Seanad debates

Wednesday, 17 November 2004

Public Private Partnerships: Statements.

 

11:00 am

Tom Parlon (Minister of State, Department of Finance; Laois-Offaly, Progressive Democrats)
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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.

Photo of John Paul PhelanJohn Paul Phelan (Fine Gael)
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We should move to Laois.

Tom Parlon (Minister of State, Department of Finance; Laois-Offaly, Progressive Democrats)
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Almost €500 million of private finance will be invested in the national roads programme on foot of the contracts awarded to date.

A number of projects signed in the environment sector range from the small to the very large and include a cross-section of public private partnership structures. The Fatima Mansions refurbishment project in Dublin which the private sector is to design, build and finance, is under way. Operational design, build and operate contracts include the Ringsend and Wexford waste-water treatment facilities. There have been two design, build, operate and finance projects to date in the education sector. These are the bundle of five schools in Ballincollig, Clones, Dunmanway, Shannon and Tubbercurry and the National Maritime College in Haulbowline, County Cork. Furthermore, the Department of Education and Science is in negotiations to reach financial and commercial closure on the Cork School of Music project.

The slow establishment of public private partnerships in some departmental areas is due to a number of factors including skills and capacity issues. Public private partnerships are acknowledged to be complex and can entail financial arrangements extending to up to 30 years. Partnerships may require the public sector to deliver a detailed initial output specification and consider the whole-life costs of a project including operation and maintenance. The process places new demands on the public and private sectors. More effort is required up front in scoping, procuring, and negotiating projects. It is important to ensure proper evaluations and scoping of public private partnership projects through proportionate processes.

Guidelines require that the National Development Finance Agency is consulted by State authorities at a very early stage of the procurement process in all public private partnership to ensure there is maximum opportunity to avail of its expertise. State authorities must refer all major or grouped projects involving more than €20 million to the National Development Finance Agency for advice. There is also a facility to refer projects of lesser value to the agency.

The agency has the function of advising on the optimal method of financing public investment projects to achieve value for money. In certain cases, the use of private finance may not be justified and the agency has the power to fund projects itself where this represents the optimal approach. Ultimately, whether or not to pursue an approach advised by the National Development Finance Agency is a decision for the relevant Department's Accounting Officer.

As is the case with all procurement processes, public private partnership projects can experience delays. This can be seen in the case of some projects envisaged for 2005 and announced in the Estimates for 2004. It is important to note that delays can arise from factors unrelated to the public private partnership process itself. Delays may result from the complexity of procurement and the process of identification of suitable projects which place skills and capacity demands on procuring authorities. The Department of Finance is aware of these issues and works in partnership with the relevant Departments, agencies and other stakeholders to minimise the degree to which they impact negatively on progress on public private partnership projects and the public private partnership process in general. While the time required to undertake up-front preparation can be onerous, the benefits are evident in the early delivery of services. The private partner must deliver to secure payment.

Public private partnerships have a continuing role to play in addressing our infrastructural needs. The public private partnership process can be employed where it offers potential for the timely delivery of a project on a value-for-money basis involving, inter alia, optimal risk transfer to the private sector over the lifetime of a project. The steps set out in the guidelines issued by the Department of Finance are designed to achieve this objective. The central public private partnership unit continues to identify ways to streamline processes as it develops the necessary guidance on procedures to be followed.

Public private partnerships must be considered within the overall context of public investment in infrastructure and public services. Partnerships represent a procurement tool to be used alongside traditional approaches and are certainly not intended to replace other more mainstream options entirely. In appropriate areas and given the appropriate level of skills, public private partnership is a real and viable option. We have learned from our experience to date and draw on it to drive the process in light of the demands public private partnership makes on the public and private sectors if it is to achieve its potential in the Irish context.

I thank the Cathaoirleach for providing me with this opportunity to speak to the House about public private partnership. I look forward to hearing the views of Members.

Photo of John Paul PhelanJohn Paul Phelan (Fine Gael)
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I welcome the Minister of State to the House. I am in broad agreement with a great deal of what he said. I was very interested to hear him say the Cullahill bypass was in his county. At that rate, he will be in Kilkenny before too long.

Tom Parlon (Minister of State, Department of Finance; Laois-Offaly, Progressive Democrats)
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I meant my constituency.

Photo of John Paul PhelanJohn Paul Phelan (Fine Gael)
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I understood the Minister of State's meaning. As a member of Fine Gael and as a private individual, I am in broad agreement with the pursuit of public private partnerships to engage private money to complete much-needed public sector infrastructural projects. Fine Gael considers public private partnerships to have the potential to provide value for money to the State and on-time infrastructural projects to the country. While the Minister of State outlined a number of projects in his statement, Fine Gael's lack of confidence is in the transparency of the decision-making process and the potential for cosiness in the evaluation of the merits of public private partnerships on a case-by-case basis.

The Minister of State referred specifically to examples of public private partnerships in the education sector. The grouped schools project was a pilot public private partnership involving the construction and operation of five large schools, the contract for which was won by Jarvis. As the Minister of State said, the Comptroller and Auditor General reported on the project. He found that while the Department estimated the partnership would result in a saving to the State of around 6% over the traditional approach, it is likely the final deal with Jarvis will cost between 8% and 13% more than a conventional procurement operation. I found the Minister of State's response to the Comptroller and Auditor General's statement wishy washy to say the least. Given the significant overrun in place of what traditional methods would have delivered, the Minister of State's response is simply not good enough. Public private partnerships were supposed to represent the watchword for value for money in infrastructural delivery. The idea that a project adopting the partnership approach would cost 13% more than traditional methods is not what was sold to the Houses of the Oireachtas when this approach was first discussed.

The Minister of State also referred to the construction through a public private partnership of the Cork School of Music, the contract for which was also awarded to Jarvis. It has now been brought to people's attention that Jarvis is experiencing financial difficulties resulting in considerable concern about the delivery of the accommodation for the school. Can the Minister of State refer to the matter in his closing remarks? The public private partnership experience in the education sector is nothing to be very excited about.

The Minister of State also referred to ten national roads projects being implemented on a public private partnership basis. These are the Kilcock-Kinnegad motorway, the Dundalk western bypass, the Fermoy bypass, the second Westlink bridge, the N25 Waterford city bypass, the N3 Clonee-Kells scheme, phase 2 of the Limerick southern ring road the M50 upgrade scheme, the N6 Oranmore-Ballinasloe scheme and the Portlaoise-Cullahill-Castletown sections of the N7 and N8.

I am concerned at the notion of placing tolls on town bypasses. One can make a case for bypassing a completely new section of motorway which links two urban areas but the placing of a toll on a town bypass could defeat the purpose if people use the existing road structure through the town rather than the new bypass. The example I would use is the developing Waterford bypass where in the city of Waterford there is only one river crossing. While traffic is heavy at critical times during the day, the new bypass involves the construction of a second bridge further down stream. The original idea was that many from my area in south Kilkenny who work in Waterford city and travel to the industrial estates on the Cork side of the city would use the new bypass to access work. If they have to pay €3 or €4 each time to cross the new bridge I can see many using the existing road structure. It is fair enough to take those travelling from Rosslare to Cork out of the city centre and that will be a good thing. The second benefit of the proposed second river crossing will be nullified if a large toll is placed on that bridge.

We all agree that the road projects outlined are vitally important and that they need to succeed for the future economic development of the country. There are undoubtedly circumstances where a project under PPP can achieve a more market and custom orientated management of revenue combined with a more efficient design, build and operate project, harbours being a good example. However, we must be careful in the selection of such projects. The National Development Finance Agency Act offers no public policy guidelines to the proposed agency as to how these selections should be made. Projects that might superficially appear to be good candidates for PPPs may not be so. Commercial pricing will not always provide the optimal use of an asset. I mentioned town bypasses as a good example. Unless the bypass is constrained by capacity, pricing of its use will divert users back into the town centre and sacrifice the gains the project was supposed to achieve.

Pricing is a matter that is important to public policy. Low off-peak pricing may be attractive from a public policy point of view but not from a commercial operator's point of view. We must be careful as to whether the risk is genuinely being transferred to the private sector or whether the State remains the risk bearer of last resort. This is a crucial issue, which the Minister of State did not address.

If the State allows part of the money to fund a prison or a hospital, the private financier may demand control over the asset and its revenue. However, if the project fails, the private operator may well decide that the optimal course of action is to close down the operation. We are all familiar with the current situation in hospitals. It would not be acceptable if the Government were to stand over a position where a hospital or a prison built under such a scheme was allowed close. In the last analysis the Government will be the risk taker of last resort and will have to step in to undertake an expensive buy-out of the private interests.

Good public policy means one does not have to shore up the funding of a project with the implied lean on the assets for the private sector with the management of different elements of the project where there may well be private sector efficiencies to be achieved. There is the option of using management contracts for areas where private sector efficiency can be achieved. It is not clear that the new agency is to be given either the remit or the expertise to make these sophisticated project by project choices. Generally, in the public sector the problem has been poor efficiency in design, building and operation. Any or all of these elements can be contracted out. It is important that the Minister of State at the Department of Finance can give a full evaluation of the experience with public private partnerships to date.

Another issue of concern is that of charges. The Government, as we pointed out in Private Members' business on Wednesday last, in its two years has implemented 31 or 32 stealth charges, by relying on PPPs, about which I have no ideological hang-up. We must be careful that we do not simply unburden the State and shift the burden on to the service user.

Road tolls are becoming more common and while they do the job they can pose a difficulty for those who rely on them, especially those on modest incomes. It is not possible to know if this is borne in mind when the decision to run with the PPP is made because we are in the dark on the criteria used. Our call for greater transparency is not an end in itself; it seeks to ensure that criteria such as this are taken into account.

Two years ago in the Dáil, Deputy Richard Bruton, the Fine Gael spokesperson on finance, asked the former Minister for Finance, during a debate on the National Development Finance Agency Bill, a number of questions on this particular area that were not answered. I hope the Minister of State will be able to shed some light on them in his closing remarks today. Does the Minister of State believe that the school projects built by the PPP have offered good value for money and is the Department happy to stand over the figures we have seen from the Comptroller and Auditor General? What premium was deemed worth paying for the risk transfer? What are the value for money tests applied by Departments? Are potential private investors justified in complaining that the value for money hurdles are not made sufficiently clear to them to make it worth their while competing? Will the National Development Finance Agency bypass the value for money tests being applied, not least by the Department of Finance? Is there a strong flow of good projects for public private partnerships and, if not, why not?

On the question of whether enough private investment is being attracted to fund schemes designated as PPPs, clearly the answer is "No". For the first time in living memory a Minister for Finance cannot present a full Book of Estimates because he said he needs to find alternative revenue streams to fund infrastructural projects that did not attract sufficient investment. To put it bluntly the Government is losing it in the whole are of public private partnerships. Such is its lack of control. I urge the Minister of State to clear up the outstanding issues in the questions raised two years ago, which were legitimate at the time. They were not answered then but the answers are badly needed now.

12:00 pm

Photo of Martin ManserghMartin Mansergh (Fianna Fail)
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I welcome the Minister of State to the House and welcome this debate. In a general sense it could be said the entire economy is a public private partnership. There are very few private sector activities that do not receive State or EU support in some shape or form. Equally there are few State sector activities that do not involve a fair degree of interaction and co-operation with the private sector. I do not have an ideological preconception either that the private sector is inherently more efficient than the public sector or vice versa and, of course, both are equally capable of being highly inefficient.

I wish to put on record the commitments made both politically and by the social partners to the whole concept of public private partnerships. For example, the Fianna Fáil manifesto issued before the 2002 election stated that Fianna Fáil would:

Encourage PPPs where this can speed up investment, increase competition and keep down prices to the benefit of the public; where it will result in greater efficiency in the delivery of services; and where it can draw on expertise and manpower resources from home and abroad not currently available in sufficient strength.

With the help of our PD partners, this translated into An Agreed Programme for Governmentwhich stated: "We believe that new methods of financing major capital requirements are required." Reference was made to the need to maximise efficiency, delivery, value for money and appropriate risk transfer. The Government has also made reference to opening up new opportunities for private companies to invest in public infrastructure through PPP projects.

Sustaining Progress 2003-2005 also had a chapter on this subject and made reference to comprehensive framework negotiations between the Government and the social partners in terms of the provision of detailed guidance to the State in this area. In addition, the National Development Finance Agency was given an advisory and potentially financial role. In last year's budget, the Minister announced a five-year envelope and stated that public investment undertaken by the private sector would rise from 3% of total spending in 2004 to 15% by 2008. The actual figures were €150 million, plus another €150 million pertaining to PPPs funded by user charges — this essentially pertains to roads. The total was to rise to over €1 billion. Targets of €150 million for 2004 and €300 million for each year up to 2008 have been set aside for PPP projects to be financed by user charges. The areas identified were the OPW, justice, environment and local government, education, public transport and arts, sport and tourism.

There is no doubt about the Government's commitment or the social partnership commitment to the process. The necessary statutory framework has been established, as has a social partnership framework. As we know, there is a relevant unit in the Department of Finance. The framework exists but it is a question of how the process will work in practice.

The primary purpose of PPPs is to assist and accelerate infrastructural investment. In the House last week I stated that the IMF regards Ireland's major economic priority in the next few years as improving its infrastructure, not only roads and transport, but also its educational and social infrastructure.

There is one consideration that does not apply in this country to the same extent as it does in others where this model has been developed. We may have been watching very closely what happened in the UK, whose borrowing is close to the ceiling established in the Maastricht guidelines. PPPs are not needed to solve the problem of how one invests in infrastructure without breaking the Maastricht guidelines. We are operating so comfortably within those guidelines that this is not the primary consideration, especially not since EUROSTAT changed, within the past year, the rules as to how one accounts for PPP projects. Previously there was an inclination to put all the long term costs into one year's budget, which clearly made the whole process otiose. One must always consider, particularly in a country like ours which has a credit rating near the top of the scale, that the public sector can almost always borrow more cheaply than the private sector. In a sense, there must be compensating virtues.

Having spoken to colleagues in Government, I have sensed that there is a certain frustration over the fact that developments are not proceeding faster. This was reflected in the Minister of State's speech. Reading between the lines, one noted that the target for PPP take-up would not be met in this financial year. On the other hand, if we go headlong in all directions without considering matters critically, we will risk having, or will have, many more reports by the Comptroller and Auditor General criticising the costs we incur. I support the notion that we need to proceed carefully if the process is to retain credibility.

Let me touch on two or three of the areas that have been chosen for PPPs. One such area is transport, as referred to by Senator John Phelan. I thought immediately of the Drogheda town bypass, but this is way outside Drogheda, and I therefore suspect the Senator was not referring to it. Being pragmatic, I feel that the benefits of tolls on long stretches of road far outweigh the costs, and therefore I do not have a difficulty with them.

I have many more reservations about phenomena such as the Westlink toll bridge. It is in a city area and we only have to listen to AA Roadwatch every morning to know that there are queues on the approach road. If, with a magic wand, one were to remove this toll bridge or have an electronic tolling process, congestion might simply occur at some other point and the net effect might not be very different. Given the volume of traffic at the Westlink toll bridge, I hope the State is getting a reasonable take therefrom. It must be a great cash cow. I hope the moneys collected are not going entirely into private pockets.

The M7 and M8 were mentioned, as was the proposed bypass between Portlaoise and Cullahill. There is a problem regarding the connection of the M7 and M8. I am a little concerned that the National Roads Authority is lopping off bits and pieces of projects in order to get its budget to stretch further. It has done so in Cashel, to which there are no links coming from the south. I was made aware of this and went as part of a deputation to the Minister for Transport. The northern links converge at a central intersection. The southern links were in the original plans and were removed. I gather this is also happening at the point where the M7 and M8 join. The point could be made that nothing can be done about this now and that one would hold everything up but we will incur greater costs than those originally envisaged if one were to re-include the links in the plans. However, given that we are not under considerable financial constraints, the National Roads Authority should be discouraged from cutting corners on projects such as those I have mentioned.

Schools have been mentioned. A report was issued in the past year on the PFI in Britain in a supplement to Private Eye. Unfortunately the report was not dated but it has some relevance to school projects here. An audit commission report on 17 PFI projects for local authority schools was issued in the past year or so. The same firm, Jarvis, was involved in five projects here. The commission found that in every single project there was no improvement on the traditional method of procurement. In some cases the traditional method would have been preferable. The schools were not cheaper, the contracts were not completed any quicker and there was no transfer of risk.

I am not attacking PPPs, but I am underlining why there should be a certain degree of caution. We are in a learning process, therefore, we will not always do everything right in the beginning. One can learn from experience. There is no doubt that, like ten years ago, financiers were hoping there would be a massive programme of privatisation. Companies thought loose money was available from the Exchequer on easy risk-free terms for an assurance that projects would be delivered. Later, when someone else was in office it would be discovered, on counting the cost and on the question of accountability and so on that a bad deal had been made.

I am not trying to attack the PPP process, but I am underlining why it is necessary, while trying to push ahead, to have a degree of caution in order to ensure the State gets value for money. Given the significant increase in wealth and Exchequer resources in the late 1990s, there was perhaps a temptation across all sections of political opinion that, regardless of whether the method used was straightforward public procurement or PPP, we could throw money at the problem because there was plenty more from where it came. The new Minister wants to emphasise that, even though we are anxious to get things done, we must get value for money in order to justify to taxpayers how the money is spent. I have no doubt that involving the private sector can result in more efficiency, quicker delivery and so on, but it cannot be taken as axiomatic. One must examine the details and proposals in each case. There must also be competitive tendering to produce the best results.

There needs to be a balanced approach to this issue. We must accept that it is a positive innovative addition to the means of providing infrastructure compared with what we had in the past. We must also realise that there are dangers and pitfalls which must be avoided. I support the Government's commitment to PPP while also supporting the degree of caution being applied by the Department of Finance as guardians of the taxpayers.

Photo of Joe O'TooleJoe O'Toole (Independent)
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I welcome the Minister of State to the House and I am pleased time was made available to debate the issue. I asked for the debate because I wanted to kill a few myths about public private partnership. Public private partnerships as established in the UK and Northern Ireland bear no relation to public private partnerships in the Republic of Ireland. They are different arrangements. There is very little to be learned by examining the mistakes made in England. The debate on public private partnerships has been dogged by the fact that one company, Jarvis, has been involved in both jurisdictions. It ran into difficulties in the UK and people point to the difficulties here. The two issues should be kept separate, and any discussion should be informed by this fact.

The Department of Finance has been less than enthusiastic about public private partnerships. It said one thing and did very little. It has been very slow, as is always the case, to be flexible in regard to funding arrangements. The Minister of State referred earlier to the importance of new methods of financing while Senator Mansergh referred to an arrangement under the last national agreement, which supported public private partnerships. The trade union movement looked very long and hard at this and, after a long period of discussion involving the trade unions, IBEC, the Department of Finance and a few other Departments, we finally came to an agreed position on public private partnerships. These are the role models of best practice for Europe. If the UK considered what we are doing it could learn much. There are also things we can learn from our own experience.

The importance of securitisation was included in the national agreement. This is another way of raising money, which is allowed for under local authority legislation. It is a matter on which I would like to have a long discussion in the future. A crucial point, raised earlier, is that until a couple of years ago, the eurocrats took the view that public private partnerships did not transfer risk, which was completely wrong. When I tried to ascertain where they got their information, they told me it was from the Central Statistics Office. I telephoned the CSO and asked where it got the information to tell Brussels that public private partnerships did not transfer risk and, therefore, were part of Government borrowing. It said it came from the Department of Finance. This is the reality of the problem. The previous Minister, Deputy McCreevy, worked hard at the time to fight against the interpretation. This is now changed and public private partnerships are not seen as part of Government borrowing.

In his speech the Minister of State pointed out that these projects are usually design, build, finance and operate but sometimes they are simply design, build and operate. We must have learned that people who are good at building are rarely good at raising finance. In most, but not all cases, the financing of these projects should be separated. Finance should be the first part of the project and design, build and operate should be the second part. We should seek to carry out both projects outside of Government borrowing.

The Minister of State referred to the State providing finance. That is not the only option. Let us suppose a public authority wants to get involved in a project under a public private partnership. Having costed the project, it can raise funds in a number of ways, including securitisation, loans and the cheapest money it can find. It can then put out to tender the cost of building, financing and operating the project. That will make it possible to take on good contractors to do the job while getting the best value for money and the best kind of building specification. This aspect has not been explored and those involved in projects invariably raise it. In the modern world, in particular, the various methods of financing are so complex and obscure to ordinary people, including those involved in contracting jobs, that it is better to separate the two issues.

Returning to the area of education, not all public private partnership projects need to be huge. They are not all roads or bridges or colleges of music. Single primary schools could be considered for public private partnership. The reason it cannot be done at the moment is the extraordinary costs of tendering, bidding and bonding that apply to public private partnerships.

The Government is facing a major problem regarding the building programme for primary and post-primary schools in terms of the cost of the building programme and the availability of money. In every town in this country there are successful building contractors who, no matter how steeped they are in the private sector and in making profit, would like to have their name on the building of the local school and would be delighted to build it. They would do it just to achieve the associated feel-good factor. I have asked small builders about this and they have told me they would love to do it. However, they can never do it because of the early costs.

Many of the jobs that have been sent out to public tender end up being done by small local contractors who are paid by the big tenderer to do the small jobs. We could get around this. Senator Scanlon is the next speaker in this debate. He and I have discussed this issue on many occasions. We could have a situation where designs would be available as part of the specification for a school project. Then all that would be necessary would be to obtain financing and get somebody to build and operate it, meaning to maintain it for a specified number of years. I would appreciate if the Minister would set somebody to work on that in his Department. I could do it. It is not rocket science. However, there must be a political drive behind it. The Department would state what design it wanted for a school, provide a specification and make it easy for people to get bonding and arrange for financing. If that were done, smaller operators could become involved in public private partnerships, there would be greater competition, more local involvement, more local commitment and a hugely successful outcome. It would also help the Government cashflow.

Let me turn now to the role of the Comptroller and Auditor General. The Comptroller and Auditor General missed the point completely. It bothers me that this was not taken up by the Government. The Comptroller and Auditor General does a great job for all of us but, no less than a bishop, he should sometimes have to answer questions. The Minister rightly stated that the Comptroller and Auditor General examined the costs only to the point of delivery. I would like to send him down to some of the schools that were built, where the principal and the board of management do not have to worry about the maintenance of the school, where they do not have to worry about the cleaning of the school or the heating of it, where all that is done as part of the contract, where the school has a higher level of maintenance specification than any other school in the surrounding area and one finds a happy school community of management, parents, pupils and teachers and no maintenance costs for the State over a period of 20, 25 or 30 years.

I cannot believe the Comptroller and Auditor General did not factor that into his calculations. Consequently, having spent two years trying to sell the concept of the positive potential of public private partnerships, he has given out a negative message regarding them so that we are now on the back foot trying to defend the concept and must start all over again to persuade people that this is something worth doing. I am not saying every project is a good one. What I am saying is that this can save money and deliver a better project with local involvement if we set our minds to doing it correctly. It is value for money and that is how we should look at it.

In this context the Minister could consider smaller projects, for example a local two, three or four teacher primary school, which would not interest the Jarvises of this world. Public private partnerships are currently exclusive of small contractors because of the cost of the bond and of the tendering process. We could eliminate these costs without breaking any European rules. It would be a simple matter to provide designs with specifications. We could then also provide a much cheaper bonding system.

There is another point which the Minister of State may have made in his speech — I was not here for it because I had an engagement I could not get out of. I scanned through his script and will read it in more detail later. There would be no risk to Government. If the State owned the land on which the school is built, and the building is there and the Government has not put any money into it, the worst that could happen is that the contractors will walk away and the State will have a school for nothing. We need to drive home the possibilities and what could be done.

Bureaucracy is the cause of the problems. The biggest negativity arising from public private partnerships relates to the School of Music in Cork. It attracted bad publicity because in the middle of the process, EUROSTAT stated that the finance involved was part of Government borrowing and would therefore have to be included within the Maastricht guidelines and all the other requirements regarding monetary funds and so on. Consequently the Government had to pull back. Then Jarvis UK ran into trouble and everybody presumed we would have the same trouble here.

We need a debate to point out these problems and they need to be taken on publicly. This is the only country in western Europe where the trade union movement is fully supportive of public private partnerships because there are enough inbuilt safeguards. Moreover, the trade union movement is progressive in its approach and can see the value of public private partnerships because money can be released by Government to do other things and we get the value locally, specifications are up to standard and the State can be a net winner.

Am I missing something somewhere along the way? Is there something about this we do not know? I assure the Minister that, wearing another hat at another time, I fought very hard to get support for this in the Irish Congress of Trade Unions. I know every argument against the concept. They were all dealt with and we came up with a system that was attractive to all the partners, a Chinese bargain, attractive to business, to the trade union movement, to Government and to the people. The only experience we have had of this is in Sligo. I would defy any of the critics of PPPs to visit the schools in Sligo, about which I am sure Senator Scanlon will shortly make us aware, and try to find any unhappy campers. There are none. They are very happy. They must be the people to which the economists spoke. They are very happy about the delivery of the project there. If we are talking about moving this forward, we can certainly get things done.

Let me turn from education to the issue of tolls. Senator Mansergh stated that he hoped not too much of the money was going to the private sector. Unfortunately, huge amounts of money are going to the private sector. The toll bridges in Dublin are the result of very successful public private partnerships under the older system but despite the fact that they are making wheelbarrow loads of money and are earning far more than they ever expected, they are now talking about putting up the price. The Dublin toll bridges, which were built years ago, are a good example of everything that is wrong about public private partnership — the taxpayer builds 20 km of road, National Toll Roads builds 100 m, and it gets not quite all the money but everything that is collected. That is madness. Surely no PD in the world would go along with that. It is giving money away. It should never have been allowed to happen.

Tom Parlon (Minister of State, Department of Finance; Laois-Offaly, Progressive Democrats)
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It is a very complicated bridge.

Photo of Joe O'TooleJoe O'Toole (Independent)
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I understand it is a bridge. I am not taking from the fact that it was a complicated work of engineering to build both bridges, particularly the Westlink. There can be no argument on the business side that the toll should be increased. It is completely wrong. Driving to any city in Europe on a tolled motorway, whether it be Paris, Lyon or any other city, as soon as one reaches the environs of the city, the motorway is toll-free. We did the opposite in Ireland. In order to complicate traffic matters further, the only place in which tolls were originally established was in the centre of Dublin city. Who thought up such a scheme?

This is the type of situation that is giving a bad name to the idea of public private partnerships. Such schemes merely represent cash cows for private sector operators who are not buying into the system. This is far removed from the issues about which Senator Scanlon and I have expressed concern on a number of occasions. We want to see local schools built in local areas, and indeed a school of music at third level. These objectives can be achieved in a proper way. The Minister of State should come back to us at a later stage on the question of a more flexible approach to the design of schemes, a separating out of financing, a clearer view on securitisation and a method for selling the positive aspects of public private partnerships to a wider public.

Photo of Eamon ScanlonEamon Scanlon (Fianna Fail)
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I welcome the Minister of State, Deputy Parlon, and am delighted to have an opportunity to speak on the issue of public private partnerships. I have experience of such schemes with regard to a school in my constituency. This project, which had its critics initially, was part of a European-wide competition for a company to build five schools. The successful company was Jarvis and it built one school in County Sligo, two in County Cork, one in County Monaghan and another in Shannon. I serve on the board of the school in County Sligo. The Department of Education and Science purchased a site and the school was then constructed by Jarvis.

This school is a fine complex, consisting of 35 classrooms as well as auxiliary offices, teacher accommodation, all-weather pitches and so on. The building work was completed in 15 months and within budget, a phenomenal achievement in any business. With departmental funding, the school has been fitted out to the highest standard by Jarvis. It is a wonderful facility, involving the amalgamation of two very old schools, Banada Abbey and the Marist Convent in Tubbercurry. As a member of the school board, I occasionally meet some of the 540 students and they are delighted with the facilities and the quality of education they are receiving.

The contract for this project states that Jarvis is fully responsible for the maintenance of the school for 25 years. At the end of that period, the school will be handed back to the Department of Education and Science. As Senator O'Toole observed, there is no risk to the State in such schemes. The principal of the school has told me that major problems are dealt with within 24 hours, while less significant problems, such as heating or some other issue which affects the holding of classes in a particular room, are handled within two hours. The back-up service is fantastic. If a classroom is not available for teaching, a reduction is made in the payment to the company at the end of the month. The principal previously served in the same post in a school with a large student body in County Mayo, where he claims two thirds of his time was spent trying to locate people to service or repair various facilities. Now, his time is dedicated entirely to the educational needs of the students and teachers for whom he is responsible.

I cannot say enough in favour of public private partnerships in the context of my experience with this school. Furthermore, the school complex is available to the local community in the evenings and at weekends. Some local functions, such as musical shows, have been held in the school and, by 9 a.m. the next morning, it is ready for occupation by the teachers and students. This is a fantastic achievement. Although the Comptroller and Auditor General has not been complimentary regarding public partnerships, my experience indicates that perhaps he did not give such schemes enough time before evaluating them. I believe he did not consider issues such as maintenance, of which there is little required when a school is new. After five or ten years, however, a school of 540 pupils will require significant maintenance. A scheme such as this represents value for money in the long term.

I agree with Senator O'Toole that roads represent a separate issue. Unlike a school, the value of which will probably depreciate, the value of a road or toll bridge will appreciate. One must factor in the finance from such facilities, particularly when one is considering a period of ten or 15 years. We all received letters from the Irish Road Haulage Association which indicated the significant amount of money to be paid to operators which provided the Eastlink Bridge and other similar facilities. It is a staggering figure and, although there are significant costs involved in providing that bridge, this is an issue, which may need to be examined. I have no doubt the Government will learn from its experience with Jarvis in the provision of those five schools. Everybody has lessons to learn, particularly in politics.

I agree with Senator O'Toole when he spoke about the significant number of projects under way, such as small national schools in certain areas. Since our experience in Sligo, a number of builders have approached me to inquire about the possibility of a similar approach being taken regarding smaller schools. We need to consider such possibilities and move in this direction because it represents value for money in the long term. The work is usually done very quickly and there is no cost to the State in terms of maintenance. My experience of a public private partnership was a successful one and it has been of significant benefit to Sligo.

Photo of Brendan RyanBrendan Ryan (Labour)
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There was some jousting during the Order of Business about ideologies and "isms" of various kinds. I have no objection to public private partnerships. Any concerns I have are based on a feeling that perhaps the driving force behind such schemes is ideological. Where they work properly, however, nobody could object to them. Who could object to the introduction of additional finance into public capital expenditure, finance which might not otherwise be available? There can be no objection to the use of public private partnerships for providing up-front funding for projects which might otherwise be delayed for ten years. However, concerns could be raised if one were to adopt the proper hard-headed approach of a competent accountant or economist. In Ballincollig and Dunmanway in Cork, I have seen the quality of the schools about which Senator Scanlon spoke. They exist, are superb and look wonderful. I am pleased for the people of those areas whose children have a place in such fine schools, which provide such fine service.

However, two legitimate questions must be raised and were raised by the Comptroller and Auditor General, perhaps in badly chosen language. One question is whether the money being spent by the State is proportionate or excessive to the quality of what is being delivered. It is difficult to compare the full cost of the Cork School of Music, which the Comptroller and Auditor General in one report put at approximately €300 million, with the ongoing costs required over a period. He raised the question of how a project originally estimated to cost €45 million would end up costing €300 million. I am reluctant to be critical of him because he fulfils an extraordinarily important role. Nevertheless, that was a less than intellectually satisfying response by him to the complexities of trying to compare how that project would be funded now with how it would be funded over 25 years, covering routine maintenance, refurbishment, etc.

I am reasonably knowledgeable about project economics, which was part of my original profession as an engineer. Everyone who knows anything about project economics or project costing knows that once one gets into the time value of money, there is an element of subjective judgment. Questions about internal rates of return and about the discount rate used are all a matter of judgment. Different companies in the chemical industry, with which I am familiar, use different indices for those measures and, therefore, come up with different answers. That is why some companies, for example in the chemical industry, expect a pay-back time of two years on an investment, some expect three years and some will tolerate four years, but that will also depend on the project. If we go the route of having useful public private partnerships, we must begin to put together dispassionate cost analysis and cost evaluations of such projects. We should always welcome new ways of doing things, new ideas and thinking.

My party's position on roads is to oppose tolls, with which I do not agree. I want to make that clear. My only problem with tolling roads — Senator O'Toole also referred to this — is that some of the tolling is in the wrong place. In other words, it the last place one would want it. For example, tolling a bypass around the town of Fermoy seems not to be the way to proceed, although tolling could be done on a road which incorporated that bypass without landing the people of Fermoy with the possible short-term, if not long-term, consequences of traffic diversion because of a toll.

I do not have great sympathy for the Irish Road Haulage Association. If its members are still insisting on going through Drogheda instead of paying the tolls on the motorway, it would be no harm if the Department of Transport and the Garda began to carry out fairly detailed checks on every road haulage vehicle that goes through Drogheda to see whether it meets all the requirements of the various regulations. It is time the drivers of those vehicles went where they are supposed to go. I do not have much sympathy with individual hauliers.

I have two problems with the tolling of the Westlink bridge. First, it has caused the most incredible traffic jams because it was badly designed, planned and laid out. Second, the toll company does not have the courtesy to tell a culchie like myself the toll I must pay until I get to the plaza.

Photo of Mary WhiteMary White (Fianna Fail)
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That is correct.

Photo of Brendan RyanBrendan Ryan (Labour)
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I have raised this point previously in the House. One comes off a roundabout on the M50 and sees a sign, "toll ahead", but there is no sign indicating the toll one is required to pay or which lane one should be in. By the time one knows which lane one should be in, one is irretrievably committed to the lane one is in. An extraordinary profitable company should be able to put together proper indications. I have no interest in getting involved in an ideological debate about public private partnerships, which can work very well.

In order for public money to be used efficiently, we must have dispassionate analysis. I am disappointed with the Comptroller and Auditor General because some of his analysis was not dispassionate. I thought it was quite trivial. One cannot compare €300 million spent over 25 years with €45 million spent today and pretend there is no difference. I need only reflect on how much my house cost me in terms of paying a mortgage over 20 years. I bought the house for €35,000. I do not even want to think about how much it cost me.

Photo of Eamon ScanlonEamon Scanlon (Fianna Fail)
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More than €100,000.

Photo of Brendan RyanBrendan Ryan (Labour)
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That and much more I would say. That does not prove I was inefficient. It was simply the way it was done.

I will return to the subject. The answer to the question of whether we are getting extra funding is "Yes". Are we getting a sharing of risk? In some cases the answer is undoubtedly "Yes" and in the case of schools the answer is "Yes". Are we getting good value for money? In terms of educational infrastructure, the jury is out. We do not know enough. I have no doubt that the quality of what people have to work with is excellent, but it is questionable whether that quality could be delivered by other mechanisms, including that of giving poor unfortunate school principals a reasonable budget for maintenance and reasonable secretarial support so that they would not have to spend most of their expensive time chasing after routine minor matters. It is also questionable whether the procedures the Department of Education and Science uses for evaluating major capital projects, the five stages, could be improved. In the case of a number of building projects in my place of employment in the Cork Institute of Technology, I took the liberty of making a freedom of information request to consider them. Whatever the Department of Education and Science achieves in terms of avoiding extravagant expenditure or perhaps in eliminating fraud is swallowed up in costing increases arising from delays. If one takes five years to complete a project that could have been completed in a year, at 5% or 6% construction inflation, such delay will add, in crude terms, 30% to the price. If one ends up saving 5% of the ultimate price by putting up the overall price by 25% instead of 30%, that is not a contribution to efficiency, although it might be a contribution to probity and rectitude and to keeping people honest.

This raises questions about, for example, bond issues where the State agrees to pay back a bond. That is called borrowing. I am not overly impressed with the efficiency of the Irish private sector and I never have been. The cost overruns in the early days of the NRA were not all its fault. They were to do with the capacity of those in the construction industry to fairly well trowel on the expenses when they were perhaps not being watched as carefully as they should have been. There was not much sign of competitive efficiency there.

It would be improper of me to talk about public private partnerships in general terms and not mention the Cork School of Music. It is not the greatest advertisement for the principle underlying such partnerships. I accept fully that once a public private partnership contract is signed and delivered, there is remarkable efficiency in the construction of a project. That happened in my place of work in the National Maritime College. As in the case of the Cork School of Music, if it takes four or five years to get to the stage of signing the contract and one ends up with a very efficiently and rapidly constructed school of music, which is being delivered six years late because it took five years to start the building project, there is a legitimate argument that we would have been better off to proceed the old way if work could have been started five years ago. Such delay has incurred a major cost which does not show up in the assessments of the Comptroller and Auditor General.

Our public sector is not good at project management. Good project management means that one is properly prepared before one starts. Clearly, we are not good at that, given the nearly €500 million worth of hospitals around the country that were built without any proper planning as to how they would be staffed and run once they were completed. That is the antithesis of what one would hope would come out of a public private partnership, which means that whoever provides the facility must deliver everything, including all the ancillary and support services apart from the teachers who will work in the school.

We are not yet beginning to do a proper evaluation of public private partnerships. I do not have a brief one way or the other, except that I believe it is a good thing if we can get extra funding to do things now which would otherwise be postponed for four or five years. If we get that extra funding we must accept that those who provide it are entitled to a reasonable return on their investment. We must also be sure that the return on their investment is reasonable. Furthermore, the fact that they provide a good service which turns out to cost three times as much as the old way — I do not say it does but if it does — we should be told that in terms that make sense to all of us.

If a wonderful toll road, such as the one in the Minister of State's constituency from Portlaoise to beyond Cullahill, which it is hoped will start in the next year or so, produces a mile long queue of people waiting to pay their tolls at any busy time during the day, it is a failure. On the Sunday of last year's All-Ireland Football Final, gardaí had to instruct the toll operators on the M1 to raise the barriers because there was a four or five mile tailback north of the toll plaza. If a company cannot operate tolling on roads in a way which does not seriously impinge on the free movement of traffic, good transport infrastructure will not be achieved. That is what has happened on the Westlink on the M50. It is time this problem was dealt with.

I am at a loss to know how the Cork School of Music has got into its present situation. My colleagues in the school have worked hard. Everything that was ever asked of them was delivered properly, on time and in the manner required. We ran into an extraordinary confusion in which the Department of Education and Science was left holding a baby which was the property of the Department of Finance because that Department had run into some statistical issue which had nothing to do with the Cork School of Music. It had to do with borrowing for much bigger projects, which would have added significantly to the level of national debt and would have been perceived as such in terms of the Stability and Growth Pact. I accept there was a problem. However, the Department of Finance never came out in public to say the problem was of its making, while the poor Department of Education and Science got stuck with attempting to explain why something which was not of its making had to be dealt with by it. I never saw the Department of Finance explaining in public what was the problem.

That is a very good example of how a basically good idea can be undermined. Public private partnership is a good idea provided we have effective cost criteria, effective performance evaluation criteria and effective sharing or transfer of risk from the State to the private sector. We are only beginning to learn. I invite the Minister of State and the Department to work at developing criteria which are objective and independent and which evaluate how well these things work.