COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 10 Nov 2005

2004 Annual Report of the Comptroller and Auditor General and Appropriation Accounts.

Mr. J. Purcell (An tArd Reachtaire Cuntas agus Ciste) called and examined.

Chapter 13.1 — West Link Toll Bridge.

Ms J. O’Neill (Secretary General, Department of Transport) called and examined.

Chairman

There is no relevant correspondence.

Witnesses should be aware that they do not enjoy absolute privilege before the committee. The attention of members and witnesses is drawn to the fact that, from 2 August 1998, section 10 of the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act 1997 grants certain rights to persons identified in the course of the committee's proceedings. These rights include the right to give evidence; the right to produce or send documents to the committee; the right to appear before the committee, either in person or through a representative; the right to make a written or oral submission; the right to request the committee to direct the attendance of witnesses and the production of documents, and the right to cross-examine witnesses. For the most part, these rights may be exercised only with the consent of the committee. Persons being invited before the committee are made aware of these rights and any persons identified in the course of proceedings who are not present may have to be made aware of them and provided with a transcript of the relevant part of the committee's proceedings if the committee considers it appropriate in the interests of justice.

Notwithstanding this provision in the legislation, I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. They are also reminded of the provisions in Standing Order 156 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government, or the merits of the objectives of such policy or policies.

Will Ms O'Neill and Ms O'Hanlon introduce their officials?

Ms Julie O’Neill

I am accompanied by Mr. Jim Humphreys, principal officer in the roads policy division of the Department of Transport; Mr. Eddie Burke, assistant principal officer in the integrated transport unit, and Mr. DerekMcConnon, assistant principal officer in the finance unit.

Ms Deirdre Hanlon

I am from the public expenditure division of the Department and accompanied by Ms Stephanie O'Donnell, Mr. David Denny and Ms Mairéad Emerson.

Chairman

Chapter 13.1 of the report of the Comptroller and Auditor General reads:

13.1 West-Link Toll Bridge

The M50 is a 40km orbital motorway around Dublin, running from the M1 at Dublin Airport to the N11 at Bray. A 3.2km section of the motorway, from the N3 (Navan Road) to the N4 (Sligo Road) includes two side-by-side bridges spanning the River Liffey (West-Link Bridge). This section of the M50 is a toll road. The first bridge opened in March 1990 and the second in September 2003.

This was the second toll scheme in the State. The first was the East-Link toll bridge where tolling rights had been granted to National Toll Roads Ltd (NTR) and which opened in October 1984.

Government Decision

In 1982, NTR had approached Dublin County Council seeking agreement in principle to construct and operate a toll facility across the River Liffey to the west of the city between the N3 and N4 national primary routes. Following discussions and negotiations involving the State, Dublin County Council and NTR, NTR submitted a proposal to Dublin County Council in May 1984.

In October 1984, the Government agreed, in principle, to a proposal from the Minister for the Environment (the Minister) to the conclusion by Dublin County Council of negotiations with NTR. The memorandum to Government noted that if the State finances were not so constrained and if substantial capital investment was being put into road improvement then it could afford to forgo the possibility of tolling the road and of private sector investment.

In the circumstances then prevailing and given the relatively underdeveloped state of the national roads, tolling options had to be considered. The memorandum noted that while tolls were not generally applied to ring roads in European countries, the Western Parkway route was one of only a few routes which could potentially provide an economic return to a private investor without the necessity for State subsidies or guarantees. The proposal to Government noted that the proposed project yielded an after tax return of 18% to NTR by comparison with a gross yield at the time from Government bonds in the region of 15%.

The Western Parkway is the section of the M50, approximately 12.2km in length, from the N81 (Tallaght Road) to the N3 (Navan Road). Its construction was completed in 1990 and was funded by the State except for the 3.2km toll road section.

Toll Scheme

The Local Government (Toll Roads) Act, 1979 provided that road authorities may, with the consent of the Minister, make toll schemes for public roads. Section 9 of the Act provided that the road authorities may, with the consent of the Minister, enter into an agreement (Section 9 Agreement) with another party to provide, maintain, manage and operate toll roads.

In October 1987, Dublin County Council, pursuant to a toll scheme made in 1985 and approved by the Minister in December 1986, entered into a Section 9 agreement (the Agreement) with a private company, West-Link Toll Bridge Ltd, a wholly owned subsidiary of NTR, under which that company would construct the 3.2km toll road including the first bridge. In return, the company would be granted tolling rights to the road for a period of 30 years after which the road would revert to the State.

Second Bridge Construction

While the construction of a second bridge was not covered by the provisions of the 1987 Agreement, it was recognised from the outset that a second bridge would be built if traffic volumes rose to around 56,000 vehicles per day. In 1985 a senior engineer in Dublin County Council had pointed out that at this volume of traffic, the reduced level of service would make it necessary to construct the second bridge. By 1998, the 56,000 per day traffic threshold had been reached. The bridge was opened in 2003, by which time daily traffic was around 40% above the 56,000 threshold.

Licence Fee

The Agreement provided that NTR would pay a proportion of Gross Toll Revenue (GTR) to the State when the average daily traffic volumes over a year exceeded 27,000. The proportion, referred to as the licence fee, would commence at 30% of the GTR for the first 8,000 vehicles in excess of 27,000 and would rise in accordance with increases in traffic volume measured in intervals or bands as outlined in Table 1 .

Table 1 Licence Fee Bands

Band	Average Daily Traffic Limit	Proportion of GTR payable to State
	First 27,000	—
1	27,001 to 35,000	30%
2	35,001 to 45,000	40%
3	Over 45,000	50%

In June 2001, the NRA entered into a revised agreement with West-Link Toll Bridge Ltd (the supplemental agreement), under which the company would construct a second bridge in return for a revised toll scheme. The revised scheme added a fourth band to the licence fee structure under which the State would receive 80% of GTR for traffic volumes over an agreed fourth band figure for the relevant year, as set out in the supplemental agreement. The fourth band commenced at 79,000, in 2001, and was to increase in annual tranches to 126,000 by 2020. The 80% threshold has not been reached to date. In 2004, the fourth band would have applied if daily traffic volumes exceeded 88,000. The daily traffic volume for that year was around 84,800.

On the basis of the agreed bands the yield from licence fees achieved and projected is set out in Table 2. The yields for the years from 2005 onwards are based on agreed forecast traffic volumes.

Table 2 Yield from licence fee 1990 to 2020a

Period	Average daily traffic over the period	Licence fee as proportion of GTR
1990 — 1994	13,500	—
1995 — 1999	42,300	16.7%
2000 — 2004	75,200	25.3%
2005 — 2009	93,000	32.7%
2010 — 2014	105,800	34.8%
2015 — 2020	114,500	36.0%

a Projected yields are shown in italics.

Taxation

At the time of the 1987 agreement, the rate of Corporation Tax was 50%. It was assumed, at that time, that NTR would not be liable for the payment of municipal rates in respect of the toll road and, at that point, VAT did not apply to toll charges.

There have been a number of changes to taxation and other charges in the period from 1990 to date

·West-Link Toll Bridge Ltd became liable for municipal rates on the toll road from 1992

·VAT has been applied to toll charges since September 2001 following a ruling by the European Court of Justice

·The rate of Corporation Tax has fallen steadily over the period, from 50% in 1987 when agreement was reached to 12.5% from January 2003

·Income tax rates and capital gains tax rates have also changed over this time.

Proceeds of Tolling

Table 3 sets out the GTR at the bridge and the appropriations to the State, excluding Corporation Tax, for the period from 1990 to 2004. €79,672,000 has been received by the State since the facility was put in place. The gross revenue in the period was €310,056,000.

Table 3 Toll Revenue and Licence Fee 1990 to 2004

Year	Gross Proceeds	Licence Fees	Municipal Rates	Appropriations to the State (excluding Corporation Tax)
	€000	€000	€000	€000
1990	1,834	—	—	—
1991	4,046	—	—	—
1992	5,243	—	294	294
1993	5,940	—	309	309
1994	6,719	—	324	324
1995	8,224	—	335	335
1996	11,296	—	347	347
1997	20,749	3,043	356	3,399
1998	26,689	5,817	367	6,184
1999	29,668	7,309	378	7,687
2000	31,045	8,079	390	8,469
2001	33,703	9,220	2,875	12,095
2002	36,857	7,585	3,025	10,610
2003	39,369	8,044	3,176	11,220
2004	48,674	15,094	3,305	18,399
Totals	310,056	64,191	15,481	79,672

Source: Department of Transport (the Department), South County Dublin and Fingal County Councils.

Cost of the M50 to date

The West-Link facility provides access to a 40km motorway standard ring road around Dublin, which in turn gives access to all national primary routes out of the capital city.

The construction of the M50 has been, with the exception of the toll road, funded by the State at a cost of around €1.1bn in 2004 values. Toll charges at the West-Link Bridge are expected to be around a further €1.1bn in 2004 values for the period 1990 to 2020, excluding VAT. When account is taken of direct appropriation of funds (€0.44bn) to the State in the form of licence fee, municipal rates and corporation tax the net cost to the public of the current M50 facility, before taking account of income and capital gains tax, is around €1.76bn in 2004 values. These figures do not take account of the cost of a proposed upgrading of these facilities to cater for user demand.

To the extent that the profits available to the shareholders of NTR are distributed, additional income and capital gains tax will accrue to the Exchequer.

Scope of the Review

Because of public concerns about the operation and cost of the toll road I decided to

·compare the economic cost of the facility with its cost to users

·review the return to NTR

·review the return to government

·consider the options available to the State under its agreement with NTR.

No Cost Benefit Analysis (CBA) was carried out for the West-Link project. The memorandum to Government in 1984 stated that while no CBA had been carried out on the proposed M50, there could be no doubt that given its national importance, the existing traffic congestion and projected traffic flows over the various sections, the investment would provide a substantial real return.

Because of the extended period of the development of the M50 network over the last three decades it is recognised that CBA would not be very informative in this instance and the project may be best viewed as a measure to remedy a major gap in the roads infrastructure. Accordingly, in the absence of a quantification of the benefits from the project no analysis has been made of the economic value of the facility to users.

Costs to Users

The cost of the facility to users is equivalent to the GTR.This section reviews the outturns on foot of the contracts taking account of the GTR projected originally and those now projected or achieved. Two issues in relation to cost were examined in the course of audit

·what was the relationship between the cost of the infrastructure and the aggregate amount paid by road users

·whether, in negotiating the second bridge contract, a reasonable degree of balance was achieved in at least maintaining that relationship.

Relationship between Project Cost and Charges

I reviewed the relationship between the cost of the facility to the users at the inception of the original agreement with NTR and the outturn expected on the basis of experience to date and current projections.

In comparing the economic cost of the facility with the cost to users all rates and taxation have been excluded. The facility refers to the 3.2km section of the M50 which is a toll road. For the purposes of this comparison no account was taken of the State investment in infrastructure on other parts of the M50 since they did not form part of the tolling scheme.

Analysis of the projections at the negotiation of the original agreement shows that the users would pay around €3.70 for each €1 in whole-life costs when expressed in 2004 values. Expected revenue from toll charges and the whole-life costs of constructing and operating the first bridge at that time are set out in Table 4. The 2004 values of the cash flows set out in that table provide the most realistic basis for comparison because it expresses the cash flows in constant values.

Table 4 Expected Revenues and Whole-Life Costs — Original Agreement

	Original Estimates 1990 — 2020
	Toll Revenues	Whole-Life Costs	Ratio of Revenue to Costs
	€m	€m
Gross Cash Flows	758	111	6.8 : 1
Cash Flows at 2004 Values	678	182	3.7 : 1

Source: Gross Cash Flows at time of negotiations in 1984 — Department of Transport.

Analysis of Gross Cash Flows by Office of Comptroller and Auditor General.

By the time the second bridge was being negotiated, the M50 road system had been further developed and the number of users had increased.Because of this increased use, road users were, by then, paying in the aggregate around €5.20 for each €1 in whole life costs. Table 5 sets out the position at the time the contract for the second bridge was being negotiated.

Table 5 Revenues and Whole-Life Costs — 1999

	Outturn and Estimatesa 1990 — 2020
	Toll Revenues	Whole-Life Costs	Ratio of Revenue to Costs
	€m	€m
Gross Cash Flows	1,332	137	9.7 : 1
Cash Flows at 2004 Values	1,026	197	5.2 : 1

Sources: Gross Cash Flows — Department records, NTR published accounts.

a Cash Flows combine actual outturn from 1990 to 1998 and projected cash flows for the period from 1999 to 2020. VAT is excluded.

Analysis of Gross Cash Flows by Office of Comptroller and Auditor General.

The costs borne by users are a factor of the toll rates and the traffic volumes. These are examined separately in the following sections.

Toll Rates

Under the toll scheme provisions toll charges may not exceed a certain level (maximum tolls). NTR may, however, charge less than the maximum toll if it so chooses. The maximum level is calculated by adjusting a base toll by reference to the Consumer Price Index (CPI). The base tolls, in 1990, ranged from 38c (30p) for motor cycles and 76c (60p) for cars up to€4.57 (£3.60) for certain commercial vehicles. The base rate for cars was adjusted upwards following the negotiations for the construction of the second bridge.

The 1987 and 2001 agreements provide that if the State instructs NTR to charge a toll lower than the maximum toll, then the State would be required to compensate the operator. These provisions effectively guaranteed that the real value of the tolls could be maintained independent of the volume of traffic.Currently, NTR charges less than the maximum rate for large commercial vehicles. Maximum tolls and tolls charges in 2005 are set out in Table 6 .

Table 6 Toll Charges — West Link Bridge 2005

Vehicle type	Maximum Tolla	Actual Tolla
	€	€
Motorcycles	0.80	0.80
Motor Cars	1.80	1.80
Buses and Vans	3.10	3.10
Commercial vehicles, 2 axle	6.10	4.50
Commercial vehicles, 3 axle	7.60	5.20
Commercial vehicles, 4 axle	9.20	5.60

a Inclusive of VAT

Impact of Traffic Volumes

Traffic volumes have been considerably greater than anticipated in the estimates that informed the setting of the toll charges. The original estimates had been based on an assumption that only the Western Parkway section of the M50 would be open to traffic and did not take account of the likely impact on traffic volumes when the additional sections would be completed.

From 1990 to 1996, the volume of traffic at the toll road was below the original estimates. In 1991, the first full year of operation, traffic volumes were around 54% of the estimates. Volumes have risen each year and by 1996 were around 91% of the estimates.In 1997, the year following the opening of the section of the M50 from the N3 to the M1, volumes rose sharply to almost 45,600 per day which was around 65% in excess of the original forecast. In 2004, the traffic volume was over 2.5 times the original estimate.

Traffic volumes at the West-Link Bridge, and the original estimates, are set out inTable 7.

Table 7 Average daily traffic volumes 1990 to 2004

Year	Original Proposals	Actual
1990	20,300	6,800
1991	21,300	11,500
1992	22,300	13,800
1993	23,500	15,200
1994	24,600	16,700
1995	25,900	20,000
1996	27,000	24,700
1997	27,700	45,600
1998	28,400	57,500
1999	29,200	63,900
2000	29,900	67,300
2001	30,600	71,100
2002	31,300	74,700
2003	32,000	78,100
2004	32,800	84,800

Whereas toll charges rise broadly in line with inflation, there is no mechanism in the agreements to provide for a reduction in toll charges if volumes exceed the estimates which informed the setting of the base tolls. The increase in the volumes above the original estimates resulted in additional costs to users of €350m in 2004 values giving a higher return to the operator as well as increasing the amount of revenue accruing to the State.

Second Bridge Negotiations

A detailed proposal for the construction of the second bridge submitted by NTR in September 1999, following negotiations between NTR and the NRA, had the following main financial features

·The costs of providing the second bridge would be met through an increase in the toll charge for cars. The maximum charge for cars under the 1987 Agreement would increase by around 17% from January 2005 with interim increases in the period 2000-2004. There was also a proposal that a further 10c be added to the toll, to be paid in full to the NRA. This provision has not been invoked by the State.

·While the existing licence fee structure would continue to apply, a fourth band was to be added in order to reduce the possibility that NTR would make windfall profits in the event that traffic volumes would exceed those projected. The fourth band was to be set at a level that was 6.5% above compromise traffic forecasts agreed between the NRA and NTR.

·Municipal rates were being charged, at that time, on what is known as the "contractors" basis but there were indications that they would be levied in the future on the "profits" basis. Under the profits basis the rateable valuation of the toll road would be far greater. It was proposed that if rates continued to be assessed on the lower contractors basis, the difference between rates assessed on the two bases would be paid by NTR to the NRA, using an agreed formula.

In addition, it was agreed that the toll road must be maintained in a manner that guarantees it will have a residual life of 15 years when it is handed back to the State in 2020.

In December 1999, the Board of the NRA approved the proposal. In doing so it took account of an independent assessment which it had commissioned. The assessment, delivered in November 1999, had noted that the NRA's negotiating position was constrained by two factors

·the original agreement was not open for negotiation and

·the NRA was not in a position to build the second bridge with either public funds or to procure a competing private sector party to do so as NTR had the sole right to toll that section of the M50.

VAT was imposed on toll charges prior to an agreement being signed and the Board approved an amended proposal taking account of VAT in June 2001.

NTR bore the cost of construction (€27m in 2004 values) and will incur additional running costs of €7m in 2004 values.However, as the extra projected toll revenue of €74m arising from the agreement attracts licence fee at50%, the bulk of the net toll revenue after taking account of those costs will accrue to the State (€37m). Although it could be argued that the users were already paying aggregate tolls at a level sufficient to remunerate the investment by virtue of volume increases in excess of those originally envisaged, it could also be argued that because there was no mechanism in the 1987 agreement to cover the second bridge financing, the achievement of an overall reduction in the ratio which the cost to users bears to the total costs incurred by NTR, when taken together with a net marginal return of only €3m to NTR, might be viewed as achieving a reasonable negotiating result.

After account is taken of the financial adjustments arising out of the second bridge negotiation, the cost to users by way of toll revenue is around 4.8 times the whole-life costs of the toll road including the two bridges, or around €869m more than the cost when expressed in 2004 values. Table 8 sets out the position following these negotiations.

Table 8 Revenues and Whole-Life Costs including Second Bridge — 2004

	Outturn and Latest Estimatesa 1990 — 2020
	Toll Revenues	Whole-Life Costs	Net Toll Revenue
	€m	€m	€m
Gross Cash Flows	1,454	170	1,284
Cash Flows at 2004 Values	1,100	231	869

Sources: Gross Cash Flows — Department records, NTR published accounts.

a Cash Flows combine actual outturn from 1990 to 2004 and projected cash flows for the period from 2005 to 2020. VAT is excluded.

Analysis of Gross Cash Flows by Office of Comptroller and Auditor General.

Adjustment of Car Tolls

The figures in Table 8 take account of the impact of adjustments to the toll on cars agreed in the negotiations about the construction of the second bridge in 1999. These adjustments were as follows

·a revised interim toll level for cars of €1.20 applying for the period 2002 to 2004

·calculation of the toll levels from January 2005 by reference to a base level of €1.20 at January 2000 indexed for inflation thereafter.

In addition, the imposition of VAT with effect from September 2001 led to the introduction of certain transitional measures. The charge to the user was increased to €1.30 between September 2001 and December 2003.Because NTR had to remit VAT on the revised toll charge its net toll revenue fell below the previously agreed level of €1.20 for 2002 and 2003. The State compensated NTR in order to maintain the company's VAT exclusive toll revenue at the agreed level.

In addition, it was agreed that the increased toll charge arising from VAT would lead to a certain volume of car users diverting to alternative routes. The proportion which would divert was agreed at around 4%.In order to compensate NTR for the anticipated fall in demand it was agreed that the State would pay additional compensation in 2003. The total compensation paid by the State was €6.4m of which around €0.5m was attributable to compensation in respect of the diversionary effect of the increased tolls.

The transitional arrangements also provided that in 2004 the car toll would further increase to €1.50 giving a toll charge of €1.24 exclusive of VAT. This increase of 4c per car in excess of the charge agreed in 1999 prior tothe imposition of VAT resulted in users paying an additional €1m in toll charges in 2004.

Licence Fee Underpayment

The agreements provide that the amount of GTR payable to the State (licence fee) may be audited by the auditor of West-Link Toll Bridge Ltd or by any suitable person as may be agreed by the NRA and West-Link. The agreements also provide that the NRA may request copies of and access to all relevant documentation and records on which the calculation of the licence fee and any deduction therefrom is based. In the event of any disagreement, the matter can be decided by arbitration.

Under this arrangement, the auditor of West-Link Toll Bridge Ltd annually confirms

·the amount of the licence fee

·the turnover upon which that licence fee is based

·the overall traffic volume for the year

·the accuracy of the computation of the licence fee and

·that the computation has been performed in accordance with the Agreement.

Notwithstanding this, my audit established that the amounts paid to the State for the years 2002 and 2003 were incorrectly calculated. Under the 2001 Agreement the compensation paid to NTR should have been treated as an element of GTR because GTR is defined in that Agreement as tolls collected or receivable together with the licence fee credit. This should have resulted in just over €1.8 million extra being paid to the State by way of licence fees. In addition, rounding of the compensation payment per car to the nearest cent by NTR resulted in a further underpayment of €171,000. Details are set out in Table 9 .

Table 9 Licence Fee Underpayment 2002 and 2003

	Comptroller and Auditor General Calculation	NTR Calculation	Underpayment
	€	€	€	€	€
Toll Proceeds 2002 and 2003	76,225,477		76,225,477
Licence Fee Credit	6,260,078
GTR		82,485,555		76,225,477
Licence Fee	23,873,880		22,060,335
Licence Fee Credit	(6,260,078)		(6,431,161)
Licence Fee payable		17,613,802		15,629,174
Underpayment					1,984,628

I enquired of the Accounting Officer

·the exact circumstances that gave rise to the non-detection of the underpayment

·what measures have been taken or are proposed to recover it and to monitor and validate future remittances.

In regard to the non-detection of the underpayment, the Accounting Officer informed me that this arose because the checking procedures in the Department had not been adapted to take account of the changed definition of GTR included in the 2001 Supplemental Agreement. This agreement provided that a licence fee credit due to NTR in respect of 2002 and 2003 would be included as part of the GTR for the calculation of the licence fee payable to the State. This was not done by NTR and the error was not identified by NTR's auditors, the NRA or the Department.

In regard to the recovery of the underpayment of the licence fee in respect of 2002 and 2003, she informed me that the Department had taken the matter up with NTR. NTR have accepted that an underpayment has occurred and have undertaken to immediately recoup €2m. In order to assist in confirming the precise amount of the underpayment and to deal with other queries relating to the calculation of the fee, NTR have been asked to provide details and explanations relating to the calculation of GTR and the licence fees payable thereon back to 1997. When this work has been completed, the provisions in the agreement relating to interest on late payments will be invoked and repayment of the amount underpaid will be secured in full.

In regard to the arrangements for the monitoring and validation of future remittances, the Accounting Officer stated that the provision of a certificate from NTR's auditors confirming the accuracy of the payment is an important part of the control system for the validation of the licence fee. In addition, procedures are in place in the Department for checking the remittances. She assured me that, since the Department of Transport was established, the Department has continually moved to strengthen and improve its financial control systems. However, in light of the seriousness of the error that has arisen in this instance, she has instructed that arrangements for validating the correctness and accuracy of the licence fee payment from NTR be reviewed as a matter of urgency. Decisions on measures to strengthen the Department's arrangements for monitoring and validating future remittances will be taken in light of the outcome of the review which is already underway.

Return for the Private Operator

At the time of the Government decision in 1984 it was estimated, in the proposal by the private operator, that the after tax rate of return on the project would be around 18%.

By 1999, prior to the agreement to construct the second bridge the projected after tax rate of return to NTR for its investment was around 25%, based on the outturn to that date and the forecasts which informed the negotiations for the second bridge. Following the construction of the second bridge and taking into account the additional investment by NTR as well as the outturn to 2004 and the revised forecasts, the projected after tax return has fallen by around 1% to 24%.

NTR's Distributable Income

Changed tax structures over the period 1987-2004 impact on the ultimate distributable income of NTR. In order to examine the effect of these changes, the distributable income of NTR has been calculated under two separate scenarios for the now estimated traffic volumes — firstly, using the taxation structures ruling in 1987 (original scenario) and secondly, using the rates which applied up to 2004 or are projected thereafter (current scenario).

On this basis, the same gross revenue is projected to result in an increase of €141m, in 2004 values, in NTR's distributable income as set out in Table 10 .

Table 10 NTR Distributable Income from the West-Link Project (2004 values)

	Current Scenario	Original Scenario
	€ m	€ m	Share of GTR	€ m	€ m	Share of GTR
Gross Toll Revenue (a)		1,100			1,100
Costs
Capital Costs	(131)			(131)
Operating Costs	(100)	(231)	21.0%	(100)	(231)	21.0%
Direct payments to Government
Licence Fee	(285)			(285)
Corporation Tax	(80)			(291)
Municipal Rates	(70)	(435)	39.5%	—	(576)	52.4%
Revenue to NTR		434	39.5%		293	26.6%

(a) VAT is excluded.

Change in Return to Government

The return to government arising out of the bridge project is not equivalent to the direct payments made to it by NTR. This is because the income distributed by NTR is taxable in the hands of its shareholders and is, therefore, an additional source of revenue.

In order to examine the likely effect of the revenue attributable to government which was projected at the inception of the agreement compared with what is currently estimated, I took account of the following factors

·the changes in municipal rates, corporation tax rates, tax credits on distributions and income tax rates over the period 1987 to 2004

·the projected distribution pattern of the NTR Group as indicated in their financial statements for the years 2001 — 2004.

Assuming total efficiency in tax collection, the estimated overall return to government has altered between 1987 and 2004 as projected in Table 11. The assumption has been made that all previously non-distributed profits will be distributed by way of dividends when the tolling period expires in 2020. In addition, it has been assumed that all shareholders in NTR are liable for income tax at the top rate and that the dividend income is not sheltered from income tax. The income tax revenue shown is the maximum that can accrue to the State under both scenarios.

Table 11 Revenue accruing to Government — West-Link project 1990 to 2020 (2004 values)

	Current scenario — projected sharea	Original scenario — projected sharea
	€m	Share of GTR	€m	Share of GTR
Licence Fee	285		285
Corporation Taxb	80		243
Municipal Rates	70		—
Income Taxb	136		125
	571	51.9%	653	59.4%

a Excluding VAT.

b Corporation Tax liabilities of NTR and Income Tax liabilities of shareholders have been adjusted for the effect of tax credits on dividends. These credits were abolished in 1999. Under the original scenario, the tax credits apply for the full period.

However, if the company were to be wound up and remaining assets distributed by way of a capital distribution, the tax accruing to the State would be around €22m less in the current scenario and around €4m less in the original scenario than that shown in the table.

Ultimately, after taking account of all tax revenues, the share of GTR accruing to government has fallen by around €82m or 7.5% of GTR. The difference between the share of the revenue expected to accrue to the State and the share that would have accrued under the revenue-sharing understanding at the time of the original agreement has arisen principally due to the fall in the rate of Corporation Tax. On the other hand, it is projected that revenue of €70m will arise from the imposition of municipal rates with effect from 1992.

There are two ways of viewing this outcome. On the one hand, it is arguable that changes in Corporation Tax rates and other charges imposed by public bodies are part of the normal business risks associated with any project, and that any additional profit, arising from the fall in corporate tax rates, which has accrued to NTR is no more than the benefit accruing to any other business.

On the other hand, it might be considered that commercial agreements involving the State as a party are struck so as to achieve a particular distribution of revenue. Taxation is part of the intended distribution when the State is involved. There may be merit in future partnership arrangements, in putting a mechanism in place to maintain a reasonable distribution in the event of major tax fluctuations in either direction.

Non-reclaimable VAT

VAT has been applied to toll charges since September 2001. The State has, therefore, increased its take at the expense of those road users who cannot reclaim VAT. Analysis carried out by consultants for the NRA indicated that around €99m in 2004 values, in non-reclaimable VAT would be paid by users of the toll bridge and would accrue to the State.

Impact of Upgrading on Revenue Sharing

The NRA currently proposes to upgrade the M50 facilities by widening the carriageways and altering interchange layouts. The traffic volumes accommodated by the M50 are projected to increase as a result of this work. Under the 2001 agreement

·the original sharing arrangement will hold until the traffic projections agreed in 2001 are exceeded by around 6.5%

·thereafter, the State would receive 80% of the GTR for traffic volumes in excess of this level.

Table 12 compares the average daily traffic volumes projected in the 2001 supplemental agreement with the fourth licence fee band above which State will receive 80% of the GTR.

Table 12 Licence Fee — Fourth Band

Year	Current projectiona	Threshold for fourth band
2005	86,463	92,000
2006	89,872	96,000
2007	93,250	99,000
2008	96,298	103,000
2009	99,183	106,000
2010	102,056	109,000
2011	103,918	111,000
2012	105,889	113,000
2013	107,641	115,000
2014	109,545	117,000
2015	111,259	118,000
2016	112,888	120,000
2017	114,423	122,000
2018	115,857	123,000
2019	117,310	125,000
2020	118,518	126,000

a These are the volumes projected in the 2001 Supplemental Agreement.

The proposed upgrading investment will have the effect of further increasing the revenue accruing to NTR as it is likely that the traffic volumes will then exceed the current projections. While NTR will receive 50% of GTR up to the commencement of the fourth band, additional revenue accruing to NTR will be restricted to 20% thereafter.

Options Available to the State

Under the existing arrangements the State may abolish or reduce tolls or limit any increase in them. However, this would trigger compensation entitlements under the agreement.

Broadly speaking, the provisions are

·If the tolls are reduced, or not increased in line with the indexation mechanism, the State must compensate NTR for the shortfall in toll revenue. The amount of compensation payable over the duration of the agreement is the difference between the reduced toll revenue and the toll revenue in the year before any such adjustment, indexed in accordance with the agreement.

·If tolls are abolished, the compensation is the total amount of toll revenue paid, less the licence fee, in the 12 months immediately preceding the date of the abolition of the tolls. This compensation would be payable in each year for the duration of the agreement and would increase in accordance with the indexation provisions.

The Department has informed me that the NRA is currently in negotiation with NTR on a range of issues affecting the West Link agreement, including a move to barrier free tolling and the funding of the proposed upgrading works on the West Link section of the M50.

Review Methodology and Sensitivity Testing

Review Methodology

Except as otherwise stated, the analysis in this review has been conducted using outturns or projected cash flow data which formed the basis of negotiations. These have been expressed in 2004 present values (2004 values) derived using a rate of 5% (excluding inflation) to adjust the value of pre-2004 estimates or outturns to 2004 levels and to discount post-2004 cash flow projections in order to bring them back to 2004 values.

Impact of Discount Rates

A private operator may use a different discount rate than the State. In order to test the variation in the ratio of revenue to costs at different discount rates, the cash flows were also discounted at 3% and 7%.

Impact on ratio of revenues to whole life costs

In all cases, the ratio of revenue to costs had risen by 1999 from the time of the original contract and had fallen somewhat from the 1999 level following the construction of the second bridge. The ratios of revenue to costs at the various discount rates are set out in Table 13.

Table 13 Ratio of Revenues to Whole-Life Costs

	3% discount rate	5% discount rate	7% discount rate
At time of contract, 1987	4.4 : 1	3.7 : 1	3.2 : 1
Prior to agreement to construct second bridge, 1999	6.3 : 1	5.2 : 1	4.3 : 1
Following construction of second bridge	5.7 : 1	4.8 : 1	4.0 : 1

The ratio of revenue to costs is greater atthe lower discount rates because a greater proportion of costs were incurred at theearlier stages of the project while a greater part of the revenues will arise in the later years. The effect of using a higher discount rate is to place a lower value on the later cash flows.

Impact on revenue sharing

There was some difference in the proportion of GTR accruing to government after taking account of all tax revenues and assuming that the State would receive the maximum income tax revenue. The share of GTR expected to accrue to the government at the different discount rates is set out in Table 14.

Table 14 Proportion of revenue accruing to Government 1990 to 2020

	3% discount rate	5% discount rate	7% discount rate
Current projected share	55.2%	51.9%	48.9%
Original projected share	62.5%	59.4%	56.3%

Mr. John Purcell

Chapter 13.1 records the results of an examination of the toll scheme for the West Link bridge carried out in response to concerns expressed by this committee and several public representatives that the scheme might constitute a bad deal for the State and users of the bridge. The toll section of the M50 motorway between the Navan Road and the Sligo road measures 3.2 km and now includes two bridges across the River Liffey. The first bridge opened in March 1990 and the second in September 2003 to cater for the large increase in traffic numbers. In October 1987 tolling rights were granted to a wholly owned subsidiary of National Toll Roads Limited in return for its construction of the 3.2 km section of the motorway, including the first bridge. A revised agreement was entered into with the company to cover construction of the second bridge in June 2001. The tolling rights are for 30 years, after which the road will enter State ownership, that is, in 2020.

We carried out a detailed analysis of the arrangements. In particular, we examined the return to the operator and the State, the cost to the user and the way in which the scheme was monitored. In examining the return we had actual figures to go on up to and including 2004, while we used agreed projections of traffic volumes for the remainder of the period up to 2020. To have a valid basis for comparison, the figures were converted to 2004 values.

Taking the return to the operator first, at the time of the Government decision in 1984 to approve the tolling of the road, it estimated that the after tax rate of return on the project would be approximately 18%. That looks fairly generous in current terms, but it must be seen in the context of the mid-1980s when there was a return in the region of 15% from Government bonds. Our best estimate of the ultimate after tax return to the operator on the funds invested is 24%. This takes account of changes in corporation tax and the imposition of municipal rates during the course of the agreement.

Regarding the State's share, we estimate that it will end up getting nearly 52% of the gross toll revenue in licence fees, rates, and corporation and income taxes, against an original projected share of 59.4%. However, it must be said it is 52% of a much greater figure than anticipated. The difference in the percentage take is largely accounted for by the dramatic fall in corporation tax rates since the 1980s.

We examined the cost to the user regarding the relationship between the cost of the infrastructure and the aggregate amount paid by users of the toll road. Analysis of the projections at the negotiation of the original agreement showed that users would pay around €3.70 for each euro in whole-life costs expressed in 2004 values. This rose to €5.20 at the time the contract for the second bridge was being negotiated, but fell to 4.8 times the whole-life costs after taking account of the financial adjustments arising from the negotiations on the construction of the second bridge.

In the course of checking the calculation of the State's share of gross toll revenue we found that the amounts paid to the State for the years 2002 and 2003 were incorrect. In fairness, there was an added complication in computing the State's share of the tolls for those years because of an agreement to pay compensation to the operator as a result of the imposition of VAT on tolls. The failure to detect the errors led to an underpayment by the operator of approximately €2 million. I see that nearly €1.94 million has been repaid, including interest penalties, and note in the Accounting Officer's opening statement that she will be informing the committee that discussions with the operator on the amount of an agreed full and final settlement have yielded results.

One of the questions is whether the State got a good deal. In purely monetary terms, the answer is yes. However, there is a line of thinking that suggests a better deal could have been achieved. For one, although the dramatic improvement in the economy undoubtedly led to a significant increase in traffic volumes on the toll bridge, particularly from 1997, it is likely that the opening of the northern cross route in late 1996 was the decisive factor. It is hard to establish definitively at this remove if that factor was adequately taken on board by the State in the negotiations leading to the signing of the original agreement.

The second factor that could be seen to have had a negative effect on the State's return was the reduction in corporation tax, partly offset by the imposition of rates. If the view is taken that commercial agreements involving the State as a party are struck to achieve a particular distribution of revenue, taxation must be brought into the equation. In that regard, there may be merit in future partnership agreements in putting a mechanism in place to maintain a reasonable distribution in the event of major tax fluctuations in either direction.

Users hardly got a good deal. Relative to the cost of the investment they pay more than was originally envisaged and experience a lower level of service than a reasonable person might expect. Members will be aware that arrangements for upgrading the M50 by widening the carriageways and altering interchange layouts are under consideration. I hope that our analysis of the operation of the tolling scheme to date will help inform in some way the State's approach to concluding those arrangements to the taxpayers' and users' advantage.

Ms O’Neill

I thank the Comptroller and Auditor General for his review, which has illuminated certain aspects of the West Link agreement and its operation to date as well as issues that are relevant not just to the future upgrade of the M50 but to the general operation of our public-private partnership programme in roads.

It emerges from this examination that the original agreement has proved very profitable for National Toll Roads and has provided and will continue to provide a substantial return to the State. The West Link agreement was approved in principle by Government in October 1984 and concluded in 1987. This ex-post evaluation is, therefore, undertaken with the benefit of considerable hindsight. The agreement was concluded at a time when the economic outlook for the country was uncertain and funding for infrastructure investment extremely constrained. Traffic volumes were much lower than projected in the early years, in stark contrast to what transpired from 1997 onwards. The level of traffic originally projected for 1990 was not reached until 1995 and in the early years people thought National Toll Roads was mad to have taken on the project.

The West Link is not a standalone piece of infrastructure. It is part of a 40 km ring road of Dublin that, despite congestion at peak times, provides substantial benefits to road users and has contributed to and facilitated unprecedented growth in the greater Dublin area. Benefit has accrued to the Exchequer from its share of the gross toll revenue. The Exchequer has received almost €66 million in licence fees to date. Over the period 1990 to 2020, an estimated €285 million will accrue to the Exchequer through the licence fee from a gross cash flow of €1.1 billion, both expressed in 2004 prices. In addition, the Exchequer receives VAT, corporation tax and income tax on distributed income and local government receives municipal rates. Overall 52% of gross toll revenue comes back to the State.

Lessons have been learned from the West Link experience. In the past 18 months the National Roads Authority has entered into three public-private partnership contracts. The arrangements within these PPP contracts are more exacting than those in the West Link toll bridge agreement. Some of the key differences from the 1987 West Link deal include competitive tendering in accordance with national and EU tendering procedures, the NRA's right to reject a super-profit tender or to ask for it to be amended, specialist traffic and financial advice to both sides in the assessment of tenders, contract variation provisions to facilitate changes in tolling technologies and exacting toll plaza performance standards aimed at ensuring efficient throughput of vehicles.

In addition, the NRA and its financial advisers undertake detailed assessment of potential profits associated with tenders. This includes sensitivity analyses and an assessment of equity returns to the PPP company of traffic volumes in excess of both the PPP company's forecasts and NRA forecasts. The NRA's advisers have concluded that the recent contracts entered into represent value for money for the public sector and that the revenue sharing arrangement included in the contracts is such that the PPP company will not earn super profits from these schemes.

The NRA, in the context of the upgrade of the M50, is in negotiation with National Toll Roads regarding the upgrade of that section of the M50 operated by NTR. These negotiations are addressing the upgrading of both the road section and the tolling arrangements. The objective from the State's perspective will be to secure significantly enhanced capacity on the M50 and improved levels of service, including barrier free tolling for road users.

In the course of a review of the West Link bridge agreement, the Comptroller and Auditor General's Office discovered an underpayment in the licence fee due to the State under the West Link bridge agreement in respect of the years 2002 and 2003. Under the West Link bridge agreement, a licence fee is payable to he Exchequer. For the years 2002 and 2003 and in the context of the introduction of VAT on tolls, a credit was negotiated as part of the agreement relating to the second West Link bridge whereby National Toll Roads would be repaid the cost of not increasing toll levels through a reduction in the licence fee payable. This credit should have been added to the gross toll revenue, GTR, before calculating the licence fee in accordance with the definition of GTR included in the 2001 supplemental agreement. This was not done by National Toll Roads and was not picked up by its auditors, KPMG, the NRA or the Department. The checking arrangements in place in the Department had not been adjusted to take account of this revised definition of GTR which, as the Comptroller and Auditor General said, was an unusual change and in a different part of the agreement. The effect of not including the credit as part of the GTR was to understate the amount payable to the State.

As soon as the underpayment was discovered in July 2005, the matter was taken up with National Toll Roads through the NRA as party to the West Link agreement. National Toll Roads reviewed the calculation of the licence fee payment for 2002 and 2003 and accepted that an underpayment occurred which they calculated as €1.86 million. National Toll Roads paid this amount to the Minister in July and also paid interest and penalties in respect of the late payment amounting to €73,000.

It should be noted that total licence fee payments to the State under the West Link bridge agreement since 1997 amount to a total of more than €66 million. The error was due to the special arrangement put in place for a limited period of two years and which is unlikely to recur. Nevertheless the procedures for checking and validating the licence fee in NTR, the NRA and within my Department should have prevented the occurrence of the underpayment. The Department has undertaken a comprehensive review of procedures and strengthened the system for validation of the licence fee, including the control mechanisms between it and NRA. Additional verifications will now be carried out on future licence fee payments received. These new arrangements were reviewed and approved by the Department's financial adviser and the internal audit unit.

The Comptroller and Auditor General referred to a pre-existing issue, namely, the appropriate rounding convention to be used in calculating the licence fee and licence fee credit. This was a matter of debate between the NRA and NTR for some time. There was a concern that the rounding convention being used by NTR was resulting in an underpayment. This review has now been completed and the NRA and NTR have agreed the appropriate rounding convention to be three decimal places. On this basis a further €136,000 is payable to the Exchequer which will be paid in April 2006 together with interest on the overdue amount to that date.

Chairman

May we publish the Secretary General's statement?

Ms O’Neill

Yes.

Deputy Curran

There are a range of complex issues in the Comptroller and Auditor General's chapter on this subject so I will stick to a few key points. I am sure colleagues will address other specific issues. Ms O'Neill said the review was undertaken with the benefit of considerable hindsight but it is vital that it was done, particularly as we consider the roll-out of PPPs and tolling in other areas. This project was first mooted in 1982 and the Government agreed to the proposal in 1984. Normally when we talk about PPPs the driving factors are a lack of Government funding and the claim that PPPs are a method to fast-track a project. From the Government decision in 1984, however, it was a further three years before agreement was reached and it was 1990 before the bridge was operational. The time from the original idea being mooted to the bridge becoming operational was eight years, which seems a long time in the context of PPP operations today. This is not a criticism but an observation from an historical perspective.

A comment made by the Comptroller and Auditor General was referred to in the opening statement. It states: "The Department has informed me that the NRA is currently in negotiation with NTR on a range of issues affecting the West Link agreement, including a move to barrier free tolling and the funding of the proposed upgrading works on the West Link section of the M50." My understanding is that there are two agreements, one from 1987 and another from 2001. Is the NRA endeavouring to enter into a third agreement? What is the issue regarding funding referred to in the report of the Comptroller and Auditor General?

Ms O’Neill

With regard to the upgrading of the M50, the principal concern of the NRA is ensuring that toll facilities are upgraded where the two bridges cross the River Liffey at West Link. The critical issue is moving as quickly as possible to barrier free tolling at that point.

The overall upgrade programme for the M50 involves a 50% increase in capacity of the M50, and it is clearly important in that context to improve the throughput of traffic around the M50 and through the bridges. The negotiations under way with NTR are in the context of the existing agreement in place with the company. It is a historical agreement but the company has the exclusive right to toll that stretch of the M50 at present. Discussions and negotiations are under way with a view to arriving at a conclusion which allows us to move as quickly as possible to open-flow tolling at that point. It is a complex legal agreement and difficult and intense negotiations are ongoing between the NRA and NTR. It would not be appropriate for me to go into the details.

There are two phases of work, separate from that issue, in the upgrade of the M50. One phase is out to tender and is a straightforward design and build contract to upgrade the road between the N4 and N7 between the two interchanges. The second phase is the widening of the remainder of the M50 to three lanes. The procurement of that is to go ahead as a PPP project. It is anticipated that the contract will be awarded in the course of 2006, with the cost of the work being funded by the State's share of the West Link toll revenue going forward beyond 2020. It is a separate contractual arrangement and both projects are out to tender.

Deputy Curran

Does that separate contractual arrangement specifically involve National Toll Roads?

Ms O’Neill

The company may be a tender to the process.

Deputy Curran

It need not necessarily be involved.

Ms O’Neill

It would not have exclusive involvement. The space where the NRA must engage with NTR is where the historical agreement is place. The company has locked-in entitlements, so any change in the agreement must be through a process of negotiation with NTR. This relates to the move towards free-flow tolling. The two phases of development to the M50 are separate contractual arrangements and are being done by way of competitive tender in both cases. One is a design and build contract and the second is a PPP project.

Deputy Curran

The Comptroller and Auditor General clearly stated that considerable revenue, 52%, of the gross toll comes to the State. The motorist pays €1.80, but this is not the real cost which is the large time delay at the toll bridge. Last year when appearing before the committee, the witness discussed barrier free tolling negotiations. We have moved considerably further in that direction. Has any significant progress been made on this issue?

Ms O’Neill

I appeared before the committee in February or March of this year and I did discuss those issues. Much progress has been made in putting out proposals for the upgrade of the road and moving to tender. Negotiations are under way. A move to barrier free tolling will involve a number of changes. A legislative change will have to be brought in.

A form of electronic tolling, the Eazy Pass system, is available at the toll bridges. To get greater use of the system, the barriers need to be eliminated because they slow down traffic flow. A legislative fix must be in place to do this to ensure that if somebody were to go through a barrier without paying a toll, an opportunity for prosecution would be provided. The system would have to be policed. A move to barrier free tolling also involves a radical change in technology as a different technology type is required. This would be similar to the technology used for congestion charging in London. A transponder in people's cars is used for tracking purposes in the event that money is not paid.

Much thinking is being done on these options. A critical factor is the negotiation of an appropriate arrangement with NTR in the context of the contractual agreement in place.

Deputy Curran

Will this effectively require a third agreement with NTR?

Ms O’Neill

It will require a revision to the existing agreement with NTR.

Deputy Curran

Clearly we are discussing a movement to barrier free tolling. Ms O'Neill said that the newer arrangements have performance criteria. Are there any performance criteria involved with the current arrangement on the West Link bridge?

Ms O’Neill

Some performance criteria are involved and there are circumstances where the NRA can——

Deputy Curran

Is it possible for the Secretary General to describe these?

Ms O’Neill

I do not have the details of the performance criteria. I would have to discuss the issue directly with the NRA. I will procure the information and make it available to the Deputy. The criteria are not nearly as robust as the type of performance criteria now being put in place in the context of new PPPs. With these, exacting standards are possible regarding traffic throughput and penalties can be imposed if standards of throughput are not met. Barriers would have to be lifted in the event of a queue of more than a certain length, for example. None of these stipulations is in place. The current performance criteria are limited and not useful in improving quality of service.

Deputy Curran

Have these criteria ever been examined?

Ms O’Neill

The NRA will examine closely everything contained in the existing contract to get the best possible value from it. There is a need to renegotiate the arrangements now in place, move on and ensure that lessons learned are applied properly to new PPP deals. These lessons are easier to see with the benefit of hindsight. I am satisfied that there are more robust performance criteria in the new arrangements.

Deputy Curran

When attempting to conclude the 2001 agreement, did either the NRA or the Department try to enter performance criteria into the said agreement?

Ms O’Neill

I emphasise that the NRA rather than the Department is party to the agreement. One of the issues for the NRA in renegotiating the agreement at that stage was the need to deal with the agreement already in place. It was not beginning with a blank page. The Comptroller and Auditor General acknowledged that taking these factors into account, the NRA did reasonably well in the renegotiations. It would not have been open to the NRA to introduce new criteria for the agreement at that stage.

Deputy Curran

It would have been open if accepted by the other party. That is the nature of negotiations.

Ms O’Neill

Of course.

Deputy Curran

I take the Comptroller and Auditor General's contention that National Toll Roads had the first agreement. The benefit to National Toll Roads of any secondary agreement or a new agreement, such as that referred to by Ms O'Neill for barrier free tolling, is that it increases volume. The company's revenue is based on volume. There is a strong financial inducement for the private operator to come to these agreements. However, the motorists and public are getting a lower level of service than what might be expected. In all negotiations that have gone on since the toll bridges became problematic, the issue of level of service has not been adequately addressed. National Toll Roads cannot be coerced, but a financial reward could be a factor if the company increased the volume of traffic. I am disappointed the issue has not been more radically addressed.

Ms O’Neill

It is a key objective of the current negotiations. It has been a live issue at all stages and a source of growing concern as traffic volumes on the M50 increase. The Deputy is correct in that no one likes paying tolls but people do not object if they are getting a good quality service in return. They are frustrated because they believe they are paying tolls just to sit in traffic. This does not happen all of the time, such as when they travel in off-peak periods to the airport on the extended M50, but it certainly does in peak periods. The NRA is examining this issue closely in terms of how it should approach the next stage, the upgrade of tolling arrangements and so on. The Deputy has acknowledged that this agreement was entered into many years ago at a time when there was no competitive tendering process in place. As such, the competitive tendering tensions——

Deputy Curran

National Toll Roads, NTR, came forward with a proposition.

Ms O’Neill

It was considered reasonable at the time as there was no history of PPPs. Resources were very scarce and the bottleneck on the M50 needed to be addressed. It is evident that this was the only way of proceeding with the project. It would be inappropriate for me to be critical of those who made decisions at the time.

We have learned much as we have moved forward such as the desirability of having strong competitive tensions in the process and including service criteria from the outset. The NRA has worked hard on this matter but its problem when negotiating changes is that it is caught within the constraints and limitations of the original agreement. All commercial bodies will exploit their commercial agreements to the maximum, which is expected of any profit making entity. We must solve the problem as we progress.

Deputy Curran

A report commissioned by NTR was published a number of months ago. Among other issues, it examined what would happen if there were no barriers. It stated they would not make much of a difference and that the problems would be transferred to other areas.

Ms O’Neill

Yes.

Deputy Curran

What is the Secretary General's view on the report?

Ms O’Neill

It was commissioned by NTR.

Deputy Curran

Is it an independent report?

Ms O’Neill

I accept that NTR commissioned an independent body to compile the report. There are genuine issues and real concerns about the extent to which the toll bridge causes a bottleneck, particularly in peak periods. One view is that part of the problem is closeness of the toll bridge to the entrances and exits for nearby routes. There is no doubt that, if one lifted the toll barriers, one might improve traffic flows to a certain extent but there would be a number of probable effects. For example, one could find bottlenecks appearing elsewhere in the system. I travelled on the M50 one morning recently and found that the difficulty occurred below the Red Cow roundabout rather than at the toll bridge. As such, the position can vary from time to time and it would be a mistake to believe that, if we lifted the barriers and motorists were charged tolls on a barrier-free basis, the problems would go away.

There are a number of solutions. One would be increasing the capacity of the M50 by 50%, which is what the upgrade will deliver. Another would be — this is something on which we are working in the context of Transport 21 — the development of an extensive range of public transport options for the greater Dublin area, including an orbital metro line, as well as park and ride and other facilities, in order that people would not have to make unnecessary journeys.

Deputy Curran

None of the plans included in Transport 21 foresees a reduction in current volumes of traffic on the M50. Even with a barrier-free tolling system, we would still be left with a bottleneck at the bridge.

Ms O’Neill

That would have to be dealt with by lifting the barriers.

Deputy Curran

NTR conducted its own survey and developed its own results. Ms O'Neill gave her frank view that there may be other problems. Has either the Department or the NRA conducted surveys or are they prepared to make a proper analysis with the barriers lifted to determine where the impact is? We have discussed this issue time and again. There are differing views but we do not know where problems are likely to occur.

Ms O’Neill

That is true.

Deputy Curran

Is this something towards which the NRA or the Department will move?

Ms O’Neill

The NRA is working on it as we speak.

Deputy Curran

On what is it working?

Ms O’Neill

The issue of traffic analysis to examine what matters arise. Work was done in the context of the EIS for the upgrade. We cannot build our way out of the problems on the M50 in terms of the increased volumes of traffic in the greater Dublin area. The environmental impact study recognised that we would need to move towards a different tolling system on the M50 in due course. Essentially, this would mean tolling to manage flows on the M50 rather than at a specific point on the route. Traffic surveys were carried out as part of the EIS to test various impacts. They are being updated by the NRA with a view to being satisfied with the knock-on effects of a move to a barrier-free tolling system.

Deputy Curran

Will the study specifically include opening the barriers for a day and surveying traffic flows?

Ms O’Neill

I do not know. One can devise models without opening the barriers.

Deputy Curran

I do not have confidence in modelling. If it had been correct, some of these issues would not have arisen.

Ms O’Neill

One would be testing a different aspect. There is a difference between opening the barriers for a day and allowing free movement which could have the effect of everyone saying it was a great day to be on the M50.

Deputy Curran

I would not advertise it. I would open it at 6 a.m. and measure traffic volumes.

Ms O’Neill

Word would spread quickly. These are slightly different issues. I will convey the Deputy's suggestion to the NRA.

Deputy Curran

I live close to the toll bridge and it is the greatest source of annoyance due to constant queues. Ms O'Neill attended the committee in February when we discussed proposed legislation providing for a barrier-free tolling system. I am disappointed we have not made progress by the end of the year. It is a matter of urgency for tens of thousands of motorists every single day. The Comptroller and Auditor General and others will speak about the financial costs to motorists but the real costs are the significant amounts of time motorists spend on the road. I do not believe the problem is receiving the urgent attention it deserves.

I accept fully that the upgrade will increase phase one capacity and can see the benefits on the Red Cow roundabout but, unfortunately, the issue of the bottleneck remains. I would like to see a detailed analysis carried out, incorporating the removal of the barriers. I know in my heart and soul that, once we opened the barriers, problems would occur in other areas. We need to know what these would be. I do not have confidence in the report published by NTR during the summer.

Deputy Boyle

As Deputy Curran said, this is a very complex issue. I will go through the chronology of events. It seems that in the 1980s, particularly 1984, NTR approached State agencies, Dublin City Council and the Government with a proposal to construct the West Link toll bridge. Had NTR been constituted as a separate company by that stage?

Ms O’Neill

I understand a wholly owned subsidiary was established to deal with the matter.

Deputy Boyle

Ireland had no history of tolling before then. Certainly, NTR had no experience.

Ms O’Neill

NTR created a separate company.

Deputy Boyle

On foot of this, a memorandum was supplied to the Cabinet which detailed, as concluded in the Comptroller and Auditor General's report, that the anticipated rate of return defined by National Toll Roads was 18% after tax.

Chairman

The East Link bridge was in operation.

Deputy Boyle

Not at that stage.

Mr. Purcell

It opened in October 1984. Obviously an agreement was made. The first toll scheme was for the East Link and it was with NTR.

Deputy Boyle

The East Link opened in December 1986.

Mr. Purcell

I do not know where Deputy Boyle got that information.

Deputy Boyle

That is the information supplied to me.

Mr. Purcell

The second paragraph in the chapter states the West Link was the second toll scheme in the State and that the first was the East Link toll bridge where tolling had been granted to NTR, and which opened in October 1984.

Ms O’Neill

My understanding is that a company called Conor Holdings made an initial approach to Dublin County Council and set up National Toll Roads as a special vehicle to develop the project.

Deputy Boyle

Apparently the East Link opened before the West Link. I do not argue with that. The date I have here is different. It might be a misprint.

Ms O’Neill

It came as an initiative from the private sector to the State.

Deputy Boyle

The central point is that this company, which became National Toll Roads, supplied a memorandum to Government and the figures they highlighted were agreed to. It was given the East Link contract. A cost benefit analysis was not done on the West Link proposal. Was such an analysis carried out on the East Link?

Ms O’Neill

It did not involve the Department. It was done between the Dublin City Council and the company. I cannot answer for them.

Deputy Boyle

Is it fair to say that both the East Link and the West Link involved a direct contract without a tendering procedure?

Ms O’Neill

Yes, that is how I understand it.

Deputy Boyle

They are the central points I wished to make.

Ms O’Neill

I want to be careful in answering questions on the East Link because the Department or its predecessors were not involved. I am clear on the West Link.

Deputy Boyle

Dublin City Council engineers stated as early as 1985 that a second bridge would be needed. That does not seem to have been considered in the development of the scheme.

Ms O’Neill

I have difficulty in discussing that point because it was a long time ago and prior to the formation of the Department of Transport. The only information available to me is what is on the record. It is hard to tell. It is clear that the extent to which a second bridge and the extension of the M50 as a full ring road were factored in was extremely limited. Concentration was on addressing the problem of the toll bridge itself. One must consider the world and era we lived in then. It would have been extremely difficult to predict the rapid pace of growth that took place in the Celtic tiger economy and the planning and other decisions that emerged from it. I do not wish to be too critical of how the people at the time examined what might be involved.

Deputy Boyle

This is one of the essential elements. There is a debate as to whether the traffic flows increased because of economic growth or the growth of the M50 itself and the additional traffic feeding into it by default.

Ms O’Neill

It is both. Economic growth led to an explosion in the population of the greater Dublin area, and it also led to significant land use development. The existence of the M50 encouraged certain planning decisions to be made at that time in terms of building urban conurbations around the M50. Clearly the combined effect of that, including decisions taken by local authorities, has had the effect of dramatically increasing the traffic volumes on the M50, such that it went from being an outer ring road to a main street to get around the city in some people's perspective. That is a real issue in the wider sense of examining land use and transportation policies in the future. We must be aware of it and not solve one problem to create another one in the future if it is not managed effectively. I do not think it was predicted at the time the decision was taken by Government.

Deputy Boyle

Moving on to 1997 when the reality of either economic growth or the near completion of the M50 was becoming apparent and the traffic volume figures were exceeded, a situation arose where discussions on the second bridge became a reality. Because the contract had been given to NTR and it had access to the same area, only NTR could be dealt with. It seems strange that the consequent agreement remained as favourable to NTR if not more so. The profitability and anticipated rate of return on the second bridge was 25% after tax. I am curious to know what measures the Government or the Department took to try to win back concessions for the State in the operation of the toll roads that would allow a greater return for the State.

Ms O’Neill

As I stated to Deputy Curran, the difficulty is that for better or worse the contract or agreement was in place since the late 1980s. Any negotiations with NTR had to occur in the context of the agreement that was already in place. At that stage, the NRA made the best deal possible against the backdrop of the strong legal agreement that NTR already had. The important issues are that the agreement should be right in the first place to allow the flexibility to deal with these issues and foresight might have suggested that sooner or later a second bridge might have been required. The NRA made the best deal it could, given the position in which it found itself with the agreement it inherited. In those circumstances all that was involved was the marginal cost of the bridge and the marginal revenues and the Comptroller and Auditor General has acknowledged that on balance it marginally improved the situation in favour of the Government and the State over the situation prior to the second bridge being built.

Deputy Boyle

Do key areas in the second contract favour NTR more, such as shadow tolling? The issue in the Comptroller and Auditor General's report is that €6 million was not counted as revenue and €2 million did not return to the State when it should have. Given that the traffic projections of the original toll roads were exceeded, NTR did not have a case to seek additional funding from the State.

Ms O’Neill

It may not have had a case for additional funding but it had a legal agreement under which it was entitled to it. The compensation arrangements built into the agreement meant it is open to the State to decide it wants a toll to be held below the level that NTR is entitled to charge under the original agreement. However, if it is held down, the State must compensate NTR. That is the reality. While we might all have a view on the rights or wrongs or values, the fact is that NTR had an explicit agreement whereby if NTR and the NRA agreed that it would not be wise to let the toll rise to the full rate of increase allowed for under the agreement, it was entitled to compensation. That is what happened in this case.

Deputy Boyle

The point I am making is that in 2001 and 2002, NTR stated that on the basis of traffic travelling through the toll gates it would have lost the equivalent of €6 million. However, it stated in the original agreement that far less cars would have travelled during 2000 to 2002.

Ms O’Neill

The nature of the legal agreement was not based on the number of cars that use it. It was based on an entitlement to compensation if tolls were less than what they were entitled to charge. The NRA did well to include the additional clause in the agreement which allows it to get an 80% share if traffic volume——

Deputy Boyle

That is another element. The contract was changed to the benefit of NTR. The Exchequer share bands jump from 50% to 80%. The first obvious question is why there is not a 60% or 70% band. In terms of how the 80% band will be reached, NTR decided the increase in the number of cars per year between 2001 and 2020 plus an additional 6.5%. It is a double escalator and the 80% band has not yet been reached. Traffic volumes must increase by a large amount before the 80% band is reached. If the 80% band is exceeded, it will be only by approximately a few thousand cars in each additional year. The benefit to the State will be quite narrow.

Ms O’Neill

The situation was that the NRA and NTR had an agreement which——

Deputy Boyle

Will Ms O'Neill answer my questions first? Why is there not a 60% and 70% band? Why allow NTR set the levels for traffic increase and put an increase on top of that?

Ms O’Neill

The only matter provided for in the original agreement — this could be only in a variation of the original agreement — was that the State would be given a 50% share. I do not wish to go into what were legal arguments between NTR and NRA at the time but one might have expected the opening position of NTR to have been 50% and no more. This should have continued to be the case. There was no entitlement of the NRA to be given anything over and above the 50%. What it sought was that in the event of super profits being earned over and above a certain threshold, it would have a way of recouping a higher proportion. It was not just a question of NTR saying this is what it believed the traffic forecasts to be, NRA also independently stated what it expected the traffic forecast to be. As long as that was what was expected, NTR would say the 50% should apply in that situation. It was to allow for a possibility that if, once again, both the Department and NTR under estimated the pace of traffic growth, there would be a mechanism to get it back. It is not nearly as satisfactory as the kind of mechanisms that are now in PPP contracts which have a staged approach. The NRA did well to get anything into the agreement at that stage which allowed it to recoup a higher proportion of the profits in the event of higher growth than anticipated.

Deputy Boyle

I do not know if that is satisfactory, to be honest. It was a poor negotiating tactic by the NRA on behalf of the State. The figures have yet to be reached and if they are exceeded in the next year it will be by a narrow margin. When they are exceeded, the figures will increase again the following year. There will be a constant game of catch-up in respect of this higher band.

Ms O’Neill

The Comptroller and Auditor General highlighted that the marginal gain for NTR from building the second bridge would be quite modest. I was not party to these negotiations because they preceded the establishment of the Department of Transport. I can only imagine that it would have been possible for NTR to sit tight and say it did not need to build this at all. The NRA was trying to get a deal done against the backdrop of an extremely robust legal agreement which entitled NTR to have to share 50% only above a certain level. Anything achieved by NRA in that context would have been an improvement on the situation in an attempt to stem the potential——

Deputy Boyle

It seems because the State had a poor agreement it could only follow through into a worse agreement.

Ms O’Neill

I do not believe it is a worse agreement, it is better than the original. However, the State must deal with the agreement to which it signed up at that time and the trick is to ensure flexibility and provision for the future is built in so as to avoid situations like this. A legal agreement is a legal agreement. If one transfers risk, one transfers reward and this is what happened in this case. It seemed at the time to be a very significant risk which was transferred to the private sector and this was borne out in the early years. Ultimately it yielded very significant rewards. This is the nature of the transfer of risk.

Deputy O’Boyle

Subsequent to West Link and to the second bridge, the company was involved in one other tolling project, the Dundalk motorway which was a new greenfield tolling project. Have the terms of that agreement altered significantly?

Ms O’Neill

Yes. The terms of all PPP agreements have altered significantly in a number of respects. The first point is the competitive tendering process. I would not under estimate the significance of that process. The NRA has had a minimum of four to five high quality bids for each of the PPP projects. This is a very high standard by international best practice. A good competitive tension is being created in the market place. In terms of developing the traffic scenarios, we are not — as happened in this case — dependent on the companies coming forward with traffic projections. Instead the NRA produces a very significant modelling on those traffic projections. It sensitivity-tests the bids, including very high levels of traffic, against the full range of scenarios that might emerge. It examines what would happen if very high levels above what might have been expected are achieved. It builds in specific revenue sharing arrangements which are very different to the ones in this contract and which allow for a phased increase in the State share at various levels. It also builds in very significant penalties and requirements around customer service standards.

A report has been provided to the State on that toll facility by the contractors as part of the PPP arrangements. This is a public document which shows the service standards required to be met and it is a much more transparent system.

Deputy Boyle

I have two more questions. The first relates to the upgrade of the M50. Is consideration being given to extending the length of the concession period as a means of funding the upgrade work?

Ms O’Neill

Consideration is not being given to the length of the concession period to NTR. In 2020 ownership of the toll bridge will revert to the State but that does not necessarily mean the tolls stop at that point. The funding of phase two of the upgrade is being done on a PPP basis where the State share of the West Link from 2010 to 2020 and all toll revenues beyond 2020 are being used to underpin that upgrade. It is not a question of extending concession.

Deputy Boyle

Is there a timescale for that? Is it ten years or 15 years, for instance?

Ms O’Neill

I cannot answer that question at this stage.

Deputy Boyle

What consideration has been given by the Department to the decision of the Scottish Executive to purchase the Isle of Skye bridge which was a similar PPP venture and which was bought out to make it a toll-free facility?

Ms O’Neill

The Department keeps an eye on what is happening with projects in other countries. The question of whether the State should buy out the toll bridge has been raised from time to time. It is an issue that can always be considered but it is an expensive proposition because of the nature of the agreement entered. One must consider what the cost would be to buy out NTR and consider that the share of the gross toll revenue goes to the State currently. One could consider buying it out and maintaining the toll or removing the toll but these all have very large price tags. Another issue is the consideration of using the income from those tolls to underpin the second phase of the upgrade of the M50. The Comptroller and Auditor General has stated that the Department has spent €1.1 billion in 2004 terms on the M50. It is an expensive project but it is important to maintain a high quality standard for the M50.

Deputy Boyle

It is €1.76 billion.

Deputy J. Higgins

I do not wish to go into the details of the Comptroller and Auditor General's report which is very comprehensive. I wish to sum up in one brief statement cum question to the Department the feelings and views of the ordinary taxpayer and users of the West Link toll bridge whom I represent.

I will put aside a projectile which I have in my hand because even in the most peaceful among us, the thought and experience of the West Link toll bridge induces great aggression.

I put it to the Secretary General that the continuing arrangement between the State and National Toll Roads is insane, irrational, illogical, and above all, robbery of the taxpayer. If the legendary Dick Turpin had assembled a gang of cutthroats and highwaymen and sat down to negotiate that deal on behalf of NTR, he could not have done a better deal than the one it got. The cost benefit analysis of the Comptroller makes horrifying reading. We have 700 m of a privately owned road and a bridge. On either side of it is 40 km of a super highway, financed by the taxpayer to act as a funnel to force tens of thousands of taxpayers every day into the jaws of National Toll Roads at the West Link bridge to be robbed. Furthermore, the Comptroller and Auditor General could not specify the other costs which arose in his report. He could not take account of the most grievous costs of all, namely, the time wasted by tens of thousands of taxpayers grounded in their cars, not, as I observe several times a day when I pass the toll bridge, during peak times but for a growing number of hours each day. Time is the most precious commodity of the thousands of motorists who sit on the bridge causing considerable damage to the environment and, with members of the neighbouring communities, being forced to breathe in the pollution emitted from vehicles.

Interestingly, my research shows that tolling dates back to pre-history. In a Greek myth a ferryman called Charon charged a toll to ferry the shades of the dead across the River Acheron. He might as well be on the West Link every day because by the time unfortunate motorists and taxpayers arrive at the bridge, they resemble somewhat the shades of the dead due to frustration and anger. Tolling continued into medieval times when one paid a farthing to have one's ass and cart go over a bridge or mountain pass. To continue tolling today, however, in the conditions of modern industrial society, is an anachronism which beggars belief. To illustrate how anachronistic it is, I would travel quicker from Palmerstown to Blanchardstown and almost as quick from Tallaght to Finglas by ass and cart than by automobile. It makes no sense to continue with the current West Link toll bridge arrangement.

Chairman

Will the Deputy press his submission by using parliamentary devices such as prefacing a remark with the phrase, "Is the Secretary General aware"?

Deputy J. Higgins

Does the Secretary General agree the evidence suggests the arrangement entered into was a tainted contract? The contract was tainted by payments to politicians and senior officials from those who founded the project. This arrangement should be ended forthwith, the West Link nationalised, the shareholders of the company in question told the golden goose will lay no more eggs for them and the toll booths removed in order that the other traffic problems to which the Secretary General adverted can be addressed. Those are the feelings of virtually every person in the country, with the exception perhaps of the shareholders of National Toll Roads.

Chairman

Does the Deputy wish to ask questions?

Deputy J. Higgins

I thought my question was clear. Should we not abolish the West Link toll immediately and act rationally in the interests of people and society, rather than facilitating a private company by providing it with a cash cow at massive expense?

Ms O’Neill

I do not want to be in any way flippant about an issue of extremely serious concern to people who travel every day on the M50, a road I use frequently. Since the extension opened, I find it an extremely useful piece of infrastructure but I also appreciate it presents a difficulty for people travelling in peak and extended peak periods. While I accept the Deputy's point about Dick Turpin, the highway man would have needed to be far-sighted to forecast exactly what would happen over the period in question. It would be wrong and completely inappropriate for me to comment on suggestions of bad faith at the time. As I see it — obviously, I have looked at the historical papers — the State's reasoning for making the decision at the time was understandable. It seemed eminently sensible and a way to get the bridge in place.

As I stated, the legal agreement the National Roads Authority has cannot be arbitrarily set aside. There is nothing one can do about the agreement as changes must be negotiated and paid for. On the difficulties experienced, which I appreciate, as I stated to Deputy Curran, the removal of the barriers at the toll bridge is one aspect of the issue. Bridges always create some bottleneck, regardless of whether barriers are in place, because they tend to funnel traffic. They are also the only way to cross major rivers such as the Liffey. Lifting the barriers and moving to barrier-free tolling is a highly desirable objective, regardless of how we achieve it.

I accept Deputy Curran's point that people are concerned about the slow pace of the process but there has been no slippage in the target date since I last addressed the committee on the issue. Barrier-free tolling has always been regarded as an element of the M50 upgrade, which is also an important part of improving the user experience. I appreciate that the position will get worse in some respects before it gets better because upgrades are not always easy. We must manage that process but I acknowledge the frustration at the current position. Policy and political decisions have to be taken elsewhere but my job is to manage the move to barrier-free tolling as efficiently and quickly as possible.

Deputy J. Higgins

Perhaps we need to move to a position of no tolling.

Ms O’Neill

That is a policy question. Without tolling, we would not have sufficient funding to underpin the second phase of the upgrade of the M50 or taxpayer's money would have to be used directly to fund it.

Deputy J. Higgins

If the extension on the far side of the M50 is all the NRA is using, that is fine. I assure Ms O'Neill, however, that a crescendo of anger and frustration is building among those living in strategic areas such as Blanchardstown or Palmerstown who must travel to work through the toll bridge. I predict this matter will have to be addressed before too long. I will say no more because I am at the end of my tether, as are my constituents.

Deputy Fleming

I want to draw on some of the lessons to be learned from this exercise, after which I will address the reasons for the underpayment. The Comptroller and Auditor General's report notes that the original projection of the State's share of revenue from the toll bridge project was 59%. Currently, the taxpayer's share of gross revenue from the toll bridge, when one takes into account the various taxes, rates and licences, is approximately 52%.

I am encouraged by Ms O'Neill's statement that lessons have been learned from the West Link experience. She has noted that the NRA entered into three public private partnership contracts in the past 18 months. Will she demonstrate what lessons have been learned? Will she also provide details of the three PPPs to which she referred? What percentage of total revenue will the State receive in respect of each of the three contracts?

Ms O’Neill

On the disparity between the projected share of revenue for the State and its current share, a significant reason for the difference between the former, at 59%, and the latter, at 52%, has been the changes which have taken place to the corporation tax regime. This raises an interesting issue, one to which the Comptroller and Auditor General also alluded, namely, whether one should try to share this risk with the PPP concessionaire. The position that the State bears this risk has not changed in the new arrangements because the State makes the call on whether to make changes in taxation. It is debatable whether the private sector would be willing to assume the risk of a change in taxation. We need to be careful in this respect because the significant policy shift which has taken place on corporation tax in recent years could be reversed. This raises the question of whether we would be prepared to pay if tax rates increased.

I do not have to hand the details on the three PPP projects but I will get the information for the Deputy and forward it to him. They differ, however, from the West Link in a number of respects. A major difference is that we expect toll revenue to remunerate 50% of the total life costs of the stretch of road in the new PPP projects, although that is an average that varies from project to project. A combination of a capital grant and toll revenues underpins private sector investment. A situation where four to five times total life costs are recouped by the company will not arise in the projects we are examining.

Deputy Fleming

Therefore, Revenue will get 52% of all moneys collected at the West Link bridge.

Ms O’Neill

With the users paying more, yes.

Deputy Fleming

It was said we had learned but it seems to imply that in the three new PPPs not only will the State not get anything back from the private operator, but will have to invest in capital costs. Will the cost of the project involve net funding by or net receipts to the Exchequer? What is the percentage? If the PPP covers 50% of construction costs, the State will carry the other 50%. Will any of the PPP operations generate a net return to the State in view of its involvement in getting the original project off the ground?

Ms O’Neill

The Dundalk western bypass is an unusual example because the NRA made no construction or operation payments, it was fully funded by a PPP and toll revenue, which is estimated to be €262 million.

Deputy Fleming

What would the State get back from this?

Ms O’Neill

When traffic levels rise beyond a certain level, the State will receive a return. I do not have the information but will get it for the Deputy. It is structured in a different away.

Deputy Fleming

Is the information available to the committee or is it commercially sensitive?

Ms O’Neill

When the deal has been concluded, the information can be made available. There are certain issues where there is commercial sensitivity but I will check for the Deputy. The structure of the arrangement involves the building up of a percentage share beyond the 50% in the West Link toll agreement. Arrangements are in place for any possible super-profits that might arise, with sensitivity testing of those projections at much higher levels than had been envisaged which prevents, as happened in the case of the West Link, a concessionaire getting 50% on an ongoing basis.

Deputy Fleming

The motorway south of Portlaoise to Cork and Limerick will be a PPP project, with a toll bridge south of the town for all Cork and Limerick traffic. The estimated cost of the contract is approximately €500 million. Is Ms O'Neill suggesting the tolls will generate over the lifetime of the concession in excess of €500 million and the State will receive a payback? I gather the State will meet a lot of the up-front cost, that the PPP arrangement only defrays a small portion of the cost and that there will be no return to the State.

Ms O’Neill

Looking at schemes that are suitable for PPPs, there must be significant traffic flows to generate reasonable toll revenues. We looked at the spread of schemes across the network and alternative routes people could use if they chose not to travel on the tolled route. We must also examine the level of toll that would incentivise people to use the route, which limits its level. Having identified projects that might be suitable for PPPs, we then put them out to tender. We ask those submitting a bid to bid based on their own assessment of traffic projections, a combination of availability payments over the lifespan of the contract, an up-front capital payment and the balance made up by toll revenue.

Deputy Fleming

What is meant by availability?

Ms O’Neill

Instead of making an up-front payment towards the cost of construction of the project, the Government could make a payment on an annual basis.

Deputy Fleming

We are talking about the new PPPs where the Government will pay the operator of the toll. This one, bad as it is, at least means the Government will get 50% back. The new arrangement seems to involve the money going in the opposite direction, with the Government paying the operator.

Ms O’Neill

Under the PPP programme, €500 million has come in from the private sector already. That is a contribution directly from the PPP companies to the State. Cash is handed over to the State. We expect to generate a further €2 billion under the proposals for toll roads set out in the PPP programme. In the period to 2010 the Government will get that €2.5 billion. In these cases we are talking about much longer stretches of road in rural areas with traffic volumes nothing like those anticipated even years ago on the West Link. To make them viable, there will be a combination of an up-front capital payment with money from the private sector. The test used by the NRA before deciding to go ahead with a PPP is if it would represent better value for money using the standard public procurement route. When that test is met and the NRA is satisfied the PPP represents better value for money, it goes the PPP route.

Deputy Fleming

Can we have the details of the three PPP projects and the flows of money mentioned?

Ms O’Neill

I will see what information I can get and if there are any problems, I will let the Deputy know.

Deputy Fleming

My main concern about the West Link is that the checking arrangements were not adjusted as a result of the position on VAT. I put this down to a lack of commercial competence on the part of the Department or the NRA. I am afraid that lack of competence will be demonstrated repeatedly under these new PPPs. I have heard nothing to instil any confidence in the commercial competence of the Department. It is dealing with some of the biggest construction companies and banks in these new PPP arrangements. These are the sharpest operators on the planet. If we cannot even collect a licence fee from the West Link toll bridge, does the State have the commercial competence to deal with this? What is the commercial background of the individuals dealing with it?

Ms O’Neill

I deeply regret the error made in the Department. It was a straightforward administrative error that should not have occurred, but it did. What is unusual about the West Link deal is that while the NRA is a party to the agreement, the money comes into the Department. That was part of the problem. If the NRA collects its own money and is familiar with the agreement underpinning it, it is unlikely to miss something of that nature. The Department was not as aware of the change in the agreement as it should have been. We have strengthened the arrangement by making it a formal part of the process of collecting the licence fee that the NRA must sign off that not only has NTR's auditors looked at it, but so has the NRA.

Deputy Fleming

Who proposed the new arrangement? Was it the NRA or——

Ms O’Neill

The NRA. The NRA has built up considerable expertise in PPPs. In the past year we have sanctioned 34 additional staff specifically to beef up the NRA's capacity to manage a significantly expanded programme. We are always extremely concerned to get the best value for money in the investment of State resources. Given that the NRA is spending over €1.2 billion a year, it needs to have skills. It also has available to it the skills of the National Development Finance Agency and its scrutiny of the projects entered into. With regard to the State sector, the NRA is among the most sophisticated in its ability to develop contracts. A positive spin-off effect of PPPs which is sometimes missed is that because the private sector has to buy in to taking on the risk, not just for the construction but also the lifetime costs of the project, the degree of external financial scrutiny it brings to bear, not just technical expertise, helps to ensure much more accurate and robust costings.

Deputy Fleming

I have to disagree with everything Ms O'Neill said. We will have to have a difference of opinion because I do not accept the loss of €2 million is an administrative issue. It runs deeper; it is a commercial issue. The chart on page 125 of the Comptroller and Auditor General's report shows that the amount in licence fees due to the State was either €22 million or €23 million. The €2 million not collected represented almost 10% of the licence fee. I cannot imagine a business missing almost 10% of its revenue from a major contract running to this amount and being satisfied to state it was an administrative issue. If there were commercial rather than administrative staff involved in the transaction, their business nose would lead them to go after the money, just as NTR goes after its money. I do not believe anybody in the Department or the NRA has the same business nose.

Ms O’Neill

On the error made, while the actual calculation that has to be made in regard to the licence fee is reasonably complex, it is not hugely difficult. The difficulty was that the NRA had negotiated, as I mentioned to Deputy Curran, this change to the agreement. It had cleverly and appropriately built into the change to the agreement that this credit should be included in gross toll revenue. It was a change in the definition in one part of the agreement. The annex which indicated how the licence fee was calculated was included elsewhere.

Deputy Fleming is right in one sense in that where the NRA is managing its own income stream from PPPs, one would expect the person or team involved in drawing up an agreement to check everything along the way. In this case, for historic reasons, the cheque comes straight into the Department and it is its job to monitor it. It is not just an administrative flaw. There was a system weakness; there should be a clear onus on the NRA to satisfy itself that a calculation is correct.

The Deputy talked about commercial competence. In this case an important part of the control mechanism was that NTR's own professional auditors were required to sign off on this and whatever other commitments may have been made. There is no doubt that this error was a source of severe embarrassment to NTR and its auditors who missed it because they would pride themselves on their commercial competence. It was not the most obvious thing in the world for anybody to spot. That said, it should not have happened but the arrangements in place, whereby the NRA manages PPPs and any flows of funds arising from them and has built up significant commercial and financial expertise, are the way forward.

Deputy Fleming

I will conclude on this question but will come back in later. Even if Ms O'Neill is talking about an amendment to the existing agreement, we are still talking about the old agreement and it is the same old practices in place. The NRA is conducting the negotiations and the money is going to the Department. That aspect has not been sorted out.

Ms O’Neill

The Deputy can take it from me that it is something to which I will be giving close personal scrutiny.

Deputy Rabbitte

I do not want to go over what Deputy Fleming has just traced but we must come back to it in terms of our attitude to the operation of PPPs and the implications in this case. Would Ms O'Neill know if the Department has a figure for the cost of buying out the NTR interest?

Ms O’Neill

I do not have a precise figure.

Deputy Rabbitte

Would Ms O'Neill have a ballpark figure?

Ms O’Neill

There would have been ballpark figures included in the report referred to that NTR put forward. Because there are difficult negotiations currently ongoing and these issues may arise, it would not be helpful if I indicated a figure at this point. I do not want a figure to become a benchmark for what may transpire in the future.

Deputy Rabbitte

I accept that, if I can draw the inference that this option is being considered by the Department. If not, I do not understand why Ms O'Neill would not tell me but if it is, I understand her point of view.

Ms O’Neill

It is not a question of what the Department is considering. The NRA is involved in negotiations with NTR, in which it is examining how to move forward towards barrier-free tolling. I do not want to go beyond that and any implication to be taken from my comments.

Deputy Rabbitte

In Ms O'Neill's view, would it be prohibitively expensive to purchase the NTR interest?

Ms O’Neill

Whether something would be prohibitively expensive ultimately is a policy decision for the Government. It would be very costly. We would be talking about hundreds of millions of euro. There would also be the share that comes to the State in toll revenues. On buying out the NTR's interest, essentially we would be required, under the agreement in place, to compensate it for what it would be expected to receive to 2020. It would be a large sum of money, no matter what way one looks at it.

Deputy Rabbitte

Is there any impediment in the way of the State building another bridge?

Ms O’Neill

NTR has the rights to that stretch of road and that particular bridge crossing. I would have to reflect on that matter but my understanding is there is not an option for the State to build another bridge at that point. In building a bridge elsewhere across the Liffey the issue of how it would be linked to the existing M50 would be raised. This is not being contemplated.

Deputy Rabbitte

Therefore, Ms O'Neill believes the terms of the contract would prevent the State building a second bridge anywhere adjacent to the existing bridge.

Ms O’Neill

There are technical issues. Perhaps that is a point that should be put to the NRA at some stage because it is the guardian of the contract. It is an issue that the contract gives the concessionaire an exclusive right to this stretch of the M50 and the river crossing at that point. I cannot comment on how far it expands width-wise but there are technical and other issues that would arise, even if it were possible. There are also issues that would arise under other contracts if something was done which had the effect of diverting traffic away from an existing toll road. There may be associated penalties in the contract. In other words, if people enter into a contract in good faith, expect all the business on the M50 to come to them and we then act so as to divert this, there could be a basis for a legal challenge. This is a point that should be put to the NRA but it is certainly not——

Deputy Rabbitte

Therefore, Deputy Higgins has no alternative but to take his ass and cart over the bridge and——

Ms O’Neill

I am just relieved Deputy Higgins did not throw a glass of water over me. I was a little nervous for a moment.

Deputy J. Higgins

No.

Chairman

The Comptroller and Auditor General may wish to comment.

Mr. Purcell

To make clear the position on the concept of buying out, the DKM report, commissioned by NTR, contains some figures. I am not necessarily giving them any credence but they are in excess of €500 million. It was commissioned on behalf of NTR. When one thinks about NTR one thinks about the toll bridge but NTR built the 3.2 km stretch between the Navan and Sligo roads. It owns that piece of land. It is possible to build another bridge in the area but, as the Accounting Officer said, it would have to be connected with the existing road infrastructure and the cost may be prohibitive. It is not a realistic option.

Deputy Rabbitte

Anybody who lives beside the West Link as I do will agree that Deputy Joe Higgins has understated the case. We are extraordinarily relaxed given that one's life is shortened by having to cross it twice a day. It is prohibitively expensive to buy it back, we cannot build another bridge and we cannot implement electronic toll payment to speed throughput. If the estimated State revenue is €285 million in the timespan mentioned and the cash flow is €1.1billion, or if one takes the 52:48 split, the impediment to electronic tolling is not finance. Why are we not doing anything? The Secretary General described it as "difficult at peak times", which is a very serious euphemism.

Ms O’Neill

First, I will deal with the issue of building an alternative bridge. The Comptroller and Auditor General is correct that NTR has the concession for the stretch of road on either side of the toll, so one would have to build around that. The State owns the stretch of road and NTR has a concession on it, which will revert to the State at end of the period.

We can improve the situation. We must complete the M50 upgrade. The grief of upgrading the Red Cow roundabout was mentioned in this committee some time ago. There will be difficulties but capacity must be increased on the M50. We can remove the toll barriers and we can provide free flow tolling. A number of issues must be addressed in that context. I am sensitive about the negotiations between NRA and NTR about how to introduce free flow tolling as rapidly as possible.

Deputy Rabbitte

When might negotiations end?

Ms O’Neill

They are under way and I do not want to apply an artificial time line that would affect how the negotiations are conducted. We all recognise the seriousness of this problem. While I may be euphemistic and I am lucky I do not have to travel it every day, I recognise that in a context where people perceive significant improvements in other aspects of the road network, the issue of the M50 and the toll bridge is a thorn in the sides of the NRA and the road users.

Deputy Rabbitte

Where stands the local authority plan for an outer ring road? Does it feature on the Department's radar?

Ms O’Neill

Yes, it features on our radar but there are some misconceptions about what an outer ring road would do. It is not designed to be a second M50. If one could build a second M50 parallel to the existing one, it would soon be clogged up because of its location in the greater Dublin area. Addressing the needs of the M50 and the demand for the movement of people in that area must combine an upgrade of the existing M50, very good public transport that allows people to avoid taking their cars on the M50 and a tolling management that allows traffic flow at peak periods to be controlled.

The outer orbital route is provided for in Transport 21 in the context of doing a more in-depth feasibility study. It will be a long-range route designed to connect the gateways of Drogheda, Navan and Naas for people who want to avoid the greater Dublin area. That makes sense.

Deputy Rabbitte

People have endured this since the mid-1990s. An entire generation will have retired by the time that is put into practice.

Ms O’Neill

I hope neither an entire generation nor I will have retired before we upgrade the M50 and implement barrier-free tolling. It is feasible. Technological solutions can be costly if one does not put thought into getting them right. Getting the right technological solution and removing the barriers as quickly as possible is the way forward.

Deputy Rabbitte

Has the Department factored in the opening of the Dublin Port tunnel and the HGVs crossing this bridge?

Ms O’Neill

We are conscious of the implications of the Dublin Port tunnel. Approximately 2,200 additional HGVs per day will cross the West Link as a result of the opening of the Dublin Port tunnel. This is equivalent to approximately one year's annual traffic growth on the M50 happening in one day. That is an issue and we are working on it in two respects. Dublin City Council is working on a traffic management plan for HGVs in the city and the NRA is conscious that the tunnel is to open along with the M50 upgrade and will have to deal with traffic management issues. This is one of the reasons we are urgently seeking to conclude negotiations with NTR.

Deputy Rabbitte

We will have the refurbishment programme under way and the HGVs pouring across the bridge. This is the immediate prospect that faces a couple of hundred thousand citizens. In that circumstance does the Secretary General not think that we should have legislation to force the operators to install tollfree gates?

Ms O’Neill

Legislation is not required to force operators to install toll-free gates. That is a matter for negotiation of the contract and it is not the most problematic part of those negotiations. Legislation is required to ensure that barrier-free tolling can be enforced.

Deputy Rabbitte

Who is stipulating that? Must everybody suffer to prevent some people escaping the toll?

Ms O’Neill

No.

Deputy Rabbitte

This has gone on for years and is getting worse. If it is within the capacity of NTR to put in barrier-free tolling, is the ability to enforce it the only delay?

Ms O’Neill

No. The legislation is in the "nice to have" category. It is needed due to the issue about revenue leakage that will arise if many people evade payment at a barrier-free toll. It is not a difficult issue and will be dealt with in one of the Bills that is to come before the House in the coming period. It is helpful to know precisely the purpose of this legislation.

A more significant issue, and one which I feel somewhat constrained in discussing, is the negotiations under way between the NRA and NTR to devise an approach to freeflow tolling within the confines of the contract. Under the existing contract, NTR is entitled to security in terms of the revenue streams from tolling. If the barriers are lifted without legislation in place and before agreement is reached, there will be problems.

Deputy Rabbitte

The committee should have the names of the lawyers for the State who negotiated this contract. I understand what Ms O'Neill is saying and do not want to be unreasonable in terms of commercial sensitivity and so on. Does the technology exist to install barrier-free tolling at the West Link Bridge?

Ms O’Neill

Yes.

Deputy Rabbitte

What is preventing its installation?

Ms O’Neill

It cannot be installed without reaching formal legal agreement. The NRA cannot decide to unilaterally or arbitrarily install it but must first reach a legal agreement with NTR. There are issues to address in this regard.

Deputy Rabbitte

Is NTR obstructing such agreement?

Ms O’Neill

I understand NTR has tabled proposals which are under consideration by the NRA. I do not wish to elaborate further because I am mindful of the instructions not to make comments on persons outside the House.

Deputy Rabbitte

Ms O'Neill is not under threat from Deputy Joe Higgins's glass. However, if the 200,000 commuters affected by this delay were listening to these exchanges, they would conclude, perhaps entirely unreasonably, that there is no particular pressure or urgency on us, on either side of the table, to deal with the problem. Is there anything we can do to communicate this urgency to the parties in negotiations, the NRA and NTR?

There should at least be the prospect that some minimal alleviation is possible through barrier-tree tolling. Why is this, as a minimal measure, not being implemented? If the problem relates largely to revenue leakage and the requirement for legislation to prevent some motorists going through the tolls without paying, I can tolerate that the Exchequer must bear some punishment in this regard. I assume, therefore, that the problem lies with NTR. The notion of facing into a winter during which refurbishment of the M50 and work on the Red Cow roundabout will commence is unpalatable.

I am somewhat sceptical about the value of advice given by traffic engineers. They could not even foresee that a slip road to Galway was required. That had to be constructed at enormous cost after the road was built. The same situation arose in regard to the slip road that was needed at the Red Cow roundabout to travel to the city centre. Proposals were put for the construction of a flyover at that roundabout and were rejected. The entire process is a disaster and the State seems to be the prisoner of a legal contract so tight and so imaginative in its scope that we are rendered impotent. We must address the minimal alleviation measures that are feasible. If they include barrier-free tolling, it is a matter of urgency that it be installed. Let there be quibbling with the two parties until agreement is reached on this. The situation is unconscionable.

Why did KPMG not identify the discrepancies in the accounts?

Ms O’Neill

That question would have to be put to the professional auditors in KPMG. I am very clear that there was no attempt to mislead the Department or the NRA. It was simply an error on the part of the NRA which should have been picked up. It is a matter for NTR, in the first instance, to take up with KPMG.

Deputy J. Higgins

Lest something I said in humour be misunderstood, I assure the Secretary General my frustration was not directed towards her. If I were to throw a pen it would be on the carpet.

Ms O’Neill

I thank the Deputy.

Chairman

I am sure Ms O'Neill has noticed our sense of frustration. It is a reflection of the frustration felt by the public. Can she give assurances that there is some sense of urgency in finding a solution? When she last came before the committee in February, she spoke strongly about electronic tolling as a solution. The committee understood at that stage that a solution was in sight. There is no evidence, however, that anything has happened since. Will she provide as much detail as possible of developments in the meantime?

Ms O’Neill

There is no doubt that electronic tolling is, in the broader sense, the way to go. One of the features of all new public private partnerships is our ability to insist that the concessionaires must proceed to barrier-free tolling. At a personal level and speaking on behalf of the Department and the Minister, there is a major sense of urgency in addressing the M50 issues and we have conveyed that urgency to the NRA. Furthermore, I am happy to convey the views of the committee to the authority. Members will no doubt have an opportunity to meet its new chief executive soon. He has been in his position only a matter of months and has given serious attention to this and a number of other issues.

I do not want to mislead the committee by suggesting it is simply a matter of taking a technological solution off the shelf to instantly provide barrier-free tolling. A tender process must be gone through in regard to public procurement procedures and so on. It is not a question of the NRA simply presenting the ideal system. There are models from abroad and the one that seems most suitable is that in place for congestion charging in the United Kingdom. The NRA has been studying the available options in considerable detail. There is the short-term issue of lifting the barriers at the M50 itself and the long-term issue of which type of tolling regime will make most sense in terms of managing flows when the motorway is fully upgraded. The NRA is working its way through this with urgency.

Another aspect is the matter of planning for and managing the upgrade. I have sympathy with Deputy Rabbitte's point. There is no doubt that short-sighted decisions were made in the early years of the roads programme. I cannot say whether this was because of short-sighted engineers or as a consequence of a lack of resources. I am aware, however, that some proposals for more substantial development of the M50 were rejected because the resources were not available. Much has been learned. A good example in this regard is the work under way on managing the upgrade of the N7. It is a difficult project that is being managed extremely efficiently by the NRA and the contractors involved.

The M50 upgrade will be difficult because it involves complex engineering. A major priority for the NRA is examining how that will be managed effectively. Perhaps most important is the renegotiation of the agreement with NTR. Many examples have been given today of deals where the State did not benefit as much as was hoped. The balance I wish to strike in terms of guidance to the NRA is to stress the sense of urgency without going so far that a perception is created that rolling over and conceding everything that is sought might represent the best value for money. I appreciate that delays are difficult for commuters but it is important that the NRA works hard to get the best possible deal for taxpayers out of any further adjustment.

Chairman

We all appreciate that. There are essentially two issues in regard to barrier-free tolling. One is the assurance to NTR and the State that the tolls will be collected in an efficient manner. Second, there is the question of who will pay to remove the barriers and install the new system. It seems it is an issue that does not require major negotiation. Why has it dragged on for years?

Ms O’Neill

It is not so simple. The difference with the new PPP arrangements which have been negotiated is that the NRA now has an explicit right to insist on a change to a different tolling regime and there is a requirement for the concessionaires to comply. This does not apply in the existing arrangements, as it was not thought of at the time. Unfortunately, therefore, the issue is not so straightforward. This raises wider issues about the contract and the upgrade. There are related issues about managing the upgrade of the stretch of the M50 on either side of the toll bridge.

Chairman

I shall concentrate on barrier-free tolling. I can see there would be dislocation of NTR staff. Instead of employing staff in toll booths, NTR might be obliged to relocate staff or make them redundant. New people to manage the electronic payments system which would be analogous to credit card management would be hired. However, I cannot see what rooted objection NTR would have to a barrier-free system if it was assured tolls would be collected, that it would receive its pro rata share of the toll revenue and that an arrangement could be made between the two beneficiaries, namely, the State and NTR, as to who would pick up the tab for the capital costs of the installation. While we must be missing something, I cannot put my finger on it. Otherwise, it appears NTR is acting in a bloody-minded fashion and completely ignoring the concerns of its customers.

Ms O’Neill

I am not privy to the details of the current engagement. In a general sense, I have been kept informed by the chief executive of the NRA as to what is at stake. A number of issues are involved. The Chairman has picked up on some of them. In the context of a switch-over to barrier-free tolling, there is the question of who would pay for it. There are questions as to the implications of such a switch-over for NTR's existing structures and employment arrangements at the M50 toll station. There are concerns about possible revenue leakage, as well as a range of other issues. I do not feel comfortable in discussing the current negotiations in further detail. Fundamentally, however, from our perspective and that of the NRA, the negotiations go to the heart of ensuring an efficient, customer-friendly service to cross the bridges is in place. It is essential to get this right. The point was made that given the constraints within the agreement, we are obliged to work extremely hard to secure the best possible deal and arrangement in the circumstances.

Chairman

I shall move on to another area which Deputy Fleming has tried to explore. As I understand it, National Toll Roads controls the East Link, the West Link and the Dundalk western bypass.

Ms O’Neill

NTR is part of the consortium for the Dundalk western bypass. That is correct. It is open to NTR to tender for any project brought to the market.

Chairman

Yes. As I have not been in that part of the country for some time, I have not yet travelled on the Dundalk bypass. Is the toll being levied?

Ms O’Neill

It is being levied at the bridge at Drogheda. An interesting feature of the PPP is that toll revenue from the bridge at Drogheda was used to fund the construction of the Dundalk western bypass.

Chairman

Are any other tolls being levied?

Ms O’Neill

Not yet, apart from the West Link and East Link bridges. The next toll to be levied will be on the Kilcock-Kinnegad bypass.

Chairman

Hence, the three operational tolls are all levied by NTR.

Ms O’Neill

NTR is part of a consortium, CRG.

Chairman

NTR is part of that consortium.

Ms O’Neill

Yes, although a different arrangement is in place.

Chairman

It seems reasonable that Ms O'Neill should be able to discuss what the Department and the National Roads Authority learned from the experiences of the East Link and West Link bridges when they went on to negotiate with a consortium which included NTR on the Dundalk western bypass. However, Ms O'Neill does not appear to have the information to hand.

Ms O’Neill

I do not. I came before the committee today under the impression that I would only deal with the Vote today. Just before I came in I realised that the committee would focus specifically on this issue. Had I been aware that the entire focus would be on this issue, I might have had a representative from the NRA available to me to provide some of the precise detail. However, I will be happy to look for it.

Arrangements must always be made on a contract by contract basis. One must always examine what the market is prepared to propose in terms of revenue from a combination of tolls and other forms of payment. The critical issue is the structuring of a range of stages at which one can recoup money from the concessionaire such as when traffic volumes rise above a certain level. This is a more sophisticated arrangement than that which has obtained to date.

Chairman

I did not fully understand Ms O'Neill when she stated PPPs for something like the Dundalk project would have three financial elements, one of which would be the toll and the second a capital grant paid by the State which could be paid by way of a lump sum or annuity. She then mentioned a third element, namely, a transfer of money to the State up front. Was that it?

Ms O’Neill

No. Within the overall PPP framework, having identified projects suitable for PPPs, one of the criteria is that such a project must be capable of being remunerated to a significant extent by user charges. The ground rules provide for a figure in the order of 50%. Hence, when considering a road project that might be suitable for a toll, the NRA asks whether the whole life cost, that is, construction and maintenance costs over the concessionary period of 30 years, would be capable of being remunerated to a significant extent by user charges. If not, one simply opts for the design and build approach.

Having done so, the NRA then considers what toll levels should be set to balance revenue generation from the toll and the need to attract traffic. This is critical, as one should avoid having an empty road. Moreover, one considers the spread of roads across the network to ensure alternative toll free roads are available. The NRA then seeks DBFO, design, build, finance and operate proposals. Bidders can make proposals which provide for a construction payment and a contribution to construction costs up front in addition to or instead of an availability payment. In other words, instead of, or with a smaller construction payment, a payment is paid over the period of the concession to the bidder to support a bankable bid. The availability payment approach is used extensively in the context of PFI programmes in the United Kingdom. Obviously, its attraction is that it allows one to spread the cost over a considerably longer period.

The NRA starts with a large number of bids which are eventually reduced to four or five serious proposals. Its purpose is to establish the combination of those elements which provides the best value for money for the taxpayer. It also compares them to the potential outcome if a straightforward and up front approach was taken whereby the NRA was to proceed with the project and collect the toll itself. Hence, while it is quite sophisticated and complicated, it works.

As for the two schemes completed thus far, we have mentioned the second toll bridge. The project due to be completed considerably ahead of schedule in the near future, namely, the Kilcock-Kinnegad bypass, was judged by Private Finance International to be the deal of the year from the perspective of the NRA rather than from the perspective of the private sector. The NRA is being seen to achieve a significant level of risk transfer, good value, a high level of interest and good, bankable bids. More than anything, we secure a commitment to high quality delivery on construction, on time and within budget, or in many cases ahead of time, as well as a high quality service over the life cycle of the project. Apart from the cash we receive from the private sector which we expect to come to approximately €2 billion up to 2010, we get quality and a focus on tight management of the budget and risk.

Chairman

I still do not understand the mix. As Deputy Fleming pointed out, if the construction company in the PPP collects the toll, the State has no margin. Moreover, capital grants are given by the State either up front or by way or an annuity in phases. How does Ms O'Neill's sum of €2 billion fit in?

Ms O’Neill

All the contractors earn €2 billion of the life cycle costs of the project from tolls.

Chairman

Was that part of the construction, management and design cost?

Ms O’Neill

Yes.

Chairman

This is all rolled in to their cost side.

Ms O’Neill

In a design and build contract, the contractor does the building work and the NRA pays him or her the full cost. This is the construction cost rather than the full life cycle cost. The NRA enters into a separate maintenance contract. In this context, the contractor does the building work and maintains it for 30 years. Instead of meeting the full cost of this, the NRA contributes towards the cost, which is tested by the market.

There are toll revenues in addition to this. The NRA does not get anything from these toll revenues if they remain below a particular threshold but once they go beyond this threshold in stages, the NRA gets a revenue share. Very elaborate revenue sharing arrangements are in place. There are also arrangements to protect against super profits, including one where the NRA tests the sensitivity of a bid at very high levels. If it becomes clear that a contractor will do extremely well at a very high level, the NRA can reject the bid or seek to have it amended. The projects vary. An average of 50 will be heavily dependent on toll revenues, while toll revenues will be a lesser element in other projects, which will affect the degree of risk transfer.

Chairman

Could Ms O'Neill give the committee as much information as possible on these arrangements in correspondence so that we know what we are talking about?

Ms O’Neill

I will do so.

Deputy Fleming

I understand that the West Link toll bridge was fully paid for by the private sector and there is a return to the State of approximately 52% of everything paid by the users.

Ms O’Neill

Yes.

Deputy Fleming

I gather from Ms O'Neill's remarks that there will be an upfront grant. She spoke about the stream of income from some new motorways to the NRA. However, this will only contribute to the original grant that came in through the NRA. It will never be a profitable business from this perspective. At the end of the 30-year life cycle of the project, the State will still have a net investment in it rather than net profits. Am I correct in stating this?

Ms O’Neill

Deputy Fleming is correct. It is a very different model.

Deputy Fleming

There is a misconception among the public that some of these new projects will generate profits for somebody and the State will get something back. The State will only get back a fraction of its investment over 30 years.

Ms O’Neill

The State usually pays fully for the investment in roads.

Deputy Fleming

Is Ms O'Neill referring to the West Link toll bridge? We voiced our unhappiness about that.

Ms O’Neill

The West Link toll bridge was an unusual case because it was effectively a 100% risk transfer to the private sector. Nothing was put into it; the contractors took the chance and made the money. There are much more balanced deals with current PPP projects. The State asks the private sector to bear a considerable degree of traffic risk in return for which it will receive toll revenues. This enables the private sector to put in a significant upfront contribution to the construction of the roads. Private contractors build the road upfront and get that stream of income.

The estimated value of what will happen between 2006 and 2010 in PPP terms is €2 billion. This is money the State receives as a direct contribution to the roads programme that it would not receive if it used traditional design and build methods. Should traffic levels exceed the projections on which the deal is based, the State will receive a share of the revenue. The State is protecting itself against the perception or possibility that the private sector might do too well out of such deals. It is a different mechanism for financing.

Deputy Fleming

The introduction of hourly trains from Dublin to Cork in each direction and trains to Limerick and elsewhere by Iarnród Éireann will surely remove traffic from these motorways. All these factors will affect traffic flow.

Ms O’Neill

They take the risk that they will not receive the expected revenue.

Deputy Fleming

I will move away from the larger picture and return to the issue of the West Link bridge. We discussed gross toll revenue. What is gross toll revenue?

Ms O’Neill

Gross toll revenue is the sum total of collected tolls. There is a formula for it in my notes. It is the turnover.

Deputy Fleming

Is it turnover or tolls? There is a difference.

Ms O’Neill

If Deputy Fleming tells me the reason behind his question, I might be able to answer it.

Deputy Fleming

In common with most people, I believe it was a very clever trick by NTR or whoever agreed it with NTR to set the toll at €1.80 per car. This is because a motorist must have a euro coin and 50, 20 and 10 cent pieces to pay the toll. A motorist needs four precise coins to get through the toll bridge to pay. It is not possible to pay the toll with fewer than four coins so I normally pay €2. What happens to this extra 10%? How does it work into all these calculations? It is a very clever fee because it is designed to ensure people will not be bothered to use the four coins.

Ms O’Neill

It is defined in the agreement as the tolls collected or receivable. We are probably getting a share of the profits if people are paying slightly over the odds.

Deputy Fleming

The toll was cleverly set at €1.80 to ensure that NTR would receive €2. Even when the toll was €1.30, a motorist still needed one euro coin and 20 and 10 cent. A toll is always set at a figure where it is very difficult to have the correct amount of change. Is this simply additional money for NTR because it is over10%? Ms O'Neill understands my argument and will return to me on that point. How does this work into the formula?

Ms O’Neill

I will check that interesting point.

Deputy Fleming

Ms O'Neill's opening statement contained a reference to a rounding convention. Is this what she means by a rounding convention?

Ms O’Neill

No, that is a separate issue.

Deputy Fleming

What is the rounding convention?

Ms O’Neill

The rounding convention occurred where NTR chose to round the licence fee to two decimal places under its calculations. We raised the issue because we were concerned that this would understate it. The Comptroller and Auditor General also picked up on it but the NRA was already in negotiations with NTR about it. It is now agreed that the licence fee should be rounded to three decimal places.

Deputy Fleming

Page 128 of the Comptroller and Auditor General's report contains a short paragraph on non-reclaimable VAT. This is obviously the VAT deemed to be imputed on the toll. With regard to businesses and business vehicles which can claim VAT back from the Exchequer for what they pay, what is the proportion of the VAT that is reclaimed by the business community and how does this factor into the 52% received by the State?

Ms O’Neill

The Comptroller and Auditor General's calculations were VAT neutral.

Deputy Fleming

What does this mean?

Mr. Purcell

We excluded VAT from that computation because it was impossible to determine what would not be reclaimed or was not reclaimable. The figure of 52% excludes VAT. We took a conscious decision to do this. Some commentators argue that VAT should be included while others disagree. We decided to be explicit and thought it was better, on balance, to exclude VAT.

Deputy Fleming

If VAT were included, it might reduce the figure of 52% because some of this VAT is clearly being reclaimed from the Exchequer. It is being reclaimed for most commercial vehicles, buses and vans and a fraction of the other vehicles.

Mr. Purcell

My colleague tells me that it is reckoned that approximately one half of the VAT is reclaimable.

Deputy Fleming

The Comptroller and Auditor General mentioned in his report that an analysis carried out by consultants for the NRA indicated that approximately €99 million in 2004 values is non-reclaimable VAT. Is he saying there is another €99 million euro in reclaimable VAT?

Mr. Purcell

Yes, approximately. These are approximations.

Deputy Fleming

I understand the Comptroller and Auditor General has not carried out the test.

Mr. Purcell

It is exceedingly difficult to do so and come up with any figures that one could stand over.

Deputy Fleming

I shall return to the matter of commercial competence. I guarantee that the commercial side would try to fix VAT rates if it felt such was worthwhile.

Ms O’Neill

What is the Deputy speaking about?

Deputy Fleming

I am talking about reclaimable VAT. It is not an issue for NTR, which gets the money when VAT is paid in. It is an issue for the State if approximately €99 million of VAT at 2004 prices is reclaimable through normal commercial returns, which would be another significant cost of the toll bridge for the State that has not appeared in the calculations so far.

Ms O’Neill

That would just reduce the burden on the user.

Deputy Fleming

The burden on the commercial user.

Ms O’Neill

The tolls are not set by NTR, but rather the NRA.

Deputy Fleming

The maximum amount is set by the NRA and NTR can operate below it.

Ms O’Neill

In case the Deputy believes the numbers are being played with, the €1.80 toll is the maximum figure, which is normally used by NTR. Eazy Pass is the solution as one does not need change. If we could reach the stage of barrier-free tolling, it would also have the advantage of people not searching for change. Concerning VAT, my understanding is that the cost is passed on to the user and , as such, they pay a price plus VAT. The onus is on business users if they choose to reclaim VAT.

Deputy Fleming

VAT is a neutral matter from NTR's point of view but refunding €99 million in VAT is not neutral from the Exchequer's point of view. There is another cost to the State.

Ms O’Neill

VAT was imposed as a result of an EU decision.

Deputy Fleming

I know. As part of the State's negotiation with NTR, a VAT element is being refunded to the commercial users of the toll bridge, which does not appear to have been adequately factored into the Department's arrangements with NTR.

Mr. Purcell

The Deputy is not quite right. VAT is neutral as far as NTR is concerned.

Deputy Fleming

Of course.

Mr. Purcell

It is not neutral as far as the State is concerned. One could say that the State inadvertently became a beneficiary of an amount of VAT as a result of a decision by the EU regarding the imposition of VAT on tolling. To one extent, there is a windfall for the State in so far as the VAT is not reclaimable by normal commuters but is as a business expense by VAT-registered organisations.

When we speak of 52%, we are trying to give a ballpark figure, assuming that all the members of NTR who would have contributed as investors are paying tax on their returns at the top rate of 42% and not taking advantage of tax shelters. We are speaking about approximate figures. As such, while I mentioned the 59.4% the State expected to get and the 52% figure, the basis for the two is the same. It is consistent in this way and the difference is relative. The State is certainly getting less in percentage terms but more in actual terms. The forecast for traffic volumes were off the mark, as is shown in one of the tables.

Deputy Fleming

It might not be relevant to the operator or the NRA in new negotiations but in the taxpayers' interests we should factor into the equation the amount of VAT placed on the new tolls that will be repaid by the Revenue Commissioners as it is a cost to the State.

Deputy Curran

I wish to speak specifically about the West Link. I began earlier with how Ms O'Neill addressed the committee in February and discussed barrier-free tolling. She has been told of the frustration of a number of members. From a commercial point of view, if this were a separate business and we wanted to achieve barrier-free tolling, it would have been done by now. I agree fully that it takes two parties, NTR and the NRA, to come to an agreement as the original agreement was constraining. We do not know how barrier-free tolling would increase volume or what NTR's reluctance is based on. As the matter seems to be protracted, would NTR prefer the State to buy out its interest? Ms O'Neill can respond to this comment if she cares to.

Ms O’Neill

I would prefer not to comment. My short answer is that I do not know as I am not privy to the thinking of NTR.

Deputy Curran

Does the Secretary General believe that events in respect of this negotiation have moved slower since February than she would have hoped and expected?

Ms O’Neill

We would like to see a speedy conclusion to the discussions under way.

Deputy Curran

Have the discussions to date been slower than the Secretary General would have expected?

Ms O’Neill

I hoped that the NRA and NTR could have resolved their issues sooner but I am making allowances for the fact that, among other issues, there is a new chief executive in the NRA who requires an opportunity to carefully examine what is proposed and take account of the consequences. I do not want to attribute motives. Without the expectation that the solution would be for the State to roll over and make appropriate concessions, I would like to see the matter resolved as quickly as possible.

Deputy Curran

I shall put another scenario to the Secretary General. Having listened to her comments, including whether we could have known then what we now know, there is a general consensus that the original agreement constrains the State. The point of entering into agreements is to insert clauses for various eventualities, which did not happen sufficiently in the original agreement. The State did not cover itself and we are facing the consequences today.

The suggestion has been made several times that the State should buy out NTR. Without mentioning what the figure might be, there would be a significant capital cost and a loss of revenue. These matters occur at a time when the M50 is being upgraded. Should we not examine alternative ways of generating and maintaining a revenue stream? A vast number of M50 users never pay tolls as they do not go near the toll bridge but there is an artificial bottleneck for people in particular areas that is imposing a profound cost on the country in many ways. It is not as easily measured as the cost of the tolls. Should we not actively consider buying out the bridge and examining alternative tolling mechanisms in the context of the upgrades?

Ms O’Neill

It is a policy matter on which it would be inappropriate of me to comment.

Deputy Curran

We are not constrained and are entitled under the agreement to buy out NTR.

Ms O’Neill

It is not so much that one is entitled under an agreement as the nature of any agreement is that it can be bought out at a price.

Deputy Curran

Is there a specific clause in the agreement about buying out?

Ms O’Neill

Not specifically, but there is a space whereby the toll could be set to €0. The consequence of doing so would be to compensate in a particular way, which would be extremely onerous. Whether it is in an agreement, one can always explore such possibilities but we would need to carefully consider the consequences and cost to taxpayers. The stream of future toll revenue underpins the funding of the two M50 developments.

Deputy Curran

It is the point at which we are tolling that is causing particular problems.

Ms O’Neill

I accept the Deputy's point.

Deputy Curran

From the lay person's viewpoint, one drives from two lanes into three lanes and straight into the bottleneck. Work will start on that development shortly.

Ms O’Neill

We referred to this earlier and I do not wish to create the impression that one could wave a magic wand, remove barriers in the morning and solve all the problems. We need updated traffic modelling and there are price tags associated with these measures. One must be certain what one is paying for and the benefits that accrue.

Deputy Rabbitte

I ask the Chairman to indulge me for 50 seconds. I have been handed a note that suggests various replies to parliamentary questions from the Minister have stated that negotiations between the NRA and NTR will lead to barrier free tolling but it will only become operational after the M50 is upgraded.

Ms O’Neill

There is the issue of when the barrier free tolling will be in place and how long that will take.

Deputy Rabbitte

I thought the tenor of our exchanges over the past three hours suggested that if negotiations between NTR and the NRA were concluded, we could install barrier free tolling immediately.

Ms O’Neill

I made the point in response to a number of queries but it is not a case of simply throwing a switch and implementing barrier free tolling. One must go through the tender process and establish the back office operation to manage it.

Deputy Rabbitte

I am asking if barrier free tolling will not be implemented until after the M50 is upgraded.

Ms O’Neill

I will check the replies to the parliamentary questions to which the Deputy refers. I understand it is possible to move towards barrier free tolling in parallel with the upgrade of the M50. The point at which stage of the upgrade process barrier free tolling commences is a matter on which I will have to revert to the Deputy.

Deputy Rabbitte

I am getting the impression we are changing the ground. Our objective is no longer the conclusion of negotiations.

Ms O’Neill

I do not want to mislead the committee in any way. The conclusion of negotiations is necessary before we can move in that direction. It does not mean barrier free tolling can be introduced overnight or that it could be in place next month or next year.

Deputy Rabbitte

What does Ms O'Neill mean by saying we can move in that direction? This is not rocket science. We are replacing the existing system.

Ms O’Neill

A back office operation must be established and the tender process must take place. The technological solution must be identified and this is under way at present. Specifications must be drawn up, the project must go out to tender and the system must be put in place. I do not want to create the impression that this is an overnight solution and that once we have concluded negotiations, barrier free tolling can be put in place. That is not the case and I regret if I gave that impression.

Deputy Rabbitte

This is a horse of a considerably different colour. How long will refurbishment take?

Ms O’Neill

There are two phases; phase 1 is due in 2008 and phase 2 in 2010.

Deputy Rabbitte

Are we seriously being told that we must wait 2010 before installing barrier free tolling?

Ms O’Neill

Can the Deputy read the wording of the reply to the parliamentary question?

Deputy Rabbitte

I do not have the reply but I will convey the message I have. Replies to parliamentary questions state that negotiations between the NRA and NTR will lead to barrier free tolling but will only become operational after the M50 is upgraded in five years' time.

Ms O’Neill

I must revert to the Deputy on this matter. My understanding is that work can proceed in parallel but I do not want to give the impression that with the flick of a switch and the agreement of NTR, barrier free tolling will come into place. It will take some time and must be done in conjunction with the upgrade.

Deputy Curran

From what Deputy Rabbitte is saying, it is implied that this process is dependent on a deal whereby increased volume of traffic will——

Ms O’Neill

It involves the practicalities of putting the system in place, including contracting processes. Some of the points raised by the Deputy are valid. What arrangements should be put in place for the move to barrier free tolling? These are being considered at present and we are all acutely conscious of the pressures. I note the frustration of Deputy Rabbitte and others. I can see the difficulties of this persisting until 2010. We are working with the NRA to have this in place as speedily as possible in conjunction with the upgrade. It cannot happen ahead of the upgrade nor can it happen instantly. We can examine models from abroad but there is no easy off-the-shelf solution. Committee members will be aware of the importance of getting good value from technological solutions.

Deputy Rabbitte

We need to take time to discuss the matter further. Can Ms O'Neill remind us who signed the contract on our behalf?

Ms O’Neill

The original contract with the NRA was signed by Dublin County Council. It was signed with the approval of the Department of Environment and Local Government at the time and was eventually taken over by the NRA when the latter was established.

Deputy Rabbitte

Could we see the bottom page that has the signatories?

Ms O’Neill

Yes, we can provide that.

Chairman

We have located some material on barrier free tolling that we can display. In reply to Question No. 5 from Deputy Shortall, the Minister, Deputy Cullen, stated:

Open road tolling, that is, the collection of tolls by automated means in a barrier free environment, is the optimal means of toll collection where the traffic volumes and toll revenues justify the investment required. The only route where a move to full open road tolling, that is, no manual collection and barrier free, is being considered, however, is the M50. The move from the current toll arrangement on the M50 to a barrier free facility would be completed over a number of stages, involving a phased reduction in the cashier-coin basket lanes with a corresponding increase in payments by automated toll collection methods.

Ms O’Neill

Does the Chairman know the date of the reply?

Chairman

The reply dates from 24 March 2005.

Ms O’Neill

There has been considerable development in thinking since then. To avoid confusion, there is a distinction between open road tolling and barrier free tolling. The latter refers to tolling at a particular point but without a barrier. Open road tolling is what Deputy Curran refers to, a system that charges a fee based on the distance the motorist has travelled on the M50. Open road tolling holds certain attractions in terms of managing traffic flows. One can tweak tolling arrangements depending on traffic volumes at a particular point. This might be where the confusion arises. Such a system was expected to be introduced at the end of the M50 upgrade, whereas barrier free tolling was something the NRA sought to achieve sooner than that. One must consider whether to do this in one or two steps.

Chairman

Where does that leave us?

Ms O’Neill

I will return and confirm the position on this matter to remove any confusion.

Deputy Rabbitte

It would be very helpful if the Accounting Officer could provide some clarity on this matter before we discuss it again. Would it be possible to negotiate that the road be thrown open for the duration of the turmoil caused by refurbishment?

Ms O’Neill

I cannot comment on that at this stage. This would raise other issues, including the agreement between the NRA and NTR.

Deputy Rabbitte

There is a price on everything and if we were prepared to pay it, we could throw open the road for the duration of the refurbishment.

Ms O’Neill

This is a policy decision for the Minister and I feel in danger of straying beyond sharing information to speculating on policy possibilities.

Deputy Curran

Is it possible to get a copy of the agreement?

Ms O’Neill

I do not know about its commercial nature at this stage. Given that a number of issues have been raised about the agreement, it might be helpful to provide a copy of it. I will check with the secretary afterwards as I must provide more information on who signed the agreement, the performance criteria used, the revenue sharing arrangements in the three contracts and specifically where the NRA stands on the ability to introduce barrier-free tolling. I suspect the last issue is surrounded by confusion regarding barrier-free tolling and open road tolling.

Deputy Rabbitte

The statement from the Minister seems to be clear:

I understand from the NRA that the cost of implementing barrier-free tolling on the M50 has yet to be determined and will depend on the outcome of negotiations with NTR. The NRA is aiming to complete the move to barrier-free tolling to coincide with the completion of the upgrade of the M50.

Ms O’Neill

The sentence dates back to March 2005 and it outlines the position as conveyed by the NRA at that time. Since then we have been in discussions with the NRA to examine the extent to which it can be advanced.

Deputy Rabbitte

Ms O'Neill must understand that from today it will not run. It is unbelievable. We discussed this for three hours in the belief that if these negotiations were concluded we could install a new electronic system. We have reached the end of the upgrade of the M50. That is the position until the Minister changes it. It is simply unconscionable.

Chairman

I do not think it will be of benefit to discuss this further. I will not close the chapter. We must leave the chapter open. It is not true to state we are more confused now than when we started, but we have not made much progress.

Mr. Purcell

It is not valid to compare this arrangement with PPP arrangements for national highways. At the beginning of this chapter I stated that the memorandum that went to Government noted that tolls were not generally applied to ringroads in European countries. That Government had its eyes wide open at the time. It was unusual at that stage to have tolling applied to ringroads around a capital city. That is the essence of the difference between this arrangement and the PPPs which Deputy Fleming was attempting to bring to light. Here, one had a captive audience with no real alternative and it would be revenue rich. That is fairly obvious but it is no harm to state the obvious. With hindsight, and given developments since then, it was not the wisest decision to do it that way. To look 20 years into the future is not easy. The agreement is extremely restrictive and it was an eye-opener to see how much it bound the State. At the negotiation of the second agreement the State was playing cards against somebody who was holding a winning hand. It was extremely difficult to make gains.

The concept of buy-out was mentioned. Effectively, a buy-out is permissible under the existing arrangements as the State may abolish the tolls. In that case compensation must be paid, but that payment is not a lump sum. The compensation amount would be the total amount of toll revenue paid less the licence fee in the 12 months immediately preceding the date of the abolition of the tolls. The licence fee is that which is payable to the State. If it was decided to abolish the tolls this year, the compensation amount would be based on the difference between the gross toll revenue in 2004 less the State's direct take from it, excluding taxes. That compensation would be payable each year for the duration of the agreement up to 2020 and would increase in accordance with indexation provisions. It would serve to link it to the volume of traffic travelling over the bridge in 2004.

As well as that cost to the State each year, the State would forgo the revenue it receives from the bridge. I wish to make that clear. The agreement does not provide for a buyout, per se it provides for abolishing tolls. That is a general point about the agreement. If the State bought out NTR it could reintroduce tolling, whether open road tolling or barrierfree tolling. That question might have to be considered.

Chairman

I thank Mr. Purcell. We will not dispose of the chapter. We will reschedule for the Vote on the chapter in the future. Is there any other business? The agenda agreed for the meeting of Thursday, 17 November 2005 is as follows: Údarás na Gaeltachta, financial statements 2004.

The witnesses withdrew.

The committee adjourned at 2.55 p.m. until 11 a.m. on Thursday, 17 November 2005.