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PPPie in the sky

Public Private Partnerships tend to fleece the publicRory Hearne 

 

The Government announced a €2.25 billion Infrastructure Stimulus Programme in July. This Programme aims to generate 13,000 jobs, address important social and economic infrastructure deficits, and support economic recovery.  The first phase of the Programme involves a €1.4 billion investment of non-Government funding. This private finance will be used to deliver infrastructure projects including roads, schools, the DIT Grangegorman campus, primary health care centres and court buildings. These projects will be delivered through Public Private Partnerships (PPPs). This mode of delivery raises serious issues, as has been accepted in analogous jurisdictions, such as Britain.

Accessing private finance for PPP projects has become extremely difficult due to the international financial crisis. The Government acknowledges this and the Progamme outlines an intention to combine funding from domestic banks, the European Investment Bank, the National Pension Reserve Fund and other sources of private finance.  However, there is no further detail given on this.

Evidence from PPP projects already developed in Ireland, in schools, motorways, social housing, and waste water projects, highlights serious problems with the PPP mechanism of delivery. PPP projects do not necessarily provide value for money (VFM). Government analysis of their VFM is never available for public scrutiny as it is deemed ‘commercially sensitive’.

PPP projects are more expensive than Government-funded projects. They involve mortgage-type annual payments that obscure the true cost. They also require a return for the private investor. Ultimately, over the long-term, these projects will require additional public expenditure above that which would be required if public funding was provided up front.

The Comptroller and Auditor General found that earlier PPP school projects were 8-13% more expensive than traditional public delivery. The stated cost of the proposed PPP Poolbeg Incinerator is €350 million, but the cost over the twenty-five year contract will be €600 million. Profits of €1bn will be generated for the private companies involved. Super profits have also been generated from the tolled PPP roads. The private operator of the tolled M8 Rathcormac-Fermoy bypass in Cork last year made a staggering pre-tax profit of just under €1 million on the project.

There is evidence in PPP projects of conflict between the private partners’ commercial imperative – its profit-maximisation requirements – and the social objectives such as flexible service provision. In PPP projects where risk materialised there were significant disputes between the public and private service providers over whose responsibility it was to pay for the problems. In most cases it was the State that was left with the cost of these problems. Dublin City Council had to pay €35 million to a private operator to provide odour-
alleviation measures necessitated by problems with the PPP Poolbeg Waste Water Treatment plant.

Finally, a significant number of PPP contracts are won by multinational service companies and financial institutions. This can raise issues of democratic control over public services. The LUAS is a PPP project operated by Veolia Transport Ireland, a subsidiary of Veolia Environment, a global multinational service provider. The Criminal Courts of Justice are managed by Amber Fund Management Ltd, which administers this PPP project through a company listed on the London Stock Exchange called International Public Partnerships which has over €2bn of PPP assets across the world. The pilot PPP schools are operated by Hochtief, a multinational service provider based in Germany.

Overall a broader range of serious issues face the Infrastructure Stimulus Programme in realising its aim of providing a stimulus to economic growth and employment.

 

F

unding for the Programme is dependent on the sale of state assets and the new licensing arrangement for the National Lottery. Neither of these sales have taken place, and are, therefore, unlikely to provide funding in the near future. Additionally, selling these assets at the bottom of the market is unlikely to raise significant funding. The time-frame, therefore, for the creation of employment would more accurately be classed as medium, rather than short-term. The Programme states that construction will not begin until 2014 in the health projects, 2015 for Grangegorman, and 2016 for the schools.

The Programme has a very high emphasis on roads. Roads comprise 59% of phase 1 in comparison to education at 20%, Justice at 13%, and health at 8%. There is no mention of environmental projects such as regional urban light rail projects, or social investment in the much needed regeneration of disadvantaged communities in Limerick, Dublin, and Dundalk.

There is a fundamental contradiction between the Government’s policy aims to create a stimulus through infrastructure investment and the cuts it has made, and plans to make, to the capital infrastructure investment budget. The capital budget was cut by €800 million this year, and a further €560 million is planned for next year. Thus, the overall capital budget will be reduced from €4.7bn when the Government took office to €3.2bn in 2014 (outside of the Infrastructure Stimulus Programme).

The financial stimulus is significantly lower than the €3bn annual investment proposed by groups such as Claiming Our Future and the Nevin Economic Research Institute. It pales in comparison to the ambition of Irish Governments in the 1950s, when this was a much poorer country, that built over 50,000 social housing units in that period. This is despite the fact, as highlighted by the Nevin Economic Research Institute, that direct Government investment in stimulus is self-financing. Overall, a long-term permanent decrease in the Government deficit results.

We could have expected more. The announced programme is logical in principle but, at this stage, seems very limited in ambition, more medium than short term, and based on a delivery mechanism with a poor record.

 

Rory Hearne is author of ‘Public Private Partnerships in Ireland – Failed experiment or the way forward for the state?’