Lack of transparency feeds questioning of PPP deals

Public private partnerships are coming under increasing economic scrutiny, writes Gretchen Friemann

Public private partnerships (PPP) are intended to save the taxpayer the cost of putting massive amounts of money up-front for much-needed infrastructure.

Introduced back in 1998 when the Celtic Tiger was approaching its peak, PPP was heralded as a more economical method of fast-tracking urgent infrastructure projects such as roads, public transport, schools and hospitals.

But economists are now questioning the Government's commitment to this initiative as reports of its complexity and the numerous problems surrounding each large-scale project continue to emerge. Last week, one of the most high-profile PPP projects, the Kilcock-Kinnegad motorway, was at the centre of a controversy after Labour's finance spokesperson, Ms Joan Burton, accused the Government of granting massive tax incentives to the consortium of private companies involved.

She said the net construction costs incurred by the firms in the PPP deal would be deductible from the amount of corporation tax owed, offering them an estimated minimum saving of €25 million. Ms Burton claimed this tax write-off was a secret deal between the public private partners on the motorway, which had been approved by the Revenue Commissioners.

While the Revenue Commissioners denied any such secret tax concessions, the exact financing of the motorway remains unclear. And it's this lack of clarity that economists believe is the biggest obstacle in assessing PPP's true merits and benefits to the tax-payer.

Dr Sean Barrett, an economist with Trinity College in Dublin, said if Ms Burton's allegations were true, then the corporate tax concessions amounted to a "State hand-out for the private companies".

He said: "The costs on this project are not clear and it looks like the construction industry is avoiding all the risks at the expense of the tax-payer. What we have to do in this country," he added, "is privatise the private sector."

According to the National Roads Authority (NRA), the organisation charged with overseeing the maintenance and development of the State's roads, the total cost of the Kilcock-Kinnegad motorway is estimated at €500 million. This amount excludes land costs, which some commentators have speculated will drain another €100 million from the Exchequer's purse.

The NRA refuses to disclose the exact amount of money Eurolink, the private consortium made up of Irish firm SIAC and Cintra Concesiones of Spain, will pay in the deal but it's understood to be €330 million.

To help recoup the construction and annual maintenance costs on the 39 km stretch of motorway through the midlands, Eurolink will collect tolls from the road users for up to 30 years.

The Kilcock-Kinnegad motorway is the first PPP road to be built in the State and it's expected to reduce journey times from Dublin to Galway by about half an hour.

However, the accusation of tax concessions on top of toll charges is fuelling the arguments of those who oppose using PPP on such large-scale projects.

PPP deals are advertised by the Department of Finance as allowing the public and private sectors to achieve what each does best. In the case of the public sector, the massive costs of numerous infrastructure projects can be met at a fraction of the total price without having to resort to Government borrowing, as was the practice in the past.

Risk allocation is transferred to the private sector because its 'bottom line' economics will ensure projects are completed quickly and more efficiently than if the State was the sole financier.

But Prof John FitzGerald, an economist with the Economic and Social Research Institute (ESRI), claims large-scale infrastructure requirements such as roads are not necessarily suitable to the PPP model.

He argues that the cost of raising money for the Government is far cheaper than for the private sector because it is less likely to default on a loan. "The public sector is good at financing but not good at delivering on projects," he said.

And while contracting out the construction of a road may offer a simple solution to this problem, entering into complex PPP deals that generally run for over 20 years with the maintenance and servicing of the road, exposes the Exchequer to a long horizon of unpredictable risk.

It also, Prof FitzGerald believes, builds into contracts the higher interest rate charges for the private sector as well as more demanding private company margins on investment funds.

Prof FitzGerald maintains: "Each PPP project must be determined on the basis that it can provide the goods and services at the minimum price. Contracts in PPP deals are expensive and the private sector must pay more for its investments. So if the Government is going to use this method, it must show the relative beneficial costs over more traditional models of direct contracting.

"In the case of road infrastructure, I think it's better to raise taxes for these projects because ultimately the consumer will have to pay through charges such as tolling."

Critical details of PPP deals, such as the margins on investment return and the exact scale of committed private sector revenue, are not revealed to the public on the grounds of "commercial sensitivity", according to the PPP unit in the Department of Finance.

However, many economists view this as deliberate State obfuscation and argue the Government's failure to publish project appraisals of PPPs shows a lack of transparency.

Dr Eoin Reeves, an economist with the University of Limerick, says: "So far there hasn't been any transparency shown in the PPP deals and without this we can't establish the comparable costs with traditional procurement methods."

Dr Barrett goes even further and claims the Government doesn't want to reveal the full costs of a project because of the embarrassment it would bring to the procuring departments.

He believes the policy guiding many PPP projects is "political rather than economical".

"It's clear that there is no private sector risk in these deals. Once the Government retracts its funding, as it did with the Bertie Bowl, private companies just aren't interested," Dr Barrett says.

Related links: www.ppp.gov.ie