Infrastructural deficit threatens expansion

Private sector investment in public infrastructure will need to be explored if continued growth in the economy is to avoid being choked by congestion and bottlenecks, according to industry representatives.

Despite the recent convergence of average incomes towards EU levels, Ireland continues to exhibit a chronic infrastructural deficit, estimated by IBEC to require investment of around £14 billion. This situation is in danger of worsening with the drying up of EU subsidies and the Stability Pact restrictions on Government spending.

The sourcing of private finance for public infrastructure has been used in other EU member states, not just in the construction of roads, but also to build hospitals, and educational facilities, as well as waste and water treatment plants. PPPs (private public partnerships) may be the key to ameliorating Ireland's overburdened infrastructure. Under these, the private sector may undertake to put up the money, build the project and operate it for a set number of years under a contract with the Government.

Mr Peter Brennan, of IBEC, says there is no shortage of funds available in the private sector for PPPs. The only problem is on a Governmental level, where there exists a bottleneck in planning and project identification.

He says the entire network of roads planned for Dublin could be funded and built by the private sector, allowing the government to redirect funds elsewhere. He disavows any talk of privatisation and says ownership is not an issue, all projects would eventually lapse back into state hands after an agreed period.

A recent report on PPPs commissioned by the Department of Finance recommended that such projects could make a limited and targeted contribution to the provision of public infrastructure. The report cited two areas in the Irish economy where such schemes might be particularly beneficial.

First, with the demand for technical labour far exceeding supply, PPP projects could be used in the refurbishment and extension of institutes of technology, formerly RTCs. Second, PPPs could be used to combat Ireland's poor road network.

Indeed, this area may be excluded from further EU structural funds under present Government plans for regionalisation.

In general terms, PPPs can exist as financially free standing where the private sector supplier designs, builds, finances and operates a project, recovering it costs through direct charges on private users.

An example of this would be the East-link and West-link bridges in Dublin where a steady stream of remuneration by way of tolls on private users acts as a return on the original investment. In the case of educational or hospital facilities, the services would be sold exclusively to the public sector who would purchase them through regular payments.

Alternatively, joint venture projects or hybrid models are where the costs are not met entirely through charges on end users but are subsidised from public funds. Mr Liam Hennesy, of Farrell Grant Sparks, says this approach may be more suitable to Ireland. He cites the example of some regional roads where tolling alone would not be sufficient to remunerate a free standing private sector investment.

Equally, the healthy state of Exchequer finances, the possibility of more EU subsidies and the option of soft loans from the European Investment Bank make joint venture or hybrid projects clearly better suited to the Irish economy. However, he emphasises there is no need for a purest approach to PPPs, each venture must be looked at on a case specific basis.

One of the main advantages of PPPs is the freeing up of public funds for projects unsuitable for the private sector to finance. Equally, PPPs alleviate the entire burden of risk falling on the public sector, instead spreading an optimum risk allocation between both public and private interests.

Theorists suggest that with PPPs there is an emphasis away from the possession of assets in favour of the actual quality of service being provided. PPPs can harness the efficiencies of both the private and the public sectors, achieving a better result than would have been obtained if each acted separately. On the downside, annual payments by the Exchequer to PPP operators may impact on future budgetary flexibility.

A more divisive issue may be the transfer of public employment into private sector hands. Under certain PPP schemes the maintenance and catering in public sector facilities would be run by the private operator. At present, these areas would normally be under the aegis of the public sector services industry.

A spokesperson for the Irish Congress of Trade Unions said that this particular issue had not yet arisen in Ireland but a keen eye would kept on any particular threat to public sector employment.