The Children’s Hospital price spiral: Call in the comptroller
The Taoiseach’s announcement in the Dáil on 18 December that the National Children’s Hospital would cost €1.433 billion has had a major impact on public morale. In early March, the KBC Bank/ESRI consumer sentiment report found an unusually large drop in consumer sentiment in Ireland in February. It is time to call in the Comptroller, writes Sean Barrett of Trinity College Dublin’s Department of Economics.
In his commentary on the decline, economist Austin Hughes stated that a factor in the decline was the controversy about a large cost-overrun in the projected cost of the National Children’s Hospital. The cost of the hospital increased from €650m in August 2015 to €700m in April 2016 to €1 billion in October 2017 to €1.4 billion as announced by the Taoiseach in December to projections of between €1.7 and €2 billion. As the project had an initial projected cost of €450m the cost escalation raised fears of what the Taoiseach called “low-balling”, that is submitting a low initial bid, locking the State in and then increasing the price afterwards. The Taoiseach also stated in the Dáil that there were some unnamed contractors whom he would not wish to tender for state contracts ever again.
Rhetoric aside, the response has been minimal. One person has resigned from the several bodies and committees charged with overseeing the project. The PwC firm has been commissioned to report on the project by late March. Work has continued on the project. No penalty has been incurred by those responsible for the cost overruns, a serious problem of moral hazard in economics.
In the Irish Times of 19 December and 16 January, I called for the intervention of the full forensic skills of the Comptroller and Auditor General the officer under the Constitution responsible for auditing public expenditure. The Constitution states: “There shall be a Comptroller and Auditor General to control on behalf of the State all disbursements and to audit all accounts of monies administered by or under the authority of the Oireachtas.”
We have in practice emphasised the role of the Comptroller after projects have already failed. This is a limited interpretation of a constitutional provision that the Comptroller audits all disbursements and audits all accounts. I would see huge gains to society as a whole from the Comptroller’s involvement at all stages of projects rather than waiting for them to fail before calling him in.
I would also recommend that the Central Statistics Office should play its part in assessing project cost escalations. Under some outstanding leaders, including the internationally renowned Roy Geary, it has a wide reputation for its data. Its wholesale price index for capital goods in building and construction increased by 6.2 per cent between 2015 the base year and November 2018. For example, ready mix cement rose by only 1 per cent over the period.
Since the cost escalation combines both prices paid and quantities bought, we must also ask if the original quantities were horrendously underestimated by those promoting the project. This in turn might be due to “low-balling”, as in the Taoiseach’s terminology or incompetence. There appear to have been serious flaws in this project in predicting the quantities of items such as drainage pipes, air vents, pipe cladding, sanitary fittings, theatre lights, gas outlets, glazing, fire sprinklers and cable supports. In addition, the promoters of the project included savings which proved to be unattainable, and underestimated contractor claims, labour costs, office costs, insurance costs, equipment, VAT, and €43 million of other items.
At the launch of the National Development Plan (NDP) in Sligo on February 16, 2018, I thought that there was far too much complacency on the large capital spending programme launched without published independent economic evaluations. IMF warnings on capital expenditure as a whole and the hospital project in particular were brushed aside. The NDP statement that “no change is proposed to long-established arrangements for oversight, monitoring and management of voted exchequer resources” is obviously wrong. Reform is needed.
Sean Barret is a fellow of Trinity College Dublin and pro-chancellor. He was a Seanadóir from 2011-2016.
