I move:
That Dáil Éireann takes note of the Report of the Committee on Public Expenditure: Control of Capital Projects.
This report arose from public concern about major cost overruns on public construction contracts and the committee decided that an urgent review should be undertaken of the extent to which public sector contracts were monitored and controlled at present and also to examine two projects in which there had been major overruns, namely, the Howth harbour development scheme and the Department of Justice prison building programme.
Because of the committee's concern about the apparent lack of control of expenditure on public capital projects it was decided to appoint the first sub-committee to examine this important area and in as much depth as was possible, given the resources available and within a very limited time scale. The sub-committee, which met for the first time on 31 October 1984 consisted of four members — Deputies Richard Bruton, Joe Doyle and Noel Treacy, with myself appointed to act as chairman of the sub-committee.
The sub-committee met on 12 occasions and heard evidence from officials of the Departments of Finance, Fisheries and Forestry, Justice and also the Office of Public Works. Submissions were received from the Royal Institute of Architects of Ireland and the Society of Chartered Surveyors in the Republic of Ireland and I want to take this opportunity to thank all those people who attended our hearings or sent us written submissions. It goes without saying that, but for their co-operation and help, we would not have been able to complete our work.
Once the sub-committee members identified the areas to be examined we structured our examination along the following lines: firstly, the sub-committee looked at the historical background, including the 1983 report of the working group on cost overruns on public construction contracts; secondly, we examined the present system of control of capital expenditure operated by the Department of Finance and at Departmental level generally; thirdly, we examined in detail the background to the cost overruns on the Howth harbour development scheme; fourthly, the sub-committee reviewed the Department of Justice prison building programme which had resulted in large-scale professional fees being paid in the case of some projects which did not get off the ground and finally, we looked at the role of the Office of Public Works and the extent to which that office acted as principal and agent in the case of a number of capital projects.
Other speakers this evening will describe in some detail the progress and results of the main committee's review. I propose to outline the sub-committee's main findings which formed the nucleus of the report adopted by the Committee on Public Expenditure last July and which is the subject of the present debate.
One of the most vital and interesting documents before the committee was the report of the working group on cost overruns on public construction contracts which reported in 1983. That report detailed the scope of the problem of cost overruns on capital projects and estimated that they averaged at least 7½ to 12½ per cent which was equivalent to about £60 million to £100 million in 1982. The working group were of the view that substantial savings of up to £60 million could be made if capital cost-overruns could be avoided.
The working group's brief was to consider what measures might be taken to avoid non-viable investment decisions and to reduce the increase in costs on public contracts during construction. The group also looked into consultants' costs, particularly in relation to fees.
There were 17 important recommendations in the 1983 report which were aimed at making the appraisal and execution of capital projects more effective. Though we know that the Department of Finance have tightened up controls generally in this area we have to say that, in the important area of introducing changes in the system of payment of fees to consultants, there has been no change made to date, so far as the committee are aware. This aspect will, no doubt, be referred to by other members of the committee during the debate. To sum up, the committee were disappointed with the lack of progress on the implementation of the working group's report and this was one of the reasons why we decided to review what action was being taken to control public expenditure.
At this point I would like to put the scale of the problem in context. The Public Capital Programme amounted to £1,259 million in 1980. In 1985 the total Public Capital Programme is estimated at £1,800 million. This is financed by Exchequer and non-Exchequer resources of £1,066 million with Exchequer borrowing funding the balance. The size of capital expenditure this year, representing a fifth of total public expenditure, means that every effort must be made to ensure that there is value for money in the case of every £ spent on capital projects. I will now refer to systems in operation at present for control of expenditure in that area. The present controls were referred to in paragraph 3 of the report.
The committee were informed that the Department of Finance issued a comprehensive circular, known as 1/83, which set down guidelines for the appraisal, control and execution of public capital projects. The purpose of that circular was to ensure a systematic approach to capital project planning and implementation throughout the public sector. It encouraged the review of and improvement of planning and control procedures already in operation as well as providing guidelines for Departments and agencies in introducing formal procedures where none previously existed.
We asked the Department of Finance to send the committee a formal memorandum on follow up action taken since the publication of circular 1/83. The response to our request by the Department of Finance is referred to in paragraphs 4 and 5 of the committee's report and the memorandum itself is summarised at appendix 7 of the report.
The overall conclusion the committee reached in the area of centralised or departmental control was that, despite the new guidelines, not all Departments were adhering to the Department of Finance control systems — in essence there seemed to be an acceptance that Departments may be allowed some discretion on the extent to which capital projects may be controlled. This we would find unacceptable and the committee have not only drawn attention to this weakness in the present system but have specifically included reference to it in the report's recommendations.
We hope that the Minister for Finance will examine the systems in operation within his Department for the control of capital expenditure and that action will be taken to ensure that any discretion or loopholes that exist at present will be dealt with so that unwarranted leaks of scarce Exchequer resources on the capital side can be stopped by immediate remedial action.
The initial objective of the committee's inquiry was to examine the steps which had led to a reported increase on the Howth harbour development scheme from an estimated £3.5 million to £12 million. Following the hearing of evidence from Department of Fisheries and Forestry officials towards the end of 1984 the committee decided that an in-depth inquiry should be made. The review was included in the sub-committee's terms of reference as part of the general inquiry into the control of capital projects.
Given the technical nature of the Howth harbour project the committee decided to engage the services of Mr. John Ballance, architect and engineer, as consultant to assist in that particular aspect of the report. I would like at this stage to pay tribute on behalf of the sub-committee and the committee to Mr. Ballance for the excellent work he undertook on our behalf. Apart from officials of the Department of Fisheries and Forestry, the sub-committee heard evidence from Mr. P. McCabe, Commissioner of Public Works, and his advisers. Again, I would like to thank the officials involved who were very forthcoming and helpful in giving evidence.
Unfortunately, the Howth harbour scheme inquiry revealed disturbing evidence of lack of proper controls which led to the final cost of the project being four times the original tender price. Our report sets out the various factors which led to the huge cost overrun. Perhaps I could summarise what happened as follows: the Department changed their plans radically after going to tender; despite the fact that two independent borehole investigations in Howth harbour showed discrepancies, the Office of Public Works went ahead with excavations and much greater quantities of rock were found than anticipated, costing an estimated £1.241 million compared with a tender price of £0.243 million; additional works cost £1.69 million; effects of a price variation clause, £2.25 million; a syncrolift £0.91 million; and other works £0.56 million; the committee were gravely concerned at the lack of control on the Howth harbour development scheme and the lack of action in the Department of Fisheries and the Office of Public Works when the costs began to get out of control. The consultant's report, which is included in our report, shows clearly the evolution of the project and how the original tender price rose from just over £3½ million to almost £12 million.
Towards the end of last year the committee became aware that, in the case of a number of major capital projects for the prison service, considerable expenditure had been incurred on professional fees. The buildings and installations were designed as commissioned by the Department of Justice. The design work had reached an advanced stage before it was decided by the Department that the projects would have to be redesigned. This was to secure economies of cost by modifying the requirements originally planned. I should mention here that in one case the redesign was proceeded with even though the Department of Finance had refused to sanction expenditure on the site development works for the project.
Because of their concern, the committee decided to follow up the initial inquiries by seeking written material from the Department of Justice and subsequently by hearing evidence. Following a series of meetings the committee found the following:
(1) Four prison building projects were involved, two in Wheatfield, Dublin, and one each in Cork and Portlaoise.
(2) Total fees of almost £13 million were payable.
(3) During 1982 the Department of Justice decided to modify the prison designs to increase the accommodation while reducing unit costs.
The committee were seriously concerned at the fees that had been paid for design work on prisons when work had actually commenced on only one site. For that reason the sub-committee were given the task of examining the other aspects of capital expenditure to which I have already referred.
The sub-committee set out to establish: (a) why very considerable fees were paid; (b) what caused the delay in getting work off the ground and, (c), what information — such as projections of prison population — was used by management in the Department of Justice in deciding on the original designs and the subsequent redesigns of the new prison accommodation.
The sub-committee found no clear evidence as to why designs on four separate prison building projects were initiated in 1979. The committee could not accept the reasons advanced by the Department of Justice for deciding on abandoning original designs and commissioning four new designs and questioned why the projects were not cost effective in the original design.
This particular case graphically illustrated for us the level of consultants' fees that must be paid under existing agreements, whereby the greater proportion is paid before construction work gets underway. The committee regard the present fee system as inequitable and are recommending that this situation should be altered immediately.
I would have to say that we found this particular case difficult to comprehend in terms of how the prison building programme got out of hand. Questions must be asked as to why certain decisions were taken and subsequently changed, the result of which added to the overall cost to the Exchequer. These and other aspects will, I am sure, be covered in speeches by other colleagues on the Committee on Public Expenditure. One other disturbing aspect was the refusal of the Minister to clarify a number of issues. This added to the confusion in the minds of members of the sub-committee.
It would be an understatement to say that the committee were unhappy with the role of the Office of Public Works in relation to capital projects generally. They might have assumed that in the case of the prison building programme the Department of Justice, if not aware already, would have been alerted by the Office of Public Works to the fact that delays and redesigns would involve greatly increased expenditure. As stated in our report, the Office of Public Works must, in their capacity as professional-technical adviser to Government Departments, assume responsibility for warning client Departments of the financial and other consequences of modifying or amending designs on public construction projects. Our recommendations define how such problems can and must be avoided in future and how the Office of Public Works can improve their performance in this area.
The committee were particularly concerned about the payment of fees to professional consultants acting on behalf of client Departments and offices. I should mention here that consultants' fees based on a percentage of total cost were last fixed by the National Prices Commission in June 1975, though we understand the Minister for Finance is now reviewing this whole area.
The sub-committee of four members, as I said before, reported to the main committee and their report and recommendations were fully endorsed. The report before the House, with minor amendments, represents the work undertaken by our sub-committee and I am happy to have been associated with them from the outset.
To sum up, in their review of capital projects, the Committee concluded that:
—The guidelines laid down in the Department of Finance Circular 1/83 left an undue level of discretion to Departments, offices and State-sponsored bodies.
—The guidelines had not been universally adopted by all agencies.
—Approval and/or sanction "in principle" by the Department of Finance is used from time to time. There is a need for clarification on the contractual or other commitment involved in such a practice. If it implies that public expenditure is committed in the absence of detailed project appraisal and evaluation, then this approach should be changed.
—On the basis of the evidence heard in the case of (a) the Department of Finance Circular 1/83, (b) the Howth harbour development scheme and (c) the Department of Justice prison building programme, the committee are convinced that radical changes are required in the management and control of capital projects if major cost overruns are to be avoided in future.
—The Office of Public Works need to improve their present approach to project management and this will occur only if there is a commitment by their management to introduce a system of tighter technical and administrative control. One of the main problem areas identified by the committee lay in the rather passive role adopted by the Office of Public Works in their relationship with client Departments. The office should act with more decisiveness and authority and should refuse to accept projects on behalf of any Department or office who do not conform to standards laid down by them, particularly in relation to briefing, monitoring and control systems.
—The present system of fee payments to consultants must be changed immediately if the Exchequer is to eliminate or greatly reduce the excessive sums that have been paid on public capital projects.
—The present contract system in relation to capital projects, has in many cases operated to the detriment of the Exchequer, that is, contracts which are not on a fixed price basis are, the committee believe, open to abuse by virtue of contingency and other additional costs being added in subsequently.
There are 11 recommendations in the committee's report. If time allowed I could read them all into the record but I will refer only to the more important ones as I see them here. The recommendations are as follows: (1) Departments or offices and the relevant State-sponsored bodies must improve present systems of briefing, monitoring and controlling of public expenditure on capital projects so that cost overruns will be eliminated; (2) Fixed price tenders should be sought in all cases of contracts of shorter duration than two years; (3) Project proposals should be drawn up on the basis of estimated total costs, that is allowing for inflation, interest, contingencies etc. rather than where only current costs are shown. The system of fee payments for consultants must be immediately amended as follows: (i) Fees should be paid in two moieties, (a) related to the cost of the project at tender stage, and (b) the smaller portion related to the final cost of the completed project; (ii) Fees should be negotiable; (iii) In the case of repetitive projects fees should not be on a percentage basis but at a reduced rate; (iv) In general, fees should be open to price competition; (v) Under no circumstances should fees be fixed as a percentage of the final cost of a project.
Reporting systems between the Department of Finance, the Office of Public Works and client Departments/offices and State-sponsored bodies must be improved. Better planning, regular reporting and early warning systems should ensure that (a), the most cost effective schemes are undertaken, (b) delays will be avoided and (c), cost overruns will not occur.
A small technical advisory unit should be set up immediately in the Department of Finance reporting direct to the Second Secretary, Public Expenditure Division. This unit, which would be small, consisting of, say, a construction economist and an experienced architect/engineer, would bridge serious gaps that exist at the moment. The function of such a proposed technical unit would be to provide the Minister for Finance with professional advice on the Public Capital Programme and which, the committee believe, is essential if the PCP is to be monitored and controlled adequately. This unit would liaise with the OPW on an ongoing basis.
Specific responsibility and accountability for capital projects and their budgets should be assigned to individual management teams appointed within the Department which should liaise with OPW or outside consultants. The committee, while recognising the constitutional and statutory position of Ministers and Accounting Officers, feel that no real progress can be made in the elimination of excess expenditure unless individuals are assigned responsibility and are held accountable on a personal basis.
I believe the committee's report to be one of the most important to be laid before the Dáil to date. I am confident that the Minister and his officials will study it in detail and act on the reasonable and basic recommendations contained in it. The implementation of the recommendations will result in an improvement in the planning and execution of projects under the Public Capital Programme. It also points the way towards significant savings, more cost effective use of taxpayers' money and ultimately a reduction in our borrowing requirements.