Mr. Seamus McCarthy:

Today the committee is examining the chapters on public private partnerships, PPPs, in both the 2010 and 2011 annual reports. It is also examining the financial statements of the National Development Finance Agency for 2011.

On PPPs, the National Development Finance Agency provides advice for sponsoring Departments and agencies. In addition, it is the procurement authority for PPP projects, other than those in the transport and local authority sectors. Major PPP contracts entered into during the past decade or so had, up to the end of 2011, cost the Exchequer approximately €2.3 billion and involved legally binding commitments to pay a further €4 billion. Programmes of future projects are in place in a number of sectors and these are expected to result in further substantial Exchequer commitments. As a result, it is important that there be a sound understanding of the circumstances in which PPPs can deliver good value and where it is better to avoid that method of procurement.

There is relatively little detailed information in the public domain on Irish PPPs. Financial commitment information is presented, in varying levels of detail, in the financial statements of public bodies. The main aim of the PPP chapters for a number of years has been to provide information on the overall level of Exchequer commitments arising from the major PPP contracts entered into. The chapter in the 2011 report recommends that the Department of Public Expenditure and Reform publish up-to-date listings of all major projects in place or being developed, as well as details of the Exchequer's commitments.

It also recommends that this commitment should be reported in the annual finance accounts. The Department has already responded to those recommendations, and some additional information has been published on the Department’s website. This information needs to be expanded and kept up to date. The Department has also committed to discuss with the Department of Finance how best to include the legally binding PPP financial commitments in the annual finance accounts.

In recent years a number of PPP projects in development were cancelled and some were deferred. Difficulties in securing project funding have also meant that most other projects in preparation progressed slowly. Significant expenditure has been incurred on cancelled projects. Some of this has delivered no effective benefit while some has led to the purchase of assets which may be of value in the future should projects recommence. The stimulus package announced in summer 2012 targets a number of projects that are to be delivered as PPPs. These include projects in the education, transport, health and justice sectors.

Reflecting some of the concerns that committee members raised at last week’s meeting, it may be useful to put the discussion of PPP procedures in a wider context. A number of issues arise with regard to any capital investment proposal. First, it must make economic sense to make the investment - for example, it needs to be demonstrated clearly that there is likely to be a sufficient return through use or service delivery over the full economic life of the asset. Next, where there are a number of projects competing for scarce investment funding, appraisal methodologies should ideally identify those which are likely to deliver relatively greater returns. If a project has passed both of those tests, questions then arise as to how best to finance the project and to procure and manage the assets. This is where the choice between PPP and more conventional direct investment arises. A choice also needs to be made about the optimum structure of the PPP, such as whether to include a finance element. The NDFA is responsible for assisting Departments and agencies in ensuring that analysis of those complex questions is done thoroughly and properly.

The guidelines issued by the Department of Public Expenditure and Reform make clear that a project should not proceed as a PPP unless careful appraisal shows that it delivers better value than using the conventional procurement approach and that it is affordable. In doing so, the projected cost of PPP procurement is compared with what is known as the public sector benchmark - that is, the estimated cost of delivering the project using conventional public sector procurement. I pointed out previously that very little information is in the public domain about that evaluation process for Irish projects, even where they have been up and running for a number of years. The Office of the Comptroller and Auditor General has reported on a number of these in the past, but that cannot be a substitute for routine publication of appraisal results by the sponsoring bodies. To date, I am not aware of any other reviews that have been published. The Department of Public Expenditure and Reform has expressed concerns that publication may have implications for the State’s negotiating position for future projects. In my view, publication would help improve understanding of the factors that influence obtaining value in public investment projects. There is also a case to be made that for certain projects, a set affordability limit should be made known to private sector bidders, who would be required to bid in terms of what they could deliver for a limited sum.

The Department’s guidelines also require that a post-project review should be carried out for all major public projects, and PPP projects are no exception. Specifically in the context of certain roads projects for which the outturn has been significantly more costly than projected, the 2011 chapter recommends that such evaluations be carried out once sufficient time has elapsed after completion of the project. The main purpose of such reviews is to identify whether good value has been achieved for the public investment, as well as any lessons for future public investment projects.

One of the key arguments advanced in favour of PPPs has been that they allow for the private sector partners to be innovative in the design of assets and in the way services are delivered. This freedom to be innovative is believed to be a factor in the potential for PPPs to deliver better value. Formal reviews of projects should allow for that kind of innovation to be identified and, where appropriate, to be adopted as the new standard in conventional procurement. In this way, selective use of PPPs should result in progressive development of economy and efficiency in public service investment. I must point out that, internationally, PPP projects are seen to have the potential to deliver good value if used in appropriate circumstances, but that there are significant cost risks if project scoping and allocation of risks are not optimal.