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11 March 2013
With the celebrated Celtic Tiger finally tiring, a continuing demand for infrastructure improvements is currently offering welcome relief for many of Ireland’s top-tier law firms.
The country’s infrastructure deficit – a hangover from its incredible growth during the glorious economic boom of the 1990s – continues to provide a steady and lucrative stream of work, in particular related to PPPs, for projects lawyers here.
And there is no doubt that they need it. With the turnaround in its finances making headlines on a daily basis and private construction deep in the doldrums, for the moment at least the public sector side remains comparatively buoyant. Firms are now pinning their hopes on a raft of landmark high-value projects currently in the pipeline (see box, page 34).
At the root of Ireland’s infrastructure bonanza is the E184bn (£146.33bn) National Development Plan 2007-13 (NDP) – the biggest and most ambitious investment framework ever proposed in the country – which should, in theory, guarantee that the sector and its legal advisers remain comfortably busy for years to come.
With a budget and scope that would turn the projects department of firms anywhere else in the world green with envy, the NDP has a bearing on all types of infrastructure work. It allocates E54.6bn (£43.42bn) for investment in economic infrastructure, E49.6bn (£39.44bn) for social inclusion measures, E33bn (£26.24bn) for social infrastructure, E25.8bn (£20.52bn) for human capital and E20bn (£15.91bn) for enterprise science and innovation, which translates as new schools, hospitals, prisons, social housing, water and waste plants and rural development.
But for all the excitement about infrastructure investment, Irish times are undoubtedly changing. For the first time in its recent history, the country now finds itself slap bang in the middle of an economic downturn, with its public finances in uncharacteristically worrying shape and in unprecedented breach of the Eurostat three per cent annual deficit limit.
This change in economic fortunes, together with negative press surrounding a recent social housing project collapse, is raising questions within the legal community about the implications for the NDP, the future of important projects still in the pipeline and the PPP model in general.
Most partners agree that a noticeable shift in attitudes toward PPPs is occurring. While Ireland was comparatively slow off the mark with PPPs compared with jurisdictions such as the UK, it has worked hard to catch up and the past couple of years have seen the concept become far more widely accepted. But unlike in the UK back in the mid-1990s, where the key driver behind their introduction was to stimulate the construction industry, PPPs in Ireland were started for a completely different reason.
“When PPPs started gaining momentum here in the early 2000s, the country was in the middle of a boom, had a considerable budget surplus and a huge infrastructure deficit,” explains Mary Dunne, a partner with BCM Hanby Wallace (BCM). “Unlike the impetus behind the Private Finance Initiative in the UK, money wasn’t the missing ingredient – the state had the funds.”
However, it was recognised that the private sector could bring speed of delivery, efficiency and expertise of lifecycle costing, maintenance and international experience of project finance that the public sector did not have. Dunne was formerly head of legal at the National Development Finance Agency (NDFA) – a body established five years ago to advise the government on PPPs. She joined BCM in 2008 and heads up the firm’s projects department.
The current economic climate has turned that situation on its head and lawyers are eagerly waiting to find out what standpoint the government decides to take towards PPPs going forward.
“Now public finances have deteriorated, it will be interesting to see whether the government decides to move PPP from an alternative to a mainstream method of procurement,” comments A&L Goodbody’s Eamonn Conlon, whose five-partner, 24-lawyer construction and projects team has worked on landmark projects such as the Luas Light Railway, the Dublin Metro and the Limerick Tunnel. “I believe it will,” he adds confidently.
There are several good reasons to suggest he is right. For one, PPPs are almost always off balance sheet for the purposes of the Eurostat three per cent rule because risk for the projects is transferred to the private sector. So the government can avoid its already limited borrowing capacity being swallowed up by large capital projects.
Unsurprisingly then, the current government is keen to promote the use of PPPs, helped by the fact that Prime Minister Brian Cowan, who took office in May this year, was previously the minister for finance and known to have been in favour of their use. That he is also heading a coalition government led by his Fianna Fáil party that includes the Green Party is also offered up as a fillip for the future of the rising number of alternative energy projects in the country (for further details, see article on page 28).
However, the government may have its work cut out, as PPPs in Ireland suffer from something of an image problem. “Other than in the roads sector, where projects have been very successfully managed, PPPs can sometimes be treated with an air of suspicion by the public sector,” explains O’Donnell Sweeney Eversheds partner Mark Varian, who left Matheson Ormsby Prentice to set up the department four years ago.
The raft of roads sector projects, which were managed by the National Roads Authority, came in both on time and under budget and are regularly hailed by projects lawyers as the benchmark for success. Other projects have not run as smoothly.
One stark example, which has been showering PPP with bad press in the past few months, is the collapse of two of five deals between Dublin City Council and property developer Bernard McNamara. Two of his other developments are the subject of mediation and one is said to be going ahead. The five projects were scheduled to deliver 1,800 homes – many of them social housing in deprived areas for tenants living in substandard accommodation due for demolition.
The contracts under dispute – involving the construction of a substantial number of private apartments on council land as the funding tool, and which subsequently fell foul of the collapse of the housing market – were settled through mediation in early September. O’Donnell Sweeney Eversheds advised Dublin City Council and A&L Goodbody advised McNamara.
While the timing of the McNamara episode, right at the start of an economic downturn, did not do much to help the public perception of PPPs in Ireland,
and some were quick to extrapolate its significance for the PPP concept as a whole, most lawyers agree that this was a specific type of project that will not be repeated in other sectors.
“The McNamara deals were classified as PPPs, but in reality they were little more than land swap deals,” says BCM’s Dunne. “They certainly wouldn’t have been classed as PPPs in the UK.”
Indeed, confusion remains over what actually constitutes a PPP here and, furthermore, whether the label is a positive or a negative one. “The legal definition of a PPP in Ireland is very broad,” explains Dunne. “In the case of McNamara there was no long-term maintenance involved in the projects.”
Rory Kirrane, head of construction law at Mason Hayes & Curran, offers another example: “One of our biggest water treatment plants, the E254m [£202m] Ringsend wastewater treatment works, which is part of the Dublin Bay Project, is commonly referred to as a PPP, but was, in fact, a straightforward design, build and operate project with no private financing.”
Other lawyers point to the fact that it is often bankers or financiers who raise questions over the true nature of such projects because they see their role as an essential part of the PPP process. As one partner put it: “Frankly, I couldn’t care less what they’re called as long as they happen.”
However it is labelled, the collapse of McNamara has certainly caused some waves in the sector. “It’s making the public sector nervous about the process – particularly whether the projects are actually going to be delivered or not,” admits Kirrane. “The procurement process is expensive, and getting projects to the point of financial close only to revisit the process isn’t ideal.”
According to press reports, the council is said to be writing to second preferred bidders on the McNamara projects to seek expressions of interest on the terminated contracts. The local authority has therefore found itself set back a number of years.
While such occasions do offer the opportunity for law firms that might have lost out with their bidder in the first round to get back on to a project, everyone agrees that projects actually being completed, and a consistent deal flow, is far more important in the big scheme of things.
Legal fees for such work have come down considerably, partly because of increased competition and also as a natural consequence of everyone involved becoming more familiar with the process and documents.
That said, one partner estimated that E500,000 (£397,630) in fees was not unrealistic on a straightforward accommodation project such as a school, with projects such as the forthcoming university, concert hall and theatre (see box, page 34) having a high likelihood of running over due to the complex nature of negotiating with so many specialists, bringing in much more.
“Firms have come to realise that, when the equity providers on a project put up hard cash to pay for the bidding stage, they want a fixed fee from legal,” says Dunne.
Lawyers have had to become much more sophisticated in putting together their budgets and be prepared to take a hit on the fees they can recover until they are shortlisted.
“You can expect a certain amount of loyalty from clients,” adds Dunne, “but mostly it comes down to who will give you a good fee. I’m constantly pitching to consortia, and quite simply if you pitch too high you won’t get the work.”
Another repercussion of the relative lack of deal flow in each specific sector, compared with the experiences of countries such as the UK, is that civil servants in the relevant government departments can be unfamiliar with the PPP model and selling it to them can be a challenge. The much vaunted National Roads Agency team had the opportunity over seven or more road PPP projects to refine their understanding and expertise of how to ensure they run well.
But compare this with the current project to relocate Dublin’s notorious Mountjoy Prison to greenfield site Thornton Hall, which is expected to reach financial close this year. Being the first prison project means it will probably, say lawyers, be treated with a degree of suspicion and resistance by the Department of Justice.
One partner, who preferred not to be named, explained that the problem has been exacerbated by the fact that while the top-level ministers have been behind PPPs for some time, historically the Department of Finance has been rather lukewarm about their use.
It was hoped that introducing the NDFA as a centre of excellence, bringing all the skills needed for PPPs under one roof, would reiterate the government’s commitment to PPPs and provide some much needed impetus. However, this has not been an overwhelming success, as recent press coverage in the Irish Times confirms.
An article on 8 September reported that “some ministers are privately critical of the National Treasury Management Agency’s [the parent agency of the NDFA] handling of the contract negotiations with builders. ‘It is hard to see how it is so difficult. Often, the contracts are for the same types of buildings.
If you can do one, you should be able to do more,’ one complained.”
Ministers have criticised the lack of projects coming out of the NDFA because they are not being driven forward sufficiently within the organisation. Lawyers we spoke to blamed the agency’s focus on the technical side of projects, rather than making commercially driven project management the priority.
Meanwhile, the NDFA’s equivalents in the UK and Northern Ireland – Partnerships UK and the Strategic Investment Board respectively – were set up with the opposite approach, outsourcing the technical, financial and legal side and recruiting and handing over the decision-making to very senior and highly experienced PPP consultants who had been doing deals for years.
These consultants would take personal responsibility for seeing projects through from beginning to end in a private sector way, unblocking issues by
going straight to the relevant ministers and thus ensuring a good deal for the state.
“Admittedly, these equivalents have themselves slowed down and become more bureaucratic recently, but the NDFA seems to have jumped straight to that status,” comments one partner.
Dunne suggests that another impact of sporadic deal flow coinciding with a change for the worse in economic fortunes is that other projects not previously earmarked to be financed as PPP projects may be revisited with that concept in mind.
“For example, at the time it was drawn up, the NDP allocated E34bn [£27.04bn] for transport infrastructure, and only E8bn [£6.36bn] of that was in respect of PPPs because the government assessment of project feasibility didn’t need to look at the availability of funds,” says Dunne. “As state funds are now diminished, the question being asked is whether some of the upcoming infrastructure projects earmarked for traditional procurement in the NDP could instead be earmarked for delivery by way of PPP – such as the Luas light rail system for Dublin and its suburbs.”
Of course, investment is often as much to do with confidence as capital and the government needs to address Ireland’s PPP image problems to fulfil that potential. If it can, lawyers are confident that the time is ripe for a big increase of work from classic design, build, finance and operate projects.
Goodbody’s Conlon sums up the hopes of many, saying: “This is one area we certainly see as significant to our firm. How significant will depend very much on whether the government decides to continue to use PPPs as a mechanism to deliver infrastructure, which would be a big vote of confidence in Ireland’s future, or on the other hand puts the breaks on delivery of infrastructure.”