Sean Barrett: Public misspending is costing us dearly
IN November 2018, Fine Gael’s opinion poll rating was 34%. By February 2020, it had dropped to 20%.
This decline coincided with the massive cost overruns on the National Children’s Hospital. On December 18, 2018, the Government approved the project. As the cost escalated (the price could be as much as €2bn), the popularity of the Government slumped. A value-for-money reputation, carefully built up since 2010, was shredded.
In November 2017, in its public investment management assessment of Ireland, the International Monetary Fund (IMF) warned that “discussions with Departments and DPER (Department of Public Expenditure and Reform) did not reveal any instances of fundamental review having been undertaken, even though there seem to have been instances where this would seem to have been appropriate, e.g. in the case of the National Children’s Hospital.”
The IMF also reported faults in capital investment appraisal in Ireland, such as non-binding reviews, which, it said, are unique to Ireland, of the 189 member states of the IMF.
Irish capital spending is pro-cyclical. We spend our way out of booms. We have an inefficiency gap of 58% compared to other advanced countries and 23% compared to the rest of the world. We have no public reporting of lifetime costs or benefits, non-publication of appraisals, and cursory reviews of budgeting.
There is a lack of attention to changes in project scope and cost, non-transparent selection of project criteria, under-developed project monitoring, and a lack of detail for individual projects. We have a threshold for cost-benefit analysis of €20m, compared to just €5m in other countries. The lack of a medium- to longer-term profile of project costs is a risk to the public finances and the database was judged inadequate in ten aspects. The IMF report lists some 27 recommendations for reform.
Notwithstanding these 15 major flaws in capital spending appraisal in Ireland and the 27 recommendations for reform, the National Development Plan, in February 2018, maintained that “the recent IMF PIMA (public investment management assessment) found a generally good standard of public investment management in Ireland.”
This is an amazing presentation of the IMF findings. (The banking inquiry concluded that the conduct of the Department of Finance included “editing and reducing the risks highlighted in the international reports” of bodies such as the IMF, the OECD, and the European Commission.)
The astonishing conclusion presented in the National Development Plan is that “no change is proposed to long-established arrangements for oversight, monitoring, and management of voted exchequer resources.” The Government nailed its colours to the mast of inefficient spending. It condoned not just the children’s hospital cost, but all other inefficient capital spending.
In June 2018, the Fiscal Advisory Council warned that taking modified gross national income as an appropriate measure of national income, capital expenditure in Ireland is “well above the EU average.” In a full-employment economy, “public investment is set to increase by a third between 2018 and 2021.”
There was a 23.5% increase in capital spending in 2018 and the inflationary aspect was not understood in either the elected government or the permanent government. Houses become ever more expensive as the construction sector seeks out lucrative, high-yield, poorly appraised public capital projects.
‘The Construction Industry Sector Performance and Prospects Report,’ by the Department of Public Expenditure and Reform, in March 2019, found that there was little or no productivity growth in the Irish construction sector in the years 2000 and 2016, and that the sector is 14th in the euro area for labour productivity.
The construction industry acts as a drag on productivity here and is the largest sector responsible for productivity gaps between Ireland and the euro area. The report found that the wholesale price of building materials rose by 0.3% in 2018, but the construction-tender price index rose by 7.4%, 25 times faster than input prices. The large price increases at the children’s hospital for sanitary fittings, lights, gas outlets, drainage pipes, sprinklers, pipe cladding, inadequate VAT provision, as well as the under-provision for costs, equipment and staff, and late delivery charges, reflect inefficiencies within the project and in its monitoring by the health sector.
The capital spending in the National Development Plan, some €116bn, is €32bn in excess of what our competing EU countries typically spend. The Irish capital spending spree is being implemented in a full-employment economy. The capital spend is 81% more than the cost of the bank rescue, but the lessons have been forgotten.
The voter discontent in the recent election, in terms of health and housing, must be addressed in the talks to form the new government. Changing ministers is not enough. The permanent government and its operations require radical change.
We have to scrap the statement in the National Development Plan that “no change is proposed to long-standing arrangements for oversight, monitoring, and management of voted exchequer resources.”
That author is out of touch with public expenditure appraisal in Ireland. The problems highlighted by the IMF have to be taken seriously and the level of economics expertise in the permanent government increased.
Article 33.1 of the Constitution states that “there shall be a comptroller and auditor general to control, on behalf of the State, all disbursements and to audit all accounts of monies administered by, or under the authority of, the Oireachtas.”
Spending departments in Ireland are captured easily by interest groups. They lack economic expertise and are budget maximisers. On capital spending, they have an edifice complex, pouring out excessive concrete without regard to the low efficiency of the spend in a low-productivity sector harming national productivity. They live in an economy based on OPM (other peoples’ money). The role of the comptroller must be expanded, as the Constitution provides. The custom and practice of waiting to call in the comptroller after a project has crashed must end.
Those involved in public expenditure projects in Ireland have avoided accountability. Nobody is responsible and the bill goes to the taxpayer. This is called ‘moral hazard’ in economics. People exempted from the consequences of their actions do not change their conduct. The legal basis for moral hazard in the permanent government is The Ministers’ and Secretaries ‘Act (1924).
All the actions of a government department’s officials are deemed to be actions of the minister. In practice, this is not possible, as Basil Chubb pointed out some 50 years ago. The permanent government underestimated both the quantities and prices of pipes, lights, sprinklers, cladding, and other inputs for the children’s hospital. The elected government was not involved at that level. Changing ministers does not address this problem.
Change was a major theme in the recent election. Banking, and many of the institutions at the heart of the collapse, showed a remarkable resistance to reform.
A simplistic solution is to vote out the elected government, while leaving the permanent government unreformed. We must not repeat that mistake at the children’s hospital. The challenge of the next elected government will be to reform the permanent government.
