PPPs are all about value for money

Comment: Public-Private Partnerships (PPPs) now feature in the budgetary arithmetic, with the Minister for Finance, Mr McCreevey, expecting a €150 million private finance contribution to the National Roads Authority capital estimate in 2004, writes Reg McCabe.

But there are strong indications that the public sector sceptics are currently in the ascendant.

As the outcome of the debate will have important implications for the future financing and delivery of key infrastructure, I will outline some of the key points at issue.

First, there is a mistaken view abroad that the EU requires PPP expenditure to be regarded as "borrowing". The confusion on this point is perhaps understandable, as the rules are complex and somewhat ambiguous.

What is at issue here is the treatment of PPPs for purposes of the General Government Deficit (GGD). As Mr Michael Tutty, European Investment Bank vice-president, indicated at a recent Public Affairs Ireland conference, case by case decisions are being taken by Eurostat, with retrospective effect. Policy, therefore, is evolving and the general principles will only emerge as precedents become established.

It is clear that the degree of transfer of project risks and rewards is a key criterion, particularly where user charges are absent or where a revenue subsidy is provided by the State.

Mr Tutty outlined the following as key criteria in determining the risk/reward balance:

1. Who is responsible for maintenance and insurance?

2. Who repays the finance in the event of early termination?

3. Who determines the nature of the asset?

4. Who bears the demand risk?

5. How significant are third-party revenues?

6. Are State payments impacted by quality of service delivered?

7. To what extent is the operator indemnified by the State for cost increases?

8. Who bears residual value risk?

Taking all these factors into account, we can conclude that even projects entailing a zero level of user charging could be "off balance sheet" for Government accounting purposes.

Ultimately, it all depends on how the contract is structured.

This approach is at odds with a narrower and more simplistic view that has captured the attention of Mr McCreevy.

Speaking at the same conference, he suggested that, as only revenue PPPs could be regarded as "off balance sheet", the PPP programme should concentrate on this form of arrangement. This view was greeted with dismay in the private sector, as it represents a significant shift in Government policy.

It would seem that the State is effectively closing off any consideration of "availability-based" schemes - where the operator is remunerated by the procuring authority on the basis of service performance - as a means of achieving value for money.

Normally, such a contract would incentivise the operator to boost service levels and reduce operating costs.

Availability-based schemes already feature in the Irish PPP programme, particularly in the education sector, where Jarvis operates five secondary schools on behalf of the Department of Education and Science.

Similar schemes are in planning in the health sector, with the Department of Health and Children contemplating the establishment of a series of PPP Community Nursing Units in the southern and eastern regional health board areas.

It is significant that availability-based schemes provide almost the entire basis for the UK's PPP programme where, under the Private Finance Initiative (PFI), more than £20 billion sterling (€28.5 billion) has been invested in schools, acute hospitals, prisons, defence, office accommodation and other sectors.

Interestingly, figures indicate that more than 30 per cent of these projects are "off-balance sheet" Clearly people are swayed more by evidence than by assertion.

The evidence of value for money in PPP is admittedly scant in the Republic. With only a handful of PPP deals in the market, a full formal assessment would be premature at this stage.

However, the National Roads Authority has been unequivocal in stating that the first roads PPP contract to be awarded (Kilcock-Kinnegad motorway) represents excellent value for money for the taxpayer, when compared with more traditional approaches to procurement.

Extensive hard evidence of value for money in PPP has been provided by a number of assessments of the UK PFI programme, which has been in operation for more than 10 years. The most significant endorsement came from an extensive evaluation from the National Audit Office, the British equivalent of the Comptroller and Auditor General.

In addition, research by HM Treasury showed 88 per cent of PFI projects came in on time or early, and with no cost overruns on construction borne by the public sector, compared to previous research that showed 70 per cent of non-PFI projects were delivered late and 73 per cent ran over budget.

The current debate on "off balance sheet" financing misses the point - this was never the prime objective for PPP - it's all about value for money.

Government can achieve better value for money and on time delivery of projects by seeking an optimum balance of risk and reward between the public and private sectors.

In the absence of a significant State commitment to availability-based schemes, Ireland's PPP programme faces a very uncertain future.

Ministers and officials need to be persuaded of the merits of a dual-track approach, where private sector expertise in facilities management is backed by a commitment of private finance and promoters' capital - and that's the REAL PPP.

Reg McCabe is director of IBEC's PPP Council.