Varadkar’s €3bn tax cut in doubt
New broadband risk to taxpayers Investors only commit €200m Advisory firms rake in €24m
TAOISEACH Leo Varadkar’s €3bn tax cut election pledge is under threat due to the cost of extending high-speed broadband throughout the country, the Sunday Independent can reveal.
Mr Varadkar has promised to significantly increase the entry point for the top rate of tax to €50,000 within the next five years, which would save workers up to €3,000 a year.
However, the Taoiseach is now being warned that he “can’t just print money” to fulfil his tax cut commitments while also spending a further €3bn of the State’s cash on the controversial National Broadband Plan. The warning comes as the
Sunday Independent reveals that the Government spent an extraordinary €23.6m on consultancy firms during the tendering process for the State broadband project.
Meanwhile, it has also emerged that Agriculture Minister Michael Creed has accidentally revealed that Granahan McCourt, the company implementing the National Broadband Plan, is investing €200m of its own financial resources upfront into the €3bn project.
Speaking on Clare FM last Wednesday, Mr Creed said: “The State is providing a subsidy to Granahan McCourt who I think are putting in something shy of the region of €200m.”
The Department of Communications said it could not comment on Mr Creed’s comments as the “level of initial equity investment and working capital is commercially sensitive”. However, the Sunday Independent has independently established that Granahan McCourt’s investment is only €200m. However, writing in the
Sunday Independent today, the chairman of National Broadband Ireland, David C McCourt, maintained his company would invest €2.5bn in to the project over the next 25 years.
Yesterday, Fianna Fail’s Willie O’Dea said it “beggars belief” that there is “so little commitment on the part of the investor compared to what the taxpayer in putting in”.
Department of Public Expenditure and Reform secretary general Robert Watt raised serious concerns about the level of investment by the telecommunications firm headed by Mr McCourt in highly critical correspondence released on the day the broadband plan was announced.
However, the scale of private investment was redacted in the official Government documents.
Mr Watt said the telecommunications firm was “only risking” an undisclosed figure, now confirmed to be €200m, of their own funds which the company will have potentially recouped by 2028.
“In these circumstances, I would question whether the future risk associated with guaranteeing service provisions over 25 years is genuinely transferred to the private operator or, in reality, actually retained by the Exchequer,” he said.
In observations on the final plan, Mr Watt also issued a stark warning about the impact the broadband plan would have on other State infrastructure projects.
He said there were serious implications for projects committed to under the Government’s much-hyped Project Ireland 2040 national development plan, including the construction of 18 primary schools, 10 primary care centres and 2,000 social houses.
When questioned on his secretary general’s comments, Minister for Finance Paschal
Donohoe insisted he would find the additional revenue for the projects.
However, economists and Opposition politicians believe the Government’s figures do not add up and insist there is not enough money in the State’s coffers to pay for Mr Varadkar’s election promises while also meeting the demands of the broadband plan and other projects, as well as the spiralling cost of the National Children’s Hospital.
Economist Colm McCarthy said the Government has “completely lost control” of public spending.
“They have ignored all warnings from the Central Bank and the Fiscal Advisory Council about public spending. It’s all well and good spending taxpayers’ money when the sun is shining but once things turn bad, taxes are the first thing the Government looks at,” Mr McCarthy told the Sunday Independent.
He also questioned how the Taoiseach could see through his promise to raise the entry point for the higher rate of tax to €50,000 in five years while also splurging the public’s finances on an increasing number of State projects. “The funding has to come from somewhere and the Government can’t just print money so something will have to give,” Mr McCarthy added.
Fianna Fail’s public expenditure and reform spokesperson Barry Cowen also said the Government’s spending and tax cut figures “don’t add up”.
“If they were being straight and honest with people, they wouldn’t be saying they can give them €3bn high speed broadband and €3bn tax cuts in five years,” Mr Cowen told the Sunday Independent.
Mr McCarthy also raised concerns about a potential shortage of construction workers to build new homes because of all the Government’s infrastructure projects.
“If you divert 2,000 construction workers to the National Broadband Plan, then they are not building all the new homes the country desperately needs,” he said.
“Builders are already complaining about the shortage of construction workers and these projects are going to significantly add to the problem,” he said.
A senior Department of Finance source said the Taoiseach’s tax plan is not at risk due to spending on infrastructure projects but rather from future increases in current spending such as increasing public sector pay.
“Governments always get into difficult over losing control of recurring spending rather than one-off capital projects,” the source said. The source said the Department’s “golden rule” was to keep current spending below the level of economic growth.
Separately, it has emerged the Government spent €23.6m on consultancy and advisory firms throughout the National Broadband Plan tendering process.
This included €11.6m paid to KPMG for “financial and procurement advisory services/specialist personnel to support” and €5.4m paid to Analysys Mason for “technical advisory services”. A further €5.4m was paid to Mason Hayes & Curran for legal advice and PwC were paid €2.4m for “economic and strategy advisory services”.
The estimated total cost of the project is around €5bn over 25 years and the State will make a maximum contribution of €2.6bn plus Vat. National Broadband Ireland (NBI), the entity overseeing the plan, carries all the risk of providing the €2.4bn. If commercial revenues do not transpire, for whatever reason, the company is required to make up any shortfall with its own funds.
MINISTERS, the Taoiseach included, have relied on a cost-benefit analysis (CBA) from the consultants PwC in justifying the €3bn Exchequer bill for fibre broadband to 540,000 premises in rural Ireland.
An earlier scheme to connect 840,000 premises was costed at €500m, one-sixth of the figure agreed last Tuesday for what is now a smaller project. The cost-benefit report was reviewed by the Department of Public Expenditure as required under the Government’s public spending code. This process binds all government departments and state agencies.
The code requires that all significant public capital projects be subjected to a full economic evaluation, comparing costs to benefits. This is designed to ensure that poor proposals are identified and eliminated, with scarce public resources concentrated on the best projects.
Unusually, the PwC study and the department’s verdict have been released to the public. PwC gave the €3bn project, the largest single scheme in the State’s history, an enthusiastic endorsement but the department advised bluntly that the PwC report was ‘‘not credible’’. The project was too risky, there was insufficient capital on the table from the sole bidder and there were various technical shortcomings in the analysis.
Since the department is tasked with ensuring compliance with the Government’s public spending code and employs specialist staff for the purpose, this should be a worrying development for PwC. The company is one of a number in Dublin which prepare cost-benefit reports for the promoters of public projects and its reputation has been assailed.
The company must have been mightily relieved when the Taoiseach, the Tanaiste and the two ministers directly involved, Paschal Donohoe at Public Expenditure and Richard Bruton at Communications, economics graduates both, chose to endorse their report, rejecting the department’s damning verdict.
Relief at PwC will have been matched by despair at the Department of Public Expenditure, chastised in such public fashion by the Taoiseach, the Tanaiste and two such well-qualified ministers.
The hapless officials should consider themselves lucky the Government did not announce redundancies forthwith, and their replacement with knowledgeable external consultants to supervise the public spending code in their stead.
The ministers, to be clear, are not relying on political prerogative alone. They are citing external analytic authority for their preferred course, namely the superiority of PwC’s analysis over that of the benighted officials.
An alternative narrative on this unprecedented and public rebuke to the officials, promul
gated energetically by the Irish Times and RTE, has to do with the imminence of elections and the moral failings of politicians. Some journalists have even suggested that the Government knows perfectly well that the Department of Public Expenditure is right, and that the PwC report is flawed. The ministers are simply too craven to scrap the broadband plan and start again. Only one of these conflicting narratives can be sustained. Was the Government correct to endorse the PwC report or should it have accepted the reservations of its detractors?
PwC has extensive experience in preparing cost-benefit analyses. One of a group of firms hired by the promoting state agency, it felt able to report positively on the gone-but-not-forgotten Bertiebowl, a third stadium for Dublin favoured by the former Taoiseach Bertie Ahern to add to Croke Park and the Aviva. This €1bn project was abandoned, despite the positive evaluation furnished to its promoters, due to the machinations of some politicians obsessed about value-for-money in capital spending and unconvinced by the consultants.
PwC also, and more pertinently, prepared a report on the National Broadband Plan in one of its earlier incarnations, released by its client, the Department of Communications in 2015.
This report, also positive, contained no quantified estimates of either costs or benefits. It also listed the labour cost of construction as a project benefit, a methodological novelty.
The latest PwC report had to address the existential challenge facing all providers of promoter-funded cost-benefit studies, which is to find, somewhere, enough benefits to exceed whatever costs are admitted.
This can lead the analyst to some strange places. Scaling the daunting mountain of costs tempted the PwC authors to include pure private benefits in the calculations, and they constitute the dominant portion of total benefits claimed for the project.
The inclusion of private as distinct from public or social benefits, the department points out, is inadmissible in cost-benefit analysis.
Manoeuvres of this kind are testament to the magnitude of the challenge in getting the numbers to behave.
The department has other complaints. The officials write: “Concerns were expressed in February 2019 in relation to the overstatement of net additional benefits.
“The latest (final) revised version of the CBA has responded to these concerns and made changes which reduce the benefit of the project by a total of €1.13bn which, all things equal, would have reduced the net present value to below zero…”
They continue: “The cost side of the CBA was also changed very significantly with costs to the operator being reduced by €1.079bn, apparently due to an error which had gone unspotted in all previous iterations of the analysis. This discovered reduction in costs fortuitously compensates for the reduction in benefits arising from our observations on the previous version of the CBA.
“In summary, the CBA is not credible, and it is questionable whether it is consistent with the Public Spending Code.”
The Department of Public Expenditure, the government’s value-for-money resource, insists that the project promoters, the Department of Communications, and its chosen consultants, PwC, have failed to establish that the project delivers benefits adequate to justify Exchequer costs of €3bn. The routine procedure in Ireland, where economic evaluations are conducted by consultants employed by the project promoters, is long established. That it produces unsatisfactory results should not come as a surprise. To my knowledge, no cost-benefit study commissioned from consultants by the sponsors of a major project has come up with a negative verdict in Ireland over the last 30 years. Unhappy with this situation, the Department of Finance commissioned a team led by the Economic and Social Research Institute to recommend a way forward in 2003. The report, whose author list included this writer, concluded thus: ‘‘If the quality of project appraisal is to be enhanced and the potential of this powerful appraisal tool maximised, CBAs must be conducted rigorously and independently of project promoters. ‘‘Consideration should be given to the establishment of a unit in the Department of Finance devoted exclusively to the conduct/ commissioning of cost/benefit studies on major projects…’’
Acceptance of this recommendation need not result in redundancies at PwC or the other firms active in the Dublin CBA industry.
It would mean, however, that they would be employed to aid the referee rather than one of the contestants.
Since Exchequer-funded capital projects rarely involve contributions to cost from anyone else, the demands on the capital programme are unlimited.
Schools, public housing, Garda stations, hospitals, road rehabilitation, Bertiebowls, there are no bounds to what can be promoted.
The Taoiseach airily suggested last week that a single-line underground tram project in Dublin could cost €4bn or €5bn. The Government was wrong to endorse PwC’s conclusions on the broadband plan. There is no coherent method of allocating limited funds without taking cost-benefit analysis seriously.
‘The €1bn project (Bertie-bowl) was abandoned dispite the positive evaluation furnished to its promoters’
‘It would mean that they would be employed to aid the referee rather than one of the contestants’