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The National Development Plan was designed to address the infrastructure crisis yet it is significantly behind schedule and certainly won't be achieved before the end of the current plan in 2006/2007. One of the key reasons behind this, aside from planning delays etc, is that Government spending on infrastructure has fallen well short of what is needed in order to deliver on the set targets. Government has been reluctant to increase borrowing to fund infrastructure investment, preferring instead to fund investment out of current income.

Part of the rationale behind this has been the need to adhere to the Maastricht criteria as set out in the Growth and Stability Pact. This sets a limit on borrowing and spending amongst the member states of the EU. The current limits state that countries cannot run an annual budget deficit of greater than 3% of GDP and debt levels cannot be higher than 60%. However the criteria were and are a crude measure that do not recognise where a country is at in its development cycle.

Ireland with a growing economy and lack of infrastructure spend in the past, will need to borrow and invest more than the more developed economies of France and Germany. Yet it is these very countries that are being criticised for non conformance to the criteria.

Ireland's programme for Stability Pact convergence as submitted to the EU in late 2004 indicated that the budget surplus for 2004 was expected to be 0.9% of GDP with similar estimates for future years. This compares to a target deficit no greater than 3% and an average Euro zone deficit of 2.7% in 2004. Ireland was similarly well within the limits for public debt at 30% compared to a 60% threshold.

IS BORROWING THE SOLUTION? The criteria as set out above have recently been amended to address the crudeness of the measure. One of the key changes of relevance to Ireland is that “major structural reforms having a verifiable positive impact on the long term sustainability of public finances will be taken into account” in context of meeting or exceeding the stated measures. Ireland is therefore at a cross roads in its infrastructure development. A conservative investment policy in the past and a conservative approach to compliance with the Maastricht rules have resulted in an infrastructure that is becoming less competitive by the day. We have low levels of inflation, one of the lowest borrowing levels of all of our European partners, a buoyant economy and budget surpluses. We need to take advantage of these conditions now and increase our investment in infrastructure whilst we can. Increased borrowing however is only part of the answer.

PPPs Another route by which Government can speed up the pace of infrastructure development is to fully embrace the concept of Public Private Partnerships (PPPs).

PPPs have been in use in Ireland for several years now but the level of development through PPP is much lower than it could or should be. PPPs are not suited for all projects - but are certainly suited to large scale infrastructure projects. The Government signalled its support of the PPP concept in the 2003 budget and reaffirmed it in 2004 by setting a target for private sector involvement in infrastructure projects of 3% in 2005, rising to 15% by 2008. However there still remains a lot of debate around the concept and merits of PPP as a means of financing infrastructure development. Perhaps this article can address some of the myths and replace them with fact.

Public Private Partnerships are contracts for the development of a infrastructure where the private sector takes responsibility for the design, build, finance and operation of an asset over a long term period. The private sector gets paid by a combination of upfront or annual payments from the Government together with, in some instances, user charges such as would apply in the case of a toll road. The private sector takes the risk of building and operating the asset over its lifetime. Why is PPP better? In a nutshell ... Traditional contracts leave much of the risk with Government. The private sector has no incentive to work around any problems encountered during construction. Infrastructure procured through the traditional route generally results in large claims being submitted by contractors for unforeseen site conditions or issues arising that were not envisaged at the outset.

By comparison, if it is the private sector's money that is on the line for the long term (as in PPP) then they are fully incentivised to work around and find innovative solutions to any problems that might arise. They are also incentivised to deliver quicker and cheaper but at a level of quality that is going to last for the long term - otherwise they will have to bear the cost of the repairs.

PPP deals are designed to permit better and more innovative solutions through a clear focus on outputs i.e. the ‘what’ not ‘how’. The private sector is incentivised to innovate quite simply through a profit motive.

Under PPP the requirement would be to build a high-standard school for 200 pupils. It is up to the private sector to determine the most appropriate design, building techniques and materials to use. Under traditional procurement the requirement would be to build a school of x size using xx materials using xx techniques with no incentive for innovation.

Why does Traditional Procurement not deliver the same benefits? There are a number of simple yet key reasons why the same benefits have not been obtained through the traditional procurement route: -The public sector is not trained, measured or rewarded for taking risks but the private sector is. Traditional procurement contracts do not provide this reward for the private sector; -There is limited accountability for the long-term consequences of decision-making in government. There is limited focus and accountability on the level of cost overruns in traditional procurement and similarly limited incentive to reduce them. There is limited focus on whether or not the Government received value for money for their investment. Yet all PPP projects have to be proven to be a better route for procurement of infrastructure before they can proceed.

One of the most common viewpoints put forward in the debate on PPP is that ‘but the Government can borrow money cheaper than the private sector so how can PPP be better value?’ Government can borrow at a risk free rate yet there is a premium (banking margin) to pay for the involvement of the private sector but the missing link in the argument is the value of risk transferred in a PPP. The private sector is proven to be more incentivised to control costs and bring projects in on time when it is their own money that is at risk - which is not the case under traditional procurement. This incentive drives down the cost of the project to the public sector - by more than the higher cost of borrowing under PPP. This is proven through the value for money assessment mentioned above.

All PPP projects have to prove that the cost as bid by the private sector for the design, build, finance and operation of an asset (including the higher cost of private sector finance), is less than the cost if the project were to be procured through the traditional route. The cost under the traditional route takes into consideration the normal extent of post completion claims received. Under PPP the risk of such claims is transferred to the private sector and the price they bid to accept this risk is proven to be less than the normal claims received.

Ireland has not undertaken PPP projects for a long enough time period to have a reasonable body of evidence to assess, however a recent study by the National Audit Office in the UK proved that PPP truly does offer better value for money with the level of time delays and cost overruns (claims) considerably less under PPP.

PROGRESS TO DATE Ireland has been slow to fully embrace the concept of PPP. We lag significantly behind our Northern Ireland counterparts in this area. However excellent results have been achieved in some sectors to date.

The Education sector saw the first deals with a bundle of five post primary schools and the Maritime College in Cork completed through PPP. Both of these projects transferred responsibility for the design, build, finance and operation (non teaching services such as cleaning, catering etc) to the private sector for a long term period of 25-30 years. These schools have been generally very favourably received. A school principle in one of the bundle of schools has commented that he finally looks forward to going to work every day as a result of having a decent building. The level of bullying in the schools has actually reduced as a result of having better circulation space - wider corridors. The Maritime College has been applauded internationally for its high standard of design.

The National Roads Authority has been particularly active in the field of PPP. Its first deal, the N4/N6 Kilcock Kinnegad project (2003) was deemed the “European Infrastructure Deal of the Year 2003” by Project Finance International, the recognized bible for PPP and project finance enthusiasts and “Transport Deal of the Year 2003” by Project Finance. February 2004 saw the award of the contract for the Dundalk Western Bypass and June 2004 the signing of the contract for the N8 Rathcormac to Fermoy bypass. So far the NRA contracts have brought in over €500m of private finance. A total of four more schemes are in procurement including the upgrade of the M50, with a further two schemes yet to come to market. The schemes closed to date have been proven to offer excellent value for money to the public sector with competitive tension leading to aggressive bidding by the private sector. Progress on the ground for schemes closed have seen innovation actually at work in practice.

Other PPP projects underway include a new National Conference Centre, a Criminal Courts Complex, a Marina in Greystones and a Thermal Treatment Plant in Ringsend.

Other projects in the environmental and social housing sectors are being procured through a hybrid PPP structure - the environmental projects do not include any private sector finance element and the social housing schemes do not include a long term operational element. One of the key projects that is ideally suited to PPP is the long awaited Dublin Metro.

TIME FOR VISION Ireland has under-invested in infrastructure over many decades. While current infrastructure investment is high in comparison with other European countries we are playing catch up and need to - and can afford to - do more. Increasing Government borrowing to fund infrastructure spending is one part of the solution. PPP also has a part to play. The long term ancillary benefits of PPP projects on the infrastructure in Ireland in terms of assisting economic growth are of major and far reaching significance. Excellent progress has been made on projects closed to date but a lot more projects need to come to market to both meet the Government targets by 2007 and create a real difference to Ireland's infrastructure deficit. PPP is proven to work but really needs a champion within the political and civil service system to drive new projects forward as indeed does infrastructure spending in general.

Michele Connolly, ACA, is a Director with KPMG Corporate Finance.

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