Debate contribution: NI Water Challenges

Debate contribution by Mr John O'Dowd on 8 April 2024.

MLA: Mr John O'Dowd
Party at the time: Sinn Féin
Date: 8 April 2024
Type: Debate contribution (made as a minister)
Business: Private Members' Business
Heading: NI Water Challenges
Assembly identifier: Official Report component 4481684

Text

Go raibh maith agat, a Phríomh-LeasCheann Comhairle.
First, I thank the UUP for securing the debate on NI Water's funding model. I also send my best wishes to John Stewart and wish him a speedy recovery. As Members know, NI Water was established in 2007 as a government-owned company — it is not a private enterprise but rather is wholly government-owned — to provide water and sewerage services across the North. Since its establishment, it has been Executive policy to provide subsidy to NI Water in lieu of domestic water charging. Since 2007, nearly £3·5 billion has been invested in our water and waste water infrastructure. NI Water has reduced its efficiency gap with similar companies in England and Wales from 49% in 2007 to 5% today. It is therefore £65 million more efficient than it was in 2007, and that is a credit to NI Water. Indeed, planned improvements in operational efficiency between now and 2027 will save consumers £62 million. NI Water delivers a high-quality service, and its status as a regulated utility company means that the Utility Regulator protects the interests of consumers by challenging NI Water to deliver high-quality, value-for-money water and sewerage services. As Members know, the Utility Regulator determines the total revenue requirement for NI Water through what is known as the price control process. For the period 2021-27, the Utility Regulator has determined that a capital investment of £2·1 billion is required to deliver the best value for customers and to deliver the much-needed services. At present, the Utility Regulator is undertaking a midterm review to determine the investment levels that are required for the remaining three years of the price control period. My Department awaits the outcome of that review, as it will, in the first instance, inform immediate 2024-25 Budget allocations. I turn to the current funding position. To date, my Department has fully funded NI Water for the first three years of the price control period. Indeed, my Department has provided almost £90 million of capital funding over and above the funding level recommended by the Utility Regulator during the period. Although we provided significantly more funding than was required at the time, Members will appreciate — Cathal and others mentioned it — that rising costs, such as those of inflation and energy, have presented a huge challenge to NI Water in providing its services. The problem, however, is not how NI Water is governed. Rather, the issue is the level of public expenditure that is available to the Executive to allocate to NI Water. That is a consequence of the underfunding of public services in the North over many years. I am glad to say that, despite some comments in the Chamber today, all parties are united in engaging with the British Government to try to resolve that issue. All parties have accepted that this place is underfunded.
Let us not put this down to ideology or "the Tories this, the Tories the other"; all parties have accepted it, so it is a realty.
The question from today's debate is this: what happens when you underfund a public service for x number of years? In this instance, you end up with the challenges that NI Water has. Those are the consequences of the underfunding of public services in the North over many years, and, as I said, I am glad to see that all parties are united in engaging with the British Government to try to resolve the issue. NI Water receives 70% of its revenue from my Department in the form of domestic subsidy, and for that reason, it has been classified as a non-departmental public body by the Office for National Statistics. As an NDPB, all of NI Water's capital and resource expenditure scores in the government Budget, so this means that it cannot borrow from external sources. However, it is also vital to note that, alongside the subsidy that it receives from my Department, NI Water, crucially, has had access to a government borrowing facility since its establishment. My Department provides NI Water with access to debt finance from a loan facility, and, to date, the organisation has borrowed £1·8 billion. Mr Nesbitt asked why NI Water pays interest. NI Water pays interest on the loan because it is established on a commercial basis. That is in government accountancy rules, and I am sure that he will appreciate that we have to abide by those rules. The repayment of the loans also comes back into the Department, but, given our constrained financial position at the moment, it does not provide us with extra cover. That is an important point to highlight, as the levels of additional borrowing that NI Water would need to avail itself of in the future would need to be considered should its governance structure move away from NDPB status and should the cost of delivering its capital programmes rise beyond current levels. That will also be an important consideration, and I know that the Assembly broadly supports my position, and that of the Executive, that domestic households will not be charged for water. The NI Water assets base is valued at around £4 billion. Its ability to borrow against that will be viable if it can demonstrate that it has a defined revenue stream outside government. Given its own prediction that it will need around £12 billion of borrowing up to 2050, it is my view that that may put the company on a potentially precarious footing, were it to borrow in excess of its assets value. The motion seeks an analysis and options for the restructuring of NI Water, including consideration of mutualisation. Before getting into that, I want to acknowledge that our water and sewerage infrastructure will undoubtedly need more investment to maintain what we have and to provide new infrastructure to keep pace with our ambitious plans for more social and affordable housing, economic growth and protecting the environment. NI Water has a plan and the expertise to achieve that. The price control determination includes ambitious targets aimed at reducing risk of property flooding, enhancing the natural environment and facilitating economic growth. However, funding will certainly be required to achieve those outcomes. Nevertheless, there is progress to be achieved with the resources available, and that will require all stakeholders to work constructively and responsibly to achieve the maximum benefits possible in the constrained circumstances. I have spoken previously about the responsibility of developers, as Patsy McGlone and Patrick Brown said, and I make no apology for saying that, in some circumstances, it will be the responsibility of the developers to invest in the water infrastructure of their development. The construction industry and developers play a hugely important role in our economy. They provide important jobs — well-paid jobs, in many instances — but they are also a commercial entity. It is only right and proper that, when we are looking at development cases — we will take each one on its own merits — this question is asked: can the developers cover the cost of the water and waste water infrastructure that is required? I find it surprising that some Members completely rule that out and say that, under no circumstances, should developers be asked to do that. I put the question back to Members: why? Why should they not be asked?
Yes.
I ask the question again: why? Why is it automatically accepted that —?
I will in a moment. Why is it automatically accepted by Members of the Legislative Assembly, whose job is to scrutinise all these matters, that the developer will pass that cost, completely and wholly, on to the buyer? It is our role, as legislators and people who are involved in scrutiny, to ask, "Why should you do that?" I am not saying that all developers will do it, but we should not automatically accept that costs will be passed on to the homebuyer. I will give way one more time, and then I will have to move on.
I am not going to comment on that individual case, but most developers whom I meet are savvy businesspeople, so I doubt that they found out at the last minute. That may be the case in that instance, but I doubt it. Turning to governance options, as recently as 2019, my Department established a working group to research and assess alternative funding models for NI Water. The scope of that work was wide, with consideration given to NI Water being able to avail itself of funding from within and outside the block grant, as well as access to borrowing, revenue-raising options and how its classification as an NDPB could be changed to give the company more financial flexibility. Alternative classifications such as mutualisation were included in that research. While the principle of a mutual company reinvesting all profits back to customers would at first appear to have merits, it was determined that it would require a change in current funding policy. Fundamentally, a mutual company requires a guaranteed and predictable funding stream that is not subject to direct political control or competing public-sector priorities. Simply put, achieving mutualisation would require charges being paid by domestic water customers. It would also require the relinquishing of Executive control over the company. Mutualisation leads directly to domestic water charges. There is no other way around it. That goes back to a point that I made earlier about government and Treasury accountancy rules. This is set out within the rules. Wishful or hopeful thinking, or saying, "Perhaps it might not happen", does not cut it. The fact is that if you want to go down the mutualisation route — I do not and I will not — you will end up charging hard-pressed workers and families directly for water.
I am sorry: I have limited time. Returning to my earlier point, that would also require a high degree of external market borrowing. As I stated earlier, NI Water has already borrowed in excess of £1·8 billion from the Government, and, as costs rise in future, further borrowing will be needed, introducing the risk that we will be setting the organisation on a trajectory whereby the largest portion of its income stream is serviced by debt. Thames Water comes to mind. I do not need to remind Members of all that is happening in England at the moment. Mutualisation is not the solution that many think that it is. Indeed, a report published in June 2023 by the Consumer Council for Water in England and Wales concluded:
"an overhaul and substantial change to the industry and company ownership would not address the main problems experienced within the water sector".
The analysis to date has shown that there are no simple solutions. NI Water has been determined as an NDPB, given the continuing level of subsidy from my Department on which it is dependent. For us to keep that status and to keep it in government ownership, we need to continue down the current route. Furthermore, we need more public funding for the Executive. We need a debate around the Executive table about the Budget. The Chair of the Infrastructure Committee asked what conversations I have had around the Executive table. I have met the Finance Minister about my budget, as have other Ministers, and I have set out the challenges facing NI Water. I look forward to the debate around the Executive table in relation to funding for the Department for Infrastructure, and NI Water will be high on that agenda. As I said, it is not the model that is important here. It is the fact that NI Water, along with all our public services, has been underfunded for many years, which has led to the challenges that we face today. I will end on this point. Last year, we invested half a billion pounds of public money in NI Water. NI Water is carrying out significant improvements across all our constituencies, but if you were a developer listening to the debate today, you would nearly think that we are closed for business. We are not closed for business. I will give way, very quickly, to Mr Nesbitt.
I am not commenting on the Audit Office report for this reason —.
As the Member will know, an Audit Office report has to go through the proper processes in that there is a protocol on how a Department responds to them. It may be taken on as a report by the Public Accounts Committee or it may not.
I will, when it is my time, respond to the Audit Office report. The Member said from a sedentary position that I will do nothing. I have already said what I am going to do. I am saying this to Members: stop talking the place down and start ensuring that investors know that we are open for business.

2,146 words. Text as published by the Northern Ireland Assembly.

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