Lost in the Flood – Government Ineptitude Contributed to Water Charges Fiasco

In most countries the idea that households should pay for their water services is uncontroversial. It is simply seen as a no brainer. Yet opposition to the introduction of water charges was obviously a significant factor in the hammering meted out by the Irish electorate to the outgoing Fine Gael/Labour Coalition Government in last week’s election. There is a very good case for water charges. Much of the blame for the current mess must go to the outgoing Government for its totally inept approach to introducing water charges which turned a perfectly sensible policy into a political fiasco.

There are significant costs involved in supplying households with clean safe drinking water and properly treating waste water. To economists the idea that people should pay for such services seems axiomatic. Why should it be any different to other public utilities such as gas or electricity?

There is also a strong environmental argument for charging for water on the basis of usage. If people have to pay for the amount of water they use they are likely to waste less. On the other hand if water is provided for “free” there is no incentive for people to conserve water. Water is a scarce resource and wasteful use of water is bad from an environmental perspective. Encouraging excessive waste by providing water for free also increases the cost of supply because it requires a higher capacity supply network. In simple terms not charging for water leads to greater demand and that necessitates higher investment spending on infrastructure to satisfy that demand.

There is a further argument for having a water utility which has its own income stream which was outlined in recent articles by Colm Keena in the Irish Times. Reliance on funding from central Government inevitably tends to result in underinvestment in water infrastructure. The State has limited resources and when it comes to allocating public funds upgrading the water network tends to lose out to providing money for more highly visible options like schools and hospitals. This is because inadequacies in the latter areas are far more visible than crumbling pipe networks. It is generally recognised that Ireland’s water infrastructure is in very poor condition and needs massive investment. This is because it was largely neglected over a long period of time – a classic case of out of sight out of mind. It is important to recognise that the best way to ensure a safe supply of clean water and to prevent pollution is to assign responsibility for providing the service to a water utility which is funded by customer charges rather than depending on central Government funding.

Reliance on central Government funding also militates against long term investment planning because Government budgets are still decided on an annual basis. In addition we have repeatedly seen that economic downturns lead to Governments cutting back on capital spending because it is relatively easy to do.

There is no disputing the fact that the outgoing Fine Gael/Labour Government made a complete mess of introducing water charges. So how did it manage to turn a fairly sensible policy idea into such a fiasco?

First it negotiated a deal with the unions representing local authority staff which provided that there would be no redundancies and thus no reduction in the cost base for many years. How ironic therefore that a number of trade union leaders played prominent roles in the anti-water charges campaign. The Government then effectively imposed a new layer of bureaucracy on top of the existing local authorities with the setting up of Irish Water. Thus Irish Water was saddled with an unnecessarily high cost base from the outset. This is another example of the classic Irish political approach of doing deals with producer groups and ignoring consumers who are going to have to pick up the tab. Far more attention and effort should have been devoted to getting the cost base right and ensuring that Irish Water would operate efficiently.

Second the introduction of water charges undoubtedly posed problems for those on low incomes. An obvious solution would have been to provide for a once-off increase in old age pensions and other welfare payments to compensate those in receipt of such payments for water charges. There are sound equitable reasons for doing this and it would probably have diluted opposition to charges. Yes such an approach would have had budgetary implications but so did introducing the “water conservation grant” of €100 per household.

The third mistake was the decision to drop charges based on usage and introduce flat rate charges instead. This of course completely removed any incentive to reduce waste and thus eliminated any possible environmental benefits. This was then compounded by the €100 “water conservation grant”. These decisions resulted in the EU Commission ruling that Irish Water borrowings had to remain on the Government’s balance sheet which had significant Budget implications.

The entire episode is a classic example of how not to implement policy. Rather than paying attention to getting it right the Government shrugged its shoulders and claimed that it had had no choice because the Troika had insisted that water charges be introduced. Little attention seems to have been paid to the detail of how the policy should have been implemented. The response, when difficulties emerged, was to look for “quick-fixes” such as flat rate charges even if such solutions were completely at odds with a key objective of the policy, i.e. promoting conservation.

There has been significant media comment in the wake of the election which claims that the result indicates that the electorate would prefer paying to ensure high quality public services to tax cuts. Difficult to reconcile such claims with the widespread opposition to paying for a quality water service.

The Legal Services Act 2015 – A Case of Regulatory Capture?

The outgoing Government has been heavily criticised in the media of late, notably in the Irish Times, over its alleged failure to introduce meaningful reform of the legal profession. Writing in today’s edition, John McManus claimed that the Legal Services Act “was undoubtedly the source of much satisfaction in Blackhall Place and Henrietta Street, the respective homes of the Law Society and the Bar Council which retained much of their hegemony.” A couple of weeks back the paper ran an article by Arthur Beesley describing how the legal profession had lobbied strenuously against the legislation. The main gist of these articles was how the legal profession had obstructed necessary reforms. Beesley’s article, based on records of correspondence obtained under the Freedom of Information Act, claimed that the Legal Services Bill, which was originally published by then Minister for Justice, Alan Shatter T.D. in October 2011, “was cast to reduce legal costs and modernise the professions”. McManus describes Shatter “as a practicing solicitor who seemed genuinely committed to reform of his profession.” The implication is clear: necessary reforms which would have reduced the cost of legal services were stymied by lobbying by vested interests. Unfortunately such claims don’t stack up.

We will put our hands up at the outset and put on the record the fact that Compecon prepared a number of reports for the Bar Council in relation to the Legal Services Bill.

In order to assess whether the Legal Services Act which was finally enacted in December 2015 represents a capitulation to vested interests, it is necessary to have some understanding of the background to its passage. Back in 2006, the Competition Authority 2006 recommended a number of reforms in the way the legal profession operated. Many of these were adopted by the legal profession itself following the report’s publication. The Memorandum of Understanding between the Government and the ECB/EU Commission/IMF Troika provided inter alia that the Government would introduce legislation to give effect to any of the Competition Authority’s recommendations which had not yet been implemented. The Legal Services Regulation Bill published by Minister Shatter in October 2011 contained a number of proposals which were at odds with the Competition Authority recommendations.

First the Authority recommended that a new State regulatory body should be established to oversee the regulation of the legal profession. Crucially the Authority recommended that day to day responsibility for regulation should remain with the existing self-regulatory bodies – the Bar Council and the Law Society – but that such regulation would be subject to oversight by the proposed new State regulator. The original version of the 2011 Bill, however, proposed removing virtually all regulatory functions from the respective professional bodies and assigning them to the proposed regulator. There are certain benefits to self-regulation, namely such a regulator has a detailed knowledge of the activity being regulated which reduces the cost of regulation. An external regulator must incur quite significant costs in order to obtain the necessary information to regulate effectively. Of course self regulation carries a series risk that the regulator will act in the interests of the profession rather than in the public interest. The Competition Authority proposal can therefore be seen as a sensible compromise which seeks to reduce the cost of regulation while preventing the abuse of regulatory powers. Minister Shatter’s proposed regulatory regime represented a far more costly option.

Another crucial flaw in the original Bill was that it would have given the Minister a significant role in the regulatory regime, raising serious questions about the independence of the proposed regulator and threatening to undermine the independence of the legal profession. When the Competition Authority recommended that an independent legal services regulator should be established they meant one was that independent of Government as well as independent of the legal profession. Shortly after the Bill was published the Authority Chairperson said in a speech that the Bill “certainly raises questions about its [the regulator’s] independence”. She went on to point out that the Bill provided for a much higher level of Ministerial involvement in the operations of the regulator than in other regulatory agencies where the case for independence of the regulated profession was less important.

EU Commissioner Viviane Reding also criticised the original Bill for undermining the independence of the legal system.

“It was indeed a disturbing trend when, in the wake of the economic crisis, the IMF, in 2011, asked Ireland to propose radical reforms to the organisation of the legal profession. The representation of the legal profession was to be abolished and replaced by a ‘Legal Regulator’ appointed by and integrated into the Irish Ministry for Justice, Equality and Defense. Certainly a cost-saving measure but let’s be clear: measures to achieve fiscal consolidation cannot come at the price of undermining the independence of the judiciary and the independence of the legal profession.” (Emphasis in original).

The IMF, who according to McManus in his Irish Times piece have long called for reform of the Irish legal profession, denied that it had requested the introduction of such provisions in the legislation following Reding’s speech and indicated that the Irish Government was responsible for such proposals.

The other major issue of contention related to proposals for alternative business structures (ABSs) for the profession. These involved possible partnerships between barristers and between barristers and solicitors, known as legal disciplinary partnerships (LDPs), and partnerships between lawyers and other professions such as accountants, known as multi-disciplinary partnerships (MDPs). The Competition Authority’s Final Report concluded that there were problems involved with LDPs and MDPs not least with regard to the regulation of such entities. Consequently the Authority did not recommend that either LDPs or MDPs should be permitted. Rather it suggested that this issue should be examined in more detail by the proposed new legal regulator. The reasons for this are straightforward. ABSs and, in particular, MDPs give rise to serious potential conflicts of interest. We have seen over the past decade how ignoring such conflicts can result in major financial collapses. Complex questions also arise as to how such multi-disciplinary business structures should be regulated. Again the Authority’s recommendations were ignored in the original 2011 Bill, which proposed that LDPs and MDPs would be permitted without further analysis.

A further major problem with the 2011 Bill was that no regulatory impact analysis (RIA) of the proposals was published until two years after the Bill was published. The purpose of an RIA is to allow for a detailed analysis of policy options in advance of any decisions being taken. Clearly in this case most of the key decisions were taken in advance of any RIA being carried. At the time it was explained that the need to enact the legislation urgently to satisfy the Troika’s demands had meant that there had not been time to carry out an RIA. As TDs debated the proposed, Minister Shatter re-assured them that it was hoped the RIA would be soon available. This is clearly not a sensible way to legislate.

While the Competition Authority argued that reforms were necessary to reduce excessive legal costs, it produced little actual evidence to support the claim that costs were excessive. The Authority noted that legal costs in Ireland were equivalent to approximately 0.8% of GDP. The RIA when it was eventually published noted that costs in Ireland “compares favourably to the UK situation where Legal services accounted for around 1.7% of GDP”. In other words Irish legal costs, as a proportion of GDP, are approximately half the UK level which does not suggest that Irish costs are excessive. Paragraph 19 of the RIA cited a survey by the National Consumer Agency which found that Irish consumers could save substantial amounts of money in respect of three commonly purchased legal services by shopping around. Again such evidence is inconsistent with claims that there is a lack of competition or that legal fees are excessive.

It is certainly true that the Legal Services Act as finally enacted differs significantly in a number of respects from Minister Shatter’s original 2011 Bill. The professional bodies have retained responsibility for many day to day regulatory functions subject to oversight by a new regulator. However, this is in line with what was proposed by the Competition Authority. In addition proposals to permit LDPs and MDPs have been significantly watered down and the Bar Council has been permitted to retain its rule requiring barristers to operate as sole traders which precludes its members from participating in LDPs and MDPs. Again, however, the Competition Authority never recommended that LDPs and MDPs should be permitted. Thus the final legislation is largely in line with what was recommended by the Competition Authority.

So claims that the legal profession effectively blocked desirable reforms and that the final legislation represents a case of regulatory capture are somewhat wide of the mark. What was ultimately dropped from the legislation were proposals that would have increased regulatory costs, potentially undermined the independence of the legal profession and permitted new forms of business structure without any adequate evaluation of their potential costs and benefits. Had Minister Shatter followed the recommendations of the Competition Authority, maybe it would not have taken four years to enact the legislation. Then again why let the facts spoil a good story?

Why Minimum Unit Pricing (MUP) of Alcohol is a Bad Idea

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Proposals to introduce MUP for alcohol just do not stack up in economic or public policy terms. Establishing a State regulated cartel, which is what MUP amounts to, is not a sensible way to target alcohol abuse. There are alternative and more effective ways of reducing alcohol consumption than MUP. MUP is unlikely to significantly reduce consumption by those who drink most and will increase the profits earned by pubs, off-licences and supermarkets on sales of alcohol at consumers’ expense. MUP will divert revenue from the Exchequer into higher profits for pubs, off-licences and supermarkets. Oh, and by the way, the EU Commission and the European Court of Justice (ECJ) have indicated that it is contrary to EU law.

Shortly before Christmas, Minister for Health, Leo Varadker T.D. initiated the second stage debate on the Public Health (Alcohol) Bill which provides for the introduction of MUP in the Seanad. Six days later the European Court of Justice handed down its judgment in respect Scotland’s MUP legislation in a case brought by the Scotch Whisky Association (SWA). (We have to be up-front and acknowledge that Compecon prepared a report on MUP for the SWA). The Court’s judgment indicates that MUP legislation is likely to be in breach of EU law. The Minister responded in media interviews indicating that he intended to press ahead with his proposed legislation despite the ECJ judgment. The Minister ought to think again.

The EU Commission stated in an opinion issued on 25th September 2012 that Scotland’s MUP legislation constituted a quantitative trade restriction within the meaning of Article 34 TFEU which could not be justified under Article 36 TFEU. The Commission opinion was in response to a Scottish Government notification under the terms of Directive 98/34/EC of an order setting a minimum price of 50 pence per unit of alcohol. The Commission opinion has been largely overlooked in the Irish MUP debate.

The more recent ECJ judgment makes clear that a Member State may introduce MUP provided it does not go beyond what is necessary for the protection of human life and health but is precluded from doing so if the latter objective could be achieved by alternative means such as higher excise duties that are less restrictive of trade and competition within the EU.

There is a basic contradiction contained in the arguments advanced by proponents of MUP. On the one hand it is suggested that MUP will affect only a minority of consumers who drink harmfully and that the majority will not be affected. Almost simultaneously, however, we are told that a large number, possibly a majority of the population are harmful drinkers. The Minister, for example, told the Seanad that:

“The majority of people who drink do so in a harmful way.”

If the majority of people drink in a harmful way, it does not make a lot of sense to introduce a measure that will supposedly only affect a minority. In reality claims that only a minority of people will be affected are just plain wrong and are probably designed to minimise consumer opposition.

The facts show that alcohol consumption in Ireland has been declining for more than a decade. Alcohol consumption in Ireland in 2013 was 26% below its peak 2001 level and was even below its 1994 level. (Consumption may have increased slightly in 2014). Similar declines have been recorded in Britain. Average consumption in England and Wales is also back to where it was in 1994, while consumption has been falling in Scotland since 2007. The decline in alcohol consumption in Ireland has been much more dramatic than that recorded in Britain, although Irish consumption levels are still above those in England and Wales but are similar to Scotland.

The key point is that the sharp decline in alcohol consumption in Britain and Ireland has been achieved without MUP.

A real decline in alcohol prices, i.e. after adjusting for inflation, was a key factor behind the rise in UK consumption levels up to the mid noughties. This price drop was partly due to the fact that successive UK Governments allowed excise duties on alcohol to decline in real terms over a long period of time up to 2008. In 2008 this policy was reversed when the then UK Government increased alcohol duties by 6% in real terms and committed itself to increasing alcohol duties by 2% per annum in real terms (i.e. 2% above the general rate of inflation) until 2014, a commitment which it honoured. The increase in UK excise duties has coincided with sharp falls in consumption.

Research carried out for the Scottish Government reported that alcohol consumption had also declined in countries such as France and Italy over the past 10-20 years. The Scottish Government report stated that the reasons for the decline in alcohol consumption in France were not entirely clear. What is clear is that in both France and Italy the reductions in alcohol consumption were achieved without MUP.

One of the arguments advanced in favour of MUP is that harmful alcohol consumption by individuals imposes significant costs on society in terms of increased health costs, crime, work absenteeism and lost productivity. Such costs are usually exaggerated, Nevertheless, they are real. They are a classic example of what economists refer to as negative externalities because individuals consuming alcohol impose additional costs on society which are not reflected in the price of the product. Economic theory has long recognised that if private consumption costs are lower than the social cost this will result in excessive consumption from society’s point of view. Economics states the best way to address such negative externalities is to tax consumption so that the additional social costs are internalised. This not only reduces consumption but means that harmful drinkers would compensate society for the negative effects of their behaviour and reduce the cost borne by taxpayers in general. MUP will, however, reduce Exchequer alcohol excise receipts.

MUP adherents frequently claim that increasing taxation on alcohol will not work because retailers will not pass on tax increases. Such claims do not stack up. The February 2012 report on a National Substance Misuse Strategy concluded:

“Increasing excise duties is one of the most effective methods of reducing alcohol consumption.”

The Report stated that there had been 3 increases in excise duty rates since 2000; cider in December 2001, spirits in December 2002 and wine in October 2008. What happened? According to the report

“After each excise duty increase a decrease in consumption of the affected beverage was observed in the following years. In December 2009 excise duty was reduced. In 2010 alcohol consumption increased by 5.3 per cent.”

Incidentally the ECJ, in its judgment, expressed the view that higher taxes are ultimately passed on.

It is also suggested that tax increases do not represent an appropriately targeted measure, as they affect all consumers not just problem drinkers. Wrong – those who drink most would pay the most tax. The evidence indicates that problem drinkers are less price sensitive, i.e. have a less elastic demand, and higher taxes are more likely to be passed on when demand is inelastic. Indeed retailers are likely to raise prices by more than the rate of the tax increase when demand is inelastic.

The drinks industry tends to be opposed to higher taxes on alcohol. However, the test set by the ECJ is whether alternative measures such as excise are likely to be equally if not more effective than MUP in reducing alcohol consumption given that they are less disruptive of trade. The evidence on this point clearly favours excise duties over MUP.

MUP will substantially increase the profits earned by pubs, off-licences and supermarkets on alcohol sales. Research carried out by the School of Health and Related Research (ScHARR), whose work is regularly cited by MUP proponents, estimated that an MUP of 50p in Great Britain would increase profits on alcohol by £1.2-£1.8 billion per annum. Other studies estimated that profits would increase by even more. The Regulatory Impact Assessment (RIA) of the Scottish legislation stated:

“Although the driver for minimum pricing is the protection and improvement of public health, we note that the effects of price increases may not be disadvantageous to the alcohol industry as a whole because the estimated decrease in sales volume may be more than offset by the unit price increase, leading to overall increases in revenue.”

Not surprisingly therefore, publicans’ bodies in Ireland have been in favour of MUP while simultaneoulsy opposing increased taxes on alcohol, which sort of gives the game away. A policy that will increase profits on drink sales while reducing Exchequer revenue from drinks’ taxes makes no sense.

A further negiatve aspect of MUP is that it will disproportionately affect those on lower incomes. UK evidence indicates that those on higher incomes tend to consume higher levels of alcohol.

Minister Varadker informed the Seanad that MUP would not lead to additional profits.

“The whole point is to reduce consumption. If consumption is reduced, less alcohol will be sold and there should not be more profits”.

The Minister seems not to understand a basic economic fact that underlies all cartels – charging higher prices increases profits despite a decline in sales. One can only hope that Minister Varadker is not assigned to an economics portfolio if Fine Gael is returned to Government after the coming election.