OPINION:Since their launch 10 years ago, Irish PPP projects have failed to meet many basic criteria, writes EOIN REEVES.
FRANK MCDONALD ( The Irish Times, April 14th) reports that one of the bidders for the contract to build the Metro North line has called for the State to underwrite the financing risks associated with the project. If this were to happen, the already-questionable case for procuring the metro as a Public Private Partnership (PPP) would be severely undermined.
Since PPPs were launched in Ireland almost 10 years ago, proponents have argued that they yield better value for money than traditional procurement methods. But this argument was largely based on the expectation that, under PPPs, the private sector takes on risks that they would not normally hold under traditional procurement.
Risk transfer, we are told, creates incentives for private contractors to complete projects on time as well as ensuring they provide quality services and value for money. If projects are not completed on time, the private sector does not get paid. If services are not in accordance with the standards specified in detailed contracts, the private sector runs the risk of penalties.
So, while private finance is more expensive than the cost of government borrowing, risk transfer, we are told, drives the private sector to provide value for money. If the winning bidder that eventually builds and operates Metro North wriggles out of taking financial risks, the future of the project as a PPP must be reconsidered. But any reasonable interpretation of events surrounding the adoption of PPP in general, as well as the procurement of Metro North, suggests that there will be no change of tack.
PPPs were officially launched in June 1999. Initially, eight projects were nominated as pilot projects. But such was the appeal of the PPP model that the PPP programme was expanded before procurement of the pilot projects commenced. Only one PPP project has been subject to rigorous independent analysis. This was the case of five secondary schools procured as a single contract.
The Comptroller and Auditor General (CAG) found that the project was procured without testing for value for money. The value assessment that was conducted after procurement commenced was found to be unreliable and the CAG estimated that the PPP will now cost the taxpayer more than traditional procurement. Undeterred, the Government has expanded the use of PPP in the education sector and elsewhere.
Admittedly, the central unit at the Department of Finance has invested significant resources in establishing guidelines for procurement under PPP. These include testing whether the PPP model of procurement will yield value for money compared to traditional procurement methods. As the procurement process for Metro North has already commenced, two separate value for money tests should have been conducted so far. According to the guidelines, the first test is not a number-crunching exercise. Instead, it is mainly qualitative and requires an examination of issues such as the scale of the project, the potential for risk-transfer and the potential for revenue-generation. This test has not been placed in the public domain but one can safely assume Metro North came up trumps on this one. The second test is more detailed and involves estimating the cost of the project if it were procured by traditional methods. This is called the public sector benchmark. This estimate makes specific provisions for the amount of risk transferred to the private sector under PPP. As more and more risk is transferred, the likelihood of value under PPP increases.
In the case of Metro North, this test should now be under way and the value of risks transferred should be reduced following the private sector’s indication that it will not take on financial risks. Will this adjustment take place? Unfortunately, we will not know because the information contained in this test is not put in the public domain. This highlights a serious problem with accountability in relation to PPP procurement. Not only is Joe Citizen denied the right to interrogate the relevant data but the Dáil Public Accounts Committee has also expressed dissatisfaction with the lack of information available to its members.
Accountability problems with Metro North are not confined to the question of PPP procurement. The fundamental issue of whether the project should proceed instead of alternatives is usually determined by conducting a cost/benefit analysis. This exercise seeks to establish whether social benefits exceed social costs. However, no such analysis has been published. Minister for Transport Noel Dempsey has stated the project can only proceed if the cost/benefit analysis comes down in favour of the project. Yet the project has already gone to tender and we are told bidders have invested over €10 million each on bids so far. Are we really to believe this project will only now go ahead subject to passing an objective cost/benefit analysis test?
The issues raised in this article are not confined to infrastructure projects in Ireland. In their authoritative book, Megaprojects and Risk, Prof Bent Flyvbjerg of Aalborg University and his co-authors highlight similar problems with megaprojects around the world. They make specific recommendations if accountability problems are to be addressed. Two key recommendations concern "transparency" and "risk capital". In relation to transparency, they recommend all documents and other information should be made available to the public. Stakeholder and civil society groups should be invited to participate from an early stage in feasibility studies and decision-making. Independent peer reviews should be carried out for all important aspects of a project. In relation to "risk capital", the authors recommend that the decision to go ahead with a project should, where possible, be made contingent on the willingness of private financiers to participate without a sovereign guarantee for at least one-third of the total capital costs. This would result in a more realistic risk assessment, a possible reduction in risk and a shift in risk from ordinary citizens to groups better able to protect themselves. It is evident these basic conditions are unlikely to be met in the case of Metro North.
Metro North is the most expensive infrastructure project in the history of the State. Whether the project goes ahead per se and whether the project goes ahead as a PPP are two separate decisions. Unless these decisions can be made on the basis of complete and transparent appraisals, the project must be reconsidered.
Dr Eoin Reeves is a senior lecturer in the department of economics at the University of Limerick, where he is director of the Privatisation and PPP Research Group