February 23 2000
Project finance is not new in Ireland. Road tolling was employed successfully to finance road building in 1984, with the opening of the East Link Toll Bridge. Since then, however, the project finance approach has only been used - at least on significant projects - on a few occasions, most notably in relation to a further toll bridge (the Westlink Toll Bridge) and a number of mining projects.
This is about to change dramatically. The reasons for this are threefold.
First, the staggering growth in the Irish economy means that the government will no longer be able to rely on the cohesion and structural funding that it has traditionally received from the European Union. The government could still fund significant infrastructure development by employing part of the general government surplus. However, the government has instead decided to shift a sizeable element of the funding requirement to the private sector.
Second, the government has decided to embark on a public-private partnership (PPP) programme, similar to the private finance initiative (PFI) programme pursued by the UK government over the past 10 years. The rationale for adopting one of these programmes is, however, only partly linked to the desire to shift an element of the funding obligation to the private sector. The belief that this approach will result in faster delivery of key projects is also put forward as a justification.
Finally, the imminent partial liberalization of the gas and electricity sectors has resulted in several national and international consortia lining up to build power stations in the state. Project finance will undoubtedly play a key role in the financing of such projects.
On June 1 1999 the minister for finance announced the projects that the government has earmarked to pilot the PPP approach in Ireland. The list includes the following projects:
The government intends to explore the possibilities for a PPP in connection with the development of the Kilcock/Kinegad section of the N4. Finally, the government agreed to include in the pilot programme projects in the following sectors:
It was intended that specified projects would be earmarked in these areas following further consultation. The minister's announcement came almost one year after the government agreed to his proposal to endorse the PPP approach, on a pilot basis. Since that announcement, two important developments have taken place.
First, the Department of Education and Science has issued a request for proposals (November 13 1999) for new accommodation for Cork Music School and three or four post-primary schools that it is seeking to have delivered on a PPP basis. The total capital required is estimated to be I£25 million, which means that it should be possible to raise the finance entirely in the Irish market.
This was followed in December by a request for proposals from the National Roads Authority for a series of pilot PPP projects in the roads sector. In addition to the projects identified in the request for proposals it is understood that the National Roads Authority is seeking to identify further PPP projects with a view to obtaining a further £I1 billion in private finance during the life-time of the current National Development Plan (2000 to 2006).
While the design-build- finance-operate model is considered to be the purest form of PPP, and the model that will be of interest to project financiers, it is envisaged that some of the projects will be financed directly by the public sector using the design-build, design-build-operate or simply operate models.
To date the responsibility for generation, transmission, distribution and sale of electricity to the public has been vested in the Electricity Supply Board (ESB), a public sector vertically-integrated monopoly. The ESB also regulated the market and controlled new entrants through its power to issue permits and make orders relating to new undertakings wishing to engage in the generation, distribution and supply of electricity. Pursuant to the Electricity Regulation Act 1999, the regulatory role of the ESB is transferred to the newly-established Commission for Electricity Regulation.
In order to comply with EU Directive 96/92 for the internal market in electricity, 28% of the highly-restricted Irish market will become available to rival suppliers. This will take effect from February 19 2000. It is understood that at least 10 consortia have expressed an interest in building new power plants. Potential developers should note, however, that the changes introduced by the act will take some time to implement fully. In addition, planning appeals are likely to cause significant delays and the allocation of scarce gas supplies between the different proposals needs to be resolved. If these hurdles can be overcome then it is almost certain that project financing will play a key role in funding the proposed plants.
Liberalization of the Irish gas sector has been introduced, to a limited extent, in the form of The Energy (Miscellaneous Provisions) Act 1995, which allows third-party access to Bord Gais Eireann's transmission network for users who consume in excess of nine million therms. Again, once the new regulatory environment is fully implemented, there should be opportunities for project financiers in connection with new projects.
Of most interest to project financiers will be those road and bridge projects that are PPP projects, on a design-build-finance-operate basis and those are mentioned above. The vast majority of road projects will, however, proceed on the design-build basis and most notable among these is the proposed Dublin Port Tunnel. The tunnel, which is estimated to cost between I£180 million and I£200 million, will be 5.6km in length and will take up to three-and-a-half years to complete.
In 1979 the Local Government (Toll Roads) Act was passed. This empowered each local authority (subject to ministerial approval), to collect tolls on new, existing and improved roads. The East and West Link Toll Bridges followed and are now considered to be successful projects.
The relevant legal provisions arenow contained in the Roads Act 1993. The 1993 act specifically allows (subject to ministerial consent) the National Roads Authority (in respect of national roads) and county councils (in respect of regional roads) to enter into build-operate-transfer type concessions with the right to collect tolls. The National Roads Authority has recently concluded an agreement for the construction and operation of a second bridge on the M50 West Link. Revenues of just over I£34 million are estimated against operational costs of just over I£2.5 million.
Irish railways have suffered from a period of sustained under-investment. The result is a significant decline in the quality and level of service available to the public. An investment programme is now underway that will upgrade rolling stock, track and signalling equipment. In 1996 the Transport (Dublin Light Rail) Act was passed to facilitate a light rail project for Dublin. The list of projects announced by the minister for finance to pilot the PPP approach in Ireland includes key elements of the Dublin light rail project. The project is valued at between I£400 million and I£600 million.
Other rail projects that may involve PPP include a rail link from Dublin city centre to Dublin airport and a suburban rail link from Cork city to its satellite towns.
The 1996 Waste Management Act was introduced to deal with the prevention, management and control of waste and to give effect to EU directives concerning waste management and disposal. In 1998 I£185 million worth of sewerage projects was announced. Several waste and water treatment projects are underway in the state, although planning consents are proving to be a significant obstacle in respect of a number of the proposals. Save where the relevant local authority has decided to proceed on a design-build basis, there should be a requirement for private finance. Current projects include a waste recovery facility for dealing with municipal solid waste in Cork, a design-build-operate proposal for dealing with sludge in Dublin Bay and a design-build-operate project for a sewerage treatment facility at Ringsend Dublin. The latter project is valued at I£145 million.
The liberalized telecommunications market is proving to be a fertile ground for new projects. A provision of I£120 million is made in the National Development Plan to promote investment in advanced telecommunications in areas where the market will not deliver sufficient investment. A total of 13 projects were awarded pursuant to the last phase (1994-1999 National Development Plan) of this scheme.
To date significant financings have included a $60 million limited recourse facility for ARCON Mines Ltd in connection with the Galmoy Mine Project (zinc) for funding part of the development costs. Another zinc mining company (Lisheen lead zinc mine, owned by Ivernia West and its partner Minorco) managed to raise $173 million in project finance in connection with the Lisheen mine.
The legal environment for limited recourse financing in Ireland is similar to that in England. In general, Irish law will govern financing documentation for Irish projects. This will be the case particularly on projects where the entire funding requirement can be raised in the Irish market. However, sizeable projects may require some, or all, of their financing from London or New York-based banks and these institutions are likely to insist on the loan documentation being governed by English or New York law. Banks lending to an Irish project can expect to receive a security package similar to the package they would receive for an English project.
For international sponsors, the laws governing the relationship between members of a consortium are broadly similar to those in England. The provisions of the Irish companies acts concerning the incorporation, ownership, management, distribution of profits and insolvency of companies are not materially different (in most respects) from the equivalent provisions of the UK companies legislation.
For further information on this topic please contact Michael M O'Connor at Matheson Ormsby Prentice by telephone (+353 1 619 9000) or by fax (+353 1 619 9010) or by e-mail (firstname.lastname@example.org).
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