I welcome this opportunity to speak to the House today on the issue of reform of the water sector, and to have the opportunity to clarify recent Government decisions and to outline what the next steps will be in the reform process.
There has been a good deal of commentary in the last week on the Governments plans for reform of water service delivery. Let me take this opportunity to clarify the facts. The Government announced last week its intention to establish Irish Water as an independent State-owned company within the Bord Gais Group. It has been decided that domestic water charges, should be based on usage and that a national metering programme will be commenced later this year. The Government has also decided to establish an independent economic regulator for water services and this function is being assigned to the Commission for Energy Regulation, who will be responsible for determining the cost of water services to the consumer and for ensuring that planned efficiencies are delivered. The establishment of the economic regulator is a key and necessary characteristic of this new model. Indeed, the need for such regulation was recognised in the last Government’s Programme for National Recovery.
My Department will remain responsible for overall policy and legislation for the sector. I will be bringing forward necessary legislation to underpin the proposed reforms to the House in due course and we will have an opportunity to further debate these issues.
The move of water sector functions from local authorities functions to a new commercial semi-State, in a regulatory environment and new funding regime based on domestic charges is a major organisational change. Establishing the new organisation under the umbrella of a mature semi-State, has a number of advantages including the existing expertise and experience to manage the set up with lesser risks than a Greenfield set-up. The independent assessment, while recognising that there were potential advantages to leveraging the structure, expertise and governance of an existing State agency in the establishment of Irish Water, also foresaw certain issues which would have to be satisfactorily addressed in such circumstances, and, on balance, recommended that Irish Water should be established as a new entity. The Government also decided that this matter should be analysed further with a view to ensuring that existing resources and capabilities in the State sector were used to best effect. This approach is also in line with Government plans to support economic growth by eliminating waste and duplication in public spending through rationalising state agencies.
The outcome of this analysis was that Irish Water should be established as an independent state owned company within the Bord Gáis Group. I would point out that the process involved an assessment of the capacity and capabilities of a number of State agencies from amongst those identified in the independent assessment as having the potential to incorporate a new water utility. It was not a tendering process culminating in the award of a contract. It would have been wholly inappropriate to take that approach, and as suggested in some quarters, involve private sector companies in bidding, when a key fundamental principle of this reform is that water services remain in public ownership.
Indeed, there has been significant commentary on whether the establishment of the new water utility is going to pave the way for privatisation in this sector. Let me be very clear on this issue. The proposal to create a public utility is not about privatisation of our water resource, nor is it a pre-cursor to privatisation. Water services will remain in public ownership. This is in line with the approach across Europe where privatisation is very much the exception rather than the norm.
I would also like to clarify what decisions have not yet been taken as these issues have also been the subject of significant commentary and some guesswork. The details of the funding model, including decisions relating to the precise charging framework including the level of charges, have yet to be finalised and will be a matter for the Economic Regulator. The amount of free allowance and the measures to address the needs of those with affordability issues or medical needs requiring a high essential use of water have also to be finalised. The Cabinet will approve the free allowance.
The national water metering programme will commence this year, and there will be no upfront changes.
Charging will not commence until 2014 which leaves plenty of time for people to plan water conservation measures and household budgets.
It is important for us to try and frame the debate around water more strategically. Water is a precious resource. On a global level, pressures created by the worlds growing population and economy, combined with the impacts of climate change, are making water scarcity a reality in many parts of the world. Work undertaken by the Mc Kinsey Water Resources Group shows that in just twenty years, global demand for water will be forty percent higher than it is today, and more than fifty percent higher in most rapidly developing countries, and by 2030 over a third of the world population will be living in river basins that will have to cope with significant water stress.
These messages are reinforced by the OECD in its Environmental Outlook to 2050, The Consequences of Inaction which it published last month which shows the position deteriorating further if robust policy responses are not taken by Governments and other key stakeholders. The OECD Report identifies among its main policy responses the need for improved water efficiency including appropriate water pricing policies, an ongoing focus on improving water quality, and the need for robust water governance and ongoing investment in infrastructure.
Ireland’s valuable water resources have the capacity to position Ireland well in terms of competitiveness, and to support the success of many water dependent sectors. Ireland needs to exploit this competitive advantage and to attract more water intensive industries. We need to explore all opportunities for using our water resources in a sustainable way to support economic growth, competitiveness and job creation. From a national perspective, the key objective of the Governments water reform programme is to put in place structures and funding arrangements that will ensure that we have a world class water and waste water infrastructure that meets all environmental and public health standards, and is well positioned to attract foreign direct investment and support job creation and maintenance in key sectors such as pharma-chem, IT and food and drink.
We have to address key organisational and funding issues in the sector or we will constrain our capacity to continue to exploit this natural advantage. There has been a historical under-investment in water and waste water infrastructure which now needs to be addressed, as well as a requirement to invest for future needs. The requirement for continued significant capital investment in water services has been estimated at €600 million annually as compared to about €370 million in exchequer capital spending this year, together with the provision for the backlog of investment required mainly to meet statutory obligations. In the context of our current public finances this presents a significant challenge which requires an innovative response to develop a sustainable funding model which can deliver these massive investment requirements.
The existing approach where water services are delivered through 34 water services authorities has inevitably lead to fragmentation in delivery and duplication of functions across authorities which has inhibited our capacity to gain advantages through economies of scale. A public water utility offers the best opportunity to build on the strengths of the existing system, and improve efficiency and effectiveness of water services delivery, provide access to new funding sources and improve strategic planning and accountability.
Establishing Irish Water as an independent State-owned company within the Bord Gais Group will facilitate making best use of existing resources and capacity within the public sector. In deciding on this approach, the Government recognised that Bord Gais Eireann has key capabilities that can be brought to bear in the establishment of Irish Water, including experience in operating as a utility in a regulated environment and a track record in raising finance. They have specific skills from their own experience of transformation, customer relations, network management, metering and utility operation that can be quickly deployed to assist in the successful establishment and operation of Irish Water. These skills within the Bord Gais Group will be combined with the considerable experience, skills and commitment to service in local authorities to build the new organisations while retaining the strengths of the existing model. It is envisaged that service level agreements will be put in place between Irish Water and local authorities and that these arrangements would end in 2017 at the earliest. This will ensure a smooth transition to the new model and guard against the loss of local expertise. It will also mean that the majority of staff will remain in the direct employment of local authorities for a considerable period.
Work is now progressing on the development of an implementation strategy which should be finalised in the next month or so. This will focus on implementation and transformation issues involved in the creation of the new public water utility and will recommend appropriate transitional arrangements. The strategy will also focus on maintaining the delivery of a critical public service during and following a restructuring process, and will give further clarity on the next steps that will be taken in the reform process.
As I clarified earlier, many key decisions remain to be taken. Much commentary has understandably focused on water metering and charges and what this will mean for households. We are the only OECD country which does not charge for water services. Providing high quality water services without regard to cost or sustainability is no longer feasible. By levying charges based on the amount of water that is used, households will be given an incentive to use water responsibly and to respect this valuable resource. International evidence has shown that where meters have been installed significant reductions have been achieved in the level of consumption. We have taken a conservative estimate of a 10% potential reduction in consumption that could be achieved following the introduction of water meters in households. And this is a conservative estimate. Metering does change habits. This view is supported by the trial carried out by The Consumer Show as broadcast on RTE on Tuesday evening which showed that a family of 5 in a 3 bedroom semi-detached home can reduce their consumption by up to 30% by taking very simple measures, for example, not leaving the tap running when washing your teeth or preparing vegetables, leaving a jug of water in fridge for drinking purposes, using the "economy" setting on dishwashers and washing machines, fitting a water saving device costing just a few euro in the toilet cisterns.
Reducing unnecessary water use reduces the operational costs of providing water services as well as providing longer term savings in relation to capital investment.
As I stated earlier, the details on the level of charges, free allowance and affordability issues have not been decided upon. However, as is the case for other providers of utility services, Bord Gais will be required to have a range of options in place to assist householders who have difficulties in paying their bills.
The economic regulator will be responsible for determining the cost of water services and ensuring that efficiencies are delivered so that the cost of providing the service to the consumer is kept to a minimum. The regulator will be consulting with Irish Water, the Department, local authorities and other key stakeholders in the coming months to determine the approach to be taken in the setting of water charges.
There is no doubt that embarking on such a fundamental programme of reform for the water sector will bring many challenges. But these reforms have the capacity to deliver a sustainable financial model in the future, leverage additional funding for investment, achieve efficiencies through economies of scale and elimination of duplication, and crucially provide an improved service for consumers. In light of the global economic challenge and the position of our public finances, the time is right to reorganise our approach in this sector to support economic growth and to meet the needs of future generations. We believe that the opportunities and benefits that the reform programme will bring for the economy, for society and for service delivery are worth the challenges and that it is in all our interests to support this approach. I look forward to hearing the views expressed in the House today, and am confident that constructive and informed engagement from all stakeholders will be a valuable input in the development of our implementation strategy to ensure that this change is managed well.