A new report by the NI Fiscal Council is warning of a growing crisis in the provision of water and sewerage services in Northern Ireland and calling for more funding for NI Water.

The warning comes in the Council's third sustainability report which this year provides a special focus on the sustainability of NI Water.

The report says that without greater and sustained investment, NI Water risks falling further behind its peers in service quality and environmental standards. The underinvestment is also constraining economic development, particularly in areas requiring commercial and residential growth.

"Increasingly unsustainable funding model”

“Resolving these issues will require new sources of funding, even though this appears politically unpalatable,” NI Fiscal Council says.

NI Water is a publicly-owned company and currently operates under a unique and what the Council describes as “an increasingly unsustainable funding model.”

Unlike the rest of the UK, NI does not charge households directly for water services. Instead, NI Water receives a government subsidy in lieu of domestic chargesn which in effect diverts more than £300 million annually from the Executive’s Budget that could otherwise be directed toward other pressing public service needs.

According to the report, although NI Water has improved its efficiency and service performance relative to counterparts in England and Wales, the Regulator believes that a performance gap most likely still exists. It also highlights that Ofwat is not happy with the performance of the water companies in England and Wales and has sanctioned big increases in water charges over the next five years. Under its current subsidy-based model, this injection of funding is something NI Water cannot match, placing it at a growing disadvantage the Council says.

NI Water estimates 18 years of above-average real terms investment needed for infrastructure backlog

The report also points out that the consequences of this underinvestment are already visible in development constraints at many sites in NI. Despite a recent step-up in capital spending, NI Water estimates that it would take 18 years of above-average real terms investment to deal with the infrastructure backlog.

The report looks in detail at NI Water’s existing funding model and finds it restricts the company’s ability to invest adequately in infrastructure. For as long as it remains in the public sector, under Treasury rules NI Water’s spending is constrained by the budget cover it receives in the Executive’s Budget rather than the availability of cash. In recent years this budget cover has fallen short of the Regulator’s recommendations.

To remove NI Water’s dependence on budget cover, it would need to leave the public sector through privatization or mutualization. The report says mutualization has received some support - however, it flags up:

“It is noteworthy that Ofwat argues that the mutual Welsh water is a relatively poor performer by the standard of its privatized counterparts.”

In the Fiscal Council’s view, given the current fiscal position, NI’s recent budget crises and concern about relative fairness between the nations, it is unlikely that the UK Government would provide significant additional resources. While developers might contribute more, but domestic charges or an equivalent increase in Regional Rates (perhaps in the form of an Infrastructure Levy) look “inescapable at some point” to bring sufficient additional funding into the sector to meet current and future challenges.

Sir Robert Chote, Chair of the Council, said:

“Water and sewerage services are essential to public health, environmental protection and economic development. The current funding model is not fit for purpose. Charging for water or increasing taxes would put a further squeeze on the household finances, but failing to do so has its own costs.”

Click here to download the report in full