Capital investment is essential for economic growth and to upgrade our infrastructure. This is especially the case with NI Water, whose works backlog is constraining housing and industrial development and urban regeneration.
Public spending on infrastructure is limited by spending rules self-imposed by the UK government, concerned about fiscal credibility in global markets. High levels of borrowing – or perceptions of lack of control – can lead to a collapse in confidence and consequent rises in interest rates. (Liz Truss could tell you about this, or she could if she had any humility.)
Moving borrowing for public infrastructure off the public sector balance sheet is a way around this. Privatisation achieves this – but UK privatisation of monopoly utilities has been disastrous. The new government is currently bringing the rail services in England and Wales back into public ownership, while councils will be permitted to do the same with bus services. The crisis in sewage discharges by water companies in England is another example of privatisation gone wrong.
The private finance initiative is an alternative approach. This converts capital expenditure into an ongoing revenue cost paid to a private contractor – equivalent to leasing property instead of buying it. The costs can be phenomenal, while coming with inflexible and disadvantageous contracting relationships. The UK entered into around 700 PFI contracts, delivering capital projects valued at £57bn, but with an outstanding liability of £160bn for use and maintenance.
Another option is mutualisation, which has been suggested for both NI Water and the Housing Executive, to enable them to borrow against their revenues and existing capital assets in order to finance investment programmes. This should accelerate spending on water supply and waste water discharge management, as well the building of social housing.
‘Mutualisation’ involves ownership of an institution being transferred to its customers. This would not be a new principle for Northern Ireland as the Moyle electricity interconnector between NI and Scotland is operated by Mutual Energy, as is the gas transmission pipeline from GB to NI. The Co-operative Group, one of the UK’s largest grocery retailers, is also a mutual, owned by its retail customers (including me).
The water supply business for most of Wales is another mutualised operation, called Glas Cymru. It borrows against its revenues and assets, enabling it to have invested £6bn in its water supply and sewerage infrastructure since 2001. It proposes to spend a further £4bn in the next period, including £2.5bn on environmental improvements.
The strong advantage of the mutualisation model compared to the privately owned water companies of England is that profits are not extracted for payments as dividends to investors, nor can borrowing be undertaken from associated companies at high interest rates to additionally generate profits for investors.
Glas Cymru is unusual as a UK utility that is a company limited by guarantee and without shareholders; is financed through the capital markets, without government support; and uses surpluses for the benefit of its customers. It differs from Scottish Water, which, like NI Water, remains within the public sector and must finance its investment from public sector borrowing.
The whole of the water industry faces serious challenges: much of the existing infrastructure is 150 years old; climate change is increasing incidents of tumultuous rain fall, which discharge systems cannot cope with; demand for water supply has increased; and the construction of new homes, industry and roads over recent decades has reduced ground capacity to absorb rain fall, leading to higher levels of water discharges through sewerage.
Consequently, all water companies in England and Wales, including Glas Cymru, are subject to enforcement cases from the regulator, Ofwat, with all 11 accused of not fulfilling their obligations to protect the environment from their discharges. NI Water is not subject to Ofwat regulation, but it seems likely that if it were that it, too, would be facing enforcement action regarding discharges, including in relation to Lough Neagh. (Opening enforcement action does not in itself demonstrate that a company has breached its legal obligations.)
Whether mutualisation is the right approach for NI Water – and the Housing Executive – is a decision for MLAs to take. But it is clear that something has to change, with water infrastructure competing with transport schemes (including the A5 upgrade), the school building programme and health and social care infrastructure for calls on Stormont’s capital budget.
According to the Construction Employers Federation, we need to spend in excess of £640m a year to catch-up with water underinvestment in NI. In the 2022/23 year, less than half this – £309.5m – was invested in new assets and the network. NI Water confirmed in a statement that it recognises that it needs to spend at least £500m per year for the next decade “to meet the current and rising environmental standards and facilitate economic development”.
NI Water’s chief executive, Sara Venning, wrote in its most recent annual report: “We have draft public expenditure limits from Government for 2023/24 which are below the levels required and have no visibility of funding for the final three years (2024/25 to 2026/27) of PC21 [price controls set by the Utility Regulator]. Such a position would not be tolerated in any other part of the UK.” At the time of the annual report’s publication, the Assembly was down and ministers were not in place – but the underfunding crisis remains today.
The big question for NI Water then is – if not mutualisation, then what?