I am head of the department of economics at the University of Limerick. Along with my departmental colleague, Dr. Dónal Palcic, we specialise in infrastructure-related research into aspects of public procurement, including public private partnerships, PPPs. We thank the committee for the invitation to appear before it this afternoon. A detailed briefing note has been submitted to the committee and I will summarise some of the main points in this opening statement. I wish to emphasise that we have had no direct involvement or advisory role in the NBP procurement. Our access to information has been confined to that which has been placed in the public domain, much of which has been heavily redacted. We wish to state upfront that having observed events and analysed documentation that is publicly available, we have formed the view that the procurement approach adopted has not satisfied the criteria necessary to ensure that the key objective of value for money will be achieved. As the committee is aware, the procurement model being used for the NBP is a gap funding model which is essentially a type of public private partnership.
I will now examine the features of the PPP model and relate them back to the NBP. PPPs can be defined as long-term infrastructure contracts between the State and a private contractor. The main characteristics of a typical infrastructure PPP include: competition for contracts; bundling of the different stages of the project life cycle into one contract; risk transfer to the private sector; and a significant element of private finance. Although the gap funding model possesses those characteristics it differs from other PPPs used in Ireland to date since ownership of the infrastructure will remain with the private contractor at the end of the contractual period.
The principal economic justification for adopting a PPP is that it provides scope for achieving value for money, VFM. However, the achievement of VFM, in turn, depends critically on what may be referred to as key VFM drivers. The main VFM drivers are competition for contracts and risk transfer and I wish to discuss both in the context of the NBP. The importance of competition for contracts cannot be over-emphasised. Competition creates incentives for bidders to reduce costs and delays and to develop proposals of higher quality. The recommendation in favour of the gap funding model was based on the assumption that the market for the contract would be competitive. However, once SIRO and Eir withdrew from the process the principal justification for continuing the procurement no longer applied.
In general, the potential negative consequences of continuing with an uncompetitive procurement are opportunistic behaviour by the bidder during contract negotiations, leading to price increases, and renegotiations after the contract is signed. The international evidence on public private partnerships, PPPs, shows that these problems frequently materialise when competition for contracts is absent. In this context, it is worth considering whether the evidence suggests that the lack of competition for the NBP contract has impacted on the project costs to date. One development that raises suspicions in this respect is the substantial increase in projected costs that will arise due to the preferred bidder rolling out fibre in the 300,000 premises area that Eir carved out of the initial intervention area. Would this have been agreed if there was real competition for the contract?
Optimal risk transfer is one of the main drivers of value for money in PPP projects. The available information indicates that the preferred bidder for the NBP will take on significant risk, particularly in terms of construction, operating and revenue risk. I wish to focus on financial risk. It is typical in privately financed PPPs for financial risk to be assumed by investors that contribute equity and loans to the PPP. Both providers have skin in the game and this incentivises them to ensure that contractual obligations are met. In the case of the NBP, we eventually learned that the level of private equity is €220 million. This is not a trivial sum of money, but it accounts for a very low percentage of total project costs. The concerns expressed by Mr. Robert Watt, Secretary General of the Department of Public Expenditure and Reform, were relevant in this regard when he noted that by 2028 the private bidder will have recouped most of its investment while the State will have invested €2.44 billion at that stage. In addition, the gap funding model for the NBP differs from earlier PPPs in Ireland as it appears that the special purpose vehicle is not borrowing significant amounts from banks or international capital markets. Rather, it appears that it will work on a cashflow basis and rely on payments from the Exchequer as the project progresses. As a result, unlike other privately financed PPPs, this gap funding model approach will not possess the advantages that arise from the due diligence and close monitoring of all aspects of the deal by experienced lenders. Overall, it appears that some of the risk-sharing advantages that typically apply to PPP projects do not apply in this procurement model, which increases concerns that the procurement will not deliver value for money.
I wish to make some points about governance aspects of the NBP. I will preface my comments by stating that the international evidence consistently shows that accountability and transparency are the critical conditions that must be satisfied if good governance is to be achieved. There have been several problems with the governance of the NBP. On the project appraisal stage of the NBP, I wish to highlight that there is very limited information about the cost-benefit analysis, CBA, in the public domain and the available data do not include detailed breakdowns of valuations, assumptions, etc. It is reassuring that the CBA has been scrutinised by the Department of Public Expenditure and Reform, but the fact that the Department concluded that "the CBA is not credible and it is questionable whether it is consistent with the public spending code" is a matter of significant concern. On the choice of procurement model, the principal point I wish to emphasise is that the financial appraisals underpinning the choice of the gap funding model are not publicly available. It is not clear if these were subject to independent scrutiny by the Department of Public Expenditure and Reform or the National Development Finance Agency, for example. Nevertheless, I recommend that these be published in order to improve the accountability of key decision makers.
The governance problems witnessed during the procurement process have been widely discussed. In economic terms, the fundamental weakness has been the decision to continue the process with one bidder. Other issues have arisen regarding the changes in composition of the bidder’s consortium, the drip feed of information about key aspects of the procurement, including the precise level of equity being invested by the preferred bidder, and controversy around interactions between the relevant Minister and investors in the consortium behind the remaining bid. Overall, the governance problems that have arisen are such that the procurement lacks the required level of legitimacy, thereby eroding public confidence in the process. There are legitimate concerns about the overall justification for the project, the chosen procurement model and the potential cost of the project and knock-on effects for other investment priorities. It is our considered view that the current procurement should be terminated and more affordable alternatives explored.
I will hand over to my colleague, Dr. Palcic, whose statement will build on the points I have raised.