5th Annual Financing Irish Infrastructure write-up

08/01/2018
Rising population and a supportive government gave a feeling of positivity to the fifth annual Financing Irish Infrastructure

“This event is an interesting checkpoint,” said KPMG partner Michele Connolly as she opened the fifth annual Financing Irish Infrastructure conference in Dublin in December. And as she compared the landscape for the PPP market in Ireland in 2017 with that of 2016, there was clearly cause for optimism.

There may not have been an announcement on the 10-year Capital Plan. But there were active PPP projects in the market and, importantly, the promise of a solid pipeline coming forward in 2018.

This was also reflected in the poll of delegates, which found 57% to be optimistic, with a further 4% describing themselves as ‘very optimistic’. While only 7% said they were pessimistic, however, almost a third of delegates (32%) described themselves as being ‘unsure’, demonstrating that there is still room for progress in Ireland.

Notwithstanding the lack of the long awaited Capital Plan, it quickly became clear that Ireland can live up to its potential as a major infrastructure market and important destination for investors in the coming years.

Gerard Cahillane, deputy director and head of operations & finance at the National Development Finance Agency (NDFA), spelled out the scale of the challenge, citing figures suggesting there will likely be one million more people in Ireland in 2040 than there are today. Later in the day, Fergal O’Brien, director of policy and public affairs at Irish business group Ibec, went further: “We think it’s going to be closer to two million,” he said, arguing that this would create a hole in infrastructure expenditure that would have to be filled by the private sector.

Cahillane pointed to a number of areas where the NDFA is already active, such as courts (“there is the intention to do more in that space”), housing (the first Housing Bundle is progressing at pace having received planning permission for all sites), and even potentially things like nursing homes (“we are in the very early stages of discussions”).

And even without the Capital Plan, Cahillane was able to highlight the fact that the government has provided assurances that all the PPPs that have recently been discussed and considered will be included in the 10-year plan when it is finally published. “Private finance will play a role,” he said. “We recognise that there is good interest in investing in Ireland.”

Aaron Boyle, partner at law firm Arthur Cox, agreed. As he opened the afternoon session, he said: “We will never have enough taxation to pay for all of the infrastructure that we want in this country.”

That private investment will be needed if the country is to keep pace with the expected rise in population. One of the biggest and most immediate challenges that the population increases will create is the need for new housing.

No wonder, then, that 57% of delegates believed that private finance will provide ‘part of the solution’ to the challenges facing the accommodation sector.

Tony Flynn, executive manager of housing and community at Dublin City Council, explained that there is already a growing gap in the market for mid-tier housing that now needs to be addressed.

Rather than focusing on social housing, or simply letting developers build and sell land for the highest price, Flynn said the council’s focus is increasingly on what is ‘affordable’ housing and suggested that this is the area that will soon benefit the most.

“Our councillors are keen for us to provide affordable housing,” he explained. “We want to bring some of our land forward for use as affordable housing.”

However, turning that land into new homes remains challenging. Hazel Jones, planning and social/affordable housing director at Bartra Capital, pointed to work that her firm has done to try to bring a project to market, only to be delayed by the processes involved.

“Once you get involved in any PPP, the focus goes onto the process not the project,” she said. “We need to have a discussion on the process because if you keep doing the same thing over and over again and expect a different result, that is foolish.”

In defence of this, David Smith, principal officer at Ireland’s housing department, argued that a lot of work has to go into the process to make sure the project is right. “We have had to test this with Eurostat to make sure it can be treated as off-balance sheet,” he explained. “There is a process that we have to go through to make sure we get it right.”

Cahillane had already confirmed that the final planning consents are now in place for the first housing bundle, with an issue to participate in dialogue (ITPD) scheduled to be published “very shortly”.

However, Jones and others warned that, if the population forecasts are accurate, the way in which housing is thought about will have to fundamentally change. “We are going to have to get thousands of people used to the idea of living in apartments,” she said. “I think the government is going to have to get over this [problem] through some sort of financial incentive. That would make apartment development much more attractive.”

However, it is not simply more housing that will be required. The growing population will put increasing burdens on health and education services across Ireland.

Emma Leonard, principal officer at the Department of Education and Skills, told delegates that her department’s focus is on the best way to provide additional places in schools. And Greg Dempsey, deputy secretary at the Department of Health, pointed out that as well as being larger, the population is getting older, putting more pressure on the nursing home sector and other health services.

Getting hot

All this potential activity is certainly exciting for the market – but it also raises another big question: does the market have enough capacity to meet the needs of the country? “We are all worried about capacity,” declared Kajima Partnerships development director Morton Corbitt.

Overheating the market is something that the industry is aware of. “It is a concern,” said Dempsey. “PPPs, by allowing projects to be started sooner, could exacerbate the problem.”

However, he and others suggested that having the 10-year plan with the government clearly setting out when it expects to bring projects to the market could help the industry respond and to recruit in time for peaks in demand.

Leonard’s work at the education department is also about tackling that skills agenda. As she explained, the current work to develop the Higher Education PPP programme is “hugely important from a strategic perspective”, adding that it is closely aligned with the skills agenda in Ireland.

As more of the planned Institutes of Technology come on-stream, they will be able to provide the construction industry with a ready supply of graduates that may help drive the industry forward as it looks to realise the 10-year plan – and beyond.

By then, it is likely that the PPP model will have evolved considerably. Ireland is already exploring new ways of doing things, as demonstrated by Ger Casey, chief executive of the Grangegorman Development Agency, which is offering a new approach to procuring and delivering infrastructure for a wide ranging redevelopment initiative.

However, later in the day Aviva’s head of infrastructure debt, Darryl Murphy, questioned the Grangegorman approach. “Bringing in different packages where the sponsors had a very strong role in developing that, I’m not sure it has worked in providing best value,” he said.

Whatever the future looks like, it is expected to be much broader than traditionally defined PPP. Richard Osborne, vice president at Macquarie, pointed out that while PPP is a core aspect for many funds, they are now increasingly looking at core-plus and added value. “I would encourage the NDFA to think outside the box about how it uses private finance. It’s a sign of a maturing market in Ireland.”

Andy Barrett, bid director at Equitix, agreed: “There is an opportunity for people like us to move into the ‘quasi-PPP’ market.”

Balfour Beatty’s development director Tzvetelina Bogoina-Seenan added that the public sector needs to consider a range of models. “This arms the public sector with more data to talk about the benefits of private investment,” she explained.

Earlier in the day, Corbitt had already put forward the potential for entering into joint ventures with local authorities for social housing projects.

There is, then, no little interest in doing things differently in Ireland. The country may be at a crossroads as it prepares for the next 10 years.

The hope from the market that was expressed strongly in December is that the Irish government now offers enough flexibility for investors to provide the finance that the market desperately needs, alongside a sustainable pipeline of opportunities.