| The ins and outs of financing LUAS |
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| PPP projects can be a great opportunity for public and private sectors to work efficiently together, but the technicalities of how exactly is a project like LUAS financed is complex |
One of the pilot projects selected as appropriate by the Government for the Public Private Partnership approach in June this year was ‘the key elements of the Dublin Light Rail (LUAS) project’. Arthur Andersen in conjunction with Steer Davies Gleave and the Department of Public Enterprise produced a report (April 1999) which made numerous recommendations for the financing of the LUAS project. The report followed on from the previous consultant’s report to an inter-departmental group of July 1998 and sets out the validity of the PPP approach to LUAS.
Traditionally the Government contracts out infrastructural work, a county council or the National Roads Authority would design the public road or bridge for example, and tender the contract out to private builders to complete the building of the project. The difference with PPP is that it combines a number of the financing aspects of a project; the minimum being the design and build phase and the maximum being design, build finance, operate and maintain (DBFOM). The latter is the most comprehensive form of PPP.
The overall LUAS network will consist of 4 lines. Currently the planning process for lines A (Tallaght to Abbey Street), B (Sandyford to St. Stephen’s Green) and C (Abbey Street to Connolly Station) is almost complete. It has been decided that the Government will finance the design and build phase of lines A, B and C as to attempt private financing at this stage would only cause delay. With LUAS the private sector will be invited to become involved in the operating process. The private sector will make a payment for the right to operate, this may be an up-front payment and the private partner may then take the revenues or indeed profit sharing scheme may be developed. The report recommends that bids for the operating right come in the form of a cash value based on projected revenue figures. The details of this have not been finalised. Brian Dunne, partner Arthur Andersen suggested that private operators in the public transport market, both domestic and foreign, would be targeted as potential operating partners. The Government will pay for the actual tramcars for Luas and already 33 vehicles have been paid for.
The final phase of LUAS line D, the North side line (Broadstone to Ballymun and Dublin Airport) and the Tunnel (St. Stephen’s Green to Broadstone) is currently undergoing geotechnical and geological studies. Therefore it is the only line with the potential primary financing element. There are two methods of appraisal for the Tunnel and line D. There will be an option to ‘design, build and transfer’ (DBT) which means that once the design and build phase is complete the private sector partner would hand back the project to the Government. Andersen’s report recommends the option that the public sector could invite tenders for the design and build of the Tunnel and line D aswell as for the equipment and infrastructure required for line D and any additional vehicles. The report goes on to say ‘there could advantages in a Tunnel concession arrangement on a DBFL (design, build, finance, lease) basis. Accordingly we would envisage that bids would also be invited for a DBFL solution where the Tunnel contractor would finance and build the tunnel and receive a rental when the Tunnel is available for use over an infrastructure concession period (possibly thirty or forty years). Payments would be suspended if the Tunnel was unfit for use or in poor operating condition’.
This option is intended to transfer design, construction and maintenance risks to the private sector, however this would mean that the private partner would need to raise substantial funds. Many argue against this option because it is cheaper for the Government to raise capital especially considering the current budget surplus. However there are risk transfer benefits according to Brian Dunne, if the private sector are tied into the finance element of the partnership, even though the nominal finance is normally more expensive for the private sector and this is what the Government would be seeking to achieve. A significant degree of risk transfer to the private sector in respect of line D and the other new lines could be delivered through DBT, and/or DBFL routes. Here the benefits of involving private sector financing are likely to ensure the effective application of project management and deliverance on time and cost. Also the DBFL route would allow the Government to spread payments over the concession period and thereby ensure, through the performance specifications, that the maintenance of the facilities is to an acceptable standard leading to more effective whole life costing of the project than through a traditional public sector procurement.
Andersen’s report examined successful PPP transport projects in the UK like the Manchester Metrolink, which made use of the DBFOM (Design, Build, Finance, Operate and Maintain) form of PPP. Dunne states that flexibility is vital in these arrangements and that it must be empahasised that ‘the key question for the Government is what is better value for the public sector?’ The main objective of PPP is to combine the skills and values of both sectors to deliver the project most efficiently. For LUAS, it is estimated that construction of lines A,B and C will be complete in 2003, therefore the Government may begin the tendering proceedings for the operating process next year or 2001. Construction dates have not been set for line D and the Tunnel where the more comprehensive form of PPP may be possible (DBFL or DBT). There will be time for much debate as to the best way forward. |
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| Article appeared in the June 1999 issue.
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