Tuesday 15 October 2019

Cathal Guiomard: 'We don't need to reinvent wheel to shield taxpayers from overruns'

Blueprint: Terminal 2 building at Dublin Airport
Blueprint: Terminal 2 building at Dublin Airport

Cathal Guiomard

How are we to protect taxpayers from cost escalation on public investments that draw from a finite pool of taxpayer funds and squeeze out other plans?

There may be lessons from the approach of regulatory offices charged with stopping monopolies overcharging for services or facilities. This involves close scrutiny of costs, including investments.

When the plan for Dublin Airport's T2 was developed, the regulator's office was concerned about possible cost overruns; it was central to the office's responsibilities that passengers not be left paying the bills for poor cost control.

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Prompted by experience of international regulatory practice (there are no wheels needing to be invented in the cost-control business), and conscious that the new terminal would cost in the order of €1bn (once roads, utilities, aprons, etc, were included), we developed the following approach.

First, we required the airport to publish its investment plans, setting out the need for the projects, their functionalities, timetables, and costs. We sent all projects costing more than €5m to a quantity surveying consulting firm to assess whether the budgets seemed too low, too high, or about right. We published that report on our website and asked for comment, including from airlines using Dublin. Projects that airlines were prepared to pay for at the costs proposed by the airport were added to the investment base. Projects supported by one side but not the other required a regulatory judgment. A final investment budget was set by the regulatory office, and airport charges for the next period derived accordingly. All this information is still available today online.

Secondly, we set out rules on how various situations would be treated - non-delivery of a project, delivery of unplanned projects, projects delivered under budget, cost overruns due to new user requirements, cost overruns credibly due to factors outside the company's control, and cost overruns due to poor project management. For each case, a specific regulatory treatment was set out.

The intention was to give the airport flexibility to vary investments as circumstances changed, or user requirements were explicitly amended, but to let unjustified cost overruns fall on the airport shareholders. These rules were distilled into a single summary. Parties knew where they would stand in advance.

After T2 had been built, the final cost was €932m against a budget of €778m. The airport sought full compensation. The regulator's office allowed half of these costs to be recouped from airport charges. The other half was deemed the responsibility of the airport, meaning that the airport will never recover the full costs of T2.

This is just an outline of the process - but there is enough to allow some principles to be derived. Cost control starts with incentives, the realisation that developers have an incentive to overcharge and a mechanism is needed to stop them.

In health, a public body is required that acts in the position of the regulator and reaches contracts with developers who deliver hospitals against budget, with explicit, public rules about how cost out-turns will be treated. There will be pushback - but the public will be protected.

There is not a perfect fit between cost control in regulation and in health. But a 'regulator' must set accountability rules in advance for cost overruns. These give managers a strong financial incentive to deliver a project on time and budget, and clarify that overruns will fall substantially on shareholders. There can only be a single 'regulator' (or body with cost-control responsibilities) and a single builder counterpart.

In fact, once the Government commissions a project - putting its requirements in writing into the public domain - its direct role should be over. The role of the 'regulator' is then to run a tender to identify a builder that can deliver the project (as prescribed) at the lowest final cost.

It has been reported that the children's hospital project applied for and was granted an exemption from the standard public procurement rules. A regime that chases minnows and spares monsters is the worst outcome of all - high costs, few benefits.

Site choice and other decisive influences on cost have to be part of the responsibility of the 'regulator'. In that regard, governments can achieve more by intervening less, in particular by denying themselves the 'meddling' powers that will cause them to be pestered by such as multi-millionaire medical consultants fighting turf wars. Governments have limited their own role in other areas with few regrets.

If it is not possible to sign a completely fixed-cost contract, then having the builder's costs evaluated by a consultant quantity surveyor is even more crucial than at the airport. Clauses that allow for cost escalation need to be policed by consultant engineers on site, from whom written agreement is needed when the developer proposes material cost adjustments above and beyond those contracted for. Cost-plus clauses should be related to official published building-cost inflation statistics.

To end the present nirvana for builders and nightmare for taxpayers, new principles are needed to include role clarity, 'regulatory' independence, and full transparency.

  • Cathal Guiomard, an assistant professor of Aviation Management in DCU, previously worked in the Irish aviation regulator's office. He is now director of the DCU BSc in Aviation Management. Opinions expressed here are personal. The regulatory reports referred to may be found on www.aviationreg.ie

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