What next for Infrastructure? - FINFACTS · envisages a near 60% reduction in Exchequer capital expenditure by 2014 from its peak in 2008. The Exchequer capital budget of . e. 3.5

What next for Infrastructure?

Infrastructure Insights

for Ireland

Implications of the fiscal crisis for infrastructure funding

The funding environment for infrastructure investment in Ireland has changed completely during the past two years or so. Even since the publication of the Infrastructure Investment Priorites 2010 – 2016 in July 2010, the goalposts have been dramatically moved. The four year plan for the public finances envisages a near 60% reduction in Exchequer capital expenditure by 2014 from its peak in 2008. The Exchequer capital budget of e3.5 billion by 2014 will be just 1.9% of GDP and represents a major scaling back of the State’s capital investment plans. The further rapid deterioration in the public finances during 2010 and the loan arrangements entered into with the IMF and the EU Commission has resulted in a much weaker outlook for Exchequer funded capital investment. Despite the economic crisis, the demand for infrastructure remains high and the existing gaps are such that the pace of economic recovery will be greatly restricted if investment is not maintained. The experience of the 1980s demonstrates that a decade of under-investment in infrastructure limits the economy’s growth potential. It also shows that significant, and ultimately very costly, long-term socio-economic problems result from a lack of adequate infrastructure provision. This is most evident in the areas of social housing, health and education but long-term competitiveness losses also arise from under-investment in transport, environment and energy infrastructure.

As a consequence of Ireland’s fiscal crisis, the economy can no longer look to the Exchequer as the main source of funding for much needed infrastructure. Ireland is now faced with the prospect of ‘smaller government’ and lower levels of public expenditure for the foreseeable future. The private sector must therefore play a more extensive role both in the provision and funding of a range of services and infrastructure. From an infrastructure investment perspective there has never been a more compelling argument for a scaling up of private financing. The Irish economy remains fundamentally sound with a growth potential well above the EU average but it is constrained by a liquidity crisis. The sourcing of foreign capital for infrastructure projects and other investment would therefore be a significant boost for economic recovery.

In order for the private sector to fully develop these investment opportunities, Government and the public administration system must embrace the concept of non-Exchequer funding mechanisms. Properly structured, PPP deals do not count as Government borrowing, and deliver on time and on budget. Yet to date, commitment to funding models such as PPPs has been uneven and greater buy-in is needed from all stakeholders in order to substantially increase the level of private sector funding in infrastructure provision.

In addition to the substantial reduction in the Exchequer capital investment programme, the further downgrading of Ireland’s credit rating during 2010 has presented difficulties for private sector financing of capital investment projects. The loss of Ireland’s A credit status means that it has become more difficult for a whole range of Irish based investments to secure foreign capital. Therefore, despite the improved environment for private funding for infrastructure projects at an EU level, following the difficulties resulting from the 2008 global financial crisis, Ireland will continue to face funding obstacles. There are solutions that Government could put in place to address this.

Ireland still needs investment in infrastructure. Private finance is still available to fund it. There are new obstacles in place that need to be addressed but there are solutions available. Government now needs a pro-active and co-ordinated response to the question of what projects to deliver and how to fund them.

Michele Connolly

Partner Corporate Finance

KPMG in Ireland

Danny McCoy

Director GeneralIBEC

Foreword

4 What next for Infrastructure?

Key

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n Infrastructure investment in Ireland needs to be prioritised by Government. Although there has been increased investment in infrastructure over the last ten years relative to previous years, Ireland is still playing catch-up in comparison with its European counterparts in terms of infrastructure. Ireland ranked 29th out of 139 countries in the Global Competitiveness Report 2010-2011. Investment in infrastructure stimulates economic activity and leads to immediate job creation, in addition infrastructure is important for the long-term economic performance of Ireland and investment now will lead to improvement in Ireland’s competitiveness and to consequential long-term job creation;

n In order to prioritise investment in infrastructure, Government needs to present a long-term capital expenditure plan. This plan needs to:

- Be prioritised and clearly outline the specific projects that are to form part of the plan;

- Clearly present the anticipated timeline for delivery of the capital expenditure projects. In addition to outlining when the project is anticipated to come to the market, the plan should also outline when the project is anticipated to reach financial close and commencement of construction. This will give a clear signal to the market, in particular to private contractors, of the anticipated level of activity in the construction market going forward. This gives contractors notice of when they will be required to mobilise their teams;

- Detail the sources of funding for both new and existing projects;

- Outline the procurement approach, whether traditional or public private partnership (“PPP”);

What next for Infrastructure? 5

- Include projects that are currently being procured through PPP for completeness and monitoring of delivery;

- Present the Government’s annual budget allocation to PPP projects. The Government should define an annual PPP spend e.g. a percentage of the total voted spend per annum. As PPP projects represent long-term commitments (over 25 or 30 years), it is important that Government is aware and in control of the annual spend to which it has committed. Greater clarity is needed on how PPPs are dealt with in budget allocations (capital versus revenue spend).

n Ireland’s Government deficit and current constraints placed on Government funding, mean that public resources are inadequate for the extent of infrastructure investment required. The private sector is well placed to play a more extensive role in both the provision and funding of infrastructure. The current economic and fiscal position means that there has never been a better time for Government to utilise private finance. PPP represents a cost effective mechanism for the delivery of Ireland’s future capital expenditure programme. All of the road schemes within the National Roads Authority’s (“NRA”) First PPP Roads Programme were delivered ahead of schedule, to budget and did not count as Government borrowing. The programme resulted in approximately e2.1 billion of private sector funding being secured for Ireland’s national road network and significant international investment and skills being brought into the country;

n As PPP represents an efficient approach to funding infrastructure investment in the current environment, all infrastructure projects above a certain threshold should be tested for procurement as a PPP. This test

could be undertaken by an independent agency with experience in the delivery of PPPs such as the NRA and the Railway Procurement Agency (“RPA”). The test would involve a comparison between procuring the project as a PPP and procuring it traditionally. A key component of this test is the inclusion of the cost of Government borrowing within the analysis of the cost of traditional procurement, otherwise the comparison would not be on a like-for-like basis;

n Given the current constraints placed on Europe’s finances, the European Investment Bank (“EIB”), is considering alternative approaches to financing investment in infrastructure including looking at a project bond mechanism. The Government should examine the alternatives being proposed and other short-term solutions available to secure international finance whilst economic uncertainty prevails;

n Responsibility for project identification, funding strategy and project delivery needs to be specified. At present, there are too many separate departments responsible for policy, early project development and project delivery. No one entity can therefore be held accountable for delays. A specific National Infrastructure Authority should be established for determining what and how infrastructure is to be delivered. In addition, special responsibility for infrastructure delivery should be added to the portfolio of a Cabinet Minister. This should prevent the current institutional barriers to delivery, such as planning and pre-procurement delays.

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Foreword: Funding infrastructure during fiscal crisis

1 Introduction 1

2 Need for infrastructure spending 2

3 Delivering infrastructure in current environment 6

4 The challenges for infrastructure 14

5 Conclusions 24

[ 8 ] What next for Infrastructure?


1While the economic assumptions that underpinned the NDP 2007-2013 are no longer valid, there is still a need for continued capital investment in order for Government to maximise the return on public investment when the economy returns to growth in the longer-term. Given the current constraints on public finances and the cost of Government borrowing, it is certain that in order to fund investment in Ireland’s infrastructure, Exchequer finances will need to be supplemented by significant private investment. The private sector is best placed to assist the Government in the delivery of infrastructure projects and in the current environment, PPP represents the most viable approach for the delivery of essential infrastructure. Properly structured, PPPs do not count as part of Government borrowing.

Currently in Ireland, there is a separation between the governing bodies responsible for determining which projects are to be delivered, and those bodies which determine how these projects are to be delivered. It is apparent that this disconnect results in substantial delays to the delivery of much needed infrastructure in Ireland. A number of our Government agencies possess significant experience and expertise in the delivery of complex infrastructure. We maintain however that this expertise is not being used to the extent possible in terms of assisting other agencies in the efficient and effective delivery of their infrastructure projects. To tackle this issue, we propose the establishment of a National Infrastructure Authority to oversee and guide the delivery of infrastructure in Ireland from policy, project prioritisation through to financing and procurement. This Authority would drive infrastructure delivery within all Government departments and agencies. Therefore, there would be a fully co-ordinated approach to the efficient delivery of infrastructure. Furthermore, we recommend that special responsibility for the delivery of national infrastructure should be added to the portfolio of a Cabinet Minister. This Minister would assist in solving the current disconnect between what infrastructure is to be delivered and how this infrastructure is to be delivered.

This report sets out to consider Ireland’s current position in terms of the delivery of infrastructure, the issues arising with delivering infrastructure in the current environment particularly in terms of funding, and then also goes on to consider what Ireland needs to do next to ensure the efficient delivery of essential infrastructure and those much needed jobs and economic benefits that are knock-on impacts of investment in infrastructure.

Introduction


Investment in infrastructure provides short, medium and longer term benefits to the economy. Infrastructure investment can be used immediately to stimulate construction and economic activity and over the longer-term can lead to substantial economic benefits through improved competitiveness. Under-investment in infrastructure on the other hand can significantly undermine the capacity of an economy.

Economic Impact

Infrastructure is an essential component of the competitiveness of an economy. This is widely argued by amongst others the Economic and Social Research Institute (“ESRI”), the European Competitiveness Index, the World Knowledge Competitiveness Index and the National Competitiveness Council.

Infrastructure is also well established as a critical issue for individuals, businesses and Governments:

n90% of global business leaders see it as a critical issue;

n70% believe future investment is insufficient to support long term growth; and

n80% believe Government must develop partnerships with the private sector. 1

According to the EU Regional Competitiveness Index 2010, high quality infrastructure is critical for the efficient functioning of an economy and is a key factor for determining the location of economic activity and the development of an economy.2

Need forinfrastructurespending

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The European Commission is also recently on record as stating “Investment in infrastructure projects is an important means to maintain economic activity during the crisis and support a rapid return to sustained economic growth.” 3 The European PPP Expertise Centre (“EPEC”) stated that “Infrastructure investment has a key role to play as an anti-crisis measure. With the pressure on public resources set to increase for the foreseeable future, unlocking the potential of private finance becomes ever more urgent.” 4

Competitiveness

Ireland remains uncompetitive and is falling further behind our European and wider OECD counterparts in terms of infrastructure provision, despite high levels of investment in recent years. The reality is whilst we have undertaken significant investment, so too have our economic peers. This applies in many sectors but particularly in transport, environmental and social sectors such as health and education. Given the importance of infrastructure in driving future economic activity, this is a situation we cannot allow to continue.

Competitiveness is measured by a number of different bodies. The findings from the most recent indices published include:

nAs highlighted in both the European Competitiveness Report 2009 and the National Competitiveness Council’s 2010 Report, Ireland continues to fall further behind our European counterparts in infrastructure provision despite high levels of investment in recent years. According to the OECD, under successive National Development Plans, Ireland’s investment rates in public capital stock were among the highest in the European Union (“EU”) (Ireland ranks well above the EU-15 average in both GDP and GNP terms on this indicator). However, perceptions of infrastructure quality remain low - Ireland ranks 25th out of 28 OECD countries measured with no improvement on our 2001 score, despite significant investments over the past decade. This is reflective of the need, which is well documented, for Ireland to play “catch up” following under-investment in infrastructure in previous years.

nThe Global Competitiveness Report 2010-2011 ranked Ireland 29th out of 139 countries measured. Ireland has actually fallen four places from the previous measurement point in 2009-2010 and fell three places in the previous measurement points in 2008-2009 and 2007-2008. Of the 12 factors

measured in this index score, infrastructure ranked as our fourth worst score (after financial market development, macro-economic environment and market size) coming in at 38th out of 139. Our infrastructure score is the one area where we are considerably out of line in comparison with other well developed innovation driven economies in our marketplace. As part of the study, respondents were asked to select the five most problematic factors (out of a list of 15 factors) for doing business in Ireland, inadequate supply of infrastructure is ranked as the third most problematic factor, following the access to financing and inefficient government bureaucracy.

It is vital therefore that Ireland now continues to invest in infrastructure in order to avoid a scenario where we fall further behind our competitors. The ESRI in their medium term review 2008-2015, estimate that a further “serious loss of competitiveness could see the economy under-perform by an average of 0.7 per cent a year” from their medium term projections. As a country we cannot afford to let this happen.

The importance of infrastructure to the long term economic performance of a country, therefore, is well established. That importance is derived not just from immediate economic benefits and job creation from the initial development of the infrastructure, but also from the long term improvement in a country’s competitiveness and consequential long term job creation. Public investment in infrastructure has a multiplier effect on the local economy over and above that of the initial infrastructure spend. McKinsey & Company state that “every dollar spent on infrastructure has a multiplier effect of $1.59 according to a widely accepted estimate by Mark Zandi, the chief economist at Moody’s Economy.com.” 5

“ Ireland ranked 29th out of 139 countries in the Global Competitiveness Report 2010-2011”

Source: Global Competitiveness Council

1 KPMG/Economist Intelligence Unit, Bridging the Global Infrastructure Gap, January 2009.

2 EU Regional Competitiveness Index 2010. http://easu.jrc.ec.europa.eu/eas/downloads/pdf/JRC58169.pdf

3 Communication from the Commission to the European Parliament, The Council, the European Economic and Social Committee and the Committee of the Regions – Mobilising private and public investment for recovery and long term structural change: Developing Public Private Partnerships.

4 European PPP Report 2009. 5 McKinsey Quarterly: The right way to invest in infrastructure.


Stimulus Tool

The Government needs to prioritise investment in infrastructure. Capital expenditure projects should be prioritised in terms of meeting aims such as job creation, economic benefit, and sustainability amongst others. An added benefit of infrastructure investment now is that this investment is a stimulus tool.

Capital investment now, can contribute to immediate job creation. It is estimated that the labour intensity associated with capital projects is approximately eight to 12 jobs for every e1 million invested.6 This would have lead to approximately 230,000 to 240,000 jobs created either directly or indirectly in the period 2011-2014 if the current programme for capital expenditure was progressed. An efficient approach is to find a means by which to continue to deliver a regular programme of infrastructure, which will keep skills levels in the country, allow construction output to proceed at an even pace without the peaks and troughs that are inefficient and more expensive, and increase employment levels in the construction sector to a reasonable level (as opposed to the unsustainable level of 2007).

What is required now is a defined programme of capital investment, which outlines the anticipated

spending in each of the various sectors such as transport, health, education, environmental and other social infrastructure, the timeline for the delivery of such projects and the anticipated procurement approach. A clear programme of anticipated timelines for the procurement and delivery of public infrastructure through the period 2011-2016 would generate interest and activity amongst the construction sector and would ensure the efficient delivery of much needed infrastructure in Ireland.

The challenge for Ireland now is how can we fund and deliver that much needed infrastructure more effectively and much faster than has heretofore been the case, and start seeing the benefits of the economic gain that should result. Given the current constraints on public funding and the cost of Government finance, the Government must look to ways of facilitating private sector investment in infrastructure.

Conclusion

Infrastructure investment now can lead to not only immediate benefits in the short-term but also medium and longer-term benefits to the economy. Infrastructure is a significant driver in the assessment of the competitiveness of an economy. In spite of Ireland’s substantial investment in infrastructure over the last ten years, our infrastructure still does

not stand up against our economic counterparts. Given the current economic situation, investment in infrastructure has become even more important as it can be used as a stimulus tool to drive economic activity. Immediate investment in infrastructure can lead to immediate job creation. In addition, this investment can help retain the skills base which has built up, in particular in the construction sector, over the last number of years.

Countries throughout the world have recognised the importance of investment in infrastructure and the link between infrastructure investment, economic competitiveness and economic activity. A number of countries throughout the world have announced significant economic stimulus packages built around a core of infrastructure projects.

In light of Ireland’s current economic context, it is important to consider the alternative approaches to delivering and funding large infrastructure projects in this environment. Considering the current restrictions on Government finances and the cost of Government borrowing, the private sector is best placed to facilitate the Government’s investment in infrastructure. The Government therefore needs to look at ways to encourage private sector investment in infrastructure.

6 Submission to Government by the Construction Industry Council, March 2009. www.scs.ie/publications/submissions_files/29-04-09-CIC-Submission-to-Government.pdf.


Capital investment now, can lead to immediate job creation.


The development of infrastructure projects or a programme of infrastructure development is largely dependent on the availability of funding for this investment. In the current economic climate, governments have prioritised projects for investment based on the extent of immediate job creation, a short-term economic benefit associated with the project or based on the long-term wider economic benefits of the project.

The funding of infrastructure projects solely by the Government is an appropriate approach where Government has the available resources for investment. However, alternative approaches to funding of infrastructure investment in Ireland are required as a result of the current deficit and the restrictions imposed by the current cost of public finance.

3

Delivering infrastructure in the current environment


PPP Approach

While a number of approaches to funding infrastructure projects are evident in the international market place, given Ireland’s current deficit and the constraints imposed by the current cost of Government finance, the Government does not have many options for funding capital investment. The PPP approach is seen internationally as one means of bridging the infrastructure funding gap. It is a viable approach for the Irish Government in the current circumstances.

Proven Mechanism

A key advantage of the PPP mechanism is that it allows the Exchequer to spread the cost of infrastructure provision over a long time frame as opposed to large upfront payments on delivery. In effect, the Exchequer aligns payment for such infrastructure with the actual usage. For example, the new Criminal Courts Complex will be paid for over 25 years through an annual series of payments that will commence only upon the opening of the complex. Therefore, the use of private finance through PPP facilitates infrastructure investment by the Exchequer today in spite of current budgetary constraints. In Ireland, the involvement of private sector finance through PPP has already been proven to deliver significant benefits to the Exchequer. All projects procured to date through this route have been delivered on or ahead of time and with no cost overrun exposure to the public sector. In addition, all PPP projects completed in recent years have been proven to deliver better value to the Exchequer when compared to traditional means of delivery. Whilst there is little published data specifically on Irish projects, a recent report (October 2009) by the National Audit Office in the UK, updating an earlier 2003 report confirms the overall better performance of PPP versus conventional procurement in respect of on-budget (65%) and on-time delivery (69%) of PPP projects. EPEC maintain that: “Across Europe, PPP is established as a valuable additional option for investment in infrastructure and strategic public services.”8

Ireland also compares favourably to other jurisdictions in terms of delivering PPPs from OJEU to financial close on schools PPPs. In the UK, the most mature schools PPP market in the world (with thousands of completed schools PPP projects) between 2004 and 2006 schools PPP projects took on average 27 months to procure. The Building Schools for Future Programme average is currently around 24 months9. Even after just two bundles in the schools PPP programme in Ireland, it is clear that our trend is towards delivering these projects more efficiently than more mature PPP markets.

PPPs that are properly structured do not count as part of Government borrowing. To achieve this PPPs need to transfer construction risk and either demand risk (as in toll roads) or availability risk (as in schools projects). Given the significant Exchequer borrowing requirements at present, any valid structure that can deliver infrastructure without increasing Government borrowing should be explored to its maximum potential.

PPP has been used as an active and successful model to date in the transport, education and civic building sectors (e.g. National Conference Centre, Criminal Courts Complex), all of which do not count as Government borrowing. Some key examples are set out overleaf:

PPPs, whereby the private sector takes key project risks, raises finance and is repaid over time either from user charges or payments linked to asset availability, are a proven funding mechanism internationally. EPEC’s July 2010 report, Public Private Partnerships in Europe – Before and During the Recent Financial Crisis, found that from 1990 to 2009, more than 1,300 PPP Contracts, with a total capital value in excess of e250 billion, were signed in Europe.7 This report also found that since 2006, the PPP market in Europe has continued to diversify both across countries and sectors. It is a proven mechanism in Ireland across a range of sectors and considering the current cost of Government finance, this is likely to be a viable method for the delivery of essential infrastructure.

Canada has long recognised the benefits of delivering projects through PPP. The establishment of PPP Canada has supported the development of P3 projects in Canada. During 2010, Canada had a steady pipeline of PPP projects with a number of projects reaching financial close. In June 2010, 68 proposals were received for approval for funding under Canada’s P3 fund in eleven of Canada’s territories and provinces. PPPs have also been particularly active in the United States over the past five years. During the first nine months of 2010, it is estimated that approximately US$4.8 billion of projects reached financial close and there is a strong pipeline of transactions lined up for 2011. PPP is seen in the US as a mechanism that can be used to improve US infrastructure in spite of the current funding gap. The French Government has also turned to PPP as a means of mitigating the current economic crisis. France has a significant pipeline of PPP projects, some of which involve large-scale PPP projects in excess of e1 billion in value.

Portugal, which is also subject to similar restrictions in terms of its public finances, is also using the PPP mechanism to fund its infrastructure development. In April 2010, in spite of a recent downgrade of Portugal by Standard and Poors, the e1.4 billion Pinhal Interior Shadow Toll Road PPP reached financial close with debt financing of approximately e892 million provided by a group of ten commercial banks. The EIB also provided e300 million of the required funding for the project.

7 European Investment Bank, Economic and Financial Report 2010/04, July 2010: Public Private Partnerships in Europe – Before and During the Recent Financial Crisis. www.eib.org/epec/attachments/efr_epec_ppp_report.pdf

8 European PPP Report 2009. European PPP Expertise Centre. www.eib.org/epec/resources/dla-european-ppp-report-2009.pdf

9 National Audit Office – Building Schools for Future Programme, Renewing the Secondary School Estate, 2009.


Convention Centre Dublin (“CCD”)

In April 2007, the Spencer Dock Convention Centre Dublin Ltd (“SDCCD”) was awarded the PPP contract to design, build, finance, operate and maintain a new national conference centre by the Office of Public Works (“OPW”). The CCD which was opened in August 2010 on time and on budget, can accommodate up to 2,000 delegates and has over an acre of exhibition space. This was a highly complex and unique project, in particular as the project was taking demand risk and the financing included sub-ordinated funding for a car park directly underneath the conference centre. It is envisaged that the CCD, designed as a landmark building located by the International Financial Services Centre, will play a significant role in the continued urban regeneration of the Dublin Docklands.

Under the PPP Contract, the OPW will pay the SDCCD an annual unitary payment linked to performance and availability of the centre. SDCCD will be responsible for operation and maintenance of the CCD over a 25 year period and is also required to secure a specified number of international delegates at the centre over the length of the concession. Such delegates will contribute significantly to the Dublin economy in that time. Furthermore, where profits at the CCD exceed specified levels, these will be shared with the OPW. The SDCCD is also subject to deductions to annual payments where defined Key Performance Indicators such as availability, number of international delegates, etc are not achieved.

The Comptroller and Auditor General’s (“C&AG”) report of September 2010 concluded that the winning bid came in lower than the public sector estimate for the project and that the OPW was successful in maintaining competitive tension during the negotiation phase of the project. Furthermore, the payment mechanism for the project is structured such that the full unitary payment is only receivable where the target for international delegates is reached and the contract incentivises performance through the imposition of penalties for non-availability, poor customer service, health and safety, etc.

Criminal Courts Complex

The Criminal Courts Complex PPP project which was procured by the Courts Service/ National Development Finance Agency (“NDFA”) involved the design, build, finance and maintenance of a new 22 courtroom Criminal Courts Complex near the Phoenix Park in Dublin with the primary objective of consolidating criminal court business within one functional location. In April 2007, the contract was awarded to Babcock & Brown and the complex was officially opened in November 2009, approximately three months ahead of schedule and on budget. The contract duration is 25 years.

The structure of the payment mechanism developed for the project is that the consortium is paid an annual availability payment based on the complex being available for use, plus an annual payment for various additional services e.g. utilities, catering costs, etc.

The C&AG Report for 2008, verified that the cost of the PPP was 6% lower than the cost under traditional procurement i.e. the PPP deal represented better value for money for the public sector.

PPP Case Studies


NRA’s First PPP Roads Programme

In 2000, the National Roads Authority launched its first PPP Roads Programme valued at approximately e3 billion. This programme was one of the largest infrastructure mandates in the history of the Irish State. The final projects on this programme reached financial close during 2007. The programme encompassed the following road schemes: the M4/M6 Kilcock-Kinnegad Motorway, M1 Dundalk Western Bypass, the M3 Clonee to North of Kells Scheme, the M8 Rathcormac/Fermoy Bypass, the Limerick Tunnel PPP, the N6 Galway to East Ballinasloe Scheme, the M7 Portlaoise-Castletown/M8 Portlaoise-Cullahill and M50 PPP Contract.All of the NRA’s PPP schemes were procured as design, build, finance and operation contracts, each of which have long-term concession periods of between 25 and 35 years. Except for the M50 PPP Contract, the concessionaire takes the risk on recouping a portion of the initial capital investment and ongoing operation cost associated with the road through the collection of tolls. While the M50 project was also procured on a PPP basis, the payment mechanism on the scheme is based on an assumed annual payment from the NRA linked to availability of the road.

A key highlight from the NRA’s first roads programme is that all of the PPP road schemes were completed and opened to traffic ahead of schedule and on budget. It is estimated that the NRA’s first PPP roads programme has resulted in approximately e2.1 billion in private sector funding being secured for Ireland’s national road network with significant international investment and significant international skills set brought into the country – another example of Foreign Direct Investment.

PPP Case Studies

Schools PPP Programme

The Schools PPP Programme proposes the design, build, finance and maintenance of 27 schools in a number of “bundled” PPP projects. The schools are being bundled together in various numbers and delivered collectively by consortia that combine to perform the design and construction and then the long-term maintenance of the schools. The schools will then be handed back to the Department of Education and Skills in effectively an “as new” condition at the end of the 25 year concession period. The Department pays the PPP company a monthly unitary payment for the 25 year contract period. Payment of this unitary charge is subject to ongoing performance by the PPP company of its obligations to ensure that the schools are both available as required, but also that services such as cleaning and catering are performed to a required standard. The payment mechanism is effective because it imposes financial penalties on the PPP company where it fails to perform.

Two of the projects, Schools Bundle One and Schools Bundle Two, have achieved financial close in the last 18 months, showing that even in the most difficult financial market conditions, bank funding (both from domestic and international and multi-lateral agencies) is available and ready to commit to infrastructure projects in Ireland. Schools Bundle One contained four schools on three sites in Banagher, Ferbane and Portlaoise (where two schools share a campus). The project went to OJEU in September 2006 and achieved financial close in March 2009. Despite the credit crunch, the project has delivered value for money to the Exchequer. All four schools were constructed in a period of 16 months and are now fully operational. Schools Bundle Two contains five schools on four sites in Abbeyfeale, Athboy, Bantry (where two schools will share a campus), Kildare and Wicklow. The project was OJEU’d in May 2008 and achieved financial close at the start of June 2010. Again this project demonstrated the ability to attract bank funding in very difficult market conditions. These projects are currently in construction and are on schedule for handover in November 2011. Schools Bundle Three contains eight schools and went to OJEU in August 2010. It is anticipated to reach financial close during 2012.


As the price of the PPP for the 25-30 year term of the deal is fixed at inception, the delivery of the future long-term maintenance of such essential assets has also been secured. These reasons should in themselves present a compelling business case to use this means of procurement for more projects through PPP.

However, there is an additional benefit to delivering infrastructure projects through PPP. Under Eurostat regulations, a properly structured project delivered with long-term private finance does not count towards Government borrowing under the Maastricht criteria. Hence it is “off” the Government’s balance sheet. Capital projects could therefore continue to be delivered through this route, whilst not using up valuable Government borrowing capacity that might be needed elsewhere. This has also been recently acknowledged by the European Commission whose recent report stated “whilst the principal focus on PPPs should be on promoting efficiency in public services through risk sharing and harnessing private sector expertise, they can also relieve the immediate pressure on public finances by providing an additional source of capital.” 10

The Government needs to continue to deliver a programme of investment in Ireland’s infrastructure and PPP offers a cost effective means to do that whilst preserving borrowing capacity for other areas of Government spend.

10 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Mobilising private and public investment for recovery and long term structural change: developing Public Private Partnerships.


Suitability for PPP

While not all projects are suitable for delivery through PPP, there are specific additional projects in Ireland which could be delivered though this mechanism:

n Environment – most of the projects delivered to date in the water, waste and wastewater sectors have not involved the use of private finance, but rather have been long term build and operate contracts with upfront public funding. Yet PPP has been used successfully to date in these sectors internationally. Water services in particular would be ideally suited to the use of a PPP mechanism;

nHealth – Ireland is notable internationally for its lack of PPP projects in health to date. Projects such as the National Children’s Hospital, bundles of Primary Health Care Centres, the new State Pathology Laboratory, the proposed new mental health facility and community based long term care facilities would be ideal for a PPP mechanism; and

nHousing – consideration should be given to the use of a long-term PPP model in the provision and long-term management of our social housing needs linked to the opportunity now arising from excess stock in the market and the opportunity presented by NAMA. The projects in this sector to date, that have been mistakenly categorised as PPPs are in effect land swaps which are too property market value dependent and consequently unsuitable for the current environment. True PPP models of social housing have been successfully deployed internationally.

Private Finance

Ireland has in the past attracted significant investment in the PPP programme from both equity and debt investors at home and abroad. A valid consideration is whether that funding is still available given the uncertainty in the banking markets. One could take the view that this is a temporary dislocation issue which will resolve itself as we move towards greater economic and political stability. However, there are also short term mechanisms that could be introduced to address this issue so that Ireland can continue to bring projects to market and maximise use of such private sector funds as are available, for example:

nCo-funding: use traditional funding for a portion of the scheme, enabling Government to attract private funding for the balance;

n New financing structures: new structures are being considered in the marketplace to address the decline of the monolines. Private sector entities such as Hadrian’s Wall Capital and also the EIB are considering offering support to different tranches of debt to de-risk the senior debt element; and

n EU support: the EIB should be asked to at least temporarily fund greater than 50% of project cost to help address this short-term funding issue.

The cost of private sector debt has risen and this is an obvious challenge for the delivery of any new projects. The cost of Government borrowings is at an all time high, therefore PPP should be even more attractive now. In any event, we contend that the issues go wider than a pure comparison of who can deliver the most competitive finance. PPP delivers very significant transfer of risk, both during the construction and operational phases, which is far too often under-estimated in the PPP debate. It also has the advantage that it does not count towards Government borrowing under the Maastricht criteria. If Ireland is ready to deliver on our infrastructure needs, then we need to think laterally about how to achieve this, outside the confines of traditional procurement.

In September 2010, the President of the European Commission announced the possibility of the Commission together with the EIB, issuing bonds, referred to as EU project bonds, which would be used to fund major infrastructure projects. As a number of European countries face budgetary constraints, alternative sources of financing infrastructure are being considered by the EU. It is maintained that such project bonds would assist in encouraging other

A pan-European solution to funding infrastructure investment in the current environment is required.

long-term investors such as pension and sovereign funds in investing in European infrastructure projects. The EU project bond would be used to enhance the credit rating of bonds issued by project companies themselves. For example, the EIB would provide higher-risk subordinated debt finance. These bonds would not be issued by a sovereign or EU entity but instead the EIB would be providing a credit-enhancing instrument for bonds which would be issued by the project companies themselves. These project bonds will differ from the monoline insurance model of the past in that they will work as a credit enhancement tool rather than a guarantee. A Pan-European solution to funding infrastructure investment in the current environment is required. Ireland should be leading the way in pushing for EU project bonds and other similar solutions to come into

force as these would assist in providing international investors with greater certainty and confidence in investing in large-scale Irish infrastructure projects. It is anticipated that the EU project bonds would be used in conjunction with the PPP mechanism and would be an efficient means of delivering much-needed infrastructure in Ireland.



Expansion of PPPs

Previous and recent Government capital expenditure programmes have set out targets in private capital investment through the PPP mechanism in the medium term but failed to provide specific details of the potential pipeline of PPP projects.

The recession opens opportunities to develop the PPP system. Previously, PPP projects tended to be for the development of large infrastructure and facilities. While there is still absolute merit in continuing the use of PPPs for these projects, it is timely to consider the use of PPPs for smaller projects too. Banks are currently attracted to projects requiring expenditure at more moderate levels than was historically the case. Where pressure is being felt by the Exchequer to deliver needed social and economic infrastructure of this scale in any sector there is scope to assess the merits of delivery through PPPs.

The real difficulty is who will lead this review. It is understood that responsibility for determining whether or not a project should be delivered as a PPP rests with the sponsoring department. It does not appear that anyone has the responsibility of independently considering or in the current environment reconsidering PPP as a delivery mechanism at a central level.

Presently, the Department of Finance has a policy role to develop guidance for the use of PPP and the NDFA has a delivery role for projects once they have been identified and confirmed as suitable for PPP. A National Infrastructure Authority should have the strategic policy responsibility of

driving the identification of projects, determining whether or not PPP is a delivery route that could or should be used or adapted for more widespread use and then working across departments to ensure blockages and delays are removed.

All capital projects identified by Government should be mandated to be considered for procurement under a PPP type structure and the PPP programme expanded accordingly. This need not be a lengthy process; a simple set of high level criteria could be set against which to compare each capital project. Smaller value projects could be bundled together into a single procurement and projects could be bundled across sectors.

Conclusion

Investment in infrastructure in Ireland is necessary to stimulate much needed economic activity. In the current economic environment, given the lack of public funding available and the cost of Government finance, alternatives to funding infrastructure projects are required. The private sector is best placed to facilitate the development of much needed infrastructure alongside the Government and PPP represents the most viable approach in the current environment for the delivery of infrastructure.

The involvement of private finance through PPP is a common approach used throughout Europe as well as in Canada and the United States for bridging the funding gap in relation to delivering infrastructure projects. While PPP has been used as a mechanism for funding road, school and other social infrastructure projects in Ireland, it hasn’t been used to the extent possible in the environmental,

health and housing sectors. Given the advantages associated with the PPP approach, in particular the use of private finance which in addition is not included within Government borrowings under the Maastricht criteria, it is recommended that the PPP mechanism should be explored further.

Although PPP in the past has been mainly used in Ireland for large-scale infrastructure projects, all projects above a certain threshold should be considered for delivery through this approach. In fact a report by EPEC in July 2010 found that the PPP market in Europe has continued to diversify across sectors since 2006 and that there is now a tendency towards smaller PPP projects.11 Alternatively, smaller projects should be bundled and procured as one larger PPP project, such as was done for the Irish Schools Bundles. Projects delivered through PPP in Ireland to date have been delivered on time or ahead of schedule and have represented value for money solutions for the Exchequer.

While the European community examines alternative approaches to funding infrastructure, Ireland should be leading the way in driving these initiatives. The EU project bond approach currently being discussed in Europe would provide a mechanism by which international investors could obtain a level of comfort in investing in Irish infrastructure projects.

11 Public Private Partnerships in Europe – Before and During the Recent Financial Crisis. European Investment Bank Economic and Financial Report July 2010.


The challenges facing the public sector in the delivery of additional infrastructure are often commented on. KPMG alongside the Economist Intelligence Unit undertook a survey of public sector infrastructure policy developers and procurers during November and December 2009. The purpose of this survey was to examine the challenge of infrastructure development from a Government perspective. This survey highlighted the following conclusions:

nLack of funds and politicisation of projects priorities are the biggest impediments to infrastructure investment;

nStimulus money is being hampered by slow approver processes and excessive regulatory procedures;

nThe majority agree that Governments and the private sector need to work more closely together; and

nPublic and private sector cultural differences present a significant issue.

In an Irish context specifically, there are a number of impediments for the efficient delivery of infrastructure investment. These include the following:

4

Challenges for infrastructure


Need for National Infrastructure Authority

Ireland is not alone in facing challenges in speeding up the pace of infrastructure development. There is an availability of relevant resources and skills within the contracting and bidding community in Ireland at present that have been built up over the years largely through experience on the NRA PPP roads programme. The Government is well placed to take advantage of that to assist in project delivery and to seek attractive bid pricing at a time when other areas of activity are slower. That skills base will move overseas if there are insufficient new opportunities at home. Lack of strong political and civil administration support is recognised as one of the greatest impediments to successful project delivery. At present there are a number of different agencies, each of which is responsible for the procurement of its own projects. While currently there is a department or agency which determines policy on what infrastructure is to be delivered, there is then too often another agency which actually delivers this infrastructure. There is thus a clear disconnect between the two. There is no one entity which has the responsibility of matching these two aspects or bringing them both together. There is, therefore, no one individual who is responsible for driving individual departments to deliver projects, to consider alternative delivery options such as PPP or to bring the project to the NDFA for delivery. This is unnecessarily delaying the delivery of much needed infrastructure in Ireland.

Infrastructure Australia formulates the strategy for the development of infrastructure and works in partnership with various states, territories, local Government, and private sector to implement changes to the national infrastructure. The agency works to identify infrastructure needs, investment priorities and policy and regulatory reforms to ensure the efficient and effective delivery infrastructure.

Germany recognised the importance of having a dedicated PPP organisation and in 2008 formed ÖPP Deutschland AG (Partnerschaften Deutschland or Partnerships Germany). ÖPP Deutschland offers advice in relation to best practice for public authorities and provides expertise in terms of the development and procurement of projects through PPP.

The solution would be to establish the National Infrastructure Authority, which built on the expertise contained in particular within the NRA, RPA and in certain respects the NDFA. This new streamlined body would provide a shared service centre of excellence to both central and local Government in delivering key infrastructure projects. Based on their respective track records in the delivery of infrastructure projects, this knowledge could be used collectively to efficiently deliver major infrastructure in the future. The benefits of the National Infrastructure Authority would include:

nCombined expertise in procurement, engineering and planning;

nImproved and more efficient procurement processes;

n Strengthened capacity to interact with local government in respect of planning matters;

nAbility to remove bottlenecks between different departments and agencies;

nCapacity and mandate to interact with the banking market and EU/EIB to drive new financing solutions; and

nAbility to market Ireland (and projects) internationally as a location infrastructure investors should consider.

Lack of funds and politicisation of projects priorities are the biggest impediments to infrastructure investment.


The National Infrastructure Authority would ensure that the pre-procurement and procurement phases of the project are progressing efficiently and expedite the identification of any potential issues in relation to the project that may impact on-time project delivery. It would have an enhanced commercial focus in terms of delivering the best deal for Government, with adherence to relevant processes taken as a basic requirement (rather than the primary requirement).

It is recommended that special responsibility for infrastructure delivery should be added to the portfolio of a Cabinet Minister. This individual would be responsible for bringing the decisions of what infrastructure should be delivered and how this infrastructure is to be delivered together. Better co-ordination between departments would be facilitated through the establishment of a dedicated cabinet sub-committee on infrastructure. Not only would the National Infrastructure Authority report directly to the Minister, it would be responsible for:

nDetermination of what infrastructure is to be delivered, the priority of projects and the timing for this delivery.

nDetermination of the delivery approach for these projects: each project above a defined threshold should be required to be considered to be procured through PPP. A test comparing the cost of procuring the project traditionally and as a PPP would be required. A key component of this test would be the cost of private finance versus the cost of Government finance. This test needs to be done by an agency with experience in the delivery of PPP.

nCo-ordination and guidance of the Government departments and agencies responsible for the delivery of capital expenditure projects. As previously outlined, the NRA and RPA have vast experience in the delivery of infrastructure projects. The Authority should co-ordinate the sharing of this knowledge between various Government departments and agencies to benefit from this experience. The Authority should arrange for the compilation of an up-to-date guidance document in relation to the delivery of capital expenditure projects.

Although the Department of Finance through its PPP unit has a library of such documentation, given the current economic environment and the constraints in the international finance market, more up-to-date guidance dealing with new challenges is required.

nMaintenance of an up-to-date project procurement log which would contain details of all Government capital expenditure projects (proposed and under procurement), the chosen delivery approach (PPP/traditional), the status of the project in terms of the procurement process and the anticipated timeline for delivery.

No clear pipeline of projects

While recent Government capital expenditure plans identified a few specific projects to be delivered over the coming five years, a clear pipeline was not provided. There is also no visibility in terms of the specific timing for delivery of projects or the anticipated delivery approach. In order to attract and maintain interest from international banks and investors in Irish PPP projects, a clear deal flow of infrastructure projects needs to be evident.

Time scales prior to OJEU

A considerable amount of time elapses from the identification of a PPP project to issue of the OJEU Notice. Responsibility for the project at this stage largely rests with the sponsoring authority (the HSE, Department of Education, etc). In the current environment, there must be benefit in attempting to shorten this timescale. This would enable projects to come to market quicker with the public sector being able to take advantage of the present competitive environment with regard to tender costs. According to the Department of Finance’s Infrastructure Priorities 2010-2016 report, tender prices are now approximately 30 per cent lower than they were at the peak of the market. Therefore, the Government has the opportunity to obtain a greater level of capital investment utilising a lower level of exchequer resources.


Possible improvements to increase the efficiency at this stage would include:

nOne authority with responsibility to address delays and blockages across departments and demand results. As previously outlined, there should also be one Cabinet Minister appointed to oversee and guide the efficient delivery of Government infrastructure projects.

nFaster decision making by departments. Clear outlines of decisions that need to be made, possible options, best practice elsewhere could all be specified to help departments in this process.

nGreater assistance being provided to the relevant sponsoring departments to compile the output specification for the project. An experienced agency needs to drive this rather than “assist”. As previously outlined, both the NRA and RPA have significant experience in the delivery of infrastructure projects. Other Government agencies and sponsoring departments should use this expertise.

n The use of template specifications from other projects.

nGreater responsibility being given to one delivery agency to drive the project through this early stage.

A clear deal flow of infrastructure projects needs to be evident.



Under the Department of Finance guidelines, the Public Sector Benchmark (“PSB”) is typically completed before the OJEU Notice is issued, but the PSB is only required to be completed before tender invitations are issued. It would be possible to streamline activities more efficiently by allowing completion of the PSB by the time tender documents are ready to be issued or even prior to receipt of tenders. It is imperative that knowledge of the costings of the private sector bids is not used to contaminate the PSB. In general though, knowledge of the private sector costings would not be known until receipt of a costed bid submission. Hence, it would be possible to get OJEU Notices issued quicker and the private sector preparing their responses in tandem with the public sector finalising the costing for its specifications. This is how the use of PSBs has been adopted in many other jurisdictions.

Streamliningplanning process

The benefits achieved through the identification and assessment of risk, which a successful outline planning permission (“OPP”) can address, are acknowledged. Outline planning is undertaken in the pre-procurement stages of a number of PPP projects. However, outline planning applications do take a significant period to process. The minimum period is at best 9 – 12 weeks under current legislation.

Currently OPP applications on projects are generally taking approximately six months to process. This is adding significant time to the pre-procurement stages of projects.

In this light, it would be timely to consider a review of the Planning and Development (Strategic Infrastructure) Act, 2006. Currently, the Act is not broad enough to capture infrastructure projects such as schools building programmes for example. Amending this legislation to expedite planning (both at outline and full planning stages) would be an obvious means of expediting project procurement. In addition, delays in the delivery of planning decisions at full permission stage need to be addressed and in particular at the An Bord Pleanála stage, which appears to be suffering from a lack of resources. An Bord Pleanála is required to respond within 18 weeks to planning issue referrals. On average this is actually taking a minimum of six months.

As a consequence of the existing structure of the planning regime, planning can add up to a year to the procurement process for a project. This requires an urgent and radical review.

Expediting preferred bidder stages

Once projects have reached OJEU, tender competitions in Ireland generally tend to proceed according to the expected timeline. The next area of delay is typically at preferred bidder stage. This is usually caused by one of a number of factors – a delay in close whilst awaiting planning, protracted bid negotiations or a difficulty in securing funding.

There have been a number of deals in recent times that have appeared to stall at the preferred bidder stage of negotiations. The details as to why this might have been the case are obviously confidential. However, project delays or cancellations are very damaging in a wider context of seeking to continue to attract international participants into this marketplace. This should not be underestimated.

One of the reasons for the introduction of the Competitive Dialogue Procedure was to avoid protracted negotiations at preferred bidder stage. However, before the introduction of the Competitive Dialogue Procedure for projects in Ireland, a number of mechanisms had been introduced into Negotiated Procedure procurements to restrict negotiations at preferred bidder stage. These were being successfully employed under the Negotiated Procedure.

It is also worth noting that in the current funding environment, there is a need for parties on both sides of the deal to be flexible as to the final funding structure to be adopted. Deals can and still are being funded in the project finance market place. This requires both flexibility in approach and often some amendments to the funding structure of the deal. The Competitive Dialogue Procedure which is intended to limit flexibility post tender submission to clarificatory changes only, is not flexible enough to address funding issues in the current financial markets. It is clear that the Competitive Dialogue Procedure when drafted did not contemplate the current volatility in financial markets which is resulting in funding terms changing over short periods. In this respect, consideration should be given to using the Negotiated Procedure as this does include the flexibility required to address changes at preferred bidder stage.


Apart from addressing this issue of required flexibility, one of the benefits of the Negotiated Procedure is that competitions tend to be much shorter (almost half the length of tender periods in current Competitive Dialogue Procedure competitions). Value for money is not just a financial comparator, it should also recognise the benefits to the economy of the timely delivery of infrastructure.

Use of programmes

The experience of the NRA Roads Programme is a good example of the efficiencies generated over the course of a programme. Market interest is attracted to a programme based approach at the outset as bidders can spread the cost and risk of unsuccessful bids over a programme of projects. Procurement timeframes, in particular towards the end of the programme, were significantly reduced and standard templates and procedures could be developed.

The focus then could be on outcomes and the procedures/processes were developed to facilitate these outcomes. There is concern that the academic pursuit of perfection and rigidity in the PPP process removes the flexibility for the mechanism to adapt and ultimately aid in the delivery of infrastructure. On too many occasions the focus remains on the process rather than the success in achieving the close and delivery of projects.

In addition, there is unease that administrative procedures within the PPP process, under control of the various departments, appear to be taking an

exaggerated time for completion. This step change has occurred in the past months where a process that previously took, for example, a number of days is now taking a number of weeks.

Use of frameworks/strategic partnering

One of the main issues with project delivery is the need to undertake competitions in accordance with public procurement law requirements for each individual project. Consideration should be given to the use of framework or strategic partnering arrangements that would allow a number of projects to be procured through a single competition. This would reduce the procurement timeframes to a single procurement process for the appointment of the framework provider/strategic partner who would then have responsibility for delivering multiple projects. This model is successfully being employed in the UK on the Building Schools for the Future programme and by the NHS in the LIFT programme.

Market interaction and communication

Regular communication and consultation with the bidding and funding community is essential. Projects that are not yet at the market have an opportunity to take on board current market conditions and ensure a project is bankable and deliverable prior to tender documents being issued. Projects that are in tender stage still have an opportunity to adapt their requirements to what is deliverable in the current market place. This is not to say that the public sector should capitulate to all the demands of private sector bidders. However, it is not in the interest of the public sector to put a project out to market that will get an initial negative reaction. Competition for funding is more intense than ever and projects will be prioritised in the banking community based on lower complexity, reasonable risk transfer, strong sponsor groups, speed of delivery/procurement and credit quality of the sponsoring authority. This is not the time to push the envelope in terms of risk transfer. It is the time to push the continued spend on infrastructure projects. It is noted that in spite of the current restrictions in the debt funding market, projects which are well-structured are still generating interest and obtaining debt funding in the current environment.

Market interest is attracted to a programme based approach at the outset, as bidders can spread the cost and risk of unsuccessful bids over a programme of projects.


An annual budgetary allocation to PPP projects.

The market in general would benefit from an ongoing and up-to-date information flow from the NDFA as regards estimated time scales for projects to come to market. This applies particularly for projects in the pre-procurement phase. It is recognised that time scales will change and inevitably there may be delays. However, it is essential, from the point of view of ensuring maximum interest amongst bidders that the market is kept informed, at least in broad terms as to when projects are likely to come to OJEU and any changes to this timing. This will facilitate formation of bidding consortia and workload planning. The market is broadly aware of the pipeline of projects but there is no accurate information or up-to-date source, in particular, on timing. The PPP project tracker is not updated very regularly and indeed includes a number of projects (waste /water) which would not generally be considered internationally to be PPPs.

Guidance

The PPP guidance that is in place to date is all related to the implementation of the PPP process. The market would benefit from more ad-hoc, short form guidance on how the process should be adapted to deal with unexpected events. Examples would be:

n the issues regarding the competitive dialogue process and competitive funding markets.

nwhat is the Irish view on changing international developments in certain risk areas such as refinancing risk share?

nwhat is the Irish policy position on continued use of the competitive dialogue procedure in the absence of being able to achieve ‘prior overall pricing’ on a deal?

ncontingency plans for means to deal with funding market’s temporary dislocation.

The guidance also needs to be updated to reflect current market conditions. Again, publication of guidance on these issues would help the private sector better understand the approach being taken by the Irish public sector. It would also assist bidders and the funding community to sell Irish projects to shareholders and credit committees. A key question that shareholders and credit committees will ask is to what extent are project requirements deliverable and to what extent is the public sector taking on board the current difficulties that the market faces. Such guidance must not be lengthy but more akin to a short form guidance note.

Affordability

One area where Ireland is out of line internationally, is the lack of guidance given to the market on the affordability level applicable for particular projects. This applies particularly for non-standard buildings or construction elements where standard pricing metrics would not readily apply. The fear amongst the public sector is that if bidders know the affordability level, they will bid up to that level and drive prices up. However the opposite is usually the case – competition drives prices down and bidders are then fully incentivised to maximise innovation within the limits of affordability, yet offer a competitive price.

This should be a win-win situation for the public sector and avoid delays, value-for-money issues or project cancellation on affordability grounds late in the day. The full PSB need not be published to achieve this.

The C&AG noted in the Report of the Accounts of the Public Services 2009 that “In order to facilitate bidders in proposing a cost-effective solution there may be merit in making the value of the PSB known to bidders, in appropriate cases. This is done in some jurisdictions and decided on a case-by-case basis. The publication of the PSB, in appropriate cases, could give greater clarity about the scope of the project allowing tenderers to balance the quality of their offerings with an effective State affordability limit”. It was also noted in this document that the Department of Finance maintain that the release of the PSB “would represent a significant departure from current guidance in relation to PPPs”. The key risk of releasing this number, according to the Department of Finance is that tenderers may use this as an opportunity to increase their price above that which they had intended to bid. The C&AG document outlined however the Department of Finance’s intention to consult further with the NDFA on this matter.


Budget Allocation

Some uncertainty currently exists in terms of the budgetary allocation and accounting treatment of PPP projects by Government departments. The key uncertainty concerns when the cost associated with a PPP project (i.e. annual payments throughout the life of the PPP project) is accounted for i.e. upfront, from capital allocations, when the project is signed, during the construction period or through the life of the PPP contract, from revenue allocations, as and when the obligations to the public sector arise during the concession. While PPP projects are often seen as representing a long-term commitment of ongoing payment obligations by the public sector, there should be a clearly defined method of allocating within budgets the public sector’s commitment associated with the project. This should be done in a manner that does not disadvantage PPP as a means of procurement. This arbitrary distinction can often provide a significant disincentive to Government departments to pursue PPP. In order to address the issue of the public sector’s long-term commitments, it is recommended that the Government considers setting a defined limit of the Government’s annual budget that would be set aside as the annual allocation to PPP projects. Having such a limit would ensure certainty as to the maximum commitments associated with PPP projects, avoid fears that undue long-term commitments had been entered into and yet at the same time allow proper planning for a defined level of commitments to be agreed.


All projects to be tested for PPP

Considering the key benefit associated with PPP, namely that the private sector raises the relevant finance for the project, it makes sense that large infrastructure projects should be tested for delivery as PPPs. It is recommended that all projects in excess of a defined threshold would be required to be tested by an independent agency for delivery under the PPP mechanism. This test would be undertaken by an independent agency, which has relevant experience in the use of private finance for the delivery of large infrastructure projects. The test would involve comparing the cost of delivering the project under traditional procurement and the cost of delivery under PPP. The cost of delivering the project under traditional procurement would need to factor in the cost of Government borrowing in order to make the test a like for like comparison between traditional procurement and PPP.

Conclusion

It is important to stress that the infrastructure market is an international market place. Bidders in Irish projects tend to have a significant international dimension. In turn, such international consortia develop relationships with indigenous employers creating significant employment and revenue in Ireland, along with capacity building and the possibility of skills transfer. A clear strategy in relation to infrastructure as a whole will help sell this crucial sector of the Irish economy to international participants in PPPs.

Recent capital expenditure plans outlined continued commitment to the delivery of a number of announced PPP projects and an intention to utilise PPP as a delivery mechanism. It will be important for the new Government to provide an early indication and certainty to the market of the envisaged investment in infrastructure over the coming years, the specific projects to be targeted as part of this investment, the delivery approach for these projects and the timeline for delivery. It is important that a clear signal is given early to the international marketplace. The danger of not providing a clear way forward is that bidders will simply look to jurisdictions where they have more certainty regarding projects and more demonstrable commitments from Government.

This could result in a significant loss of inward investment to our economy.

In the current environment, any project delay is interpreted as the Government stalling or withdrawing its support for a project. The recent high profile cancellations of Thornton Hall and the Decentralisation Offices do not help market confidence in this regard. Infrastructure investment is a global marketplace and Irish projects compete for interest from contractors/ investors/ funders across the globe. Those interested parties simply move on to the next strong viable opportunity. There is a view in the international marketplace, notwithstanding the pipeline, that projects are not being delivered on quickly enough and this is taken as a sign that Government commitment to such expenditure is waning.

With current budgetary constraints and the current cost of Government borrowing at an all time high, the funding of future infrastructure development is likely to rest with the private sector. PPPs present significant opportunities to deliver much needed infrastructure and will be accounted for off the Government’s balance sheet. It is recognised that PPPs represent long-term commitments for the Government in terms of paying, for example, ongoing unitary charges or operational payments to the private sector in return for the provision of infrastructure. However, any concern about over exposure to long-term commitments could be managed by defining a reasonable long-term threshold for committed budgetary payments.

The PPP delivery approach should be considered as a potential procurement approach in respect of the delivery of projects in excess of a defined threshold. In considering a project, a like-for-like comparison test between delivering the project through PPP and under traditional procurement should be undertaken. The approach that appears to represent the best value for money for the public sector should then be chosen. In determining this value for money it will be necessary to compare the Government cost of funds to the cost to the private sector of raising finance in respect of the project.

The private sector is best placed to assist Government in the delivery of much needed infrastructure and in the improvement of the international competitiveness of the country.


Ireland needs further investment in infrastructure in order to improve our competitiveness. Capital investment now will assist in the economic recovery of the country in the longer term. Investment in capital projects therefore needs to be maintained and in fact increased. As is the case with a number of countries throughout the world, Ireland has an infrastructure funding gap. The Government is no longer in a position to fund Ireland’s infrastructure and this presents an opportunity for the private sector to step into this breach and work with the Government in the funding and delivery of much needed infrastructure in Ireland.

Conclusions

5


Capital investment now will assist in the economic recovery of the country in the longer term.

The Government needs to expedite the delivery of capital expenditure projects for immediate job creation. In order to maintain our skills base in the construction sector and attract interest from international construction contractors, there needs to be increased visibility in terms of the pipeline of capital expenditure projects, in particular the pipeline of projects to be delivered through PPP.

A number of countries throughout the world have recognised the benefits associated with PPP and thus have devised a clear pipeline of projects to be delivered through this mechanism. The use of private finance to deliver public infrastructure through PPP has been proven to deliver significant value to the Exchequer. Funding through this mechanism is also not counted as part of Government borrowing. In spite of current issues in the international debt funding markets, it is evident that well-structured PPP transactions are still attracting market interest and more importantly obtaining debt funding and successfully achieving financial close. In any event there are various alternatives through which the Government could address market nervousness on lending in Ireland.

The EU is currently examining alternative ways of funding Europe’s future investment in infrastructure. Ireland needs to do the same. It is important that Ireland bridges its current infrastructure funding gap and regains the confidence of international investors to invest once again in well-structured Irish infrastructure projects.

PPP projects represent long-term payment commitments for the Exchequer. In order to achieve clarity as to the extent of these commitments on an annual basis, agreement should be reached as to the defined annual PPP spend. If the Government defined a specific annual PPP spend, projects could be committed to with certainty up to this threshold and the Government would be in control of the annual spend it has committed to over the long-term.

Responsibility for project identification, funding strategy and project delivery needs to be combined in one agency, a National Infrastructure Authority. At present there are too many separate departments responsible for policy, early project development and project delivery. No one entity can therefore be held accountable for delays. Furthermore, it is recommended that special responsibility for the delivery of infrastructure be added to the portfolio of a Cabinet Minister. This Minister will then drive individual departments and their agencies in the efficient delivery of infrastructure projects. This should prevent the current institutional barriers to delivery, such as planning and procurement delays.

In spite of the current economic situation, there is an opportunity for the Government to invest in the infrastructure needs of our country through partnering with the private sector, to stimulate required economic activity and address Ireland’s infrastructure deficit.

Documents

What next for Infrastructure? - FINFACTS · envisages a near 60% reduction in Exchequer capital expenditure by 2014 from its peak in 2008. The Exchequer capital budget of . e. 3.5