PPP accommodation/real estate – the next big thing in Irish PPP – kicked of the year with the successful funding of the Dublin National Conference Centre (NCC) and the Dublin Criminal Courts in deals lead arranged by AIB and Depfa, and KBC respectively (for more details search "Spencer Dock" and "Dublin Courts" on www.projectfinancmagazine.com).

More is to follow. The whole PPP climate in the Republic of Ireland has changed – roads are off the PPP menu and real estate is on. The social infrastructure market has been boosted by the devolving of more responsibility to the National Development Finance Agency (NDFA), which has also been given more resources to carry out its mandate, and has a relatively new CEO in Adrian Kearns who is also a director of the National Treasury Management Agency.

Previously, NDFA's main role was advisory, but it now procures PPP projects on behalf of various government departments – for example it is currently out to the advisory market with the second mandate for the next batch of schools in a programme of 27 projects that need to be fulfilled by 2009 for the Department of Education and Science.

Industry sources say the re-scoping of the NDFA has helped move projects along more quickly as the body has considerable knowledge and experience of PPP. And that is good news in a market where negotiations have often proved lengthy – particularly on some past roads deals – and fees and margins are tighter.

As Colm Fanning, partner at McCann Fitzgerald, says: "On the schools programme, bidders have been under pressure to play hardball on pricing. But as getting PPP done gets easier [although planning can still cause headaches], and the risks more familiar, that will naturally be reflected in margins and fees."

Total investment under the National Development Plan (NDP) and the Multi-Annual Framework for 2007-2013 is budgeted at Eu76.2 billion. Of that Eu11.2 billion will be funded via PPP schemes based on availability payments and the NDFA says that Eu1.9 billion of PPPs will be funded by user charges.

In terms of the overall budget, transport is the most important with Eu24.5 billion targeted, followed by environment, heritage and local government with Eu17 billion and education and science coming in at Eu7.36 billion.

Anticipated slower economic growth, which will impact the government's budget, will be a key factor favouring PPP over direct state investment. At the same time PPP participants have growing confidence in the Republic thanks to the relatively good track record on roads projects to date, the recent financing of the National Conference Centre and the Criminal Courts complex.

Margins have been on a downward trajectory for several years – primarily because of the growing familiarity with Irish PPP and a general convergence of margins taking place across Europe's mature PPP markets. "Margins are also coming down due to more favourable asset allocation rules under Basel 2, particularly for higher grade tranches," says John Kirwan, Head of PFI with Depfa Bank Ireland.

Kirwan adds that: "since Depfa launched the first securitisation of PPP loans in 2004 there has been an increasing trend in the use of similar structures and we are aware of other lenders planning future securitisations – the main driver being the favourable capital treatment it receives. This could see lenders becoming even more aggressive in their pricing."

Dublin Metro

The highest profile future project is the Dublin Metro. Not only will it be Ireland's largest PPP ever, but it will be hotly contested by both domestic and foreign banks and sponsors.

Essentially, the Irish government wants a new metro system for the capital at an estimated cost of Eu2-3 billion. Although, no one is yet talking margins – it's too early for that – the prestigious cachet attached to the deal is likely to spur fierce competition for the financing.

The Metro was mandated by the government in January 2002 and has since been going through phases of consultation and evaluation – the Rail Procurement Agency (RPA) is being advised by KPMG, Pinsent Mason and A&L Goodbody.

Infrastructure and rolling stock are separate concesssions. The operators will be made up of consortia initially, but will in time report directly to the rail authority making it easier to deal with individual companies that don't perform. They can effectively be removed from the operation without unduly impacting the other operators or the running of the network.

Also, the RPA wants to avoid a situation where there is, for example, a good quality operator, but poor quality rolling stock. By holding two separate tenders the RPA feels it can get the best of both worlds.
However, the project will be highly complex. In the construction stage tunnelling under urban areas will be involved. Although this has been done in other countries, there are still considerable risks, which could lead to cost overruns and delays.

Once operational, the sponsors will largely be remunerated on availability. However, there could be an element of fare risk to incentivise operators – a similar model is used in Ireland's light rail projects.
"Banks will need to get comfortable with the construction risks, the complex contractual structure and the interface risk between the separate infrastructure, rolling stock and operator parties before they can be expected to bid very aggressively," says John Sisk, Head of Infrastructure EMEA at Allied Irish Banks.

Bankers acknowledge that the Metronet debacle in the UK could cast a shadow over the Irish project. Metronet recently went into administration. It could make some lenders reassess their desire for exposure to such complex projects.

However, whereas Metronet was involved in running and refurbishing London's antiquated underground network, the Dublin Metro is a greenfield project. Though complex, like the London one, it embodies different risks and challenges.

Health, schools and accommodation

There may also be some significant deals in the health sector in the coming years. The HSE has preferred bidders for co-locations projects – private sector hospitals built in the grounds of existing state hospitals – for eight sites. And although not PPP, the projects will require significant commercial funding.

For some of the smaller Irish PPPs, in the sub-Eu100 million range, banks have had a tendency to simply park the deal on their books or have backed away because the margins wouldn't meet their IRR targets.
But small bundles of social infrastructure projects are expected to make up a much larger chunk of the market going forward.

The Department of Education and Science has asked the NDFA to procure 27 new schools through PPP by 2009. Of that, 23 will be new post primary schools and four new primary schools. According to the NDFA, the value of the 27 schools is estimated at Eu320 million.

Three bidders – BAM; Hochtief/Sisk; and Macquarie Partnerships of Ireland – have already been short-listed for four new schools (Portlaoise-based St Mary's CBS and Scoil Chriost Ri, St Saran's Secondary in Ferbane, and a community college in Banagher). The concession is for 25 years and the winning consortium is to be announced by the end of the summer. The schools will provide places for 2,700 pupils under a DBFM concession.

The advisory mandate for the second batch of schools – 25-year DBFM concessions in Cork, Limerick, Wicklow and Meath – has also launched (bids are due 21 August). And the Department of Education and NDFA is extending the model beyond schools with an advisory tender for a mixed training programme that includes 17 buildings – otherwise known as the Gateway Project. The NDFA says third level accommodation projects worth Eu255 million have also been allocated to PPP.

Some bankers speculate that margins for these types of deal could end up around the 50bp over Euribor level given the low risk profile and with the ultimate procurer being the Department of Education & Science.
It is a level of return, which some banks have decided is too low on low volume – average deal size is anticipated to be around Eu70-100 million. And there is speculation that lenders may end up taking equity stakes in projects to top up margins – as happened in the UK market. But any chance of a large Irish secondary PFI market developing are remote. To date only Dragados has sold its M1 stake to SMIF and there is simply not the number of projects available in Irleand to support a large trading market.

Other PPP accommodation/real estate projects include the Office of Public Works (OPW) undertaking a decentralisation programme for a number of departments. It involves building the headquarters for the Departments of Education, Agriculture and Trade and Enterprise outside Dublin. Bankers estimate the deal to be worth Eu150 million and preferred bidders should be announced around September/October with financial close early next year. The tenor is likely to be around 15 years reflecting the DBFM concession period of similar time length.

The Thornton Hall prison project – a replacement for the older Mountjoy prison – is also moving forward. The deal could be worth around Eu500 million and as such represents one of the largest PPP accommodation deals to date in the Irish Republic.

Terms are likely to be aggressive, say bankers. Expressions of interest from six consortia were received in April 2006. According to the NDFA, negotiations are now underway with the preferred bidder – the Leargas Consortium comprising McNamara & Co and Barclays Private Equity & Global Solutions. A deal should be closed mid to late 2007 and it will be the first project to use the NDFA's Template Project Agreement (TPA) as the basis for the preparation of the project agreement.

The TPA is an important development in that it tries to reduce bidder risks and costs, while allocating risk as much as possible towards the private sector without putting upward pressure on lending margins. According to bankers it has been successful in this area. "They've been very good at judging just how much risk the private sector is willing to take," says a local PPP banker.

There is also talk of doing a second prison under PPP, but few details have been released so far.
Also, in the pipeline, but less firm is a new home for the Abbey Theatre and the refurbishment and enhancement of the National Concert Hall. Although the government has mandated them to be PPPs and is seeking advisors, bankers are not confident about these projects emerging anytime soon as they're not top of the political agenda.
End of the roads?

Tendering on the current round of road projects is basically over with only the delayed financial close of the M50 (sponsored by icon with RBS, Fortis, MCC and La Caixa lead arranging the debt) likely to make the headlines in September.

According to bankers this particular road scheme is unusual in that it is purely availability-based. Previous concessions included traffic risk. Given Ireland's booming economy, relatively low per capita car ownership and heavy immigration, lenders were generally willing to take a favourable view on traffic risk.

The concession, which involves building extra lanes, is worth around Eu500 million and has a 30-year tenor. With no traffic risk, margins could come in around 60bp. "We decided not put traffic risk out to the private sector," says Michael Kennedy, senior project manager, finance, with the National Road Authority (NRA). "We want to maintain flexibility over tolling to help with traffic management."

"Although PPP roads have been a success, there are currently no plans for more roads under PPP,"adds Kennedy. However, some bankers note there is still a significant infrastructure deficit in Ireland – including for roads. And it is thought that the government will come back within the next few years with more projects involving road widening for example – something Kennedy does not rule out.