Cost benefit analysis on public private partnerships overdue

Cost benefit analysis on public private partnerships overdue

The collapse of Britain’s second largest contractor, a group with annual turnover in excess of £5bn, is a huge embarrassment to the British government, writes Kyran Fitzgerald.

Questions are being raised about the operation across the water of privatised infrastructure projects and another distinct set of questions are being levelled at the public sector over the negotiation of procurement contracts.

These issues are also highly relevant from an Irish point of view, particularly in view of the impending increase in spending on national infrastructure.

Carillion expanded at breakneck speed. Financial controls were lacking. In retrospect, the group was operating on wafer thin margins which left it exposed to cost overruns on projects, in particular two large hospitals in Liverpool and the West Midlands.

The direct impact of the collapse on Ireland appears limited, with some school projects affected likely to be completed to schedule.

However, there are understandable concerns down the line that failings in public tendering could lead to problems down the line in the case of projects like the National Children’s Hospital.

The State must strike a hard bargain, but it must be sustainable as it is the taxpayer who will be on the hook in any collapse along with employees, shareholders and of course, sub contractors and joint venture partners.

In 2013, the Construction Industry Federation called for a major overhaul of public sector construction procurement. It condemned the “lack of clarity, incomplete information and lack of legal resources and low quality of tender documents hampering progress”, adding that “the system favours the lowest tender price as opposed those with the greatest ability to undertake and complete a project.”

According to director general, Tom Parlon, the collapse of ‘countless public projects’ could be attributed to flaws in the system of procurement.

The then minister of state, Brian Hayes, accepted improvements in the system were required. 

Today, Mr Parlon accepts there has been a “marked increase in engagement between the industry and the office of Public Procurement culminating in the launch of a review of the performance of public works contracts.”

However, with an expanded public capital programme due for launch by the end of March, the CIF is seeking further improvements, arguing closer collaboration should reduce the likelihood of disputes and cost overruns. This would allow companies to assess costs and to forecast more effectively.

The whole issue of the structuring and financing of public infrastructure projects is also to the fore, these days.

Concerns exist over the wisdom of reliance on the private sector for both financing and long term management of contracts such as roads and schools.

Britain’s National Audit Office has just published a report concluding that reliance on private finance is more expensive than funding projects directly with taxpayers’ money. Currently, in the UK, there are over 700 PFI contracts in existence worth over £60bn (€68bn).

The NAO has concluded the cumulative cost could approach £200bn by the 2040s unless new deals are agreed.

The report estimates a group of schools covered by PFI contracts cost 40% plus more to build than if they had been financed by Government borrowings. The difference in the case of hospitals studied was even higher at 70%.

Eoin Reeves, of the University of Limerick, has studied PPPs and is a long time sceptic when it comes to the use of public private partnerships.

He reckons there are still big issues around the performance of PPPs which he estimates account for between 10% and 20% of financing of projects through public procurement.

In his view, the UK National Audit Office has produced a ‘really interesting report’ in which they conclude that the experience of the past 25 years with the UK Private Finance initiative has not been a good one.

Dr Reeves regrets the fact the Office of the Comptroller and Auditor General, the body charged with measuring value for money in Irish public expenditure, has produced so little in the way of assessments on Irish PPPs.

He points to a report by the body on pilot school PPS which “produced really good detailed analysis” back in the early noughties.

It found that the PPPs cost more than anticipated. Since then, little in the way of analysis has emerged, an omission he attributes to a lack of resources.

A lack of transparency in details on PPP projects exists in large part because of a reluctance to release commercial information.

Dr Reeves believes greater transparency is required. “Decision makers should be made accountable.”

The ‘buy now-pay later’ approach at the heart of PPPs may now be attracting growing scepticism even at the heart of government.

According to Aaron Boyle of Arthur Cox solicitors, there are mixed signals regarding PPPs evident in the mid-term review of the capital plan.

The emphasis now is on accessing EIB funding to support infrastructural development along with new financing mechanism such as the Irish Strategic Investment Fund. However, the challenge of ensuring that sufficient project management expertise is developed within the public sector remains.

Nevertheless, PPPs may continue to have a role to play where they bring to the table outside partners with unique levels of expertise not available within Government.

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