GD 0004/11
Report of the
Isle of Man Water and Sewerage
Authority
Water Rates Increases 2011/12 and Beyond
For approval by Tynwald
January 2011
Price: £1.70
To: The Hon. Noel Q Cringle, MLC, OBE, President of Tynwald, and the
Honourable Council and Keys in Tynwald assembled
Foreword by Mr T M Crookall, MHK, Chairman of the Isle of Man Water
and Sewerage Authority:
In 1999 the Water Authority (now the Water and Sewerage Authority) received
Tynwald approval to undertake significant capital works that would replace its
ageing infrastructure with assets capable of meeting the necessary standards of
service which would offer the highest quality of water delivered reliably to the
customer now and into the future.
The capital programme has been developed and in the last 12 years the major
infrastructure improvements have been delivered at a cost of £80 million. The
remainder of that capital programme will be completed in the coming years
within the overall £108 million budget.
Funding the capital programme has been based upon increases in the water
rates approved by Tynwald in 1999. The Authority is committed to completing
its capital programme and repaying the £75 million bond issued by Treasury to
fund the programme. The Authority has reviewed the schedule of increases
which were approved to March 2019 and is now confident that the anticipated
above inflation increases which were to be made in the next two financial years
can be reduced to the lower of 4% or the rate of inflation prevailing at that time.
The Authority is confident that these lower levels of increase will still allow the
Authority's Sinking Fund to grow sufficiently to repay the bond when it becomes
due in 2030.
The Authority is now presented with an opportunity to reduce the approved
increases in the water rates and those recommendations are contained in this
report.
T.M. Crookall MHK
Chairman
Isle of Man Water & Sewerage Authority
1. Background
On 15th June 1999 the Isle of Man Water Authority (“the Authority”) gained
Tynwald’s approval to the following motion:-
“That the Isle of Man Water Authority Strategic Business Plan 1999 to 2009 and
Beyond (Part 1) be received, and its objectives and analysis be approved as a
general strategy”
That Strategic Business Plan contained the necessary increases in water charges
to fund the capital investment programme. The increases were to be:3 years from April 1999 at 15% per annum increases, followed by
7 years from April 2002 at 10% per annum increases, followed by
8% in 2009/10
7% in 2010/11
6% in 2011/12
5% in 2012/13
4% in 2013/14
followed by increases at the prevailing rate of inflation in subsequent years to
March 2019.
The Treasury issued a bond on the behalf of the Authority for £75 million in
March 2000 which will become due for repayment in March 2030. The Authority
used the monies available from that bond to fund the early years of the 20 year
capital investment programme identified in the Strategic Business Plan.
In 2006 the Authority also established a Sinking Fund to be used to repay the
Treasury Bond in full in March 2030.
The 12 years of increases in water rates from 1999 approved by Tynwald have
allowed the Authority to attain a level of financial stability enabling it to repay the
annual £4.2 million interest on the bond, to fund the later years of its original 20
year capital investment programme once the original bond had been drawn down
and to ensure that the resourcing of the Sinking Fund is adequate to meet the
Authority’s commitment to repay the Treasury Bond in 2030.
The Authority has completed works valued at £80 million in the last 10 years as
part of its £108 million (2008 prices) overall 20 year capital programme as
originally identified in the Strategic Business Plan approved by Tynwald in 1999.
Consequently, there is now an increased certainty in the overall cost of the
capital programme. As a result of this increased certainty, in the present
economic climate the Authority has felt it necessary to review its long term
financial position and in particular to review the potential to reduce the proposed
increases to the water rates in the next two years.
2. Findings
The Authority regards its ability to repay the bond in 2030 as a key responsibility
and it has to be prudent in the assumptions that it makes within its financial
model. The Authority’s Board is also aware that in the current climate that the
above inflation increases in water rates year on year is placing an increasing
burden on the community.
Although short term returns on investments and cash remain very low, the long
term funding returns in AAA Bonds and UK Gilts (and our own IOM Treasury
Bond when available) have now increased to over 4.25% for 2028 UK Gilts with
AAA Bonds attracting a further interest of around 0.3% with a further 0.3%
available on the Isle of Man Treasury Bond.
Treasury has confirmed that the Authority can take advantage of the guaranteed
return from these long term rates because the primary purpose of the Sinking
Fund is to ensure the ability to repay the 2030 IOM Treasury Bond. The
Authority’s Board requested the Officers of the Authority to undertake a review of
the long term rates available, the current status of the Sinking Fund and the
contributions that the Authority was committed to making in future years. This
review of the long term finances indicated that the fund would reach the required
value in 2030 if the proposed increases for the next two years (2011/12 and
2012/13) currently set at 6% and 5% respectively were both reduced to the
lower of 4% or the annual Manx Retail Price Index inflation to December of the
previous year.
The impact of such a change would be a reduction in income of £320,000 in
2011/12 and a further £160,000 in 2012/13. This would result in an on-going
reduction in future years of almost £500,000 per annum. The Officers and Board
of the Authority have reviewed with Treasury the results of these proposed
reductions in the long term financial model and are confident that the
opportunity to reduce the increase for the next two years can now be
recommended.
3. Recommendations to Tynwald
1. That the increase in the water rates for the financial years
2011/12 and 2012/13 be limited to the lower of 4% or the
prevailing rate of inflation over the preceding 12 months as
measured by the Manx Retail Price Index in the December of
the preceding year; and
2. That Tynwald reaffirms that for the financial years 2013/14
and beyond, the increase in the water rates shall be limited to
the schedule as approved by Tynwald in June 1999.