Government in lobbying for changes to EU borrowing rules

The Government is lobbying for changes in the proposed rules the EU uses to assess borrowing, which could hinder major projects such as the Dublin Metro, writes Cliff Taylor, Economics Editor

Revised rules are due to be completed by the end of this year and are currently under discussion by a committee of senior statisticians from across Europe, who will advise Eurostat, the EU statistics agency, on what approach should be adopted.

A key issue for Ireland is how countries will be expected to treat money that the State borrows to fund its share of projects completed in partnership with the private sector.

Money borrowed for such projects may have to all be counted in government borrowing in one year, which would push up the deficit in that year and make it hard to stay within the 3 per cent of GDP annual deficit limit.

The State could have to accrue the spending on such projects into the national accounts - and thus increase borrowing - in the year when construction ends and the State effectively takes ownership of the asset, according to Mr Mick Lucey of the Central Statistics Office, who is Ireland's representative on the statistical group currently considering these issues.

This could mean, for example, that if the State entered into an agreement to pay for a big project like the Metro over a period of years - as has been suggested - it could have to count the full cost in one year in its total of the general government deficit (GGD). As the estimated phase one cost of the Metro is over €2 billion, this would cause serious difficulties in managing borrowing, threatening to push it up sharply in one year.

The GGD is the measure that the EU uses to measure borrowing each year. Under the rules of the Stability and Growth Pact, which regulates borrowing levels in the euro zone, the deficit must be kept close to balance through the economic cycle. It is not meant to exceed 3 per cent under any circumstances, although France and Germany are currently in breach of this limit.

The Government has been examining varies types of public/ private partnerships to help fund and deliver major infrastructure projects. There are proposals that some of these projects - such as the Metro currently under discussion - could be funded and built initially by the private sector, with the Government then paying a contribution over a period of years that would provide a return to the private investors. Tolls could also part-fund this return.

In traditional purely State-funded projects, the Government would borrow money and could spread the cost over the full construction period - typically three to five years.

However, Eurostat may not allow this in the case of public-private partnerships.

The Government will seek to get agreement on an interpretation of this rule that will not hinder major investment projects, according to a senior official source. The Taoiseach, Mr Ahern, referred to the issue at last week's EU summit when he said that he did not understand the logic in accounting terms of having to take the "hit" in terms of the general government deficit up front.

Eurostat may be persuaded to allow the cost to be spread over the full construction term of the project - although there appears to be no possibility that it will allow the cost to be spread over a longer period to facilitate the kind of 20-30 year payment plan that has been mooted in relation to the Metro.

Another possibility is that, at political level, there could be a recognition that such projects may from time to time push up borrowing in euro zone states and that this should not be considered to be outside the rules.

This issue is separate from the related consideration of which projects can actually be moved off the State balance sheet and not counted as part of the general government deficit. This is only likely to be allowed in cases where revenues such as tolls account for more than 50 per cent of the capital and operating costs, or where a substantial portion of the risk of the project is moved to the private sector in vehicles similar to operating leases.

In the latter arrangement, the costs to the State may be prohibitive in many cases, as the private sector would seek a substantial return for taking on project risk.