An October 2005 file photo of damaged Yallahs water pipelines, a system managed by the National Water Commission. Yallahs is a main intake source for the Mona reservoir in Kingston. It was repaired following damage by two big storms. - File Lavern Clarke, Business Editor
National Water Commission made a $1.21 billion loss in 2006, despite a one billion growth in revenues that year, but is projecting that it will shave millions off that figure for an 11 per cent improvement in its deficit to $1.076 billion this financial year, according to figures obtained by the Financial Gleaner.
But NWC president E.G. Hunter is defending his agency's performance saying that a big portion of the loss is accounting charges linked to annual write downs of the value of the company's expansive assets, and an unavoidable expense locked in under a wage pact seven years ago.
"The loss is largely pension and depreciation costs," said Hunter. It's mainly an accounting loss."
The agency's 'depreciation, financing and other charges' topped $1.74 billion in 2005, growing by more than two billion to $1.97 billion a year later, its audited figures show.
The commission predicts an even bigger charge of $2.16 billion for these items in 2007 - about $1 billion of which appears to be depreciation charges - but also anticipates an increase in operating profit to offset some of those losses, for a final outturn of a $1.1 billion deficit.
That figure represents a $134 million improvement on its deficit in 2005.
Operationally, however, the water agency has recorded growing earnings in the black, from $640 million in 2005 to $764 million last year. Operating profit is projected to grow even more this year to $1.08 billion.
Revenues are also expected to climb from $8.5 billion to $9.6 billion, pushing up its operating profit margin from 8-9 per cent in the past two years to 11.3 per cent. The commission's assets, last valued at $28.2 billion three years ago, said Hunter, are currently estimated at $30 billion, net of depreciation charges and gains from system expansions.
Hunter did not supply a full breakout of the 'depreciation and other charges', but said $846 million of the total was the annual portion of pension payments to NWC workers.
More than $6.9 b liability
In fact, NWC is carrying a more than $6.9 billion liability for pensions, as of March 2006, approximately $2 billion of which is linked to retroactive retirement benefits dating back to 1988.
The commission had initially opted out of complying with a Finance Ministry directive issued under the Edward Seaga-led Jamaica Labour Party administration to make all public sector workers pensionable, in recognition of the International Year of the Worker.
The commission rationalised at the time that while government financed capital projects undertaken by the NWC, the agency was funding its wage bill from its own resources and therefore not compelled to implement the new policy.
"NWC was only partially funded by government," said Hunter. "Salaries were paid from revenues."
Only senior managers got pensions.
But in the year 2000, as a concession to its employees and push for buy-in on an agreement to fix wages for two years while the agency restructured, the commission agreed to put its 1,500 workforce on pension retroactive to 1988, the year of the decree. The agreement required no matching contribution from employees; the 'past service' pensions, or free scheme as Hunter calls it, are fully financed by NWC.
The agency currently employs about 2,000. The other workers are on a contributory scheme.
The commission has lobbied the Office of Utilities Regulation to phase the pension expense into its approved rate structure, the plan being to pass on the pension expense to customers through bigger water bills, but the regulator nixed the proposal.
Given the estimated $100 million of revenues that NWC projects it earns from a one per cent increase in rates, the commission would have needed about a 9 per cent bump to offset the annual $846 million pension expense.
Each one per cent increase in rates is equivalent to an 8-10 per cent increase on customers water bills, according to Hunter.
NWC's last three-year rate regime expired December 31, and an application is pending.
Hunter says he wants to get the timing right - noting that an election year tends to generate extreme reactions - to enhance his chances of landing the level of increase he feels will help the commission improve its bottom line.
His loan servicing charges are expanding - interest expenses was estimated above $290 million this year - and he wants a big enough hike in rates to absord those expenses.
"The commission will make an application for a new tariff when the organisation is convinced it will get the level of increase it requires to deliver the quality service it wants to deliver to its customers," Hunter told the Financial Gleaner.
Its rate application process requires the commission to hold 16 public consultations in major towns islandwide.
Long-term liabilities
Finance Ministry figures indicate that the commission is carrying long-term liabilities of $4.2 billion, compared to $1.82 billion in 2005.
The hike in its borrowings resulted from a policy switch in 2002, which required the commission to assume responsibility for all loans used to finance water projects, whether raised by or with the assistance of the Finance Ministry through bilateral or multilateral sources, or commercially by NWC.
For funds borrowed by the Government, said Hunter, the commission is required to sign a loan agreement with the Finance Ministry assuming responsibility for paying off the loan.
lavern.clarke@gleanerjm.com
