Dail Question No: 6

To ask the Minister for Public Expenditure and Reform his plans to increase off balance sheet capital investment.

- Sean Sherlock.

* For Oral answer on 01/06/2017
Ref No: 26209/17

Reply

Minister for Public Expenditure and Reform (Paschal Donohoe):

Over the coming years the Government intends to increase capital expenditure as clearly outlined inour Capital Plan.When account is taken of the additional €5.14 billion now committed to capital investment over the period of the Plan, capital expenditure will reach 11% of gross voted expenditure in 2021, or almost75% higher thanthe 2016 level.I might add that we need to be careful to avoid stoking construction price inflation by increasing expenditure without paying attention to the capacity of thesector to undertake additional projects.

Public infrastructure is primarily funded by direct Exchequer financing which is classified as on-balance sheet. Off-balance sheet funding of capital projects is also possible in certain circumstances,primarilythrough the use of Public Private Partnerships or PPPs. Such mechanisms offer an alternative model for delivering infrastructure, that can facilitate the delivery of additional capital projects and that can be effective in particular circumstances. However, the long-term nature of the financial commitments arising under PPPs require that the use of such arrangements must be carefully planned in order to ensure that they are used to address infrastructural needs that are not likely to change over a 25 year period, and do so in a manner that is sustainable in the long term and which the public finances can afford.

I have asked my Department, as part of the mid term review of the Capital Plan, to review our experience of using PPPs and to consider the scope for further use of PPPs to complement the direct provision of infrastructure using Exchequer funding, on a basis that is sustainable and affordable in the long term.

A senior level group has been established, comprising relevant officials from the Departments with experience of procuring projects by PPP, together with the Department of Finance, the National Development Finance Agency and Transport Infrastructure Ireland. This group isreviewing past experience withPPPs and its report, once complete,willprovide an evidence based analysis of the potential for further use of PPPs, and concessions,as a procurement option for the delivery of additional capital infrastructure. Assessing the affordability, sustainability and value-for-money of PPP procurement will be key elements of the Group's work.

There is already a significant number of projects being delivered on an off-balance sheet basis under the Government's PPP Programme. While such off-balance sheet structures have a role to play in enabling additional infrastructure to be delivered in parallel with direct Exchequer provision, they are not a panacea and do involve significant financial commitments on the part of the State for many years into the future. The scope to use suchoff-balance sheet structures to deliver capital infrastructure is also somewhat constrained under the latestEurostat rules. However, the Government remains open to the possibility of using furtheroff-balance sheet optionsto supplement direct Exchequer investment and assist with the delivery of critical national infrastructure on a timely basis, where this is considered suitable and provided that this can be done on a sustainable and affordable basis.

The report of the Expert Group will help inform a final decision onhow to proceed in relation to off-balance sheet PPPs in the context of the new long-termcapital plan to be published later this year.

Possible Supplementary Questions

Q: How many PPPs are in operation at present?

R: A list of 27 PPP and Concession projects which are now either operational or in construction, by sector, is available on my Department's Central PPP Unit's website

In addition, work is also progressing on a number of other PPP projects, including:

  • Grangegorman DIT Project, expected to reach construction stage in the autumn;
  • a700 bed student accommodation concession project in Grangegorman;
  • a€300 million socialhousing PPP project – to deliver 1,500 social housing units in 3 bundles;
  • a €200m programme of Higher Education (mainly IOT) projects, to be delivered in 2 or 3 bundles;
  • a €150 million community nursing home PPP bundle
  • a €150m Justice project (Courts complex or Garda Station project)

Q: What is the difference between a PPP and a concession?

Both PPPs and Concessionsinvolvea project beingfinanced by the private partner and then made available for public use over the life of the contract. To qualify as a PPP under Eurostat rules, themajority of the cost of the asset must bemet directly by the Exchequer over the life of the contract (20-25 years), by way of availability based unitary payments. On the other hand, if the majority of the cost of the asset is funded by user charges, then Eurostat classifies the project as a concession.

Both PPPs and concessions can be classified as off-balance sheet, but the rules applied by Eurostat in determining the classification of both are different.

Q: What about other types of off balance sheet vehicles?

Apart from PPPs and concessions, no other model hasyet been identified that would be capable of providing infrastructure on an off balance sheet basis. For example, despiteexploring options for a new off balance sheet vehicle to provide social housing, and despite meeting with a variety of providers and financiers of social housing to discuss possible options over a period of about 18 months, aClearing House group chaired bythe Department of Housingwas unable to identify any new off balance sheet model that would be capable of being classified as off-balance sheet underEurostat rules.

Q: How much do PPPs cost?

Financial responsibility for individual PPP projects rests with the relevant Sponsoring Agency. However, my Department's Central PPP Unit's website at contains details collected by my Department from Sponsoring Agencies on the contractual capital value, unitary payments and future commitments for each individual PPP and concession project.

The latest aggregate information on these PPPs is as follows:

  • Contractual capital value at end 2016: €4.95bn
  • Unitary Payments made to 2016: €2.6bn
  • Future unitary payment commitments at end 2016: €6.6bn.

Q: What is the annual cost of PPPs?

My Department does not publish details of the projected annual cost of individual PPP projects over their lifetime, but rather provides aggregate details, by project, of the unitary payments paid to date and projected future unitary payments by project. However,

  • The latest projections available indicate that the cost of PPP Unitary Payments in 2017 is expected to be €240m.
  • This cost is projected to continue to increase until 2021 when it is expected to peak at over €340m.
  • Thereafter, the average cost for the next 14 years, to 2035, will exceed €300m per annum, before falling to an average of some €200m for the next 7 years to 2042.
  • It will be 2053 before all unitary payments for existing PPPs have ceased.

Q: Is the Minister concerned about the future cost of PPPs?

PPPs offer an alternative model for delivering infrastructure that can be effective in particular circumstances. However, the long-term nature of the financial commitments arising under PPPs require that the use of such arrangements must be carefully planned in order to ensure that they are used to address infrastructural needs in a manner that is sustainable in the long term and which the public finances can afford.

It was for this reason that the Government introduced an Investment Policy Framework for PPPs in 2015. The purpose of the framework was to set a limit on the extent to which the annual costs of PPPs would pre-commit capital funding available to future Governments for investment purposes, in terms of the overall aggregate Exchequer capital allocation projected to be available in any individual year.

The framework applies to the future cost of unitary payment charges in respect of both existing PPPs already in place and new PPPs currently in procurement or planning, together with the up-front Exchequer costs associated with procuring the planned new PPPs. The current requirement is that, taken together, such future costs in respect of PPPs should not pre-commit more than 10% of the overall aggregate capital funding projected to be available to future Governments in any individual year.

A limit on the pre-commitment aggregate capital funding is, I believe, a prudent andappropriate cost control mechanism and will ensure that the future annual cost of PPPs is balancedrelative toprojected available capital resources on an annual basis.The operationof the Investment Policy Framework will, of course, beexamined along with all other significant elements ofPPP policy as part of the review currentlyunderway.

Q: Why is a Group reviewing the role of PPPs?

The Mid-Term Capital Review presents an opportunity to assess the extent to which PPPs can play a role in mobilising and applying resources to support national development.

Fiscal rules place limits on total spend, albeit with some limited latitude for capital spend. PPP's could offer a model that enables continued investment in key infrastructure projects, but at the expense of financial commitments that need to be met over a period of decades.

Government needs to formulate a strategic view on the extent to which PPPs can play a useful role in delivering infrastructure, without placing an unsustainable burden that severely constrains future capital budgets.

In the context of the mid-term review of the Capital Plan, I have asked my Department to consider the scope for further use of PPPs to complement the direct provision of infrastructure using Exchequer funding, on a basis that is sustainable and affordable in the long term. A senior level group has been established, comprising relevant officials from the Departments with experience of procuring projects by PPP, together with the Department of Finance, the National Development Finance Agency and Transport Infrastructure Ireland, to review past experience of PPPs and to provide an evidence based analysis of the potential for further use of PPPs (and concessions) as a procurement option for the delivery of capital infrastructure.

Affordability, sustainability and value-for-money of PPP procurement are, therefore, key elements of the Group's work. The terms of reference of the Group also includes consideration of existing PPP guidance and governance which encompasses the investment policy framework for PPPs recently introduced by Government to limit the future exposure of the Exchequer to future PPP costs.