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.