Mutualising water: 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.”
Project Merlin shows little magic in Northern Ireland: Business Month
The main UK banks have reached agreement with the Treasury to increase lending to small and growing businesses – providing an extra 15% in loans, while also supporting the UK’s regional growth agenda. Very good news it might seem.
But just what is this likely to mean in practice for Northern Ireland? The fear is not very much. Joanne Stuart, chairman of the Institute of Directors in Northern Ireland, explains: “The total amount committed through Project Merlin is £190bn, of which £76bn is specifically for SMEs. There has been no indication of a regional split on the £76bn and we have heard nothing from the banks in Northern Ireland regarding this.
“It is worth noting that although amongst the big four banks here, only Ulster Bank - through RBS - signed the agreement: HSBC, Santander and Barclays also have a presence in Northern Ireland. In our view, the finance minister should be asking each of the banks for details on how much will be allocated to Northern Ireland.”
Indeed, anyone hoping that Project Merlin will quickly change the lending environment for businesses in Northern Ireland is likely to be disappointed. A spokeswoman for Barclays explains: “Merlin was announced relatively recently and at the moment it is a framework agreement and a lot of the detail behind it is rolling out now and needs to be clarified. Within the next few months it will become clearer. At the moment we can’t give you clarification for what it means for Northern Ireland.”
Ulster Bank confirms that Project Merlin will influence the availability of funding for SMEs in Northern Ireland, but declines to say at present how this will happen, or to what extent. An Ulster Bank spokesman says merely: “We remain committed to making lending available where there is creditworthy demand and Ulster Bank will continue to play its part in Northern Ireland.”
Businesses here remain dependent on a different Big Four of banks from those in the rest of the UK. Along with Ulster Bank, the market leaders are Northern Bank (owned by Danske Bank), First Trust (owned by Allied Irish Banks) and Bank of Ireland. AIB and Bank of Ireland have their own concerns, having been rescued by the ailing Irish government. There are obvious worries that their lending to businesses in Northern Ireland could be badly affected.
First Trust denies that its problems are leading to a withdrawal from business lending here. “First Trust Bank is keen to meet the needs of SMEs and we continue to support viable businesses,” says a spokesman. “SMEs are a critical sector for First Trust Bank and will remain so into the future…. Many of our customers are still actively seeking to reduce their debt levels and as a result we are experiencing a reduction in the general demand for credit. Our lending criteria remain the same in that we look for good solid businesses with the ability to repay.”
Northern Bank seems keen to expand its loan portfolio here and stresses its commitment to the principles of Project Merlin, despite not being a signatory. A spokesman explains: “Northern Bank is already demonstrating many of the same principles of the project in relation to lending expectations and supporting regional growth.
“Northern Bank has consistently supported business growth and is continually responding to the challenges and opportunities in the local economy through our strong commitment to enabling economic regeneration and business growth in Northern Ireland. That commitment to supporting business is there not because we are compelled to do so by project parameters, but because we firmly believe in the value of the finance, services, relationships and expertise that we can bring to trading businesses in Northern Ireland - a combination that is attracting many local companies to Northern Bank.”
Santander volunteered to sign-up to Merlin, despite not being one of the largest UK banks. But it aspires to join the club and to grow its business in Northern Ireland. Spokesman Andy Smith says: “We have grown our lending by 16% in 2009 and 26% in 2010. We are happy to say we will grow our lending, because that is the only way we will grow our market share. We are committed to growth across the piece and in all regions.”
Talk of expanding lending will be welcome news to small firms, but the cost of borrowing is just as important as availability. Roger Pollen, head of external affairs at the Federation of Small Businesses, explains: “Obtaining credit from banks remains a major concern for many FSB members. Our recent survey figures revealed that around 84% of small businesses are not approaching the banks for loans, with many saying they have already been refused, or the cost is too high.
“In addition to this, those small firms that are using the banks as their main source of finance are telling us they are being penalised by high interest rates. This is a worrying trend, especially when we consider that the base rate is currently at an all time low.
“On face value, it is encouraging to learn that Project Merlin has been agreed and claims to ensure that almost £200bn will be lent to businesses across the UK. However, while the full details of the agreement – including the full implications for business owners and banks in Northern Ireland – remain to be seen, the FSB’s welcome must be one with reservations and caution. As with all agreements, it is necessary to consider three things; why was an agreement necessary, what is in the small print, and how enforceable is it?”
Pollen adds: “The FSB is uneasy that while £76bn of the £190bn agreed by the banks will be ring-fenced specifically for small businesses, some of this credit will only go to businesses looking to receive between £2m and £10m in equity finance and so will not assist the vast majority of smaller businesses that may need it most.”
Both the FSB and the IoD are calling for the business lending environment in Northern Ireland to become more competitive. The IoD’s Joanne Stuart says: “We would like to see movement from the British Bankers Association and the banks operating here on the plan for implementing the recommendations in the BBA’s ‘Supporting UK Business’ report, which are supposed to increase transparency on bank lending and improve access to finance in Northern Ireland.”
The BBA stresses that it is seeking to improve lending to small firms here as part of its Business Finance Task Force and that it has met with finance minister Sammy Wilson. It adds that banks in Northern Ireland – including those based in the South – have committed to continued financing of businesses here and that the task force – established last summer – will eventually lead to a £1.5bn UK-wide business growth fund. However, much of the focus of the Task Force is helping firms to improve their ability to present good business cases to lenders, to improve their chances of success, rather than necessarily increasing the pool of available finance.
Project Merlin also had other dimensions beyond increasing small firms’ lending – it committed banks to limiting the size of their bonus payments and to disclosing senior executives’ remuneration. And the banks agreed to support the Big Society – which has made few waves in Northern Ireland – and the regional growth agenda, through £200m to support the Government’s Big Society Bank and £1bn for regional initiatives.
Businesses here, though, will want something firmer than vague promises that support for regional growth is demonstrated at least as strongly in Northern Ireland as in Great Britain.
