Mega-projects should not also mean mega overruns
The massively escalating cost of the National Children’s Hospital is all too typical of the spending on the State’s big capital schemes, writes Colm McCarthy
THE furore over the Garda whistleblower affair dominated the Irish media all last week. This diverted attention from a very substantial scandal which emerged nine days ago, the revelation by The Irish Times that the National Children’s Hospital will cost €300m more than the estimate on which the Government commitment was based. The decision to go ahead was taken as recently as 2012 when the cost was put at €650m. It now appears that the cost will approach €1bn and some critics fear that the bill will go even higher. The public, and it would appear the news media, have become so inured to these cost overruns that the scandal has already faded from view.
Any large business firm informed of such an extraordinary jump in the cost of a project would have to consider cancellation. Going ahead at such a hugely inflated figure could threaten the firm’s survival. But governments never seem to respond this way. Several ministers reacted to the news of this shocking escalation with assurances that the project would go ahead regardless. They seem captive to irreversible political commitments, rather as if the desirability of the project is entirely independent of cost.
If the promoters of State mega-projects are aware that an admission of cost escalation will not risk the cancellation of the scheme, they have no incentive to prepare good cost estimates to begin with. Despite a long and sorry history of cost overruns on large capital schemes in Ireland, there is no punishment for misleading the Government with fantasy numbers, aside from a session at some toothless parliamentary committee.
The Department of Finance and, more recently, the Department of Public Expenditure and Reform, are responsible for oversight of public spending in Ireland, both capital and current. There is a long history of attempts by these bodies to ensure that all Government departments and spending agencies adhere to rigorous standards in project appraisal, especially regarding larger components of the Exchequer-financed Public Capital Programme.
The Department of Finance issued guidelines for project appraisal in July 1994 and these were updated in June 1999 and in February 2005. (Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector). This document required that all capital projects costing in excess of €50m be subjected to a formal cost/benefit analysis or CBA. This threshold was reduced to €30m in January 2006 and subsequently to €20m.
Since the public finance crisis erupted in 2008, these attempts were intensified, culminating in the Public Spending Code which is binding on all expenditure headings financed from the Exchequer.
The Central Expenditure Evaluation Unit (CEEU) established in the Department of Public Expenditure and Reform released in July 2012 a manual supposed to govern the conduct of economic appraisal for Exchequer-funded capital projects. The document notes that CBA analyses have in the past failed to meet satisfactory standards. The problems included departments and agencies not carrying out CBA analyses at all; serious underestimation of costs; and double counting of benefits
It is a requirement of the Public Spending Code that cost-benefit analyses be undertaken for all large projects and that each CBA be submitted for approval to the Central Expenditure Evaluation Unit before commitments are entered into. Apparently a contract has been initialled for the children’s hospital at the inflated cost figure in breach of the Public Spending Code. Has the Public Spending Code been abandoned? If so, when was this announced to the Dail?
If there is no proper appraisal of projects, it is almost inevitable that some will tend to furnish dishonest initial estimates of cost, improving the chances of political approval. To tell lies, in other words. The more innocent explanation is that these huge, once-off projects are difficult to price with precision and honest mistakes can be made. But the ‘honest-mistake’ hypothesis can be tested.
Governments have been paying for huge, once-off projects since the construction of the pyramids of Egypt. An equal incidence of low and high estimates in the historical record would support the ‘honest mistake’ hypothesis and exonerate the project promoters.
The economist Bent Flyvbjerg leads a team at the University of Oxford which has researched mega-project costs for countries around the world. Flyvbjerg’s conclusion is that initial cost estimates have been consistently too low and have shown no improvement in accuracy for centuries. He has framed what he calls the “iron law of megaprojects”. Publicly funded large projects go “over budget, over time, over and over again”.
Historically, nine out of 10 mega-projects go well over budget and most take much longer to build than expected. There is no evidence that the repeated overruns are due to honest mistakes and the researchers are forced to conclude that the promoters of these projects are engaged in systematic understatement of capital costs and extravagant claims for project benefits.
The outcome, says Flyvbjerg wearily, is the “survival of the un-fittest”: the biggest lies (or the most exaggerated benefit-cost ratios) win out and the project promoter’s task is the identification of the most plausible fibs.
Major cost overruns have been a constant feature of the Irish public capital programme for half a century, stretching back to the construction of the NET plant in Cork in the 1970s. After eight years of restraint, Exchequer allocations are being increased and a window of opportunity has reopened for wasteful capital spending.
Projects deferred during the crisis are emerging from hibernation, complete with spurious cost estimates and PR campaigns, all in the absence of any effective system of project appraisal.
It may be too late to do much about the National Children’s Hospital. It will be built, since the political system is incapable of any other response, regardless of cost. If the vaunted Oireachtas committee system, intended to be the flagship of the ‘new politics’, needs an opportunity to prove itself, there should be an extensive inquiry into the preparation of the €650m cost estimate for the project at St James Hospital.
Nor is it too late to reopen the siting of the project, in an inner Dublin suburb already suffering congestion.
Numerous greenfield sites are readily available, accessible from both city and provinces, in the rolling prairies that abut the M50 motorway. If one of the Oireachtas committees has the appetite, they could usefully inquire into the process of site selection, and the role played by professional and commercial vested interests.
There are some non-essential, and even larger, mega-projects emerging from hibernation in Dublin which could still be stopped before the revelation of cost increases commences.
Two underground railway projects in Dublin, the Dart Underground at a cost of €4bn and the Metro North at a cost of €2.4bn (these are pre-overrun figures in both cases) are being awoken from their slumber.
The scope for overruns with tunnels is the stuff of legend, attested in some of the world’s greatest public finance disasters, including the Anglo-French Channel Tunnel and, closer to home, the Dublin Port Tunnel.
It is not too late for both projects to be subjected, in public, to the full rigours of the Public Spending Code, before the fibbing starts.
‘It is not too late for full rigour before the fibbing starts’