As politicians don the hard hats to announce a slew of capital projects, Kyran Fitzgerald says we can learn from international research how not to repeat the notorious cost overruns of the past.
Politicians are partial to projects that are shovel-ready. They like nothing more than to be pictured with hard hats on their heads.
Now, it seems we will soon be witnessing helmeted ministers clutching spades at photo calls.
We have just been through a period when capital investment was on the long finger.
Now, mothballed projects are being dusted off: Metro North, the Cork-Limerick motorway, a slew of other road projects, schools and hospital extensions.
No-one questions the importance of capital investment, but do we go about it in the right way?
First, there is the method of financing and in particular, the move towards off balance sheet financing and the spreading out over a long lifespan in the cost of projects.
Public private partnerships (PPPS) have been in vogue here since the end of the 1990s.
Between 2008 and 2012, PPPs accounted for one sixth of planned investments, with over 100 such projects underway, at various stages, according to a paper by Eoin Reeves of the University of Limerick.
The Comptroller & Auditor General examined schools projects financed this way, concluding that they turned out to be 13% more expensive than those financed by conventional ways (savings of 6% had been promised).
In the UK, the Private Finance Initiative (PFI), its version of PPPs, was launched under Margaret Thatcher.
There were a number of outstanding examples of schools projects running over budget where the private partner has gone belly-up, leaving the taxpayer to pick up the tab.
The former British chancellor George Osborne ordered a revamp of PFIs back in December 2012, and the UK government is now keeping a closer tally of project outcomes.
Private firms will still be involved and projects will still be off balance sheet. However, crucially, the UK state will no longer be tied to long-term service contracts.
It will be able to chop and change partners to secure better deals.
The British state, it is claimed, has saved £1.5bn (€1.7bn) through renegotiation, but remains on the hook for around £125bn on such projects.
In 2013, Eoin Reeves estimated that around €2.35bn had been spent to date on 37 PPPs here. The total commitment ran out at of €6.4bn.
Of this, the lion’s share of just under €3bn was committed to roads, and €1.33bn to building schools.
It was a case of buy now, pay later.
The whole PPP bandwagon came off the road, like so much else, following the financial crash, falling in 2012 to a third of 2007 levels.
In July 2012, however, 38 projects were added under a Government stimulus plan.
Such partnership arrangements may still have their place, particularly involving complex projects, where outside management is needed.
But are they really needed for schools, even roads?
Too often, local councils have lost out on tolls.
Is the quality of local management such that outside partners are needed?
Public bodies have lost a lot of management and technical expertise due to early retirement.
This may come back to bite us, as the public capital programme is ramped up.
Perhaps it is so, but at least, let’s make sure that the carve-up between public and private is a fair one, and that the taxpayer does not end up as turkey.
Next, there is the critical issue of the management of projects to completion and indeed, well beyond.
The McKinsey consultancy has investigated cost overruns in large infrastructure projects.
In a recent report, it cited an estimate from Bent Flyvbjerg of Oxford University’s Saïd Business School, that nine out of 10 mega projects run over budget.
Riskiest are rail projects: 44.7% were over budget. Then there were bridges and tunnels, which run 35% over budget. Roads were on average 20% over budget.
There are plenty of examples.
Berlin’s disastrous stalled airport and Boston’s massively over-budget tunnel, ‘the Big Dig’, come to mind.
McKinsey points to three main reasons for such overruns. First, unrealistic budgeting, the weakness in design and capabilities followed by poor execution.
As the consultants put it: “Up-front preparation pays for itself many times over.” And that involves paying for good engineers, surveyors, architects.
Some fear that the opposite has happened in Ireland, with public bodies scrimping on payments to professionals.
“If developers spent 3% to 5% of
capital cost in early stage engineering and design, it tends to produce far better results in on time and on budget delivery,” according to the consultants’ report.
Organisation of construction projects is often faulty, with the project director sitting four or five levels down from top leadership, and a jumble of sub-contractors, leaving legal minefields in place.
Just witness the battle over liability set to commence in the wake of the Grenville tower tragedy.
Of course, the selection of
projects has to be correct in the first place and not driven by popular sentiment and vote catching.
It would be helpful if the Government had in place a commission of independent experts to advise on selection.
It would also be helpful if funding for projects could be ring-fenced so that economic downturns do not throw them off course as has been the case so often in the past.
The Economic and Social Research Institute economist, Edgar Morgenroth, has observed that Irish public capital investment over the long run — 1970 to 2013 — has been well above the EU average “contrary to popular belief”.
The problem is that it has moved up and down to a dramatic extent depending on our fluctuating government finances.
Such capex ‘bulimia’ is not conducive to economic efficiency either at a project level, or national level. Teams get broken up. Experience is lost. Expenditure occurs just when land and labour costs are at their highest.
Is there any wonder that Mr Morgenroth points to “doubts” about the value for money secured on such spending? Just recall the Tiger years when spending went through the roof as landowners and suppliers picked up kings’ ransoms.
Let’s just hope that we are not about to repeat some of the same old mistakes as our politicians don those hard hats and wield the old shovels again.
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