Clouds of uncertainty

What does the future hold for the troubled utility Northern Ireland Water after the catastrophic water shortages of last year? Dean Stiles reports.

Tony Wray, the chief executive of Severn Trent Water said early last year that the water industry in Britain was creaking and in danger of coming apart: should nothing be done to repair the cracks, the pipe will burst and investors, customers and the government could all end up in the sewage.

In Northern Ireland that happened after Christmas with some 40,000-supply restrictions lasting for almost two weeks in some cases. Northern Ireland was compared with a Third World country. Doctors warned of health risks. Fire tenders supplied hospitals with water. On any measure, it was a catastrophic failure of a basic utility.

Politicians have been adroit at keeping their distance from the problem, pointing the blame at Northern Ireland Water’s management. The company has also cited historic under-investment in Northern Ireland’s infrastructure as a contributing factor in the crisis. “I think the weather has caught the system out, because the system is creaking,” said Alan Strong, senior lecturer in environmental engineering at the University of Ulster.

“We’re talking today about water supply, tomorrow it could be the sewage system that’s overloaded, some day it could be a major flooding issue. Northern Ireland Water and the whole water industry are creaking in terms of dealing with a range of pieces of infrastructure that are not really fit for purpose,” he said.

“There is a programme of water main rehabilitation by NI Water, but it’s like the old classic school report ‘could do better’,” Strong said.

Chris Mellor, who was sacked in March 2010 as chairman of Northern Ireland Water (NIW), said that the utility was a “disaster waiting to happen”.

He blamed politicians and the state-run utility company’s current management for the province’s water crisis.”

He said: “I think this is what happens when you get rid of the directors at the top of NIW, who knew what they were doing, and replace them with people who have no experience of running a water utility. In my view, the politicians, as well as the company, must take some share of the blame. I think it was interesting but predictable to see the politicians lining up at Stormont to blame the company.”

But even before the most recent crisis, the company was embroiled in controversy. NIW was formed in 2007 as a semi-public body borne out of the water service, but concerns over its financial dealings have dogged the organisation. It emerged last year that NIW had overcharged thousands of non-domestic customers, some by up to £4,000.

In September 2009, the utility regulator found that NIW was half as efficient at delivering services as other UK water providers. It was ordered to cut £136M from its running costs for the following three years. In March, four of its senior executives were dismissed from their posts. Mellor, Declan Gormley, Ruth Thompson and John Ballard were fired after an internal inquiry found that major contracts were awarded without competitive tendering. The chairman and three non-executive directors on the board were informed of their dismissal in a letter signed by the regional development minister, the Sinn Féin MP Conor Murphy. There was no suggestion at the time of fraud, but the breaches were serious enough for the minister to take action.

The chief executive of Northern Ireland Water, Laurence Mackenzie, spotted the discrepancy not long after he was appointed in August 2009. He resigned in January 2011 following the most recent supply failures this Christmas.

His is the first casualty in the crisis, but the blame cannot be laid solely on his desk. In practical terms the disaster was caused by massive leakage rates during the thaw from pipes fractured by extremely low temperatures in the weeks prior to Christmas. It happened on a smaller scale the previous winter when the freeze and subsequent thaw during December 2009 to February 2010 had “a very significant impact on the leakage figure”. The company said that in its annual report 2009/10 that “sustained progress has been made in retrieving the additional leakage that was incurred during this difficult period.”

NIW’s infrastructure weaknesses have been well documented. Earlier last year the Institute of Civil Engineers (ICE) graded Northern Ireland’s water and wastewater infrastructure as requiring attention. The problem is not unique to Northern Ireland. In the Republic, substantial water restrictions remained in place after supply was restored in Northern Ireland as Laurence MacKenzie noted in his resignation statement in early January.

The problem on both sides of the border is an ageing infrastructure coupled with unwillingness by political leaders to address funding of repairs and upgrades. Domestic users do not pay for water or sewage anywhere in Ireland while governments are reluctant or unable to allocate sufficient resource to infrastructure water improvement.

ICE believes that water charges – which the Northern Ireland Executive has said it does not plan to implement in the next four years – should be brought in to give NIW adequate funding to address the shortcomings in the network.

Wendy Blundell, ICE regional director, says: “The stop-start approach of funding infrastructure does not work and that’s the method we’ve been using here in Northern Ireland. If you look across to England that has not been the approach – they have, over the last 20-years, had that sustained investment in their water infrastructure in particular. We need a robust water infrastructure here.”

Padraic White, the interim chairman of NI Water, said that the weather had caught out the company. “Despite all the plans and preparations of NIW, which worked last year, I think what caught the organisation on the hop this year was the sheer speed and extent of the thaw,” he said.

Under-investment in Northern Ireland and the Republic needs to be seen in the context of experience in England and Wales and problems in terms of funding after 20 years of privatisation. Water companies in England and Wales have accumulated some £33B of debt since privatisation two decades ago. As with NIW they face challenges to maintain “security of supply” likely to increase with predicted effects of climate change. The UK government is expected to address this in its white paper on the future of the industry along with the regulator’s role in the Defra-led review of Ofwat.

It is against this backdrop that Wray calls for changes, arguing that the sector’s 22 utilities be allowed to compete and ultimately consolidate. Northern Ireland Water is the last remaining public-owned body left in the UK in charge of water supplies. It needs to do more than just catch up with England and Wales: it must anticipate and adapt to the changes expected in the rest of the UK.

NIW needs investment, but even if politicians allow domestic water and sewage charging this may not be enough. The current model for England and Wales, in which companies invest in a regulated asset base via long-term borrowing and make a return by billing customers, is under stress with high profile investors, such as Neil Woodford, an Invesco fund manager, opting out of the sector. In the future, much depends on how sympathetic UK regulators are to investor needs.

Wray points out that the sector is “utterly dependent” on investors. “The sector is cash-negative – we borrow money to do the capital works. If the investors weren’t there, customer bills would be four times higher,” he said.

“Over the next 25 years, the sector needs about £20B a year in capital raising. In the energy sector, there is a huge amount of capital to raise to green the electricity networks, while the UK also wants to continue putting money into road and rail. What we would point out is that regulators need to hone their judgment such that not only is there an appropriate return, but that in the competition for capital the sector gets its fair share.”

Wray is also pushing for utilities to be allowed to trade water in a bid to avoid unnecessary infrastructure investment in one part of the country while rival operators have a water glut elsewhere. “Continuing with a regional system with a resource that is becoming scarcer is crazy. We need to connect networks.”

NIW’s future, as a regional utility starved of investment looks limited. If consolidation makes sense in England and Wales, then the same is true for Northern Ireland. In December, ESB, the Irish state-owned main electricity company in the Republic, bought Northern Ireland Electricity (NIE) for £1.2B. A joint statement Viridian, ESB and NIE’s parent company, said: “NIE will continue to operate as a stand-alone business under the NIE brand and identity.”

Similar approaches to a privatised Northern Ireland Water may make sense and provide the only sensible route for a major upgrade of network infrastructure on both sides of the border.

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