Madam, - An article on public-private partnerships (PPPs) in your Business Section of May 16th reflected some negative perspectives on the National Roads Authority's PPP programme to which I would like to respond.
Firstly, on the tax treatment of PPP projects I want to make it clear that there are no tax incentives for roads and that no tax advantages have been given to a road consortium.
In the case of a National Roads Authority PPP contract, a consortium, following a public tendering process, contracts to design, build, finance and operate a road for 30 years and then hand it back to the State free of charge. The consortium is not granted a leasehold interest in the land and at the end of the concession period has nil value assets in the road. The consortium must pay to build and maintain the road, which is a cost to its business over the 30-year period.
Corporation tax is charged on profits, not revenue, in line with the tax treatment of business generally. No profit is made unless the net construction costs are recouped from tolls. Accordingly, a tax deduction is properly given for these costs. If this tax treatment did not apply the consortium would be penalised for investing in public infrastructure rather than, say, a private office development.
This tax treatment is consistent with the accounting treatment of the road costs and recognises the particular circumstances of the contract whereby the consortium is obliged to hand back the road to the State free of charge. Such tax treatment applies to any PPP project where the asset is handed back free of charge to the public sector.
The article quotes Dr Sean Barrett of TCD as asserting that "there is no private sector risk in these deals". On the contrary, there is very substantial risk taken by the private sector in a PPP road contract. For instance, the consortium carries the risk of cost overruns for constructing the road and maintaining it over the long term. It must bear the risk of traffic usage on the road not materialising in accordance with its forecasts and, furthermore, if the consortium defaults on its obligations the State can take over the asset without compensating it.
Any informed observer of road contracting can see that this constitutes significant risk and differs sharply from the traditional procurement model.
Before concluding any PPP contract, the National Roads Authority will conduct a full value-for-money analysis to determine whether PPP offers savings over traditional procurement. For the N4/N6 Kilcock-Kinnegad motorway contract which was recently awarded, this analysis was undertaken with the help of independent financial and engineering advisers. It confirmed that significant cost savings would accrue to the public sector by using PPP.
In this case, the State is acquiring a major asset - a 39-kilometre motorway that would cost an estimated €550 million - for a fixed Exchequer payment totalling €152 million. In addition, the State will recoup a significant portion of the Exchequer payment by way of a share of the tolls, municipal rates and taxes. - Yours, etc.,
GERARD M. MURPHY,
PPP Manager,
Naional Roads Authority,
Waterloo Road,
Dublin 4.