The Government's determination to expand its use of public-private partnerships has not been justified, writes Dr Eoin Reeves
The clear commitment on the part of the Government to adopt the Public Private Partnership (PPP) model of procurement will have enormous implications for the delivery of public services in Ireland.
Essentially it means that services in sectors such as education, health, public transport and environment will be provided for and financed by profit-seeking private enterprises. Naturally this raises questions, including whether PPP arrangements are suitable in terms of value for money and service quality. Given that Ireland's experience of PPP has been either unfavourable or untested, it is quite astonishing that the PPP programme is expanding so rapidly.
One can only conclude that recent announcements on the expansion of the programme have also been made for political reasons, because the economic case for PPP is weak.
Moreover, there is a considerable body of international evidence which demonstrates the difficulties in executing successful procurement under PPP. So why is the Government going further down the PPP route?
Ireland's experimentation with PPPs dates back to 1999, when the Government announced eight pilot PPP projects. Before the procurement process was completed for any of these projects, the PPP programme was expanded. By the end of 2001, more than 100 projects were earmarked for procurement under PPP.
The first pilot project to complete the PPP procurement process was the grouped schools project. The private sector was contracted to design, build, operate and finance five secondary schools, which opened in 2003.
The initial impression was that it was successful and that the lifetime costs of the project would be 6 per cent cheaper under PPP than traditional procurement.
The project was then subjected to detailed analysis by the Office of the Comptroller and Auditor General (C&AG). In June 2004, the C&AG reported that the PPP would not save money. Instead, it estimated that "the projected cost of the PPP deal was 8 per cent to 13 per cent higher than the projected cost of procuring and running the schools using the conventional approach".
One of the main shortcomings was the appointment of a preferred bidder prior to conducting a financial analysis to determine the projected costs of conventional procurement. Best international practice would compare projected costs under conventional procurement with the best private sector bid before deciding on a bidder. The decision to proceed without undertaking this comparison cannot be attributed to a lack of understanding of the PPP process. Rather it suggests political pressure to complete the procurement process and deliver a project that politicians and vested interests could announce as "on time and within budget".
Whether value for money can be achieved under PPP lies at the heart of the debate about its suitability as a model for procurement. Most PPP arrangements in Ireland involve the provision of finance by the private sector. But because private finance is more expensive than Government debt, value for money will only be delivered if cost savings are accrued elsewhere.
Proponents of PPP tell us this will happen because it provides the private contractor with the scope to innovate and deliver better quality services.
More importantly, the PPP model is based on allocating risks to the parties best able to manage them. The PPP contractor assumes appropriate levels of risk, which creates incentives to deliver cheaper and better services.
There is evidence to indicate that innovation and risk transfer are by no means guaranteed under PPP. The Audit Commission (2003) in Britain compared schools projects under traditional procurement and the private finance initiative (PFI) model.
They concluded that "the quality of school buildings built via more traditional means was, on average, better than the early PFI schools and there was little evidence of design innovation".
In December 2004 the Taoiseach, Bertie Ahern, criticised the private sector's lack of appetite for taking risk in the context of PPP contracts.
The C&AG concluded that the risk transferred to the private sector in the grouped schools project was appropriate but "limited", therefore raising doubts about the scope for the PPP model to facilitate the level of risk transfer required for value for money.
Commentators on PPP in Britain and Australia have noted that a project often only gets approval if the figures show that the PPP option gives better value for money.
Hence, public service managers, in making a case for much-needed investment, must be expected to interpret and present data in ways which help to achieve their objectives.
Assurances to the contrary from Ministers must be taken on faith, as it is Government policy not to release details of the public sector benchmark.
This has real implications in terms of accountability and the legitimacy of the PPP model. While problems with conventional procurement such as cost overruns and delays provide good grounds for new forms of procurement, the scale of the expansion of the PPP programme is unwarranted.
Of the eight pilot projects announced in 1999, only the grouped schools project has been investigated by the C&AG. Given the widespread concern about poor value for money from Government expenditure, the Government would be well advised to conduct rigorous analysis of other PPP projects before committing to what is still an unproven model of procurement.
Dr Eoin Reeves is a senior lecturer in economics and director of the privatisation and PPP research group at the University of Limerick