Mutualising water: Business Month

Posted on October 1, 2011 · Posted in Business Month

Northern Ireland Water has had a difficult time since it converted to a Government-owned company – GoCo – in 2007. It has been mired in a series of controversies: problems have included serious billing errors, bitter recriminations over its loss of two permanent and one interim chief executives and last December’s debacle over pipe bursts.

It is no wonder that former regional development minister Conor Murphy pulled together a respected panel of experts to advise on how the service could improve. Yet since the report was published three and a half years ago, there has been no indication that its proposals would be implemented. A spokeswoman for DRD declined to comment on the report, saying that its recommendations were a matter for the incoming regional development minister.

Panel members are unhappy about this hiatus. Review chairman Paddy Hillyard, professor of sociology at Queen’s University, complains: “Nothing has happened. It has not been put out for consultation. Conor Murphy wanted from the very beginning perhaps to bring it [NI Water] back in-house, but that is just very expensive.”

Instead the review panel proposed substantial organisational reform, with Northern Ireland Water proposed to become an autonomous organisation structured as a mutual – which Hillyard also refers to as a ‘municipal’ option. He believes that the mutual/municipal structure is the obvious way forward.

“The whole of the Executive was opposed to privatisation,” explains Hillyard. “It needed some form of structure that meets the public [sector] accountancy rules, without that being to our disadvantage. Our thinking throughout was that people had lost confidence in the sense that there was a battle going on about water charges. Direct rule ministers had set up a GoCo and perhaps wanted to privatise at the end of the line. We felt that the municipal option was one that people could buy into and was not likely to lead to privatisation in the future.”

Although structuring NI Water as a mutual might sound radical, it is actually a proven method of delivery. Glas Cymru is the water provider for Wales, which is a mutual and widely considered the most efficient water provider in Great Britain. It cut its financing costs by a quarter after converting to mutual status. As Glas Cymru is not a government body, it can finance investment without this being counted against the public sector borrowing requirement (unlike NI Water). And without shareholders, it has no dividends to pay. At the same time, its secure income streams make it very attractive to lenders.

A spokeswoman for the company explains: “The successful model is unique in the UK with all the profits made by the organisation being reinvested into the company for the benefit of its customers. Its success can be measured in a number of ways: for instance, as a result of its operating and financing efficiency Welsh Water’s average household bill will be 6% lower in real terms in 2015 compared to 2001 when Glas Cymru took ownership of Welsh Water. In those same 15 years Welsh Water will have invested close to £5 billion – around £4,000 for every household – on maintaining and improving its £25 billion network of assets. Under Glas Cymru’s ownership, Welsh Water has the highest credit rating in the sector, which means that it can raise funds from long-term bond investors at low cost – which really matters when every 1% increase in the cost of finance adds 5% to bills in the water industry.”

Mutual Energy Ltd owns and operates much of the energy infrastructure in Northern Ireland: its assets include the Moyle Interconnector, which links our electricity systems with that of Scotland; the gas pipeline between Scotland and Northern Ireland; and the Belfast Gas Transmission Pipeline.

Paddy Larkin, chief executive, also argues that its structure gives it a key operating strength. “As a mutual company, MEL does not have any shareholder: the principal stakeholders are Northern Ireland energy customers and all the benefits of low cost of capital, together with operational efficiencies, are returned to them.  In the case of Mutual Energy, the company is governed by a board which reports to a panel of members who represent consumers – this ensures that the interests of consumers are kept at the heart of all business activities.

“As an example, since 2003, savings on the cost of capital associated with the mutualisation of the Moyle Interconnector are estimated to be approximately £20 million, a saving of nearly 24 per cent on the non-mutual case.  There are also significant operational savings to be gained – in the case of Mutual Energy, the core operating team is small, to reduce costs and overheads with operational and maintenance activities competitively outsourced. The mutual business model comprises low cost of capital, no dividend payments and a focus on operational efficiencies, all of which make a significant contribution to reducing the cost of energy for consumers in Northern Ireland.”

Ed Mayo, secretary-general of Co-operatives UK, is a panel member advising the UK Government on the possible mutualisation of a wide range of public services, including the Post Office. “There are very, very strong reasons why water as a natural monopoly should operate in the public interest,” says Mayo. “Water is a life line service….. People need to know that delivery will be there and it will be reliable: some vulnerable people are high water users.”

Mayo argues that there are two major gains from mutual ownership of a public service utility. One is cost. “The attraction of a mutual is that without shareholders you don’t have the additional cost of paying dividends.” The second benefit is improved engagement with customers – though, suggests Mayo, that is something that Glas Cymru has yet to fully exploit.

“Glas Cymru has a very effective track record of finance and delivery in Wales,” says Mayo. “[But] Glas Cymru is a kind of quasi mutual in the sense that it is a non profit organisation, but with a closed membership. One of the methods to get real involvement [by consumers] is to stick with good co-operative principles and open membership more widely. This is possibly what Glas Cymru might move to over time, but there would be an opportunity for Northern Ireland Water to build on that from the start.”

Hillyard agrees. That [Glas Cymru] is one model,” he says. “But there are other models, which one could think about. That model is about just having a shell and very few employees. It looks on paper a municipal, but in practice it looks like a public company. My feeling is that more work should be done on how to create a business that doesn’t look like a public company, but which pushes down costs.”

There is an opportunity now to create a solution that gains general support, believes Hillyard. “It’s how you create something that is acceptable to everyone. The key thing is to keep an eye on the public accountancy rules: while keeping it [NI Water] in-house there is an automatic loss that could be spent on hospitals, schools and so on. So you need a legal entity to set up.” And, he believes, this would also improve its capacity to deal with problems.

“I think communications was an issue over Christmas,” explains Hillyard. “That was result of a number of factors, including the operation not being at arm’s length. Until it is at arm’s length, I think it cannot operate effectively. If they [DRD] had accepted our recommendation that it should be at arm’s length from 2013, then I think we would all be in a very much better position.”