Road body runs out of funds at the right time

BUSINESS OPINION: The news that the National Roads Authority is being starved of money for new projects is perhaps not as much of a surprise as it first appears, writes John McManus.

After all, the Minister for Finance was dropping hints to this effect in the run-up to the Budget, but presumably nobody took him seriously.

What is more surprising is that in this - an election year after all - the Government seems to be making no effort to hide the fact. Instead of resorting to the sort of obfuscation that one might expect on such an embarrassing point, the Department of the Environment has come out with its hands up. It would be nice to think this is just the Department of the Environment demonstrating the sort of transparency that we want, but seldom get, from our public bodies. Another possibility is - perish the thought - that the Government has an agenda which benefits from the revelation that the €6 billion (£4.73 billion) National Roads Programme has run out of puff.

One policy that stands to gain from the current situation is the Public-Private Partnership initiative. PPPs were always meant to play an important part in the €50 billion National Development Plan, but with few exceptions the major infrastructure projects that have actually got under way - such as the Dublin Port Tunnel or Luas - have been funded directly from the public purse.

One of the main reasons for the delay has been that the Government has been engaged in a fairly protracted evaluation of PPPs as required under the terms of the Programme for Prosperity and Fairness - the reason being the lukewarm attitude of the unions. It has only now got around to introducing the legislation required to allow State bodies such as the National Roads Authority enter into PPPs. The State Authorities (Public Private Partnership Arrangements ) Act 2001 is at the committee stage and the intention is for it to be passed into law in the current session of the Oireachtas.

The Government was correct to proceed cautiously down the PPP road because the case for them is far from absolute, and in recent times has become less clear cut. The basic argument for PPPs is that public sector projects can be delivered with private sector efficiency, and at lower cost.

The issue was examined in some depth by the Commission on Public-Private Partnerships, which looked at the British experience and published its report last summer. The Commission is dismissive of the lower cost argument but gives some support to the case that PPPs are more efficient and deliver better value for money.

PPPs are not any cheaper - in the long term - than directly funded projects, because any savings that might be achieved through private sector efficiency are counterbalanced by the cheaper cost of borrowing incurred by the State. The assumption here is that the Government will always be able to borrow at a lower rate - through the issue of debt - than private companies or public-private hybrids.

Further and more difficult-to-follow arguments can be made to the effect that, ultimately, the money to pay for the projects comes from the public sector - regardless of whether they are directly funded or built under PPP. As a result, the burden on the State is the same.

The Commission on Public-Private Partnerships takes the view that PPPs have a useful role to play, but should not be seen as "privatisation by stealth". It argues that "the extra costs of private finance have to be outweighed by the benefits resulting from the skills and risk-transfer that come in working in partnership with the private sector". The problem then becomes one of defining what these benefits are and measuring their delivery.

The passing by the Oireachtas of the enabling legislation for PPPs will generate some debate - but not in the Dáil, one fears - as will the awarding of the first large PPP contracts. The main focus for opposition will be the unions which have expressed doubts about PPP in the past, particularly where it is used as a substitute for State investment, rather than as an addition. It was the unions' concerns on the issue that led to the inclusion of a review of the issue in the terms of the Programme for Prosperity and Fairness. IMPACT and SIPTU both objected to the Government's plans for a PPP approach to developing Dublin's water supply last year.

There is no doubt that the issue could do with some further examination. The Republic currently has one of the lowest debt to Gross Domestic Product ratios in Europe. There are very few economists who would object to a limited increase in borrowing to fund specific infrastructure projects - many indeed expected to see a move in this direction in last December's Budget.

Instead, the Minister for Finance dogmatically avoided borrowing and it would now appear that PPP will be expected to meet the growing funding deficit in the National Development Plan.

One of the main attractions to Government of PPP is that the borrowing involved is effectively off the Government balance sheet. But when you take into account the Commission on Public-Private Partnerships's conclusion that the drain on public finances is the same, it begins to look less and less like a clever move and more like a conjuring trick.

However, any backlash that might emerge against PPPs at this late stage is likely to be easier for the Government to ride out in the absence of any realistic alternative.

This is exactly the situation that the Government seems to have engineered with the National Road Programme, but it is hard to know if it really is that clever.