JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Wednesday, 15 Oct 2003

Vol. 1 No. 17

Public Private Partnerships: Presentation.

Chairman

We have with us Mr. Eamonn Kearns, director; Mr. Pat O'Neill, programme manager and Mr. Michael Manley, principal officer, all from the PPP unit of the Department of Finance. Mr. Kearns will make the presentation to the committee. He has supplied us with much documentation in advance, which many members are familiar with. He will make a summary of that to us.

I wish to remind witnesses that while the comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected. Members are reminded 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 any official by name or in such a way as to make him or her identifiable. I now invite Mr. Kearns to address the committee.

Mr. Eamonn Kearns

Thank you, Chairman, Deputies and Senators. Mr. Manley is a principal officer in the public expenditure division and is not actually attached to the central public private partnership unit. I will be brief in my presentation because we circulated a document which sets out the highlights of policy on public private partnerships. The summary presentation deals with the background but given the Deputies and Senators' expertise in the area I will not dwell on the origins and background of the PPPs.

I will start by explaining what we mean when we talk about PPPs. Any form of arrangement between the public and private sector has from time to time been referred to as a partnership between them. In public-private partnerships we tend to focus on PPPs as defined in the State Authorities (Public Private Partnership Arrangements) Act and as encompassed in the framework for PPPs which was agreed with the social partners under the PPF. That puts a kind of boundary on forms of public-private partnership.

What we are really talking about is design, build, and operate PPPs, where those three elements of individual projects are combined in one contract which is agreed between a State authority and the private sector. We would then include design, build, operate and finance forms of public-private partnership where private finance of various forms - it could be senior debt bank finance or finance which would includeequity, possibly from sponsors - would be added on.

Finally, we would include public-private partnerships which encompass all of the design, build, operate and finance elements maintained over a full life cycle but which are remunerated by user charges - a stream of revenue which is generated from those who use the service or asset. That repays all or part of the debt and the operation, refurbishment and maintenance costs over the full life cycle. These are the forms of PPP we have been testing in the pilot programme we have had running for three years.

In the three years, we have come from having no PPP pilot programmes in 2000 to having around 40 PPPs at various stages of procurement. The committee would be familiar with many of them. One of the projects which has been completed is the five schools project - two Cork schools in Dunmanway and Ballincollig, and one each in Clones, Tubbercurry and Shannon. The committee will also be familiar with the extension to the West Link toll bridge which was an addition to an existing PPP type arrangement which was remunerated by tolling. The National Maritime College is in construction at present and it is a design, build, operate and finance PPP. There are also various forms of design, build and operate PPPs in the environmental services area, particularly in water supply.

We have, as we set out to do in commencing the pilot programme, tested the PPP approach. We have learned considerably from those early pilot projects and the learning has brought follow-on development in a number of respects. First, we had the creation of the National Development Finance Agency. The early projects threw up a number of issues on cost of private finance, the evaluation of best value for money when using private finance, and the optimum structure of finance to suit the various different types of projects. The NDFA is now there to advise all State authorities undertaking projects in excess of €20 million on the optimal form of financing.

Our unit has learned from, and has learned by doing, the initial pilot projects and has drawn on that to put in place a series of guidance notes which are encompassed in the interim guidance which we gave to the members of the committee and which is in the presentation packs. The notes deal with the issues of project assessment and selection and cost-benefit analysis. They then deal with the process of bringing projects through from their selection as PPPs to completion. They also deal with critical questions such as the creation of the public sector benchmark which is the basis for the comparison between the cost of developing a project as a PPP and the costs which would be incurred were it to be developed under traditional procurement means. The guidelines set gateways through which projects must pass if they are to proceed to completion as public-private partnerships.

We already have a number of examples of PPPs which brought together those various elements. Recently, the National Roads Authority signed the first motorway PPP contract - for the Kilcock-Kinnegad motorway which has tested another variation. The West Link involved a bridge, a river crossing, so it was a particular form of PPP. The N4-N6 Kilcock-Kinnegad road which is a stretch of motorway which will be funded mainly by tolls is another form.

Moving forward, the Minister is looking to further projects which are design, build, operate and finance with streams of revenue from user charges which will remunerate the borrowing and cover the operation, maintenance and refurbishment costs over the full life cycle. The Minister is also anxious to look at projects which deliver better value for money, accelerate the delivery of programmes and improved quality public services when the PPP approach is applied to them.

The Minister is also reviewing the whole question of future public capital investment, the sourcing of finance for such investment and the appropriate mix as between the various alternatives, ranging from full Exchequer financed projects across spectrum to projects which are PPPs wholly financed by the private sector where the costs are met by revenue from user charges. He has also indicated his intention to create a framework within which better value for money for the Exchequer can be achieved and delivery of projects can be accelerated. Decisions on these issues will be made in the near future.

If the committee wishes I will leave it there and perhaps follow up on any questions arising or on the documentation.

Deputy R. Bruton

The critical concern I have in regard to PPPs relates to the funding as opposed to the design, build and operate parts. Traditionally, the Government is the cheapest borrower in the market - the rate is 4.8% or something like that at present. The private sector has less good credit ratings so it must add that on. It also must add on a profit margin and take on the risk. In the case of Mr. Brennan's recent proposal for the metro, we saw that when one did the discounted cash flow on what he was proposing, the internal rate of return was 14.5% as against the Government's 4.8% borrowing standard.

Can Mr. Kearns explain how his section decides a PPP is justified in paying the 10 points more? The PPP could be contracted to design, to build and operate but it could be funded entirely by the State. How does the unit justify the transfer of risk that would be taken on by the PPP? How is it justified from the State's point of view and how is it actually pinned down? In many cases the PPP may be shouldering a risk but the State might have a different view because it has many projects and does not necessarily have to appropriate the stream of returns in tolls. It might have no tolls and the benefit is still there.

It seems to me that the critical issues for the State are the issue of the public sector benchmark, as Mr. Kearns called it, and of demonstrating that it is better to go the route of getting the private sector to do the job. I have tried in vain to establish from the National Roads Authority how it stacks up on this critical comparison but it will not reveal any of that information to me. Hopefully, they are revealing it to the Department of Finance. I have also approached the Department of Transport to find out how the East Link and the West Link have stacked up in terms of whether they were good for the public sector and whether the consumer is being ripped off by paying too much of the consumer surplus, as we used to call it in economics, over to these private developers. Was it necessary to agree the sort of contract where they have got twice the rate of inflation on their tolls that have applied to the CPI?

What really troubles me is not the principle of PPP but the huge culture of secrecy observed internally by the promoters of projects. It makes me extremely suspicious.

Putting on his finance hat, is Mr. Kearns sceptical about the possibility that the promoters of these projects will rosy up the benefit side and fudge the cost side in order to get through the gateways that are in place? What about the day when the costs explode and the benefits prove not to be realised on anything like the scale they imagined? Why does Mr. Kearns believe that, for example, instead of these costs, benefits and appraisals coming before a committee such as our own or a committee of independent wise men, the promoters should be allowed to do their own evaluation? Clearly it is in their interests to evaluate the projects as being better than they are because they will get a chance to push ahead with them.

We have too much experience of public projects going badly wrong to be wildly enthusiastic about some new wheeze that takes them completely out of public scrutiny and into an area in which everything is commercially confidential and cannot be released. Perhaps I sound unduly negative about this, but I have tried in vain to obtain a good appraisal from any Department that is engaged in this sort of thing. Nobody is saying, "This is a great project; we really did well by going down the PPP road and it could not have been this good if we had done this through the public sector." I would like to hear Mr. Kearns answer criticisms such as this and explain why he feels this secrecy - excluding even elected people such as ourselves, who are supposed to be scrutinising on behalf of the taxpayer - is so important to the process.

Mr. Kearns

May I ask some of my colleagues to contribute to certain aspects of the discussion?

Chairman

Yes.

Mr. Kearns

The public sector benchmark, PSB, is perhaps the critical gateway once a project has been developed as a public-private partnership. It is an important tool for us in evaluating the benefits of pursuing a PPP - compared with any other form of procurement - once it has been decided that the project is necessary, that the business case stands up and that a PPP approach is being taken. A couple of elements of the PSB are worth considering. It sets out what it would cost the relevant State authority - in the case of a road, the National Roads Authority - if it were to procure the same project, as specified, by traditional means.

In the guidelines we have developed on the basis of learning from earlier projects, the public sector benchmark must be three things. It must be comprehensive: in other words, it must identify the broad range of risks as mentioned by the Deputy - risks that can be transferred to the private sector and those that can be retained by the public sector - and how the cut is made. It is critical that risks are not simply pushed out to the private sector in a PPP. Risks must be identified, managed and mitigated by the party best positioned to do that over the full life cycle of the project.

The PSB must also be detailed. Whereas in the initial cost-benefit analysis required under the capital project appraisal guidelines can be more or less qualitative in the way it is structured, the PSB must cost the various risk elements. As more PPP projects are developed, particularly in the roads sector, and as we learn more about the identification and pricing of risks in the marketplace, we want to see a risk database being maintained and added to with every PPP-type project. We will be doing that in consultation with the National Development Finance Agency.

The third criterion for the PSB is that all of its elements must deal with the flow of funds adjusted for the risks that are transferred to the private sector. It needs to focus on the whole life cost: for example, not just the capital cost of putting a road in position but the cost of maintaining and refurbishing the road and making sure the residual value of the road at the end of the concession period meets the specifications set out in the schedule to the contract. We are talking about costs for the project derived from the output specification. That is where we are going with the public sector benchmark.

Of course there can be difficulties. If we have never undertaken a project by this means, how do we obtain historical data? That can be a problem, but we are aware of it. Other jurisdictions come up against the same difficulties. In some cases it will be necessary to adopt a "shadow bid" approach, in which the public authority - for example, the NRA - would benchmark against projects of similar form in other jurisdictions to determine the appropriate pricing for risks it might want to transfer. Once that has been completed, an assessment is made of whether the benefits, which are quantified, outweigh the project costs. That is what the PSB will do.

Our thinking is that at that stage an affordability cap will be set. It will be the public sector benchmark. Members will appreciate that it may not be possible to price absolutely everything, so there might be a small percentage of flexibility around the final figure. The final figure, however, must be an affordability cap. That will represent that absolute limit on the out-turn cost for the project. In other words, using the public sector benchmark to evaluate the tenders that come in from the marketplace, the sponsoring agency will not be in a position to exceed that affordability cap and it must remain unchanged for the duration of the whole project. We see that as the test of whether value for money is being achieved.

The Deputy asked why we cannot make the PSB publicly available. We see it remaining confidential mainly from the perspective of ensuring a competitive market in the bidding process for projects. We believe that not revealing our affordability cap is an incentive for bidders to work from the bottom up. If we release our benchmark, as happens in the UK, we believe that the tendering process would focus on that benchmark and the objective would be to structure bids to come in just below the benchmark. We are not looking for that; we want to create an incentive for the private sector to develop and price projects and evaluate risks from the micro-level up to the overall bid. This should result in better innovation, not just in terms of the engineering elements of the project but also in terms of the forms of financing the project may bring. Members may know that the NRA wants bidders to bring their financiers with them once they put together the tenders for their bids. Keeping the PSB confidential enables bidders to use their professional expertise in identifying the best approach to delivering the outputs we are looking for.

Deputy R. Bruton

My initial scepticism is due to the suggested figures of 14.5% private sector - or 15%, if one read some articles in the newspapers last week - and 5% Government. Those are the two packages we have on offer. Mr. Kearns is saying it is right to pay the 14.5% or the 15%. Could Mr. Kearns give me some concrete examples of what the taxpayer is getting for the extra 10%? If we cannot know the PSB either before or after the process, we need to have some feeling for what we are getting in return for this massive premium. I do not think Mr. Kearns has addressed this issue.

The East Link is finished. Can we not find out how the State did out of it? Did we pay too much? Were the tolls we gave them over the contract period too generous? I think they were much too generous.

This should be done objectively by the Department and we should be included in the debate so we can learn from any mistakes made. This is not a blank page; the Department is describing a process we will see in the future but I want to see if this game is worth the candle, with concrete examples of savings to the State compared to what might have happened otherwise.

Mr. Pat O’Neill

Projects are made up of different evaluative debts, such as senior debt, junior debt, subordinated debt and equity. Equity is the highest risk so it is last to be paid out in a cash flow cascade. The higher the risk, the higher the return. Looking at a sample project, the amount of pure equity would be 1%, with subordinated debt of 9% and senior and junior debt making up 80%. The return on equity - 14.8% was quoted but it varies depending on the return the private sector wants for the project - depends on the access to finance and numerous other factors. Senior debt can be 150 to 200 basis points over the Euribor rate of 2%. There are different costs for different levels of finance. The pure equity finance is a minor part of the project that is not given for the whole project value.

On asking where the State gets value for money, if we look at pure funding, the Government is AAA rated and can get cheaper finance than the private sector but we link the risks - the design, the building, the finance and the operation. We have placed significant risk with the private sector. The private sector tells us that it has innovative ways to erect a building or operating a project more cheaply and efficiently. It can design projects to fit our output specifications. PPP no longer looks at the fact that a project runs to a particular specification, we say we want it to perform a service and the private sector can design it within our output specifications, build it, operate it and finance it. We evaluate value for money by compiling our costs from a public sector way of delivering the project and that becomes our benchmark. The benchmark is made up of capital costs, design costs and operational costs for the years determined by the contract, the replacement of the assets over the life of the contract and the maintenance, then we identify all the risks and we include them. That becomes our benchmark.

We then build that up from our output specifications. We give the specifications to the private sector tenders and they build their tender on the same information, working on the same basis. We compare the tender against the benchmark and if the tender exceeds the benchmark then, as per our interim guidelines, that project can be stopped. If the tender comes in below the benchmark, we know we are getting value for money. It is not value for money if we look solely at finance, the point made, but it is if we look at the whole project.

It was said that costs explode. We have structured the interim guidelines so that we look at the public sector benchmark being developed by the procuring authority, or sponsoring agency as it is called under the capital appraisal guidelines, and it goes to the sanctioning authority, the body that approves spending the money, and it then approves that amount of money. Only at that point will that procuring authority go out to the market. When it goes out to the market, the sanctioning authority can identify that the money is available to spend. If it exceeds that amount, the project is stopped. It is the decision of the sanctioning authority.

Senator O’Toole

When looking at the costs for a 30-year period, is there a template that states that a school would need to have to be replaced in X years? Is the cost of Civil Service time included? If every school is built in this way, is money saved in Civil Service administration? I cannot understand how Euribor would have any connection with a 30-year project. The idea that someone could assess risks on the basis of a number of basis points on the inter-bank rate is amazing.

Mr. O’Neill

The relation to Euribor was to give the committee an idea of the cost of debt to the project. The Euribor rate is used normally as a base and that relationship gives an idea of the cost of senior debt financing.

On the whole life costs of projects, a model is built that identifies the equipment going into a building. Some boilers may last 15 years and then would have to be refurbished or replaced. It comes right down to a fundamental level.

Senator O’Toole

We are getting letters every day about that not happening. It sounds utopian.

Mr. O’Neill

When we sign a PPP contract with a private sector consortium, it takes the risks of maintaining and managing the building for the period of the contract. It must take on board all those costs and if, for example, a door breaks and it is not corrected within a certain time frame, a penalty mechanism kicks in. Each issue is scaled as to its importance to the establishment. If the whole room is not available, there will be an availability penalty and the company is not paid for that.

Deputy Burton

This is the fifth time I have heard this presentation and it is like dealing with smoke and mirrors - the Department is prepared to give out a certain amount of information. I went to the conference on PPPs last week on behalf of the committee and there was a general air of despondency from the private sector members I spoke to in relation to our PPP process. At the conference, Dr. Michael Somers drew the comparison between the cost of borrowing to the Government at 4.5% and the expected rate of return of PPP operators of14%. The difference has not been explained to us in a satisfactory manner.

It is impossible to escape from the fact that the reason this mechanism became so fashionable with the Department of Finance is because it offers an off-balance sheet mechanism to secure projects which would otherwise affect Department of Finance figures and impact on our meeting the terms of the European Growth and Stability Pact requirements. That remains a fundamental motive and it is dishonest of the Department and the Minister not to address that issue as central.

I was impressed by the conference and other presentations. Can the Department explain the risk being transferred to the private sector by schools, a public good, with an identifiable life history and expected life-span? Why should the public sector pay the risk premium that has been identified by Dr. Somers when we know and understand that we need schools and hospitals?

This point reaches its extreme in the case of the Cork School of Music, where a €12.9 million capital programme, by the time it was assessed on a PPP basis over a 20-year period and the contractor got involved, had mushroomed to become a €200 million project which is now bogged down and may never be completed. These questions must be answered but instead we are getting this phoney discussion on initials on all projects.

National Toll Roads has done extraordinarily well from the toll bridges. The toll bridges and tolling roads are mechanisms to produce a stream of revenue to pay for a project but are the costs being charged to motorists paying for this public good reasonable? Is the Exchequer getting a reasonable return? We do not see this.

The second toll bridge, which is listed here as a PPP project, was built without any competition. There are many firms that might have competed for the second toll bridge but there was no competitive process because the in situ operator of the first bridge, National Toll Roads, got the second bridge. The bridges are a licence for NTR to print money.

Senator Mansergh

And for traffic congestion.

Deputy Burton

There used to be a subject called political economy and the economics here are that National Toll Roads is doing very well. I take my hat off to the company. It told Fingal County Council four years ago that the cost of the second bridge would be £17 million and it opened the bridge on time for €23 million. As project manager, it delivered what it said it would do - the problem was in the public service - but in the meantime we are paying for the most expensive traffic jam in Europe. The Department's figures take into account the monetary exercise involved while my constituents are sitting in an expensive traffic jam on the outskirts of Dublin. Can we move the debate on so we can have answers to our questions?

The Mulhuddart housing project is on the list. Dr. Somers and dozens of other speakers at the seminar all agree with me that this is not a PPP. This is Fingal County Council, on which I was leader of the Labour Party which agreed to this, transferring a plot of land by agreement to a private builder to build houses to a quality of design within a time frame which will then be paid for by private purchasers under the affordable or normal purchase scheme. How does that meet PPP requirements? It does not; it is stuck in to make the list look longer.

Mr. Kearns talked about the road projects, and I understand their attractiveness because there is a clearly identifiable stream of revenue, but Mr. Tutty of the European Investment Bank said on two occasions at the conference that the transfer of risk in the projects did not imply that there has to be a user charge up front, there were other ways of transferring the risk. Has the Department of Finance, since Mr. Tutty said that, thought about identifying those other ways?

From the conference, people like Mr. Tutty and Dr. Somers clearly indicated that building schools and county council offices are not PPPs in the understood sense. If the Growth and Stability Pact was relaxed tomorrow so we would not have a problem about large infrastructure projects being allowed under the Lisbon rules, would we continue with PPPs? The Cork School of Music is a disaster and the East Link and West Link are examples of expensive ways of getting the private sector to do something the public sector has been unable to manage on time but the other cost, not included in the figures, is the major traffic jam.

Deputy C. Lenihan

I am interested in the extension of the PPP involved with the West Link. What performance indicators were established and what legal obligations were placed on the operator? It is clear that the first phase that was built in the 1980s had no relationship to traffic levels so there were no performance indicators required of the contractor to adjust its performance or add to the infrastructure should traffic levels grow to a certain level. It could be argued this was at an earlier stage before PPP was mentioned and it was just a private deal but now there has been an extension built, what role did the Department play to ensure the local authority got best value for money in terms of re-negotiating the contract to reflect the wider issues reflected in the contributions of Deputies Burton, Richard Bruton and me - the congestion problem and traffic levels? I accept that the company delivered on budget and in time and that is why people sign up for PPPs - project management is more efficient in private hands. What performance indicators for this infrastructure have been included to mean that we will not be faced with the situation in ten years time where a third bridge across the River Liffey is needed while we face major congestion before it is built?

Has the Department any views on the overspend on Luas, which has gone way over budget? There was a consortium at the conference in the Department of the Taoiseach which built an underground system for Kuala Lumpur on time and within budget, on the basis of design, build, finance and operate. Should we go that extra mile in terms of specifying contracts to design, build, finance and operate? The Malaysian authorities got their system, although it went back into public ownership shortly after because it had been over-specified in terms of traffic levels on the underground, for €800 million. We, however, are lamentable, with overruns on Luas and project management for delivering critical public infrastructure. If we are going down this road, we need performance indicators and there should be penalty clauses to punish operators who do not do what they are supposed to do. That is what happens in the private sector and that is the appeal from the point of view of the State in having PPPs - penalties can be imposed on firms that do not deliver to specification on time and within budget.

I will not speak about the general level of debt but I will ask if we can achieve better value for the total spend by using PPPs. From my service on the Committee of Public Accounts, I have a problem with project management and the capturing of costs in relation to these projects. They are susceptible to pressure. An example of such pressure is local engineers on one section of motorway adding on road sections that benefit them but not the overall costs.

Senator Mansergh

Until the end of the 1970s there would be endless supplementary Estimates in the budget. Successive Governments then decided that this was not to be tolerated except in the case of small amounts. A similar discipline must be applied to public construction projects where there is not the necessary control.

The West Link toll bridge is a disaster in many ways. There should not be toll bridges around a capital city. If a person goes round Paris, there are no tolls on the orbital routes, although many roads in France are tolled. The East Link bridge is a separate case, there would be stops and starts on it anyway because it is a two track road.

I assisted Mr. Charles Haughey in 1981 to write the speech for the opening of the East Link toll bridge. My recollection is that this was for a 20-year period and that after that it would revert to the State. Has it reverted to the State and, if not, why not? If tolls are collected why are they not benefiting the Exchequer or the local authority? Why is the bridge still in the possession of National Toll Roads after the 20-year period? When was the contract changed so that NTR still owns it?

Instead of putting stilts, spaghetti junctions or grade separations at the Red Cow roundabout at a cost of between €100 million and €300 million, we should use that money to buy out the tolls at the West Link toll bridge and knock them down. It would relieve traffic in Dublin as much as anything one might do at the Red Cow roundabout. If a situation causes huge problems, is there not a facility for the State to buy it out? Would that be the best thing to do? It would make as much of a contribution to alleviating congestion as anything else.

Mr. Kearns

We will do our best to answer some of those questions but we will not be able to answer all of them, partly because of the nature of the unit. We do not have direct authority in respect of individual projects; our unit develops policy on PPPs derived from the pilot project process.

Deputy R. Bruton

Is transparency a policy? These agencies refuse to release any information.

Deputy C. Lenihan

As the final arbiter of public spending, the Department of Finance must have some insight into the nature of the contracts. They must be shared with the unit because the taxpayer is paying the bill.

Mr. Kearns

Certainly, the responsibilities and the remit of the public expenditure division of the Department of Finance are the same in respect of public private partnerships as they are with any form of capital project. It is not, however, part of the remit of the PPP policy unit to drill down into individual projects. We do not have staff of the unit on project boards. There were staff on two of the initial project boards but that is not part of what we do.

Deputy Burton

We now have another body under the NTMA, the National Development Finance Agency, which was said to be the body to which every Department sends likely projects. Why does the policy unit still exist? Why did it not go to the NTMA? This is my problem with these projects - they are like mushrooms - they grow and grow. The Taoiseach announced the establishment of another body recently. Why not get rid of one of the initial bodies in that case? What is the logic of continually expanding these bodies? If there is another body, why not abolish the NRA and the myriad consultants floating around it? Why not make the structure logical where if one body is created, another is dropped?

Mr. Kearns

That is entirely right. Under the review of structures for PPP, approved by the Cabinet Committee on Infrastructure and PPPs, my unit will diminish and eventually withdraw from policy development once we have put in place the broad body of guidance and advice from which Departments will work. We are trying to develop an alternative procurement method for infrastructure projects and we have a finite role. We will not be a body that expands.

Deputy Burton

Is the unit of an anarchist position where the State will ultimately wither away to be replaced by something better?

Deputy C. Lenihan

This tape will self-destruct in five minutes.

Mr. Kearns

Withering away is a good phrase.

Deputy Burton

We better send a message to Deputy Joe Higgins.

Senator O’Toole

The Department of the Public Service still exists 20 years after it was abolished.

Mr. Kearns

We will leave behind a body of guidance with standardised forms of contract and project documentation that will mean we will have the capacity to deliver PPPs in an efficient and effective way.

The role of the NDFA is critical. We found from the initial pilot projects that there is a necessity for an agency which embodies financial expertise. Dr. Somers and his staff have experience in finance that will be a resource for the National Treasury Management Agency that will, through the National Development Finance Agency, help every State authority to find the optimum form of financing. That is why it exists. We did identify inadequacies in the financial evaluation of projects at the beginning. Senator Mansergh raised the interesting question of whether there is the capacity to buy out a project. If one looks at PFI projects in the UK, they did not generally have an option for pre-payment. They had re-financing but to some extent that was at the discretion of the private partner. In PPPs here we want the State to have the prerogative to pre-pay. In other words, after three or four years of operation the State can step in and pre-pay the senior debt and the equity, and take back the operation to do what is most appropriate in value for money terms at that stage. This might be to look for another partner or whatever. That is a very useful and valuable part of the process we are developing.

Senator Mansergh

Is that the way the Department deals with most projects at present?

Mr. Kearns

On the schools projects there is a pre-payment after three years of operation.

Deputy Burton

If that is the case how can one talk about the transfer of risk? If the State is pre-paying where is the risk gone?

Deputy C. Lenihan

There is no risk.

Mr. O’Neill

Our objective, and the objective set for the PPP process, was to deliver value for money for the Exchequer. Our motive is to deliver value for money, speedy development of infrastructure and quality public services. Our first project, the group schools, was sent to the CSO which evaluated it and sent it to Eurostat which supported the adjudication by the CSO that the project is on the Government balance sheet.

Deputy Burton

If the State is pre-paying there is no transfer of risk. Under European rules it cannot be called a PPP unless there is a transfer of risk. This is what people like Dr. Somers and Mr. Tutty said at the conference. If the State pre-pays and guarantees all the payments where is the risk? There is a risk that the operator manages the project badly and ends up going bust which is different.

Deputy C. Lenihan

Mr. O'Neill is referring to pre-pay as early cash out and the State can buy back.

Mr. Kearns

I heard what Dr. Somers and Mr. Tutty had to say. Our PPP programme differs from the private finance initiative in the UK and in some other jurisdictions in that we envisage that there will be public private partnerships where there is no private finance involved, where the design, build and operation are funded directly by the Exchequer, and in some circumstances with funding provided through NDFA. Where do we find risk in DBO?

Chairman

This is why we wanted a question and answer session. Throughout my local authority area I see design, build and operate proposals for group sewerage schemes and group water schemes, to be fully funded by the Department but they are called PPPs yet the PPP involves only design, build, maintenance and operation. Most people understand PPP to involve——

Deputy C. Lenihan

It is where private people are providing the operation.

Chairman

People believed that PPP involved private capital. If there is State capital it is only a matter of detail whether the State is employing a consultant to design it and then go to tender to build it, employ its own staff to operate it or sign a maintenance contract. That is not really a PPP. If that were the case one could say every contract is a PPP down to a tender to build a house. We thought the private finance was a critical element.

Senator O’Toole

Maybe it could be explained in the following way. This committee is interested in the point the Chairman has just made. We are talking about the transfer of risk. The Department officials have said quite clearly that some projects are PPP and some are not. The only interest we have in this is in PPPs where there is a transfer of risk from the public to the private sector. If one takes the example of the group of schools project, somewhere along the way this was determined to be on the Government balance sheet. We would have thought that had to wait until someone in Eurostat approved it, although Mr. Kearns said that the CSO told Eurostat which agreed with the CSO. If the State said it was not going to pay for the schools but the local boards of management or some local groups would enter into a ten, 20 or 25 year contract to lease back the schools or operate them for the next few years, why can that not be done in such a way that there is no risk to the State? In other words, if the State says it will pay these boards of management in that area so much per capita over the next ten, 20 or 30 years, that is on the balance sheets at present and nothing changes there. If it decides to use that money to lease back a school or whatever, why can that not be done in such a way that it can be off-balance sheet and still within Eurostat rules?

Mr. Kearns

Senator O'Toole has hit on a critical issue. Risk transfer is central to PPP. That is absolutely true but there are degrees to which we can transfer risk. We do not want to push risk onto the private sector regardless of the cost because cost feeds into value for money and the private sector will cost——

Senator O’Toole

Can Mr. Kearns tell us where it goes wrong? What happens in a project where somebody asks why can it not be done so that it is not a cost to the State?

Mr. Kearns

With every risk comes a price. One of the main risks in the schools, which the private sector would not take, was demand risk, that is, will there be students attending the school every day for 25 years? If one looks at a toll road the risk is passed on to the private sector.

Senator O’Toole

Did the group of schools not buy into that risk?

Mr. Kearns

No, because to buy into that risk they have to make predictions about the demographics of the locality. The private sector will say that it will take on that risk. The public sector will then have to ask how much is that risk and are they prepared to pay for it? As part of our public sector benchmark we break down each of the risks, evaluate them, look at the probability and put a cost against them. When the private sector comes in with its tenders in the negotiation we can say we would like to transfer this risk to you, what is your value for this risk? The procuring authority assesses whether to retain or pass over that risk.

Chairman

The committee and I would love to see the document the officials use to assess these criteria. I am very pleased to hear them say that they have criteria on which they assess, price and decide the matter. I am not referring to any specific project because they say they are dealing with the overall policy, not the individual projects. If we had sight of the document and the criteria that are used on a policy basis that the officials disseminate to every Government Department we could begin to assess the process. The lack of that type of information hitherto has led to us being unclear about this or on a different track from Department officials.

Deputy Burton

We are getting deeper into the issue. In the example of the schools, those that were chosen in the bundle were identified as being in areas where there was a proven demand for a school. One was in Ballincollig, a few were around Sligo and so on. If there was a proven demand for the schools what is the risk factor? Is it that the population would leave the Ballincollig area and no one would go to school? That is an unrealistic risk. That is unlikely to happen in the next 30 years. It is not as though one were to set up a new school in south County Dublin tomorrow to compete with existing schools and look for market share. This is why Dr. Somers and others say that in the school projects there is no transfer of risk because these are public properties which are deemed essential to the functioning of some area of Irish life. The operators of the school know that there is a definite demand for places in schools because the Department of Education and Science commissioned the project in response to a demand, either for a new school or for the replacement of an existing school. It knows the population figures and so on.

Deputy C. Lenihan

We are kidding ourselves here because no matter what piece of infrastructure is built the State will always be the owner. If the consortium goes bankrupt or becomes illiquid in the process of rolling out the infrastructure, the State will own the motorways, so to talk about total risk transfer is an anomaly in this debate. Obviously, this did not happen in the case of the NTR, which became too successful, resulting in traffic jams, and there was no control over it becoming a runaway success.

Deputy R. Bruton

On a point of order, we have asked many questions and the groups have not had a chance to answer any of them. We would be better informed if we heard the answers.

Chairman

I ask the members to bear with the officials while we get some answers. There will be supplementary questions but let us take this opportunity to hear the answers.

Mr. Kearns

To take the Chairman's point about the documents. We can make available to the committee tomorrow a risk matrix which sets out the forms of risk and what party could bear those risks, whether the public or private sectors, or whether the risk can be shared.

If a consortium were to go bankrupt or fail to deliver the service in the roads and schools projects, the banks are the lenders for the senior debt. They have step-in rights and can replace the operator if it does not meet the performance criteria as set out. If the banks cannot find an alternative operator early termination means that the asset reverts to the State, less rectification costs in the case of the schools. In other words, the senior debt is repaid only when the problems have been put right, whatever that costs. In the case of the roads there is no compensation.

Mr. O’Neill

There is no compensation on termination for operator default so we would get a road for zero costs.

Mr. Kearns

In those circumstances the banks would lose their money which is very significant. That point touches on some of the other questions. We know through feedback from colleagues in other jurisdictions that we are breaking new ground in pushing these types of project onto the market where we have not seen this kind of risk before.

Mr. O’Neill

The objective of PPP is to deliver value for money and that means allocating the risk to the party which is best able to manage it. That does not mean for example, that we transfer planning risk. The public sector can better deal with that whereas the private sector would find it more difficult and therefore would put a higher charge on it. There are some risks, depending what project one is considering and that is why there is flexibility. The objective is value for money for the Exchequer. In other international settings the objective, albeit not a written one, is off-balance sheet financing. To achieve that, as per ESA 95, one needs to transfer amounts of risk. Those two factors are not compatible. We look at the optimal risk, ESA 95 looks at the transfer of a significant amount of risk to make sure that it is off the Government balance sheet.

We endeavour to deliver various types of procurement mechanism. Traditionally, there was one type of mechanism whereby the procuring authority would employ a designer and a builder and maybe do its own operation and funding. So, four main areas were dealt with separately. When we finish writing the policy we hope that there will be two types of traditional procurement, namely the first I mentioned and linking the design and build, while on a PPP there would be design-build-operate, and design-build-finance-operate and a concession. We have also prepared an operation one for Luas. It is not for the construction of Luas.

In each of these options there is a different level of risk transfer. The closer one moves into a PPP, the higher the risk transfer required. There are performance penalty points in the Luas operation contract. It is obliged to hit certain time scales and there is an incentive in the contract to run more trains, and to take more revenue. The PPP is there as an incentive to people to do the thing they would want to do in their own interests.

That leads to the question raised earlier about allowing procuring authorities evaluate their own projects, whatever was the point behind that. As I see it, the point was do we allow procuring authorities evaluate tenders? We have developed interim guidelines and in those we have a public sector benchmark. That is the full cost of delivering that project. In agreement with the sanctioning authority an affordability cap is set for the project that the procuring authority may not exceed. It can evaluate the project as long as it does not exceed that level so there is no problem about escalating the cost because it has to return to the sanctioning authority every time it goes one cent above that level. The guidelines are structured to make a procuring system available to different levels from large projects to small ones. In that case the sanctioning authority might move, as does the sponsoring agency. For example, in the case of the metro the RPA might be the sponsoring agency and the Government the sanctioning authority. In a local authority project the building section could be the procuring authority and the finance section might be the sanctioning authority, using its allocated budget.

Deputy Burton

From the point of view of this committee there is no transparency on benchmarking. For example, in the case of Luas, the Minister for Transport, Deputy Brennan, tossed around several figures last week, as did many others, for putting the stilts on the Red Cow roundabout, ranging from €20 million to €30 million and €60 million.

Senator O’Toole

€300 million.

Deputy Burton

I am referring to the adjustments to the Red Cow roundabout. Unless politicians and Ministers have some sense of what realistic costs are how can one expect Ministers and Oireachtas committees to exercise any realistic oversight when there is no transparency of information? Short of calling someone in Birmingham and Madrid and asking them to quote a price for putting the Red Cow roundabout on stilts how are we to know the best price? We get wild figures for Irish public procurement prices because there is almost no transparency on what the costs are or should be. We have developed an extraordinary and very expensive consultancy structure. Our dilemma is how to get the section represented by the officials here to give some straight advice on what are fair or reasonable costs for procuring public projects by whatever method. We are not near that point.

Deputy C. Lenihan

Are the officials happy that the new contract for the National Toll Roads and the West Link supercedes the previous contract, and has some element of performance-related requirements and penalties for the operator that protects the State?

Mr. Kearns

We do not have a role in monitoring or sanctioning any aspect of the West Link contract. That is not among our responsibilities.

Deputy R. Bruton

What about the East Link one? Can the officials say whether that was good value?

Deputy C. Lenihan

I do not understand how the central policy unit can evolve policy on this without looking at the two most spectacular examples where the State went the PPP route and gave the projects to NTR to operate. How can it frame policy without being aware of the terms and conditions applied to the contract for NTR on the West Link bridge? This is fundamental. It is the ultimate PPP and Mr. Charles Haughey was right to sign the contract in the first place. Times were different then and there was less money in the economy. The terms and conditions, not the principle, interest us and that should infuse the public debate. I cannot believe that the State, as represented by the officials here, has pulled back from this contract and said it is a matter for Fingal Council and South Dublin County Council. That is not the best value for the taxpayer. There is profound interest in the Department of Finance in value for money for the taxpayer. If the unit has not studied how NTR has arrived at its present situation it beats me.

Mr. Kearns

I understand the Deputy's point but in the Central Policy Unit we draw through the agencies which are established to deliver individual projects. The National Roads Authority has responsibility for its PPP programme. There is a PPP manager in the NRA.

Deputy R. Bruton

Mr. Kearns is not answering the question. Let us stick to this issue. We want to know value for money. We want to see it demonstrated to us, if necessary stripping out the commercial confidentiality and giving it in generic terms, or whatever way it can be done. The officials keep saying it is not for them, it is for other people who will say it is not for them because it is commercially confidential. The East Link bridge will say something else; Fingal will have something else to say; the city council will say it is part of a consortium and it cannot give any answers. The issue is transparency. The officials are describing lovely models which are admirably put together; I have no dispute with them. Like Doubting Thomas we want to put our fingers in and see that this is flesh and blood.

Mr. O’Neill

The public sector benchmark is a management tool——

Deputy C. Lenihan

In the officials' consultations with the NRA did they ever discuss what happened with the West Link in terms of the risk; how it was structured and the pay back to the Exchequer? Presumably the unit goes down to that level with the operators, and asks them how projects are working out. Did the Department ever ask the NRA or the two councils how it was working out or how it was structured? Was there never a conversation of that kind?

Mr. Kearns

We have endeavoured to draw on the projects, including the NRA and West Link. We do not reach over the agencies to deal directly——

Deputy C. Lenihan

It is a simple enough question; did the officials ever in any context, in evolving their policy on PPP, ask the people who structured the deal with the NRA, how did that work out, what sort of premium was put on the payments? Did the West Link ever come up in discussions between the Department's policy unit and the operators? I am not suggesting that they reach over them but would they never have asked them out of curiosity?

Mr. Kearns

The Government established the central policy unit and the inter-departmental group and the NRA is represented on the inter-departmental group. Part of that process is that the NRA brings issues that arise in its development of PPPs to the table. Our job is to draw on that——

Deputy C. Lenihan

The officials are in that group. Did the questions about the West Link ever come up?

Mr. Kearns

Yes, indeed the West Link has come up.

Deputy C. Lenihan

Once it came up for discussion the officials must have formed an impression of that contract; how it was structured; whether it was to the benefit or detriment of the State interest and whether it was good or bad value. Were there lessons to be learned about how they should be structured in the future? The officials must have come to some conclusion.

Mr. Kearns

We try to take issues that are identified in the individual projects and from them draw broader PPP policy.

Deputy C. Lenihan

I have got the picture. What issues did they learn about from the West Link example? That is easy; I am not asking about how the contract was structured.

Chairman

Maybe I can put the question simply: the document which the officials have presented to us states, "The PPP process is being developed on a pilot projects basis to ensure learning by doing and to facilitate the development of guidance material". One can develop policy only when one knows what has happened in the past. The officials must have the information on all the projects from the commissioning agencies of the State; otherwise they cannot write new policies. That is it in a nutshell. If the PPP is in the process of "learning by doing" the officials must have the evidence of what was done in the various projects or they could not be here. That is the essence of the unit. Do the officials get the point?

Mr. Kearns

I accept that point entirely.

Chairman

Perhaps they cannot say it to us; maybe they have information they are not at liberty to give us. They should tell us that and we will pursue it separately.

Mr. Kearns

I am endeavouring to deal with the questions but I am reluctant to give a value judgment on individual projects. There are very substantial issues on the roads projects in respect of the form of project structure; for example, how the project is brought to the market, the types of risks which are transferred and gain-sharing. In the roads projects as they are now being pushed out we are gain-sharing above certain thresholds. In other words, if the road use is greater than targeted, it is not just the private consortium that takes all of the revenue. That is one of the points that emerged from looking at the West Link.

Deputy C. Lenihan

There is no gain-sharing arrangement there at all.

Deputy Burton

There is gain-sharing. The toll bridges have turned out to be a licence to print money for the private operator. There is a clawback to the State and when the volume of traffic has grown as much as it has the clawback increases. I should like to tell Deputy Lenihan that neither Fingal nor South Dublin county councils get anything because the clawback revenue is not hypothectated; it does not provide anything.

It will be appreciated that there is a large daily traffic jam along the route of the M50. It is particularly severe at the West Link. The NRA for the past two years has brought forward proposals on the upgrading of the M50 to three lanes in each direction and improving five to seven junctions, including the Red Cow roundabout one, into fully graded interchanges. From a management viewpoint, this has been appallingly badly managed, so much so that the whole environmental impact study will have to be redone. Down the road, doing all this work may well become another PPP. I imagine NTR and the Spanish companies will bid for it. However, why is the current management of the process so brutal and poor? The Department is saying that it has an oversight. Can the Department not speak to the NRA on how it is managing these projects? In Deputy Richard Bruton's constituency, the port tunnel is——

Chairman

Deputy Burton, I have to stop you. We cannot be asking the Department of Finance officials about the traffic jams on the M50.

Deputy Burton

My comments are about the process.

Chairman

This is a matter for the Committee on Transport, the local authorities or a meeting with the NRA.

Deputy Burton

May I finish on this point, Chairman?

Chairman

Linking this to the policy on PPP——

Deputy C. Lenihan

Deputy Burton was responding about——

Deputy Burton

May I finish on this point? The tunnel is due to be finished sooner rather than later. Senator Mansergh is aware that there will be 8,000 additional lorries each day on the M50. Returning to my political economy argument, this means that moving traffic on the M50 will become a crisis. In the Department's valuing and accounting of all this, why can we not get some movement when trying to address a crisis? How do we value or cost it? I do not get any sense of how any of this is going to be done.

Chairman

I am asking the Department officials not to deal with the issues of transport and traffic jams. It is not in the competency of the Department of Finance representatives. Will the Department officials concentrate on how it will impact on the policy that they are developing and how it will translate into dealings with future contracts?

Mr. Kearns

We were discussing individual projects and how they feed into learning. If one looks at the interim guidelines on public-private partnerships, one will see that there are elements of a process in that, particularly regarding establishing value for money, setting affordability caps, which sponsoring authorities must adhere to when bringing projects to the market. This is breaking new ground because one will not see templates for this form of PPP approach in other jurisdictions. Why is that? It is because we have learned through the interdepartmental group and the feedback of those responsible for implementing projects, of their experience and learning. We are trying to centralise that and codify it in a form of guidance. We are literally translating that learning by doing which the delivering authorities have into guidance which will make possible a better and more robust process for PPPs which can be established for the long run.

Mr. O’Neill

We have approached this as learning by doing. This was undertaken throughout the involvement of people from the central PPP unit as observers to assist the project boards. That phase has now finished. Out of it came two major developments. One was the interim guidelines which identify every stage that has to be gone through in the procurement of a PPP project. It identifies at high level what steps are required. We are currently writing up the detail for each one of those. It is a very different approach to the one used in most other countries; it goes along the lines of ensuring a project is scoped out first and then brought to a gateway. It is then approved or not and when it goes ahead, a more detailed analysis is done of the cost of all elements of the project. It then goes to the procuring authority who can go through the whole process without any impediment or coming back constantly to be told to "go" or "stop", subject to being within the affordability cap. There is also a value for money comparison which is an exercise we are drawing up currently. It enables each procuring authority to do a detailed analysis of the tenders compared to their public sector benchmark. This will ensure that value for money is documented and achieved for each project. There is also the role, not in other countries, of a process auditor who will audit all the major elements of that process and report back into the accountable——

Deputy R. Bruton

Will they be accountable to the Houses of the Oireachtas?

Mr. O’Neill

They will be accountable to the Accounting Officer.

Deputy R. Bruton

No, can we get that auditor to come before the committee to speak to us now?

Chairman

Will Mr. O'Neill explain the role of the process auditor? There is one in each separate Department?

Mr. O’Neill

Their role is to make sure that each stage of the guidelines is followed in the procurement of a project. They will have a checklist to check against it. They will report to the Accounting Officer. For instance, where projects are small and undertaken by a local authority, the Accounting Officer will be a number of steps away from the hands-on of the project. The process auditor will ensure that the main elements, as per the guidelines, are followed. It is to ensure that the steps of EU procurement and the procuring authority are followed.

Deputy R. Bruton

Is this an independent person who is not part of the sponsoring agency and who will report to the Houses or——

Mr. O’Neill

They will report to the Accounting Officer.

Deputy R. Bruton

No, but the accounting officer is within the system. If the auditor is within the system, then it is of no benefit to us who are sceptical. Mr. O'Neill sort of slurred over this issue. If the Department of Transport is sponsoring the building of a metro, there is an incentive to have a high PSB, with tenders coming in and getting the project off the ground. However, there is another interest, which is the taxpayers', which is to ask was all of this done to the minimum possible cost. One needs to have someone outside the process, who is not locked in as a Secretary General, a finance officer or anybody else, who can be accountable to the Houses. Surely, the Department's guidelines have envisaged the need for an independent outside person to say such and such a project is going well, good value and the process in place should continue?

Mr. Kearns

It is the prerogative of the Minister to determine those issues within his or her remit. What the process auditor will do is report to the Accounting Officer. They will not be part of the project board. In other words, they will not have executive functions in respect of the projects board. They will be there to simply ensure that at each stage the process that we have set out in the guidelines adheres to the green book on procurement guidelines; the capital project appraisal guidelines and our own PPP guidelines. The Accounting Officer will then be amenable to the Dáil in respect of that project.

The thinking is to put in place a means to deliver to the person who is accountable, a——

Senator O’Toole

That is internal. It would be very helpful if the largest and the smallest project that the Department is looking at were described to the committee, without details or locations. The committee is having difficulty in getting to the terms with what is currently happening in PPPs. Are there many projects in hand? What is the largest one and what is the smallest one?

Mr. Kearns

If the metro proceeds as a PPP, it will clearly be the biggest civil engineering and PPP project we will see. Of the projects that have been advanced in procurement, the Kilcock to Kinnegad road is——

Senator O’Toole

On the proposed metro a figure has been produced. When Mr. Kearns describes the process he is involved in, it seems to me that those who gave us those metro figures did not go through the process that has been described. We hear from a Department about the constructions costs not including the operational costs. Is Mr. Kearns saying that the current system of giving prices and costs does not go through the same process? Mr. Kearns must understand that it creates a huge problem for us when everything seems to overrun afterwards. Is it just that the first figure has no basis in fact?

Mr. O’Neill

The way PPP works is that one draws up output specifications. To use an analogy: if we are asked what kind of a car we want, we would all say "a red Ferrari capable of 150 mph". However, when we would check to see what money we have in our pocket, we would realise we are not in the Ferrari league at all. We would then review our specifications for a car. It is similar with a PPP. An output specification is drawn up which states what we require from output. Then we cost it. It is then that we would realise that it is too dear and we would re-spec it. The point we have in the interim guidelines is that we re-spec the project to the point of where the sponsoring agency and sanctioning authority state that they can afford the project from within their budget.

Senator O’Toole

Yes, but when a Minister says that it will cost X hundred million euro to build a metro, is he saying this before any of this process is carried out? Is this the case? I take this as a "yes".

Chairman

This is not in the remit. I want to move on to the other point of the Department's definition of PPP versus the public's. Can a design and build be a PPP?

Mr. Kearns

Generally, a design and build on its own which has no long-term involvement of the private sector tends not to be a PPP. However, design, build and operate has the potential to involve the private sector in the long run.

Senator O’Toole

Can one not just design, build and lease back without operating the building?

Chairman

Lease back and finance? Design, build and finance or design, build or operate? Let me give two examples that do not appear in the Department's documentation. I am at a loss in understanding the Department's definition of PPP. Take the example of the Midlands Prison built in Portlaoise some years ago. It was designed, built and financed entirely by the private sector. However, for some reason, it is not included in the Department's definition. It is been leased back to the State over a 35-year period. Can it be explained why it is not a PPP? That is one of the classic examples of design, build and finance, yet it never appears in the documentation. What is a PPP if that is not? Take the other example of the Monasterevin bypass currently under construction. I am not sure if there is an operating clause in it, but it is design and build. The Department officials used the phrase earlier when they referred to PPP and then to PPP-type projects. The public do not know what subtle, technical difference there is when these two types of projects are separated. Are the officials saying that the Midlands Prison is a PPP-type project? Why is it not a PPP project?

I apologise for being frustrated, but the members of the committee are frustrated in that we are not much the wiser of what this process is about. I do not know how we are going to revisit it.

Deputy Burton

We have our suspicions.

Chairman

We are none the wiser and yet we are a reasonably competent group of politicians. PPP seems to be a fancy title for changing a process for something we always did. Instead of getting a builder to design and build it, he will actually run it and that is now a PPP. Can these subtle differences be explained?

Mr. Kearns

We circulated a copy of the framework for PPPs which was negotiated with the social partners under the Programme for Prosperity and Fairness. What that states is that where one has a combination of design and build with operation, maintenance and finance over the full life cycle of an asset, then that constitutes a PPP. Part of our difficulty is to set some form of boundary about what we are talking about when addressing PPPs. In the relevant legislation, it was found necessary to specifically provide for a statutory authority for State bodies entering into PPPs. A section in the Act tried to define that in legal terms. However, the underlying principle, again, was the combination of design and build with some form of operation, maintain or finance responsibility. In other words, it was bringing together an additional element to design and build.

Chairman

Why does the Midlands Prison not fall into this definition?

Mr. Kearns

The Midlands Prison was an embryonic form of public private partnership. There was an attempt to transfer risk in respect of the interface between design and build and the incentive of the private sector to bring in the financing. The chairman of the Office of Public Works has described it as a prototype for the kind of developments we are endeavouring to bring forward. We are actually testing PPP across a range of structures. Deputy Burton mentioned the Mulhuddart housing project which is listed as a design, build and finance project. I do not have any more details than what is in the presentation on that. What we have asked Departments to do is to pilot a number of different forms, so that we can draw from them a little knowledge and learning going forward.

Senator Mansergh

We have documentation of how PPPs operate in theory. Our problem is that we want to understand how they work in practice. Could I suggest that the next publication might be entitled, PPPs - 12 Case Studies. This could tell us in considerable detail how they have worked in particular cases whether they have been prototype.

Chairman

I have bad news for Senator Mansergh on that issue. I am sure that if that document came to be published, large sections would have to blanked out for commercial reasons.

Deputy R. Bruton

What is the commercial reason?

Chairman

I have seen reports laid before the Public Accounts Committee where part of the arrangement was that the financial details would not be disclosed because to do so would assist competitors in the next PPP. One of the downsides of these schemes is that there is a lack of public transparency and accountability. I have seen reports before this House with several sections blanked out.

Senator O’Toole

This information is important. Noting from how this is operated in the UK, one of the well-known companies has a habit of pitching their bids at a competitive rate. However, on the basis of going through the process of changing specs, they manage once they succeed to increase the cost of the project as it goes along. Senator Mansergh's suggestion is a much better idea on case studies than mine. The Department does not have to tell us exactly what project it is. However, it can take us through exactly how and where the costings increase. To my mind, it is at the spec change stage the problem arises. If the spec is corrrect at the start of the process there should not be a need to change it. It has happened in the UK. The modus operandi was to pitch in with a low bid and when the contract was won, change the spec which raised the costs out of control. If we were aware of how the Department’s process operates, then we would be better able to make a judgment.

Deputy Burton

After listening to several of the Department's presentations and reading the documentation, I wonder if those structures developed for these processes mean a bonanza time for accountants, lawyers and assorted consultants. Can they get into the various advisory stages of this process? What is the final economic justification for this plethora of expensive advice - at €600 an hour? Those on the senior engineering, accounting and legal side who give advice charge rates of €1,200 and €2,500 a day. Is that not very expensive? Why is this structure that has been created so expensive? The cost for a bidder is very high, so much so that some bidders are bidding in order to get into the process. I heard that the NDFA is now so alarmed at the costs associated with the structures, as are many of the construction firms, that they are offering to bear many of these costs. I understand English but I do not understand much of the language in this. I am a professional auditor, like the Chairman of the committee, and I do not understand what a "process auditor" means. When I go to a building site or a factory I know that a "progress chaser" is someone who makes sure a job gets done. Can the officials please explain how this structure is not monumentally expensive? The Chairman has already admonished me for citing individual examples, but can the officials tell me why this is not monumentally expensive? It must be remembered that all the banks and others have an input into these processes. I worked for international accounting firms and I know how to keep a diary of charging my time at full cost. All of this is added to the process. Can it be explained how the Department's structures actually save money? Many of the construction companies are also bewildered. It is very expensive.

Mr. Kearns

Deputy Burton's concerns are correct because the Minister was concerned about the cost of client advisers in respect of the early PPP projects. It is a new process. It is also fair to say from the discussion we have had that it is complex. It was necessary for the procuring authorities at the beginning to engage financial, legal and process advisers. We were concerned at the cost of these advisers. Deputy Burton is right that it can get very expensive.

Deputy Burton

Can the officials give us some indicator of those accounting and legal advice figures? I see all those suits at conferences and I know they do not come cheap.

Mr. Kearns

This is an extremely important point. The purpose of creating the National Development Finance Agency was to create on the public sector side of the table a degree of information, knowledge and practical experience in dealing with financial modelling and issues where there is a high cost in respect of client advisers. The NDFA is providing that to State authorities now.

Deputy Burton

To whom now? Is the NDFA going to pay some of the would-be bidders costs for all of this? Some bidders are concerned that the bidding cost are so high, unless it is a loss leader project, and their investment in bid A means that down the road they get work on project B or C.

Mr. Kearns

There is another dimension to this. Working with the NDFA, what we are doing in the central policy unit is to standardise the PPP process as much as possible. That would include creating model forms of contract which would significantly compress the period for negotiation and also the extent for variances from the model. We are trying to do this so that the negotiation process will be quicker, simpler and without the necessity for extensive reference to legal opinion on both the side of the client and the bidder. The construction industry is concerned at the entry cost to PPP and the bidding costs. There is no question about that. One of the difficulties there is precisely on this issue——

Senator O’Toole

Time is also another factor. On that list there seems to be 13 different stages. That is one more than the whole procurement process which is the entire tendering process. What is the quickest way to get from preliminary appraisal to contract close, before any building starts? I knew Mr. Kearns was not going to answer the question. What is the quickest time taken to get this done?

Mr. O’Neill

The first schools project went for about 18 months from start to finish. Comparative projects in the UK were taking three and a half years.

Senator O’Toole

So, the 13 steps there would take 18 months.

Mr. O’Neill

It took 18 months before construction. However, one of the big differences with PPP is that the minute the contract is signed, they actually start the building the next day. With traditional procurement, a contract is signed, the builder finishes the design of the project and it is still subject to variances. Our contracts would be signed and sealed on that day and any changes are the fault of the private sector.

Senator O’Toole

This is front-loaded. The design is actually the end of the process.

Mr. O’Neill

Yes, but it is front-loaded to inform us.

Senator O’Toole

It is a good idea and I do not disagree with that. The design would come before that. From thought process to the day they stick the spade in the ground with 24 politicians looking down at it, what period of time are we talking about?

Mr. O’Neill

As I said, it will vary because the roads——

Senator O’Toole

A short time ago you said that it would take 18 months.

Mr. O’Neill

Sorry, for schools. For roads, it takes us significantly longer due to much bigger projects.

Senator O’Toole

Eighteen months is about ten times quicker than it usually takes to build a school through the Department of Education and Science. If the officials tell the world this, they will be inundated with ideas.

Chairman

For the Senator's benefit, I also am looking at the chart on public-private partnership. These are only the steps within the capital expenditure aspects of the project. We did not talk about planning, environmental impact studies or preliminaries.

Senator O’Toole

Or planning permission.

Chairman

Or An Bord Pleanála.

Deputy Burton

This is learning by numbers.

Chairman

We did not speak either of judicial reviews of planning decisions. These are only the steps within the capital expenditure aspects of the project and not the other ones.

Mr. O’Neill

Yes, and planning does not tend to cause a major problem for schools and environmental impact statements are similar.

Deputy Burton

Perhaps we might return to my question about the cost of the technical advisers - the lawyers and so on - involved. In the experience of the officials, would the cost of the legal advisory and consultancy framework involved be 10% or 12% of the project cost? Perhaps you might give us a ballpark figure. I am concerned that it is very high, though I know that some advice is required.

Mr. O’Neill

There are costs, as Mr. Kearns said, on both sides of the fence. There are costs on the private sector side too, and most of the contracts are for a proportional payment subject to winning. Many of the private sector companies are becoming more competitive between the consortia. On the public sector side, we recognise that there was a learning curve and equally that the financial expertise required to advise such projects is quite significant. That is the reason that the NDFA was set up. That obviously controls the financial costs. We are well aware that the bid costs are a big issue for the private sector, and we endeavour to address that, not by paying the costs, since it is debatable whether that would reduce or affect them, but by standardising the procurement process and giving certainty to the private sector by interim guidelines so that when a project comes out, it will not escalate in cost, causing it to be pulled, with all the wasted costs involved. That gives them certainty. From the point of view of using legal advice and so on, there will be standard forms of contract as much as we can across sectors so that perhaps 70% or 80% of the contract will be standardised. The rest will obviously be negotiated specifically for that contract. We are endeavouring to create generic guidelines to reduce the bid cost to make it more amenable even to smaller projects.

Deputy Burton

Perhaps Mr. O'Neill might give us a specific example of what he called bid costs. For instance, in the case of Kinnegad, what were the bid costs for the Department of Finance, including the time costs? I heard on the fringe of the conference that underbidders claim to have spent millions on unsuccessful bids. Is there any way that Mr. O'Neill can tell us so that we can make an evaluation of what the totality of those costs is likely to be?

Mr. O’Neill

I do not have access to the information. We hear what bidders are saying at conferences about the amount of money they spend on bids. All that we can endeavour to do is reduce the cost to bid, increase the certainty and ensure that there are not too many bidders involved. We would not bring four tenderers right down to the wire, for it is obviously not in their interests. We are doing our best to make it fair. The bid costs will depend on the project size and the negotiating power of whomever is the lead in the consortium and how those costs are negotiated. I had experience in the UK on the bid side, and the bid costs depended totally on the project and the consortia. An element of my fees might have been part of a win bonus, part to operate or part to get to certain stages. When one talks to the private sector, people will inevitably always tell you that they spend a huge amount of money. Our endeavour is to reduce the procedure to give more certainty and reduce those costs from our perspective and theirs.

Deputy Burton

I presume that you have also been employing legal and accounting consultants?

Mr. O’Neill

Yes, the procuring authorities, such as the NRA and the Department of Education and Science, have appointed advisers. As I said, on the financial question, we identified a need to have the financial advisers for the State for those procuring authorities upskilled and up that learning curve for each and every project rather than simply to consult a new consultant through a procurement process and expect that person to know everything about what is going on. The NDFA was appointed to provide those skills not just for PPP but for all infrastructure projects over €20 million.

Chairman

On that, we will call what you have been referring to "the client representative". Is the cost of the client representative to the sponsoring body more or less in PPP projects where something is designed, built and operated rather than in the traditional procurement method? My instinct tells me that the client representative has less work to do, since he or she only has to set out the parameters of what we are looking for and assess the bids. The representative does not have to examine the detailed design from the various companies tendering. What is your view on that? Does the State know the difference in costs on that yet?

Mr. O’Neill

The client representatives, for instance, on an education project, would be financial, legal and technical, so there is a technical element. They assist in drawing up the output specifications to——

Deputy Burton

Were financial and legal services bought in?

Mr. O’Neill

Yes, they were bought in.

Deputy Burton

I just wanted to confirm that.

Mr. O’Neill

As we said, in future, given the setting up of the NDFA, financial services will be channelled through it for all projects over €20 million.

Chairman

But nothing legal or technical?

Mr. O’Neill

There is obviously a certain amount of legal advice but——

Chairman

But not technical?

Mr. O’Neill

There are three elements, financial, risk and insurance. Those are the areas where the NDFA will be giving advice to procuring authorities.

Chairman

Do you have an indication of the cost to the Exchequer of the client representative or technical advice and whether it is greater or lesser than going through the traditional procurement method? We know that it is heavier for the bidders. The conclusion is that there must have been some transfer of the costs regarding bidding for the project to the private sector bidders. I hope that there is some saving to the procuring body. Do we know that? Have we examined it?

Mr. O’Neill

No.

Chairman

That is an important element.

Mr. O’Neill

They are distinctly different. With a PPP, the output specifications must be designed up to a significant level of detail so that they can be costed by the client advisers, which is not the case in traditional procurement. I could not give a clear answer one way or another.

Chairman

The client representative in design, build and operate projects would normally have to carry out an environmental impact assessment, and that would form the basis.

Deputy Burton

On the M50, the EIS will have to be redone in my view.

Mr. O’Neill

The Senator referred to changes in specifications and the concern that in other countries they are changed by influence from the private sector tenderers. I agree with him totally that the specification changes have been influenced. We recognise that, and to stop it we have issued interim guidelines. We create a public sector benchmark and do not release it. What has been experienced abroad is that, when one releases what information one has, such as the public sector benchmark, one's costs and valuations on risk, to the private sector, it focuses on telling one how inaccurate one's prices are and ups the project values constantly. That has been the case in the UK. We have taken a different approach here, which is that we do not release the information. I understand that there is a confidentiality issue. If information were released on the public sector benchmark for roads, the private sector would know precisely what valuation the public sector had put on risk. The risks attached to road A and road B are very similar, so it would be very easy for anyone in the private sector to reduce any value for money that the public sector would get in the rest of the roads programme.

Deputy R. Bruton

Mr. O'Neill is saying that we can never know, since the way that one interprets the risk and puts a value on it in the public sector must remain confidential for ever. Otherwise, by scrutinising it, one gives valuable information to potential bidders. Therefore, the taxpayer and his or her representatives can never know either. That is what we find intrinsically unsatisfactory. I do not know how you will square that circle. That has been the frustration here all along.

Senator O’Toole

As a contrast, if one looks at the web site of the Independent Radio and Television Commission, one sees that it has on it the tender applications, documentation and presentations of every single applicant for a licence. Of course it does what you say - it makes it easier for others to get involved. That is no bad thing. It helps not only us but everyone. There are situations, and that is one, where there is a highly competitive tendering process and all the tenders and applications are up there for the world to see.

Mr. O’Neill

The way the process is structured in the interim guidelines, we allow the market to compete against itself. The minute one gives out information such as the public sector benchmark, one is no longer allowing the market to compete against itself. It competes against the procuring body. Then one will get perhaps only a tiny benefit, for the private sector is watching one's price all the time.

Senator O’Toole

What is the difference between the specification and the benchmark? That is my confusion. The specification is what you are looking for. Are you talking about the risk attaching to that?

Mr. O’Neill

What we call the output specification is a written document saying what is required, an environment that will be at a certain temperature and light level to accommodate a certain number of people. Obviously it is more detailed than that. The public sector benchmark takes that specification and costs it, saying how much it costs to design, build, operate, maintain and replace all those elements, as well as the risk.

Deputy R. Bruton

You are applying the same principles of risk assessment as those risk fellows. It is not a mystery to those private sector tenderers. They know what you are at, yet you say that it must be kept secret. You will be using evaluators and actuaries.

Deputy Burton

And ten law firms.

Mr. O’Neill

Look at the difference. When we construct a public sector benchmark, we do as I explained, adding risk to those four elements. The private sector has similar elements, covering the costs of designing, building and operating a project. The risk for them is the additional charge of finance. When we compare ours with theirs, they look at the cost of finance. They do not always look at each and every individual risk in the same manner as we do. The second point is that something that I might think risky, you might not think risky. Why should I tell you what my value for that risk is? It will colour your thinking. We should keep our valuation of our risks to ourselves.

Deputy R. Bruton

That would imply secrecy from the point of view of the taxpayer.

Chairman

I will adjourn the meeting at this stage. The witnesses said that they would forward some documentation to us. When do you expect to have the next series available in your Department's publications? As a Member of the Oireachtas - I know that you have been with other committees - there is a sense that what you are about is not being understood. I ask you to examine how the information is presented. I know that you were with another committee and that it had difficulty. Some of us feel at the end of three hours with you that we are not much wiser, though we want to be. There is a great deal of information. I know that it is a new area, but you might have some other way of getting information into the public arena so the public can understand such things better. I accept that it is a new area. I will leave that thought with you.

Mr. Kearns

Thank you very much. If we have not fully answered the questions, it is not for want of trying to be as clear as possible. We are developing a communications strategy in which we are endeavouring to target areas that need more detailed explanation. We will try to rollthat out in a way that will benefit all the stakeholders.

Chairman

Thank you for your attendance and taking all the questions. I accept that they were difficult on many occasions and that they were repeated. You will understand that they were asked in the interests of establishing more information from our point of view regarding PPPs.

The joint committee adjourned at 6.05 p.m.sine die.