Wednesday, 21 October 2015

Independent Review of Ireland’s PPP Experience is Essential

Eoin Reeves: A largely unnoticed feature of the government’s new €27 billion capital investment plan – Building on Recovery -is the decision place a ten per cent cap on the total annual exchequer capital spending on Public Private Partnerships (PPPs).  This marks a significant shift in government policy on PPPs as it recognises the mounting annual spending commitments on existing PPPs.


Since 1999, successive governments have officially embraced PPPs as a means of delivering much needed public capital investment.  Under PPP private contractors take responsibility for most elements of the project life cycle.  Hence PPP involves the public sector entering into long term contracts with private consortia that agree to design, build and operate assets such as roads and schools.  A critically important characteristic of several PPP projects is that the private sector is contracted to finance the relevant investments.  This makes PPP extremely attractive as it raises the potential to keep infrastructure investment off-balance sheet.  In other words, the size of the national debt, as presented in the official statistics, can be contained while the government procures much-needed physical infrastructure.

But there is no such thing as a free lunch and PPPs must be paid for.  The new capital investment plan recognises that the burden of repayments on existing PPP is growing.  It is forecast to reach €225 million this year and will increase to €380 million in 2012.  As PPPs are long term contracts, annual commitments on existing PPPs will stretch beyond 2050.  The scale of new PPP investment announced in the new Capital Investment Plan is therefore a relatively modest €500m.  This has been rationalised on the grounds of ensuring PPP investments are affordable and sustainable.  But one suspects that there may be a degree of disenchantment with PPPs in terms of how they have performed to date.

Ireland has over fifteen years of experience with PPPs and in relative terms is a global leader (after the UK) in this respect.  But the delivery of PPP projects has not always been smooth and in a number of instances PPP projects were announced but never materialised.  The failure of the PPP approach to deliver several social housing projects has had enormous economic and social consequences for struggling communities.  Other examples of PPPs that were never brought to fruition include nursing homes, elements of a national oncology network and the DART Underground that was first postponed in the context of the global financial crisis.

Despite claims that PPP would guarantee ‘speedy delivery’ of projects, the reality has been a litany of delays and postponements.  This is partly explained by the complex nature of procurement under PPP which results in lengthy tendering periods.  For example, the tendering periods for PPPs such as the National Convention Centre and the Shanganagh Wastewater Treatment plant in Dublin were over three years.  The contract for the Poolbeg incinerator was advertised in July 2002 and took almost five years to award.  These delays in procuring contracts drive up social and economic costs and may deter private bidders for contracts.

Higher costs reduce the scope for achieving value for money, which is a core objective of PPP policy in Ireland and other countries with extensive PPP experience such as Australia, Canada and the UK. The experience in the UK – the world leader in PPP procurement- is suggestive.  In 2012, HM Treasury published the findings of an in-depth review of PPP use.  It noted widespread concern that PPP was not delivering value for money and taxpayers have not been getting a fair deal.

The UK Treasury highlighted a number of factors impeding the achievement of value for money.  These included slow and expensive procurement processes, the transfer of inappropriate risks to the private sector, resulting in a higher risk premium being charged to the public sector, and possible windfall gains accrued by equity investors on PPP projects.

It is striking that after fifteen years of PPP usage in Ireland there has not been a government-led, in-depth review of the PPP experience to date.  Despite the fact that total exchequer spending on existing PPP contracts exceeds €6 billion, we do not have detailed information on whether or not PPP has achieved important objectives such as value for money.  Public agencies tell us that assessments have been completed, but the workings and details that should support such claims are not in the public domain.

A thorough, independent review of the performance of PPP in Ireland to date is long overdue.  In the absence of such a review future decisions about how infrastructure is procured and managed will not be clearly evidence-based.  This is not in the interest of citizens (present and future) who will ultimately pay for infrastructure and related services.

Dr. Eoin Reeves is a Senior Lecturer in the Department of Economics and Director of the Privatisation and PPP Research Group at Kemmy Business School, Univerity of Limerick

1 comment:

PAUL SWEENEY said...

This is most interesting. What is also interesting is the the new government investment plan Building on Recovery increases investment substantially albeit from a very low base, but as a percentage of GDP is is still going to be very low by historical Irish and international standards. Part of the reason is that GDP is projected to grow fairly strongly but the level of planned investment is just not enough.
The excellent book by John Kay "Other peoples' money" which is about financialisation, is critical of PPPs and other off balance sheet financing. It a great read.