The NRA and its PPP Myth. What PPP money ??

Sponge Bob

Other than the Dublin Outer Orbital which , as we know, is the next ' major NRA priority' despite it even not being in Transport 21; there is no appetite among major construction companies for the PPP projects that have been quietly peddled about by Fred Barry , eg the N17 and N20 components of the Atlantic Corridor.

The banks are not now interested in any road that has under 30k car movements a year and that with a hard toll thrown in too. That rules out all the Atlantic corridor including the M17 where shadow tolls were all that was on offer.

The Outer Orbital should manage just about 30k movements a day and a hard cash toll ' compris' for luck.

This means that the bids for these mooted PPP projects ( if any) will be very high because the cost of funding is very VERY high and will continue at those levels for quite a while . Probably 8-10 years from now.

The spread for Government Infrastructure type funding has quadrupled since March . Infrastructure is normally funded at Euribor ( a variable inter bank borrowing rate) + a % profit .

Euribor is variable but the really large variance is in the spead over Euribor.

Projects that were recently costed at near the cost of direct government borrowing are now as much as 3% above government funding costs on a design build handover basis and this gap is not reducing.

Add in the 30 year maintenance windows and you are looking at Euribor + 5% . 5% of a lot is a lot, especially over 30 years .

The government can borrow at Euribor+0% ( ish) at present so if the government wishes to borrow €1bn to build just a part of the Atlantic Corridor in 2010 it will pay €30m a year less in interest than a consortium of construction companies could get finance for .... or €50m less if maintenance is involved.

The golden age of the keenly priced PPP is over. Fred Barry will be informing his Board over the next few weeks that if the money does not come from central funds then it less economical to build that road.

Unless of course it is his openly professed "next major priority" the Dublin Outer Orbital .

Mind you Fred may find that his plan backfires if all the money goes into Dublin Heavy Rail because Fred sees no value in building planned roads any more , they are all too far from Dublin for Fred

Lennoxschips

The banks are not now interested in any road that has under 30k car movements a year and that with a hard toll thrown in too. That rules out all the Atlantic corridor including the M17 where shadow tolls were all that was on offer.

Indeed. I say we put these people in charge of the NRA.

strassenwolf

But, SpongeBob, there should be no need to worry about the M17 or the funding for the overall Atlantic Road Corridor.

The money for that was "ring-fenced" by Martin Cullen, Bertie Ahern, Brian Cowen and Mary Harney as part of the T21 package.

From what they said at the launch, that funding would seem to be secure.

I'd imagine, though, that the non-T21 stuff like the outer ring road may have to be put on the longer finger.

bk

The problem with direct government borrowing, versus PPP, is that the direct government borrowing gets included in the national deficit and goes straight on the national debt and the EU is already rapping our knuckles for borrowing 6.5% of GDP this year as opposed to the EU limit of 3% of GDP.

I'm not so worried about these relatively minor road projects, I'm much more concerned how this will all effect Metro North and Dart Underground?

strassenwolf

bk wrote:

I'm not so worried about these relatively minor road projects, I'm much more concerned how this will all effect Metro North and Dart Underground?

Oh those projects are OK, because they are part of T21. They may be delayed a bit, because it doesn't necessarily look good to be going for big ticket projects at a time of cutbacks, but the money has been set aside for the projects, so I'd imagine they will go ahead eventually.

ardmacha

but the money has been set aside for the projects

Set aside in what sense? These a numbers in a plan, the NRA does not have a account with this money in it. If you had been setting aside some money to buy a new car and you then had a big decline in income then you would reorganise what you were planning to spend your money on.

crocro

I think strassenwolf is being sarcastic. Nothing is ringfenced. It's no secret that we are now considering raiding the national pension reserve fund to pay the bills. Possibly the NPRF will be used for infrastruture projects but more likely it will be used for public sector wages.

strassenwolf

crocro wrote: »

I think strassenwolf is being sarcastic. Nothing is ringfenced.

crocro, I didn't originally intend to be sarcastic. But, I'm afraid I must have let my sarcastic side out.:( My apologies.

Like almost certainly all people on this board, I want to see a decent and appropriate public transport service in all parts of Ireland, but I am obviously particularly interested in decent public transport services in my home town, which is Dublin. (A city in which I do not currently live).

At least some (if not all) of my annoyance stems from having witnessed, when I was working in Ireland, the grandiose statements from people like Martin Cullen about "ring-fenced funds", "Grand Central stations" and "world-class public transport systems", and having allowed myself to believe that at least some of it might be true.

As regards T21, we know that Martin Cullen is gone. I think we can assume that the "ring-fenced" funds for T21, which he spoke so much about - if they ever existed in the first place - are gone. And the idea of Dublin being host to a "world-class public transport system" - a realistic, though difficult, task, even in the boom years, when much might have been done - is gone as well.

I'm sorry for being sarcastic, crocro. But with some or many of the much-vaunted T21 projects possiibly going to be put on hold or cancelled, I'm afraid I can't but be disillusioned when I look back at the PR stunt that we saw in Dublin Castle:(

Off-topic, I know. I request some sympathy from the mods.:)

Victor

What can be done is create a PPP scheme where the private partner gets a lump sum up front to reduce their borrowing requirement, but keep them involved in making sure that (a) the road isn't grossly over-specified and (b) quality is good enough that they won't skimp.

gjim

Typically, the PPP structure that we are talking about is to tender is for fund, design, build, maintain/operate and handover. But you don't have to tender for absolutely everything in one package. Removing items also has the pleasant side-effect that more consortia are likely to apply as it is relatively difficult and expensive to assemble a team with skills in all the areas.

I have never understood why you'd outsource the funding component even when the world was awash with finance given the spread between government borrowing and private funding is wasted money. With the spread widening - as Sponge Bob pointed out, this waste just eats up more and more funding with no return.

Therefore the government or it's agents should tender on a design, build, maintain/operate and handover basis but provide the finance through government borrowing. The Westlink debacle is an extreme case but most analysis shows the current structure of using private finance delivers poor value to the public.

I always believed the public debt issue was the main attraction in this PPP structure but the government has shown itself prepared to borrow between 12 and 15 billion mostly to fund expenditure next year so now I'm not sure.

Keith186

I think the less PPP's the better. It will cost us more in the long run even though it may get built quicker. I watched a documentary on Channel 4 or BBC last year and it exposed the flaws of PPP's.

Once the project is built the Private entities were making much more money in the meduim/long run than the Government would have had to spend and this was crippling the budgets. Leeds Hospital was the prime example I think and some school.

Sponge Bob

A PPP is usually a on a DB or on a DBO basis ( meaning Design Build Operate)

It is not daft for the RPA to go this latter route seeing as it will be abolished next year and seeing as it has no expertise to run a railway anyway .

It IS daft for a road. Road DBO projects should be no longer than 5-10 years and that to make sure that they do not crumble in that time .

However the spread betwen bank financing and financing by public debt issuance is currently so great that no savings are possible by going the PPP route at present , none This simply means that new PPP projects are uneconomic and likely for the next 2-3 years.

The NRA has been notoriously unforthcoming about the M50 widening PPP projects , to the extent that the Comptroller and Auditor general urgently needs to report on the issue .

This is a very long DBO contract . It strikes me that it is a cast iron excuse for price gouging and that Irish Taxpayer and the people of Dublin both will suffer for a long long time over this particular widening deal .

Flying_Dutchman

Sponge Bob wrote: »

A PPP is usually a on a DB or on a DBO basis ( meaning Design Build Operate)

However the spread betwen bank financing and financing by public debt issuance is currently so great that no savings are possible by going the PPP route at present , none This simply means that new PPP projects are uneconomic and likely for the next 2-3 years.

The NRA has been notoriously unforthcoming about the M50 widening PPP projects , to the extent that the Comptroller and Auditor general urgently needs to report on the issue .

This is a very long DBO contract . It strikes me that it is a cast iron excuse for price gouging and that Irish Taxpayer and the people of Dublin both will suffer for a long long time over this particular widening deal .

Spongebob,
I agree with your assessment that these second PPP roads programme projects will not stand up to any rigorous financial scrutiny(COBA analysis) provided that they are checked using the NRA's own project appraisal guidelines.
However, the figures tend to be massaged. Note the link below, demonstrates that the taxpayer "only" had to pay €99m for the Waterford By-Pass road project (23km dual carriageway) while their assessment indicated a project cost of €600m excluding land purchase at 2006 prices!!!!!!!!!!!!!

http://www.nra.ie/PublicPrivatePartnership/ProjectTracker/N25WaterfordBy-Pass/

The Sunday Times yesterday reported that discussions are still ongoing with pension fund managers with a view to investment in infrastucural projects (sumitted by CIC March 2009).

What has happened to this excellent idea?

Could the NRA use its powers to borrow money as provided for in the 1993 Roads Act (to a ceiling of €635m @ 1993 prices) to further invest in roads infrastructure. If so, could it achieve the unwritten rule of "off balance sheet" accounting. The N11 Arklow Rathnew project (currently a PPP) could be tendered as a DB contract pretty quickly.

westtip

Think it has been debated before - based on our appalling experience on West link in which the state and its good citizens were fleeced, I really don't think there would be a problem in the publics mind if there was open transparency on road buiding - and apply a toll until the road has been paid for and then open the road up to free of charge passage (forward maintenance managed through verhicle taxation); If we all knew for example - if 15,000 vehicles use this new stretch of road a day at 2 euro each and the total cost including interest is going to be x million - we the public could be kept informed of when we will have finished paying for the road - call it public public partnership if you like. Personally I think it would be an easier pill to swallow than the open ended PPP deals the government has signed up for in the past. Better still if we were told there will be an element of profit on top of the capital costs (plus interest and maintenance in the tolling period) but that profit was for example going into the national pension fund then yes it may be better received.

Sponge Bob

Just wanted to point out that not a single PPP contract has been signed for a Road or Rail project since I started this thread in November 2008. Two and a half years ago.

The fact that the Department of Transport and the NRA and the RPA and IE have continued to waste unprecedented sums of money 'planning' these non starter projects since then deserves a tribunal of its very own.

For the money spent on these highly paid consultants/engineers/accountants/civil servants since 2008 we could have actually fully built and paid for one of Newlands Cross or the Gort-Athenry Road or Arklow-Rathnew.

I hope Leo stands up on his hind legs in the Dáil and tells us precisely how much we have wasted...by my estimate it was around €150m-€200m INCLUDING consortium bid preparation costs and NOT including land acquisition on the N17/N18/Newlands sections or 'enabling' works on MN.

Despite my clear warning to the Dot/NRA that the entire PPP model was banjaxed in November 2008 they went off in February 2009 and announced a grandiose 'Second PPP' tranche like so and wasted stacks of time and money.....we never even heard what happened to the Enniscorthy/New Ross tenders announced a year ago...but we do know that time and effort was wasted on them too...in fact this page on the NRA website claiming that "It is anticipated that contrac signing will take place in late 2011/ early 2012. " is more than just a tad insulting and never mind the sloppy typo they left on it for over a year. !!

Having gloriously wasted vast amounts of contractor time and money and effort, as well as public money, it is time we declared the PPP idea to be the Very Dead Parrot it is.

In fact it cannot be restarted until well after the states entry onto the sovereign debt market. But they were told as much in November 2008 so my conscience is clear at any rate

lucernarian

I wondered this in another thread, and I may as well ask it here. (My own knowledge of PPPs is very limited right now) Say a private consortium wants to make an investment in constructing e.g a toll road which will be a good and stable revenue earner, say the cork north ring road as a hypothetical example. Even if the soverign is up to the gills in debt, what's stopping a private and international consortium from going to the capital markets and thereby fund an investment with a likely good return??

Sponge Bob

Bit of a long story but back in 2006 state paid 2.5% interest on borrowings. A PPP was fundable at 4% or so. As long as you could pull in 4% of your private sector borrowings a year you were quids in. So a government could pseudoborrow a bit of cash without officially borrowing if they handed over tolls like Drogheda or Kinnegad or Ballinasloe or Portlaoise. Except that did not happen in Limeick on the tunnel or M3 or waterford where guarantees were also given

Now the state is slated at a nominal 10% borrowing cost the spread pro rata is the same as it was , 2.5% to 4% translates as 10% to 17.5% possibly even more.

If say the M18 cost the PPP consortium €100m to build they must now bring in €17,5m a year just to pay interest, then they gotta make a profit on top of that.

Even if a road is hard tolled €17.5m translates to €350k a week, €50k a day in tolls over and above salaries and maintenance of the asset etc.

So that €100m road would have to carry well over 25k CARS a day. Now what happens if it costs €300m to build that road.

What was broken by late 2008 was the securitisation market where the risk could be laid off to a fund of some sort prepared to buy this low income stream and that was what made PPPs viable in the mid decade.

Anyone backstopping/holding an already securitised PPP now has a low income on an incredible risk. Maybe Kinnegad - Kilcock is securitised. All the other PPPs are lying around on Finance Partners books, unsecuritisable.

The last train rolled out the door by late 2008 ....even with no bank guarantee or Anglo going poof.

It is galling that the Departments of Finance and Transport ever thought that train would roll back into the station again while they and their agents in the NRA wer e peddling utterly broken and unsecuritisable PPP propositions.

If those cúnts had proper jobs they would have been sacked years ago.

lucernarian

Ah, my point is more fundamental than that. Why is there a spread based on the soverign long-term borrowings in the first instance, provided the consortium was not financed by Irish banks? Surely a consortium wishing to invest in a build and run contract for any given state will have the financing decided on the likelihood of the project generating a good return? Of course, once it's being built in a stable country. The state doesn't pay the interest and principal I thought, it would be the consortium who would pay it back over 30 years etc from revenue from the infrastructure

Sponge Bob

The spread was there anyway because private companies could never borrow as cheaply as a state TBC.

The state, in theory, also saved money because of tighter cost control by the private sector in its own interest and thereby compensating for covering the spread.

The main impetus for a PPP was always because a state in a DOWNTURN could undertake more capital spending by deferring capital spending at the time and paying current expenditure for it after the downturn. It was intended as a cycle smoother where Capex did not have to crash precipitously as usual. Some projects could go ahead and be built as a pump primer and because they were paid for after the slump. They are a good mechanism, in principle and on a limited scale, for keeping efficient delivery ( read construction) teams together over the bottom of a cycle.

PPPs are a smoothing mechanism for the bottom of an economic cycle, a John Major era invention from the UK. Ours were cooked up during a boom to placate FF voters that stuff was happening.

On a small scale they are also a way of benchmarking an inefficient state controlled process to see if internal procedures can be improved as in the pilot schools program of the early 2000s where the PPP schools could be benchmarked against VEC expenditures for comparison and lessons could be learnt by all.

Importantly they are supposed to cap overruns ....pity the UK never used PPPs on some of their crazy defence procurement projects such as Nimrod.

The Dept of Education learnt feck all as it happens...given the quality of their staff.

lucernarian

The first statement is at the crux of my confusion. Why would a foreign company willing to invest money in some piece of infrastructure be under the obligation to pay a higher rate of interest than the state in which the infrastructure's located? Am I missing something obvious here? Is it because the credit offered will inevitably end up on the balance sheet of Irish banks regardless of who or what international institution provided it?

Sponge Bob

To_be_confirmed wrote: »

The first statement is at the crux of my confusion. Why would a foreign company willing to invest money in some piece of infrastructure be under the obligation to pay a higher rate of interest than the state in which the infrastructure's located?

Because they are not a state. Companies can fail while a state can always raise taxes to deal with cashflow issues. Sovereign debt should always pay a lower interest rate than corporate or private debt...no matter how creditworthy the corporate or private debtor.

You also forget that every Eurozone state bar Greece paid the same low interest rate ( c 2.5%) on their new issue sovereign debt before the sovereign debt crisis kicked off in 2009 leading to a serious sovereign risk repricing. There was no relative risk in a German bank getting involved in an Irish PPP before 2009 ...as distinct from a German PPP.

Sponge Bob

The ESRI just published this article. I do not agree with all of it but it has a good summary of why a PPP process can be used instead of Capital Expenditure excepting economic cycle/fiscal cycle considerations.

Commercial secrecy, eg the Limerick Tunnel, can hide manifest failures...especially over the long term.

http://www.esr.ie/vol42_1/05%20Reeves%20PP%20article.pdf

III PPP OBJECTIVES, VALUE FOR MONEY (VFM) AND ACCOUNTABILITY
Governments adopting PPP tend to offer similar justifications for adopting
this model rather than more direct forms of public provision. One of the key
justifications for PPPs is that they serve to control public expenditure. Under
appropriate conditions (in relation to risk transfer) PPP investments do not
count towards public borrowing thereby providing off-balance sheet financing.
Second, where PPPs are structured on the basis of the private finance,
governments can avoid up-front capital costs. Spreading these costs over a
longer period can assist in meeting fiscal targets. A third rationale for PPP is
that they provide a model for providing infrastructure and services at lower
cost (VFM) resulting primarily from superior private sector scale efficiencies
and technical efficiency (Vining et al., 2005). A key driver of VFM is the scope
for risk transfer under PPP. This scope for risk transfer provides a fourth
argument in favour of PPP. If risks are appropriately allocated between public
and private contractors, this provides an alignment of incentives that
encourages greater efficiency. A fifth justification for PPPs is that they provide
scope for better innovation and accrual of dynamic efficiencies as bids are
tendered on the basis of an output specification instead of detailed input
specifications that characterise traditional procurement.

Whether PPPs succeed or fail in the achievement of these objectives is
open to question. Evaluations of PPP outcomes have only started to emerge in
recent years. These tend to focus on the question of VFM and while the
findings tend to be mixed, the quality of evaluations is undermined by the fact
that most PPP contracts are at early stages and there are no published studies
based on statistical analysis of a reliable sample of PPP projects.

Accountability is an important issue in the PPP debate. As PPPs are
institutions “… exercising public powers, using public resources and providing
public services, they need to be accountable to those on whose behalf they act”
(Jones and Stewart, 2009, p. 59). Accountability is therefore required if PPP is
to serve as a legitimate tool of governance but the international experience
with PPP suggests that PPPs are characterised by shortcomings in relation to
expectations in this regard. In their review of the international experience
with PPP, Hodge and Greve (2007) note that:
PPPs also seem to have provided only limited levels of transparency or public
participation. With limited transparency and complex adjustment formulae in
PPPs, the clarity of partnership arrangements can also be difficult to fathom.
This does not give citizens confidence in the arrangements, when despite the
rhetoric of risk sharing with private financing, a significant financial role for
the government is often the reality (2007, p. 552).
One of the key mechanisms of accountability under PPP is the VFM
assessment process. Ball et al. (2007) define VFM in the context of the PFI as
… related to the idea that the PFI scheme can produce a flow of services of at
least equivalent quality to that which could be provided by the public sector,
but at a lower overall cost (taking into account, particularly the allocation of
risk).

opinion guy

i think the N52 shoudl become the M52. Fonud myself on this road in various places alot during my recent travels. It's useful.....or rather it would be if the upgraded it. For journeys like Dundalk to Galway would be awesome, or Cavan to Drogheda or others. It also intersects the M1, N2, M3, M4, M6 and I think M7 at Nenagh.

Totally needs to be done.