Joint Committee on Transport and Communications díospóireacht

Chairman

The purpose of today’s meeting is to consider the need to reform public works contracts for the construction of transport infrastructure. I welcome from the Department of Transport, Ms Ethna Brogan, assistant secretary, Mr. Andrew Ebrill, principal officer, and Mr. Dominic Mullaney, principal adviser on roads. They are all very welcome. I thank them for accommodating us on this matter.

All witnesses are reminded of the long-standing parliamentary practice to the effect that they should not criticise or make charges against a person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative they comply with any such direction. For witnesses attending remotely from outside the Leinster House campus, there are some limitations to parliamentary privilege and, as such, they may not benefit from the same level of immunity from legal proceedings as a witness who is physically present does. Witnesses participating in this committee session from a jurisdiction outside the State are advised that they should be mindful of domestic law and how it may apply to the evidence they give.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the Leinster House complex to participate in public meetings. Reluctantly, I will not permit a member to participate where he or she is not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts of Leinster House will be asked to leave the meeting. In this regard, I ask any member participating via MS Teams to confirm prior to making his or her contribution to the meeting that he or she is on the grounds of the Leinster House campus.

Members and all those in attendance in the committee room are asked to exercise personal responsibility in protecting themselves and others from the risk of contracting Covid-19.

I invite Ms Brogan, on behalf of the Department of Transport, to make her opening statement.

Ms Ethna Brogan

I thank the Chairman and members of the committee for the invitation to meet them today to discuss transport infrastructure delivery in the context of the inflationary pressures and supply chain constraints facing the construction industry at present. I am joined by my colleagues, Mr. Dominic Mullaney, our principal adviser on roads who deals with regional and local roads matters, and Mr. Andrew Ebrill, principal officer with responsibility for national roads and active travel in the Department.

As members will be aware, the Office of Government Procurement, OGP, which operates as an office of the Department of Public Expenditure and Reform, is responsible for implementing national policy on public procurement, particularly with respect to construction procurement. Policy on public works contracts, which are the form of contract used in transport projects and more broadly across the public capital programme, is a matter for the Department of Public Expenditure and Reform. For this reason, I do not propose to address the specific issue of reform of those contracts as it is not within our Department’s remit. However, we are acutely aware of the difficulties facing the construction industry at present and the potential impact these difficulties may have on delivery of transport projects under the national development plan.

We are liaising closely with the Department of Public Expenditure and Reform and have brought any emerging issues in the transport sector to its attention. I understand that Department is currently examining the position regarding the impact of construction inflation on public works contracts and is considering a number of options to address the difficulties that are emerging. Ultimately, any decision in this regard will be a matter for the Minister for Public Expenditure and Reform.

The transport projects to be developed over the next ten years are set down in the national development plan, NDP, which was approved by Government last October. The NDP provides funding of €35 billion for transport infrastructure over the next ten years. Delivery of the transport elements of the NDP will support many of the national strategic outcomes, NSOs, in the national planning framework, particularly NSO 1, compact growth; NSO 2, enhanced regional accessibility; NSO 3, strengthened rural economies and communities; NSO 4, sustainable mobility; NSO 6, high-quality international connectivity; and NSO 8, transition to a low carbon and climate resilient society. We will be investing in active travel, bus, rail and road projects across the country to deliver these outcomes.

Turning to national roads, funding under the NDP will facilitate continued protection and renewal of our existing national roads infrastructure, including motorways, in line with Government policy. The NDP foresees an Exchequer allocation of approximately €2.9 billion for the protection and renewal of existing national roads over the ten-year period to 2030, in addition to approximately €1 billion on public private partnerships, or PPPs, allocated fairly evenly across the decade. Approximately €5.1 billion of Exchequer funds are earmarked for new national road projects across the lifetime of the NDP to 2030.

In terms of new national roads projects, in keeping with the programme for Government, a ratio of 2:1 is to be maintained between new public transport investment and new road investment. This means that while there will be expansion in public transport options to facilitate a broader range of choice for citizens, investment in key road projects will also be progressed.

Focusing on 2022, Transport Infrastructure Ireland, TII, was allocated approximately €733 million from the Exchequer for national roads capital funding for 2022, broken down as follows: €254 million for the protection and renewal of the existing national road network; €118 million for committed PPP contracts; €331 million for new road projects; and €30 million from within the Department’s capital envelope allocated to TII for protection and renewal in December 2021, helping to augment TII’s spending in 2022.

In line with the NDP and Government policy, TII allocated this national roads funding for 2022 in a manner which seeks to achieve the following outcomes, in addition to safety: protection and renewal of the existing national road network; progressing major projects at or near construction; progressing major projects which are pre-construction but well advanced in the development pipeline; and prioritising the remaining funding for major projects which provide for local bypasses and compact growth in Ireland’s towns and villages.

Turning to regional and local roads, as members will know, the regional and local road network provides vital connectivity in rural Ireland. It is essential in supporting economic and community links throughout the country and is relied on by buses, cyclists, commercial vehicles and private cars. The NDP will enable a spend of €5.35 billion on the protection and renewal of this network over the period to 2030.

Targeted improvement schemes will also be funded, including projects to take traffic out of town centres and to facilitate improvements to the public realm and the adoption of more sustainable transport modes. A sum of €677 million has been earmarked for that. Approximately €600 million has been allocated to regional and local roads in 2022, the vast majority of which, approximately 90%, relates to protection and renewal. A robust and safe regional and local road network will be vital to support expanded and improved bus services and to connect dispersed communities with their local villages and services.

The NDP commits unprecedented funding to local authorities throughout the country to deliver high-quality active travel infrastructure to enable more people to make the switch to active travel. Approximately €290 million is being invested this year in walking and cycling infrastructure throughout Ireland along with another €60 million on greenways. We see delivery start to happen across the country and can expect to see it ramped up in the years ahead.

As for bus and rail, we will also see major public transport projects progressed and delivered over the period of the NDP, including BusConnects, the DART+ programme, MetroLink and substantial investment in suburban and intercity rail projects.

The funding provided for transport in the NDP aims to support the delivery of numerous projects across all modes. The Department is committed to ensuring delivery of this ambitious programme to the maximum extent possible to contribute to the national strategic outcomes in the national planning framework. We recognise the very real difficulties emerging on the construction front, which may have an impact on delivery. Many of those difficulties, as the committee will know, are driven by global events. We will continue to work cross-departmentally to address those in the period ahead. I am happy to take any questions Members may have.

Deputy James O'Connor

I appreciate that.

Chairman

Deputy O'Rourke has facilitated Senator Horkan contributing earlier, as the Senator has another engagement.

Senator Gerry Horkan

I thank Deputy O'Rourke. I thank Ms Brogan for attending with her team today. In a way, this meeting arises from the meeting we had with Transport Infrastructure Ireland about the problem it is encountering with the public works contracts. I can understand Ms Brogan's position but it is regrettable that we do not have officials here from the Department of Public Expenditure and Reform to talk about the public works contracts and the problems they are causing. However, we can meet them on another day.

Chairman

We will follow up. It will come out of today's meeting that we will have to have them before us. It is a natural sequence.

Senator Gerry Horkan

Senator Gerry Horkan

When she has some of those indicators, Ms Brogan might feed that back to us as soon as possible. There is no point in promising people things that are completely undeliverable. If everybody knows you cannot get the materials or staff and the stuff is costing far more than it was originally going to cost, something has to give and we need to be able to understand what is going to give first and so on. I thank the witnesses for their efforts.

It is a matter for the Government to address. I suggest that it involve a real engagement with the relevant stakeholders and a responsive reaction in terms of the Government moving the levers it has as quickly as possible because we do not want to see businesses go to the wall because of the nature of the constraints we have applied to them or, more important, projects not being delivered or being delayed to an inordinate degree.

Senator Jerry Buttimer

I thank the witnesses for attending and for the presentation. This is an important meeting and I echo the remarks of Senator Horkan that we should have the Department of Public Expenditure and Reform before the committee as a matter of urgency as part of an ongoing discussion on the reform of public works contracts.

I thank Ms Brogan for her presentation, presence and responses to my questions. I ask her to send me a copy of the CMATS response being sent to Deputy O’Connor. I wish Ms Brogan every success in what is a flagship Department, as alluded to by the Chairman, in respect of sustainable travel. We have a roads network which we need to address in respect of the issue of active travel. I hope Ms Brogan will use her influence to ensure those involved in BusConnects and the CMATS project in Cork engage with landowners and residents as we make this important modal shift.

My other concern, to which I may refer again, is with regard to the allocation of funding addressed in Ms Brogan’s presentation. I will make a further contribution, with the leave of the Chairman, on that issue later.

Chairman

As Deputy Carey is still not available, I call Deputy Ó Murchú.

Okay. I understand the response from Mr. Ebrill in respect of the six projects. This comes back to my fundamental comment, however, and it is one I know many members will be sick of me saying, that the national development plan is the flagship policy. This meeting is about the reform of public works contracts. In that context, I would like to hear what the Department has done in respect of initiating reform of public works contracts. I ask that given the issues we are encountering. We will also hear about them later from the representatives of the Construction Industry Federation, CIF.

I have a major concern in this regard. From a political perspective, we will be in the shop window if we do not have project visualisation and delivery. We will go before the people in a situation where project X has not been delivered and we will pay the political price. This comes down to that too in many ways. Regarding reform of public works contracts, where are we with that process and what are the implications for ongoing projects, including those six projects we mentioned and others? Is there an import in respect of the whole issue of the modal shift we have heard about regarding active travel? What are the implications on the active travel segment of the Department’s endeavours in respect of the issue of public works contracts?

Ms Ethna Brogan

As I said, I am not in a position to address specifically the matter of the reform of public works contracts. That is not within the policy remit of our Department.

Senator Jerry Buttimer

As a matter of interest, does Ms Brogan think it should be, or where should it rest? I know I am presenting her with an academic type of question.

Chairman

In that context, we had representatives from Transport Infrastructure Ireland, TII, with us before Easter. We find that to be a measured type of body. Its representatives came in here and basically told us that the NDP was on fire and under serious threat. They did not do that lightly. We have invited representatives from the Department of Public Expenditure and Reform to appear before the committee, and we expect them to attend because this matter is of such magnitude. I happen to be a Deputy for Limerick city. When Roadbridge went to the wall a short time ago, 630 people lost their jobs. We speak to people throughout the country. The national development plan in respect of road projects is under serious threat. I would like to hear a sense of this urgency reflected in the Department of Transport.

We are arguing here about six projects that did not go ahead for the sake of €10 million, and we had to delve in and forage out this information. This issue has taken up pages of space in the media. It has caused untold anxiety for people. Side by side with that aspect, €260 million is allocated to active travel. Those are great projects and no one is questioning their value for money. For me, this is about asking questions about value for money. I want to see active travel and such projects. Equally, though, I need to see road projects getting under way as well. I am not ideologically driven. I want to see both those endeavours happening in tandem.

The problem we have here is that there is a current public works contract. In the case of all contracts put in place prior to 1 January 2022, inflation must be above 50% to enable contractors to make additional claims, and that can only happen after 30 months of a contract. Since 1 January 2022, the rate for inflation has decreased and it must now be above 15%, but contractors still cannot claim for 24 months. The witnesses are from the line Department with responsibility for the funding of road and transport projects.

With inflation rampant and with the cost of fuels, are the contracts causing the Department concern? While TII did not do this lightly, it came to this committee with a very strong message that there is a serious problem with the way contracts have been awarded historically and it worries that more firms will not be able to function. My understanding is there are four main civil building contractors in the Irish market at the moment, and many of them, like Roadbridge, have gone.

The question is how important the national development plan is for the Department of Transport on the roads side. Is what is happening at the moment causing the Department serious concern? Is the Department having active discussions with the Department of Public Expenditure and Reform to ensure public service contracts can be amended and are flexible to deal with external factors like the Ukraine war and other issues, given there was rampant inflation prior to that? Is that causing the Department concern? That is why we are here today.

Ms Ethna Brogan

Of course it is causing us concern. It is a rapidly evolving situation and we are actively engaged with the Department of Public Expenditure and Reform on the matter.

Chairman

Does Ms Brogan believe the public works contract needs to be amended, whether temporarily or otherwise, to ensure it takes account of the huge inflation? The 15% sounds great but they cannot put in a claim for 24 months. If someone has a contract and was up and running before 1 January, they cannot put in a claim until they are above 50% inflation and they cannot do that for 30 months. As a layman and as an accountant, that appears to me to be unworkable in the current climate. I do not want to see the national development plan going down because we have a contract that is a straitjacket for contractors in the current environment. It might have worked in a low inflation environment but, in the current environment, I have serious concerns that we are about to get into a situation where there will be a car crash with the national development plan. As a committee Chair and as a Deputy for Limerick city and Munster, I cannot allow that to go unnoticed. We want to see urgency in this regard. Is the Department looking for the current public works contract to be amended?

Ms Ethna Brogan

We are relaying the information we are getting from the industry about the difficulties the contracts are causing due to the inflationary pressures that are being experienced across the economy. We have relayed those concerns and we are engaging actively with the Department of Public Expenditure and Reform on it. As I said, ultimately, national procurement policy is a matter for the Minister for Public Expenditure and Reform.

Chairman

There is an element of pass the parcel going on here at the moment. As a committee, we will not allow that to happen. This public works contract is too serious. I am not certain of the full details on Roadbridge but, from what we hear, the sector is under serious strain with regard to the contracts.

A March 2022 statistic from the Civil Engineering Contractors Association has caused me serious alarm. Respondents were asked if they had ever submitted a bid price for a public tender at or below cost. The results showed that 56% of the respondents - the contractors - have submitted at or below cost. The main reason they have submitted under these conditions are business continuity, lack of a future pipeline and chasing cash flow - chasing the dragon - and I think many of them have been doing that. When Covid came, they were not able to maintain cash flow because contracts stopped and they could not physically get the money in and, eventually, that was going to catch up with them. In addition, due to deficiencies in the contract documentation, there was a lack of opportunity during tendering to engage with clients for clarification.

If they started prior to 1 January, they have to wait for 30 months to be able to engage with TII and they must have above 50% inflation. Since 1 January, it is 15% but they cannot engage with the Department for 24 months, or two years into the contract. That means the contracts themselves may not be sustainable, and I have to question whether they are or whether they can ensure success on the framework tender. We are getting that all of the time from the contractors. There are four main Irish contractors left. I do not want a situation where, in a short time, we may have no Irish contractors able to bid for roads projects. That is the critical thing for me. They are providing huge employment. There has to be realism between the Department of Transport and the Department of Public Expenditure and Reform. If the current framework is going to have a consequence of making these firms insolvent, we have a problem.

With regard to the Coonagh to Knockalisheen road in Limerick city, we spent months arguing with the Minister for Transport. If it had been allowed to go ahead the way it should have, it would probably be built by now. It is 30% complete and is idle for the people of Moyross and the north side of the city. It will have to go out to re-tender, and the company that was building it was Roadbridge. This is very serious.

I call Senator Buttimer to conclude.

Senator Jerry Buttimer

I am happy to conclude there.

Chairman

In that case, I will call Deputy Ó Murchú. I am passionate on this. I am an accountant by training. The figures do not add up at the moment on the public works contract, particularly for major roads projects. It does not add up. Deputy Cathal Crowe will be aware that, with the situation of Roadbridge locally, we have had to re-tender.

Senator Jerry Buttimer

The comments of the Chairman are backed up by the documentation we received in the context of the report I spoke about in terms of public tendering and the one the Chairman has quoted from. That is why it is important we have further meetings on this. I ask Ms Brogan to give me, if not today then by email, the concluding dates for Dunkettle and Macroom. I thank her again for being here today.

Chairman

Ms Brogan will follow up with correspondence to Senator Buttimer.

Ms Ethna Brogan

Yes.

Chairman

I call Deputy Ó Murchú.

Deputy Ruairí Ó Murchú

I thank Ms Brogan and the other witnesses. I apologise as I had a number of other engagements that meant I was late. I think I have got a significant understanding of how the interaction has gone and I could probably guess some of that on the basis of Ms Brogan’s opening statement. In fairness, the Chairman has stated the difficulties that were put clearly in front of us, especially by TII, in regard to public works contracts, and I am not going to rehash that as it is obviously a system that will not work. It is a fact we have not got to the point of having a system that is fit for purpose to deliver the national development plan at this time.

One of the questions I want to put concerns the fact this is not the first time the State will have entered into contracts during inflationary periods and, therefore, I am not sure any of us understand the inability to get a fit-for-purpose system in play. I am guessing from what Ms Brogan said previously the Department is engaging with the Department of Public Expenditure and Reform in regard to the contracting system and, at the same time, it is interacting with other stakeholders, be they contractors, the industry or whoever else. I would like Ms Brogan to go into some detail in that regard, but if she is not going to, she is not going to, and there is no point rehashing that and going over old ground.

On another issue, we had the Minister, Deputy Ryan, and others before the committee and they spoke about planning. We know the Attorney General is doing a piece of work in that regard because there are obvious difficulties with our planning system. On some of that, there is tinkering, for want of a better term, and maybe major tinkering needs to be done. However, beyond that, it is a fact we need to resource certain areas, whether the judicial system, An Bord Pleanála or otherwise. The Minister, Deputy Ryan, has used the term that it is almost the survival of the fittest in regard to planning applications. While we need due diligence done, for the companies that are contracting, one of the issues is that it can be two years down the line.

Mr. Dominic Mullaney

Ms Ethna Brogan

It would not be appropriate to speak about the work of the group at this point.

Deputy Ruairí Ó Murchú

We need to engage to ensure this happens. The most important thing is to ensure the timeline is as short as possible and that we get a system that is fit for purpose and works.

Deputy Cathal Crowe

I join others in welcoming Ms Brogan, Mr. Mullaney and Mr. Ebrill to the committee. I apologise as today is exceptionally busy and there have been many overlapping meetings. I read the opening statement and I have followed most of the debate from my office. I want to pick up from where Deputy Ó Murchú left off. The planning process for roads is very frustrating. In Dublin city there is a professional planning objection company, namely, The Swans and the Snails Limited.

Does the Department agree with that?

Mr. Dominic Mullaney

Yes. In terms of the negotiated tender, they will try to deal with any other safety stuff, if any.

Deputy Cathal Crowe

I thank Mr. Mullaney for his replies.

In conclusion, I was a councillor before I became a Deputy and the Chairman is a former councillor. Over the years we attended similar briefings, as Oireachtas representatives and councillors, and I never ever heard the Limerick northern distributor road be treated as just being a discrete infrastructure project from Coonagh to Knockalisheen. It was always a bandit corridor that brought one north to the city through south-east Clare and was to be done in phases. I do not what parlance that the Minister has introduced but certainly in the region and locality the project was always to be done in phases. It may not have been to everyone's taste or liking but there were processes to deal with route design and all the other issues that people had and now it appears that the project has been guillotined by the Minister, which is wrong. I do not know whether he will be in public life in 2040 but the people around the area will need certainty regarding infrastructure and by his action this scheme has been pulled from them overnight.

Chairman

Deputy Canney is next. Even though he is not a member of this committee I will allow him to ask a question.

Deputy Seán Canney

I appreciate that as I know other committee members wish to contribute. I have watched the discussion of the public works contract on screen. From a roads, transportation and civil engineering point of view, and as I was a quantity surveyor who worked in the industry and lectured on procurement, I have received a lot of feedback that the civil engineering contractors in this country are turning their backs on us because they can go to England and get a fair new engineering contract, NEC, as the risks are shared and there is a greater opportunity to have a viable proposition. I do not know how the Department is getting on with tenders at the moment.

Does the Department have any works out for tender at the moment? My understanding is that building contractors and civil engineering contractors are refusing to price contracts because they cannot price the risk.

I have a very simple question for the officials. Earlier the Chairman and others asked how we fix the problem with public works contracts. I suggest this problem can be fixed by one simple amendment to the existing public works contracts. The amendment can be put in because it can be agreed between both parties. Therefore, if the contracting authorities and the contractors agree to insert a price variation clause in the contract, it will solve this problem not forever but until we get to more stable ground again.

I want to withdraw,if possible, my comments relating to subcontractors and plant machinery. I thank the Chairman.

Chairman

We are now back in public session and will resume our consideration of the need for the reform of public works contracts for the construction of transport infrastructure. I welcome Mr. Tom Parlon, director general and Mr. Paul Sheridan, director of the Construction Industry Federation, CIF. They are both very welcome and I thank them for their patience. I now invite Mr. Parlon to make his opening statement on behalf of CIF.

Mr. Tom Parlon

On behalf of the Construction Industry Federation, CIF, I thank the members for the opportunity to come before the committee and address this extremely important matter that will have a major implications for the delivery of construction projects for the foreseeable future. I am accompanied by my colleague Mr. Paul Sheridan, who is the director of main contracting.

This is what we are really talking about. The issues we are highlighting represent the difference between an industry functioning efficiently and one becoming logjammed. It is the difference between public projects being delivered in line with Government expectations or one where many contractors are unable to tender due to price volatility. The CIF has been warning about the issues around the public works contracts for quite some time, and the problems we are talking about today are not new. What is new is how those problems are now manifesting.

The level of hyperinflation that has seen construction material costs skyrocket in recent weeks has made clear to everyone the scale of the flaws that have been built into the public works contracts. The situation in Ukraine may be what has brought these matters into focus but there is no doubt the current system has long been unable to manage the impact of inflation, supply chain disruption and other industry-recognised risks. This was obvious to anyone following the industry on the back of Brexit and the pandemic. It should not have taken the impact of a war for badly needed reforms to take place.

Pricing inflation is one of the most challenging risks impacting contractors. There is an unwarranted assumption that contractors are better placed to manage this form of uncapped risk - and it is effectively uncapped - for the duration of the project due to their relationships with suppliers. Unfortunately, that is just not credible. No contractor in the world is able to avoid price rises when we are witnessing hyperinflation of this scale. For example, in recent weeks we have seen the price of rolled steel rising by 66%; a 50% jump in rebar prices, going from €900 per tonne to €1,350; cables comprising mainly copper up by 31% to €8,642 per tonne; and delivery times being doubled for air conditioning units, electronic controls and lighting equipment.

These examples are just the tip of the iceberg. The reality is most construction materials are now seeing significant jumps in price, and that is why is it so concerning that public clients often approach risk management by transferring as much of that risk as possible to contractors and the supply chain. Driven by a lack of technical understanding, this leads to plans that fail to forecast the full nature of risks, and that will have a material impact on a project's time and cost. It is not just the industry that can see these problems. The Government and the Office for Government Procurement recognise the issues and have committed to reform.

Interestingly, in 2019 the Office for Government Procurement stated that, under the public works contract, risk transfer is not operating satisfactorily because the market is not pricing risk and formal dispute mechanisms were being triggered early arising from the notification requirements built into the contract. It also indicated there is a poor definition of works requirements due to the poorly resourced design teams. These flaws have been affecting the industry and the delivery of public projects for quite some time. Not only is the flaw built into the process but public clients are taking full advantage of these weaknesses. The transactional operating model they have adopted drives price assumptions and the allocation of risk before contractors and the supply chain even get involved. That means public works contracts present open-ended risk to the contractor, which they have no ability to measure and cost thanks to a competitive lowest tender process.

It is well documented that margins in the construction industry are tight. As the committee has seen in our supplementary materials, the CIF recently commissioned a report on public tendering practices and their impact on delivering value. That report, conducted by Idiro Analytics, found that the average margin for public contracts was 3.8%. When materials costs are soaring at the rates we have already outlined, that margin does not stand a chance. The CIF believes allocating and managing risk is one of the biggest contributing factors that prevents firms from making the sustainable margins needed to invest in their businesses and the wider sector. Poor risk allocation between clients and contractors prevents construction projects from being procured and delivered successfully.

When challenges arise in public projects, this means the commercial agreements leave little room or budget for putting things right. These challenges are further exacerbated by the focus public procurers in Ireland place on the lowest price tenders. That outlook means risk does not get adequately priced. The simple solution here is for more emphasis to be placed on quality in the award of tenders, backed by the use of quality and price ratios.

If Ireland adopted international standard forms of contract, such as the new engineering contract, NEC, or the International Federation of Consulting Engineers, FIDIC, contract, all these issues could be addressed. These contracts are built to encourage collaboration and the equitable allocation of price variation risk. Contracts of this nature make more sense for the Government, the industry and the taxpayer. By capping the level of risk applied to contractors, it enhances project outcomes, avoids delays or disputes and delivers better value for the taxpayer. Implementing such a system will also help kick the habit of squeezing costs to save money in the short term. More intelligent procurement, putting contractors on a stable footing and unlocking investment throughout the supply chain will speed up the transformation of the industry that business, government and the public wants to see. These outcomes are diametrically contrasted to the scenarios delivered through the current public works contracts in Ireland. As an illustration of how out of step we are with international standards, it is worth noting that international contractors will not price work in Ireland based on the public works contracts.

Better risk management will lead to many more projects being delivered on time and to budget, creating fewer disagreements ending in legal action and greater trust between businesses. It is the industry’s view that this reform process represents a badly needed opportunity. For that opportunity to be grasped, significant changes will need to be made to the public works contracts. Specifically, we believe the contracts and process should be changed to adopt the more modern, flexible approach contained in the NEC or FIDIC contracts, promote early and continuing engagement and a collaborative environment between clients and contractors, and provide a clear and complete project description where risks are identified and explained. The process should also minimise the use of price-only criteria and encourage accurate, fair and clear use of multi-criteria awards. We should promote multistage procurement processes and identify and penalise below-cost bidding or abnormally low tenders.

Until these changes are implemented, the current public works contracts will continue to create an adversarial environment that is prejudicial to good project management and wasteful of taxpayers' money. Nobody is happy with the current system and this is the Government's chance to create one that really works. I thank the committee.

Deputy Darren O'Rourke

I thank the witnesses for the statement. I do not know if they watched the earlier proceedings, when we spoke with departmental officials. What we as a committee tried to impress upon them was a degree of urgency with the matter, and we have some work to do with other Departments.

Representatives of Transport Infrastructure Ireland met the committee before Easter and they pointed to a number of issues as they saw it. It was helpful for us to hear them. They spoke about the need to align stakeholders and address planning and regulation. They spoke from the perspective of delivering projects. The main question they raised was the need to address fundamental problems with public contracts.

I will ask a couple of questions and I am sure others will pick up along the same theme. How are these problems manifesting with projects that are ongoing and what impact will be seen for projects in the pipeline? What does the Government, including the Department of Public Expenditure and Reform and senior Ministers, need to do to straighten this out?

Within that ask, what are the most urgent things they can do?

Mr. Tom Parlon

We have repeatedly raised the issues with the Minister. Mr. Sheridan has a path worn to the Office of Government Procurement. There is good engagement. The Minister acknowledged that there is a serious problem and asked the Office of Government Procurement to bring forward some options. I spoke with the Secretary General with the Department of Public Expenditure and Reform this week. He said there would be a further meeting with the Minister this week and the Department hoped to bring forward some proposals. He spoke about how complicated and politically sensitive an issue this is. I appreciate that is the situation.

However, contractors who signed up to a project based on prices 18 months ago have much bigger problems. A couple of large well-known firms have gone out of business. A number of large UK firms that were operating here, such as Balfour Beatty, have left the country mainly because of public works contracts.

Chairman

What do the witnesses regard as large contractors? Which Irish contractors remain in the Irish market?

Mr. Tom Parlon

Those currently operating projects are still here. One of the companies that went out of business had signed a contract for a substantial road project, but had not begun it. I understand that the increase in the price of diesel was a factor. Large excavators that are used to haul a lot of stuff out and in use a lot of diesel The increase in the price of diesel over the past three or four months has caused a 10% increase in the overall cost of a contract. That situation is untenable.

The report we commissioned shows that contractors are only putting about 2.2% aside for risk. Clearly, if people are taking on an inflation rate of 15% or 20%, they are losing a lot of money. Businesses could very well go broke if their cash flow runs out. Other business may decide that a project is no longer tenable. People have a responsibility to not trade recklessly and may decide to cease working on a contract. We know from past experience-----

Chairman

How many Irish contractors are active in the Irish market at the moment and are up and running with contracts?

Mr. Tom Parlon

They are all working.

Chairman

Could Mr. Parlon name them for us?

Mr. Paul Sheridan

As part of our submission we provided information on the number of contractors that have left the market. I understand the number of companies has reduced from 138 to 77. The type of contractors that would be in a position to deliver on some of the major infrastructural projects associated with transport in the NDP is decreasing. They are also in an internationalised market. Other clients in the UK and Europe are more competitive in the terms and conditions of their contracts, like the NEC. Therefore, they are looking at an open-ended risk on the Irish public works contracts and deciding that they will not tender. What is exacerbating the situation is, as Mr. Parlon said, the inflation risk. It is too difficult to go into a fixed-price contract. We are seeing a thinning out of the industry, unfortunately.

Deputy Darren O'Rourke

Representatives from the Department came before the committee. It was difficult to read between the lines. They have a line they need to hold. I got no sense that a duck was paddling under the water and there was a level of urgency regarding this. They spoke about ongoing assessments and engagement. I ask the witnesses to give us a sense of the type of risk that is at stake here, in terms of a timeline within which something needs to move. Does this involve months or years?

Mr. Tom Parlon

Chairman

The old contracts referred to 50% inflation and required a 30-month wait. Since 1 January, the figure is 15% for inflation if companies wait 24 months. The witnesses might comment on that timeframe. Whatever will work now must be pretty straightforward because changes need to be introduced now and work straightaway. It will take a long time to get a framework for new contracts up and running.

Can the witnesses distil down for us what they would like to see in a variation? Mr. Parlon made reference to the 10% increase in the price of diesel. We are all hearing about that. Can he drill down and tell us what he would like to see in practical terms?

Mr. Paul Sheridan

I would like a straightforward formula and process around making a legitimate cost recovery claim for material cost increases that everybody understands.

Chairman

Should businesses be able to make that application straightaway within 24 months? How would Mr. Parlon deal with that?

Mr. Paul Sheridan

No. We fought hard against the introduction of these unique contracts. We thought some amendments to existing forms of GDLA would have done the job and allowed the industry to continue. Unfortunately, that is not the case.

Looking at the last four years, we have to acknowledge that Brexit, Covid and everything have impacted on the ability of the OGP to deliver on what it has set out to do. Why would the Government want to reinvent a unique contract when there are standard international forms that will allow it to attract international companies? If we want to deliver a metro or anything like that, we have to bring in this expensive equipment that international contractors use and our local contractors generally do not. They go into joint venture, then they come in and help deliver that. Unfortunately, Article 4 of the current public works contract, which any layperson can read, states you are responsible for everything, whether foreseen or unforeseen, excluding your price. Your are supposed to get a price for that in six weeks.

Senator Jerry Buttimer

Mr. Parlon's reference in his opening statement to the issue concerning the Office of Government Procurement from 2019 about risk transfer because the market was not pricing risk, as well as Mr. Sheridan's contribution, are interesting to us. We are in a perfect storm, but it has led to an opportunity for reform and realignment of the process. The case study at the back of Mr. Parlon's presentation to us gives an example of the gravity of the situation. This and the earlier meeting are important and we have work to do.

Have the witnesses been before the finance committee yet, or engaged with it?

Mr. Tom Parlon

No. In our pre-budget submissions, even though it is not a budget issue, every year when we sit down with the Minister for Finance and his officials in pre-budget, the public works contract comes up as an issue. It has been a bone of contention for a long time. Who expected we would have 20% and 30% inflation?

Senator Jerry Buttimer

That is true.

Chairman

For CIF members, given the current contracts framework, what is the risk of further civil contractors like Roadbridge going to the wall?

Mr. Tom Parlon

Chairman

It is a matter of urgency. As well as the Office of Government Procurement, we will ask the Minister, Deputy Michael McGrath, to appear before the committee. The committee is not tied directly to one line Department; however, the biggest segment of the NDP is roads, which falls very much under our remit.

How many people are employed in the sector? Has the CIF had an opportunity to look at that? How many jobs do you believe are involved, Mr. Sheridan?

Mr. Paul Sheridan

Approximately 155,000 people are employed by the construction industry at present.

Mr. Tom Parlon

That is the entire industry.

Chairman

Directly and indirectly?

Mr. Tom Parlon

No. That is directly.

Deputy Seán Canney

I welcome Mr. Parlon and Mr. Sheridan. I come from a construction background. The history of the public works contracts we have, for the benefit of the committee, is that they were introduced in 2007. Negotiations had been ongoing at the time, but the then Minister for Finance guillotined the whole process and brought in these contracts and forced them onto the industry. For the first seven or eight years the risk was masked by a recession.

Chairman

And low inflation.

Deputy Seán Canney

And no inflation. Basically, contractors were not pricing the risk. Then, however, as inflation began to take off a little, they were able to gauge and to price the risk. What has happened in the past six months, however, is such that nobody knows what will happen tomorrow, never mind next week or in 30 months' time. That is where we are. As I said earlier, the contracts were brought in at a time when the Dublin Port tunnel was being built and there were rumours that it was going over budget, it was going to collapse, water was coming into it and it would never be finished. There was a knee-jerk reaction to change the contracts. I think Mr. Sheridan said the GDLA form of contract was fine, although it needed to be tweaked a bit at that time.

Another thing that is missing from this whole process is that there is an onus on the building contractor whose balance sheet has been affected to provide a contract guarantee bond for every contract it goes onto. That is based on the strength of its balance sheet, so an insurance company will not take it on unless it does that. We are cutting ourselves off at the pass before we get there. That is a very important aspect to this as well.

When I talk about the construction industry, I am talking about the guy who is building a house or a house extension, not the big guys. I am talking about the guys who have to go home in the evening and worry whether they will have money at the end of the week to pay the wages or whether that money will pay for the bit of plant they have at the end of the month. They might have a load-all or whatever else. These guys are getting caught the same as the big guys in proportion.

I know of a guy who is building a house at the moment and who has the Polycor stone on it. It is a two-storey house. He has blockwork going from there. He is already €20,000 over budget on the project and has not got to the finishing stages of it at all yet. Because it is a private house, he will have to talk to the client and they will negotiate how they will deal with that. The private sector is functional in that there is an open book when it comes to this. The client will sit down and look at specifications, savings and whatever else to make the project work, and that will help everybody.

What is wrong here is that we have been caught out by what has happened between Covid, Ukraine and the hyperinflation we have seen. I have been talking to the Minister, Deputy Michael McGrath, about this and I know he is consulting with all the various Departments, but my biggest worry about this is that, as far as I understand, the Office of Public Works cannot now compete in respect of the tender for works. It cannot get contractors to tender for works because they will not tender in this market as they would be tendering blind. The words "reckless trading" were used, and that is exactly what this is. People will be recklessly trading if they continue the way they are.

That particular contract was tendered for two or more years before it started. That is a big issue as well.

Mr. Tom Parlon

It should be pointed out that on some civil engineering projects, the diesel cost increase alone has accounted for a 10% increase in overall costs.

Deputy Cathal Crowe

That is huge, especially when we are talking about projects costing tens of millions of euro.

Mr. Tom Parlon

It is huge, yes. We all know that to pull in and fill up a car at the pump costs an extra €20 or €30 but filling trucks and diggers that are only doing five miles to the gallon is just frightening.

Deputy Cathal Crowe

Based on our available building skill sets, what is the limit of our capacity to construct?

On the construction industry's capacity in a broader sense, it is a problem-solving industry. When the industry sees a pipeline of work coming, no matter what type of work is involved, it will find a way to deliver it but it has to have that visibility. That is why we need the tracker. That is why we need to see when projects are going to hit site and to know that money is being put into the design and feasibility studies so that there is a continuous pipeline. Then there will be investment in attracting people, attracting more talent and so on.

The biggest issue we emphasise with all of our meetings with Government agencies on public works contracts, capacity and the NDP is around the export capacity of our own domestic construction industry and the importance of attracting people to build Irish infrastructure rather than UK infrastructure. Construction companies will not do that because they are balancing their books and it is too risky here. A number of our biggest members will not do public works here at all because it destroys their culture. They do not operate like that and they do business elsewhere. If the State could get some of those really good guys who are building for the biggest investors and companies across the world back into Ireland, that would solve the capacity issues.

Deputy Ruairí Ó Murchú

The State needs to deal with the tendering piece and then make sure it has the plans that will allow for the throughput. The CIF is saying there is sufficient elasticity to make it happen.

Mr. Paul Sheridan

Yes.

Chairman

Thank you very much. We will be following up with the Department of Public Expenditure and Reform and the Minister, Deputy McGrath. This meeting came about because TII was before us just before Easter and rang alarm bells. TII did not do that lightly because it is not that type of organisation. This committee had to take on board what TII said and examine it further. We will now follow up with the Department and the Minister. I thank Mr. Parlon and Mr. Sheridan for coming before us. We have broadened our remit somewhat but road projects are vital. If the witnesses wish to raise any other issues with this committee, they can write to us. We look forward to further engagement with them.

Mr. Tom Parlon

I thank the Chairman and committee members for their engagement. We appreciate it very much and will keep the committee informed of any relevant developments.

Chairman

It is in everyone's interest that we have a sustainable construction sector. Mr. Parlon referenced the taxpayer and it is taxpayers' money we are talking about in the context of public works. We must have a sustainable construction sector. The last point Mr. Sheridan made was that extra capacity could be brought on stream by getting contractors back onto Irish soil rather than abroad.

Joint Committee on Transport and Communications díospóireacht - Wednesday, 27 Apr 2022

Reform of Public Works Contracts for the Construction of Transport Infrastructure: Discussion

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Joint Committee on Transport and Communications díospóireacht -
Wednesday, 27 Apr 2022