Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697804984166.pdf (Ireland)
NewERA Presentation to Joint Committee on the Future Funding of Domestic Water Services 7 February 2017 Background to NewERA Report on Irish Water Funding  Irish Water requires Ministerial consent to enter into borrowings.

 As part of NewERA’s statutory functions, NewERA provides financial and commercial advice to relevant Ministers on any consents requested by Irish Water, including in relation to borrowings and capital expenditure.
 In June 2016, NewERA provided a report for the Ministers on Irish Water, relating to: ‒ A review of Irish Water’s estimated additional funding requirements arising from the suspension of domestic water charges; and ‒ Options for the debt funding of Irish Water and the cost of its existing debt facilities relative to the cost of State funding.

2 Estimated Financial Impact of Suspension of Domestic Charges  2 scenarios – billing recommences in Q2 2017 or not.
 Based on Irish Water Business Plan/Budget forecasts prior to suspension.

 Assumes no significant change in Irish Water’s operations/capital expenditure plans (except customer cost savings).

 Does not include the €110m saving from water conservation grant.

 Additional State subvention to cover shortfall from no domestic billing.

 Assume planned working capital loans to change to subvention if no domestic billing.

 Government decision in October 2016 on additional funding for 2016 and Q1 2017.
3 2016A2017F2018F2017F2018FEUR millionsScenario 1 (Billing)Scenario 1 (Billing)Scenario 2 (No Billing)Scenario 2 (No Billing)Income Statement Impacts:Domestic Revenue(181)(6)(3)(238)(243)Domestic Bad Debt Provision7 0 0 0 0 Customer Costs14 0 0 20 20 Net Income Statement Impact(160)(6)(3)(218)(223)Cashflow Impacts:Domestic Receipts(130)(125)(42)(259)(237)Customer Costs14 0 0 20 20 Net Cashflow Impact(116)(125)(42)(239)(217)IW Requirements:Replacement Funding (Subvention)174 125 42 278 246 Working Capital Loan changed to Subvention(58)n/an/a(39)(29)Net Additional State Funding to IW relative to Business Plan116 125 42 239 217 IW Funding Requirements from State in Business Plan:Subvention479 475 474 475 474 Working Capital58 39 29 39 29 Equity184 270 270 270 270 Total Funding in Business Plan721 784 773 784 773 Additional Funding from Suspension of Charges116 125 42 239 217 Total State Funding to IW837 909 815 1,023 990 Estimated Financial Impact on Irish Water of Domestic Billing SuspensionSource: NewERA analysis based on information provided by Ervia/IW.
Notes: Scenario 1 assumes domestic billing recommences in April 2017 for the period April-June 2016 with collection rate of 65% in 2017 and 70% in 2018.

Scenario 2 assumed domestic billing does not recommence in 2017/18.

Background on Debt Funding  The Business Plan published by Irish Water in 2015 contains a capital investment plan of c.€5.5bn over the period 2014-21.

‒ This was assumed by Irish Water to be part funded by c.€3bn in borrowings.
 Irish Water’s funding strategy in its 2015 Business Plan assumed Irish Water would be classified outside General Government.

 Irish Water is currently classified by Eurostat as part of General Government.

‒ Irish Water’s expenditure (net of external revenue) impacts on the General Government Balance (GGB), irrespective of whether the funding comes from the State or externally and whether it is provided as equity or debt.
‒ Irish Water’s external borrowings are included in the level of General Government Debt (GGD).

‒ CSO has indicated that Eurostat will generally only reconsider classification based on c.3 years of observed data.

 As Irish Water’s debt facilities have 1-year terms, they each need to be extended on a rolling basis with Ministerial consent.

 The main focus of NewERA’s review was the cost of Irish Water’s debt facilities relative to the cost of State funding.
4 Irish Water’s Debt Facilities  In 2015, Irish Water put in place €1.26bn in short-term (1-year) bilateral debt facilities, €810m from 8 domestic and international banks and €450m from the Ireland Strategic Investment Fund (ISIF) ‒ €975m drawn under the facilities at 31 December 2016.

‒ Unsecured revolving credit facilities, meaning there is flexibility to draw-down, repay and re-draw amounts during the term of the facility.
‒ Also flexibility to repay and cancel the facilities at certain periods during their term.

 Irish Water’s total finance costs in 2016 were c.€21m, including interest on working capital facility from the Minister for Finance and the ISIF facilities.

 Average annual cost of €810m bank facilities is c.1.4% (c.€11m on a fully drawn basis) ‒ Interest on ISIF facilities not relevant from a GGB perspective as ISIF is also classified as part of General Government.
5 LenderAmount Available (€m)Amount Drawn at 31-Dec-16 (€m)Amount Undrawn at 31-Dec-16 (€m)Average Total Cost (1)Bank Facilities8106751351.40%ISIF Facilities450300150Total Facilities 1,260975285Irish Water Debt FacilitiesSource: NewERA analysis based on information provided by Ervia/IW.

Notes: (1) Assumes all facilities are fully drawn for 1 year.

Total cost based on current EURIBOR (where applicable), the interest rate margin and the % annual cost of any upfront fees.
Bond Market Conditions  Substantial fall in cost of State funding in recent years due to improved economic backdrop and ECB action.

‒ Increase in longer-dated yields since the start of Q4 2016 but still at low levels.

‒ For example, since December 2016 the NTMA has issued 1-year debt (€500m) at a negative yield of -0.42% and 20-year debt (€4bn) at a yield of 1.73%.
Irish Sovereign Bond Yields (2-year and 10-year) 6 Yield (%)Source: Bloomberg (weekly data)-149141924Jan 10Jul 10Jan 11Jul 11Jan 12Jul 12Jan 13Jul 13Jan 14Jul 14Jan 15Jul 15Jan 16Jul 16Jan 1710 Year2 YearEU/IMF Programme EntryRising ELAMoodys DowngradeOMTEU/IMF loan rate reductionNTMA issuance recommencesEU/IMF Programme ExitNTMA resumes bond auctionsECB QEIreland’s 1st100-year noteBrexit Trump Semi-State Borrowings  Debt funding environment is also favourable for commercial semi-State entities.
‒ In December 2016, Gas Networks Ireland issued 10-year (€500m) and 20-year (€125m) bonds at yields of 1.43% and 2.30%.

‒ Last week, ESB issued a 12-year (€500m) bond at a yield of 1.87%.

 It is generally the case that the cost of semi-State borrowings would be at a premium to the cost of equivalent State borrowings (but with the benefit that such semi-State expenditure and borrowings are excluded from GGB/GGD).
‒ Semi-State entities bonds (Gas Networks Ireland, ESB, daa) currently priced at a premium of c.0.2-0.5% relative to State borrowings.

7 Cost of Irish Water’s Borrowings relative to State Funding  Irish Water is currently different to the above commercial semi-State entities: ‒ Relatively early stage of establishment.

‒ Relies on a high level of State funding.


‒ Classified within General Government (which negates the benefit that would typically arise from a commercial semi-State entity being in a position to raise external borrowings for capital expenditure without impacting on the GGB/GGD).

 In the current funding environment, the State could fund Irish Water at a lower cost.

 Indicative current pricing premium for Irish Water over State borrowings of c.1.8% over a 1-year period.
‒ Based on a like-for-like comparison of Irish Water’s 1-year average cost of 1.4% relative to the most recent NTMA 1- year Treasury Bill auction at a negative yield of -0.4%.

 Implies an overall indicative cost saving to the State over a 1-year period of c.€14m based on €810m of borrowings.
 We don’t compare the cost of Irish Water’s 1-year facilities relative to the cost of longer-term Irish sovereign debt, given the greater refinancing risk of short-term facilities and uncertainty over what Irish Water’s longer-term funding costs would be.

 The actual saving would depend on the term of the borrowings that the State used to replace Irish Water’s debt facilities.
8 Conclusions  While Irish Water remains classified within General Government, it difficult to justify the incremental cost of maintaining Irish Water’s external borrowings (relative to cost of State funding).

 Therefore, we recommend in our report that Government give consideration to replacing Irish Water’s debt facilities, and funding Irish Water’s future borrowing requirements, with State funding.
‒ If the existing debt facilities are to be replaced with State loan facilities, the total amount of loans should provide Irish Water with an appropriate amount of excess liquidity against which it can plan its future expenditure.

‒ If some flexibility of funding (as currently available under the existing facilities) cannot be provided under a State loan, Irish Water could retain a smaller amount of external facilities to provide it with this flexibility (e.g.

as a standby or backstop facility).


 Government Decision in October 2016, to commence replacing, where possible, Irish Water’s external debt facilities with more competitively priced State funded debt facilities.

‒ Work has commenced on implementing this decision in 2017.

‒ In the interim, the existing facilities to continue to be extended on a short-term basis.

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