The private sector may be asked to invest in the Luas project as part of a plan by the Government to seek investment for capital projects.

The plan, Government approval for which was announced yesterday by the Minister for Finance, Mr McCreevy, could see roads and schools being built and operated by private interests.

The Department of Finance is to set up a separate unit within its organisation to help co-ordinate the move. This is expected to take place within two months.

The approach, known as a Public Private Partnership (PPP), will run initially on a pilot basis. Among the projects which could be funded, built and operated by the private sector are the Drogheda Bypass, the Western Bypass at Dundalk/Newry, the Southern Cross motorway and parts of the Northern Port Access route in Dublin.

The private sector would undertake to put up the money, build the project and operate it for a set number of years, under a contract with the Government.

The report proposes various models for the private sector to make a commercial return on its investment, but one method would be to pay the consortium involved a certain amount of money each quarter, or each year, for a specified number of years. A return of around 5 per cent per annum has been mooted as a ball-park figure, depending on the project involved.

A report commissioned by the Government on the issue and published yesterday, recommends that a number of PPPs be conducted in areas such as transport, infrastructure waste and water treatment and the construction of educational facilities. Mr Liam Hennessy, of Farrell Grant Sparks, who researched the report with Goodbody Economic Consultants and Chesterton Consulting, said experience abroad suggests that PPPs can make a limited and targeted contribution to the public infrastructure.

The report says only projects with a minimum investment level should be considered. "Civil engineering projects should be of sufficient magnitude - £30 million - to enable the private sector to benefit from economies of scale, absorb the initial learning cost and at the same time make an acceptable return, it adds.

It says the threshold for building projects could be considerably lower - perhaps £5 million-£10 million. It also points out that developer-led water or sewerage schemes, designed to open up specific tracts of land for housing development could have thresholds as low as £1 million£5 million.

Although the priority will be roads, the private sector may be asked to fund part of the Luas project, possibly the section that goes underground. Whichever consortium wins the project, it would also be responsible for maintaining the section for a number of years.

Mr Hennessy said PPPs would not replace current Exchequer investment, but would play an additional role. Advantages of such private investment would include speeding up the process by which such projects are brought to development and transferring the risk from the public to the private sector.

The report was welcomed by the Construction Industry Federation (CIF) and IBEC, the employers' lobby group. In a statement, IBEC director Mr Peter Brennan said it had lobbied the Government on the issue and welcomed its rapid response.

"We are confident that, provided private sector expertise and skills are fully engaged as the pilot phase progresses that PPP projects will have a significant role to play in the long-term as EU funding for essential public capital expenditure will not be available," he said.

The CIF director general, Mr Liam Kelleher, said that private participation, when fully established, will provide an additional source of expertise and resources in the "crucial area" of public infrastructural projects. "It is vital that high levels of investment are sustained to underpin high economic growth levels and to avoid creating a braking effect caused by congestion," he said.

Both IBEC and the CIF, as well as ICTU representatives, were part of an advisory group which worked with an inter-departmental group to examine PPP issues earlier this year. Yesterday's report recommends setting up a PPP forum comprising trade union representatives, contractors, financiers, facilities managers and financial, legal and strategic advisers.

As well as a unit in the Department of Finance to oversee and advise on the PPP process, the report recommends that similar units be set up in Government departments involved in the projects.