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FactCheck: Can water charges really be abolished?

TheJournal.ie’s GE16 FactCheck dives deep into what could be a major issue for the next government, and resurfaces with some answers.

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AS PART OF our GE16 FactCheck series, we’ve been testing the truth of claims made by candidates and parties on the campaign trail.

For our final in-depth article of the election campaign, we’re looking into something that got one of the highest volumes of emails of any issue, but was surprisingly neglected on the national level – water charges and Irish Water.

Among them, Martin in Meath East and Laura in Cork North Central heard several parties pledging to get rid of the charges, and wanted to know if this was a realistic possibility.

Simple question – VERY complicated answer.

Further down in this article, we will also be examining the Social Democrats’ claim that water charges are only just covering the cost of Irish Water’s implementation programme.

CLAIM: We can and will abolish water charges – Fianna Fáil, Sinn Féin, Social Democrats, Anti-Austerity Alliance, People Before Profit, various Independents
Verdict: Half-TRUE

What was said:

In each of their manifestos, the parties mentioned above have said they will abolish water charges, if elected to government.

The facts

Irish Water bills Source: Niall Carson/PA

This is an extremely complicated subject, so let’s break down the two main issues that could, it is argued, prevent an Irish government from getting rid of water charges – European law, and the Troika deal.

European law

In 2000, the European Commission brought in the Water Framework Directive, a strategy to improve water quality and harmonise water management across the EU.

Article 9 gave every country until 2010 to:

Ensure that water-pricing policies provide adequate incentives for users to use water resources efficiently, and thereby contribute to the environmental objectives of this Directive.

Very crudely put, this means, ‘Find a way to pay for water that encourages people and businesses to save it, and not to pollute it.’

However, Article 9.4 allowed something of a loophole, known as the “Irish exemption,” which meant countries could, if they didn’t have an “established practice” of water charges, find some other way to encourage conservation and other environmental aims.

After 9 years without domestic water charges (businesses had been charged and metered since 1998), Finance Minister Brian Lenihan announced in his 2010 Budget speech:

The Renewed Programme [for Government] also contains a commitment to introduce a system of water metering for homes. Preparations are under way. Water charges, when introduced, will be based on consumption above a free allocation.

In the 2011 Programme for Government, Fine Gael and Labour committed to the creation of Irish Water, and a “fair funding model” for water, and charging for water usage “above the free allowance.”

And in 2015, the government introduced domestic water charges.

The Troika Deal

00116569 Source: RollingNews.ie

In November 2010, the Fianna Fáil-led government signed an €85 billion bailout agreement with the EU, IMF and European Central Bank, imposing strict fiscal targets on Ireland.

As part of this, the Memorandum of Understanding (MOU) between Ireland and the Troika addressed the issue of water:

To secure our fiscal targets, a number of fiscal measures have been identified for 2012–14…We are also planning to move towards full cost-recovery in the provision of water services… (pg 8)

In advance of introducing the charges, the government committed to:

…[undertake] an independent assessment of transfer of responsibility for water services provision from local authorities to a water utility, and prepare proposals for implementation, as appropriate with a view to start charging in 2012/2013. (pg 30)

As you can see, this is not particularly specific or binding language.

However, over the course of twelve reviews of Ireland’s implementation of the terms and conditions of the bailout deal, the commitments became increasingly detailed and concrete.

By March 2013, the Irish government was promising the Troika:

water9threview Source: IMF

Does any of this mean we can’t abolish water charges?

First, here’s what the main participants and parties are saying:

Irish Water told us that despite the exemption from domestic water charges, “no alternative [to charges] was found” between 2000 and 2010, that would have allowed us to comply with the broader requirements of the Framework Directive.

And now:

A move away from water charges by Ireland would be a breach of the EU Directive, in the absence of an alternative mechanism to achieve the ‘polluter pays’ principle.

Irish Water was unequivocal on this point, but notably did not invoke the Troika Deal in its assessment of whether water charges could be abolished.

The Department of the Environment told us:

The Government’s policy on water charges is fully consistent with the objectives of the Water Framework Directive and reflects the commitment entered into as part of [the Troika Deal].

A spokesperson did appear to allow for the theoretical possibility of an alternative to domestic water charges, but only on the strict condition that, in the words of Article 9, it “does not compromise the purposes and the achievement of the objectives of the Directive.”

However, they were adamant that getting rid of the charges would be “a clear breach of the commitment entered into” as part of the Troika Deal.

00147255 Fianna Fáil Environment spokesperson Barry Cowen. Source: RollingNews.ie

Fianna Fáil correctly pointed out that Ireland left the bailout programme in December 2013, and we are now in a period of “post-programme surveillance” which the Troika estimates will last until the year 2031.

A party spokesperson told us:

The state must meet the re-payment schedule but specific measures such as the continued implementation of water charges are not required under the post-programme surveillance mechanism.
Ireland is free to set out its budgetary choices once outstanding loan re-payments continue to be made.

Fianna Fáil estimates the cost of getting rid of charges as €210 million, which they say has been accounted for in the party’s manifesto.

The spokesperson noted the exemption under Article 9.4 of the EU Directive, and concluded:

We are confident that the abolition of water charges is both legally and financially possible.

On the question of whether abolishing water charges would violate the terms of the Troika Deal, a Sinn Féin spokesperson told TheJournal.ie:

We have no doubt it would be a breach of the Troika MOU agreed with Fianna Fáil – that’s the idea.
That MOU is no longer valid and Sinn Féin would have never signed up to it.

They added that there is “no legal impediment” to getting rid of the charges.

90387242 Source: RollingNews.ie

Deputy Paul Murphy of the AAA called the Troika argument against abolition “bogus,” and added:

Just because it’s in the Memorandum doesn’t mean that the Irish government cannot legally abolish water charges. The memorandum of understanding is an agreement between the Irish government and the Troika.
However, it does not legally bind any future government from changing policies. The legal basis is clear. Water charges and Irish Water were created by Acts of the Oireachtas. They can be abolished and dismantled by an Act of the Oireachtas.

Murphy added that Ireland’s continued exemption under Article 9.4 meant that the EU Directive “doesn’t impose any legal obligation either.”

Kieran Allen, Director of Elections for People Before Profit, told us:

We do not accept that a sovereign Irish parliament is forever bound to commitments made to the Troika.

The Social Democrats did not respond to this particular enquiry.

Evaluating the arguments

00145241 Troika officials on their final visit to Ireland in 2013. IMF official Peter Breuer (L), and Craig Beaumont (C), IMF Mission Chief for Ireland. Source: RollingNews.ie

Let’s deal with the Troika agreement.

Firstly, many of the detailed provisions and commitments in the Memorandum of Understanding have proven to be flexible.

For example, the 2010 MOU contained a promise to cut the minimum wage by €1, which Fianna Fáil did. However, after entering office in 2011, Fine Gael and Labour reversed that cut, and increased the minimum wage.

In fact, Ireland originally committed to introducing water charges by the time it left the bailout programme – 2013.

But the Troika agreed to a significant two-year delay in this timeline, allowing implementation to be pushed back to 2015.

Secondly, the post-programme surveillance reviews offer detailed assessments of how faithfully Ireland is meeting the conditions of the bailout, but the overarching concern throughout them is overall fiscal stability, deficit reduction, and economic growth.

And even from the fiscal point of view, there is considerable leeway.

For example, in a 2014 report, the Commission noted:

Overall, expenditure developments were on track, while some overruns in the health sector (0.1% of GDP) were offset by savings in other areas.
Barring surprises, the 2014 fiscal deficits target under the EDP will likely be met despite some slippages in the health sector.

Those “slippages” of 0.1% of GDP in 2014 amounted to roughly €250 million.

Thirdly, it is also worth noting that the Irish government had already decided to pursue domestic water charges well in advance of the Troika MOU.

Remember that the late Brian Lenihan announced that intention in December 2009, and the government made an even firmer commitment to a programme of water charges in July 2010 – four months before the Troika “came to town.”

The first post-programme report explicitly notes this, on page 82:

The Programme for Government 2011-2014 included plans to introduce domestic water metering, but this was not specified in the original MOU. From the 5th Review the MOU included text on water metering, reflecting the authorities’ existing plans.

The post-programme reports do emphasise the importance of water charges in contributing to the public finances, helping to foster property development and increase Ireland’s competitiveness.

However, Fianna Fáil’s contention that “Ireland is free to set out its budgetary choices” once we continue to repay loans, is an accurate assessment.

Gavin Barrett, Professor of European Constitutional and Economic Law at UCD, told TheJournal.ie:

Ireland exited the Programme of Financial Support for Ireland in December 2013, so it is not clear how the Troika  could exercise any leverage now.

Any party proposing to abolish the charges will need to find a way to pay for that shortfall in revenue, of course, but that move alone – in the context of many budgetary metrics – is hardly likely to scupper our entire economy.

Michael Doherty, an expert in EU Labour law and policy, and professor of Law at Maynooth University, told us “Ireland has exited [the bailout programme] and the specific commitments made cannot bind Ireland forever.”

However, he warned the Troika “would be likely to object to abolition” and added:

…A future government could make the case that a stable and sustainable water supply can be funded in other ways. It would likely have to make such an argument very explicitly and very convincingly.

On balance, then, neither the original MOU with the Troika, nor the increasingly entrenched commitments of the outgoing government from 2011-2013, are an insurmountable barrier to the abolition of water charges.

The Water Framework Directive, on the other hand, is a far trickier proposition.

article9 Article 9.4 of the EU Water Framework Directive - the Irish exemption. Source: EU Commission

Article 9 is fairly clear in requiring a system of paying for water that incentivises conservation, based on the “polluter pays” principle.

This means that paying for water is directly linked to your usage of water.

An alternative solution to domestic charges – for example, a higher rate of taxation on polluting industries, ring-fenced for investment in water infrastructure – might solve the overall funding problem.

But it would still appear to fall foul of the Directive’s requirement that the system of payment incentivises water conservation, and that the payment system be “disaggregated into at least industry, households and agriculture.” (Article 9.2)

Michael Doherty raises another important detail. The exemption in Article 9.4 suggests a country can decide against domestic charges, where that follows their “established practices.”

So while the exemption may have applied in previous years, now that we do have water charges, “It might now be difficult to argue that it is ‘established practice’ in Ireland not to have them.”

In conclusion, Doherty says, a major barrier must be overcome by any government promising abolition.

Without charges, how is Ireland going to ensure a stable and sustainable water supply, without “compromising the objectives of the Directive”?

Gavin Barrett is clear in his assessment:

…It is hard to argue that the abolition of domestic water charges would be anything other than illegal.

For that matter, however, he also suggests that the current system of charging a flat rate up to a certain cap, since it does not directly link payment to consumption, may also be in breach of the Directive, until all usage is metered.

That’s a view shared by Mindy O’Brien, co-ordinator of Voice of Irish Concern for the Environment, a non-party-affiliated environmental charity.

The Directive, she says, requires “a system of water charging that is metered so as to encourage householders to use less water.”

The current capped charge does not provide this incentive and thus is clearly not in line with EU law. Our current system is the worst of all worlds and appears to be more of a water tax rather than a user charge.

There is also politics at work here, though.

Despite being of the view that abolishing water charges would most likely be illegal, Gavin Barrett also points out that the potential consequences of that are less certain.

It would be up to the European Commission to prosecute Ireland for the breach of EU law and they mightn’t want to, for political reasons.

Furthermore, the political parties’ ability to abolish charges will depend largely on what form a new government takes.

Fianna Fáil, for example, have said abolition is a “red line” issue for them. But in the event of a coalition with Fine Gael, for example, it is difficult to see how that would be achievable.

Conclusion

Irish Water bills Source: Niall Carson/PA

A government proposing to abolish water charges would have to very clearly and concretely outline how it will pay for investment in our water infrastructure, in order to avoid the opprobrium of the Troika in its regular surveillance reports.

However, opprobrium and increased scrutiny from our creditors are complicating factors, but clearly not absolute barriers to abolishing water charges.

The EU Water Framework Directive, however, is a major legal obstacle.

A new government would have to devise a system of paying for significant investment in water which involves every sector in society, and incentivises conservation by linking consumption to payment, while also removing domestic water charges.

Irish Water is right to point out that in the decade after the introduction of the Directive, Ireland failed to introduce such a system.

It is extremely difficult to see what the alternative is to domestic charges, which have been introduced in every other EU member state bound by the Directive.

However, we do have to allow for that theoretical possibility (despite the current absence of a clear and concrete plan from any of the parties that support abolition) as well as the possibility that even if we did breach the Directive, there would not be significant consequences for us.

So in light of that, the claim that a new Irish government could abolish water charges is rated Half-TRUE.

CLAIM: Water charges are costing as much as they’re collecting – Social Democrats
Verdict: Mostly TRUE, but it will depend on how many people pay their bills and receive the grant, and will change as the benefits of metering come to fruition.

Several readers emailed us about eye-catching claims by the SocDems on social media over the last week, including Comhall Fanning in Dún Laoghaire, Stephanie Carroll in Dublin West, and Dave McGinn in Dublin South-Central.

What was said:

Page 39 of the party’s manifesto contains this claim:

The money being charged on domestic water charges is not being used to run, or to upgrade, the water system.
Even if everyone paid their water bill, the money collected would do nothing other than cover the costs of the water meters and the costs of billing.

The facts

The Social Democrats’ claim is probably best summarised in this video explanation, although we will go into more detail further down:

Source: Social Democrats/YouTube

In response to an enquiry from TheJournal.ie, the party provided the same set of figures, with more detail, so let’s get out a calculator.

  • €271 million: total expected revenue if everyone pays
  • - €166 million: the cost of the water conservation grant if everyone receives it
  • = €105 million
  • - €6 million: the cost of administering the grant
  • = €99 million
  • - €44 million: the annual cost of water meters
  • = €55 million
  • - €54 million: the overall cost of meter readings, billing, debt management etc…
  • = €1 million

Testing those numbers

  • Irish Water confirmed that “projected revenue from a full year of domestic water charges is €271 million.”
  • They also told us: “The Water Conservation Grant is available to every household in the country regardless of whether or not they are Irish Water Customers.”

To clarify, the grant is administered and paid for by the Department of Social Protection, not Irish Water, but its cost is still borne by the public.

To receive it, households must register with Irish Water, but they don’t have to be customers.

The last official count, by the CSO in 2011, put the total number of households at 1,654,208. Using the 1.3% rate of population growth from 2011-2015, we can estimate there were 1,676,084 households in Ireland last year.

All of them, according to Irish Water, are eligible for the €100 grant, a total that would come to €167 million if there was 100% uptake.

  • In January, Social Protection Minister and Tánaiste Joan Burton said €5,782,035.42 had been spent on administering the grant in 2015.
  • Irish Water confirmed to TheJournal.ie that “The overall cost of the metering programme is €540 million.”

The Social Democrats said the figure of €44 million per year is based on dividing up the overall metering cost across the average life span of a water meter, which they placed at 15 years.

That gives €36 million a year, and with an estimated borrowing interest rate of 1.5%, we arrive at a figure of €41.4 million per year, just slightly above the €41 million estimate provided by Kelly to the Dáil last December (pg 766).

However, Irish Water disputed these figures, saying that the true annual cost of meter replacement was €18 million.

The actual replacement cost over 15 years is less than 20% of the first install cost because the chamber and cover accommodate a simple exchange of the meter unit.

90409429 Source: RollingNews.ie

Furthermore, they argued that the data gathered through metering allows Irish Water to identify consumption and leakage patterns.

In the long-run, a spokesperson said, this would prevent the unnecessary construction of new treatment infrastructure, and the €540 million capital investment on metering would eventually pay for itself through these savings.

  • The Social Democrats reached the cost to serve figure of €54 million by using the UK water agency Ofwat’s 2014 price review as a guide.

Irish Water disputes this figure, saying they have read the Ofwat report, and found the spending involved included bad debts, and that Irish Water had newer meters which would cost less to read.

Our overall comparable ‘cost to serve’ for all billing activities…is €20 million in the medium term, possibly less in the longer term.

However, the SocDems figure included spending on meter readings, maintenance, debt collection, fielding enquiries from the public, and not just billing.

Irish Water’s customer operations report from 2014 estimated their overall customer operations costs – which appears to cover all these categories – as €46.43 million in 2016.

Let’s use that figure, and do the calculations again.

  • €271 million: total expected revenue if everyone pays
  • - €167 million: the cost of the water conservation grant, if everyone registers
  • = €104 million
  • - €5,782,035: the cost of administering the grant
  • = €98,218,000
  • - €18 million: the annual cost of meter replacement
  • = €80,218,000
  • - €46.43 million: annual customer operations costs
  • = €33.78 million

90362065 Source: RollingNews.ie

So there would appear to be a gap between the estimate provided by the Social Democrats, and the estimate we’ve arrived at here, using the best available sources.

However, remember that €33.78 million is the figure left over to invest in Ireland’s water infrastructure, which has always been the stated purpose of the entire project.

So while the Social Democrats’ may have overstated the figures involved, the thrust of their warning is right.

Remember – their calculations were based on 100% payment of charges, and 100% uptake in the Water Conservation Grant.

Let’s run the numbers again, based on the actual current levels.

The most recent information was that 61% of customers paid their bill in the last billing cycle – although that doesn’t necessarily mean 61% paid in every billing cycle so far.

Furthermore, Joan Burton told the Dáil in January that 887,010 households – around half the eligible households – had actually received the grant last year, amounting to €88,701,00.

  • €165.3 million: Revenue at current payment rate of 61%
  • - €88.7 million: Current cost of the water conservation grant
  • = €76,599,000
  • - €5,782,035: the cost of administering the grant
  • = €70,816,965
  • - €18 million: the annual cost of meter replacement
  • = €52,816,965
  • - €46.43 million: annual customer operations costs
  • = €6,386,965

That’s almost €6.4 million left over to invest in water, based on current levels. Again, not quite the €1 million claimed by the SocDems, but not far off.

Irish Water’s argument that metering investment would begin to pay off through otherwise undetected leaks being detected, is a crucial one.

However, no specific timeline was offered for when the €540 million initial investment would “pay for itself”, although this could take decades. Such is the nature of long-term capital investment.

Since the Social Democrats’ claim relates to Irish Water’s current operations, the contention that “Water charges are costing as much as they’re collecting” is Mostly-TRUE.

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