| First pilot PPP project signed in Ireland |
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| On November 16th 2001, sixteen months after commencement of the process, the Minster for Education and Science, Michael Woods, signed a Project Agreement with Jarvis Plc’s Irish subsidiary for the design, build, finance and operation of five new post primary schools. Even by UK standards, this represents one of the fastest procurements of a project by way of public private partnership (‘PPP’), Kevin Feeney explains. |
This project is the first PPP project to be procured since the government endorsed the PPP process in 1998. The project represents what many believe to be the end of the beginning of the roll out of PPP projects in a wide range of sectors. It is also significant insofar as it establishes a template for the allocation of risk between the public and private sectors which will form a benchmark for many other sectors in which PPP will be tested.
The project comprises the design, construction, financing, operation and maintenance of five post primary schools; two in county Cork and one in each of counties Clare, Sligo and Monaghan. Together the schools will accommodate approximately 3500 pupils and the project has a capital cost of approximately 81m euros.
In deciding on and shaping the project the Department of Education and Science was keen to exploit the benefits of PPP within the education sector, which has grown into a very buoyant and successful PPP sector within the UK. In addition, it was recognised by the department at an early stage that the project needed to be of a suitably large size to justify private finance and to attract experienced construction and facilities management sponsors. The department decided that a bundle of five schools would be the right number for the first pilot.
A&L Goodbody and Farrell Grant Sparks were appointed by the department as advisers to deliver the project. A project board was constituted which comprised the advisers, members of the department PPP team and members of the Department of Finance. The project was procured through this project board.
Several principal objectives were established by the project board. Firstly, the project had to deliver better value for money than if it was procured under traditional means. Secondly, an efficient and effective timescale for delivery of the project to financial close was crucial. Third, there was a need to ensure that the level of risk transfer between public and private sectors was benchmarked and generally consistent with risk transfer templates within PPP sectors in other countries. Fourth, there was a need to ensure that the procurement process would not result in bidders incurring excessive bid costs.
The procurement process commenced by way of a notice in the European Journal (‘OJEC’) in June 2000. The process used was the negotiated procedure under the EU procurement Directive. The process was conducted in a fair and transparent manner and each of the unsuccessful bidders were afforded a debrief meeting and given copies of their scores.
One of the key value for money benefits for Ireland arising from PPP is the speed and efficiency of the delivery of the project to the point which it can be operated and used. The UK PFI experience has however demonstrated, especially in the early years of the PPP process, that that there are often considerable delays in the procurement of PPP projects. Periods of three years from commencement of the PPP process through to financial close were typical. The project board were therefore concerned that the PPP process could founder unless project delivery could be accelerated. The challenge for the advisers was to develop a procurement strategy which could deliver the project faster, but without compromising innovation, value for money or the quality of the end product. The strategy used was one which was based on competitive dialogue with each of the bidders being required as part of their tender to ‘sign off’ on a detailed project agreement. The intention was to preclude the need for lengthy and often protracted negotiations which typically take place between preferred bidder and financial close.
Based on A&L Goodbody‚s PPP experience advising on UK PPP projects, a project agreement was developed which was consistent with UK PPP ‘best practice’ . There was however a sensitivity in relation to market acceptance of the PPP concepts/risk transfer issues in Ireland. A number of concerns were identified. For example, at a time when both construction and general inflation were spiralling, what would the attitude of the private sector be to inflation risk over a 25 year concession period - would the Irish Consumer Price Index (which is not generally an accurate measure for wage inflation) be accepted as a measuring stick? How would the building contractors, who were experiencing an unprecedented construction boom, view the additional construction risks associated with the PPP process (e.g. would they simply walk away on the basis of the risk/insufficient reward having regard to other opportunities in the market)? How would bidders and their funders view vandalism risk (typically one of the larger risks in the PPP education sector) in an Irish context and how would the bidders and funders view and price long term change of law risk and change of tax risk (e.g. change in corporation tax) in the context of a project where one is locked into a predetermined income amount from day one?
In view of the sensitivities referred to above, part of the tender strategy was to obtain feedback from the bidders on the risk allocation at a sufficiently early stage in the process. Having taken on board certain of the bidder comments, the resultant project agreement was issued to the three shortlisted bidders at invitation to negotiate stage (October 2000). The bids were evaluated having regard to, inter alia, the extent to which they were not prepared to accept the risk transfer reflected in the project agreement. In March 2001 Jarvis were selected as preferred bidder.
The procurement strategy hinged on the need for the project board to take a balanced approach to risk transfer issues. The aim was to comply with PPP best practice from elsewhere and not use Ireland as a testing ground for passing new and further project risks onto the private sector. Feedback from the unsuccessful bidders was that the project agreement was generally a balanced document.
A considerable number of complicated concepts were developed to deal with the fact that there were five schools in the project. The agreement had to cater for all eventualities such as failure to obtain planning permission for one or more of the schools and the knock on effect on the project economics if there was a partial termination of one or more schools. Similarly the financing of the project and the payment mechanism for five schools had to be structured to accommodate the various permutations.
Work on site is now well under way and in a little over a year‚s time from now the schools will be opened to pupils. The pupils will be the real beneficiaries of the PPP process. |
Kevin Feeney is a partner and head of the project finance team at A&L Goodbody solicitors. The team are currently advising on a wide range of transport, education and water PPP projects in Northern Ireland and in the Republic of Ireland.
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| Article appeared in the January 2002 issue.
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