Tuesday, 13 February 2007
National Development Finance Agency (Amendment) Bill 2006 [Seanad]: Second Stage (Resumed)
I thank Deputies for their welcome for the legislation and their contribution to the debate. As I said in my opening speech, this is amending legislation with a clear focus. Its purpose is to extend the functions of the National Development Finance Agency in order to allow it to undertake the procurement and delivery stage of public private partnership projects and to provide for connected matters. This is to build on the skills and capacity essential for successful public private partnership procurement.
In my opening speech I addressed a number of the broad range of issues raised in Deputies' contributions relating to capital investment, public private partnerships generally and the national development plan. In my response to the debate I will, therefore, concentrate on the issues raised on the subject matter of the Bill. However, I would like to recap on the overall strategy reflected in the approach taken in the Bill, which was raised in some of the contributions to the debate, before addressing some of the individual points made. The context for the Bill is the Government decision in 2005 to establish a centre of expertise to undertake the procurement phase of public private partnership projects funded by a stream of annual payments from the Votes of Departments and agencies. That decision does not apply in cases where specialised agencies already exist to undertake the procurement of public private partnership projects, such as the National Roads Authority and the Railway Procurement Agency. As Deputies are aware transport represents a major investment area under the national development plan.
Accountability for individual projects and the role of the Department of Finance was a theme that arose in the debate. Departments and agencies operate under a system of delegated sanction for capital expenditure. Responsibility for individual projects rests with the Minister concerned. The choice of projects to be procured by means of a public private partnership is a matter for the individual Ministers concerned. Even in the case of projects referred to the centre of expertise for procurement, the project sponsor remains responsible for all aspects of the assessment and evaluation of projects, including the decision to procure by means of a public private partnership. After the project parameters are set the project is handed over to the centre of expertise in the National Development Finance Agency. The centre is then responsible and accountable for the procurement of the project to turnkey stage within the parameters set by the sponsoring Department or agency.
Much of the debate concerned broad Government policy on capital investment including public private partnerships. A number of issues raised are appropriate to guidelines rather than particular to the Bill before the House. It was suggested the role of my Department should go beyond issuing guidelines. The Department of Finance sets the broad framework for capital investment and also sets out the principles that should be applied to capital appraisal, project management and evaluation. Sponsoring Departments and agencies are and should be accountable for projects. On a number of occasions, I have outlined the architecture being introduced under which management in Departments must take an active role in overseeing compliance with the relevant guidelines.
A specific requirement of PPP projects is the appointment of a process auditor behalf of the Accounting Officer whose role is to check on compliance with the proper procedures and processes for all projects over €20 million. More generally, for all capital investment, including PPPs, there is a requirement on Departments to put in place a system of spot checks for compliance with the value for money frameworks and to report annually on the findings of these spot checks to my Department.
I have recently established the central expenditure evaluation unit in my Department which will review these spot check reports from Departments and will directly undertake a series of spot checks of individual capital projects.
Deputies mentioned their concerns about the need for public scrutiny of PPP deals. Public private partnerships are complex and, in addition, the Comptroller and Auditor General noted that ultimately the full value for money of these projects can only be judged over the lifetime of the project. We need to address the challenges of the complexity of PPP procurement on a variety of levels. First, the Government wants to see specialised skills and expertise applied at the up-front stage of deals. Second, the basic principles of clear accountability for decisions and robust project management must be applied throughout the project. Third, reliance has to be placed on the institutional structures, including the facility for the National Development Finance Agency, to provide expert financial advice to State authorities on the financial components of bids and on the general requirements for assessing value for money set out in guidance. There are constraints on making commercially sensitive information public. The need for the private sector to protect commercially sensitive material is recognised in a number of legal contexts such as the Freedom of Information legislation.
There are also practical considerations for State authorities in protecting their negotiating position in further contracts and maintaining competitive tension in bidding situations. It should be borne in mind overall that the National Development Finance Agency and the Comptroller and Auditor General have been provided with access to the financial components of deals.
It has been observed that the PPP route can be slower at the up-front stage. I have said on several occasions that typically it will take at least 18 months to two years to reach construction stage in a PPP project but overall delivery times for projects have been impressive, for example, in the five schools projects and in the roads area. Once the lines are cleared, accelerated delivery is a real prospect but PPP projects are not immune to the factors that can cause delay in any large capital project.
Deputy Bruton mentioned the need to build confidence in public private partnerships and in the ability of the public sector to manage them. We are much further along that road than when the public private partnership programme was launched in 1999. A major suite of guidance specific to the PPP process has been put in place by my Department and is fully up to date. The Comptroller and Auditor General acknowledged in the value for money study of the five schools in 2004 that even then lessons learned from the early projects had been incorporated into the guidance. This process has continued.
Where expert agencies are put in place to procure and negotiate projects, I expect the practitioners to apply lessons learned, project on project. In providing procurement powers to the centre of expertise the Bill provides a further measure to strengthen the capacity of the public sector to manage public private partnerships.
I turn to some of the specific points raised by Deputies. A number of the general concerns addressed earlier were raised by Deputy Bruton. He asked about the use of special purpose companies for financing purposes under the principal Act. I am advised that there has been no need to draw on the agency's financing functions for those projects referred to the agency to date. However, preparatory work has been taken by the agency to facilitate the exercise of financing functions should the need arise.
The provision under the principal Act that the chairperson and chief executive officer of the agency when appearing before committees of the House cannot comment on the merits or otherwise of Government policy is a common legislative provision. As the Deputy is aware it also applies to civil servants when they appear before Oireachtas committees. The National Development Finance Agency reports directly to me. I assure the Deputy I will take note if the agency should express any general concerns about the public private partnership process in that context.
Deputy Burton commented on the time that has elapsed between the announcement of the centre of expertise in July 2005 and the legislation. The Government noted from the outset that the new functions would commence on an interim non-statutory basis and that the necessary legislation would be introduced in due course. Statutory provision is urgent to allow the National Development Finance Agency to sign contracts in the education area in the coming months. The Bill passed all Stages in the Seanad last November.
Deputy Burton mentioned the need to justify the extra cost of private finance. One of the drivers behind setting up the National Development Finance Agency in the first place was to have access to advice as to whether the use of private finance is justified for particular projects. That is an important point. What we learned from that was the need to move beyond an advisory role for the National Development Finance Agency in the context of PPPs and given that there was not a uniform level of expertise within Departments as to how one would proceed, should a PPP be deemed appropriate by the Minister, that we should try to bring together all that expertise in a centre of expertise under the National Development Finance Agency. Heretofore the agency simply had an advisory role as to how one would proceed in terms of the best financial arrangement or instrument that should be used to get best value for money for the taxpayer.
Deputy Burton asked me to clarify the role of the central public private partnership unit in my Department. The role of that unit, to which six staff are assigned, is to facilitate the public private partnership process centrally by developing the general policy framework including, where necessary, the legal framework, within which public private partnerships operate and by providing central policy guidance to Departments and other State authorities in that context. That is an important development and a practical response by us to ensure the PPP process works effectively given that not every Department would necessarily have acquired the level of expertise necessary should a PPP project be deemed appropriate within a Department. Putting that expertise together and allowing the Department of Finance to have a co-ordinating role in terms of the guidance that should apply and how one should proceed with a project and move it to the NDFA, as a delivery agency, provides the right balance, which this amending legislation seeks to achieve, between accumulating the necessary level of expertise within the one area and maintaining accountability by sponsoring Departments and Ministers for their decisions in proceeding along a PPP route. This ensures there is no break in the accountability mechanism at the expense of efficiency and vice versa.
The role of the unit is to facilitate the PPP process by developing the general policy framework. It also provides the secretariat to the interdepartmental group on PPPs and the informal advisory group on public private partnerships at which relevant social partners are represented along with Departments and agencies. The evolution of how PPPs should be dealt with has arisen as a result of that social partnership process. I have arranged for an increase in the number of directors who will be part of the National Development Finance Agency, including trade union membership, to ensure the social partnership ethos is maintained as we try to develop PPPs and that we do not do anything that would be opposed to the ethos the public private partnership has engendered. My Department has the same role in respect of PPP projects as it does in capital investment projects generally in terms of setting the overall capital investment framework and the basic principles to be observed for appraisal, assessment, procurement and evaluation of projects. This is also an important point.
The Department of Finance has a co-ordinating role. I do not seek to micromanage line Departments or Ministers in respect of the projects for which they have responsibility, be they in education, health or environment. The line Minister is the person who makes the decision with the advice of his or her civil servants as to how they should proceed. Once they go the PPP route, rather than trying to develop expertise within every line Department, it is best to transfer it to an implementing agency where, as Deputy Connaughton rightly said, there is the ability under the structure of the National Treasury Management Agency-National Development Finance Agency, NTMA-NDFA, process to buy in and obtain that expertise in a more flexible manner than might be available by traditional public sector recruitment methods and to ensure we have that level playing pitch in terms of expertise and the bidding tension that is necessary to get the best value for money.
The point made by Deputy Connaughton is a fair one. From 2000 to 2006, the lesson we have learned in the last national development plan is that, to be frank, we did not have developments plans up to then. We had maintenance programmes because no Government had the resources to be ambitious enough to develop capital programmes to the extent that we are now in a position to do. For example, under the present development plan that was recently announced, more than €100 billion in capital investment is envisaged over that six or seven-year period. Up to €25 billion per year will be invested in terms of developing the productive capacity of the economy which is necessary to meet the historical deficits that have built up over the years through no fault of any Government but simply as a matter of resources being available or unavailable, as the case may be.
We now recognise that the PPP idea or concept can be part of this. It does not in any way supersede traditional capital investment processes. In fact, the PPPs are part of this and, thus far, we have been unable to exploit its potential sufficiently. At least through this amending legislation, we are putting in place a structure which best equips us to identify those projects that could be done by a PPP process. In this way the Oireachtas could be satisfied that the necessary accountability mechanisms in terms of line Ministers and the necessary expertise being available through the NDFA centre of expertise can enable us with confidence to see the PPP process develops using taxpayers' money to best effect.
Deputy Catherine Murphy outlined reservations about toll roads. Obviously, there has been some controversy about this in respect of some bypasses in the Deputy's constituency or in Cork. Individual projects in this area are a matter for the Minister for Transport and the National Roads Authority. However, it must be said that the PPP roads programme has been impressive in its delivery. It has been on or ahead of time and on budget and I do not think it is really contested by anybody, given the roll-out we are seeing, that the NRA will be able to provide us with the full national motorway programme by 2010, as envisaged.
As was said earlier, there was a hope that we might be able to get this done by 2006. The process has been a learning curve for everybody in this respect. It is clear that land acquisition costs were far higher than anticipated. We saw subsequent deals with farmer organisations to deal with that matter within the social partnership context. Construction inflation in the early years of the programme from 2000 to 2002 was significant, of the order of 12% in the first year and 9% in the second year. Thankfully, due to the expertise that has been built into the NRA and the fact that there are international consortia in the construction industry partnering Irish firms in respect of many of these major road projects, not just national companies with expertise, construction inflation in the last few years of the outgoing plan was 3% to 4% per annum, which is very much in line with normal inflationary costs. There has been a growing confidence that the NRA and the RPA have developed the necessary ability to negotiate and create a competitive situation whereby people who have acquired expertise in this area have come to our shores and are partnered with existing indigenous building construction companies to do a job of which we can all be proud.
My Department and the public administration generally are now far more acquainted with the full impact costs of these major proposals. There has been far more heat than light in our debates regarding the fact that at the end of the day, the cost of the job is not what we might have thought it was in 2000. The cost of any job is the best tender price available on the day on which we sought the job to be done. The real litmus test is not about making political points about an original concept which will subsequently have developed into a much bigger job of far greater complexity. We are undermining confidence in our own system by suggesting that we so far out of line with project costs that it borders on incompetence. That is not the case.
When one analyses the situation, one finds there have been considerable developments from the concept price of a particular project to the detailed design which, in many cases, subsequently expanded. The port tunnel and the Luas system are examples. I recall when I was Minister for Transport that it was suggested in 1992 that one could build the Luas system for €250 million. I do not know if one could ever have done it for €250 million but there was certainly no tender price whereby it could be done for €250 million. It was done for the price it was done for, although there might have been a slight overrun which was not of great measure. Our electors are entitled to know that, as a result of the learning curve having improved and the gaining of experience from the early years, these large projects are being completed on time and within budget, based on the tender price at the time.
I will bring this down to the ordinary person's language. I built a house 12 years ago for a price for which I would be unable to build it now. It is a normal house, but the point I am making in order to make the situation understandable to everyone is that we all know the price of building the same house now would be far higher. Some 12 years ago, it was a certain price but were I to build it now, it would be a different price. The idea that we are in some way lax or incompetent for not being able to complete a project for a 1992 figure is nonsense.
We must acknowledge that the learning curve has been steep but that our implementing agencies are delivering and the PPPs, through the centre of expertise idea, are delivering and will continue to do so. Deputy Fleming was very fair and accurate in terms of his contribution as Chairman of the Oireachtas Joint Committee on Finance and the Public Service to outline precisely the Comptroller and Auditor General's attitude to the pilot schools initiative. A rather exaggerated negative view was taken of this report until Deputy Fleming put it in its proper context. We can now look forward to PPPs in the education area making a contribution, which means that many projects will come on stream more quickly than was the case with the traditional procurement method for reasons of which Deputies of all persuasions will be aware in terms of the stages it goes through, the number of these stages and the level of delay involved. It is far better to try to get expertise up front——
It is much better to deal with the design issues up front before the private sector develops the project and, as Deputy Fleming said, takes on the responsibility of the operational costs over the lifetime of the project. Risk transfer is an important criterion in deciding whether a project is appropriate for a PPP so that we do not take all the risk up front. If there are possibilities through contractual arrangements to spread the risk, it is clearly in the interest of the taxpayer to do so.
I acknowledge Deputy Boyle's call for a debate on PPPs. The Bill is amending legislation and the basic legislative framework for using PPPs was put in place by the Oireachtas in the State Authorities (Public Private Partnership Arrangements) Act 2002 and the National Development Finance Agency Act 2002. The use of such partnerships was supported by the social partners in the national framework agreement on PPPs in 2001.
I thank all those who contributed to the debate for the many interesting points they made and for their support for the legislation. It is the right way forward and I look forward to their ongoing support during the passage of the Bill.