Dáil Éireann Debate, Tuesday - 21 July 2020
12. Deputy Mairéad Farrell asked the Minister for Public Expenditure and Reform if there have been reforms to the procurement process with regard to the issue of guaranteed maximum price contracts to ensure that massive cost overruns will not be borne on the taxpayer going forward; and if he will make a statement on the matter. [16633/20]
View answerA major reason for the cost overrun of the children's hospital was the extremely deficient way the guaranteed maximum price contract was handled. I have here a quote from the independent PwC review into this debacle. It states, "There was a lack of formal planning, strategic direction and preparation in relation to the process by which the GMP would be determined." Have there been any reforms to the procurement process related to the issue of guaranteed maximum price contracts to ensure that substantial cost overruns will not be borne by the taxpayer in future?
I thank Deputy Farrell for her question. I will give her the written answer and then she can ask questions to follow up. As Minister of State at the Department of Public Expenditure and Reform I have responsibility for the development of policy to ensure adequate expenditure oversight on capital projects and for public procurement. The public spending code is the set of rules, procedures and guidance developed to ensure value for money in public expenditure. It sets out the oversight and approval process for public expenditure proposals, including capital projects.
All public works projects that are delivered under the Exchequer-funded element of the national development plan must be procured in accordance with the provisions laid down in the capital works management framework. It comprises an integrated set of contractual provisions, procurement templates, procedures and guidance which cover all aspects of the delivery process of a public works project from inception to final project delivery and review to assist contracting authorities in meeting their ongoing procurement requirements.
The general requirement is that public works projects are to be comprehensively defined prior to tender. The standard form of public works contract is used on the vast majority of public works projects. It is a lump sum, fixed-price contract with tightly defined conditions governing price increases and time extensions. In limited circumstances, a derogation from the use of the standard forms of contract may be sought by means of an application to the Government contracts committee for construction. This process may be used for complex or large projects or for those which have specific requirements which do not naturally fit with the standard forms of contract.
Since the public works contracts were introduced in 2007, two projects utilising a two stage award process resulting in a guaranteed maximum price have been agreed through this derogation process. These are the new children's hospital and Dunkettle interchange upgrade works. Due to the scale of the national children's hospital and the complexity of the Dunkettle project, the early involvement of the contractor, facilitated by these types of contracts, formed part of the risk management strategy.
It is important to note that a derogation, if agreed, does not approve the approach or strategy of the contracting authority, but simply acknowledges that the circumstances are such as to warrant a different approach than the standard. It is a matter for the contracting authority and the approving authority to satisfy themselves as to the adequacy of the approach with regards to compliance with procurement rules and project appraisal in accordance with the public spending code. Accountability for the procurement strategy rests with the contracting authority.
Significant amendments were made to the public works contracts in 2016 and engagement is currently under way in the Office of Government Procurement on a more comprehensive review of construction procurement. The latest review of the public spending code was completed in 2019. The update to this code specifically strengthens the existing guidance to better reflect the realities of project delivery with a particular focus on financial appraisal, cost estimation and risk management. It will be supplemented by a new governance and assurance process for major projects with an estimated cost of more than €100 million. This new process will involve an independent, external review of major projects at key stages in the project life cycle.
I believe a guaranteed maximum price is essential, because it gives price certainty to the State about the cost of large public procurement projects and ensures taxpayers are not left on the hook for the types of cost overruns we have seen, which have seen the cost of the children's hospital balloon to what I am worried will be around three times the original cost, making this the most expensive medical centre in the history of the world, which is embarrassing to say the least. It seems to me from the Minister of State's response that there will be some sort of review and report. Will he outline the areas and the issues that will be examined and confirmed? Will it be made publicly available and, if so, when?
It is much more than a review and report, which would be inadequate. The Deputy is right to refer to the PwC report from last year. Its analysis was that the national children's hospital involved a substantial overspend and it pinpointed an underestimation of cost. It made two recommendations. One was that we need to strengthen the rules of the public spending code. Further, it stated that we needed an independent, external review of large projects at every stage, all the way through the project life cycle. There was somebody outside the contracting Department who could say "Hold on a second, we need to stop here". Both of those recommendations have happened. The public spending code was updated last year, in 2019, and I advise the Deputy to have a look at that. I met with the officials in charge of the public spending code and I am very impressed by their enthusiasm and ability. Secondly, on large projects of more than €100 million, there will be an external, independent review at all stages of the project life cycle.
It is good to hear there will be an examination of this issue. It is a pity the PwC report also makes clear that the business case proposal upon which the State based this investment decision contained material errors regarding not adhering to the public spending code, to which the Minister of State alluded. Will the Minister of State advise why it was not adhered to? Who is responsible for ensuring it is enforced? It will be the most expensive hospital in the world.
I confirm that the recommendations of the PwC report will be implemented. The shortfalls that were found will be addressed. With regard to who is responsible, the sponsoring authority that wanted to propose this project is the Department of Health. The body that sanctioned it, the approving authority, was the Government. The Department of Public Expenditure and Reform provides the public spending code and advice and help to anybody who is undertaking large projects. The PwC report indicated that it was not enough to rely on the sponsoring authority, which is the contracting authority, to monitor its own projects and that we needed an external, independent review so that someone could review it and say that it is not enough.
That is the change that we need. We have a huge number of projects worth €1 million and more planned as part of the national development plan. We need a robust control mechanism to make sure those projects do not run over in the way the children's hospital has done, and that we learn from that.
