JOINT COMMITTEE ON TRANSPORT debate -
Tuesday, 23 Sep 2003

Vol. 1 No. 25

Public-Private Partnerships: Presentation.

Chairman

I welcome Mr. Eamon Kearns, director of the public-private partnership unit of the Department of Finance; Mr. Michael Manley, principal officer, public expenditure division; Mr. Pat O'Neill, programme manager, PPP unit, and Ms Catriona O'Brien, communications manager, PPP unit. I draw the attention of the visitors to the fact that members of the committee have absolute privilege but this same privilege does not apply to the witnesses appearing before the committee. I also remind members of the long-standing parliamentary practice that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I ask Mr. Kearns to commence the presentation.

Mr. Eamon Kearns

Thank you, Chairman, for inviting us to make a presentation to the committee. I am accompanied by Catriona O'Brien, communications manager in the public-private partnership unit who has responsibility for managing the communication strategy agreed with the social partners in the context of the Programme for Prosperity and Fairness; Pat O'Neill, who is programme manager with the unit and has been the project specialist and his responsibility is to manage the development of detailed policy guidance in respect of all issues of public-private partnership; Michael Manley, who is a principal officer with the public expenditure division and Cormac Gilhooley, who is the assistant principal in the public-private partnership unit.

The unit has responsibility for developing policy on public-private partnerships and for co-ordinating public-private partnership policy. Its key responsibility is developing detailed guidance. A presentation has been circulated to the Chairman and members of the committee. This general presentation on public-private partnerships policy deals with issues such as policy development, the structures for PPP and so on. Having spoken to the Clerk to the committee, we also provided a second presentation which looks in a little more detail at the process of project assessment and evaluation, the public sector benchmark and the procurement of policy. I can make the presentation on the broad issue of public private partnerships or we can look in more detail at the issue of procurement.

Chairman

We would prefer to hear about procurement.

Mr. Kearns

We will be more than happy to take questions on the general issues as well. If any members of the committee wish me to speak in more detail on any of the issues raised in the general presentation I will be more than happy to do so.

I will address the committee on some of the key issues of public-private partnership procurement. There are ten key PPP procurement steps, beginning with preliminary project appraisal, or the cost-benefit analysis, of projects. We will then look at the National Development Finance Agency and the critical role the NDFA will play in project assessment and in developing PPP projects. We will then look at the PPP assessment, that is, the choice of PPP as the procurement option and, within that, the form of PPP that will be chosen. I will then look briefly at approval points in the process and follow on with a brief description of the optional market consultation that is allowable for major infrastructure projects under the EU procurement directives. We will also look in some detail at the public sector benchmark. I will begin with our definition of the public sector benchmark and then consider some of the key elements of the PPP PSB. We will then look at the affordability cap, which is a critical tool for evaluating value for money under public-private partnerships. I will speak briefly about the procurement process and look at the critical value for money comparison, which is an important part of public-private partnership. I will then look at a question which might be of concern to members: why is the public sector benchmark confidential? Why, within our PPP process, do we have this confidential element in respect of the public sector benchmark?

On the preliminary assessment, it is critical in the future development of the PPP process that the guidelines for public private partnerships are followed by all sponsoring agencies. Wherever an agency looks at its capital programme and at the options for delivering projects, the guidance we provide as an assistance and back-up is critical. That is true for the appraisal of all capital projects but particularly for public-private partnerships. The first stage is the establishment of the business need. There is an international saying that there is no good public-private partnership without a very sound project. Establishing the business need is the essential preliminary step. The next essential step is to appraise the options for delivery of the service or the creation of the asset. The options appraisal has to look at the way the service is delivered by traditional means and look for innovation and variations in how that can be done. The cost-benefit analysis weighs the costs of proceeding with the project against the benefits the project, when completed, will deliver.

Once the preliminary assessment has been completed the sponsoring authority has the assistance of the National Development Finance Agency in moving on the project to the next step. The role of the National Development Finance Agency, which was created by statute last year and came into existence at the beginning of January this year, is to be the critical financial back-up to sponsoring agencies, including Departments, agencies or State authorities, bringing forward capital projects. Its principal role is to recommend to State authorities the optimal financing mechanisms for major capital projects. The guidelines are clear. Whenever a State authority wants to bring forward a capital project in excess of €20 million it must seek the advice of the National Development Finance Agency. The NDFA then advises State authorities in respect of the financial aspects of their infrastructural projects. That covers the whole remit from the form of financing to the structure of the financial model, the payment mechanisms and so on. The NDFA provides this financing advice throughout the procurement of the project. Within the legislation there is also provision which empowers the NDFA to provide financing directly for projects, for example through the creation of special purpose companies. It will opt to do this on the basis of the value for money evaluation which it made on the projects brought to it by the State authorities.

What is the benefit of the National Development Finance Agency? There are four key benefits. The first is value for money. In the early PPP projects this became the critical issue in respect of the financing of projects. On how we evaluate what is best value for money in developing projects as public-private partnerships, the National Development Finance Agency in drawing on the personnel expertise, knowledge, know-how and experience of the National Treasury Management Agency can bring to bear a critical value-added in respect of the value for money assessment undertaken by Departments in respect of PPP projects. This is about the application of commercial-type standards to the procurement of public projects in relation to the financial model which best meets the project needs and meets value for money requirements. The NDFA will advise the project board, the State authority in question, of the optimum financial model.

We see this as underpinning the PPP approach to public service provision. The PPP approach is complex; and particularly so in respect of the various forms of financing of available PPP projects. This is recognised internationally. The NDFA will provide expert knowledge and the insights into the options for financing to the State authorities and underpin the PPP approach going forward. There is a relatively shallow pool of knowledge and expertise here in respect of the detailed elements of the financial models needed for complex infrastructure projects financed by the private sector. We did not have, until the creation of the National Development Finance Agency, a centre of excellence. Other jurisdictions have such centres. They are in the Netherlands and in the UK through Partnerships UK. The NDFA is now able to learn by doing in respect of the roll-out of public-private partnerships, centralise that expertise and recycle it to future PPPs.

All State authorities are statutorily obliged to seek advice from the NDFA. It is not an option; they must seek advice from the NDFA. They must do so in relation to all major projects such as road and rail projects and they must seek advice for relatively small projects which are grouped. An example would be the group of schools projects. Members may recall five post-primary schools were recently procured by PPPs. Each project would have been a relatively small, straightforward, conventional project but grouped together the project became more complex. NDFA advice must, in future, be sought in relation to such projects. There has to be a realistic threshold because if they do everything, nothing will be prioritised. The guidelines set a threshold of €20 million in respect of capital projects for which advice from the NDFA is mandatory. That does not preclude a State authority opting to go to the NDFA in respect of any other project. They can still do so in respect of projects approved within their expenditure allocation.

The NDFA will support the State authority in all finance-risk and insurance project issues. In other words, it is not a once-off. The NDFA, if required by the State authority, will work with the project board through the procurement process. Once the NDFA has given its advice in respect of the optimum form of financing, the next stage is the PPP assessment. That is where the sponsoring agency must ask itself a number of questions. The first critical question is, has the sponsoring agency the necessary statutory power of vires? The Oireachtas passed an Act in 2002 regarding PPP arrangements. That legislation gave to listed State authorities, including Ministers, Departments, local authorities, health boards and so on, the necessary vires in respect of procuring PPPs. The sponsoring agency has a legal obligation to ensure it has that power before proceeding to enter into the PPP arrangements.

I will explain briefly the reason for that. We know that in other jurisdictions there have been examples of State authorities, acting in good faith, entering into long-term contractual arrangements with the private sector under PPP-type arrangements only to find that under court challenge they acted ultra vires in entering into those forms of arrangements. There is a necessity to ensure the required statutory powers are in place.

The second question, one that has to be asked in respect of all projects, is critical in terms of PPPs. Does the chosen PPP have the potential to deliver value for money? That is the critical touchstone in respect of moving the process forward in the PPP assessment. We will speak about value for money later. I am sure members will have questions in that regard. The further question of whether there is potential for user charges must also be asked. User charges in respect of transport projects would be real tolls on motorway projects and the fare box in public transport projects and mass transit systems. It is necessary that the extent, form and nature of user charges be identified at PPP assessment stage. That will determine the particular direction and structure the project may take in the future.

It is also necessary to examine the potential for what we call third party income. Third party income differs from tolls because it is not about revenue arising from patronage of the service or use of the asset for the direct purpose. They relate to ways of utilising the asset which can generate additional income. For example, one may have the opportunity to develop retail outlets with the private sector at railway or bus stations. That can generate rental income for the retail outlets. One could use them for some form of extra income in addition to direct user charges. The potential in that regard needs to be examined in respect of the PPP project at the assessment stage.

Another critical question is the form of PPP that delivers best value for money for the Exchequer over the full life cycle. We are not merely talking about building it and putting it in place and then walking away from it. We are talking about concessions of up to 25 years or longer. We must look at what form of PPP delivers the best option over the full life cycle. There are several variants of the PPP model. There is design-build-operate which does not involve private finance. Finance in such cases is provided by the Exchequer or the NDFA. There is also DVOF which involves private sector finance without user chargers. There is also a stand-alone or full concession public-private partnership where the debt, operating costs and maintenance would be met by user charges over the full life cycle. It is at this stage of the assessment that the critical decision must be made in respect of the form of PPP to be used.

Once the assessments have been carried out, there are gateways which the sponsoring authority, the Department or the agency bringing forward this project must pass. In looking at the project, following assessment, there are key questions which we want Departments to ask. What is the priority of the project? Is the project a priority in respect of the policy programme and meeting the need in respect of the sector? We also need the sanctioning authority to consider whether the preliminary appraisal developed by the sponsoring agency has been satisfactorily carried out. The sanctioning authority must then consider the PPP assessment and determine whether the appropriate form of PPP has been chosen. Once satisfied, sanction can then be given. Sanction is twofold: sanction to proceed with the project and sanction to appoint client advisers.

There is a second critical approval point, that is, the approval point which must come after the affordability cap has been set in respect of the overall cost of the project. There is at this stage an optimal market consultation process. This has been undertaken by the Department of Transport and the Railway Procurement Agency in respect of the metro project. The purpose of this - and it is allowed under EU directives - is to establish the market interest and whether the market has capacity to deliver with a PPP. When the present team in the PPP unit took over there really was no market here for PPPs. It may be that it is necessary through market consultation to establish for particular forms of PPP that there is the capacity here to deliver. It is also necessary to identify and clarify suitable options or solutions and we can deal with those in questions and answers if the members wish.

I move now to the public sector benchmark. We put in a definition of the public sector benchmark, which is in tune with the development of the guidance and of the process to date. What we are saying is that the PSB is a key management tool in this process. We use it in the quantitative assessment of the value for money of the project during the procurement process and in the evaluation and comparison of bids. That sounds like a mouthful, but what it means is that when we reach this critical stage in evaluating a public-private partnership we need to move from what in many respects is a qualitative assessment into putting numbers on the elements of the project and looking at the risks, pricing the risks and coming to conclusions in respect of the quantitative evaluation that is carried out. It is critical because clearly every bid will be different. So a solid standard is needed against which the bids that come from the marketplace can be evaluated. We are looking for competition in PPP. Competition is critical in getting value for money in PPP so we need a tool, which will allow us to compare and evaluate the variants that come to us in terms of the bids.

The public sector benchmark validates the continuation of the procurement process. Once the PSB is established, it is then possible to move on with the procurement process. The critical element of the PSB is to look at what the project as specified would cost using traditional procurement. This is not just a notional cost. Under the guidelines we will be looking for sponsoring agencies to look in detail at the cost, the pricing risk and evaluating the various elements of the project. It will be a requirement that the project be delivered at the cost, which is identified in the PSB. If the bids in the tendering process come in too high, then the Department or the agency bringing forward the project will need to revert to the figures that are determined in the PSB.

The PSB must be three things critically. It must be comprehensive; it must be detailed - it must drill down into the elements of the project as far as possible - and it must be risk adjusted. In other words, it must look at the extent to which risks can be identified, mitigated and transferred where possible to the private sector. The PSB is not simply about looking at the cost of building the asset. It is about looking at the whole lifecycle cost: building; commissioning; operating; maintaining; refurbishing; and having a residual value at the end of the concession period. The PSB must contain all of those various elements of the project.

How is it possible to get those? It is a requirement that the costs, which are included in the PPP PSB, are derived from detailed output specifications. In other words we are not asking Departments to measure the size of the asset they want - to specify in detail the amount of bricks and mortar or whatever will go into it. We are asking Departments to take the perspective from the outputs they want to deliver the service. In other words, it is reorienting the perspective of Departments towards quality service provision as opposed to the inputs.

We also want them to look at historical data where these are available. They will not always be available. In some projects we will not have undertaken this form of transport previously. Metro is a case in point. So where there is no historical data and we cannot establish what it cost to do this type of project in the past, we may require some other forms of approach - for example what we call a shadow bid. That is with the client advisers, the sponsoring agency will look at costing the project from the bottom up, as it were, perhaps benchmarking against similar projects in other jurisdictions. The sanctioning authority then compares the PSB with the preliminary assessment. This is critical because, having done this drill down and this detailed evaluation, we need at this stage to look again to see whether the costs and benefits bear out our expectations. If they do not, it is necessary to go back again and look at the preliminary assessment. Critically the PSB does not change. Any material change necessitates a review of the original cost-benefit analysis and the affordability.

I will move on to the affordability cap. Once the public sector benchmark determines the costs inherent in the project the affordability cap is what the sanctioning authority decides is the absolute limit on the outturn cost. The outturn cost will be based on the PPP tenders, which come in the competition. The sanctioning authority at this stage sets the affordability cap. What we envisage is fairly straightforward. It will be the costs inherent in the public sector benchmark plus or minus an agreed percentage margin. It will never be possible to anticipate every variant so it may be that some flexibility is needed in respect of the cap. In other words, it is not an absolute number, there is some flexibility built into it - not a major flexibility but a little in order to ensure there is sufficient latitude in rolling out the project.

The affordability cap is then used to evaluate tenders. That is what the tenders must bid against. If the tenders come in above the affordability cap, then there is a difficulty because it is necessary that the affordability cap is not exceeded by the sponsoring agency. In other words, it must not be changed. The work has been done on the PSB, the detailed evaluation of cost is done and the marketplace is being asked to bid against that unknown cost by going through much the same kind of exercise and building the project from the bottom up.

The procurement process can commence only once the affordability cap is set. That is not absolute. With some projects - like the roads projects for example - approved by the Government, the agency can commence the early stages of procurement in parallel with compilation of the public service benchmark. We want to be reasonable and realistic in how this is done. I will not go through each element of the procurement process, but if any members have any questions we can come back and deal with them.

I now come to what is really the critical issue: the value for money comparison. This is where the project board within the sponsoring agency evaluates the preferred tender. This happens when the various processes of procurement have been gone through, the tenders are received and the project board must decide the tender it will nominate for the project. The focus is on value for money. Members will be familiar with the concept of the most economically advantageous tender. This is about evaluating this most economically advantageous tender against the public service benchmark.

It is necessary the criteria used evaluate all elements. We price the project on the basis of an output specification and it is essential that we are satisfied that the market bidding for the project has done that too. Otherwise it will be very difficult to get value for money. We need to compare what the market has bid with what the public sector has specified as the requirements in the output specification.

In this again one has to be realistic. It may be that the private sector will bid to take more of the risk than would be anticipated in the public service benchmark. It is possible it might take a price risk so high that the agency will not want to transfer all the risk. Therefore so, there has to be some flexibility. There may well be some risk that is greater or less than exists in the public service benchmark. Once this value for money comparison has been signed off on, it is possible to move forward with completion of the contract. What that does is to set and seal the public sector outturn costs. In other words, by using the affordability cap and the public sector benchmark against the tender bids, one will set a cap on what one will spend on this project. That is unlike traditional procurement, where one will have variances and price variations, so that from the time of contract closing to contract completion, one very often sees an upward drift in prices. That will not happen with this form of PPP. What one determines as the cost of the contract at this stage, against the affordability cap, is what it will cost on completion of the project.

We have set out some of the reasons the public sector benchmark in this type of process needs to be confidential. Most of them are self-explanatory but I will just highlight one or two. First, in looking at various models of PPP, I have to point out that there is no template. There is no other jurisdiction in which we can choose a form of PPP contract, procedure or structure and transplant it to this country. Wherever we look, the driver for value for money is competition.

A PSB which is not revealed to potential bidders incentivises competition. A person who goes into a retail shop with a limited amount of money, knowing that he can bargain the price down, does not reveal how much money he has. Similarly, in simple terms, the competition does not know the level of one's affordability cap and must evaluate the project from the bottom up, price the individual elements, decide how much risk to take, price that risk and finance it with some confidence. Without keeping the PSB confidential, it is very difficult to incentivise competition. It is also a key factor in allowing innovation.

What are we looking for in a PPP? In the construction of a road or a building, the materials being priced by the bidders will be more or less the same, such as concrete, bricks and mortar and even the cost in wages and salaries of key people like quantity surveyors and so on. All of those are relatively standard costs. That being so, where do we get value added? We get it in innovation, not simply in terms of the engineering aspect of projects, although that is very important. It also involves innovation in terms of the financial model and how the financial package is created in support of the bid. By not revealing the public sector benchmark, we require the private sector to think in terms of the necessity to come up with a package which they believe can get through the procurement process and win the bid. Inevitably, that means there is information in the bids and also in the public sector benchmark which is hugely sensitive in commercial terms and to which bidders would clearly like to get access, thereby gaining an undoubted commercial advantage.

The PPP process is still at a relatively early stage of its development. In the public private partnership unit we have responsibility for developing detailed guidance on all aspects of it. We draw our understanding from the widest possible circle. We work with the social partners in the PPP advisory group and we also listen very carefully to what is said in Oireachtas committees about PPP matters. In our consultation process, we take into account, in so far as we can, the views expressed here. It is the view of the Minister that the PPP unit should be a point of contact on any aspect of public private partnership information. As far as possible, we like to keep all stakeholders in the PPP process up to date through our website. This presentation will go on the website as soon as the committee is satisfied.

Chairman

I thank Mr. Kearns for his presentation and I am glad to hear it is not confidential. On the matter of confidentiality, there is a great deal of frustration on the part of this committee that information provided by the RPA on the metro project is confidential. Despite the fact that the RPA employed various groups of advisers at a cost of many millions of euro, this committee was given a document which we were not allowed to discuss with anybody outside the committee. While we appreciate the confidentiality aspect, there is a great deal of frustration in this committee on the matter.

Deputy Naughten

I have two questions initially. On the subject of innovation, Mr. Kearns said it does not relate only to the engineering aspect but also the financial side. It is difficult, in relation to roads projects where the specifications are already set before the PPP starts, to get any savings on the engineering side. What mechanisms are in place under the PPP structure to incentivise, either in terms of cost or time, savings in projects where there are no private funds involved in the project? It seems to be well incentivised when a private operator's funds are involved, but not where only State funding is involved, even through a PPP process.

My second question relates to the issue of value for money and cost-benefit analysis. Has a cost-benefit analysis been carried out on the cost of money if the State borrowed the amount required to fund a project, as compared to the cost of a private organisation borrowing that money? The Government's credit rating is a great deal stronger than any commercial company and it can borrow money at a much cheaper rate. On the basis of design, build and operate, using State funds, one could achieve the type of savings required while borrowing at a substantially lower rate. Perhaps Mr. Kearns will elaborate on that.

Deputy Shortall

On Mr. Kearns's presentation, in which he has given us the theory of how the PPP unit operates, I wish to ask a few practical questions about its work. On cost-benefit analysis, does the unit take responsibility for carrying it out on all major public projects? If not, who has that responsibility? Is such analysis carried out periodically on each individual project? While one might accept that a Dublin Luas project costing €300 million might show a very positive cost-benefit analysis, it might, indeed, be negative when it runs to more than €1 billion, as is now likely. Who is responsible for monitoring the progress of projects to ensure they remain in a positive cost-benefit situation? Does Mr. Kearns have some specific comments on Luas, having regard to the currently anticipated cost in the region of €1 billion? Do the figures add up and is there a benefit at this point?

On the question of value for money, what is the role of the PPP section in that regard? Are the studies carried out on projects, whether as PPP or otherwise, available to this committee? We would be very interested in examing those studies, whether within the transport area or outside it. Deputy Naughten has already asked how PPPs stack up, compared to more traditional forms of borrowing. Presumably, the PPP unit makes that calculation. Can we see those assessments on some of the PPPs with which the unit has been involved to date? Does the unit carry out a value for money comparison as between delivering a project by way of PPP and, for example, diverting pension reserve funds? Is there a case, on financial grounds, for recommending such an approach, as opposed to a PPP?

We read in the newspapers that the Minister seems keen to deliver a Dublin metro by way of public-private partnership and that he is supported by the Cabinet in this regard. What work has the Department done on that? As a matter of common sense, I cannot understand how there could be a positive cost-benefit in delivering a metro through a public-private partnership if it is to cost the taxpayer €10 billion. That is the figure the Minister himself has placed in the public domain. What cost-benefit analysis has been done, if any? Can the witnesses inform the committee as to the extent of the work their unit has been involved in with regard to the proposed metro?

Deputy P. Power

I compliment Mr. Kearns and his group for attending and dealing with the issue of confidentiality which, as the Chairman has explained, is a great bugbear for the committee. It has been explained from the other side why other institutions might have a difficulty with it. My questions are related to what has been said by Deputies Naughten and Shortall, though I may make the points a little more bluntly.

We have all been told that the benefits associated with the public-private partnership model are innovation and an accelerated delivery of projects. This latter benefit is one I have always associated with PPP, but I did not hear one reference to it in the Department's presentation. While I accept the need for a range of controls and a sequential method of analysis from the outset of a project, the benefit of an accelerated process is lost. I say that as a supporter of public-private partnership for other reasons. Contrarily, the process is actually delayed. Many witnesses and delegations have appeared before the committee from home and abroad to make the point that the delay of a project is the critical ingredient in the inflation of its cost. I wonder if there is a complete paradox in what has been said by the officials. Rather than provide innovation and accelerated delivery of projects, public-private partnership actually results in delays. To concur with Deputy Naughten's point, it is difficult to understand how private sector finance can better the Government's ability to borrow, particularly given recent international interest rate trends.

Deputy Naughten

When responding to Deputy Shortall's question about the metro project, will Mr. Kearns state whether third party income has been assessed on it?

Mr. Kearns

I might ask some of my colleagues to respond to some of the questions. To answer Deputy Naughten's question, under a public-private partnership arrangement innovation is one of the few ways in which the successful bidder can ensure a project is delivered in a way which meets his or her costs while delivering a reasonable return. Under the conventional procurement model, we go to the market to seek bids for a design. Once a project's design becomes available we own it at which point we make a separate and subsequent tender in the market place to seek bids from contractors to build the road, school or whatever. Once built, we take possession of the structure, commission it and operate it. There are distinct elements and the Exchequer provides all of the financing.

When one looks at the elements of design, build, operation, finance, maintenance and refurbishment, one sees that the risk in respect of the interface among those elements was always with the State. Under the traditional way of doing things the State always takes the risk. In a public-private partnership all of those elements are put together and placed before the market.

If one approaches the individual elements piecemeal and something goes wrong at the building stage where there is an identifiable, inherent difficulty in the design, the State bears the cost. It is our design. Similarly, when a project is operational, any flaws which become apparent due to the way in which it was built must be borne by the State. Bringing the elements together in a public-private partnership allows the operator to examine ways in which to design the asset to make it efficient and economic to build on time and under budget.

This process will also occur in a way which allows the consortium to manage the operation, maintenance and refurbishment cycle of the asset over 25 years in a way which meets the cost profile and which is profitable. If a building does not meet the output specification or if a road is not available for use, the private body does not get paid; it cannot collect the toll and the availability payments are not made. That public-private partnership incentivises innovation in a way traditional procurement methods do not is partly explained by the way in which we put together the various elements of the process.

Deputy Naughten also asked about the cost-benefit analysis in terms of the cost of money. He is absolutely correct to state that the Government can always borrow more cheaply than the private sector. The cost of Government borrowing will always be below whatever price the private sector is likely to find in the market place. There are a number of ways to add value to private money. Broadly, there are two types of privately financed public-private partnerships. The first type, which one sees in relation to roads, is known as concession projects where the design, build, finance, operate and maintain elements are bundled together and the private sector finances the deal mainly through senior debt and equity. By financing the deal, we can get better value against our public sector comparator by transferring risk to the private sector.

Where the banks finance a roads project that fails to be completed on time, it is private money which bears the additional cost of the extra time required to complete it. If the project costs more than is contained in the bid, the private sector bears that cost. Members should not forget that the affordability cap with the percentage buffer is the maximum outlay of the public sector. We value the risk we transfer in respect of on time, on cost delivery as well as the risk over the full life cycle availability of the asset. One can offset the additional cost of the private sector finance against the value of that risk over the full life cycle.

If there is inadequacy in a road refurbishment programme and lanes of a dual-carriageway are not available, the operator loses revenue from the toll booths which must be closed. If a classroom is not available for use for teaching purposes at any time, the unitary payments made to the operator will be reduced and stepped down according to a pre-set payment mechanism with penalty points. If, for example, the operator collapses and cannot continue, one of the benefits one would get is that the banks have step-in rights. They can step in and, in order to safeguard their investment, they can replace the operator with a new operator. If they cannot replace the operator and the project has to be terminated, termination is on very favourable terms for the Exchequer. In fact, in terms of roads projects, we can terminate projects on operator default without compensation.

Mr. Pat O’Neill

We have inherited this mechanism from the UK, where it was started first. It involves no compensation on termination for operator default. It basically means that if they default and fail to deliver the service, we get a road for zero cost.

On the schools project it is slightly——

Senator Morrissey

What is the position on the Luas?

Mr. O’Neill

It is slightly different. The precedent only pertains to the roads sector. We would need to clarify the position in respect of the Luas. The Luas was designed and built under traditional procurement procedures, which does not involve a PPP. There is an operator contract for the Luas, which does involve a PPP. That contract determines, with the provider, the precise times when the Luas will have to arrive at its stops every day throughout the duration of the contract. Failure to meet those time schedules will mean a reduction in the profits of the operator.

The point all three Deputies made related to the cost of finance, which Mr. Kearns has mentioned. To try to put it in simplistic terms, when we create our public sector benchmark, what we cost from the public sector side to deliver a project consists of the design cost, the construction cost, the operation cost, the maintenance cost and all costs associated with the risk involved in delivering all those elements. There are risks associated with design, construction, ground conditions, etc. That is our benchmark. That is what we keep to ourselves.

When the private sector tenders, it looks at the costs of design, construction, operation and maintenance and it puts in financing charges. We then measure both of these against each other. We take a holistic approach. Everybody is quite well aware that the cost of finance for the Government is much cheaper than that for a triple-B rated private sector company. However, the private sector keeps telling us that it can design better and can build more efficiently. It can do it way better than we can do so. It can amortise and mitigate the risks of a project and can operate more efficiently. Those are the areas where the private sector brings its benefits to bear on a project.

How are these benefits brought out? They are brought out by our giving them output specifications. The private sector has constantly told us that if we want a clock on the wall it will give it to us, but that if we tell it we want to be able to tell the time it can use its creativity to decide how it wants to present that output over the period during which the service is required. That is where the private sector brings its brains to bear on a project. This is why it is so essential that we need a benchmark to be able to measure what it provides for us in the tender format. Therefore, if we give out that benchmark, we are letting it know the outputs, our expectations and what we think it can do, and we are removing its ability to innovate.

One other element that causes harm and which has been seen internationally is that when one states the amount of money in one's pocket or one's affordability cap, the private sector company involved tends to focus on - this is proven - how one has constructed one's benchmark as opposed to how it should construct its costing from the output specification. This has had an undesirable result in respect of one specific project which I will not name. It was a hospital project, the capital cost of which was in the region of €235 million. The private sector company built the unit and two months before opening it, it realised that the capital cost of delivering the project was significantly lower than its tender price. It refinanced the project and, as was published at the time, made a minimum gain of €70 million on a €235 million project. The company will justify the gain by saying it was because it mitigated all the risks. One very important reason is that the price of the project for which it bid and succeeded in winning did not reflect in true competition the actual price of delivering the project. Therefore, one can understand why it is important not to divulge the public sector benchmark and the affordability cap.

Deputy Shortall

How can a judgment be made if that information is not divulged?

Mr. O’Neill

We use the public sector benchmark. Whoever is the procuring authority will use this and measure the preferred tender against it.

Deputy Shortall

The RPA used a figure of €4.8 billion. That was the public sector benchmark. Within a couple of weeks, it was able to reduce this to €3 billion. How do we know that the taxpayer is getting value for money?

Mr. O’Neill

What we are saying is that we are both starting from the same base. An output specification is drafted which states the requirements, such as a requirement to go from Connolly Station to Tara Street. A determination is made on the basis of that output specification.

Chairman

Do you think it was right that the RPA circulated the cost of the metro in the public domain? It released the final figure before the project had even gone to tender.

Mr. Kearns

We do not have any sanctioning authority or mandatory input in respect of the individual projects. That is not our role. Our understanding of the figures in the public domain is that they relate more to the initial preliminary assessment rather than to the public sector benchmark. Our understanding is that the public sector benchmark for the metro can only be completed once one has determined the particular route and once the dimensions of the project have been agreed. We understand that those issues are still awaiting a Government decision and until one actually has a tremendous amount of detail in respect of the choice of route and so on, one does not have the public sector benchmark as we have been describing it. If one wants an early estimate, one will look at a variety of options in a more qualitative way than if one requires a more rigorous public sector benchmark exercise, which has to take place before one determines the ultimate affordability of the entire project. That is my understanding of the matter.

Chairman

I believe Deputies asked other questions.

Deputy P. Power

Before Deputy Ellis contributes, I would like an answer to my question on the accelerated delivery of projects compared to the amount of time it takes to put the whole thing together.

Mr. O’Neill

With regard to the accelerated delivery of projects, if we look at the stages that Mr. Kearns outlined, one will note that we have created a number of stages that are very limited in respect of the approval process. I am not sure if the committee is aware that there are two bodies: a sponsoring agency and the sanctioning authority. The former does the majority of the work and the latter approves the finance. If one looks at the stages Mr. Kearns mentioned, one will notice that there is a preliminary assessment. Not all projects that are viewed initially reach the procurement stage. One might have a ten to one ratio, for example. One examines one's project to see if it is required and then one moves on. Only when one believes one has a viable project for which there is a need, an option in terms of ways to carry it out and a cost benefit-analysis - we will talk about that in a moment - which will actually deliver a benefit does one go ahead, hire client advisers, if necessary, and, with the NDFA, scope out a public sector benchmark. That is one main exercise one is doing.

The earlier costings may include desktop exercises with a certain amount of detail. The public sector benchmark involves a detailed exercise. It allows the sponsoring agency to know that a certain project will cost €X to procure it. Then it goes to the sanctioning authority and says, "You are the person with the purse, can you allocate this amount of money for this project and will you prioritise it?" It then decides if it is a priority. The authority then sets an affordability cap, which is, as has been explained, the public sector benchmark plus a percentage margin. That is the limit of the involvement of the sanctioning authority. After that the sponsoring agencies will carry out the procurement for the project. There is no impediment to the project at any other stage from PPP, as long as it stays within the agreed affordability cap.

Deputy P. Power

I would like to argue the point but I know other Deputies have questions.

Mr. O’Neill

There was a question about cost-benefit analysis. As Mr. Kearns explained, our role is to lead, drive and co-ordinate the delivery of PPP within and across the sectors. We are obliged to learn by doing. We did this through a number of pilot projects. We have learned a number of lessons from the pilot projects and, taking cognisance of those, we are currently writing policy. We do not have any approval or sanctioning authority role over any project. We can only assist, advise and help——

Deputy Shortall

Does the Department carry out periodic cost-benefit analysis as projects spiral in cost? Are those figures available?

Mr. O’Neill

We do not do that. Guidelines on how to conduct a cost-benefit analysis have been issued by the CSF unit. That document has to be adhered to. A cost-benefit analysis is done at the first stage when preliminary figures are available. It is also viewed when a public sector benchmark is compiled. If the benchmark is exceeded at any point for a major material issue, the cost-benefit analysis has to be reviewed again to examine if it will deliver, or continue to deliver, benefits with that material change.

Deputy Shortall

Are periodic cost-benefit analyses carried out on non-PPP projects?

Mr. Kearns

We do not have any role in respect of undertaking cost-benefit analysis. Our role involves working with sponsoring agencies in the Departments. We draw on their experience in rolling-out individual PPP projects. We draw knowledge, understanding and expertise to recycle in detail, guidance that we publish on the website.

We also have policy development responsibility. In drawing on the experience of working on projects, we try to issue notes that have a wide application. If we develop techniques in PPP that we believe will be of use in other forms of procurement, we make those available through the appropriate mechanisms.

Deputy Shortall

Is the analysis available?

Mr. Kearns

Everything will be published on the website. All our analysis will be published on the website.

Deputy Shortall

Will the specific cost-benefit analysis of any project be available?

Mr. Kearns

We do not have control of individual project cost-benefit analyses.

Deputy Shortall

Who controls it?

Deputy P. Power

The sponsoring Depart-ment?

Mr. Kearns

Yes, the sponsoring Department. For example, if it is a NRA project it is their responsibility. We do not undertake or monitor that cost-benefit analysis.

Within the PPP process, in order to ensure that sponsoring agencies are comfortable with how they are adhering to the guidelines, we are looking at the necessity of appointing what we are calling a "process auditor". That auditor will be responsible to the accountable officer in respect of any public expenditure on PPP projects. The role will be to ensure that all the necessary regulatory and procedural issues are dealt with. It is not that the cost-benefit analysis meets a particular need and weighs the project in the balance, but rather that it is undertaken and the stages are completed before the project moves on. Our unit does not have any role in respect of individual cost-benefit analyses for particular projects.

The Deputy mentioned the Luas project. The design and construction of the Luas project was not a PPP. We have not been involved in the Luas project per se.

Deputy Shortall

I used that as an example of spiralling costs that might mean it does not offer a positive return. I am asking then about periodic cost-benefit analysis.

Mr. Kearns

In the PPP process we are working towards achieving the kind of concept that the Deputy is talking about. There have to be control points that the projects must pass, not just at the beginning but as the procurement proceeds. That is a valid point.

Deputy Shortall

Is that what the unit is currently doing?

Mr. Kearns

We are developing PPPs and we have, in interim guidance documents, identified gateway points. The interim guidance is available.

Deputy Shortall

I also asked about the unit's involvement in the metro to date and value for money.

Mr. Kearns

The central policy unit in the Department of Finance does not have a role in carrying out VFM in individual projects. We have not done that for the metro. That is not our function. We do not have authority to carry out a cost-benefit analysis on the metro.

Deputy Shortall

Much of the presentation focused on cost-benefit analysis and value for money. It seems extraordinary that the unit is telling us that it does not have a role in either of those important areas. Surely the unit has a monitoring role.

Chairman

Is the unit saying that unless the metro is built through a PPP it will not look at it?

Mr. Kearns

I am not saying that. I thought Deputy Shortall asked if we had responsibility to carry out a value for money audit.

Deputy Shortall

My question was about the extent of the unit's involvement in the metro to date.

Mr. Michael Manley

Perhaps I can offer some clarification on this and the stage Luas is at. Mr. Kearns has been describing projects that have been sanctioned and are going through the PPP process. Metro is not at that stage yet. The Minister for Transport will bring it to Government for approval if it is to proceed. Once it is sanctioned the processes will kick - in. Government has yet to decide on the question of a metro. My understanding is that the Minister for Transport intends bringing a proposal for decision to Government very shortly. When it gets to sanction stage, we can then look at methods of procurement, PPP, how the benchmark is to be constructed, etc. Giving the scale of a metro - whether it is to be €2 billion, €3 billion, €4 billion or €10 billion - it is first a matter for Government to decide.

Deputy Shortall

If this unit has not had any involvement, it sounds as if the Minister is using back of an envelope figures.

Chairman

The Minister is using figures produced by his Department.

Mr. Manley

The Government decided that the RPA should go to the market and try to gauge the sense of interest in the project and estimate the overall cost. It is therefore the RPA that has taken that work and I expect it has engaged reputable consultants. The Minister will have to be satisfied the overall imagery of the project is robust enough before he brings it to Government.

Deputy Ellis

Is the unit telling us that despite the metro being intended to be a PPP, it has not been consulted and it is the RPA that is spearheading it at this stage?

Mr. Manley

Perhaps I have confused members. Government has got to decide if it is going to sanction a metro. My expectation is of a PPP project. However, it is not a matter for the Department of Finance or the PPP unit to work out the costings. We are not competent or expert in this regard. Rather, it is a matter for the sponsor, which in this case is the Department of Transport, or the RPA to bring forward a proposal.

Deputy Shortall

If the PPP unit in the Department of Finance is not competent to judge a PPP proposal, who on earth is?

Mr. Kearns

It is not a matter of competence but rather one of authority in respect of the decision-making process.

Chairman

What authority?

Mr. Kearns

The Railway Procurement Agency is the statutory authority with responsibility for delivering the project. In terms of the model we have referred to, the Minister for Transport will be the sanctioning authority. However, the probability is that the Minister will bring the various gateway steps to the Government for a decision.

Chairman

Can we clarify this? The RPA has a discussion with the Minister who brings the matter to Cabinet. When will this fall to Mr. Kearns unit to examine?

Mr. Kearns

My unit has been involved in various preliminary stages of the metro concept, working with the Department of Transport and the RPA within the PPP structures which we have established.

Chairman

Has the unit actually examined the plan?

Mr. Kearns

Only to the extent that we have looked at every PPP project which has been brought forward to date in order to help us develop detailed guidance in our policy on PPP generally. However, we do not have authority in respect of any gateway decision on the metro project.

Deputy P. Power

My understanding is that when the model has been set up, it is up to the sponsoring agencies or competent authorities to put that model in place in respect of each individual project.

Mr. Kearns

That is exactly the remit which we have under the——

Chairman

Does Mr. Kearns unit then just check that they are crossing their ts and dotting their is?

Mr. Kearns

We are not checking or looking over the shoulders of those who have responsibility.

Deputy Ellis

There should be a responsible group employed in any Department on any major infrastructural project to say whether it comes within the guidelines and is viable or not. However, Mr. Kearns is now telling us that they have not been consulted on the metro and its position as a viable project.

Chairman

I would be surprised if the Department of Finance was not looking over people's shoulders to make sure they were spending money properly. When I was a Minister of State, they looked over my shoulder every day.

Mr. O’Neill

To return to what I said earlier, the role of the PPP unit is to drive and co-ordinate the PPP process and we started with a number of pilot projects. We could have developed and implemented policy only to find that it did not suit the projects and finish up with projects that did not——

Deputy Ellis

What kinds of projects has the unit developed?

Mr. O’Neill

Group schools, the National Maritime College and a number of others.

Deputy Ellis

What road and rail projects has the unit taken on?

Mr. O’Neill

Road projects such as the second Westlink bridge and the Kilcock to Kinnegad road——

Deputy Ellis

It is not Mr. O'Neill's fault.

Mr. O’Neill

We are developing a new procurement process. We are giving options.

Deputy Ellis

It is a guinea pig unit. We have sat here for an hour and some of us are getting sick of sitting here for hours and allowing others to get in.

Chairman

There is another speaker to come.

Deputy Ellis

I know that and I have to go to another meeting.

This is a guinea pig unit within the Department of Finance to set up a hopeful model on PPPs at a later stage.

Mr. O’Neill

That is not written in our remit. Our job is to learn from the pilot process and develop guidance which is applicable across the sectors. We do not have a monitoring role.

Senator Morrissey

I thought one of the unit's principal functions was to find alternative means of finance, particularly in regard to the metro. Mr. Manley stated that they would all do their job once the Minister gives the go ahead for the metro but one of the reasons he cannot do so is that, to use the unit's buzzword, the "affordability cap" is outrageous. Who designed the affordability cap? It was not the people who will eventually deliver it - the Government - but rather the PPP unit or the RPA or else we do not know. Nevertheless, the figure we have been given is over a 25 year period at €10 million or €15 million per annum or €4.8 billion from the city centre to the airport, which is obviously outrageous.

Therefore, the Minister cannot give the go ahead if he is looking at that figure coming from the unit before it goes to the marketplace. The Minister wishes to give the go ahead, but the figures being thrown out by the sponsoring unit are incorrect.

I thought one of the main functions of the unit when it was established by the Minister for Finance was to find alternative methods of finance, which no one else in the world could find - off the balance sheet in order to meet EUROSTAT requirements. Where is the unit in that debate? I thought that was one of the principal functions of the NDFA. Will the representatives of the unit speak to us about that specifically?

Mr. Manley

For the metro, the RPA is the sponsoring authority. The Department of Transport would in the norm be the sanctioning authority. It is such a large project that I expect the Minister wants to bring it to Government because, whatever way one looks at it, it is a very expensive project. The first decision is whether it will go ahead. It is beyond that stage when we get into the detail of the public sector benchmark.

Senator Morrissey

If a Minister gives that go ahead for any project, he or she buys in and he or she or future Governments may be hung out to dry. That is where we are with Luas. Mr. Manley may say it is not a PPP but we have bought into something without knowing what the real costs and benefits are. That is because the costs we were given were probably underestimated and the benefits were over-estimated. It is the sponsoring authorities which are doing this.

Mr. Manley quite correctly referred to innovation coming from PPPs. However, that is at odds with what I understand when he says that salaries will be the same regardless of who builds the system, that construction costs and materials will be the same. Mr. Manley referred to innovation in finance. However, large companies will get finance from the same place. Where is this famous innovation? I suggest that the innovation will come back to over-design on projects, about which we have had discussions in the context of the Madrid metro. The metro here has been over-designed and over-costed, in order that there is a bigger pool of money to divvy out. How can any Minister give the go ahead on figures that do not relate to modern European experience?

Mr. O’Neill

Everything the Senator has said has been justified by the approach we have taken which will address this. I am referring to the public sector benchmark and the affordability cap. The Senator referred to escalating costs and we will compile a detailed public sector benchmark to see if we have specified a Rolls-Royce or a mini. When we get those figures, everyone will say that the realistic cost is too high and we can go back to the drawing board and re-specify. Is it not better to do that now, rather than when we are tied into design criteria and we are in the ground digging and building? Our approach under the interim guidelines, to carry out the public sector benchmark - which is the detailed cost of the public sector delivering that project - will open our eyes to the cost of the project before we have made any commitment to the market. It addresses the Senator's concerns.

Senator Morrissey

Whose cost base is the study working off? It is not working off the marketplace.

Mr. O’Neill

On the contrary, it is very much so. The output specifications are drafted by the procuring authority or sponsoring agency and when it is developing the public sector benchmark, it approaches the sanctioning authority to seek assistance from the private sector.

The assistance they get from the private sector includes technical advisers for the metro, for example, because we do not generally have them in-house, and cost consultants. Cost consultants will also be advising on the costing of the private sector tenders. Therefore we are using private sector people to assist in delivery.

Mr. Kearns

The National Development Finance Agency has an obligation to look at the optimum form of financing. That spreads across the spectrum from financing which is entirely Exchequer-funded to that provided through senior debt, equity and other forms of finance, such as bond finance, on the private sector side, and there is a range of options between those extremes. The role of the NDFA is to recommend to individual authorities that come forward, whether the NRA, the RPA or any other State authority, for projects that will cost more than €20 million, the form of financing that will meet their needs most effectively. In some projects with private finance, it will be possible to bring forward projects which will be outside the general Government balance. What determines that is what is known as ESA 95 - ESA stands for European system of accounts. In summary, what this states is that whatever party bears the risks and rewards of ownership for the duration of the operation of the project should bear the project on its balance sheet. If the public sector bears most of the risks and rewards, it will stay within general Government balance. If not, it will lie on the balance sheet of the private sector consortium for the duration.

In a project in which one is remunerating borrowing by the private sector by means of user charges such as road tolls, in the case of a road project, there is a stream of income that pays the debt and the cost of operation. If it does not pay for the whole debt, maybe there is some form of public sector contribution. The balance will tell one how much risk the private sector has. If the private sector charges tolls and takes the demand risk - in other words, the risk that the target number of cars does not use the road and revenue falls - clearly it bears the risk of a loss. Therefore, the project is most likely to be determined off the balance sheet. It is up to EUROSTAT, ultimately.

Senator Morrissey

That is the real question about the metro, is it not? Where do we find the money? That is what I was asking initially, because I thought that was one of the primary functions of the NDFA - to find ways of raising money that would be off balance sheet.

Deputy Naughten

On the issue of value for money, does the section have anything to do with the evaluation of the project itself - as in, whether it is value for money to proceed with the project initially? This is the question all of us are asking about the metro. I asked earlier what mechanisms are in place to incentivise a project either in terms of cost or time savings for the State, where there are no private sector funds involved.

Before I move to the roads programme, I have a question about the public sector benchmark. We have the traditional procurement mechanism, but everyone has realised at this stage that this mechanism is flawed. The Minister has been talking about transferring the risk to the private operator, with a fixed-price contract tendered on day one. Is that now included in the public service benchmark or are we still dealing with the old, flawed system we had traditionally?

I have a question specifically about the roads programme which is very interesting when considering private finance. Mr. Kearns spoke about innovation in relation to design-build-operate projects. The difficulty is that in our roads programme that option is not available for any stage because the design is already specified at the time the contract goes out to tender; there is no benefit for the State in relation to the building, and the operation is a matter for the company itself. This means that those companies tendering for the projects are actually competing on the basis of how they will finance the project over the period of the programme. In such cases, is it not true that we can fund it much more cheaply from our own resources than by using private moneys? There is no risk involved because the design is already done and the flexibility is not there for the incumbent.

Mr. Kearns

To a great extent, that was the rationale for the creation of the NDFA in the first instance. In some of the early public-private partnerships, the issue of the non-debt interest cost of finance, in terms of fees, charges and so on, was something we had to consider very carefully. The NDFA will now be in a position to work with each State authority, including the National Roads Authority, in respect of future roads projects, so that they can make the call and say whether the private finance option will deliver the best value for money. As the Deputy said, if we find that we are not getting the kind of innovation we are looking for - and would expect - in the bids, and if it is determined that the cost of private finance for that particular roads project does not meet value for money criteria - in other words, the public sector benchmark - it will be up to the NDFA to make that call. The benefit of NDFA is that it will make the call at an earlier stage in the procurement process.

Deputy Naughten

The difficulty about the roads programme is that there is no flexibility or innovation possible for the design or the specifications, because they are already laid down by the consultants. For example, before the Kinnegad-Kilcock motorway project went out to tender, the specifications were laid down: there had to be a bridge at this particular point, or so much macadam on the road throughout. Innovation for that project was only possible in the area of finance. How can finance coming from the State sector not compete with any type of innovative project in the private sector?

Mr. O’Neill

The question the Deputy asked about design-build-operate projects is related to this. In this type of project the public sector provides the finance, so what is the difference between a design-build-operate project and a design-build-finance-operate project? In plain terms, in the latter project the private sector has its shirt on the line. What I mean is that it only gets paid the capital cost of the project over the life of the project, plus the operating costs. In a design-build-operate project, however, the design and building costs are paid as and when they are incurred, not up front. What are at risk in this project are the operational costs. Very little is on the line, so where is the incentive? It is very much reduced compared to the incentive of having all one's finance on the line, subject to meeting the output specification.

On the roads, it is recognised that because of the environmental impact statements and public consultations that need to be done and the setting of the road tolls at a certain point and so on, which are all necessary so that the public may have an impact on a road that is to go through their environment, the amount of flexibility and innovation is restricted. This has been communicated to the Department of Transport, which is considering whether there is anything it can do to allow innovation. What the Deputy said has also been passed on to the National Roads Authority. However, the Department of Transport must balance the public need with the innovative need through the environmental impact statement.

Deputy Naughten

Where is the innovation on the road from Kinnegad to Kilcock? The only innovation available in that project is financial. The main risk associated with it is the number of vehicles that will go through the toll. There are no savings to be made in the design because it is set in concrete. We are looking at State funds competing with private funds.

Chairman

Money being used for other roads.

Deputy Naughten

The point is it can be borrowed more cheaply if the Minister for Finance, on behalf of Ireland Incorporated, borrows it rather than if a Spanish company borrows it.

Mr. O’Neill

I disagree. There are numerous risks in that project. The private sector could tell the committee how many risks it has taken on board. We might have agreed the alignment and the height off the ground in the EIS but the design of the bridge is up to the private sector. There are numerous elements up to the private sector - design, construction and many other factors. The National Roads Authority would be clearer on this than me, but we are obliged to keep within certain European safety guidelines that concern barriers in the middle of the road and the width of lanes. Those must be adhered to but numerous risks are passed to the private sector outside the demand risks the Deputy mentioned.

Deputy Shortall

We are all taken aback to discover the Department of Finance has no role in monitoring PPPs. Does any Department have such a responsibility? How is the public service benchmark constructed? What would the advice be to the Department on a metro system? Should it use the original benchmark from the RPA of €4.8 billion, the revised estimate of €3 billion or the Madrid metro figure of €1 billion? When there is such a wide variation in estimates, how is the public service benchmark constructed?

Mr. Kearns

On monitoring, we are not an extra layer of checks and balances on individual project delivery. The structures for PPP set up by the Government clearly provide for a sponsoring agency in respect of all projects.

Deputy Shortall

Who monitors that agency?

Mr. Kearns

For the metro it would be the Railway Procurement Agency. The Department of Transport has policy responsibility in that respect and, ultimately, the Department of Finance will have a role in the public expenditure provision.

Deputy Shortall

Who monitors it? That is what I want to know.

Mr. Kearns

Our role in PPP is a co-ordination role. We bring to the interdepartmental group on PPP information——

Deputy Shortall

We have heard that already. Who monitors PPPs now?

Mr. Kearns

The responsibility for monitoring individual projects lies with the sponsoring agency and the sanctioning authority in every case.

Deputy Shortall

The authority that is delivering them?

Mr. Kearns

Yes.

Deputy Shortall

Is there no monitoring by the Department of Finance?

Mr. Kearns

No.

Deputy Shortall

Fine.

Mr. Kearns

Every public-private partnership project must be within the sanctioned envelope of resources.

Deputy Shortall

We must be forgiven for assuming the Department of Finance had a role in that.

Mr. O’Neill

The structure outlined in the capital appraisal guidelines identifies the role of the sponsoring agency, the body procuring the project and doing the work, and the role of a sanctioning authority. If we are talking about a metro project, the sanctioning authority would be the Department of Transport or the Government itself. If a project was procured in a local authority, such as erecting a new office block, the sponsoring agency could be the local authority and the sanctioning authority might be the Department of the Environment, Heritage and Local Government or some civil body.

Deputy Shortall

Therefore, there is no monitoring agency.

Mr. O’Neill

I am not saying that.

Deputy Shortall

Who monitors it?

Mr. O’Neill

The sanctioning authority holds the purse strings and is responsible for the expenditure.

Chairman

It would be the Department of the Environment, Heritage and Local Government?

Mr. O’Neill

It is a moveable feast. It moves up and down, depending on the size of the project and its importance.

Deputy Shortall

Therefore, there is no independent monitoring.

Mr. O’Neill

The sanctioning authority is responsible for its spend to the Government through the Vote system.

Chairman

There is an arrangement in respect of public expenditure monitoring and control for which the Department of Finance's public expenditure division has responsibility. Just because it is a PPP does not mean there is any diminution of that role; it means there is not another layer of approval.

Deputy Shortall

Therefore, someone in the Department of Finance monitors it.

Chairman

Every spend in every Government Department is monitored.

Deputy Naughten

The old Department of Public Enterprise was the sanctioning authority and also the monitoring authority for Luas and things are now out of control. We thought that when the witnesses appeared today, they would ensure we would not see a repeat of that situation. Now we are as badly off in relation to Luas as we were previously because there are no mechanisms to prevent the same mistakes.

Chairman

There are.

Deputy Shortall

Where?

Chairman

I have explained that if a Government Department wants to do a PPP, it will show everything that must be done throughout the process. If it is being done with a PPP, it will monitor itself because the private sector will ensure it is not overspending because it would lose a fortune.

Deputy Shortall

Who protects the taxpayers?

Chairman

They are protected by the unit within the Department of Finance.

Deputy Naughten

We do not know the amount of the private sector finance involved; that is the concern.

Mr. Manley

It is a statutory requirement that the Department has a sanction to spend public money. That is a legal requirement that goes back to the 1800s. The Department of Finance has delegated sanction to Departments to spend public money from the Votes for specified purposes such as national roads and the Dublin Transportation Office. There are parameters within which that money may be expended. The Department is then responsible for that expenditure; it has delegated sanction for it. The metro is so large that it is hard to imagine how it will fit into that system, it is an enormous project.

The Department of Finance has been and is concerned about the level of monitoring and the performance of projects. Last year we were instrumental in the two evaluations of roads and public transport which were undertaken and we have revised the system of sanction for this year. Instead of giving Departments indefinite sanction, we have given them annual delegated sanction and we require them to specify what they intend to achieve over the year. The intention is that, at year end when we come to renew the sanction for the next year, we will ask how it went. That is our role but the primary responsibility rests with the Department undertaking the project. The Department has primary responsibility for delegated sanction.

Deputy Shortall

What advice would the Department offer about constructing the benchmark for metro?

Mr. O’Neill

It is the output specification that determines the cost of the public sector benchmark. A public sector benchmark is made up of the capital, operation, design and maintenance costs and the evaluation of risk.

Deputy Shortall

Which set of costs will be used?

Mr. O’Neill

If I say that I want a car, the first question I would be asked in return would be the specifications I want - those of a Rolls Royce or a Mini. If the specifications are written out, that will determine the price of the public sector benchmark or the quality of the car.

Deputy Shortall

The experts in Madrid say it will cost €1 billion and, for the same line, the so-called experts here are saying it will cost €3 billion. How is the benchmark decided in that case?

Mr. O’Neill

The sponsoring agency draws up its output specifications and it must come up with the public sector benchmark. It comes to the sanctioning authority holding the purse strings and states its project, as it had scoped it, costs X billion. The sanctioning authority then says that it does not have the money for that or whatever. The debate goes on between the sanctioning authority and the sponsoring agency and identifies how the project is costed.

Senator Morrissey

One of the principal functions of the public-private partnership unit of the Department of Finance was to find finance. What progress has it made on that front? Has it found any of this type of finance that can be off balance sheet?

Mr. Kearns

I wanted to come back on that. One of the reasons the National Development Finance Agency was set up was that the initial public-private partnership pilot projects were to look at a range of forms of PPP, including design-build-operate without private finance and also privately financed projects and different forms of privately financed projects. One of them was the group of schools project. In that, we recognised that we needed another arm or element of expertise on the side of the public sector but with knowledge and competencies in the financial markets. That was the National Treasury Management Agency. The NDFA was set up to draw on the expertise on the NTMA and make precisely the kind of judgments the Senator is asking about.

Is it, in the case of an individual project, feasible to go down the private finance route? If so, what form of private finance will deliver best value for money? We are looking for forms of private finance which meet value for money criteria, not private finance for its own sake. What we are looking for in PPP is a procurement regime that gives better value for money and accelerated programme delivery. It is not an end in itself.

I wanted to clarify this point with Deputy Shortall and with the Senator. PPP is really a procurement option, not an end in itself. The PPP approach will not improve the configuration of a project. It simply offers an alternative way of delivering the project that can obtain better value for money. We are not, as a unit, there to add another layer of bureaucracy on to the approvals mechanism for any individual projects.

Chairman

I thank Mr. Kearns, Mr. O'Neill, Mr. Manley, Ms O'Brien and Mr. Gilhooley for attending and speaking to us. It was a very interesting presentation and maybe we will see the officials again at some stage.

The joint committee adjourned at 5.13 p.m.sine die.