The challenge of PPPs in turbulent times for construction
05 September 2013
Author: Dr Eoin Reeves, senior lecturer, director of Privatisation & Public Private Partnerships Research Group, course leader for MSc in Economic Analysis, University of Limerick
Public private partnerships (PPPs) are set to make an important contribution to capital investment in Ireland in the coming years. The stimulus plan announced by the Irish Government in July 2012 places PPP at the heart of plans for national economic recovery.
The majority of projects earmarked for investment under the €2.25 billion plan will be procured under PPP. These include the Grangegorman third-level campus, approximately twenty primary-care health centres, two bundles of courthouses, three major road schemes and new police regional headquarters.
Mobilising a renewed wave of PPP procurement in Ireland will be challenging. It is noteworthy that the Government’s plans were announced at a time when PPP activity levels have fallen worldwide. Moreover, the UK ,which is the world leader in PPP procurement, has recently announced a major re- vamp of its private finance Initiative due to “widespread concern that the public sector has not been getting value for money and taxpayers have not been getting a fair deal now and over the longer term” (HM Treasury, 2012: 1).
These events provided the rationale for a recent seminar on the Challenges of PPP in Turbulent Times, which was jointly hosted by the Privatisation and PPP Research Group at the Department of Economics, University of Limerick and the Cornell Program in Infrastructure Policy at Cornell University, New York State. The seminar brought together academics, public sector procurers and private sector participants for the purpose of exploring the challenges involved in a new wave of PPP procurement in Ireland.
Speakers on the day were: Prof Rick Geddes, Cornell University; Prof Edgar Morgenroth, Economic and Social Research Institute; Brian Murphy, chief executive, National Development Finance Agency (NDFA); and Dr Eoin Reeves, University of Limerick.
SCALING DOWN OF INVESTMENT PLANS
Prof Morgenroth described how significant levels of capital investment in the boom years had largely brought the quantity and quality of Ireland’s infrastructure in line with our trading competitors. There were, therefore, a number of justifications for the scaling down of investment plans in the context of the economic crisis, as well as factors such as falling tender prices.
The decision to expand the country’s PPP programme poses considerable challenges, however, especially due to the shortage and cost of private finance. In this context, the seminar heard Brian Murphy describe how the new wave of PPP would be characterised by a number of innovative features that would be put in place in order to improve conditions for investment in the turbulent environment.
These include the identification of potential debt funding sources such as the European Investment Bank, Council of Europe Development Bank and the National Pension Reserve Fund (to be re-directed by the government as the Strategic Investment Fund).
In addition, the NDFA has set itself the goal of significantly reducing tendering periods and costs. It is intended to reduce bid costs by 50 per cent and a target tendering period (from OJEU Contract Notice to Contract Award) of 15 to 18 months has been set.
Measures taken to achieve these goals include the reimbursement of part-bid costs for bidders/preferred bidders in the case of PPP project cancellation, as well as part-bid costs to unsuccessful bidders that have submitted compliant bids. These measures demonstrate very clearly how the Irish Government and its Centre for PPP Expertise (the NDFA) are highly committed to the goal of mobilising PPP investment.
In this sense, the Government is adopting an approach similar to countries around the world that are struggling to stimulate growth and counter recessionary forces. However, the international and Irish experiences to date show how the adoption of PPP poses considerable challenges to be met if the PPP industry is to recover from the effects of the global financial recession and credit crunch.
LACK OF PRIVATE FINANCE
The most recent evidence shows that PPP activity at a European level is running at one-third of the level observed at its pre-crisis peak in 2007. Ireland provides a stark example of the impact of the global financial crisis, with 24 major projects cancelled due to the shortage of affordable private finance. These include projects of strategic and social importance such as the Dart Underground and a number of social housing projects.
Besides the challenges of attracting private finance and stimulating the market for PPP contracts, it remains the case that in international terms, there are issues around PPP procurement that have yet to be fully resolved. As a consequence, the precise details of the PPP model continue to evolve as policy makers continue to learn from the experience to date.
The recent launch of Private Finance Initiative 2 (PF2) in the UK is premised on the recognition of these unresolved issues. It is by no means clear that PPP can necessarily deliver value for money, which is often presented as the key economic objective of governments.
The key driver of value for money is risk transfer. Under PPP, the private sector is contracted to take on more risk. Although contractors are paid a premium to take on extra risks, we were told that optimal risk transfer can create incentives to build better quality infrastructure, while ensuring value for money.
However, the UK experience has been such that PF2 suggests a major re-think on the nature of risks to be transferred and the terms under which risk transfer is executed.
RISK TRANSFER ISSUES
Questions around risk transfer have also arisen in the Irish case. The most recent report by the Comptroller and Auditor General (C&AG) casts some much-needed light on the opaque world of PPPs. It provided insights into how the key objective of risk transfer may not be materialising in the case of Irish roads contracts. Although the information provided is limited, it does highlight the potential costs of toll roads where contracts are based on traffic risk sharing.
As traffic volumes have fallen below expectations, the State is now obliged to pay extra fees to private contractors under the terms of the original agreements – whereas the precise amount to be paid depends on traffic flows this could amount to €6.7 million in 2012, if traffic grows by 2.5 per cent.
Similar levels of traffic growth will result in further payments for the next 13 years in the case of the Clonee-Kells (M3) PPP and until 2041 in the case of the Limerick Tunnel. The C&AG also raises questions about the advantages of PPP over traditional procurement, given the new forms of contracting that will result in more risk transfer under the latter.
Another key challenge with PPP is the need for more information if PPP is to be widely understood and accepted. Low levels of transparency and poor accountability are issues that have undermined the PPP model internationally. These represent big challenges for Irish policy makers, given the serious problems that have arisen with PPP projects to date.
These range from cases of acute failure (e.g. social housing), significant financial losses to the exchequer (e.g. schools) and problems with procurement (Dublin waste-to-energy and water services). There is also a need for clearer information about fiscal commitments under PPP.
While PPP investments may be considered off-balance sheet, the Exchequer is still on the hook for payments over the life of the contract. The need for clearer information in this regard explains the move in the UK to publish an assessment of PFI liabilities in the Whole of Government Accounts.
The issues of risk transfer and transparency are just two of many that policymakers must continue to grapple with if PPP is to deliver on its promises. The seminar at the University of Limerick provided a useful forum for exploration and discussion of such issues and we look forward to similar events in the future.http://www.engineersjournal.ie/2013/09/05/the-challenge-of-ppps-in-turbulent-times-for-construction/http://www.engineersjournal.ie/wp-content/uploads/2013/09/Dublin-cranes-1024x683.jpghttp://www.engineersjournal.ie/wp-content/uploads/2013/09/Dublin-cranes-300x300.jpgCivilconstruction,Ireland,procurement,public private partnership,United Kingdom