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Sutton and East Surrey Water plc Working to deliver

Funding Water Infrastructure – How State Authorities Can Meet the Challenge Jeremy Pelczer Chairman, Sutton and East Surrey Water

25 June 2013


Agenda

•Personal Experience •Stakeholder Expectations •Characteristics of Investment Requirement •Aligning Planning Horizons •Funding Choices •Managing the Bill Impact

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Personal Experience Models Appropriate to Contexts •England – the privatised utility model across multiple companies •Scotland- public ownership, responsible to the Scottish Government •Asia/Pacific – public ownership, private participation; •USA – local (state) regulation; very diverse with 54,000 water companies •Chile – concept of “model” company across multiple regional companies • Important for Irish Water is to find ways of benchmarking performance, and establishing strong model of leadership and Governance

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Stakeholder Expectations A Public Service – Regardless of Delivery Mechanism •Water quality imperative - “fit for human consumption” and concept of “Guardian of the public Health” •Environmental impact - protection, sustainability, enhancement • Customer service -

choice, contact/call centre capability, right first time and resolution of queries (unwanted calls, written complaints, abandoned calls) idea of service incentive

•Efficiency - continuous improvement, strong and clear KPI’s •Operational Integrity - stable/reliable asset condition •Affordability - social mix, tariff options, value for money, bad debt risk •Funding - long term, stable, continuous, financeability/bonds •Philosophy of public service ethic, private sector cutting edge efficiency

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Characteristics of Investment Requirement

•Capital intensive industry •Long asset lives, especially networks • Asset values for pricing – historic or current cost, inter-generational issues? •Investment boundary decisions – capital or operating cost solutions (repair or replace ?); idea of totex in future •Competing stakeholder expectations – long or short term – environmental improvement or manage bill impacts – customer and community engagement

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Aligning Planning Horizons

• Water

resource management plans - 30 + years – Supply/demand balancing - twin track approach – Supply side measures - groundwater sources, storage reservoirs, treatment capacity, distribution capability – Demand side measures - metering, water efficiency, leakage control

•Asset Management Plan periods – 20 + years – Strategic Direction Statements – Quality of business planning; clear outcomes based; clarity on risks and risk mitigation actions •Price Control Periods – 10 years, 5 years, 8 years? – The key is good quality planning across the medium and long term setting out a menu of choices to allow decisions on funding levels needed that can be made against the context of affordability, sustainability, operational integrity and customer preferences

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Funding Choices

•General taxation (government/local authority ownership) – Pros - democratic legitimacy, lower borrowing costs, minimises social impact – Cons - competition for funds, time horizons determined by political process, lower efficiency pressures •Asset transfer (privatise) – Pros - strong efficiency incentive, long planning horizons, risk transfer – Cons - equity returns, public legitimacy challenge, cost of regulation •“Mixed economy” - public ownership, private development (PFI) – Pros - democratic legitimacy, long planning horizons, efficiency incentive, risk transfer – Cons - complex contractual relationship, high returns, cost of contract management • “Mixed economy 2” - asset transfer + major project funding (Thames Tunnel) – Pros - long planning horizons, risk transfer, efficiency incentive – Cons - project funding risk premium, three-way contract relationship, high profile

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Managing the Bill Impact

•Subsidy or full cost recovery? •“Pay as you go” or “pay as you use”? •Inflation linked or pre-determined profile •Bill, price or revenue controls? •Prescribed basis of charge or customer choices; listening to customer priorities •Mandated “social tariffs” or customer choices •Annual or more frequent bill increases

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Jeremy Pelczer, Water Forum 2013  
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