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the procurement of 11 PPP contracts with an aggregate capital value of over €1.5 billion. Methodology. This paper exam
KBS RESEARCH BULLETIN OCTOBER 2017

ISSUE 56 As a leading Irish business school in a public university system, KBS is committed to excellence in teaching and to fostering knowledge and understanding of business and society within a diverse, research active and socially engaged environment. Research at KBS serves this mission. Our goal is to cultivate excellence in research, underpinned by our core values including commitments to promote learning and discovery as well as social responsibility and ethical behaviour; to protect academic freedom and enhance knowledge; to maintain a future orientation and an international perspective; to promote inclusive and sustainable societies and facilitate the involvement of industry. Our research finds a focus in the four academic departments of the School as well as in themes (Work, Knowledge & Employment; The Services Economy & Tourism; Entrepreneurship, Innovation & Marketing; and Public Policy, Enterprise, Governance & Sustainability) and clusters (Accountability (ARC); Digital Marketing ; Efficiency & Productivity Analysis; Emerging Risk Assessment & Underwriting; Human Rights & Development Practice; Interpretive Consumer Research; Psychological Science in Business; Privatisation & PPP; and Quality of Work). See http://www.ul.ie/business/ research for more information.

Getting back on track: the expanded use of PPPs in Ireland since the global financial crisis Dr. Donal Palcic, Prof. Eoin Reeves Synopsis The global financial crisis resulted in a major slowdown of activity in the global market for public private partnerships (PPPs) with Ireland among those most affected. Since 2012 however, the Irish government has adopted a number of initiatives to boost PPP investment. This paper shows that these initiatives have been associated with a renewal of PPP activity. It suggests that some of the adopted measures may involve trade-offs between encouraging PPP investment and achieving standard PPP objectives such as economic efficiency and better innovation. However, the attraction of public sources of finance from sources such as the European Investment Bank should result in a relatively lower cost of finance and enhance value for money. Introduction and Background The fiscal consolidation measures implemented after the recent economic crisis resulted in drastic cuts in public capital expenditure with gross public capital spending by the Exchequer falling from a peak of just over €9 billion in 2008 to €3.4 billion in 2013. In order to compensate for swingeing reductions in public capital expenditure the Irish government has sought to attract private investment in public infrastructure. In July 2012 it announced an economic stimulus plan which aimed to add €2.25 billion to overall public capital expenditure.

The vast majority of this stimulus package was based on a new programme of nonExchequer financed PPPs. Since then, the planned level of PPP investment has expanded with the Government announcing a €300 million PPP programme for the development of social housing in 2014, with a further €500 million of PPP investment (in third level education facilities, a new courts complex and new police stations) announced as part of the Government’s new capital plan in 2015. Since 2012, Ireland has bucked the trend observed in other EU countries by finalising the procurement of 11 PPP contracts with an aggregate capital value of over €1.5 billion. Methodology This paper examines the details of, and motivations for, the programme of PPP investment in Ireland since the global financial crisis. It describes the models adopted for financing new PPP projects and the measures taken for the purpose of accelerating procurement times. It examines the potential of these measures in terms of achieving the economic objective of reducing the total (production and transaction) costs of PPP infrastructure projects. It shows that these measures have been associated with increased PPP activity in Ireland since the crisis as a number of projects have reached financial close and advanced stages of procurement. However, it identifies how some measures

AUTHORS

Dr Donal Palcic, Department of Economics, Kemmy Business School, University of Limerick, Limerick

Prof Eoin Reeves, Department of Economics, Kemmy Business School, University of Limerick, Limerick

may involve potential trade-offs between encouraging new investment and reducing the scope for improving cost efficiency. Issues and Questions Considered The principal measures taken to encourage PPP investment after 2012 are examined in terms of their potential to encourage investment and reduce the total social costs (production and transaction costs) of PPP procurement. The first set of reforming measures we examine concern the adoption of strategies that sought to circumvent the constraints imposed by private capital markets. Whereas a range of credit-market enhancement models were adopted by other governments and supra-national institutions such as the European Commission, the Irish authorities have largely relied on using public sources of finance to kick-start PPP activity. Public sources of finance underpinning the latest wave of PPP procurement in Ireland include the European Investment Bank (EIB) and, to a much smaller extent, the Irish Strategic Investment Fund. The advantages of sourcing finance from the EIB include the fact that margins are lower than those that apply in the case of commercial lenders. Second, the EIB and commercial lenders are not insulated from credit risk and are therefore incentivised to take steps to manage risk exposure by evaluating projects carefully. The second wave of PPP procurement was also supported by measures taken to reduce the transaction costs which are a significant component of the overall economic cost of infrastructure investment and PPPs. One source of high transaction costs under PPP relates to lengthy tendering periods which have been a feature of PPP procurement in Ireland. The National Development Finance Agency (NDFA) which holds responsibility for the procurement of PPPs in most sectors recently set a target of 15-18 months for tendering periods for PPP projects. It also aims to reduce bid costs by 50 per cent. Measures taken by the NDFA for the purpose of achieving these goals include the development of specimen/ exemplar designs for repeat building types (e.g. schools, primary care centres) and the reimbursement of part-bid costs to unsuccessful bidders (with a compliant bid). Another noteworthy change has been made to procurement in the Irish roads sector where the decision has been taken to

change from toll-based (revenue sharing) to availability-based road PPP contracts. Prior to the economic crisis, most road PPPs were hard-toll schemes where demand (traffic) risk was transferred to the private sector. Since the economic crisis, however, all new road PPPs have been procured as availability-based schemes. In these cases a fixed unitary payment is paid by the government subject to the contractor meeting performance and availability criteria. Outcomes and Findings The new wave of PPP is characterised by features that distinguish it from PPP procurement prior to the financial and economic crisis. These include the more significant financing role played by public institutions such as the EIB, and the ISIF which suggests that more recent PPPs have relied heavily on public sources of financial support. Cheaper public finance can be expected to enhance the prospects of achieving better value for money. Moreover there are likely benefits to be accrued from the due diligence and risk management functions provided by the public and private providers of finance. Other aspects of recent PPP policy provide evidence that Ireland has learned from the experience with PPP before the crisis. A number of measures have been taken to reduce transaction costs and increase the efficiency of the procurement process. Like most public policy decisions, however, there are potential trade-offs associated with some of these measures and it will take some time before the impact of the measures outlined in this paper can be properly assessed. For example, schemes to compensate unsuccessful bidders and the move to availability-based road PPPs are likely to have negative consequences for important PPP objectives such as innovation and value for money. Notwithstanding these issues, it is clear that the measures being adopted are motivated by the overriding economic objective of providing stimulus to the fragile Irish economy. In that context, the government and relevant decision-makers have demonstrated a willingness to make compromises and take potentially suboptimal decisions in the interest of boosting an economy that is in the early stages of recovery from its most severe economic crisis.

A full copy of the paper can be obtained at: Getting back on track: the expanded use of PPPs in Ireland since the global financial crisis Policy Studies, 38 (4) http://dx.doi.org/10.1080/014 42872.2017.1314456 Authors: Reeves E., Palcic D. For further information and comments, please contact: Prof Sheila Killian Assistant Dean, Research Kemmy Business School University of Limerick, Ireland T: +353 61 202237 E: [email protected]

Forthcoming Research Bulletin Title: ‘Performance Appraisal and Performance Management: 100 Years of Progress?’ Authors: DeNisi, A. & Murphy, K.R. (2017).

About the KBS Research Bulletin The purpose of the KBS Research Bulletin is to make our research more readily accessible to a wide range of interested stakeholders, and so allow our work to have a useful impact on the society in which we operate. We regard this as an important part of our stakeholder engagement. Their dissemination aligns with both the UL focus on excellence and impact in research, and on the KBS strategic goals of cultivating excellence in research while contributing to our community of stakeholders in a responsible and sustainable manner.