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PPPs in Ireland: Government Review Endorses Use of PPPs for Delivery of Major Infrastructure

AUTHOR(S): Garret Farrelly
KEY CONTACT(S): Garret Farrelly, Nicola Dunleavy, Rhona Henry, Peter O’Brien, Kate McKenna, Leonie Dunne
PRACTICE AREA GROUP: Projects
DATE: 30.08.2018

Summary

In July 2018, the Irish government’s ‘Inter-Departmental / Agency Group’ (a group of senior officials from procuring Departments and agencies) (the “Group”) published its long-awaited report on the use of Public Private Partnerships (“PPPs”) in Ireland (the “Review”).  The Review examined PPPs as a means for delivering priority public capital infrastructure in Ireland and, in particular, the role that PPPs may have in delivering projects in the new National Development Plan (the “NDP”) (click here for our initial insight on the NDP).

In light of the Government’s plan to increase Exchequer-funded public capital investment through the NDP, the Review assessed whether PPPs should be used:

  • to deliver additional investment beyond that contained within the NDP; and / or
  • as a procurement option to assist in the delivery of the NDP in circumstances where PPPs offer the best value-for-money.

The Group favoured the latter approach, ie, that PPPs should be viewed as an alternative mechanism to Exchequer funding to deliver the NDP and should not be used to deliver additional projects under a separate PPP programme.  The Review noted that supplementing the NDP with an additional PPP programme would put further, possibly unsustainable, pressure on the construction sector and could be counter-productive.

Further, the Group recommended that additional PPP models be developed to suit smaller scale projects.  At present PPP projects are typically accessible to large domestic and international sponsors and contractors.  The Group noted that a tailored model which is less financially and logistically demanding may better suit smaller projects (ie, projects with a value of €20 - 50 million and a contract length of up to 10 years) and would enable smaller domestic contractors to compete for PPP projects which were previously out of their reach.

Detailed Analysis

The Role of PPPs

The Review noted the following benefits which arise from the use of PPPs and also the challenges presented by PPPs:

Benefits

  • The scope to harness the innovation, commercial and management expertise and efficiencies of the private sector.
  • The ability to assign risks to the party best positioned to manage and mitigate them.
  • The ability to deliver public capital infrastructure in times where the Exchequer is facing budgetary or fiscal constraints and is unable to fully fund projects.
  • Value for money and timely delivery when applied to projects of the right scale, risk and operational profile.

Challenges

  • The PPP process is demanding as it involves identification of the entire cost of delivering the asset over the duration of its lifespan and the negotiation of a complex contract which is typically over 25 years in duration.
  • Private sector borrowing is generally more expensive than State borrowing, which is transferred to the State in its unitary payments.
  • PPP payments are binding contractual obligations and so can have an adverse impact on public authorities’ budgets in times where public expenditure is constrained, potentially limiting the development of further infrastructure during downturns.

Ultimately, the Group concluded that PPPs are a valuable procurement mechanism when utilised for projects of an appropriate scale and complexity.

Fiscal Review

The Group highlighted the importance of ensuring that PPPs deliver value for money (“VFM”) when used to invest in public capital infrastructure.  The Group further stressed that VFM should not be simply interpreted as generating a lower cost than traditional procurement.  Instead, PPPs should be compared against traditional procurement based on the whole life cost of the project (which would account for, amongst other things, the cost of operating and maintaining an asset).  The Group acknowledged that the additional cost of private sector borrowing poses a challenge for PPP projects to satisfy VFM requirements when compared to traditional procurement.

The long-term nature of PPPs necessitates careful planning to ensure that they only impose appropriate and sustainable long-term financial obligations upon the Exchequer.  At 31 December 2017, the Irish State’s future liability of all contracted PPPs amounted to €7.2 billion.  Assuming that all pre-contract phase PPP projects proceed to development, this figure will exceed €9 billion.  The cost of the unitary payments for all existing operational PPP projects is currently €260 million annually.  Once all the projects which are currently being progressed as PPPs are operational, this figure will peak at €410 million per annum.  It is clear therefore that PPPs impose potentially onerous long-term financial commitments upon the State, and while they may be capable of delivering VFM, PPPs already account for a significant level of public expenditure (even before a decision is made on whether or not further PPP projects should be delivered).

IMF PIMA Recommendations

In its Public Investment Management Assessment Report (the “PIMA Report”), the IMF expressed the view that the Government has placed too much emphasis on the additional projects which PPPs can deliver and not enough on the fact that they can be used as an alternative mechanism to traditional procurement where they offer VFM. The PIMA report suggested that where the State is facing less fiscal constraints on its infrastructural investment, greater emphasis should be placed on assessing the VFM case for PPPs as it may lead to fiscally demanding projects becoming more sustainable than if developed using traditional procurement.

Prior to 2012, the full capital cost of all new PPPs over their construction period was treated as a charge against the relevant Government Department’s Exchequer capital allocation.  In 2012, a 10% cap on the aggregate cost of PPPs as a percentage of aggregate Exchequer capital expenditure was imposed in place of this charging mechanism.  The PIMA Report recommended that this 10% cap be removed and the pre-2012 position be reinstated, a recommendation endorsed in the Review.

The National Development Plan

The Review emphasises that stopping and starting investment programmes (something which the Irish Government did during the recent downturn) can have an adverse impact on projects.  In particular, it can make it difficult for procuring authorities to maintain relationships with investors and cause uncertainty regarding the State’s capital investment plans (which may discourage potential investors).

In order to prevent any future potential PPP projects from being suspended or cancelled (along with the reputational damage that may cause), the Group recommended that no additional individual ‘PPP programmes’ be developed outside of the existing NDP pipeline.  Instead, the Group proposed that PPPs be retained as a procurement option for all major NDP projects.  This approach would allow the Government to avail of the benefits of PPPs without risking the negative consequences of the suspension and recommencement of individual PPP programmes.

Matheson Comment

The conclusions of the Review bode well for Ireland’s construction and infrastructure sectors.  We welcome the suggestion that PPPs should play a prominent role in the delivery of the major NDP infrastructure projects.  While the move away from individual PPP programmes may seem discouraging, the overall emphasis on the use of PPPs for the delivery of a clear medium- to long-term infrastructure pipeline is positive: in our view, our clients (which includes sponsors, lenders, contractors and State entities) will appreciate the long-term certainty and predictability that the Review recommends.

The Group’s recommendation that a new model of PPP be designed for smaller scale projects is also a positive development.  This will broaden the appeal of PPPs, particularly for domestic Irish contractors to whom PPPs had previously been inaccessible or unmanageable.

The Group’s suggested approach, if implemented by the Government, should smooth the capital investment cycle, helping to prevent the recurrence of the pro-cyclical investment strategies employed by previous Irish governments (which resulted in delayed or cancelled projects) and bringing much-needed certainty to investors in Irish infrastructure.

This article was co-authored by Projects partner, Garret Farrelly and Projects solicitor, Conor Blennerhassett.

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