to share call centres, customer support and

billing systems;

Provide accelerated route to the implementation of utility

systems;

Could provide strategy development and planning,

engineering, project management, network management

and procurement skills;

Could provide financial and treasury capabilities;

Potential to leverage borrowing power of the existing

utility;

Potential to benefit from existing utility brand; and

Potential to utilise existing regional / mobile workforces.

As compared to a green field scenario for Irish Water there

could be less flexibility in setting up the terms and conditions

for new members of the workforce, and in determining the

most appropriate resourcing mix;

Risk of increasing national dependence on a single utility,

thereby increasing the bargaining power of the workforce;

Existing utilities would need to bring in water industry

knowledge / experience;

Risk of impacting negatively on the borrowing power of the

existing utility, because lenders will take account of the whole

organisation, and any issues in one business area could

influence lending decisions related to the other;

Risk of diverting the attention of management from existing

strategies with competing priorities;

Funding of the new utility may have to be kept separate from

the existing state agency’s funding. Perceived or real cross-

subsidisation could pose issues for the regulators;

Potential constraint on the flexibility of Irish Water to shape its

own strategy and culture;

Risk of impacting negatively on the brand of the existing utility;

Differences in the requirements for skills, process and systems

between water and energy/roads could prove to be significant

with potentially significant costs for the relevant state agency to

address these;

Risk of impacting negatively on business as usual as the

organisation redefines its operating model and structures;

The level of external support required to plan, manage and

execute the integration of Irish Water into an existing utility;

Many of the potential benefits of having Irish Water integrated

with another State agency could be limited by the fact that

regulators will want the different regulated businesses (e.g.

water and energy) ring fenced and separated for regulatory

purposes. This would make integration more difficult;

Some of the State agencies concerned are already required to

maintain separation of their supply and network businesses.

This is likely to limit the potential to exploit existing facilities

and capabilities in the integration of Irish Water;

Impact on the balance sheets, headcount and operational

footprint of some State agencies arising from the significant

scale of Irish Water;

The potential implications for Irish Water and the


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Advantages Disadvantages

ESOP/ESOT’s of existing State agencies on the transfer in of

water assets;

The fate of the relevant State agencies is uncertain due to

current reviews. Integration of Irish Water could impact their

potential for restructuring or cause the need for extensive

strategic restructuring within the state agency at the same time

as Irish Water is being implemented; and

Recent examples (such as Welsh Water, the former United

Utilities and Hyder Group) indicate that multi utilities tend not

to achieve the synergies anticipated.

Figure 45: Embedding Irish Water in an Existing State Agency

The implementation of Irish Water will be a very complex transformation, requiring significant focus andinvestment in the years ahead as the water and waste water activities of 34 separate local authorities areseparated out and integrated into one public utility entity. With pressure on public finances, security of supplyand water quality, attention will be focused on implementing an Irish Water, which is capable of securinginvestment funding, realising operating efficiencies and securing the supply of quality water on a national basisat the earliest possible time.

There is a clear opportunity to establish a new fit-for-purpose organisation, based on international best practiceand structured to deliver an efficient and effective service to domestic and non-domestic customers. The singleWater Utility Model is recognised in capital markets as an investment grade structure, with funding packagesdesigned specifically for this purpose. Precedence points to the efficiencies that have been delivered in relationto the operating costs of standalone water utilities in the UK ranging from 2-3% per annum in England andWales and up to 40% over 5 years in Scotland and to the improvement in the quality of service provided tocustomers.

Alternatively, there is an opportunity to leverage the structure, expertise and governance of an existing Stateagency. This may provide some marginal acceleration of the implementation timescale, but would not in ourview significantly shorten it, since the critical path will be determined by the preparation of essential legislation,the lengthy and complex implementation and planning activities outlined above, and by the speed of thetransfer of assets, staff and responsibilities from local authorities to the new utility. The experience referred toabove from the UK would indicate that multi-utility models have not been successful due to the difficulties inmanaging a multi-utility business and the limited opportunity for operational synergies where activities need tobe ring-fenced for regulatory purposes.

Whilst our analysis has indicated that there would be a number of potential advantages, in our view these areoutweighed by the disadvantages, in particular:

The potential impact on the borrowing power of both Irish Water and the existing State agency; The constraints on integration and sharing imposed by the requirement to ring-fence the water service

from other regulated businesses, and the requirement to maintain separation of the networks and supplybusinesses in some of the existing State agencies;

The need for a fully focused management team to drive through the establishment of Irish Water over thenext six years, managing the transition of activities from 34 local authorities to Irish Water,implementing water charges, and managing an evolving regulatory regime;

The potential implications for Irish Water and the ESOP/ESOT’s of existing Semi States on the transferin of water assets;

The uncertainty surrounding the future ownership of the state agencies concerned following recentGovernment considerations to sell some State assets; and

The level of synergies which could be leveraged in the provision of water services by State agenciescurrently constrained by the separation of their own regulated activities.


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Consequently, on balance, PwC see no compelling reason to assign responsibility for water services provision toanother State agency.

Unless these issues could be satisfactorily addressed, based on the factors outlined above, theinformation to hand and our experience of the water and utilities sector nationally andinternationally, it is our recommendation that Irish Water should be established as a separatecompany in its own right.

As regards other means of potential involvement for the existing State agencies, PwC has recommendedelsewhere in this document that Irish Water procures a management partner through a competitive tenderingprocess as soon as possible after January 2012. The role of a management partner would be to support the:

Set up and management of the new organisation; National initiatives to be undertaken (e.g. billing, metering); and Design and management of the transition to a fully operational utility.

It is envisaged that a number of the State agencies listed above could be suitable candidates for this role, eitheron their own or in partnership with the private sector. However, PwC expect that public procurementconsiderations will dictate that the partner would have to be selected through a public tendering process opento the private sector as well as the State agencies.


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8. Recommended TargetOperating Model


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8. Recommended TargetOperating Model

Legal and Institutional FrameworkIrish Water will be a State body set up under statute and in conformity with the Code of Practice for theGovernance of State Bodies. The Minister will appoint the Board.

The governance arrangements applying to Irish Water should be consistent with the Code of Conduct for thegovernance of State Bodies and OECD principles on good corporate governance by ensuring there is an efficientand effective legal and regulatory framework in place, with high standards of transparency and disclosure.

The company will employ its own staff and it is usual to provide in statute for the terms and conditions,including superannuation rights, of the staff who will be designated to transfer to Irish Water from localauthorities and the DECLG. The company will also have the freedom to commercially contract for third partyprovided services (outsourcing) as determined appropriate by the management and Board if necessary.

One of the early tasks of the Board will be to decide on its organisation structure and recruit the Chief Executiveand Senior Management team. The remuneration package of the Chief Executive will need to be agreed with theMinisters for ECLG and PER.

The Board's statutory powers will have all the characteristics of a commercial body with powers to borrow,enter into PPPs, joint ventures and set up subsidiaries.

As its staff will no longer be employees of the local authorities, they will not count for public service numbers.As a consequence, the macroeconomic effect of setting up Irish Water will be that public service numbers willreduce thus reducing current obligations on the Exchequer and also Debt/GDP ratio.

The primary legal issues arising and outline of the main legislative changes required to give effect to therecommended organisational form are set out in Section 10 below.


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Summary of Proposed Industry StructureThe main bodies and their relationships in the target operating model are shown in Figure 46 below.

Figure 46: The Overall Structure for the Public Utility Model

The roles and responsibilities of the main participants in the sector are summarised in the table below:

Participant Responsibilities

EU Set policy that impacts water services at a pan European level.

DECLG Set national water policy having regard to other national policies (Programme forGovernment, NewEra etc.)

Set water pricing framework;

Play a national role in determining the legal and regulatory framework for thesector, in line with our EU obligations; and

Look after legislation and policy in relation to the management of the abstractionlicensing process.

EPA Environmental regulation of Irish Water

River Basin Management Planning

Abstraction management; and

Testing and monitoring (Irish Water and GWS).

Commission for EnergyRegulation (CER)

Economic regulation (price reviews, tariff design, assess efficiency of Irish Wateretc);

Ensures that Irish Water provides customers with a good quality service at a fairand efficient price;

Regulating the domestic and non-domestic tariffs;


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Protects the interests of consumers by keeping charges as low as possible;

Enables the sector to develop in line with overall national economic and socialneeds;

Enables service providers to develop in a sustainable and financially viablemanner;

Setting challenging efficiency and performance targets for water service providersand monitoring their performance in that regard and taking action, includingenforcement, to ensure the overall statutory objectives for the sector are met; and

Making sure the water service providers deliver the best for consumers and theeconomy and the environment in the long term.

National Consumer Agency

(Planned to Merge withCompetition Authority)

To develop a representative view of what water sector customers would expect ofthe water service in Ireland.

Irish Water Licensed water company, subject to economic, quality of service andenvironmental regulation;

Provider of water and waste water services to household, commercial andindustrial water customers in Ireland (not served by Group water schemes);

Localised catchment management focused on source protection

Abstraction;

Water treatment;

Water conservation;

Waste water treatment;

Water and sewerage network operation;

Management/operation of combined sewer overflows;

Sludge disposal;

Asset operation and maintenance;

Investment planning and delivery;

Asset management;

Billing and collection;

Customer relationship management;

Respond to requests for new connections;

Execution of abstraction management plans;

Water resource planning;

HR;

MIS; and

Obligation to supply water and wastewater services where reasonable andeconomic to do so.

Group water schemes26 To provide the water services they are expected to provide by theirmembers/customers;

To comply with environmental regulation as determined by the EPA;

Will interact with Irish Water to receive bulk water supplies where these arecurrently sourced from local authorities; and

Should retain opportunity to convert to or merge in with Irish Water if required.

GWS customers To receive water services from GWS providers subject to environmentalregulation from the EPA; and

To pay water charges in line with their GWS providers’ payment policies.

DBO To provide services to Irish Water and the group water schemes as required intheir contracts.

26 There may be benefit in allowing group water schemes the option to transfer their assets and operations to Irish Water aspart of the new legislative arrangements.


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Lenders To provide finance to the water sector in Ireland on terms as determined bymarket conditions.

Customers To receive water services subject to economic, environmental and quality ofservice regulation from Irish Water; and

To pay water charges in line with Irish Water’s payment policies.

Figure 47: Water Services: Key Roles and Responsibilities

Body Role

OPW Fluvial (and sea) flooding protection.

Local Authorities Local planning consents; Stormwater management (with NRA);

Storm sewers; Septic Tanks.

Figure 48: Other bodies: key roles and responsibilities

While the tables above will be self explanatory in most respects, there are some ‘boundary’ issues which meritsome clarification. For instance, it could be argued that the issue of septic tanks should be transferred to IrishWater on the basis that Irish Water could then better assess which areas should be served with new sewers andwould have more control on the potential for groundwater protection. On balance PwC have suggested that thisfunction should remain with the local authorities on the basis that it is not related to a network related publicprovision of wastewater services and is more linked to housing planning issues than utility management.Equally, the interlinks between Irish Water, the Local Authorities, the NRA and the OPW in respect of run off orstormwater will need detailed consideration, particularly in the context of combined sewer overflows. Theallocation of roles in abstraction may also merit further consideration.

The transformation planning for implementing the target operating model will also need to consider the roles ofother bodies to the extent they are impacted by the creation of Irish Water including for example:

ESB: through its involvement with certain water courses and reservoirs; The bodies responsible for management of inland water ways; and The Department of Agriculture Fisheries and Food.

The implementation planning phase of the new operating model should involve consultation with theCCMA/local authorities and others on the boundaries of roles and responsibilities outlined in Figure 47 andFigure 48. Where some roles remain for the local authorities (for example responsibility for environmental andwater quality monitoring and reflecting the principles of the Water Framework Directive), arrangements tosupport their ongoing activities will need to be put in place in order to achieve the goal of financialsustainability. One option which could be considered would be to introduce an abstraction charge (particularlyfor larger volume abstractions) which could generate funds to support the local authorities in fulfilling theseroles. This would have to be explored in more detail in the implementation phase.


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RegulationA typical independent economic regulator for the water sector would be expected to ensure that water serviceauthorities provide domestic and commercial customers with a good quality service in a fair and efficient andeffective manner and offering value for money, by:-

Making sure that the companies provide customers with a good quality service at a fair and efficientprice;

Regulating the prices charged to the consumer, based on a set of charging principles which:-

o Protect the interests of consumers by keeping charges as low as possible;o Enable the sector to develop in line with overall national economic and social needs; ando Enable service providers to develop in a sustainable and financially viable manner;

Setting challenging efficiency and performance targets for water service providers and monitoring theirperformance in that regard and taking action, including enforcement, to ensure the overall statutoryobjectives for the sector are met;

Making sure the water service providers deliver the best outcomes for consumers and the economy andthe environment in the long term;

Customer consultation on major policy issues e.g. on the criteria for determining the level of chargesand changes in the levels of charges.

In the interests of ease of implementation and also cost effectiveness of regulation the role of economicregulator for Irish Water should be allocated to the CER. Given Government policy on the need to rationalisethe number of State agencies, and the recommendations of the Review Body for Sate Agencies (McCarthy), PwCformed the view that the best alternative to creating a new regulatory body for the economic regulation of thewater sector was to assign the regulatory responsibilities to an existing economic regulator. PwC formed theview that the Commission for Energy Regulation had the closest strategic fit in this regard, as distinct fromregulators in the telecoms or transport sectors. The EPA has separate independent functions to discharge and inline with international practice PwC recommend keeping the activities of the EPA – technical andenvironmental regulation- separate from economic regulation.

One of the initial roles of the CER would be to consider the structure of the initial tariff for Irish Water for whencustomer charging is introduced and also to establish the regime for economic and quality of service regulation.

Figure 49: Regulation


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The EPA will continue in its role as environmental regulator: however PwC expect it primarily to focus itsrelationships on Irish Water rather than the local authorities in respect of water services, recognising thereallocation of roles to Irish Water. The EPA will be the environmental/technical regulator of the Group WaterSchemes although it will have the option to request that front line regulation be undertaken by Irish Water oreven in some circumstances, albeit limited, by the local authorities.

PwC also recommend the establishment of a body with responsibility for the representation of the view of waterand sewerage customers, with a similar remit to the Consumer Council for Water (CCW) in the England andWales system. The role of that organisation is focussed on ensuring the customer complaints are responded toby the water companies. In effect the CCW acts as a further level of escalation for a customer complaint if thecustomer feels the water company has not responded quickly or effectively. The CCW also lobbies companieson behalf of customers on major local or cross industry water customer service issues. This important rolecould be taken on by an existing body, for example the National Consumer Agency (NCA). The respective rolesof CER and the NCA in relation to customer complaints and other matters would need to be clarified during theimplementation planning phase.

Leadership and CoordinationPwC would expect Irish Water to have a Board composed of executive and non executive members in order toprovide appropriate governance. PwC also recommend the creation of a Board advisory panel in particularduring the early years of the creation of Irish Water to allow representation of the views of key stakeholders inIrish Water – this could include for example customer representatives or local authorities.

The structure of the management team will be a matter for the Board and Chief Executive. However, PwC wouldexpect the executive structure to be established based on the roles identified in the organisation chart shownbelow. These are the roles typically undertaken by the leadership of a water and sewerage company.

On some occasions for smaller water companies the “back office roles” IT, finance and HR can be combined insome form. In the case of Irish Water PwC would suggest the roles remain separated given the volumes of workto be expected (in HR in managing the transfer of staff, and in IT with the IT investment programme that willbe required to implement the MIS). There may be benefits in splitting Asset Management and the CapitalProgramme responsibilities. However it is noted that a number of water companies have these roles combinedto support lifecycle asset care policies.

A specific function of Monitoring and Evaluation is shown. This would be the primary contact point for boththe economic and technical/environmental regulators.

One further consideration which may need to be borne in mind when structuring Irish Water is the potential forfuture retail competition (see Section 8).

Figure 50: Typical Organisation Chart for a Water Utility

ManagingDirector

OperationsServices

Asset Mgt.

EngineeringFinance IT & MIS

HumanResources

CustomerServices &

Billing

Marketing &Comms

ExecutiveSupport

Monitoring andEvaluation


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Operations

Consideration of a regional structureIn our assessment of the Public Utility Model for Irish Water PwC recommended that the Utility retain someregional focus to supervise and support the local customer interface but also to support river basinmanagement. The theme of a regional structure for some of the operations of Irish Water has been a consistentpart of stakeholder feedback and also proposals for the reorganisation of Irish Water in the past. The riverbasins in Ireland are shown in the figure below.

Figure 51: River Basins of Ireland

The ultimate decision regarding the number of operating regions should be made by the management of IrishWater. There could be 3-7 operating regions, if the mid-point were adopted e.g. 5 operating regions they couldbe:

South Western; South Eastern; Western (with part of North Western roughly corresponding to Donegal allocated to Western Region); Shannon (with the remaining part of North Western allocated to Shannon region - including parts of

counties Cavan, Monaghan, Longford and Leitrim); and Eastern (That part of Neagh-Bann region in the Republic allocated to Eastern Region, including parts of

counties Louth, Meath and Monaghan).

In terms of delivery of operations, management should be empowered to develop the model they wish to use forIrish Water.


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The operational restructuring of Irish Water away from local authority boundaries should be a route to thedelivery of operational efficiencies, allowing greater flexibility in workforce management and deployment.Systems to support efficient workforce management which involve, for example, mobile dispatch are all beingdeployed in leading utilities throughout Europe, leading to reduced numbers of depots, spares and reducedworking capital. Such systems would facilitate specialised crews providing a speedy response to problems,drawing on resources nationwide to assist where required.

By reflecting River Basin Management Planning districts in the operational organisation model, monitoring andenforcement, data collection and target setting can be reflected from the RBMPs to the operating region. Thiswill allow greater transparency in reporting and in assessing whether targets can and have been achieved.

There are a number of opportunities open to management regarding delivery models and the use of in-sourcedor outsourced labour as demonstrated in the figure below. PwC recommend that the customer billing andcollections activity is outsourced as there is likely to be a need to have the activity well established to supportthe introduction of billing and experience shows there is significant preparatory work to be undertaken withregards to household data capture and cleansing customer records to ensure successful billing. As has beenidentified elsewhere in this report, other state agencies may feel they have the experience and competencies tocompete to run some of the activities Irish Water may need to outsource.

Operating DistrctManagement

Water Treatment

Outsource elementsto Contractors or

LA's

Own staff (e.g.mobile mtce)

DBO's

WastewaterTreatment


LA's

DBO's

Own staff e.g.mobile mtce

Water Resources Water Networks


LA's

Own specialistteams (leakage)

Frameworkcontracts

Cooperation withGWS

WastewaterNetworks


LA's

Own specialistteams (jetting)

Frameworkcontracts

Sludge

SpecialistSubcontractors

Quality, Labs etc

Figure 52: Operations Services


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Asset Management and Capital ProgrammeMost of our stakeholder soundings indicated that there will be continued long term investment in the water andwastewater infrastructure in Ireland to address sustained under investment in the assets to date. The currentWSIP 2010-2012 and the Value for Money review on the previous WSIP highlight these issues. There isevidence to suggest an immediate backlog of required investment of the order of €500 million and in additionthere are the requirements to fulfil obligations under the Water Framework Directive.

The immediate focus will be on compliance with ECJ rulings on water and wastewater treatment. However,there will be an increasing focus on water conservation and strategic water resources. Other issues include asignificant number of small WWTP’s which are not compliant with treatment standards, localised issues ofquality and security of water supply. Investments will also be needed to drive efficiencies in the business.

As part of its operating model, Irish Water will need to deploy leading sector practices in terms of capitalexpenditure allocation and delivery, it will also need to develop leading practice asset management to be able todeliver the required investment and efficiently and effectively as possible.

A typical expected process for asset management planning and approval is shown below.

Figure 53: Typical Asset Planning and Approval Process

Irish Water will require heavy initial investment in collecting and maintaining asset information with a visibleasset register being built and maintained including asset performance, condition and criticality gradingaccording to standard methodology. In addition there will also need to be a national high quality, reliable andgranular GIS system for both water and wastewater assets (mainly underground/invisible assets). This wouldneed to be linked to the River Basin Management GIS and the Development Planning GIS systems. LocalAuthority Development Plans and Regional Development Plans would form a key input as would NationalSpatial Plans (Hubs/Gateways) as would inputs from other agencies such as the IDA/Enterprise Ireland andresearch agencies such as Forfás.

The management team for Irish Water should also have commercial freedom to determine which aspects of thecapital expenditure and asset management process they outsource to third party providers. As a typicalminimum, setting the strategy and investment planning is retained in-house by utility companies in the watersector – other aspects of delivery are outsourced or provided on a mixed model.


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Customer Service and BillingCustomer service and billing will be a new activity for Irish Water in whatever organisational form it takes. Themodel for customer billing should be based on the following principles:

Irish Water would have a Customer Charter outlining its service level commitments; There should be a single point of contact for all customers for billing and technical queries; Customer Service Representatives (CSRs) may specialise in dealing with financial and technical queries; Complete record of all interactions with the customer to be available rapidly to the CSR including notes of

all phone conversations, emails, scanned letters, payment history and this to be kept up to date in realtime (this will require investment in systems);

CSR’s specialising in dealing with financial queries to be empowered to close off as many queries on thefirst contact as reasonably possible. This may include discretion to waive small items of payment;

Technical staff in the field or office that are approached by customers to refer the customers to the centralprocess. Every contact with the customers to be logged and handled in this way, even for rural locations;

CSR’s dealing with technical queries to have visibility on the GIS, real time operating information,workflow management systems as well as whether complaints/queries have been made by customers forrelated or the same issue;

Centralised and integrated customer contact centre (note with application of advanced ICT it is notnecessary for all CSR’s to be in one location to implement a centralised and integrated contact centre);and

The customer experience is that a high proportion of issues will be resolved satisfactorily on the firstcontact. Other issues not resolved on first contact will be tracked through the system and the customerkept informed on progress.

In addition the quality of customer services delivered by Irish Water should be regulated by the economicregulator (possibly using incentive mechanisms if the regulator felt that was to be appropriate.) The customerrepresentative body will also have a role in monitoring the customer service performance of Irish Water.


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Funding Requirements and Financial ArrangementsFor the Public Utility Model PwC has undertaken a high level assessment of what the financial position for thebusiness might be and in particular the likely funding requirements. A number of scenarios can be run on thesenumbers, depending upon the assumptions made and sensitivities chosen in relation to Governmentsubvention, the level of external funding and the charges to be applied. In this section of the report PwC hasreflected the outputs from three illustrative scenarios:

Scenario 1: The purpose of this scenario is to reflect the resulting funding requirements based uponspecific assumptions around the level of Government CAPEX support available during the periodmodelled.

Scenario 2: The purpose of this scenario is to reflect the resulting funding requirements based uponmore aggressive (lower) assumptions around the level of Government CAPEX support available duringthe period modelled.

Scenario 3: The purpose of this scenario is to reflect the impact of designating a set domestic charge,in the mid-range of those charged by UK water companies, where the balancing funding requirement,(less domestic and non domestic charges) will be discharged by the Government and/or third partyborrowings.

General AssumptionsA number of assumptions have been made in preparing the scenarios above:

In all cases an assumption has been made in the models that the following funding requirement27

will be covered:

o The operating costs of Irish Water as a utility;o Funding for capital expenditure and the replacement of existing assets;o Cost of any borrowing to fund Irish Water.

All of the scenarios shown have assumed a 90% collection rate in terms of both domestic and nondomestic charges.

Where reference is made to any domestic free allowance, it has been assumed that this value will bereceived in full (i.e. even though we have assumed above that 10% of all invoices issued will not becollected, it is still nevertheless assumed that Irish Water will receive the value of any free allowanceassociated with those invoices).

New OPEX costs have been assumed in relation to leakage detection / sampling compliance, theRingsend DBO, the North Dublin Waste Water Treatment Plant and the Greater Dublin StrategicWater Supply projects. These new costs total €65m per annum and come on line on a staged basisbetween 2014 and 2020.

Transitional costs totalling €12m (before VAT) are included in OPEX between the period January2012 and June 2013. These costs are to fund activities including hiring a management team andsetting up a programme office for the transition. Other new OPEX costs included in the modelinclude the funding of a regulator from 2014 and the transfer of some departmental staff to IrishWater.

An OPEX backlog, previously referenced in the Finance section of Chapter 3, has been included inthe model totalling €60m. This backlog has been spread over a 3 year period 2015-2017.

27The funding requirement is an estimate of what the utility will need to support its OPEX and CAPEX activities. Our scope

of work does not specifically include the evaluation of how that funding requirement should be met (government support,

customer charges etc).


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OPEX efficiency rates of 2%, starting in 2015 for 11 years, and 1% for the remainder of the model.This appears to be consistent with our analysis of the saving made by England and Wales watercompanies (see Section 3) and Scottish Water (see Appendix 7). The OPEX starting base used wasthe 2011 budget, adjusted for inter-authority contributions;

Meter reading costs have been included in the model from 2015 onwards, when it is assumed withinthe CBA analysis that 80% of meters will be in place.

Additional OPEX efficiencies relating to the introduction of metering in line with the department’sCost Benefit Analysis (CBA) submission dated 12 August 2011;

For capital expenditure PwC has assumed:

o An annual CAPEX requirement of €600m before efficiencies and metering programme.

o Efficiency gains of 1% have been assumed from 2014 onwards. These efficiency gains relateto having a Water Utility in place which has central control of all assets and investmentdecisions; can operate across local authority boundaries; can leverage the combined spend ofthe CAPEX program to negotiate supplier rates and has dedicated staff with specificexpertise in managing capital investments. The accumulative effect of this by 2030 is 17%.The accumulated efficiency rate is applied to the base CAPEX spend of €600m in 2011. Overthe period 2014 to 2030, this results in a CAPEX saving of €918m.

o A spend of €500m, spread over 5 years from 2015 to 2019, to address part of the CAPEXback log for Irish Water.

o Metering capital costs and replacements costs. The capital costs are spread over 4 yearsfrom 2013 to 2016, totalling approximately €356m while replacements costs begin in 2021and are approximately €10.5m each year before inflation. The total replacement costs for theperiod 2021 to 2030 is approximately €105m.

o Total CAPEX spend of €10.2bn between 2013 and 2030 (post backlog, metering campaignand efficiencies)

All numbers are expressed in real terms.

All valid local authority water and waste services related assets and liabilities will transfer to IrishWater (see Chapter 3: Assets & Liabilities). The value of the assets transferred will be based on theregulatory capital value, which we have assumed to be €4.7bn for the purpose of this report (see alsothe paragraph entitled “The ability of Irish Water to access financial markets” below for furtherinformation). The value of the liabilities assumed to transfer to Irish Water is €326m.

The number of domestic households has been derived based upon the 2010 census results for non-vacant dwellings multiplied by 77% (an extrapolated percentage of houses connected to public mainsbased upon the 2006 census results). In addition it has been assumed that the number of domestichouseholds will increase by an average of 1% YOY from 2014.

In relation to VAT;

o PwC has not made any assumptions in relation to the rate of VAT chargeable for water andwaste water services. The provision of water by local authorities is an exempt activity as a resultof an EU derogation obtained by Ireland. As a result, the local authorities are not entitled toreclaim relief on input VAT on their purchases.

o As the derogation is only available in situations where water is provided by local authorities,Irish Water, as a taxable entity, would be required to charge VAT for water services. The rate ofVAT applicable would be determined by the Department of Finance. Irish Water wouldhowever be entitled to reclaim input VAT on their purchases.


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o For the purposes of the scenarios presented, as we do not have a detailed breakdown of theinput VAT paid by the local authorities in recent years, we have not assumed any recovery ofinput VAT. Any such recovery of input VAT by Irish Water will reduce the level of fundingrequired.

Key FindingsThe key findings from the 3 illustrative scenarios are as follows – more detailed workings are available in Annex1 to this section:

Depending upon how the funding requirements of Irish Water are met, there will be significant variationsin any resulting charges for domestic and non domestic customers:

o Scenario 1: This scenario implies a net funding requirement (after taking into account bad debtassumptions) from domestic and non-domestic customers of c. €920m in 2015, increasing to c.€963m by 2020. A key assumption is that Government funding will only be available through to2022 and amount to €2.1bn for the period.

o Scenario 2: This scenario implies a net funding requirement (after bad debts) from domestic andnon-domestic customers of c. €1,020m in 2015, increasing to c €1,063m by 2020. A keyassumption is that Government funding will only be available through to 2018 and amount to€900m for the period.

o Scenario 3: This scenario, which implies a fixed domestic charge for the period through to 2030,results in a net funding requirement (after bad debts) from domestic and non-domestic customersof c. €880m in 2015, increasing to c. €923m by 2020. As domestic charges cannot be flexed tooffset changes in funding requirements and/or bad debts, Government funding of c. €3.1bn wouldbe required in the period through to 2030.

If a Free Allowance along the lines of that outlined in recent Government policy statements were to beintroduced (i.e. all households will be provided with a free allowance of water and charges will only apply tousage above that allowance), the cost of this Free Allowance in 2015 (based on a percentage of OPEX, beingan illustrative 42 litre water allowance per person per day over the total average water usage per person perday – 145 litres) would be €122m, thus reducing total funding required from domestic and non-domesticcustomers by between 12% (scenario 2) to 13% (scenario 1). This €122m would have to be funded byGovernment.

One of the primary tests for determining whether or not Irish Water would be treated as on or off theGeneral Government Balance Sheet (GGB) is whether the sales generated by Irish Water (excluding anyGovernment grant income or subsidies) would be more than 50% of the operating costs includingdepreciation and interest. For each of the three scenarios above we have sought to apply this test, and ineach instance the percentage of sales to operating costs were well above the 50% threshold. Consequently,while the CSO / Eurostat will make the final determination in this regard, and may indeed take othertests/factors into account, there would nevertheless appear to be indicative support for the contention thatIrish Water’s borrowings would be deemed to be outside the GGB. This benefit would also extend to anyliabilities transferred from the local authorities to Irish Water as discuss in Chapter 3: Assets & Liabilities.

The Ability of Irish Water to Access Financial MarketsFor the purposes of deriving a debt ceiling for third party lender borrowings, we have made some assumptionsin relation to what the regulatory capital value range for Irish Water might be based on comparisons with SouthWest Water (SWT) and Northumbrian (NES) water in the UK.

An RCV valuation range was derived by firstly calculating the RCV per customer of SWT and NES as a basis forextrapolation using the number of water and waste customers in Ireland, and secondly, the ratio of RCV to


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Modern Equivalent Asset Value (MEA) for SWT and NES which could then be applied as a multiplier againstthe NBV of Irish water assets as at 31 December 2010.

The result of these two exercises (lower result of the first and higher result of the second) provided a RCVvaluation assumption range for Irish Water of €2.8bn - €6.5bn, with the mid-point (€4.7bn) being selected.

In England and Wales water companies are typically able to borrow up to c 70-80% of regulatory capital valuewhich would mean a debt capacity of over €3bn – Irish Water is unlikely to achieve this level of gearing to RCVinitially as the company would be in its nascent years without an established track record of financialperformance or regulatory stability. PwC have therefore estimated the debt capacity of the business based ontypical EBITDA ratios for an investment grade company and concluded in scenarios 1 & 2 that the companycould have a debt capacity of €606m in 2015, rising to potentially €2.9bn by 2030. This finding is sensitive toassumptions which have been made.

The debt capacity of Irish Water will however ultimately depend on the level of funding made available to thebusiness. Once funding through whichever sources (customer charges, the exchequer) is known then the debtcapacity for the business can be estimated. However, typically water companies are regulated to be investmentgrade businesses and will have a credit rating of BBB+ or more. Using criteria set out by the financial ratingagencies, a company with modest financial risk and BBB+ status would be required to meet certain ratios. Forexample the funds from operations/Debt ratio should be between 30% - 45%, while a ratio of Debt/EBITDAwould need to be in the range of 1.4 to 2.0. Based on a more aggressive approach and BBB status theDebt/EBITDA would range between 3.0 and 4.5.

A key driver in any calculation of this nature will be the level of return allowed by the regulator. Currently theElectricity and Gas networks Weighted Average Cost of Capital (WACC) is about 6.0%, but may be higher forwater utility companies. Based on an indicative RCV valuation of €4.7bn as the starting point, an EBITDA ofapproximately €505m could be obtained by 2015. Using the above criteria for aggressive financial risk and BBBstatus, a multiple of 4 could be applied to the EBITDA to give a debt ceiling of approximately €2bn. At the startof operations a more conservative multiple would be applied, maybe as low as 2, giving a debt ceiling ofapproximately €1bn.

For the purposes of setting a debt ceiling in the current financial structure, an EBITDA multiple rising to 2 overthe first five years of operations and then rising to 3 over the next five years (remaining at 3 thereafter) wasused for illustrative purposes. Following on from the approach highlighted above the company debt ceilingcould reach approximately €2.9bn by 2030.

StaffingThe management team of Irish Water will determine the staffing and skills required for the new organisation.Following a detailed staffing audit and managed process, the appropriate staff from the local authorities willtransfer to Irish Water with recognition of relevant labour law requirements. Irish Water Management maydetermine that the transfer of staff required from local authorities will be carried out on a phased basis.

A key principle for the staff management in Irish Water is that the organisation will have the freedom to hireappropriately from the open market at market rates on a basis similar to other semi-state organisations. Itwould be expected at the outset, for example, that the specific skills required for the new management teamwould need to be recruited from the market, with existing candidates from national or local government alsofree to apply. All new staff employed will be employees of Irish Water.

As regards staff numbers, clearly the ultimate requirement will depend on many factors, not least of which willbe management’s strategy regarding outsourcing. Taking into account the variety of resourcing strategiesemployed by UK water companies, benchmarks (see Section 3) would suggest that total WTE numbers requiredby Irish Water, when Irish Water has fully taken over all water services from the local authorities (i.e. in 2018),will be significantly lower than the 4,278 deployed today.

Reduction in staffing requirements would be achieved over the period to 2018 by designing a fit-for-purposeoperating model; eliminating all existing duplication of activity; consolidating work locations and creating


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centres of expertise; driving synergies through the delivery of a national as against local service; leveragingtechnology to automate activity and remotely manage operations; rationalise roles and responsibilities of staff;leveraging flexibility of external expertise; etc.

The actual staffing numbers required will need to be determined by Irish Water management during the initialset-up phase.

In the context of reducing headcount and constraints on expenditure in the local authorities, Irish Water will beable to present opportunities not otherwise available to staff dedicated to water services. Increasedspecialisation will provide routes for career development as well as enhancing job satisfaction. Standardised HRstructures and methodologies of operation will allow for sideways moves for interested personnel where theindividual would like to take advantage of this. An increased emphasis on training and development and theintroduction of new systems at an accelerated pace will provide both challenges and opportunities. As IrishWater will be a public sector body, considerable protection will be provided by law for staff transferring to IrishWater from local authorities.

The smooth transition of staff from local authorities to Irish Water will involve discussions with staff and theunions. Potential transition issues may include:

Full and complete identification of water staff within the local authorities; TUPE (statutory transfer) issues associated with bringing together parts of 34 organisations into a single

organisati0n; Comparability of similarly titled roles across local authorities; Harmonisation of the terms and conditions for new Irish Water employees and local authority

transferees; and Staff concerns regarding personal terms and conditions, pension entitlements, location, etc.

It may also be desirable that some staff currently engaged in the regulation of Group Water Schemes betransferred from local authorities to the EPA, once the new regulatory arrangements are in place.

Marketing and CommunicationsIrish Water should have a strong brand presence similar to the retail arms of gas, electricity and telecomsutilities in Ireland. As part of marketing and communications Irish Water will have a requirement to ensurecustomer awareness of:

Water conservation; Need for payment for water services; and Cooperation with the metering programme.

In addition the organisation will want to develop communications strategies for response to emergencysituations or issues of water demand exceeding supply in any area.

MIS/ITExperience of the water industry elsewhere suggests that strong centralised MIS will be required that will besupported by state of the art ICT systems. This is an essential ingredient to support a professional customerservice, to drive efficiency in operations and capital expenditure, to generate procurement savings, to allowstandardisation of policies and procedures (Standard Operating Procedures – SOPs), and to report to theregulator(s).


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Figure 54: Typical water company MIS systems structures

Integration into Regional and Local PlanningIrish Water would take account of the Local Development Plans and Regional Planning Guidelines in assessingits investment priorities. It would also be appropriate to provide an ongoing forum where local authorities caninput to the asset management process of Irish Water and particularly the priority and timeline for key schemesto support local and entrepreneurial development, as the planning horizons for Irish Water may be longer thanthe current three year cycle for the WSIP and one year cycle for the RWP. The current mechanism for theannual review of the WSIP may provide a framework for this. In addition, state agencies such as IDA, HSE andothers should be consulted in the capital investment prioritisation process and have a forum where they canraise urgent requirements such as responding to a potential significant inward investment for job creation orpublic health protection measures.

The process by which Irish Water would itself be subject to planning regulations (e.g. construction of treatmentplants, pumping stations and road openings for laying and/or repairing pipes) is an implementation issue to beconsidered in detail at a later stage.


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The Role of Competition in the Provision of Water ServicesDuring the course of our discussions with key stakeholders in relation to the reform of the Irish Water sectorthe matter was raised as to whether the provision of water services in Ireland should be based on competitivemarkets.

Traditionally the supply of water services has been considered to be monopolistic in nature, largely because ofthe large capital investments involved in developing water sources, treatment and transportation. Duplicationof such investment for different suppliers would be an inefficient use of resources.

Competition could take two forms:

1. The introduction of competition “in the market” in which there may be competing water sources,treatment companies or retailers selling water services to customers; or

2. “Competition for the market” where there is a competition for a contract to provide water and/orsewerage services. This second approach is commonly used in the water sector with PPP contracts28 used

globally, the concession models used in France and the DBO contracts that are in place and operating inIreland currently.

In recent years limited competition “in the market” for water and sewerage retail services have been introducedin Scotland for non-household customers (who can chose from three alternative water supply companies inaddition to Scottish Water) and there is a number of upstream water rights trading schemes operating inAustralia29, the US and Southern America.

Generally the application of a competitive model is not widespread as yet. There is as yet no drive for theintroduction of competition into water service provision from the EU. It is being discussed for water companiesin England30. However, firm proposals are not in place as yet.

Given the challenges facing the water and sewerage sector in Ireland at present (with a focus on supporting theintroduction of charging, introducing regulation to ensure cost efficiency and also ensuring funding to addressthe investment challenge), PwC do not consider that the introduction of competition into the market should beregarded as a priority at this time. However, our model will bring a single focus to the sector which will beregulated independently, allow for greater transparency, enable comparisons to take place with performance inother countries and also internal comparisons. PwC suggest, that once Irish Water is well established as a selffunding utility the Government and Regulators may wish to assess international experience of the introductionof competition in water and sewerage services to identify whether Ireland could benefit from competitivemarkets in the water sector at a later date. With this in mind, PwC recommend that, when undertaking thedetailed design of the new organisational structure for Irish Water, the possibility of future retail competitionshould be taken into account.

Competition for the market and the procurement of major works, capital delivery, operations and also relatingto customer services (billing call centres etc) could be an important feature of Irish Water. Procurement ofservices competitively will allow access to private sector expertise and also the tender process in such casesshould also give indicators of the efficient level of costs. The UK and parts of continental Europe have reliedheavily on such outsourcing models.

The option therefore of creating Irish Water as a competitive company in a liberalised waterindustry is not taken forward in this study for further consideration, as the sector has otherchallenges which have largely been addressed by using the Public Utility Model in otherjurisdictions.

28 Public Private Partnership: for example the Sofia Water contract described earlier in this report.29 See for example: http://www.environment.gov.au/water/publications/action/case-studies/murray.html#trade30 It is our understanding that the Welsh Assembly is yet to be convinced of the benefits of water competition for Wales, see

for example http://www.waterbriefing.org/index.php/home/regulation-and-legislation/item/3842-welsh-assembly-publishes-strategic-policy-position-statement-on-water. Ofwat’s assessment can be found athttp://www.ofwat.gov.uk/competition/review/


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Annex 1 to Section 8 -Detailed FinancialWorkings


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Annex 1 to Section 8 - DetailedFinancial Workings

Attached below are the detailed workings in relation to each of the three funding scenarios outlined in Section8. Recommended Target Operating Model

Scenario 1: Decreasing Government CAPEX fundingScenario Specific Assumptions:

1) Government CAPEX Funding will be available in the following assumed amounts:

2014 2015 2016 2017 2018 2019 2020 2021 2022 Total

€450m €400m €350m €300m €250m €200m €100m €50m €0m €2.1bn

2) Domestic Charges can be issued from 2014 (i.e. in advance of completion of the metering programme)to fund any shortfalls not met by Government Funding, Non Domestic Charges and Third PartyBorrowings.

3) A Debt Ceiling for third party borrowing is often set as a multiple of earnings before interest, tax,depreciation and amortisation (“EBITDA”). The CER normally sets a EBITDA target for utilitycompanies based on a cost of capital of their regulatory capital value:

o A weighted average cost of capital (“WACC”) of 6%;

o An assumed Regulatory Capital Value (“RCV”) of €4.7bn to provide the initial basis for anEBITDA calculation (based on the net book value of assets thereafter);

o A limit on debt capacity rising to 2 and then 3 times EBITDA over time.

This approach is consistent across many other regulated utilities.


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Scenario 1: Funding Requirement

Funding Requirement (€m): 2015 2020 2025 2030General OPEX 711 659 582 543Other Costs (Debt Service Costs, Tax etc.) 32 107 240 425CAPEX 742 558 539 509Total funding requirement 1,485 1,324 1,361 1,477

Funded By:Government CAPEX Funding 400 100 - -Third Party Borrowings 165 261 316 379Remaining balance to be collectedfrom Domestic & Non DomesticConsumers

920 963 1,045 1,098

Potential Breakdown of Remaining Balance assuming a Domestic Free Allowance*:Non Domestic Customers** 395 414 448 471Domestic Customers** 403 424 460 467Free Domestic Allowance 122 125 137 160Total Funding Balance 920 963 1,045 1,098

Figure 55: Funding Requirement per annum (Euro)

*A Free Allowance would need to be funded, either by 1) increasing the rate charged to domestic customers sothat the resulting total payments received less any free allowance equals the payment which would have beenreceived were no free allowance in place or 2) providing additional separate funding, e.g. Government funding.

** A 90% collection rate has been assumed on all domestic and non domestic charges and consequently thefunding requirements reflected above are the net requirements after taking bad debts into account.

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Government Funding (CAPEX) Lender Funding Funding of Free Allowance Remaining Funding Requirement


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Scenario 1: Financing the Funding Balance

The remaining balance reflected in the table and graph above can be funded in a number of ways, including 1)Non Domestic Charges, 2) Domestic Charges and/or 3) Additional Government funding. While in this reportPwC make no recommendations in relation to how this should be funded or what any potential domestic chargeshould be; an example is provided below of what this could mean for a domestic customer.

Non Domestic Charges

In deriving the charge for domestic customers PwC has assumed that non domestic customers will be chargedthe same rate per cubic metre as domestic customers (calculated on the basis of the full cost of funding IrishWater less Government funding and third party borrowings) and that the collection percentage will be 90%.Based on the funding gap to be met in this scenario by domestic and non domestic income, this will result in asignificant uplift on the current rate for non domestic customers.

Figure 56: Non Domestic Charges (2014 – 2030) adjusted for bad debts (Euro Excl. VAT)

Domestic Charges

Once the net non domestic customer funding is subtracted from the funding requirements (less governmentfunding and third party borrowings); then the remaining balance needs to be sourced elsewhere. In the chartbelow we have assumed that this funding will be sourced from domestic customers; however we have alsoreflected the impact on a potential domestic charge where government fund a domestic free allowance.

Figure 57: Domestic Charges (2014 – 2030) including and excluding a free allowance (Euro Excl. VAT)

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Average charge per non domestic customer (adjusted)

-

100

200

300

400

500

600

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Funding requirement per domestic customer (90% collection)

Funding requirement per dometic customer (less free allowance)


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Option 1: No Free Allowance

On the assumption that there is no free allowance, the top line in the chart above reflects the charge perdomestic household before VAT which would be required to complete the funding of Irish Water.

Between 2014 and 2018 this average annual charge would be circa €422 before VAT.

Option 2: Free Allowance funded by Government

The bottom line in the chart above reflects the charge per domestic household before VAT assuming that a freeallowance of 42 litres per person per day was available and was funded by Government.

Between 2014 and 2018 the average annual charge under this scenario would be circa €332 before VAT.

It should again be noted that the above charges are indicative only and that a full tariff pricing model wouldneed to be developed and tested by the appointed Economic Regulator to arrive at such a charge. This pricingmodel would make assumptions on the level of bad debts likely to arise based on the charging mechanismapplied, and depending upon the assumptions made, this could result in higher charges to domestic customersthan reflected above.

Domestic Charge Comparison

The domestic charge under Scenario 1 of circa €422 per annum before VAT would be below the average of theUK Water Companies.

Figure 58: Revenue requirement per customer comparisons Irish Water (Scenario 1) and England and

Wales companies (Euro per Customer excl. VAT)

Source: "Independent Review of Charging for Household Water and Sewerage services" authored by Anna Walker,

published Dec 2009.

€0

€200

€400

€600

€800

€1,000

€1,200

ANG WSH NES SVT SWT SRN TMS UU WSX YRK Irl


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Scenario 1: Implications for General Government Balance

For the purposes of determining whether Irish Water would be treated as on/off the general governmentbalance sheet (GGB) one of the primary tests is whether or not sales (excluding any government grant incomeor subsidies) are more than 50% of the operating costs including depreciation and interest.

No Free Allowance

The following table reflects that calculation assuming no free allowance:

Sales (€m): 2015 2020 2025 2030

Total Sales* 920 963 1,045 1,098

Operation Costs (€m):General OPEX 711 659 582 543Interest on borrowings 19 52 90 107

Depreciation** 151 216 278 333Total Operating Costs 881 927 950 983

Sales as a % of Operating Costs: 105% 104% 110% 112%

*The sales value reflected above is net of assumed bad debts.

**Note the depreciation value which would be used for the purposes of determining whether the sales as apercentage of operating costs (including interest and depreciation) are more than 50% would be calculatedbased on an extensive audit of the asset values and useful lives of the existing asset base. The abovedepreciation figures were calculated on a straight line basis assuming an average asset life of 50 years.Consequently the above percentages should be treated as approximations only.

Free Allowance

If a free allowance was to be given to domestic customers, and was to be provided by Government on auniversal basis rather than via the social welfare to particular individuals meeting specific criteria, then this“revenue” would need to be deducted from the above calculation.

The table below reflects this alternative where there is a universal free allowance:

Sales (€m): 2015 2020 2025 2030

Total Sales 920 963 1,045 1,098Less Free Domestic Allowance 122 125 137 160Total Sales (exc. Free Allowance) 798 838 908 938


Depreciation 151 216 278 333Total Operating Costs 881 927 950 983



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Sales as a % of Operating Costs (2014 – 2030)

Figure 59: Scenario 1: Sales as a % of Operating Costs (2014 – 2030)

It would appear from the table above that there is indicative evidence to support a contention that Irish Watershould be off the GGB as under both variants of scenario 1 the level of sales are more than 50% of the generaloperating costs plus interest on borrowings and depreciation.

Under variant 2 however, if a universal free allowance were to be provided to the general public upon theintroduction of domestic charges, it is possible that this specific contribution by Government may count asgovernment expenditure. If however this allowance were to be provided through the social welfare system (i.e.only specific water customers would be entitled to avail of this allowance assuming they met set conditions),then variant 1 may still apply.

Note: The above tables reflect a view on one of the tests which may be run to determine whether or not IrishWater should be off the GGB. There are other tests which would be run by the CSO/Eurostat when making thisdetermination and other factors which may be taken into consideration.

70%

80%

90%

100%

110%

120%

130%

140%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Sales as a % of Operating Costs Sales (less Free Allowance) as a % of Operating Costs


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Scenario 2: More Aggressive Decrease in Government FundingScenario Specific Assumptions:

1) Government CAPEX Funding will be available in the following assumed amounts:

2014 2015 2016 2017 2018 Total

€400m €300m €150m €50m €0 €900m

2) Domestic Charges can be issued from 2014 to fund any shortfalls not met by Government Funding, NonDomestic Charges and Third Party Borrowings.

3) A Debt Ceiling for third party borrowing has been set determined by:

o A weighted average cost of capital (WACC) of 6%;

o An assumed Regulatory Capital Value of €4.7bn to provide the initial basis for an EBITDAcalculation (based on the net book value of assets thereafter);



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Funding Requirement (€m): 2015 2020 2025 2030OPEX 711 659 582 543Other Costs (Debt Service Costs, Tax etc.) 32 107 240 425CAPEX 742 558 539 509Total funding requirement 1,485 1,324 1,361 1,477

Funded By:Government CAPEX Funding 300 - - -Third Party Borrowings 165 261 316 379Remaining balance to be collected fromDomestic & Non Domestic Consumers

1,020 1,063 1,045 1,098

Potential Breakdown of Remaining Balance assuming a Domestic Free Allowance*:Non Domestic Customers** 438 457 448 471Domestic Customers** 460 481 460 467Free Domestic Allowance 122 125 137 160Total Funding Balance 1,020 1,063 1,045 1,098


*A Free Allowance would need to be funded, either by 1) increasing the rate charged to domestic customers sothat the resulting total payments received less any free allowance equals the payment which would have beenreceived were no free allowance in place or 2) providing additional separate funding, e.g. Government funding.

** A 90% collection rate has been assumed on all domestic and non domestic charges and consequently thefunding requirements reflected above are the net requirements after taking bad debts into account.

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Government Funding (CAPEX) Lender Funding Funding of Free Allowance Remaining Funding Requirement


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Scenario 2: Financing the Funding BalanceAs previously referenced a full tariff pricing model would need to be developed and tested to derive a potentialcharge to a domestic customer. While we make no recommendations in this report as to what that chargeshould be, we have sought to reflect below what this could mean under Scenario 2.

Non Domestic Charges

In deriving the charge for domestic customers PwC have assumed that non domestic customers will be chargedthe same rate per cubic metre as domestic customers (calculated on the basis of the full cost of funding IrishWater less Government funding and third party borrowings) and that there will be a 90% collection rate on allinvoices issued.

Figure 61: Non Domestic Charges (2014 – 2030) adjusted for bad debts

Domestic Charges

Once the net non domestic customer funding is subtracted from the funding requirements (less governmentfunding and third party borrowings); then the remaining balance needs to be sourced elsewhere. In the chartbelow we have assumed that this funding will be sourced from domestic customers (90% collection rate);however we have also reflected the impact on a potential domestic charge where government fund a domesticfree allowance.

Figure 62: Domestic Charges (2014 – 2030) (Euro Excl. VAT)

Option 1: No Free Allowance

On the assumption that there is no free allowance and 90% of all domestic charges invoiced are collected, thetop line in the chart above reflects the resulting charge per domestic household before VAT. Between 2014 and2018 this average annual charge would be circa €501 before VAT, peaking at €540 in 2018.

Option 2: Free Allowance funded by Government

The bottom line in the chart above reflects the charge per domestic household before VAT assuming that a freeallowance of 42 litres per person per day was available and was funded by Government.

Between 2014 and 2018 the average annual charge under this scenario would be circa €411 before VAT,peaking at €452 in 2018.

-

500

1,000

1,500

2,000

2,500

3,000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

-

100

200

300

400

500

600

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Funding requirement per domestic customer (90% collection)

Funding requirement per dometic customer (less free allowance)


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As with scenario 1, for the purposes of determining whether Irish Water would be treated as on/off the generalgovernment balance sheet the following review was undertaken:

No Free Allowance

The following table reflects the outputs from the sales as a percentage of operating cost test assuming no freeallowance:

Sales (€m): 2015 2020 2025 2030

Total Sales* 1,020 1,063 1,045 1,098






Free Allowance

The table below reflects the alternative variant where Government fund a universal free allowance:

Sales (€m): 2015 2020 2025 2030

Total Sales 1,020 1,063 1,045 1,098Less Free Domestic Allowance 122 125 137 160Total Sales (exc. Free Allowance) 898 938 908 938





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It would appear from the table above that there is indicative evidence to support a contention that Irish Watershould be off the GGB as under both variants of scenario 2 the level of sales are more than 50% of the generaloperating costs plus interest on borrowings and depreciation.

Under variant 2 however, if a universal free allowance were to be provided to the general public upon theintroduction of domestic charges, it is possible that this specific contribution by Government may count asgovernment expenditure.

70%

80%

90%

100%

110%

120%

130%

140%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030



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Scenario 3: Set Domestic Charge of €400 (Excl. VAT)Scenario Specific Assumptions:

1) Domestic annual charges averaging €400 before VAT per household can be issued from 2014through to 2030.

2) A Debt Ceiling for third party borrowing has been set determined by:

o A weighted average cost of capital (WACC) of 6%;

o An assumed Regulatory Capital Value of €4.7bn to provide the initial basis for an EBITDAcalculation (based on the net book value of assets thereafter);


3) Any funding balance less domestic charges, non domestic charges and third party borrowings will bemet from Government funding.


Funding Requirement (€m): 2015 2020 2025 2030General OPEX 711 659 582 543Other Costs (Debt Service Costs, Tax etc.) 32 107 240 425CAPEX 742 558 539 509Total funding requirement 1,485 1,324 1,361 1,477

Funded By:Domestic Charges* 485 509 533 557Non Domestic Charges** 395 414 448 471Third Party Borrowing 165 261 316 379Government Funding 440 140 64 70Cumulative Govt Funding(2014 – 2030)

906 2,266 2,627 3,060


* The domestic funding reflected above is net of bad debts** The funding from non domestic charges reflected above is as per scenario 1.

Under this scenario there would be a requirement for Government funding throughout the period under review(totalling €3.1bn by 2030 on a cumulative basis).

-

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Domestic Revenue (Net of Bad Debts) Non Domestic Revenue (net of bad debts)

Government Funding Third Party Borrowings


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No Free Allowance

The following table reflects the outputs of the sales as a percentage of operating cost test assuming no freeallowance:

Sales (€m): 2015 2020 2025 2030

Total Sales* 880 923 981 1,028






Free Allowance

The table below reflects the alternative variant where Government fund a universal free allowance:

Sales (€m): 2015 2020 2025 2030

Total Sales 880 923 981 1,028Less Free Domestic Allowance 122 125 137 160Total Sales (exc. Free Allowance) 758 798 844 868





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As with Scenario 1 & 2, the above table would appear to provide indicative evidence to support a contention thatIrish Water should be off the General Government Balance Sheet as the level of sales is substantially more than50% of the general operating costs plus interest on borrowings and depreciation.

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030



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9. Transition Strategy


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9. Transition Strategy

The preferred Public Utility Model represents a major change with significant implications for the waterindustry in Ireland and its many stakeholders. Clearly, the transition approach adopted will be crucial insuccessfully achieving the objectives of the reform. Some of the key challenges faced include:

Ensuring that the implementation of the Public Utility Model secures the benefits of putting the model inplace;

Ensuring that Irish Water is appropriately staffed in terms of numbers and skills with a mix of existinglocal authority staff and external expertise;

Ensuring the smooth transfer of staff from local authorities (and other bodies, where appropriate) toIrish Water;

Maintaining the detailed knowledge of local infrastructure currently held by local authority waterservices staff;

Ensuring the continuity of effective local service provision, including support of the Group WaterSchemes;

Achieving the required shift in managerial and staff culture from a local authority environment to aculture with the features of a commercial entity;

Integrating the various processes, systems, ways of workings, cultures etc; Minimising the risks associated with national dependence on a single company for continuity of public

utility services; and Ensuring that mechanisms are put in place to identify and address legacy issues such as historical

commitments on tariffs agreed with large customers, existing loans and other liabilities, regularising landpurchase, wayleaves and other property issues.

The transition strategy recommended is a phased approach leading to a full transfer of water services from thelocal authorities to Irish Water over a period of up to 6 years. Overall, PwC envisage a step by step change at apace driven by Irish Water management (who may wish to effect the implementation over a shorter timeframe),based on the objective of achieving maximum efficiencies and achieving a self-funding status for the waterservice as quickly as is practical.

The phased approach is recommended over a ‘Big Bang’ approach, as it allows Irish Water design, build andimplement a ‘fit for purpose’ organisation structure to deliver water services without the constraints of theexisting local authority model. It also allows Irish Water to control the development of water services during thetransition period through agency arrangements with the local authorities. Consequently, it is most likely todeliver efficiencies earlier, reduce the risk of failure and maintain security of supply throughout the transitionperiod.

The key phases suggested are as follows:

Figure 66: Phased Approach


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The timescales proposed are based on the view that 18 months is the minimum period within which therequired legislation could be enacted and the necessary interim agency arrangements with local authoritiescould be put in place. Following this a period of stability is required to enable Irish Water to establish itsoperational capabilities in terms of organisation, processes and systems, and to be in a position to commencethe transfer of staff and operations from the local authorities. It is envisaged that this transfer would take placeon a phased basis over a three year period to ensure a smooth transfer of skills expertise and knowledge.However, the pace of this transition would be a matter for Irish Water, the Department and the localauthorities.

The key features of the strategy proposed are:

Pending the enactment of the enabling legislation establishing a corporate body, The Minister wouldappoint an interim board on 1st January 2012 to commence making the necessary preparations toestablish the formal statutory company. From that date it would (supported by a ProgrammeManagement Office (PMO)):

Plan, design and commence implementation of the long term organisational, governance andstaffing arrangements, including arrangements for the appointment of a Chief Executive;

Take over responsibility for the metering project and the customer billing project; Take over other DECLG responsibilities (national projects and strategic planning) Consult regarding the interim agency arrangements with the local authorities which would come

into effect on 1st July 2013 (see below); Assist the DECLG with the preparation of a new Water Services Bill to establish Irish Water on a

statutory basis; and Select a Management Partner to support the management of Irish Water through the set up and

initial phase of operations.

It is envisaged that the PMO would become part of Irish Water on its establishment;

Irish Water would acquire statutory responsibility for water services on 1st July 2013 following enactmentof the Water Services Bill. From that date:

Local authorities would be appointed by Ministerial Order as agents of Irish Water withresponsibility for operational and maintenance services for a period of up to 5 years;

Ownership of water services infrastructure assets would transfer by Ministerial Order from localauthorities to Irish Water;

Irish Water would manage and monitor the performance of the local authorities under the agencyarrangements;

Irish Water would continue to build up its own staffing and capabilities; and The terms and conditions for statutory transfer of staff from local authorities would be finalised.

Existing terms and conditions would apply unless agreed otherwise;

During this period, Irish Water would also put in place regional management structures based on theRiver Basins, and would incorporate the staffing requirements for regional management and operationsinto the local authority agency arrangements;

Commencing on January 2015 it is envisaged that Irish Water would, by Ministerial Order(s), take overthe water operations of the local authorities on a phased basis. The pace of transition of operations, andthe unwinding of interim agency arrangements, would be determined by Irish Water management, inconsultation with the DECLG and local authority management based on:

Progress in building Irish Water’s own capacity, resources and systems; Progress in the development of national solutions; Priority opportunities available to achieve economies of scale; and The performance of the local authorities in meeting their obligations under the Agency

arrangements.


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It is envisaged that transfer of all water services activities from local authorities to Irish Water will havebeen completed by 1st January 2018 at the latest. However, Irish Water would have the possibility ofentering new longer term agreements with the local authorities for specific services.

During the period of transition, the local authorities will continue to play an important role. This will include:-

Entering into agency arrangements to provide quality and compliant services to Irish Water, includingservice changes as required, with the attendant additional governance burden;

Supporting the due diligence of the existing structures to be carried out by Irish Water – including assets,staff, funding commitments, expertise, systems, locations;

Cooperating in the introduction of improvements in systems and procedures across the water service; Supporting strategic planning and adopt the culture and operating procedures to operate cross county

bounds; Cooperating in transition planning; Planning for phased re-deployment or transfer of staff to Irish Water; Ensuring effective knowledge transfer where required – especially in relation to local needs; Ensuring business as usual – continuity of quality water service; Putting processes in place to track and monitor services provided and expenditure incurred, for the

purpose of invoicing Irish Water; and Supporting drives for cost efficiency e.g. procurement, leverage of central services.

In order to achieve the timescales set out above, PwC would recommend that:

The PMO should be set up as soon as possible to drive the various activities required to set up IrishWater. The transition activities would be organised in a series of workstreams, each potentially involvinga number of organisations, such as the DECLG, the local authorities, the EPA, etc. The workstreamswould include, for example:

Legal: drafting new legislation to establish Irish Water as a new body and defining how existinglegislation would need to be changed, and what revisions to statutory duties for the bodiesincluded in the creation of Irish Water would be required;

Governance: workstream to develop and finalise implementation of the industry governance inparticular supporting the implementation of the regulatory regime and upstream governancearrangements;

Organisational: creating and implementing the structures for Irish Water Board, Managementteam and organisation;

Human resources: identifying the short and medium term staffing requirements for IrishWater, and developing strategies as to how they will be met;

Stakeholder management: given the complexity of potential asset and people transfer fromthe local authorities and other bodies (e.g. the DECLG) to Irish Water a workstream will berequired to manage and control that process;

Systems: specification and sourcing of the IT/MIS systems and IT service providers required inthe initial of Irish Water operations;

Business Strategy / Planning: putting in place initial business strategy policies and plans forIrish Water; developing resourcing strategy and selecting a management partner;

Finance: identifying and implementing the financial systems, processes and controls toeffectively manage and report upon the performance of Irish Water; define and establish financefunction structure;

Operations: documentation of scope and quantum of existing local authority operations andmaintenance services; agreeing general principles for service levels and payment with 34 localauthorities; concluding interim agency arrangements with 34 individual local authorities; definingkey processes and procedures for Day 1 operations under interim agency arrangements;

Asset Management; selecting asset valuation partner, completing due diligence on localauthority assets and liabilities; agreeing asset transfer valuation with the local authorities, DECLGand other funders; completing due diligence on DBOs ;


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Environmental Regulation: defining and agreeing EPA role and responsibilities; defining andagreeing changes to environmental monitoring and reporting processes and systems;

Economic Regulation: defining and agreeing CER water regulatory role and responsibilities; Defining and agreeing economic and financial regulatory reporting processes and systems; Facilities: Acquiring and fitting accommodation and facilities ready for occupation; and Programme Management: Managing and coordinating the overall transition programme.

A Management Partner should be procured through a competitive tendering process. The partner couldbe in place by January 2013. The partner organisation should be experienced in managing utilities and inparticular in managing utilities in the water industry. It is anticipated that the partner would provide aninterim management team, comprising primarily second line management resources to support the IrishWater Executive Team in managing Irish Water for a period of up to 5 years from January 2013. Its rolewould be to support the Executive Management Team in:

Set-up of the new organisation and ensuring operational readiness by 1st July 2013; Management of Irish Water in the transition period to 1st January 2018; Implementation and management of the customer database; Implementation and management of billing and metering; Implementation and management of other national initiatives; Implementation and management of back office facilities required for Irish Water including

finance, Procurement, HR, IT etc.; Design and implementation of the new operational approach for Irish Water including: regional

structures, the role of outsourcing, skills requirements etc.; Asset management, including the initial definition of the asset register for Irish Water in support

of asset transfer; Strategic planning for water services infrastructure; Identification, planning and managing the delivery of efficiencies in the infrastructure, systems

and services of Irish Water; Supervising and coordinating the operations of the local authorities operating under agency

arrangements; Building Irish Water’s own capabilities; and Managing the phased transition of staff and operations from local authorities to Irish Water in the

period from 1st January 2015 to 31st December 2017.

An outline implementation plan is set out below. A more detailed plan will be provided in the next phase of theconsultancy engagement.


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Figure 67: Implementation Plan

2012 2013 2014 2015 2016 2017 2018

Key Milestones Jan July Jan July Jan July Jan July Jan July Jan July Jan July

Project Management Office (PMO) Established xInterim Board and Management Team appointed xIrish Water CEO in place xOther Key Irish Water Executives in Place xTender for Management Partner Issued xManagement Partner in Place xRegulator appointed xRegulator's Water Team in Place xMetering Programme Commenced xLegislation in Enacted xIrish Water acquires statutory powers and responsibility xAgency Arrangements in place with Local Authorities xAssets Ownership Transferred to Local Authorities xMetering Programme Completed xNon- Domestic Billing commenced xPhased Transfer of Staff and Operations to Irish Water Begins xTransfer of Staff and Operations to Irish Water Completed x

Irish Water: Phase 1Report

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10. ImplementationConsiderations -Legal


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10. ImplementationConsiderations - Legal

Primary Legal IssuesThe primary legal issues arising from the Public Utility Model, and which will need to be addressed as follows,are:

Primary legislation will be required:

to establish Irish Water as the sole national water services authority31, to establish the economic regulator, and to clarify responsibilities and the relationships between the various actors in the Irish water sector.

The legislation should contemplate and provide for the transfer to Irish Water the water sector assets andliabilities, and the water sector employees, of the local authorities; and

The establishing legislation must provide for elements of the transitional regime recommended.

Primary Legislation

Establishing Irish WaterThe legislation establishing Irish Water will revise the arrangements contemplated by the Water Services Act2007. Other water services legislation will also need to be amended to transfer functions to Irish Water. 32

A new Irish Water will have to be established as a body corporate (either a statutory body or a statutorycompany). More recently commercial state bodies corporate have been established as, or converted into,companies incorporated under the Companies Acts33 but subject to the specific legislation34 and such acorporate form would be well recognised and understood. The legislation would provide for setting up of aprivate or public limited company incorporated under the Companies Act, the shares of which would be held by,or on behalf of, one or more Ministers of Government and/or an agency such as NewEra.

The principal functions (objects) of Irish Water would be set out in the legislation which would require thatthose objects and other relevant provisions of the legislation be reflected in the constitutional documents of thenew company. In line with equivalent legislation, the legislation could provide that these documents and anyamendments to them, and the exercise of certain powers by Irish Water (e.g. borrowing powers), would besubject to prior approval by one or more Ministers35.

Such legislation would also provide for the responsibilities of Irish Water in terms of the services beingprovided, including in respect of its obligations under legislation such as the Water Framework Directive.

Given that this entity would be the subject of specific legislation, one issue that should be considered is thedegree to which such specific legislation should restrict the powers of the new entity to carry on activity otherthan water services. To the extent such restrictions are included in primary legislation, then they would only be

31 While PwC note that Section 27 of the Water Services Act 2007 contemplates the Minister prescribing a personperforming a function, PwC did not believe that this approach would be advisable or possible given the overallrestructuring inherent in the utility proposal. This section may have relevance in the transitional period.

32 E.g. Water Services Act 194233 E.g. EirGrid plc34 Such entities are generally described as “statutory companies”.35 Such approval would be in addition to any approvals or requirements contemplated by the Companies Acts.


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capable of being changed by new primary legislation – this may be thought to be unduly onerous. It may bedesirable, with a view to the longer term, to provide in the legislation for Irish Water to have a power to engagein any business activity with the prior Ministerial approval.

Irish Water would also need to be given the powers currently available to local authorities as water serviceauthorities in order to undertake its functions (e.g. powers to install pipes, powers to charge extended todomestic supply etc).

Establishing the regulatory frameworkUnder the Public Utility Model the legislation will provide for the role of economic water regulator byconferring additional statutory functions on the Commission for Energy Regulation, perhaps restyled as the“Commission for Utility Regulation”. 36 The environmental regulator of Irish water will be the EPA and Irishwater will be subject to water quality regulations by the EPA. A consideration that will need to be taken intoaccount will be the relationship between such an economic regulator and the environmental regulator (theEnvironmental Protection Agency) and to what extent each such regulator should take into account the views ofthe other regulator. The experience of the inter-relationships between other regulators with shared orconcurrent responsibilities for a single statutory process, such as the role of the EPA and An Bord Pleanála inrespect of land use and development, may be of assistance in this context. PwC would expect the EPA wouldalso have environmental oversight of the Group Water schemes.

PwC would expect that the regime for economic regulation of Irish Water would include the following elements(which are common in utility regulatory regimes):

the delineation of overall functions of the regulator and its duties as to the manner in which its functionsare carried out and any matters to which it must have regard in carrying out those functions;

a licensing regime under which the regulator would grant a licence to and monitor the performance ofthe licence by Irish Water;

provision for the regulation of the terms and conditions (including the tariffs) of services to be providedby Irish Water;

a regime for infrastructure approvals (which will be superseded by the strategic infrastructure regimewhere relevant);

the regulator’s role in relation to security of supply and in relation to emergencies affecting supply; the regulator’s role in relation to the protection of customers in their dealings with Irish Water which

may include monitoring service provision and, at the option of the customer, the resolution of disputesbetween the customer and Irish Water. The regulator could also have a role in setting measures toprotect vulnerable customers;

the regulator’s powers to give directions, modify licences etc.; and any residual power of the Minister to give general policy directions to the regulator.

Clarification of responsibilities and allocation of rolesThis, to some extent, has been addressed above. There will be a number of different actors in the water sectorand the rights and responsibilities of each will need to be clearly delineated in the legislation. The other issue isto ensure that each responsibility is imposed on the person best placed to assume and manage suchresponsibility, and this report contains recommendations in regard to this issue.

That said, it must be recognised, particularly in the context of regulators, that an over-rigid demarcation couldbe to the detriment of overall supervision. The views of the environmental regulator are likely to be highlyrelevant to the considerations of the economic regulator and vice versa. The legislation needs to provide such aframework whereby such views can and will be taken into account sensibly.

It seems unlikely that the current role and powers of the Minister in respect of the water services would beundertaken in the future by any one person. The creation of Irish Water would address in part the aspects of therole directed at coordination of a sector with multiple water authorities. The Minister would retain only the

36 See the Gas (Interim) (Regulation) Act 2002 as an example the legislation extending the functions of CER to become theregulator of the gas sector.


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roles of policy and legislation. Some other aspects of the Minister’s role would be undertaken in the future bythe economic regulator and/or the environmental regulator of the sector.

Statutory TransferThe legislation establishing Irish Water will need to provide for the transfer to Irish Water of the assets andliabilities of the local authorities in respect of water services and for Irish Water to take over the employment ofemployees of the local authorities engaged in the water services business or for a framework to facilitate such atransfer37.

In the present circumstances, where the local authorities carry on many other activities and have assets,liabilities and employees outside the scope of the water services area, it would be desirable to facilitate in thelegislation one or more transfer schemes which would specify or describe the assets and liabilities (whether byexclusion or otherwise) and employees to transfer. Such plans would become effective on a date or dates to bespecified by the Minister by order. Such an arrangement would provide clarity to all parties as to what wasbeing transferred and, if wished, could be adapted to facilitate a transitional arrangement whereby Irish Waterwould take a transfer of operational assets, liabilities and employees of the local authorities on a phased basis(e.g. river basin area by river basin area) when it was in a position to absorb those businesses and undertakethem directly, discontinuing the transitional agency arrangements with those local authorities.

It is usual in the case of statutory transfer between state agencies/bodies for the terms and condition oftransferring employees to be fully preserved (save to the extent they are agreed to be changed with therecognised trade unions and staff associations concerned) and for there to be considerable consultation withemployees and their representatives well in advance of the transfer.38

Transitional RegimeWhile it is possible that the foregoing might be effected in one step, it is more realistic, to expect that there willbe some transitional arrangements. Such arrangements could include having the local authorities continueperforming the functions but on an agency or similar basis for Irish Water. The terms of such an agency wouldneed to be contemplated by the legislation and the rights and responsibilities of each party during suchtransitional period set out, including:

The right for Irish Water to approve works (other than presumably emergency works); The funding relationship; The power of Irish Water to give directions, and to step-in, in relation to how the functions by the local

authority are being carried out; and The limits of the responsibility of the local authorities having regard to their status as agents for so long

as they are acting within the scope of their authority as such.

37 Such as by means of a scheme affected pursuant to the legislation.38 The protections afforded to employees on such a transfer would usually exceed those afforded by TUPE legislation


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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. Youshould not act upon the information contained in this publication without obtaining specific professional advice. No representation orwarranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers, its Partners, employees and agents do not accept or assume any liability, responsibility or dutyof care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication orfor any decision based on it.

© 2011 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the Irish firm,PricewaterhouseCoopers, One Spencer Dock, North Wall Quay, Dublin 1 (which is authorised by the Institute of Chartered Accountants inIreland to carry on investment business). As the context requires, “PricewaterhouseCoopers” and “PwC” may also refer to one or moremember firms of the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), each of which is a separate legalentity. PricewaterhouseCoopers does not act as agent of PwCIL or any other member firm nor can it control the exercise of anothermember firm’s professional judgement or bind another firm or PwCIL in any way.

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