Opinion: the Project Ireland 2040 plan reveals that the government does not see PPPs playing an important role over the next decade
An interesting question arises following the publication of the government’s 10-year public investment plan Project Ireland 2040 and that's the future prospects for investment using public-private partnerships (PPPs).
The coverage of PPPs in Project Ireland 2040 is confined to a one-page summary of a yet unpublished review of PPPs by the Department of Public Expenditure and Reform. A close reading of the short summary is likely to alarm those who have promoted PPPs over the years.
PPPs have been used to procure over €5 billion worth of infrastructure projects such as motorways and schools since the early 2000s. However, the new national development plan contains a number of statements that are explicitly unfavourable towards PPP. For example, it states that given the planned increases in overall capital spending under the plan, additional investment using PPP "may not achieve value for money" and may increase overall public capital investment to levels that are not consistent with macroeconomic or fiscal sustainability.
In addition, Project Ireland 2040 correctly acknowledges the complexity of procurement under PPP. In light of this observation, it states that the scope for "alternative PPP-type contractual arrangements" will be examined in 2018 and there is a need to consider the use of PPP for less complex, smaller-scale projects over a shorter time period. This is unlikely to impress potential PPP investors who incur considerable costs when assembling tenders and typically prefer to bid for large projects with predictable returns over lengthy periods.
Although the new plan does appear to make some positive points about the future of PPPs in Ireland, I would argue that a careful reading of the details reveals that the government does not see PPP playing an important role over the next ten years.
For example, the plan recommends that the current PPP spending limit of 10 percent of annual Exchequer capital allocations be removed. But this is replaced with another constraint that is potentially more binding because it recommends that the capital value of PPPs in future should be charged to the capital allocation of the sponsoring department.
For now, it appears that the PPP approach as we have known it is set to change
To understand this issue, it is necessary to consider the impact of PPP on government debt and government capital expenditure. Currently, the use of PPP is attractive to government because the big up-front financing (borrowing) for these PPPs is not counted as capital expenditure in the years that the infrastructure is under construction. Instead, the funding of PPP projects is spread over the life of the contracts. This helps the government control spending and meet fiscal targets. In addition, if certain conditions are met in relation to risk-sharing, the borrowing required to finance a PPP project is not counted as government debt and it’s counted off-balance sheet.
If the recommendations of Project Ireland 2040 are implemented, the capital cost of future PPP investment will be counted as capital spending in the early years of the project. The budgetary advantage of PPP will therefore be removed thereby reducing the attraction of PPP investment for government.
The plan does appear to encourage the use of PPP by recommending the introduction of incentives to use PPPs based on user charges (e.g. toll roads). It states that the self-financing element of any such project may be discounted when charging the project to the sponsoring agency’s Exchequer allocation. On the face of it, this appears to be favourable towards PPP.
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From RTÉ Radio One's News At One, UCD's Orla Hegarty questions the value for money of PPPs following the collapse of UK firm Carrillion which had several school and public building contracts in Ireland
However, there is a wider picture. The encouragement of toll roads procured as PPPs is at odds with government policy since 2013, which has moved to providing non-tolled motorways. More recent road PPPs, such as the M7 from Gort to Tuam, are funded by the government who pays the private operator if the road is available for use. This is also consistent with the international trend away from PPP models where revenues to private operators depend on traffic flows.
It is difficult to see Ireland bucking this international trend which has emerged because private contractors are reluctant to assume demand (traffic) risk. If the incentives which Project Ireland 2040 recommends lead to encouraging privately financed toll-roads, a likely consequence will be the need to give the private sector guarantees that compensate for low traffic levels. This may not be politically acceptable and will have implications for the overall cost to government.
On balance, Project Ireland 2040 can be interpreted as being unfavourable towards PPP. This will disappoint a number of interests that have contributed to the development of PPP institutions and markets that are well regarded by the international community of PPP investors. More will be revealed when the government’s review of PPPs is eventually published. But for now, it appears that the PPP approach as we have known it is set to change. Time will tell if this results in significant reductions in levels of PPP investment.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
