Seanad debates

Wednesday, 17 November 2004

Public Private Partnerships: Statements.

 

11:00 am

Tom Parlon (Laois-Offaly, Progressive Democrats)

I welcome this opportunity to reiterate my personal commitment and that of the Government to the public private partnership model as a procurement option. This debate is timely given that the Government approved a programme of pilot PPP projects in 1999, a number of which have a now been completed. We are building on the experience to date in the context of the Government's commitment to invest significantly in public infrastructure in the years ahead.

While the private sector has often undertaken work with the public sector, PPPs are a new form of partnership, which focus on a whole life and integrated approach to the procurement of large-scale public assets or services which would otherwise have been provided by the public sector. A national framework agreement on PPPs was agreed in 2001 between the public sector, including the main Departments and agencies engaged in the PPP programme, and the relevant social partners — IBEC, ICTU and the ClF. PPPs were defined as an arrangement between the public and private sectors with clear agreement on shared objectives for the delivery of public infrastructure and-or public services by the private sector that would otherwise have been provided through traditional public sector procurement.

PPPs in Ireland take a number of forms, such as design, build, operate and finance, DBOF, or design, build and operate, DBO. Under the DBOF model, the private sector generally constructs and makes available the asset or service before any public money changes hands and the State then remunerates the private sector — subject to satisfactory performance — for the costs incurred in the design, build, operation, maintenance or financing of the asset. The payment mechanism is regular unitary payments to the PPP company over the term of the contract, typically a period of up to 25 years. The payments may be suspended for non-performance.

In the case of PPPs funded by user charges — such as toll roads — the arrangements are different. In these cases, a concession is given to the private sector to levy an agreed charge on the public for the use of the asset for the period of the concession, typically for periods up to 30 years. Such PPPs are self-financing to the extent that they are funded by user charges.

We have invested time in developing the PPP procurement model in Ireland because the PPP approach in appropriate projects offers the potential for the timely delivery of a project and value for money. The early pilot projects in the education area, a bundle of five secondary schools and a third level facility, the National Maritime College in Cork, were each procured and built within three and a half years — an impressive delivery time overall. Of course, there were other aspects to the schools project, to which I will return.

PPPs have also been successfully rolled out in the roads and local authority areas and have made good progress. However, there are new technical and policy issues raised by this new complex procurement approach. We are doing our best to learn by doing. The disciplined thinking required of both public and private sector in entering into this model has crystallised a number of factors which are of benefit to the procurement process generally, especially the importance of being clear about output specifications up-front and looking at the whole-life costs. The potential of the PPP model as a procurement tool to contribute to addressing Ireland's infrastructural needs was recognised in the multi-annual capital investment framework announced in the 2004 budget. The framework, also known as the multi-annual capital envelopes, was broken down into estimates for capital investment, including PPPs funded by unitary charges from departmental votes, in addition to those funded other than by the Exchequer. The capital provisions will be reviewed in each budget in the light of priorities and the prevailing economic and budgetary situation.

There is an emerging issue in regard to the short-term outlook under the envelopes. Based on the latest information available from Departments in respect of PPPs funded by unitary payments, there may be a shortfall in PPP projects at construction stage in 2005 relative to the Estimates announced in 2004. There are a number of reasons for this including the lead time of 18 months to two years involved in bringing PPP projects to construction. A new multi-annual capital envelope for the period 2005-09 will be announced on budget day and new capital envelopes will take account of the PPP shortfall in 2005, overall investment priorities and the wider expenditure and budgetary position. This is all part of the learning process and will be built upon to ensure that PPPs continue to play their part in helping to meet Ireland's infrastructure needs in the years ahead.

Senators will he aware that the Comptroller and Auditor General recently published a value for money study of the bundled schools project, which was the first pilot completed on a design, build, operate, finance basis, without user charges. This is a helpful report which will assist the development of PPPs into the future.

Among his conclusions the Comptroller and Auditor General indicated that the cost of the final PPP deal on the schools was likely to prove 8% to 13% higher than the projected cost of procuring and running the schools using the conventional approach. I stress that this relates to the Comptroller and Auditor General's assessment of the position up to financial close and not over the whole life of the project. The Minister for Finance has noted the Comptroller and Auditor General's conclusions as regards the value for money outcomes of the project to date. He also notes the observation by the Comptroller and Auditor General that ultimately, the full value for money represented by the group schools project will be determined over the 25-year cycle of the scheme, as well as his recommendation that the bundled schools be compared after five years against a comparable group of schools traditionally procured.

The Comptroller and Auditor General acknowledged that the schools pilot protect was a learning exercise and lessons learned in the education, transport and environment sectors, including the bundled schools project, have been incorporated into guidelines issued by the central PPP unit of the Department of Finance, for use by Departments and agencies. This is an ongoing process.

Moving to the roads area, the Kilcock-Kinnegad contract has received international awards which cited the level of risk transfer achieved by the public sector. The PPP guidelines are designed to help ensure that the best value for money solution is used in each instance. The Department of Finance issued guidelines on the procedures for the assessment, approval, audit and procurement of PPP projects in July 2003. These set out checks and balances to be applied in PPP procurement to achieve value for money. Two significant aspects, which draw on our experience to date, include the early setting of a clear budget for a project and the appointment of a process auditor in large projects to ensure that all required regulatory and administrative steps have been taken prior to contract signing. More detailed guidance is in the process of development and will be issued in the weeks and months ahead.

In general, PPP procurement has the potential to offer better value for money through the allocation of risk to the party that can manage it best; performance based payments; capturing private sector innovation; commercial and management expertise by involving the private sector more centrally in the provision of assets and services; use of long-term contracts whereby bidders and Departments and agencies focus on the whole lifecycle cost of projects and not just on the up-front capital costs, which can lead to more innovative designs with lower life-cycle costs and improved maintenance and operational standards; and fast project delivery.

Two key Bills were enacted in 2002 to facilitate the PPP process. The State Authorities (Public Private Partnerships) Act 2002 clarified the powers of State authorities to use PPPs and ensures they have the power to undertake such projects as well as joint ventures. The National Development Finance Agency Act, enacted at the end of 2002, established the National Development Finance Agency to advise Departments and State agencies on the optimal means for financing public investment projects in order to achieve value for money and to advise on all aspects of financing PPPs. The National Development Finance Agency was established on 1 January 2003.

Public private partnership activity in Ireland to date has involved three broad categories of project. These are public private partnerships funded by user charges such as roads projects, partnerships funded through a stream of unitary payments from individual Votes, such as educational accommodation projects, and other public private partnerships in the environment and local authority areas. Urban development and social housing projects tend to be funded primarily from local authority resources, including land swaps, and adopt the design, build and finance model. Environmental projects to provide water and waste treatment have used the design, build and operate model and, so far, have not availed of private finance.

While time does not permit me explore in great detail all sectors and projects, which are in any case matters for the Ministers concerned, I will mention some examples in which public private partnerships are delivering key infrastructure investments. I am advised that four concession contracts with user charges have been signed to date in the roads area. These are the Kilcock-Kinnegad motorway, the Dundalk bypass, the Fermoy bypass and the second Westlink bridge. Already, a number of additional roads projects are at procurement stage including the N25 Waterford city bypass, the N3 Clonee-Kells scheme, phase 2 of the Limerick southern ring road and the M50 public private partnership upgrade scheme. The two further major projects at planning stage are the N6 Oranmore-Ballinasloe east scheme and, in my own county, the N8 Portlaoise-Cullahill-Castletown project.

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