PPPs in Ireland

Posted on June 18, 2018 · Posted in Accounting & Business

“Public Private Partnerships cannot be regarded as an economically viable option for delivering public infrastructure,” concluded a recent report from the European Court of Auditors.  The EU’s audit body examined PPPs in Ireland, Spain, Greece and France delivering road and ICT infrastructure that were supported by EU funds.  “The PPPs audited suffered from widespread shortcomings and limited benefits, resulting in €1.5bn of inefficient and ineffective spending,” explained the auditors.

 

Yet Ireland has just reaffirmed its commitment to PPPs.  The National Development Plan promises public investment in infrastructure that will be amongst the highest in the EU as a share of national income.  This adds up to €116bn over the 2018 to 2027 period.  The plan envisages PPPs playing a key part in the strengthening and updating of public infrastructure, including roads, schools and broadband.  “In light of the role that PPPs have played in recent decades in delivering public capital infrastructure with private funding and full transparency on the economic cost of projects, PPPs should remain a feature,” says the NDP.

 

The NDP was published alongside the Department of Public Expenditure and Reform’s review of PPPs, which concluded: “The potential use of PPP should continue to be assessed (and encouraged) for all large scale projects.”  However – perhaps because of the criticisms of PPPs – there is no planned increase in their use.  Under a slight variation to the limits in their use, the capital element of PPPs must not exceed 10% of a department’s annual capital budget. An IMF review of PPPs in Ireland – part of its Public Investment Management Assessment (PIMA) – proposed tighter controls.  “Spending on PPPs could be brought more firmly within the fiscal envelope,” it said.  The IMF also recommended the government “consider imposing restrictions on PPPs that are more likely to impose a future fiscal burden and consider ‘raising the bar’ by requiring PPPs to achieve higher net cost savings compared to the public-sector benchmark.”  The IMF concluded that “investment in public-private partnerships (PPPs) [had] compensated for cuts in public spending during the financial crisis and subsequently”.

 

This is consistent with the ECA’s view that Ireland favoured PPPs to keep liabilities off the government balance sheet.  Despite this, PPPs can still generate contingent liabilities.  The Limerick road tunnel was built by private contractor DirectRoute (Limerick) via a PPP, with some costs recovered through tolls.  Traffic usage was below that projected, leading to the potential triggering of traffic guarantee related payments of €200m over the life of the contract.  At a meeting of the Oireachtas Public Accounts Committee earlier this year, Labour TD Alan Kelly asked: “Is that not just insane?” Michael Kennedy of Transport Infrastructure Ireland disagreed, adding: “we have all learned that trying to forecast demand risk in an urban area is very difficult.” This situation is not unique: Portugal was crippled by motorway traffic guarantees on toll roads under PPPs.  PPP obligations accounted at one point for more than 14% of Portugal’s GDP, with 80% of these related to transport schemes.

 

According to the European Court of Auditors, the application of PPPs across the EU suffered from various deficiencies.  They were not always well managed, produced poor value for money and were hit by delays, cost increases and under-use.  The auditors pointed out that “actual usage was as much as 69 % lower than forecast in ICT (in Ireland) and 35 % for motorways (in Spain).”  They added: “For most of the projects examined, PPPs had been chosen without any prior comparative analysis of alternatives, thus failing to demonstrate that it was maximising value for money and protecting the public interest.” This conclusion is similar to the findings of a review of the UK’s version of PPPs, the Private Finance Initiative, conducted by the House of Commons Treasury Select Committee in 2011.  Its report found that PFI had been favoured in order to circumvent capital spending restrictions, with schemes not always justified on a value for money basis.  More recently, the collapse of Carillion and profit warnings issued by other UK government contractors have added to the anxiety.

 

Ireland’s Comptroller and Auditor General Seamus McCarthy conducted his own review of PPPs as part of his Report on the Account of the Public Services 2016, published late last year.  McCarthy noted that the PPP programme is continuing to expand, with annual payments set to rise from €225m in 2016 to €345m by 2021.  While avoiding outright criticism of PPPs, McCarthy recommends greater accountability and scrutiny of projects, including the publication of post-project reviews.  He points out: “Of the 17 projects that have been operational for more than five years, ten have been reviewed…. To date, no post-project reviews have been published.”  Improved transparency of PPPs might help to stem public concern about them – but, based on the ECA findings, they might do the opposite.

 

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There were outstanding commitments on Irish PPPs of €6.6bn at the end of 2016 (the most recent year for which figures are available), on top of €3bn of expenditure previously incurred. Projects include toll roads, motorway services, broadband provision, nursing homes, courts, social housing, water treatment and the building of schools and institutes of technology.  Across the EU, since the 1990s there have been 1,749 PPPs worth a total of €336bn.  Some Irish projects have encountered serious difficulties.  The Metropolitan Area Network (MAN) ICT project was downsized to cover 66 towns instead of the planned 95, with a 4.2% (€50,953) cost increase per town.  The M17/M18 Gort to Tuam motorway took five years to procure, rather than the average 15 months.  A lack of liquidity following the financial crisis increased the private partner’s difficulty in finding sufficient sources of financing to reach a financial close.  The road opened in September last year, with an overall investment of €550m.