It is widely acknowledged that Ireland needs considerable investment to bring its public assets up to standard. A&L Goodbody Consulting in its recent report (Ireland’s Strategic Infrastructure Investment 2020), projected a massive €164 billion public sector investment requirement over the next 15 years. The National Competitiveness Council’s latest report shows that Ireland still ranks 13th from 16 developed countries in terms of perceived quality of infrastructure. In addition, recent high-profile government programmes, launched both here and in the North, demonstrate the further levels of investment envisaged. For example, the recently launched Transport 21 programme to deliver our roads and rail network will cost over €34 billion alone.
Delivery of these programmes, to time and budget, will require a step change in procurement and financing, and the Minister for Finance has made it clear that value for money for the state will be paramount in determining the procurement route. PPPs are one such route that, when properly structured, address the minister’s concerns.
So what are these PPPs and what has been the experience to date in Ireland?
In their purest form, PPPs are arrangements where the private sector takes responsibility for the design, construction, financing and operation of an asset over a set period. The private sector is typically not paid until the asset is operational and performing to the contracted standard.
This avoids the cost and time overruns that have characterised many public sector projects in the past. Recent international research into completed PPP projects corroborates this. In the UK only 22 per cent of PPP projects have cost overruns and 24 per cent were delivered late, as compared to traditionally procured projects of which 70 per cent were delivered late and 73 per cent ran over budget.
There are also other 'hybrid' forms of PPP including design, build and operate projects in the water sector, and more recently, innovative PPP 'property' deals involving the provision of much needed social housing in Dublin, or marine facilities.
PPPs have been in use in Ireland for some time now but we have been slow to embrace the concept and the level of activity has not yet matched their potential. This is in sharp contrast to other jurisdictions, including Northern Ireland. There has, however, been substantial progress in the area of roads and education. In roads, for example, both the N4/N6 Kilcock, Kinnegad and the Dundalk Western Bypass have been completed months ahead of schedule, with resultant value for money to the exchequer in the region of tens of millions of euro. In schools, principals have been provided with superior designs, accommodation and level of service, which have resulted in significant non-financial benefits, including the freeing up of teachers to concentrate on teaching. In addition principals have reported reduced bullying and increased take up in school meals as a result of their new facilities In other sectors such as rail/Dublin Metro and health schemes, the use of PPPs has failed to materialise despite significant international precedent which demonstrates their suitability in these sectors.
The Government however, has now signalled its desire to increase the use of PPPs by setting a target for private sector involvement in infrastructure of 3 per cent this year, rising to 15 per cent by 2008. In addition, in July of this year, the Minister for Finance announced a new initiative aimed at accelerating the delivery of PPPs for key capital infrastructure projects. Under the initiative, the relevant skills and capacity within the public sector would be consolidated within the National Development Finance Agency ('NDFA') to progress new projects suitable for PPP procurement in the Departments of Education and Science, Health and Children, and Justice, Equality and Law Reform.
With these changes, we have seen the first signs of increased deal flow in the PPP market. Projects such as the new National Conference Centre and new Criminal Court for Dublin are now being procured. In addition, the provision of a further 26 schools via the PPP route has also recently been announced by the Minister.
By seeking to put these building blocks in place, the Government has taken a leaf out of the Northern Ireland Government’s book whereby, in the North, a new body was established separate from government to identify ways to procure much needed infrastructure and attract international investment and expertise. This has resulted in a deal pipeline of over E5 billion in just over two years, compared to E0.5 billion in the previous ten years. It is this sort of step change that is required to truly change Ireland’s ‘under investment' in infrastructure provision.
Barclays Bank Ireland PLC is extremely active in the PPP market, both here, and indeed, across Europe. For example, we were the sole lead arranger of the recent Cork School of Music PPP. We have seen the benefits of faster implementation of projects, reduced whole life costs and improved quality of services. We welcome the setting up of a centre of excellence in the NDFA, publication of guidelines of the process and, crucially, the testing of value for money to ensure only those schemes which are cheaper than the equivalent 'public sector benchmark' proceed as PPPs.
There has been a lot of debate on the merits of PPPs in Ireland. A common argument regularly used against PPP is that the State can borrow money cheaper than the private sector. Nobody disputes that. However, this compares apples with oranges, in that it ignores the value of risk transfer in a PPP. Secondly, as
PricewaterhouseCoopers highlighted in its submission to the Northern Ireland Assembly enquiry on PPP, as the upfront capital cost of project may only represent 20 per cent -25 per cent of the total cost, the actual extra cost of private finance may only amount to 2 per cent of the total cost over the life of the project. Clearly, if the private sector can deliver reduced costs and savings as its own money is at risk, this can easily more than outweigh this increased cost.
In conclusion, with the ingredients now in place, government needs to move quickly to adequately resource the NDFA and accelerate its enabling legislation to underpin the creation of a sustainable deal flow. This will attract not only international expertise and capital, but also enable Irish contractors to gear up and invest to continue to meet the challenge required. Indeed, with the construction sector output and employment now a vital clog in our economy, we need the Government to ensure a steady flow of infrastructure projects to the market (both PPP and traditionally procured projects). PPPs will not be suitable for all projects, but where they accelerate the delivery of much needed infrastructure at a cost lower than the equivalent public sector solution, then they should be pursued vigorously. |
