In last Friday’s Irish Times Martin Wall and Pat Leahy headlined on the front page an increase in the cost of the new Dublin childrens’ hospital to €1.4 billion. On the same day the Irish Examiner front page headlined a €110 million cost for Páirc Uí Chaoimh. The hospital cost was reported at €700 million in April 2016 and the sportsground cost was reported at €80 million in July 2017. Ireland seemed yet again to be reverting to form as one of the worst countries in the world for capital investment appraisal.
It was not as if we had not been warned. The IMF published a Public Investment Management Assessment (PIMA) on Ireland in November 2017. The report was highly critical of public investment and provided many signposts to reforms in the area. The report was successively misunderstood, dismissed and ignored.
The misunderstanding of the IMF report is displayed on page 101 of the National Development Plan (NDP) launched in February. It claimed that “the recent IMF PIMA found a generally good standard of public investment management in Ireland.”
It didn’t. It actually gave Ireland four good grades and 11 medium grades for effectiveness with medium the lower grade. Under institutional strength Ireland fared better with nine good and six medium grades. In the overall summary assessment the number of medium grades exceeded the number of good grades by 31 per cent.
A moderate interpretation of the report is that the IMF found “a generally medium-standard of public investment management in Ireland”. An adversarial viewpoint based would say that its critique of Irish capital spending is scathing.
The dismissal of the IMF report occurs on page 100 of the NDP which says “no change is proposed to long-established arrangements for oversight, monitoring and management of voted exchequer resources”.
This complacency
It is now vital that this complacency be abandoned and that the IMF and the recent Fiscal Advisory Council reports are a wake-up call for both the spending departments and the Department of Finance. The IMF makes 27 recommendations for reform.
We have cursory reviews of budgeting. There is lack of attention to changes in project scope and cost. There is non-transparent selection of project criteria
The IMF found “the non-binding nature of the Department of Public Expenditure and Reform (DPER) review of appraisals on sanctioning authorities is a unique feature of Ireland’s system”.
The IMF has 189 member states so that our unique non-binding appraisals gives us a ranking of 189th among the member states. It also found that Irish capital spend is “strongly pro-cyclical-surging as the economy boomed and cut back following the crisis”.
Infrastructure expenditure in Ireland has an efficiency gap of 58 per cent compared to other advanced countries and 23 per cent compared to the rest of the world ). Ireland pays more for its infrastructure than in other countries and uses it less efficiently. This has been a recurring point in the research of Dr Edgar Morgenroth of Dublin City University.
Ireland has no reporting of lifetime costs or benefits . Where projects involve construction and maintenance cost profiles that increase over the medium term there is “a potential that government over-commits by giving budget approval to large projects that in the medium-term could require funding exceeding that available within the fiscal rules.
This risk is already being borne out in some departments such as health, where projects are “committed”– ie those with government and budgetary approval –have already exceeded their available spending allocation even under the expanded budgets anticipated under the mid-term review of the capital plan”.
Adopt policies
The IMF reports “substantial scope for the Irish authorities to adopt policies that will help improve the efficiency of PIM (public investment management)” . We don’t publish appraisals. We have cursory reviews of budgeting. There is lack of attention to changes in project scope and cost. There is non-transparent selection of project criteria. There are infrequent fundamental reviews. Active project monitoring at DPER level is underdeveloped. There is lack of cost detail for individual projects. There are costings which have not been validated by vote officers in DPER). The threshold for cost-benefit analysis by the Central Economic Evaluation Unit of €20 million compares with €5 million in other countries.
Shutting the door to the 27 reforms proposed by the IMF was mistaken given both the IMF expertise and Ireland's poor record
The IMF flagged the problems inherent in the National Children’s Hospital project as follows: “Discussions with departments and DPER did not reveal any instances of fundamental review having being undertaken, even though there seem to have been instances where this would have been appropriate, eg in the case of the National Children’s Hospital.”
The NDP ignored both the general criticism by the IMF of Irish capital expenditure and the specific IMF concern about the hospital.
The IMF and Fiscal Advisory Council reports have to be taken more seriously by the Department of Finance and the spending departments. The complacency and lethargy of the NDP shows a permanent Government out of touch with economic reality in a repeat of the run-up to the last recession.
The NDP seriously underestimates the import of the IMF critique. Last Friday’s headlines in two national newspapers won’t be the last. Over a year after the IMF report it can be seen that it was ignored. The IMF does not show a generally good standard of public investment in Ireland. Shutting the door to the 27 reforms proposed by the IMF was mistaken given both the IMF expertise and Ireland’s poor record.
There will be plenty more cost over-run headlines to come with much work ahead for the Comptroller and Auditor General and the Public Accounts Committee. Those responsible for cost over-runs have little to worry about. The record is that all of those responsible will, in the Irish moral hazard tradition, evade responsibility and successfully transfer the burden to the taxpayer.
Sean Barrett is a fellow emeritus at the department of economics in TCD