Saturday 24 August 2019

Colm McCarthy: 'It's wrong to endorse broadband plan and ignore officials' warning on costs'

The €3bn broadband decision is another example of major projects being encouraged by consultants, writes Colm McCarthy

Taoiseach Leo Varadkar listens to Communications Minister Richard Bruton speaking at the launch of the National Broadband Plan approved by Government at the Department of Justice and Equality on St Stephen’s Green. Photo: Steve Humphreys
Taoiseach Leo Varadkar listens to Communications Minister Richard Bruton speaking at the launch of the National Broadband Plan approved by Government at the Department of Justice and Equality on St Stephen’s Green. Photo: Steve Humphreys

Ministers, the Taoiseach included, have relied on a cost-benefit analysis (CBA) from the consultants PwC in justifying the €3bn Exchequer bill for fibre broadband to 540,000 premises in rural Ireland.

An earlier scheme to connect 840,000 premises was costed at €500m, one-sixth of the figure agreed last Tuesday for what is now a smaller project. The cost-benefit report was reviewed by the Department of Public Expenditure as required under the Government's public spending code. This process binds all government departments and state agencies.

The code requires that all significant public capital projects be subjected to a full economic evaluation, comparing costs to benefits. This is designed to ensure that poor proposals are identified and eliminated, with scarce public resources concentrated on the best projects.

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Minister for Public Expenditure Paschal Donohoe. Photo: Gareth Chaney
Minister for Public Expenditure Paschal Donohoe. Photo: Gareth Chaney

Unusually, the PwC study and the department's verdict have been released to the public. PwC gave the €3bn project, the largest single scheme in the State's history, an enthusiastic endorsement but the department advised bluntly that the PwC report was ''not credible''. The project was too risky, there was insufficient capital on the table from the sole bidder and there were various technical shortcomings in the analysis.

Since the department is tasked with ensuring compliance with the Government's public spending code and employs specialist staff for the purpose, this should be a worrying development for PwC. The company is one of a number in Dublin which prepare cost-benefit reports for the promoters of public projects and its reputation has been assailed.

The company must have been mightily relieved when the Taoiseach, the Tanaiste and the two ministers directly involved, Paschal Donohoe at Public Expenditure and Richard Bruton at Communications, economics graduates both, chose to endorse their report, rejecting the department's damning verdict.

Relief at PwC will have been matched by despair at the Department of Public Expenditure, chastised in such public fashion by the Taoiseach, the Tanaiste and two such well-qualified ministers.

The hapless officials should consider themselves lucky the Government did not announce redundancies forthwith, and their replacement with knowledgeable external consultants to supervise the public spending code in their stead.

The ministers, to be clear, are not relying on political prerogative alone. They are citing external analytic authority for their preferred course, namely the superiority of PwC's analysis over that of the benighted officials.

An alternative narrative on this unprecedented and public rebuke to the officials, promulgated energetically by the Irish Times and RTE, has to do with the imminence of elections and the moral failings of politicians. Some journalists have even suggested that the Government knows perfectly well that the Department of Public Expenditure is right, and that the PwC report is flawed. The ministers are simply too craven to scrap the broadband plan and start again. Only one of these conflicting narratives can be sustained. Was the Government correct to endorse the PwC report or should it have accepted the reservations of its detractors?

PwC has extensive experience in preparing cost-benefit analyses. One of a group of firms hired by the promoting state agency, it felt able to report positively on the gone-but-not-forgotten Bertiebowl, a third stadium for Dublin favoured by the former Taoiseach Bertie Ahern to add to Croke Park and the Aviva. This €1bn project was abandoned, despite the positive evaluation furnished to its promoters, due to the machinations of some politicians obsessed about value-for-money in capital spending and unconvinced by the consultants.

PwC also, and more pertinently, prepared a report on the National Broadband Plan in one of its earlier incarnations, released by its client, the Department of Communications in 2015.

This report, also positive, contained no quantified estimates of either costs or benefits. It also listed the labour cost of construction as a project benefit, a methodological novelty.

The latest PwC report had to address the existential challenge facing all providers of promoter-funded cost-benefit studies, which is to find, somewhere, enough benefits to exceed whatever costs are admitted.

This can lead the analyst to some strange places. Scaling the daunting mountain of costs tempted the PwC authors to include pure private benefits in the calculations, and they constitute the dominant portion of total benefits claimed for the project.

The inclusion of private as distinct from public or social benefits, the department points out, is inadmissible in cost-benefit analysis.

Manoeuvres of this kind are testament to the magnitude of the challenge in getting the numbers to behave.

The department has other complaints. The officials write: "Concerns were expressed in February 2019 in relation to the overstatement of net additional benefits.

"The latest (final) revised version of the CBA has responded to these concerns and made changes which reduce the benefit of the project by a total of €1.13bn which, all things equal, would have reduced the net present value to below zero…"

They continue: "The cost side of the CBA was also changed very significantly with costs to the operator being reduced by €1.079bn, apparently due to an error which had gone unspotted in all previous iterations of the analysis. This discovered reduction in costs fortuitously compensates for the reduction in benefits arising from our observations on the previous version of the CBA.

"In summary, the CBA is not credible, and it is questionable whether it is consistent with the Public Spending Code."

The Department of Public Expenditure, the government's value-for-money resource, insists that the project promoters, the Department of Communications, and its chosen consultants, PwC, have failed to establish that the project delivers benefits adequate to justify Exchequer costs of €3bn.

The routine procedure in Ireland, where economic evaluations are conducted by consultants employed by the project promoters, is long established. That it produces unsatisfactory results should not come as a surprise.

To my knowledge, no cost-benefit study commissioned from consultants by the sponsors of a major project has come up with a negative verdict in Ireland over the last 30 years.

Unhappy with this situation, the Department of Finance commissioned a team led by the Economic and Social Research Institute to recommend a way forward in 2003. The report, whose author list included this writer, concluded thus:

''If the quality of project appraisal is to be enhanced and the potential of this powerful appraisal tool maximised, CBAs must be conducted rigorously and independently of project promoters.

''Consideration should be given to the establishment of a unit in the Department of Finance devoted exclusively to the conduct/commissioning of cost/benefit studies on major projects…''

Acceptance of this recommendation need not result in redundancies at PwC or the other firms active in the Dublin CBA industry.

It would mean, however, that they would be employed to aid the referee rather than one of the contestants.

Since Exchequer-funded capital projects rarely involve contributions to cost from anyone else, the demands on the capital programme are unlimited.

Schools, public housing, Garda stations, hospitals, road rehabilitation, Bertiebowls, there are no bounds to what can be promoted.

The Taoiseach airily suggested last week that a single-line underground tram project in Dublin could cost €4bn or €5bn. The Government was wrong to endorse PwC's conclusions on the broadband plan. There is no coherent method of allocating limited funds without taking cost-benefit analysis seriously.

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