Improvements are required in evaluating, monitoring and reviewing public expenditure, in capturing all the costs, and with contract specification and tendering, writes Dr Michael Mulreany.
Cost overruns in the public sector have been in the spotlight this week. Prime Time television and the front pages of national newspapers have carried reports of spiralling costs incurred in public projects and property acquisition, and in dealings with the private sector to provide infrastructure.
The examples highlighted are recognisable to different degrees by the public: Cork courthouse, the new prison site at Thornton Hall, the heritage site in the Boyne Valley, accommodation for asylum-seekers, and the Youghal road scheme which overran its original estimate four times.
Some, such as the West-Link toll bridge, resonate particularly strongly with sections of the public. Other examples, such as Lacken weir on the Nore through which salmon cannot pass, and the Longford "superloo" in which each flush is subsidised to the tune of €8, may well become defining anecdotes of this era of public investment.
These examples find echoes in a previous generation, instances such as the acquisition of the Johnston, Mooney & O'Brien site in Ballsbridge and cost overruns at Howth Harbour, the Royal Hospital Kilmainham, and an investment by the State agency Nítrigin Éireann which overran its budget sevenfold. Indeed, we can trace back examples of inefficiencies in public works for several hundred years; jocose references to public contracts even appear in our national literature such as Boucicault's The Shaughraun.
These happened in a poorer Ireland; it is not too surprising that the turbo-charged economy of the past decade has produced its own vivid problems; there are now more and bigger projects than before.
It is probably little consolation to the Irish taxpayer to find that they are not alone. There are graphic examples from abroad, most memorably from the Grace commission in the US which found systematic overcharging in public procurement, as evidenced by the well-publicised $400 hammer and the $1,000 toilet seat cover.
In Britain, one can cite examples of cost overruns ranging from defence projects to public buildings. The expert valuation on the new Scottish parliament building shows it to be worth some €100 million less than the cost of construction: a fairly unique case of parliamentary negative equity. Nor is the problem confined to the public sector, as the consumers and shareholders who have been affected by corporate mismanagement well know.
The taxpayer needs reassurance on public expenditure, just as the consumer needs reassurance on corporate governance and management. They need to know that expenditure is being evaluated, monitored and benchmarked against best practice elsewhere and that public officials are driving hard bargains with the private sector.
Money that is unnecessarily spent, for example, in providing excess road capacity or in "gold-plating" public facilities is money that could be used in the health or education services or to fund tax cuts.
We therefore need to look at fundamental issues. Are there skills gaps in evaluating, monitoring and reviewing public expenditure? Are there systematic gaps in capturing all the costs? Is there a problem with contract specification and the tendering for public projects?
There is evidence that improvements are needed in all these areas. Take the tendering process where there are concerns about the accuracy, validity and reliability of costing. It is, of course, possible for a private contractor to make mistakes in estimating the costs included in a tender.
But at present in Ireland there is a bias in these errors - there appears to be consistent underestimation. So much so that it would be innocent to think that this was unrelated to a competitive tendering system in which a low bid is more likely to win. On winning the contract the provider therefore has an obvious commercial incentive to increase costs.
A corollary of this "gaming" is that part of the overrun is actually cost-recovery. It is also true that part of a cost overrun can be due to design changes introduced by the project sponsors after the tender is awarded, particularly in cases where there are multiple stakeholders.
However, there is legitimate concern that some design changes are due to over-design, especially where designers are paid a percentage of any increase in spending.
More generally, there is a sense of public malaise that excess profits are being taken by private contractors on public contracts, where cost increases far exceed construction inflation and where margins are significantly higher than those found abroad.
The problem is not that easy to fix just by varying the type of contract.
A contract whereby a contractor is simply paid a fixed fee no matter what eventual cost might transpire, will be perceived as risky by potential bidders and will discourage bids. A "cost-plus" contract, which pays costs plus a mark-up, such as for example 12 per cent, gives the potential contractor no incentive to control costs.
This leaves us with cost-sharing contracts in which the State shares in the cost of overruns which may include claims for additional costs due to legal delays, poor soil conditions or to bad weather - an indeterminate issue if ever there was one in this country.
The demands of dealing with contracts, with time delays in their completion and with price variation claims, emphasise the need to develop an evaluation culture in the public service. What is being done? It may surprise some to discover that the public sector has taken quite a forward line in the battle against inefficiency and cost overruns.
An important development has been a programme of expenditure reviews. Since 1997 almost 100 of these expenditure scrutinies have been completed ranging across the public service, from areas such as property management and maintenance to overtime arrangements and from national road maintenance to the school meals programmes.
The quality of these reviews has improved over time and they are being monitored to ensure that recommendations and changes are implemented.
Work is under way to review programmes such as supports to the long-term unemployed, which are cross-departmental and need therefore both to guard against duplication and to promote efficient sharing of information.
Another significant development has been the provision of supports to smaller public service offices to conduct efficiency scrutinies; these offices have heretofore encountered difficulties in creating resources for this purpose. Consistent with all of this, more public servants, through focused education and training programmes, are building their capacity to analyse policy and evaluate expenditure. These are skills gaps identified both by the public service itself and by the National Economic and Social Council.
Welcome also has been the publication in January 2005 of updated guidelines on appraising and managing capital expenditure proposals. The guidelines cover different stages of public programmes from appraisal through planning and implementation to review. They also advise on issues such as employing consultants and indicate the type of appraisal appropriate to different scales of programme, for example, for programmes valued at over €50 million cost benefit analysis should be used.
The guidelines also reaffirm basic principles such as the need to have well specified objectives. Objectives which are specific, measurable, realistic and time-bound help to match expenditure with needs.
Of course, we also must look at how we forecast our needs and our costs by, for example, stress testing the different assumptions underlying projections. This is an obvious prerequisite of any model of public provision which works on a "forecast and furnish" basis. It is necessary also to have a system to identify, evaluate and control reasonable risks and to make full use of new financial management andaccounting systems.
The new mercantile ethos which exists in Ireland carries with it some old familiar problems. The media reports are in essence postmortems on these problems. We should, however, realise significant efforts are under way to combat waste and promote value for money which we can reasonably expect will lead to improvement and that transparency in monitoring and evaluating is greater than before. And we should not forget that, even though some public programmes come in over budget, in the main public investment produces net benefits which endure.
Dr Michael Mulreany is assistant director general with responsibility for education and research at the Whitaker School of Government and Management in the Institute of Public Administration