Sunday 25 May 2008

Deal collapse shows faults of PPPs

The collapse of the public private partnership (PPP) between Dublin City Council and developer Bernard McNamara has set alarm bells ringing throughout government departments and local authorities which have significant projects being undertaken by similar partnerships.

The scheme would have built hundreds of units of social and affordable housing in some of the poorest areas of inner-city Dublin. Some flagship projects will now be the subject of close examination in the coming weeks. For a government which has staked its political reputation - and built an electoral strategy - on massive infrastructural investment, it’s a worrying development.

Dublin City Council is understood to be urgently reviewing other PPP projects, and has been in contact with several other developer-consortiums. Some are believed to have responded positively at this stage, but not all.

The council will also examine the possibility of legal action against McNamara. A counter-suit by the builder is also possible.

It’s also a sign that PPPs are not the catch-all solution that many once thought. It’s clear they work very well in some cases in some markets - but not in all cases in all markets.

PPPs are a relatively recent addition to the tools available to government, though the administration of Bertie Ahern enthusiastically adopted them as its public-building programme gathered pace in its second term. There were, according to the Department of Finance, relatively few such projects prior to 2003. Since then, there has been an explosion in their use by government.

The department lists more than 80 projects in its latest PPP update, but many of these include multiple construction projects - one, under the auspices of the Department of Education, includes six new schools.

The rest of the projects vary from roads projects, other educational building works, the National Conference Centre, Concert Hall and new National Theatre, government offices for decentralised departments, the planned Metro, a new Luas line, new prisons, a mass of local authority housing, sewage and drainage schemes and the proposed incinerator for Poolbeg in Dublin.

However, while it may seem that every government building project is now being handed over to the private sector, this isn’t the case.

According to a spokesman for the Department of Finance: ‘‘The vast majority of government capital projects are still funded out of our own resources.”

Of a total spend of €78 billion under the government’s omnibus National Development Plan, PPPs will account for just €13 billion by 2013. The target of €13.35 billion comprises €11 billion for PPPs funded by future ‘‘unitary payments’’ and €2 billion to be paid by user charges, such as road tolls.

So it’s not, as has been advertised in some quarters, the wholesale privatisation of government spending. But it’s not chicken feed either; there’s a lot of business here for developers and other private operators.

According to one source who is well-versed in the area, politicians love PPPs because they keep the cost of the project off their balance sheet - enabling a range of projects to proceed more rapidly than would be the case if each was provided by the public body themselves.

When they work, said the source, they deliver projects more efficiently and speedily than publicly-run projects. So, when they work well, they work well. And when they don’t work well? Then the developer cuts and runs?

In fact, according to two people familiar with the Dublin City Council-McNamara deal, it was not a deal on the classic PPP model. ‘‘It wasn’t really a PPP at all,” said one.

‘‘It was a property deal. And when the property market goes wallop, property deals run into trouble.

‘‘A real PPP involves the private sector doing everything and being remunerated over, say, a 30-year period,” said another source. ‘‘These housing schemes were never PPPs.”

Whether it’s a real PPP or a poor imitation, local authorities like these arrangements because they get new infrastructure, but without large loans. ‘‘It’s risk-free,” said one source last week, adding ruefully. ‘‘Well it’s supposed to be.”

Sunday Business Post

No comments: