Opinion/Eoin Reeves: In the past weeks, Eurostat, the statistical office of the European Communities, took a decision on the treatment of arrangements such as public-private partnerships (PPPs) in the national accounts.
Reports suggest that the decision constituted a relaxation in accounting rules that will make it easier for governments to utilise PPPs for the purpose of capital investment.
There is little doubt that Ireland's PPP programme requires a boost. Since its introduction in June 1999, the proposed PPP programme has lost momentum.
Although hundreds of infrastructure projects have been identified for investment under PPP, the record on progressing individual projects has been disappointing. The PPP to build five secondary schools is the only pilot project that has reached the stage of service delivery. So far, the PPP model has failed to provide faster delivery of vital investment in infrastructure.
One problem with implementing the Irish PPP programme arises from the curbs of the Stability and Growth Pact, which limits annual borrowing to 3 per cent of gross domestic product and initially provided a rationale for adopting PPPs.
The attraction for Government was the prospect of off-balance sheet financing. If PPPs used private rather than public finance, it was believed State borrowing would be unaffected.
This rationale was fatally flawed. Off-balance sheet financing is entirely cosmetic, as what is borrowed must be paid back later. Unfortunately, the Government's obsession with off-balance sheet financing has resulted in some perverse policy decisions, e.g. the case of the Cork Music School. Although the decision was taken to go ahead with this PPP and contracts were signed, the project was put on hold because the EU decided that it should be counted against Government debt.
Following Eurostat's decision, hopes have been raised that this problem can be avoided in the future. Unfortunately, this may not be the case. In effect, the statement by Eurostat amounts to a clarification. Unless PPP projects are characterised by a significant transfer of risk to the private sector, borrowings by the private sector will be counted as Government debt. Eurostat's statement provides detail on the nature and degree of risk that must be transferred in order to keep PPP investment off the Government's balance sheet. The degree of risk transfer required is significant, with the private partner required to bear construction risk and at least one of availability or demand risk.
In the Dáil last December, the Taoiseach, Mr Ahern, expressed his concerns about the failure of Irish firms to take the level of risk required under PPP.
Last June the Office of the Auditor and Comptroller General analysed the PPP used to build and operate the multi-storey car park at Beaumont Hospital. Under this agreement, the private contractor levied fines on the hospital for cars illegally parked in the hospital grounds. Under the contract, the contractor could charge a multiple of the all-day parking charge because theoretically each place would be used more than once a day. Risk transfer actually added to costs in this instance.
Slow progress with the State's PPP model cannot be attributed to problems with risk transfer alone. As a complex procurement process, PPPs involve significant organisation and costs, called transaction costs. They arise as a result of organising competitive tendering processes, designing complex contracts, and monitoring and managing client-contractor relationships over an extended period. When these costs are too high, the case for PPPs may be considerably weakened.
The PPP to build and operate the National Aquatic Centre provides an example of where high transaction costs can undermine the PPP model. Serious deficiencies with the conduct of the procurement process resulted in the abandonment of the PPP model in the case of this project.
There is great scope for examining different options for maximising the potential of competition between a diverse set of service providers from the public, private and voluntary sectors.
Putting an end to the obsession with off-balance sheet financing would be a useful starting point.
Dr Eoin Reeves is a senior lecturer in economics at the University of Limerick and director of the PPP and Privatisation Research Group
