The Failed Experiment: Public Private Partnerships in Ireland

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Review and commentary: Public Private Partnerships in Ireland: Failed experiment or the way forward for the state? Rory Hearne, 2011, Manchester University Press

The recent Comptroller and Auditor’s report on the 2011 public service accounts reveals the continuing cost of Public Private Partnerships (PPPs) in Ireland. It provides further evidence that the transfer of risk has been exaggerated and overpriced.

The National Roads Authority (NRA) agreed to traffic-related guarantee payments for the M3 Clonee/Kells and Limerick Tunnel PPPs. The NRA has to pay the PPP company additional money if average traffic levels in any half-year period do not exceed the level of guaranteed traffic in the contract. The Comptroller and Auditor reported significant shortfalls in traffic volumes relative to the guaranteed thresholds in 2010 and 2011 and forecast the additional payment of €6.7m for 2012. Even if traffic continues to increase at an average 2.5% per annum, the government will be paying traffic guaranteed payments for the M3 Clonee/Kells PPP until 2025 and the Limerick Tunnel until 2041! Additional payment could exceed €140m at current prices.

The beneficiaries of the traffic guarantees, as shareholders of the PPP companies, are Ferrovial (Spain) for the M3 and include Strabag AG (Austria), Meridiam Infrastructure (global fund) and Allied Irish Bank for the Limerick Tunnel.

Major concerns about risk transfer have arisen in other PPPs in Ireland and are well documented in Hearne’s comprehensive analysis. It is highly recommended as a refreshing alternative to the PPP propaganda peddled both by the state and by construction companies, banks and PPP advisers such as lawyers and management consultants.

He examines risk transfer in detail in two chapters on the Grouped Schools Pilot PPP Project and the use of PPPs to regenerate Dublin’s inner city estates. The schools PPP demonstrated the vital role of contract monitoring by the public sector when performance risk is supposedly transferred to the private sector. The trend towards a ‘thin client’ model and self-monitoring by private contractors in PPPs and outsourcing is a cost cutting tool that usually backfires with significant consequences for service users, staff and value for money.

Hearne examines the use of PPPs to regenerate Dublin’s inner city estates and identifies eleven lessons including full resident participation, ensuring the regeneration process sustains existing communities, the importance of social regeneration, the need for new funding models, and to draw on best practice. This chapter extends John Bissett’s important analysis of the long-running saga of regeneration of St Michael’s Estate and the impact of the four failed housing PPPs.

Ireland’s PPP programme was reinvigorated by the €2.25bn infrastructure stimulus plan launched in July 2012. Over 60% of the plan will be PPP projects to be designed, built, financed and operated by the private sector. The government claimed that some projects were ‘shovel-ready’ but the long procurement process for PPPs means that most economic and employment benefits will not obtained for several years. Questions have been raised about priorities, for example inclusion of the M11 Gorey to Enniscarthy, one of four road projects and the absence of public transport projects, and the location of some of the planned 35 Primary Care Centres.

Hearne shows how PPP contractual commitments and the loss of flexibility led to distortions and inequalities in the distribution of public spending cuts in 2008-2010. Similar financial consequences of PPPs have been exposed in Britain with the government having to spend €1.9bn bailing out seven NHS Trusts because PPP hospital payments absorb such a high proportion of their budget.

Hearne stresses the importance of an economic stimulus and the potential of infrastructure bonds and reallocating the annual allocation of 1% of GNP to the National Pension Fund Reserve Fund and reducing the tax breaks for private investment. This comprehensive critique of PPPs should have been followed by a fuller discussion of the alternative investment strategies and ways in which existing PPPs could be made more democratically accountable.

The Irish Congress of Trade Unions (ICTU) plan for major new investment programme for Ireland was critical of the excessive profiteering in PPPs. But it accepted the need to avoid up front capital costs to keep projects off the General Government balance sheet. The ICTU recommended two new investment models. The first would use existing semi-state enterprises to channel funding from the European Investment Bank and other funding sources. The second would replace bank with private pension fund finance. However, changing the source of finance merely adapts the PPP model, it does little to change it.

Hearne recommends “a temporary halt to the development of new PPP projects until further informed analysis is undertaken of the effectiveness and appropriateness, both from a value for money and social perspective, of PPPs in the in the delivery and management of public infrastructure and services.” Unfortunately, there is little sign of this happening in Ireland. The current UK review of the Private Finance Initiative is expected to be more cosmetic than fundamental change.

The Hearne book is a major contribution to the evidence base supporting a radical review of the design, provision and ownership of public infrastructure.

References

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Dexter Whitfield is the Director of the European Services Strategy Unit and Adjunct Associate Professor, Australian Workplace Innovation and Social Research Centre, University of Adelaide.
 

2 Responses

  1. eamonn moran

    October 2, 2012 9:58 am

    “The Irish Congress of Trade Unions (ICTU) plan for major new investment programme for Ireland was critical of the excessive profiteering in PPPs. But it accepted the need to avoid up front capital costs to keep projects off the General Government balance sheet.”
    This is a dangerous road that ICTU are agreeing to travel. The idea that the government would want to understate the national debt at the moment is obvious for political reasons. Vast quantities of spending is moving off balance sheet. But all these debts and interest payments have to be met regardless. When ICTU actively conspires in understating the size of our debts they make a rod for their own backs. They should be demanding investment but using Enron accounting to do it is bad practice in any circumstance.

  2. Kieran C

    October 2, 2012 4:51 pm

    The Government is forced by to use PPPs by the EURO requirement to maintain a Deficit/GDP of 3%. If the government undertakes the infrastructure development it adds to the deficit and at present it cannot do this as the deficit is over 3%. Eurostat states that projects undertaken by the private sector are not added to the deficit. This shows the German wish for all infrastructure to be undertaken by large European multinational companies.
    Privately funded projects have been shown to be more expensive state run projects in one study done on a school project by the Comptroller and Auditor General in Ireland and in many Private Finance Initiatives (PPPs) in the UK.