Wednesday 19 December 2018

Don't throw the PPP baby out with the Carillion bath water

Workers have downed tools and walked off Carillion sites following the collapse of the British building giant. Photo: PA
Workers have downed tools and walked off Carillion sites following the collapse of the British building giant. Photo: PA
Richard Curran

Richard Curran

The multibillion-euro collapse of British building giant Carillion will have consequences on this side of the Irish Sea. Not only has the collapse stirred up a political hornet's nest in the UK, it may lead to a backlash against public private partnerships (PPPs) referred to as private finance initiatives (PFIs) in Britain.

Several school projects here have been caught in the crossfire of the Carillion collapse. As workers on some of those sites, understandably, downed tools and walked off the job during the week, the domino effect was becoming very apparent.

In Britain questions are being asked about the choice of Carillion as joint venture partner, its financial position while winning new state contracts and who knew what and when.

Here the education projects will at the very least be delayed, but they may be harder to fix than some imagine.

PPPs tend to be set up as standalone special-purpose vehicles with specific shareholders and shareholder agreements.

It is hard to fault the government here for entering into partnerships with an enormous UK building giant with a solid track record.

But how deep is the due diligence on what is going on with prospective partners?

In Britain, investors are rushing to the defence of the PFI system and hoping that it won't be abandoned or scaled back by the government in the wake of this very embarrassing and costly collapse.

What about here in Ireland?

PPPs are increasingly seen as a useful mechanism for the State to fund infrastructure and other capital investment projects.

Yet, there are inherent problems and risk with them.

For example, who carries the risk if something goes wrong?

How easily can a new company be brought in to replace the old one if something happens?

The advantages of PPPs are also there. They allow the government to build major projects without having to provide all of the money up front.

Now that we are under the cosh of the European stability pact rules and have to manage our borrowing, PPPs have become a more important funding vehicle.

But there could be a backlash.

It is surprising how over the years there have been complications with so many of these PPPs in terms of how the deals are structured.

In the boom years the State practically abandoned building social housing and opted for PPP joint ventures with developers, who subsequently went bust in the crash, leaving the country short of social housing.

Look at the controversy over the West Link toll bridge in Dublin, where the State eventually bought out the operator's interest but at a significant cost.

The bottom line is that we should not have an over-reaction to the Carillion collapse and it might be better to improve the contracts on new PPPs by taking account of the events of the last few weeks.

One of those lessons might be, that when choosing prospective private sector partners for vital social infrastructure, the bigger they are, the harder they fall.

Nama comes out on the right side of Vestager investigation

The European Commission finally decided to conclude there had not been unfair competition for once. After a string of rulings against corporations in the last two years, European Competition Commissioner Margrethe Vestager found during the week that Nama was not providing illegal state aid to client developers by offering them cheaper loans. The ruling followed a complaint from five property developers: Michael O'Flynn, Paddy McKillen, David Daly, Patrick Crean and MKN Properties Limited.

They alleged that Nama distorts competition in the Irish property development market by granting loans at very favourable conditions to property developers which are creditors of Nama.

They also alleged that Nama itself benefited from various illegal state aid measures in Ireland, including a State guarantee on its funding. It is hard to argue against their complaint. The EC concluded that Nama lends money when it is commercially viable to do. But one complaint flows from the other. If Nama benefited from cheaper funding arrangements when it was originally set up, and enjoyed a State guarantee, then the definition of "commercially viable" for Nama is different to private sector lenders or developers.

It has the luxury of waiting longer for a return while sourcing cheap finance for itself.

This is where the EC fudge dating back to the establishment of Nama comes in. When it was being set up, in order to keep Nama's balance sheet (€32bn of borrowings) off the State's books, it was incorporated as a quasi-private-sector entity. Its ultimate holding company has several private-sector shareholders, as a mechanism to keep its borrowing off the exchequer national debt.

The reality is that it is controlled by the State and has always been guaranteed by the State. The complainants weren't too concerned about the unusual structure until around 2015, when Nama's strategy began to change in a way, where they argue, it became the state's vehicle for house building. Again, it is hard to argue with them on that.

But the EC was never going to find in the complainants' favour. It even said State support to Nama had already been approved under the Commission's 2010 decision.

Having agreed to a rather creative corporate structure to keep Nama's debt off the Exchequer books, the EC would hardly come along now and say it is a State entity providing unfair support. The developers who complained were baffled by the ruling. I can see why, but a ruling in their favour would have left an unholy mess. It was just not to be. Better luck next time.

CPL's gig economy bonanza

While the debate about the merits of the 'gig economy' continues to rage, one company definitely benefiting is recruitment group CPL Resources. First-half profits rose 11pc as it placed more people in temporary work, both here and in the UK.

The gig economy has become a bigger factor in the employment mix on both sides of the Irish Sea, but especially in the UK, which this week reported the highest rate of employment in the economy since the 1970s.

Unemployment in the UK is now just 4.3pc. A major driver of jobs growth has been the self-employed and those involved in the so-called gig economy. CPL's net fee income (NFI) from permanent placements accounted for 32pc of the total and it was down 2pc year-on-year. But temporary NFI (68pc of total) was up dramatically by 20pc.

The group is enjoying margins of over 11pc on these temporary placements. The explanation provided for the recent surge in temporary, rather than permanent placements was all about "a global move toward the 'gig' economy".

But there are still question marks over the long-term trend for the UK jobs market. It is thriving right now but then again Brexit hasn't actually happened yet. At this stage CPL has enough geographical spread to help cushion bad news that might come from Britain further down the line.

Sunday Indo Business

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