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Dáil Éireann debate -
Wednesday, 28 May 2003

Vol. 567 No. 6

Priority Questions. - Public Private Partnerships.

Joan Burton

Question:

47 Ms Burton asked the Minister for Finance the reason for allowing the full construction costs to be incurred by the private developer of the Kilcock-Kinnegad motorway to be allowable against corporation tax; the legislative basis for this decision; if this principle is to be applied to other public private partnerships; and if he will make a statement on the matter. [14737/03]

I am informed by the Revenue Commissioners that the tax treatment to apply in public private partnerships, where the developer designs, builds, finances and operates – DBFO – the facility, was established by the Revenue Commissioners in June 2001. That treatment was applied in the bundle of schools projects and the National Maritime College before confirmation was sought in relation to the Kilcock-Kinnegad motorway. A guidance note prepared by Revenue setting out the treatment is due to be published as part of a series of guidance notes on public private partnerships to be published by the special unit in my Department dealing with these type of projects.

Section 65 of the Taxes Consolidation Act 1997 is the legislative basis for taxing trading profits and provides that tax shall be charged on the full amount of the profits arising in a year of assessment. The section does not give any guidance on how the profits are to be computed. The profits of a trade for taxation purposes are ascertained in accordance with the ordinary principles of commercial accountancy unless there is a specific tax rule to the contrary. The Accounting Standards Board publishes Financial Reporting Standards. Standard No. 5, entitled "Reporting the substance of transactions", provides the specific guidance for the recognition of profits in the case of public private partnerships.

Under the DBFO arrangements the developer designs, builds, finances and operates the facilities. They are licensed to operate the facility for a certain period after which the property reverts to the State for nil consideration to the developer. The expenses incurred on developing the property are incurred for the purposes of earning a profit from the operation and are, therefore, of a revenue nature. The accountancy standard FRS5 allows, effectively, for the amortisation of these expenses in the profit and loss account of the developer, in other words the expenses can be written off over the life of the contract at a fixed amount per year. This is a method of matching the costs of the development with the receipts from the public private partnership contract. Revenue accepts the profits as disclosed in accounts prepared in accordance with FRS5 as the profit for tax purposes from the public private partnership contract of the developer-operator.

The Minister would therefore agree with me that the consortium who got the franchise for the PPP on the Kilcock-Kinnegad route got, first, a franchise to charge motorway tolls and then as the Minister has just disclosed, access to tax allowances in addition to a 65% subsidy from the State for constructing the road. That is a triple "whammy" for the road-user, who pays the subsidy which is the State's contribution, who pays the tolls and who now is funding, through tax expenditures, the tax breaks for the company.

I received correspondence from some of the companies involved. The Minister read out the relevant accounting documentation which argues substance over form, and I accept that, but the reality therefore is that the rolled-up capital value of the road, including the very high transaction costs, legal fees, etc., which are included in the cost of any PPP, including the capital cost of the road, is now available to that company to be written off for tax purposes.

Why is the statement from the Revenue Commissioner on the tax breaks available for PPPs not yet published? The companies may know, but the House of the Oireachtas does not know, economists who are trying to value PPPs do not know and general public certainly do not know that they are getting this triple "whammy" of the tolls, subsidising the cost of the road and now paying the cost of the tax breaks. The Minister must come clean and explain this to the House.

As far as I was aware, the Deputy's party is in favour of the principle of PPPs, unless there is a change, not alone in the leadership of the Labour Party but also in its long-standing policy in this regard. Public private partnerships have been welcomed on most sides of the House and also by the trade union movement, subject to their usual provisos.

What the Deputy dealt with, the question of the matters to which the Deputy referred, would have been taken into account before a franchise was decided for that motorway. What I am asked to deal with here, the tax treatment of PPPs in this context, is dealt with, as I pointed out in my reply, in the normal context under the normal accounting standards which apply to this area, and there is nothing unusual about this. In simple terms, it is very similar to the treatment of a developer of land when it is being used as part of his housing development. It is treated as stock in trade rather than as a capital asset, and the cost of the development can be written off against the developer's income.

The Deputy asked here about the tax treatment of this transaction. I outlined what it is and there is nothing unusual about it. Leading up to any of the PPPs, including the maritime college and the bundle of schools project, the Revenue Commissioners have treated this in the same way and therefore there is nothing unusual in the tax treatment regarding the concession the winner has got in the case of the Kilcock-Kinnegad motorway.

The matter of the tax advantage would be taken into account in the assessment of the overall financial model for a PPP. The tax treatment is taken into it as part of the calculation before a decision is made to grant a PPP. It is part of the calculation mechanism.

What the Minister has given us today is new information. The information he has just given is not available. How can we then calculate the value for money of a traditional road project funded directly by the State, as opposed to a PPP, if the full value of the tax breaks for the PPP consortium are not clearly laid out? They are not clearly laid out. The Revenue, as the Minister stated, has not yet published the full guidelines. How are Members of this House supposed to make a judgment?

Can the Minister give me the cost of the tax benefit, over the life of the contract, to the consortium who have taken on the PPP for the Kilcock-Kinnegad motorway so that we can calculate and include it in the calculation of the cost of that PPP? How else do we get an estimate of whether the taxpayer is getting value for money, whether for a road or the bundle of schools?

An Leas-Cheann Comhairle

We are over the time. We must proceed to the next question.

Could the Minister give us the tax cost for both the school project, the maritime college and the Kilcock-Kinnegad PPP?

Since the PPP concept is quite new, I accept that maybe people are not familiar with what goes on. Bidders for PPP projects prepare complex financial models which model their projected income and expenditure over the concession period. Tax payable is an integral part of these models. In submitting their tender, bidders will have targeted the required return on the investment and tendered accordingly. The tax treatment referred to forms part of that calculation.

Moreover each project is subject to a value for money assessment. These assessments take account of all relevant Exchequer cash flows including public expenditure and tax revenues, and any tax benefit accruing to the private sector is evaluated as part of the assessment of the PPP project.

We do not have that information.

That is done.

An Leas-Cheann Comhairle

We must proceed to Question No. 48.

The guidelines are supposed to be published shortly anyway, but it is available to these people.

That is after the first lot have been given, which is hardly satisfactory.

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