Ireland's public private partnership roads programme has punched above its weight in attracting publicity. Under the National Development Plan, Ireland's 10-roads PPP programme is expected to bring in Eu1.27 billion in private finance by 2006. The reality is two years to go and two roads - the N4/N6 and N1/M1 - financed (three including the M50 Westlink Bridge).

The same is true of education - a Eu66 million DBFO for the Maritime College closed in 2003, the Cork Music School awarded to Jarvis awaiting close, and a Eu92.3 million five-schools package also closed by Jarvis in 2001, and very little else.

Part of the problem is the expectation created by the launch of the NDP plan. The PPP scheme was launched in 1999 with a series of pilot projects, the majority of which were in the road sector - the M50 Second West-Link Bridge; N25 Waterford By-Pass; and N7 Limerick Southern Ring Phase II. Eight further roads were announced in 2000. What was not announced was that no more than two deals per year were likely to be awarded.

The perception was that Ireland was in a hurry. The government simply nominated projects as pilot projects on the basis of their ability to attract market revenues and accelerate the country's infrastructure development programme. The reality is that Ireland is looking for value-added - hence the focus on real tolls rather than shadow tolls - and is very debt aware.

At its simplest - expect the unexpected from Irish PPP. Unlike in the UK, where Jarvis has attracted bad press for some of its PPP contracts - to the point it has changed its name in for PPP tendering to Engenda - the developer has performed well in the Irish education sector. And although deal flow in the Irish roads sector has been slow to date, the Irish National Roads Authority has negotiated two of the best procurement deals in any PPP market to date. Furthermore, the programme has attracted two of the biggest names in the sophisticated Spanish toll road development sector - Ferrovial/Cintra and Dragados.

Hard bargaining

The first major Irish road - the N4/N6 Kilcock-Kinnegad real toll road (see www.projectfinancemagazine.com for details) sponsored by Cintra - reached financial close in March 2003. The deal was contentious from start to finish: the risk position of the NRA was unreasonable (PPP without the partnership); the traffic forecasting was wrong; the pricing was too cheap for a first time deal and it would never syndicate. All are rumours that contain elements of truth - all were distorted beyond recognition as they spread.

Nevertheless, the rumours took over and the N4/N6 was a difficult ride for all concerned. Whilst initially there was no shortage of bank interest in Irish roads, many fell away after looking at the risk profile and the constraints on risk management. For example, real toll rates are determined by the government, not the sponsor, and there is no guaranteed comfort against competing routes. There is also no compensation in case of operator default (a risk beyond lender control) and no potential reward for taking on more risk because of a revenue sharing mechanism with government on higher than expected profits.

The reality is that the deal did syndicate with a reasonable take up a few months after close - Banco Opi, BPI and ICO all took a piece. And the template and pricing benchmark set by he N4/N6 has proved a workable basis for future deals - notably the N1/M1 sponsored by Celtic Roads. Simply put, the Irish National Roads Agency (NRA) went to market and got one of the best first time PPP deal ever procured by a public sector entity.

Financing and the concession contract for the N1/M1 Dundalk Western Bypass (search www.projectfinancemagazine.com) - the second of Ireland's controversial public-private partnership toll road projects to come to market - signed simultaneously on 9 February 2004 and with less controversy than the N4/N6.

Sponsored by the Celtic Roads consortium - led by Dragados along with Irish toll road operator NTR and Royal BAM subsidiaries Edmund Nuttall and HBG Ascon, the deal is very similar to its predecessor. Crucially, however, this time part of the project is already built - 43km of existing motorway and toll plazas built by the Irish state south of Dundalk and real tolled and operated since mid 2003 by co-sponsor NTR. Traffic forecasting is therefore more predictable than on the N4/N6.

In addition to the existing stretch, the project involves construction of 11km of new motorway and 7km of new link roads inclusive of 12 over/underbridges and a railway bridge.

Lead arranged by Societe Generale (SG) the financing pulled in four co-arrangers - AIB, DEPFA, KBC and ICO - at a tightly priced step up from 110bp during construction (expected to take two years), 120bp until year 10, 135bp during years 10-20 and 150bp thereafter.

The pricing - very similar to N4/N6 - demonstrated a simple truth: that first time deals in developed markets could be procured and be bankable without paying a premium.

This is in stark contrast to other European PPP roads programmes. Portugal is now suffering under the financial burden of its shadow toll system, although the problem has more to do with speed and huge volume of projects closed than the degree of value-added the country got out of the deals.

Despite the slow pace of road deals to date, with the first two major projects closed, the process is picking up. Next will be the N8 Rathcormac/Fermoy bypass, which is expected to close within the next three months. The Direct Route consortium was selected as preferred bidder in February 2004. The consortium comprises Kellogg Brown & Root, Strabag, John Sisk & Son, Lagan Holdings, Roadbridge and the First Irish Infrastructure Fund (a joint AIB/European Investment Bank (EIB) fund. Mandated lead arranger is KBC with ING, AIB and the EIB participating.

The delayed N25 Waterford Bypass pilot project - delayed because of archeological exploration of sites along its route - is also expected to close before the end of the year. In addition, the tender phase for the M3 Clonee-Kells scheme began in February 2004.

Improved bureaucracy

The Irish PPP bureaucracy has also been improved to get things moving. Ireland's PPP process is now underpinned by a five year multi-annual capital spending allocation announced in Budget 2004 which set out targets for traditional and PPP/NDFA investment. This includes a target for private sector investment of almost Eu3.6 billion by 2008 through the PPP/NDFA allocation for individual Government Departments, in addition to a target of Eu1.35 billion over the same period for PPPs funded by user charges.

Having moved from annual to five-year budgets, the NRA can now make more concrete long-term commitments. And a number of grey areas between the awarder and sponsors/ lenders have also been crystallized.

A force majeure definition has been put in place clarifying what insurance risks rest with the private sector and state. The penalty point regime leading to termination has also been made more generous to sponsors and lenders alike. The NRA has also clarified its obligations in ensuring adequate access to PPP toll roads via existing connecting routes and is penalised if it fails to meet its obligations. Furthermore, the system for calculating payments to the sponsors and lenders in situations where the sponsor is forced into extra build other than that outlined in the original bid is now clear.

The new Eurostat ruling on PPPs, announced on 11 February 2004, is also expected to have a major impact on deal flow - making it possible to do Eu30 billion of projects off the government balance sheet over 20 years.

The new ruling states that the cost of a PPP project and its impact on the government books can be spread over the full period of the contract provided the construction risk and either demand or availability risk is transferred to the private sector. Prior to this, Eurostat ruled on the accounting treatment of PPPs on a case by case basis with only projects fully funded by user charges or those with very significant risk transfer classified as non-Government assets and recorded off balance sheet.

Where's the rail?

PPP plans in the rail sector have been the most disappointing. Two weeks ago the government announced that there would be a decision in two weeks on the Dublin Metro, which has been on and off the shelf for two years. No decision as yet.

The pilot rail PPP scheme was the LUAS Operation Line A&B project which was conceived in the early 1990s. This involved additional light rail lines to link up with or extend the LUAS system currently being developed. These include an extension of Line A of the LUAS into the Docklands, a new north-south line from Ballymun via the city centre to Dundrum, and a new east-west line from Lucan via Ballyfermot to the city centre.

The LUAS project does not involve private finance and the concession to run the lines was awarded to Connex on a five-year extendible basis on 28 February 2002.

But the main interest has always been in the proposed Dublin Metro. This Eu2.4 billion project is managed by the new Rail Procurement Agency and will see 70km of metro built in two stages. 12km to 14km of the system will be underground. Phase one will see a line from Dublin Airport (or possibly from beyond the airport to Swords) to the city centre and Shaganagh with a spur to Blanchardstown. Phase two will see this spur extended southwards through Clondalkin and Tallaght back to the city centre.

If it ever happens - and there are severe doubts amongst bankers that it is economically viable - the Metro will be the largest infrastructure project ever undertaken by the Irish state and the acid test for Irish PPP.

Despite the lack of headline grabbing rail deals Ireland's first waste to energy PPP - Pollbeg - is expected to be out in the next two months. The scheme is a design-build-finance-operate (DBFO) PPP with best and final offers from three interested bidders due in on 2 April, 2004. The new facility, which will have the capacity to thermally treat approximately 400,000 to 500,000 tonnes per annum of household, commercial and non-hazardous industrial waste.

Similarly, the first social housing design build finance (DBF) - Fatima Mansions Housing Regeneration Project - deal is expected to be awarded this year. Fatima Mansions is one of the largest housing projects ever undertaken by Dublin City Council and involves redevelopment of a 364-unit apartment complex on an 11-acre site. The new development has received planning permission and will comprise 220 social and affordable housing units, 300 private residential units, sports and community facilities and commercial retail space.

Rail aside, the Irish PPP programme is beginning to deliver on its initial promise - there are even two health deals in the mix, albeit no pre-qualification has emerged yet. And some criticism of the pace of development is unfounded - Ireland is a small country with a small deal flow.

And while the concentration on value-added is well founded, as PPP spreads across Europe, Irish deals, which initially attracted a lot of bank interest, are going to be competing with more and more newcomers in other jurisdictions. Without the economies of scale of major and repeatable deal flow, and with very tightly priced deals, international developers and bankers will be looking for easier returns elsewhere first, and Ireland second.