Oireachtas Joint and Select Committees
Thursday, 7 March 2019
Public Accounts Committee
Oversight and Implementation of Capital Projects and the Role of Public Officials on State Boards: Department of Public Expenditure and Reform and the Office of Government Procurement
Today we are examining the historic and continuing role of the Department of Public Expenditure and Reform in the oversight and implementation of projects under the national framework for capital investment and the national development plan. The focus of today's meeting is the Department's role in ensuring that value for money is achieved through the systematic appraisal and professional management of all capital projects. We also wish to explore the role of public officials on State boards. The matter for consideration today initially arose from our meeting with the National Paediatric Hospital Development Board. We will be engaging with that board again in the coming weeks. Ten major capital projects that are currently in various stages of development are listed before us. One of these is the national children's hospital. I want to put the €140 billion of expenditure under this plan in context. The children's hospital represents about 2% of that amount. The committee is concerned that the issues affecting that project will arise in other major projects. We wish to know what control mechanisms are in place to deal with that. We want to ensure that commitments given are delivered within cost and that value for money is achieved. We are here today to discuss not just one project, but several projects.
We are joined today by Mr. Robert Watt, Secretary General of the Department of Public Expenditure and Reform and Mr. David O'Brien, principal officer at the Office of Government Procurement. Mr. O'Brien is also the chairman of the Government contracts committee for construction, is that correct?
I wish to put that on the record because it is an issue of concern regarding the derogation for a particular project. We are also joined by Mr. David Feeney, principal officer, and Ms Ciara Morgan, assistant principal officer. Members should note that Mr. Watt is the Accounting Officer for the Office of Government Procurement.
I remind members, witnesses and those in the Public Gallery to turn off all mobile phones. If they are merely put on silent mode they will still interfere with the recording system.
I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.
Members of the committee are also reminded of Standing Order 186 to the effect that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a member of the Government or the merits of the objectives of such policies. While we expect witnesses to answer questions put by the committee clearly and with candour, witnesses can and should expect to be treated fairly and with respect and consideration at all times in accordance with the witness protocol.
Before I call on Mr. Watt I note that we had quite a discussion on the non-appearance of Mr. Paul Quinn, whose attendance the committee has specifically sought. Deputy Jonathan O'Brien, who is the first speaker, may want to raise that issue. I will not get into it any further but I wish to put the witnesses on notice.
Another matter I wish to raise is a comment in connection with this committee which was tweeted a few moments ago and attributed to Mr. Watt. Perhaps Deputy O'Brien wishes to raise it. I request that Mr. Watt clarify it. This is a very specific point before we get into the business of the meeting. It only arose in the last few minutes.
I was very careful to note that this comment was reported. Nobody in the committee heard it. We were in here doing our business. It was reported by a very responsible journalist that Mr. Watt was quoted as saying that the Chair, Deputy Fleming, "has to control the mob", the mob being members of this committee. If that was the case it would be deeply unsatisfactory.
Mr. Robert Watt:
I thank the Chairman and I thank the committee for the invitation to be here to discuss the oversight and implementation of capital projects. The Chairman has already introduced the colleagues by whom I am accompanied. I emphasise the point with regard to Mr. David O'Brien, chairman of the Government construction contracts committee, which is relevant in terms of derogations from the standard procedure relating to lump-sum contracts. There is compelling evidence that efficient capital public investment is central to long-term economic well-being. Efficient capital investment allows the economy to grow-----
The statement has been prepared and I would like to hear it. The public would like to hear it. If Mr. Watt chose to have a statement of 18 pages, that is his decision. It is a matter of courtesy to the members to have it read out and it is usually what we do. Rushing or mumbling through it-----
Mr. Robert Watt:
I thank the Chairman.
Efficient capital investment allows the economy to grow faster on a sustainable basis by raising productivity and supply capacity. This has an important role to play in alleviating capacity constraints that might otherwise restrict economic and social progress. Value for money is the key policy objective and policy seeks to support efficient and sustainable public investment.
The selection, appraisal, and delivery of individual public capital projects is the responsibility of each relevant Department. My Department is responsible for overseeing the implementation of the national development plan within Project Ireland 2040, supporting value for money and protecting sustainable capital investment of the State. In that context, I will discuss very briefly Project Ireland 2040 and progress in rolling out the different projects; the existing processes for selection, appraisal and delivery of public sector capital projects, including governance; and the plans in place to strengthen those processes.
Project Ireland 2040 was launched a year ago. As Deputies are aware, it seeks to achieve ten strategic outcomes building around the overarching themes of well-being, equality and opportunity. It consists of the national development plan and the national planning framework and it seeks the alignment of investment with the spatial outcomes set out in the planning framework. Project Ireland 2040 moves beyond the approach of the past, which saw public investment spread too thinly and investment decisions that did not align with a spatial strategy. These practices contributed to some of the major issues that we face today as a country, particularly the predominance of Dublin in terms of economic growth and development, alongside the challenges facing rural communities.
Project Ireland 2040 seeks to develop Cork, Galway, Limerick and Waterford as viable cities of scale that can act as alternatives and a counterbalance to the continued growth of Dublin and its surrounding region. These cities will act as drivers of growth for their wider regions and for rural areas. Over the first ten years of Project Ireland 2040, €116 billion will be invested and investment will reach 3.5% of national income - defined through GNI* rather than GDP - this year and over 4% of national income by 2027. This significant acceleration in investment is in line with national and international analysis to the effect that Ireland's public capital infrastructure needs to be substantially strengthened to support the resilience of our economy in response to risks such as Brexit. As Deputies are aware, public capital spending was necessarily impacted upon as the Government sought to restore the public finances during the recession. This plan seeks to accelerate the necessary catch-up in public capital infrastructure.
There has been much recent commentary on the delivery of large-scale projects. In that commentary, we can lose sight of the significant progress that is being made. Project Ireland 2040 is already delivering better transport links, facilitating improved health and environmental outcomes and delivering more housing. I will not go through the list of projects but I will highlight some of them. The national road network is being upgraded and, for example, the M11 Gorey-Enniscorthy motorway will open to traffic later this year. It is the largest project under way in the State and is currently scheduled to be completed on time and on budget. Works will be started on key arteries on the N4, as Deputies know, the Ardee bypass, the N22 and many other projects.
To improve our international connectivity, works commenced on the new runway at Dublin Airport last month, which is due to be operational by 2021. This is a significant project for Dublin Airport, and we can consider the time taken to deliver it compared with high-profile runways in our nearest neighbour. It is a useful benchmark of the speed with which this project will be delivered.
There will be over 90 new school building projects in construction this year and over 300 schools will benefit from minor works improvements, while 2019 will see the completion of the national forensic mental hospital and the opening of 18 primary care centres throughout the country. There will be 6,500 social housing units developed and when acquisitions and leased units are added, that figure will be reach 10,000.
The Bandon flood relief scheme will be completed this year, along with other flood relief schemes. The projects upgrading the water supply in Drogheda and Dundalk will be completed this year and projects to address water quality and capacity in other towns and cities will also begin this year. Sewerage schemes in Blanchardstown, Athlone and Liffey Valley will commence in 2019.
The majority of recent projects have been delivered on time and on budget, and I will highlight a few of them. The N22 Tralee bypass was completed on time and at a cost of €73.4 million, which is under budget. The N25 Cork south ring road interchanges upgrade was completed at a cost of €81.5 million, while the north docklands sewerage scheme was also completed. The Waterford towns and villages wastewater project was also completed on budget at just under €26 million, while phase 2 of the National Indoor Arena is expected to be completed ahead of schedule this March at a cost of €26 million. Notwithstanding the challenges that exist and which we will no doubt discuss later, this highlights the professionalism across many sectors in delivering public capital projects.
To support Departments as they work to achieve value for money in investment in capital infrastructure, a suite of key reforms has been introduced to support the efficient implementation of Project Ireland 2040 and its objectives. The Land Development Agency has been set up by the Department of Housing, Planning and Local Government to ensure optimal use of State land. Four new funds have been set up focused on urban and rural investment, climate action and disruptive technology to prioritise funding to the best projects, and they are being managed by the relevant line Department. A construction sector group has been established to ensure regular and open dialogue between the Government and the construction sector, which is important in addressing various capacity and skills issues that exist in the sector, as well as the need for the Government and the system to work collaboratively with the sector in order to improve performance in the years ahead.
A Project Ireland 2040 delivery board meets regularly to ensure effective leadership of the implementation overhaul. The investment projects and programmes office has been established in my Department to co-ordinate reporting on Project Ireland 2040 and drive reforms, including strengthened business cases and project appraisal. A capital projects tracker is published on our website to inform citizens of the variety of projects being implemented in their area and to give a greater overview to the construction and infrastructure sectors. The tracker is currently being updated. A capacity and capability review of public sector bodies is being commenced in the Department to ensure that the State's delivery practices are to the highest standard. This reflects a concern that the capacity and performance of bodies varies, depending on historical role in delivering infrastructure. Given the scale of this project and the demands placed on Department that would not previously have managed projects, it was necessary to carry out a review of that capability.
As part of the ongoing reform of Ireland's capital management systems, the Office of Government Procurement is conducting a review of construction procurement strategy and we are reviewing the public spending code. The purpose of these reviews is to strengthen the existing guidance to better align with the realities of project delivery and with a particular focus on improved financial appraisal, cost estimation and management.
I will touch on the processes that are in place to ensure the effective selection, appraisal, delivery and oversight of capital projects. Let me stress that the management, delivery and oversight of individual investment projects within the agreed allocations is a key responsibility of every Department and Minister. The Government receives regular reports informing it of actual expenditure and my Department is in regular contact with all other Departments and offices to ensure that actual expenditure is being managed within the overall fiscal parameters. In addition, the drawing down of funds from the Exchequer is monitored and reported on against profile on a monthly basis in the published Exchequer statement.
A range of processes and guidance is in place to support Departments and Ministers in securing value for money and I will discuss some of these as they relate to the public spending code and public procurement rules. The public spending code is the set of rules, procedures, and guidance to ensure value for money in public expenditure. The public spending code encompasses guidance on a variety of issues related to the management of expenditure at each stage of the expenditure cycle. This includes central guidance on the application of appraisal and evaluation methodologies, including cost-benefit analyses. The public spending code sets out the oversight and approval process for public expenditure proposals, including capital projects. Governance and clear lines of responsibility are key to successful public capital investment. The public spending code supports this by clearly setting out the responsibilities that lie with different roles. These main roles are the sponsoring agency and the sanctioning authority.
The Department or agency proposing and implementing a project is the sponsoring agency.
It is responsible for appraisal, planning, implementation, management and post-project review of the project. The sponsoring agency is responsible for developing a project proposal, which is then submitted to the sanctioning authority for decision on approval at key designated gates in the project lifecycle.
The Department or body funding the project and which is responsible for project approval is the sanctioning authority. It is responsible for approval in principle at the key gates in the project lifecycle, that is, following appraisal, approval to proceed to tender, and approval to accept a tender if the project has significantly changed, such as through an increase in costs. The sponsoring agency is responsible for managing and monitoring the implementation of the project. The sanctioning authority must be satisfied that the agency has appropriate systems to ensure that the project is delivered in line with what has been approved. If adverse developments occur which affect the desirability or viability of the project, the sponsoring agency must report to the sanctioning authority.
Sponsoring agency and sanctioning authority roles can lie within separate public sector bodies. The relevant local authority will typically be sponsoring agency and the Department of Housing, Planning and Local Government will be the sanctioning authority for a social housing regeneration project. Sponsoring agency and sanctioning authority roles can also be within one body. For example, for maintenance projects funded by local authorities, the local authority may be both the sponsoring agency and the sanctioning authority. For larger projects costing more than €100 million - and this is a key point - the Government is the ultimate sanctioning authority. For practical purposes, in respect of these projects, the relevant Department will lead on that project.
The public spending code is supplemented in some instances by sector-specific appraisal guidance. These are developed by the relevant Department and set out additional requirements and parameters specific to the sector while remaining in line with the public spending code. In the transport sector, for example, specific rules and cost-benefit analysis of transport projects may differ from the cost-benefit approach in other areas of public policy.
Public procurement rules cover the acquisition of works, supplies and services by public bodies. National rules governing public procurement must comply with the relevant EU, WTO and national legal requirements and obligations. The aim of European and national rules is to promote an open, competitive and non-discriminatory public procurement regime.
The high-level review and reporting structures set out in the public spending code are key to better project management and form the basis of the guidance material on project management that is set out in the capital works management framework, which was first published in 2007.
All public works projects delivered under the Exchequer-funded element of the plan must be procured in accordance with the provisions laid out in the capital works management framework. The framework is mandated by circular and was developed to provide an integrated set of contractual provisions, guidance material, technical templates and procedures which cover all aspects of the delivery process of a public works project from inception to final project delivery and review to assist contracting authorities in meeting their requirements. The public works contract is a key component of the framework and is a lump sum, fixed-price contract which is used not on all projects but on most public works contracts.
This framework is maintained by the Office of Government Procurement in conjunction with the Government contracts committee for construction. As mentioned, David O'Brien, who is with me today, is the chair of that committee. The committee has representatives from all the main sanctioning authorities and bodies across the public service. It is possible for public bodies to seek a derogation from the use of the standard forms of contract from the committee. This process may be used for complex or large projects which have specific requirements that do not naturally fit with the standard "lump sum" contracts and has been availed of by a number of sanctioning authorities. A derogation, if agreed, does not approve the approach or strategy of the authority but simply acknowledges that the circumstances are such as to warrant a different approach from the standard. It is a matter for the contracting authority and the sanctioning authority to satisfy themselves as to the adequacy of the approach with regard to compliance with procurement rules and project appraisal in accordance with the spending code.
Reform is an element of Project Ireland 2040. We also have to learn from experiences, both good and bad. There is no doubt but that the experience of delivering capital projects highlights the need to step up the pace of reform still further. The delivery of large, complex, multi-year capital projects in a construction market impacted by shortened economic cycles brings many challenges in terms of tender price volatility, skills shortages, etc. This is why the Minister for Public Expenditure and Reform recently set out a further suite of reforms.
First, we need more certainty on project costs. Government will no longer pre-commit to major bespoke projects until there is 100% clarity on tendered costs. The Government will approve major projects to be evaluated and designed, but there will be no final commitment until the tendering process is complete. It is not possible to know the price of a capital project with a high level of certainty unless there is a full design specification, planning, if necessary, has been achieved, and the project has been competitively tendered. In future, Government will not commit to projects until the design and price are clear. This could delay projects, which I know will be an issue, but will ensure greater cost certainty. There is a trade-off between timeliness and core certainty regarding large bespoke projects because the time it can take to develop the detailed design, in many cases, can be years. This certainly increases the cost but it also takes time. Of course, it also involves expenditure up front. Depending on a final decision on a project, that may involve expenditure which ultimately does not lead to an end product or a final build.
We need more realistic costs and a better understanding of costs in capital projects. In future, the budgets of large bespoke projects will include a significant premium for risk in order that cost estimates are more realistic. As risk is managed through the project lifecycle, the risk premium will reduce. For example, a project on a brownfield site with a high degree of complexity and which has not been fully designed has a higher risk premium incorporated into its budget. As the risk is managed, this premium should reduce over time. The revised capital works management framework will require Departments and their agencies to improve the quality of information on projects as they are implemented. This will improve decisions on projects and allow projects to use digital technologies such as building information modelling, BIM, to improve how efficiently they are developed. This is another significant challenge for sanctioning authorities in ensuring that the information is there at the outset to ensure we can use the technology embedded in the BIM approach. As part of the reviews of Ireland's capital management systems, my Department will conduct a full assessment of how cost estimation for capital projects could be improved. This will include exploring the potential of external peer review of cost estimates for projects over a certain size.
We also need to strengthen our capital management systems. As I mentioned, we are reviewing them. The Office of Government Procurement is conducting a review of construction strategy and we are reviewing the public spending code. The purpose of these reviews is to examine how capital projects are currently selected, designed and delivered and to strengthen these processes, taking account of lessons learned. The reviews will result in a range of changes. I will highlight just two changes at this point. One is earlier identification of projects. At present, Departments are typically presented with projects which are fully formed and in respect of which the delivery methods and project roles and responsibilities have been set. In future, Departments will engage at an earlier stage to have more input into project roles and responsibilities; delivery method, critically; identification of risk; and discussion on costs. Second, and finally, a number of high-profile projects have highlighted issues with the performance of advisory firms. We will seek to link payments to advisory firms to clear performance standards. We will bring in performance standards linked to payments in future contracts with those firms.
That is, I hope, a quick run through of our approach to what is a very complex area involving many different types of projects and many different agencies and authorities across the public service. I look forward to engaging with the committee on these matters.
I thank Mr. Watt. The following speakers have indicated so far in the following sequence. Deputy Jonathan O'Brien, the first speaker, has 20 minutes. Deputy Alan Farrell, the second speaker, has 15 minutes. Then the other speakers will be Deputies Marc MacSharry, Alan Kelly, Catherine Connolly, David Cullinane and Catherine Murphy. I will stick strictly to the time - members have often heard me say this - to allow every member in. There is nearly a full membership here. The meeting will finish at 1 p.m. because Mr. Watt is due to appear before another committee and, out of respect for that committee, we will not delay its proceedings. We, therefore, have two and a half hours to do our work. I call Deputy O'Brien.
Mr. Robert Watt:
When it comes to attendance at committees, I am the Accounting Officer, obviously. I am responsible. I am here, therefore, as the main person to answer questions. I bring along the people who I think can help me in ensuring we answer questions. In fairness, in our engagement in the past, we have always tried to be upfront and have the relevant information to hand, and if it was not to hand, my colleagues could help. The people I chose for today's meeting are those who are in a position to help in answering the questions. As for Mr. Quinn, David O'Brien is the chair of the Government contracts committee. That was the committee involved in the consultation with the national children's hospital board regarding the type of procurement process that might be desirable for this project.
We wanted Mr. Quinn here today because he gave written evidence to the committee on 25 January which we wanted to test. I put it to Mr. Watt that contact with the GCCC was initiated by Mr. Quinn but Mr. Watt said that was not the case. The written evidence states the engagement between the National Paediatric Hospital Development Board began at his initiation as a member of that board in October 2013.
Mr. Robert Watt:
Mr. Quinn is not a member of the contracts committee but is a member of the board. In saying the board should discuss this with the contracts committee, he was playing a role as a member of that board. Mr. O'Brien is chairperson of the relevant committee which is discussing the approach and the effect of the derogation which I mentioned.
Mr. Watt's opening statement does not even reference the national children's hospital, which is bizarre, given that it is the largest capital project in the history of the State. It will be the most costly and has one of the largest overruns so I do not get how Mr. Watt does not even reference it. It is like there is a determination not to discuss it today with the Committee of Public Accounts. It is my belief that Mr. Watt did not want Mr. Quinn to appear before the committee because of the awkward questions that would have been asked of him. Mr. Watt can correct me if I am wrong.
I find it bizarre that Mr. Quinn is not here, given his unique position as head of the Office of Government Procurement and the fact that he was appointed by the Minister for Health in the public interest to serve on the development board.
Mr. Robert Watt:
He has not appeared before any committee. I am here today to discuss our Department's role in relation to the overall management and oversight of capital projects, of which procurement is an element. The contracts committee has a role to play and Mr. O'Brien is the chairperson of that committee, which is why he is here to discuss the issues around procurement. Mr. Quinn's role in this project was as a member of the board. I understand that the board is being invited and that Mr. Quinn will attend as a member, which is appropriate given his role in this project.
We should be questioning that written evidence at this meeting because this meeting is dealing with procurement, tendering and capital projects, yet we cannot get an opportunity to question him.
Mr. Robert Watt:
I am here to answer the Deputy's questions and I have brought people with me. I have appeared before this committee many times over the past eight years and if I am not in a position to answer questions, we will communicate with the Chair in the normal fashion. I am here to discuss the oversight and implementation of capital projects.
I did not directly reference the children's hospital but I indirectly referenced it several times in mentioning the experience of recent projects and the lessons we can learn from those. My job, as the person who is responsible for the overall approach to the capital management of projects, is to learn lessons from how we manage projects. Over the past number of weeks, with colleagues and the Minister, Deputy Donohoe, we have debated how to improve the process and I have set out a variety of measures today which the Government has taken and announced, and which I have set out for the committee. They set out a new approach to ensure we manage projects as best we can.
As the Chair has said, and as everybody in this committee knows, I am not the Accounting Officer for the children's hospital and our Department is not the sanctioning authority or the sponsoring agency. We are not involved in the day-to-day work or the evaluation of tenders and the Department is not involved on the national children's board.
Mr. Robert Watt:
It is our responsibility to manage the overall process, including the public spending code, the procurement processes and public financial procedures to ensure we manage projects as best we can. There is a responsibility on individuals, Departments and authorities to the projects relevant to them.
Mr. Robert Watt:
In the spring of 2017, the Government approved an estimate of €980 million for construction, which has increased by approximately €400 million. The reasons have been set out in other committees and in public commentary and have been documented by the Secretary General of the Department of Health and the Minister.
We are not in other committees and I think this is Mr. Watt's first appearance before any committee on this particular issue. What other people said is for them. I am asking Mr. Watt, as the Accounting Officer for the Department who is ultimately responsible for forking out the additional €450 million, if he is happy that processes were adhered to by the Department of Health?
Mr. Robert Watt:
I am happy that the project was managed by the Department of Health in line with the public spending code. There are issues around the nature of the tendering process because we moved away from the lump sum contract and they sought a derogation, which led to a two-stage process. As the board, and others closer to the project than I, have set out, the complexity of the project meant that it was not possible to set out a detailed design and they went into a two-stage process where preliminary works were undertaken and the detailed design was then set out. When the detailed design was finalised, it became apparent that the estimate that underpinned the contract in spring 2017 was not accurate.
There are a number of issues for us and I have set them out in the statement. We never know what the cost of something is until we have a detailed spec and a tendering process.
Mr. Robert Watt:
There are two issues with the two-stage process, which I addressed in my remarks and which will have implications for future projects. First, we committed to significant preliminary works before the final tender was established. That was because the preliminary works were significant, at €200 million. The Drimnagh sewer also had to be moved and there were very significant enabling works on which significant spending occurred before the final cost. It is very clear that we should not allow that to happen again.
The second issue is that we were given commitments relating to the approximate bill of quantities that underpinned the contract and how accurate they were. They did not turn out to be accurate and that is something that has also been documented. The Government has committed to a review of that by PwC.
I am also aware of what the Minister has said he is going to introduce in terms of changes. The costs soared in a very short period of time and nobody, in the Department of Health or the development board which includes civil servants who are obligated under a circular, saw fit to mention it to Mr. Watt, despite a memo from the HSE stating that it should be brought to the attention of the Department as part of the budgetary process.
Why did that not happen? Has Mr. Watt asked anyone those questions?
Mr. Robert Watt:
The issue, as has been set out by the people who are responsible for the project, is that there were discussions around increasing costs and those matters were brought to the Minister for Health in August and September. We were told in November about this and we asked for a detailed note. A detailed note was received by us on 19 November, we had a discussion with the Department and we communicated with the Minister a few days afterwards in terms of that. We were told about the significant cost issue at that stage and we met our colleagues in the Department of Health and we engaged with the Minister at that stage on it.
Mr. Robert Watt:
The Department of Health has said that it was establishing the figure. If the officials had come to the Department of Public Expenditure and Reform in the middle of October and said there was an issue, we would have asked what the issue was and they would have said they did not know yet. We would have then asked them to please establish what it means, what the final cost issues are.
Mr. Robert Watt:
I am not going to get into the ins and outs of this because it is not my responsibility. There were a whole variety of issues in relation to costs. There were costs that were identified in August. Those costs then came down and other issues appeared, as the Deputy knows. It serves absolutely no useful purpose for me and this committee to get into the who knew what, when or how. I have set out today what I think the lessons are for the management of these projects and I have set it out very clearly. That is what my focus has been over the past number of months with the Minister.
As part of the public spending code, what mechanisms has the Department put in place to oversee major capital projects? Are monthly updates or reviews supposed to be submitted by the contracting authority to the Department, including on the budget?
Mr. Robert Watt:
We get monthly reports from each Department on capital spending. We have a profile over five years of capital spend. Each Department, as the Deputy is aware, has its list of projects and has the allocations set out, so a profile is built up. They are adjusted every year because some projects are further advanced than others and some projects are delayed for whatever reason. There is an iterative process. Every year, there is an annual allocation which is set out and voted upon by the Dáil. Against that allocation and profile, we receive reports every month from each spending Department which sets out that Department X had a capital budget of €100 million and was meant to spend €10 million in January. If it spends €8 million, €9 million or €12 million, we report that. That is reported to me every month.
Mr. Robert Watt:
When the authorities are looking at perspective projects and going through the different stages of deciding on priorities, design, appraisal, going to tender and post tender, the sanctioning authority has responsibility then to ensure that the project is in line. In a road project, for example, that has a budget of X amount, where that project is over €100 million and the tender comes out way above that figure, the matter would be brought to the attention of the Government and it would have to decide whether to proceed with the road project. That higher or lower spend - that could also happen; it depends - would then be reflected in the allocations for the Department and we would then monitor it accordingly.
As Mr. Watts said, that is on actual spend and does not look at future spend. However, there is also a yearly report done which is, I believe, submitted to the Department of Public Expenditure and Reform in June of every year. It contains a checklist.
The Department makes an annual assessment of each Department's compliance with the public spending code and publishes this assessment on its website. The assessment is based on the Department's quality assurance report.
Mr. Robert Watt:
Yes. We do a review as part of the delegated sanction. The Departments have to write to me in effect to say that they have checked the processes are in place. This is part of the due diligence we do. As part of the delegated sanction, the Departments have to reassure me that they have put in place the proper procedures and basically that they are aware of the public spending code, the procurement rules and the obligations under those different codes and rules.
Mr. Robert Watt:
They have to do an appraisal. For a project of scale, one above €20 million, Departments have to do a cost-benefit analysis. They have to say to the Department of Public Expenditure and Reform that they have done the cost-benefit analysis. In cases of projects of a certain scale, officials from our Department would engage with the relevant Department and provide technical assistance and advice on the parameters used to evaluate benefits and so on.
We know from the minutes of the hospital development board, which is another reason Mr. Quinn's attendance at this meeting would have been useful, that there was an indication as far back as March 2018 of a potential costs overrun. Was that reflected in the assessment report submitted to the Department of Public Expenditure and Reform in June 2018?
Nobody told Mr. Watt there was an issue. Despite the matter being discussed at various committee meetings of the development board and the head of the Office of Government Procurement having all of this knowledge, nobody saw fit to tell Mr. Watt or any of his officials.
Mr. Robert Watt:
The Department was not in a position to answer that question until November. Just to go through the timeline, a report was submitted to the Department of Public Expenditure and Reform on 19 November 2018. We met officials from the Department on 23 November. We brought this is to the attention of the Minister and we sent a formal submission to the Minister on 26 November.
I welcome Mr. Watt. I express my disappointment at the comments attributed to him earlier today in the media.
I do not consider a colloquial expression of that nature to be helpful and it is unbecoming of a person in his office. That being said, we are here to discuss Government contracts and in particular, the contract for the national children's hospital. Hindsight is wonderful, of course, but from my perspective there are two flaws with that particular project, the first being the fact that it was two-stage and the second that there were additions and problems on site which have pushed the total expenditure up. I am not sure that any Government Department was equipped with the necessary foresight to be able to determine that these problems were arising. That is glaringly obvious when there are changes made to the manner in which Departments operate in terms of the note that Mr. Watt has provided to us in his opening statement.
I have five specific questions. On the two-stage tender process, I do not understand and, to a certain extent, I do not accept that there was not an element of foresight in terms of understanding the difference between the two-stage process in the context of the ability of the Department in question to obtain a competitive tender on the basis of the complexity of what was being done on the ground. As someone who worked briefly in the formwork business, I cannot understand how on earth a secondary company would be able to walk on site and say that it could tender, based on what is in the ground or what was supposed to be put in the ground, as per the original contract. How was that considered appropriate? Was there any knowledge in the Department of Public Expenditure and Reform that this was the nature of the contract? Perhaps Mr. Watt or Mr. O'Brien could answer that. Was there anyone with the experience to say that it could not work for various reasons?
Mr. Robert Watt:
The two-stage process was decided on because the detailed design was not developed for the project. The plan was to do the enabling works, start phase one and as the contractors would be there, dealing with the reality of the project, they would then finalise the design and move to the guaranteed price. The contracts committee was told the quantities were 95% set at that stage. It was an approximate bill of quantities but it was fairly certain, at 95%. That is really the issue, as the Deputy identified. To go to a two-stage process and to commit to significant spending when there is uncertainty about the final outcome is not appropriate. However, we were told that the bill of quantities was well established. As I see it, there is an issue about how that happened. I cannot talk about it because I was not involved. It is for those who were involved to explain what happened there but clearly, it is risky for the State and that is why we have set out that we will-----
Mr. Robert Watt:
One moment. The Government would have been in the position to re-tender when we got to the guaranteed price and that was the decision the Government had taken. The challenge then was to determine the type of tendering process. Would it be a real competitive process and would it lead to a better outcome than the one we are looking at now?
I must stop Mr. Watt there. Any reasonable person who is planning a project, regardless of what that project is, has an idea of what that project is going to look like, what it is going to deliver, how quickly it can be delivered and how much it is going to cost. I do not understand how, given the complexities of the project, all those logical parts of constructing a building could be set aside, knowing what we know now. I have never understood it, from the very first day that this matter came to light.
Mr. David O'Brien:
The two stage process is widely used. It is known typically as early contractor involvement and is widely used in infrastructure projects internationally. It is a development out of design and build, which is a form of contract that transfers a significant degree of risk to the contractor. It has had its problems and this process has evolved out of that approach. The benefits are that it gets the contractor involved in the design and risk evaluation of the project at the earliest point possible to try to uncover and work through issues that may arise on the job.
Mr. David O'Brien:
No, the key here is that the documents that were issued at the tender stage were issued on the basis of a fully designed basement. The basement works that are currently under way were designed and a standard contract was awarded for those works. There was an early engagement stage between the commencement of that work and what we call the guaranteed maximum price.
In his opening statement Mr . Watt said that 100% clarity would be required on tendered costs. How can that possibly be achieved? If one thinks about a complex project like metro, for example, how on earth is one going to be able to achieve that?
Mr. Robert Watt:
What we are saying is that in the future we will only make a decision on something when we have the detailed design set out. In the case of the hospital, that would be all the bill of quantities for every room, corridors, systems and so on. We must set out the detailed design and that must be priced competitively, in a process. That said, within a detailed design there is always potential for price variations and for disputes. If one thinks about a traditional lump sum contract, that is not necessarily the end of the matter. There can be disputes and it can get very adversarial. That is a function of the quality of the tender and design. If we have a very well designed project, where we have sufficient detail and have spent a lot of time and money on developing the design, that ensures that we will have the optimum level of certainty. Even if 100% is not achievable, it will be 98% to 102%. It will be at a rate where-----
We must consider the nature of the difficulties with the hospital project and the potential for difficulties to arise in future projects. The largest capital project in the State is not the children's hospital, to correct my colleagues.
It is the metro. If as a State we are operating with procedures which have proved to be not without difficulty, how can this or future Governments, committees on finance, public expenditure and reform and transport and the Committee of Public Accounts have certainty about and stand over the figures put out through the Department of Public Expenditure and Reform and-or other Departments?
Mr. Robert Watt:
Yes. Let us take a road project as an example. Once we have set out the design and have a price, we have reasonable certainty about how much it is going to cost. That has been the history in the past 15 or 20 years. My view is that where people put out numbers for the cost of a project without having set out the detailed design or tested the market, it is a guesstimate. It is an estimate, not a certain price.
I was first elected to the Dáil in 2011. Shortly thereafter - I think in 2012 - the figure for the hospital project, admittedly on the Mater hospital site, was €450 million. Hindsight allowed me to profile the cost of T2 at Dublin Airport which Mr. Watt mentioned. It was estimated to cost €690 million, but with extra costs for fit-out and so on, the project came in at a cost of €960 million. The cost of the national children's hospital was pitched at €450 million. I often ask myself how we came up with the figure, given the cost of the T2 project that had only recently finished at the time and which was probably far less complex. Did the expenditure profile document provided not set off alarm bells?
Mr. Robert Watt:
No. The health expenditure profile sets out what was included in the budget, voted on by the relevant committees and approved by the House. We assess expenditure against that profile. Actual expenditure is the issue. Clearly for this project, the actual expenditure is for preliminary works; it was not the prospective spend when the final details were established.
An official of the Department of Public Expenditure and Reform was seconded to the National Paediatric Hospital Development Board. We have heard repeatedly that that individual did not have any responsibility to report-----
I thank Mr. Watt for the clarification. It has been stated on many occasions that this individual had no responsibility to report what was developing to Mr. Watt, as his boss, or the Government. Will Mr. Watt comment on that point?
Mr. Robert Watt:
To my mind, it is clear that the correct procedures were applied, that Paul has an obligation as a member of the board, that issues arose that were clearly understood by the chairperson and that the chairperson brought them to the relevant Minister. I am absolutely 100% certain that Paul acted exactly as he should have because issues arose, he knew that the chairman of the board knew about them and that the chairman of the board had communicated that he was going to communicate them to the Minister. It is from clear from the minutes that that happened. There is absolutely no issue with how Paul discharged his duties. He absolutely 100% discharged them in the way he should have done.
Mr. Robert Watt:
No. The way it works is things are written down when somebody has a reporting relationship. Paul had a role as part of the board. He made his views known as a member of the board and this was very clearly communicated by the chairman to the Minister. It is very clear from the minutes which the Deputy has seen that that took place. There is no doubt in my mind that Paul discharged his duties.
I welcome the Secretary General. I take no offence at the comments he made outside, as reported by the media. As far as I am concerned, I am paid well enough to take a bit of grief and, frankly, so is Mr. Watt. With that mind, I ask him not to mind me in being a little abrupt because I have only ten minutes in which to get through my questions.
Has the Department of Public Expenditure and Reform taken such a passive approach to other capital projects in the past? Mr. Watt saw fit to mention the Collooney-Castlebaldwin bypass project, which is great news for me and Sligo, but in terms of its cost, it is in the ha'penny place in comparison with what we are talking about.
Later today Mr. Watt will make an opening statement at the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach, in which it will be stated the Department monitors the actual spend against the monthly expenditure profiles based on information submitted by Departments to the relevant Vote section in order to keep track of the aggregate spend by each Department compared to the planned spend and that the Department does not approve expenditure at individual project level, which I accept. On the aggregate spend in the Department of Health in the period in the year to mid-November, when the issues were formally communicated, were there no indicators that there something was going wrong in that Department?
Mr. Robert Watt:
I will respond to the two questions. To respond to the second question, the profiles relate to actual spending. Reports were provided for us on the actual expenditure incurred in undertaking preliminary works related to the children's hospital and other projects that are the responsibility of the hospital.
To respond to the first question regarding the Department being passive, we are not being passive at all. Between 2012 and the spring of 2017, there was voluminous contact - I think the emails are out there under freedom of information requests - in which the Department was raising issues about governance, procedures and cost estimation for the children's hospital project.
Mr. Robert Watt:
No. In 2012 a Government decision was made based on the tender which we understood was an approximate bill of quantities of 95%. It was our understanding at the time that there was a figure for the hospital that was higher than that which had been put out there. It was €980 million. That was our understanding of what was happening. It is not fair to suggest we are being passive. The contrary is the case. It was our understanding - it is fair under the public spending code - that the sanctioning authority was managing the project, given the Government decision in the spring of 2017.
I have one very good suggestion - do not go to tender any more unless the Department has an absolutely detailed design. To me, that is tendering 101, and all I have built is a house. There is one bit of advice.
That point is made. That is an observation.
Mr. Quinn, as head of the OGP, reports to Mr. Watt. Is that correct? How often does Mr. Watt meet him in that function? Are there scheduled meetings daily, weekly, monthly or quarterly?
Okay. Let us take ten off, that is, 42 meetings a year. I do not believe it credible that Mr. Quinn would not say to Mr. Watt, "Just to let you know what's going on down the road. We are overshooting here". For a man of Mr. Watt's experience, given all the excellent projects that have worked out so well, which he rightly put on record as he is entitled to do and in which I support him in so doing, it is not remotely credible that Mr. Quinn did not fill him in on what is currently the largest project costing €1.7 billion or whatever will be. It is grand to say it is not in minutes and that they followed the correct procedures but I am putting it to Mr. Watt that it is not credible.
I am probably rushing but I have two very important points I want to raise and I know I will only get one bite of the cherry. We were provided with a note from the Department of Health on 31 January arising from our earlier meeting. It looks like we are heading for a cost of €1.7 billion. PwC are helping us, and Mr. Watt laid out a series of improvements for the next projects, but we are still faced with the public having to pay the bills for this project. A footnote states: "Exclusions include changes in scope, excess national construction tender inflation above 4% post July 2019, changes in legislation (e.g. VAT, PRSI, statutory labour rates, building regulations)". Let us focus on the construction tender inflation because I am conscious that this was subject of a "Prime Time" programme the other night but it was in a footnote of a document given to us in January. According to AECOM Ireland's annual review and the Society of Chartered Surveyors Ireland in respect of last year's performance and next year's projected performance, construction tender inflation has run at 7.5%, on average, in the past year and is likely to be no less than 7% in the year ahead. Does that not mean, in effect, that the BAM-provided construction inflation exceeds the 4% that is budgeted for in the contract or that this briefing document would suggest, and that once construction inflation performs at broadly the same as last year, it is open season again on negotiations?
Mr. Robert Watt:
I will answer the question but it is not for Mr. O'Brien either. There is a board, which is the sponsoring agency. There is an authority, which very clearly has responsibility for this. As I understand it, and I do not recall the document the Deputy is referring to, if inflation is above a certain level, that has implications for the cost. I think that has been set out clearly.
Yes, but the Department of Health briefing document states: "Exclusions include ....". I only have a basic understanding of language and certainly none of value engineering but, reading English, this says to me that if construction inflation goes over 4% when it is performing at 7.5% last year and projected, according to AECOM Ireland's annual review looking ahead to 2019, that it is likely to be at 7%. Seven minus four equals three. Can we look forward to the fact that BAM will be able to invoke the exclusion mentioned here of it having exceeded 4% and, therefore it will be open season again, and that €1.7 billion was the accurate price then but now we have to negotiate because inflation has exceeded the 4% provided for?
Okay. So that we are absolutely clear for the people watching at home, for all of our organisational oversight and reviews, nobody knows what the price will be because if construction inflation performs broadly in line with profile of experts such as AECOM Ireland and the Society of Chartered Surveyors Ireland, we can chuck it down. BAM will be in a position to renegotiate aspects of price because of construction inflation so in terms of €1.7 billion, we may as well have said €900 million because it will be higher, and it is likely to be significantly higher.
In terms of the contract, I would like to know - and the public are entitled to know - whether it is an annual construction tender inflation rate or a Dublin-based one. These self-same expert groups suggest that Dublin could be performing up closer to 10% and 12% in terms of tender inflation whereas nationally it might be an average of 7% or 7.5%. Either way, the public, to this day, for all the facts we have been provided with, are being sold a pup because nobody knows, least of all Mr. Watt, because of this? I have one final question.
Mr. David O'Brien:
In our contracts, they are fixed price for a period of 30 to 36 months depending on the fixed variation clause being used. At the end of that period, and this would be the case in a project of long duration such as the hospital, there is an entitlement to recover. That is the case in most construction contracts.
It may well be standard operating procedure for building a road, and we know about all the successes, but the public was under the uninformed impression, and certainly I was until I researched for this meeting and I saw "Prime Time" the other night, that as ridiculously high as €1.7 billion sounds, it is likely not to be remotely that price and if construction inflation continues, we can expect an increase of in or around 3.5% per year if levels remain the same, although many of these reports suggest they will increase.
We have established that. I will load these together. The first preliminary question to line this up is to the Comptroller and Auditor General. Is it within the competence of the Department of Public Expenditure and Reform, the Taoiseach or this committee to have asked him to undertake a review of this project such as that being undertaken by PwC?
I know it is Mr. McCarthy's decision. If he was asked to do that - and no doubt he has seen the terms of reference of the PwC review - would he have had to procure significant additional resources to complete it?
If Mr. McCarthy's office were asked to do that and if he had to procure some expertise to do it, does he think he would manage to undertake to do that, given his office is above reproach with no commercial relationship with anyone on the planet, for any less than €450 million?
My next question is for Mr. Watt. When reviews such as this are considered why does the State always go to the top four or five companies within the two canals when in-house expertise is available that is above reproach and that may, at a minimum, be able to do it as cheaply? One thing we are certain is the Comptroller and Auditor General's office has no commercial relationship with anybody and the public could have absolute confidence in the outcome.
In choosing PwC, was there a tender process?
Mr. Robert Watt:
The HSE. Clearly it was not my Department.
That has answered that. With regard to the inflation issue, Mr. O'Brien answered in general about contracts under the organisation but because it gave a derogation, this contract does not come under Mr. Watt's chairmanship. Is that correct?
So the people we have to address the question about the additional inflation - and it is obvious there will be increases - are on the hospital board and they are due back here in the coming weeks. The next speaker is Deputy Alan Kelly who has ten minutes.
I have four questions for the Secretary General and his colleagues. My questions relate to the Estimates process, the functionality of the Department, communications between Departments and circular 12/2010. These are my four topics and I hope to get through the four questions.
Article 28.4.4° of the Constitution states, "The Government shall prepare Estimates of the Receipts and Estimates of the Expenditure of the State for each financial year, and shall present them to Dáil Éireann for consideration" , while Article 17.1.1° states the Dáil "shall consider such Estimates". I cannot get my head around the Estimates process we went through late last year and revised earlier this year. We had a situation where Estimates were published on 9 October, which was budget day, and we had Revised Estimates on 19 December. There was awareness in the Department of a massive overrun in the children's hospital. The Constitution is clear that the Government "shall prepare Estimates of the Receipts and Estimates of the Expenditure of the State for each financial year", and they have to be done truthfully. How can we say the Estimates done last October were done accurately and to the best ability of the Department? How can we say the book of Revised Estimates of 19 December were also done in this way? On 20 February in the Dáil, when there were further Revised Estimates, the Taoiseach tacitly said they had to be re-profiled. There had been awareness in the Department of the issues relating to the hospital, with regard to an assistant secretary, for some time and there was awareness in the Department on 19 November, as Mr. Watt has outlined, of the large overrun. Were inaccurate Estimates given to the Dáil last October and, subsequently, last December?
Mr. Robert Watt:
The Estimates are prepared on budget day. A summary Estimate is set out by the Minister on budget night. Changes are then made. This year there were very modest changes. There are always technical issues as end year positions become clearer. Then, as the Deputy has said, Revised Estimates are set out. The implications for the children's hospital and what it meant for the allocations of Departments were not decided upon by the Government. There was insufficient time for us, because the Government was debating, to recast the Estimates, and they were published because we are always anxious to publish them before the end of the year. We do not publish them the following year. We do not believe it is appropriate to publish the Estimates after the year has begun. We now endeavour to publish them before the end of the year. A decision was taken that we would publish the Estimates. As the Deputy will be aware from his time in government, it is not unusual for the Government to publish its Revised Estimates at a time issues are outstanding that the Government may know might require a revision subsequently. There were cases when the Deputy was a Minister, which I will not go through, when the same thing happened. This is not unusual and I am absolutely confident the Estimate prepared was accurate.
The amount is €100 million, if I understand, with regard to the implications for the health Estimate-----
I apologise for the engagement and I know Mr. Watt must answer the questions but I have a short time and I would appreciate it if he could keep the answers short. The sum of €100 million is not Mickey Mouse money. I know in the scale of what Mr. Watt has presented, it is a fraction but it is not Mickey Mouse money.
I know. I am just saying that with regard to the scale of the issue it might be a fraction of the total spend, as Mr. Watt has outlined, but it is €100 million. When the Estimates were revised in December, there was full awareness in the Department of it.
At the MAC, where a member of the board was sitting, and which Mr. Watt admitted met more than 40 times a year, there was awareness of this. It is not credible in my eyes or in the eyes of most people to state there were Chinese walls and that Mr. Watt or the Minister was not made aware of anything to do with an overspend. If that is accurate, which is what is being said, there is an issue of dysfunctionality somewhere. I have a couple of questions on this. I have gone through all of the emails from the Department of Health to the Department of Public Expenditure and Reform. Why did it take so long for the two Departments to meet to discuss the children's hospital? I do not know these people and I am referencing them only to show who was communicating. There was an email from David Moloney to Fiona Duffy at the Department of Health on 20 November, in which he stated Jim Breslin had made him aware of some issues relating to the children's hospital and the budgetary process in October but that this is the first documentation the Department has been provided with. In fairness, Mr. Watt said that earlier. What does not add up to me is Mr. Watt said he found out on 19 November but the Minister found out on 9 November.
Mr. Robert Watt:
What I said was that a report was submitted by the Department of Health on 19 November and that we met that Department on 23 November. A formal submission setting out the outcome of the meeting was sent to the Minister on 26 November. There was a meeting, which I believe the Minister attended, at which it was mentioned that there was an issue. We understood it was an issue. We then asked for a detailed note on it.
He has now added to that. On 9 November, the Minister was made aware of it. When was Mr. Watt first made aware that there was an issue? It is just a simple question and I am entitled to ask it. He was first made aware in written form on 19 November. When was he first made aware of an issue orally?
I want to know when the Department became aware of the issue because the Estimates process had been completed. If the Department was aware of the matter, why was the issue not flagged as part of the Estimates process?
There was an email from Ms Tracey Conroy to Mr. David Moloney on 20 November. I will read it into the record because, following my question, Mr. Watt will need to hear it. Ms Conroy is the assistant secretary of the acute hospitals policy division in the Department of Health. I do not know Mr. Moloney. The email states:
David we have been seeking to meet your division on this issue since the end of September - Fionnuala's discussions with Barry O'Brien on September 27 and follow up voicemails and emails requesting a meeting on October 17, October 24 and November 15.
I'd appreciate if you could revert with a time [...]
In light of the scale of this issue and the fact that the Minister for Health has been aware of it since the end of August or early September, why in the name of God did it take so long to reach that point? We now know Mr. Watt's Minister was aware of it on 9 November. Mr. Jim Breslin made a reference to it during budget negotiations in October. That is acknowledged by an official in the Department. Why did it take so long for officials in two Departments to sit down and have a meeting?
Mr. Robert Watt:
They have many meetings about many matters. During the budget process, there could be 30 plus meetings between officials in our Department and the Department of Health about matters relating to the budget. Mr. Moloney and his team asked for a detailed note on what the position was and it was stated that we would engage with them when we had the facts, but the facts were not established at the time. It is very reasonable to ask, on any issue, that the facts be set out and that a meeting take place when the facts are received.
To be fair to the Department of Health - I am playing devil's advocate here - its officials were trying to talk to Mr. Watt's Department. I am referring to a document released to us. The dates are 27 September, 17 October, 24 October and 15 November.
It seems timely enough. The Secretary General of the Department of Health flagged this during budget negotiations. It is referred to by an official in Mr. Watt's Department. Numerous attempts were made to meet. In fairness, the Minister actually made reference to this during a meeting of the health committee. Mr. Watt feels it is timely enough that, on 21 November-----
It certainly had enough documentation to have a discussion with Mr. Watt's Department at the time. We have seen all the documentation, the letters that came through the board and the board's minutes. The Department of Health officials certainly had enough to have a discussion with Mr. Watt's Department. The fact that there was no meeting is bewildering to me. I do not find the answer satisfactory.
The Estimates process is bewildering. There were MAC meetings taking place. An official was present but nobody said anything. I refer to the Revised Estimates, the lack of capacity even to have a meeting between the two Departments and the awareness between 9 November and 19 November.
I want to ask Mr. Watt about circular 12/2010, which is the protocol for civil servants nominated to the boards of non-commercial State bodies. We do not need to go through the steps outlined. It basically concerns how State bodies should perform. The circular is quite clear about what any State official serving on a board has to do as regards making a Minister aware of matters. Footnote 1 states the relevant Minister is the Minister under whose aegis the body falls. The circular states:
Occasions when information must be conveyed directly to the relevant Minister without delay
The Minister must be notified without delay where:i There are serious weaknesses in controls that have not been addressed despite being drawn to the attention of the board or the Chairperson;
ii There is a significant strategic or reputational risk to CIB that is not being addressed;
We can hardly say now there have not been reputational issues relating to the national children's hospital. Given that we now know there was massive over-expenditure in the summer of 2018 and that we have seen the board's minutes, would it not have been reasonable, bearing in mind that Mr. Watt is the person who governs the area covered by the circular, for the person on the board to go directly to the Minister about the over-expenditure?
Is Mr. Watt not concerned that, given the way the circular has been interpreted in this instance, issues could arise over other State boards and how civil servants or State employees adhere to this circular on those boards?
Mr. Robert Watt:
I did address the question already. It states that there are serious weaknesses that have not been addressed. The matters were brought clearly to the attention of the chairperson, and the chairperson brought those matters to the attention of the Minister for Health. It is absolutely crystal-clear that Mr. Paul Quinn and his colleagues acted exactly in line with the circulars. I hope the Deputy accepts that.
I am just asking Mr. Watt for his opinion. On the second part of my question, which has nothing to do with the children's hospital, is Mr. Watt happy that there might be a need to examine how the circular is being interpreted across other areas, or has his Department done an audit? Has it been restated?
Mr. Watt and his team are very welcome. It is most unacceptable that he referred to the committee as a mob. If he did not describe it as reported, perhaps he will confirm that he will ask the reporter to withdraw it because it is not accurate.
There are many questions I want to ask.
If it is not correct that Mr. Watt called the committee a mob, will he issue instructions for that to be changed? Is it that he said it and he is apologising for that?
It is offensive to call a committee a mob. Níl sé ceart ná cóir agus ní féidir glacadh leis an focal "gramaisc" a úsáid maidir leis an gcoiste seo. I am not sure how I should interpret Mr. Watt's body language. I am here to ask questions in the politest manner possible and to get replies.
Allow me to put my questions in perspective. I am from Galway city and I welcome the national development plan and its contents pertaining to Galway to a certain degree. It is very good in terms of the language used, to which we will return. It refers to developing and implementing a comprehensive and strategic metropolitan area spatial plan to enable transformation, sustainability so on. I welcome all of that lovely language. Language is very important. We are here to discuss governance. For me, this is about governance and making sure proper procedures are in place to ensure value for public money. Does Mr. Watt agree?
Good. In 2015, the new hospital board appeared before this committee prior to my becoming a member of it. As a result of previous issues relating to the original project, the new board appeared before this committee. Absolute assurances were given to the committee that the board had learned its lessons, governance was in place and no issues would arise. In the same way that Mr. Watt told us in his opening statement that the Department has learned lessons, the board stated at that time that it had learned the necessary lessons. Did Mr. Watt look at the transcript of those proceedings? He did not. Well, I did. I took the precaution of reading the transcript of that meeting and looking at what the board members said. I then followed up regarding what the Department was to do. It was to produce a report on what had been learned from the debacle that led to the meeting. I ask the Comptroller and Auditor General to provide the figure written off in regard to the previous hospital site.
Some €35 million was written off. I do not expect Mr. Watt to address that issue but I expect him to be familiar with it and to know what was learned from it. The board provided assurances. Does Mr. Watt agree that its members were picked for their expertise? Okay. I regret that Mr. Quinn is not appearing before the committee today but that was the decision of the Department. I went through the minutes of the board meetings on this matter. The minutes of a meeting on 4 July 2018 note the lack of co-operation of all parties and that the guaranteed maximum price had not been agreed. That had been an ongoing concern since earlier that year. Nobody knew what was the guaranteed maximum price. As the months go on, the minutes keep recording that concern. At some stage, the board engaged an expert. This took place under a two-stage process that the Department allowed and to which I will return if I have time. The board was alerted to the high level of risk in July 2018. A guaranteed maximum price had still not been agreed by August. I ask Mr. Watt to listen to the following when he is ready. Plan B was discussed by the board which noted that the performance of BAM during phase 1 up to that stage fell far short of what would be expected of a tier 1 contractor. That is noted in the minutes. I highlighted these issues when going through the minutes and I wondered what were the board and the contractor doing. I am not commenting on that; I am asking a question. In October the board remarked that BAM had not delivered, and questioned whether various design and contractor teams were fit for purpose to deliver a project of this scale and complexity. Shall I repeat that or has Mr. Watt taken it on board? In October the board noted that BAM had not delivered and questioned whether the design and contractor teams were fit for purpose.
I understand that. I highlight those minutes to show Mr. Watt that questions are being raised by the board about its design and other teams that were procured for their expertise under the new Government's model at great cost. Private contractors were brought in because of their expertise. There are ongoing issues relating to the new model. I wish to move to the issues explored by Deputy Kelly regarding the emails. It seems that the Department of Health was writing to Mr. Watt even earlier than was previously clear. On 17 October, an email was sent to Barry.O'Brien@per.gov.ie, who I presume is an official in Mr. Watt's Department. It states, "we spoke briefly a couple of weeks ago when I said we want to brief you on the current position" and so on. It refers to "potential cost issues emerging relating to the GMP" or guaranteed maximum price. The Department was clearly on notice of those issues on 17 October. Reference is made in the email to a previous meeting. Am I not making the question clear?
Following on from the questions asked by Deputy Kelly, why did the meeting not take place? I am referring to 17 October. Deputy Kelly's time ran out before he could go back that far. If we had more time-----
Am I painting this wrong when I say that the Department of Health was desperately trying to contact his office and making reference to a meeting with officials of his Department a few weeks previously regarding cost issues arising?
That is correct. An email of 20 November from Mr. David Moloney offers thanks for material provided and continues, "As you know in the past we voiced serious concerns in relation to the governance of the Children's Hospital project, and were assured that the arrangements in place were sufficiently robust." The Department is highlighting the fact that it had concerns regarding governance. When the Department of Health contacted Mr. Watt's Department desperately trying to raise concerns about cost issues, did alarm bells not ring in the Department of Public Expenditure and Reform? Did Mr. Watt's Department not realise that as it was being contacted by the Department of Health on the matter, it should see what was going on? Did alarm bells go off?
I have shown that there was previous contact with Mr. O'Brien at a minimum. Is the two-stage process now gone? Has the Department decided to do away with it or did I misunderstand Mr. Watt's opening statement?
Mr. Robert Watt:
The issues that have arisen with the children's hospital raise significant concerns regarding the two-stage process, particularly a two-stage process which commits us to significant spending on preliminary works in the absence of certain guarantees. Obviously, we will not support that type of process being used again unless it involves modest spending on preliminary works and far more certainty around the------
I welcome those changes and what Mr. Watt is saying. My difficulty is that throughout all of this documentation which I have read there is constant reassurance that the two-stage process was the way to go.
It avoided confrontation, litigation and extra costs but here we are today. One of the notes from the Department suggests that we may be looking at a project cost of €2 billion. That is according to departmental emails. The two-stage process, which was allowed, did none of those things. It did not avoid litigation, did it?
Mr. Robert Watt:
At the time, the view of the National Paediatric Hospital Development Board, which was debated and then brought to the contracts committee, was that if we had done a lump-sum contract, it would have taken many more years to get the detailed design and that given the complexity of the project, it would have been very difficult to get people to bid for it by way of traditional lump-sum contract because the risks would have been too great. Clearly, it did not work out as expected-----
-----from Mr. Watt, despite his 18-page document. We do not know that if another children's hospital were to be built tomorrow, it would not go from costing €650 million to €2 billion. Are we looking at a project cost of €2 billion as suggested in the email? That is my difficulty. In the 18-page document, Mr. Watt mentions that a few reviews are under way. Again, it is noteworthy that he does not mention the children's hospital project or itemise what has been learned by his Department about how governance needs to be improved in the context of circulars. Mr. Watt stated that the Department is reviewing Ireland's capital management systems. Is that review being conducted by the Department of Public Expenditure and Reform, when did it start and when will it be completed? There is one more commitment on page 15 of the document. Mr. Watt stated that his Department would conduct a full assessment of cost estimation. Mr. Watt's opening statement contains those two promises. Have these reviews started and when will they be completed?
It would be helpful, in terms of the opening statement, to know when the reviews started, when they will be completed and when the findings relating to them will be made available. That would help to give reassurance.
Before I call the next speaker, Deputy Catherine Murphy, I have a duty, as Chairman of this committee, to make the following clear. I will read from the invitation that the committee approved and agreed and which was issued to Mr. Robert Watt.
I wish to confirm that the Committee requests your attendance at a meeting to discuss the Department's historical and continuing role for the oversight and implementation of projects under the national framework for capital investment, and under the national development plan 2018-2027, as specified in your Department's published Annual Business Plans. The Committee would particularly like to focus on the Department's role in ensuring that value for money is achieved through systematic appraisal and professional management of all capital projects.
In light of this letter, the committee wrote a number of days ago to the Department asking it to list approximately the ten major projects that fall under this issue, and we got the list. It starts off with MetroLink and goes on to the national children's hospital. It then deals with the water supply project - eastern and midlands region, for which Irish Water has responsibility; the N20, Cork to Limerick; the Galway city ring road; the public private partnership, PPP, M11 project, Gorey to Enniscorthy; the greater Dublin area drainage scheme under Irish Water; the N21 to N69, which runs from Limerick to Adare to Foynes; the PPP N25, which is the Newross bypass; and the national broadband plan. We have been here for over two hours and I am concerned, as Chairman, that we have not been sticking to the subject matter of the invitation. We have spent most of our time dealing with one item, namely, the children's hospital. I must make sure that this meeting is run in a balanced way that is fair to the members and the witnesses who were called to discuss the national capital plan, not solely one item. As Chairman, I have a duty to ensure that the discussion aligns itself to the invitation. The invitation did not refer to the national children's hospital specifically. Yes, we can mention it, but, as Chairman, I am going to ensure that for the remainder of the meeting the discussion aligns itself with the invitation. I hope I am making myself clear. Yes, there can be some further comment on the national children's hospital-----
I hope people are listening. I have said the national children's hospital is No. 2 on the list. I just want to make sure, however, that the meeting at least barely reflects the invitation that was issued, which was broader than one topic. At the end of the meeting I do not want any reasonable observer to be able to say we had a meeting solely on the national children's hospital. Yes, it is a key element but it is not the specific-----
Let us be a little realistic in this regard. We are here to reassure ourselves about the value for money on all projects. If one stands out as questionable on governance issues, we are looking for reassurance not just in words, but in actual written form as to how that will not happen with other projects. That is the first point. The second is that a comment was made about a mob. That took two or three minutes of people's speaking time to clarify as well. Let us just put this in a realistic framework. I support the Chairman totally as to what should be discussed at the meeting. It must be done within a realistic framework.
I welcome our guests. It is important that witnesses and members have respect for each other. Although I do not want to labour the point, I feel the comment did not get this meeting off to a good start. I think it was utterly inappropriate. Mr. Watt has apologised.
I refer to page 9 of the opening statement, on which the public spending code and looking to achieve value for money are mentioned. Mr. Watt stated:
The Public Spending Code sets out the oversight and approval process for public expenditure proposals including capital projects. Governance and clear lines of responsibility are key to successful public capital investment.
Of course, they are. With regard to the list of projects Mr. Watt provided, many are roads projects and the lead authority would be the National Roads Authority, which has a great deal of expertise at this stage. My county of Kildare, for example, has more motorway running through it than any other county due to the location of the N7, N9, N4 and so on. The NRA is the lead authority for much of this and has great experience in those projects, and, essentially, it stays on budget and on target. It is in the context of bespoke projects that the real problem arises. We cannot really go into the national broadband plan, but a great deal has been said about the procurement process for that. We cannot really discuss MetroLink because it is a current project. The stand-out project, which is the bespoke one where there is a degree of experience and where we can see there are institutional gaps, is the national children's hospital.
Mr. O'Brien heads up the section that deals with capital projects. What is his background?
Mr. O'Brien would be well apprised in terms of tendering, etc. I did not have to go and do research in Harvard, Yale, Cambridge or Oxford. I just had a look at the DIT for an outline of what can go wrong where there are serious project design errors. Essentially, it states that if the design plans are defective, one will inevitably be destined for cost overruns in construction projects, particularly if there is a design deficiency or a poorly-designed, inaccurate or incomplete plan. Would Mr. O'Brien have anticipated some of these things? For example, a derogation would have had to be given in this regard. Did he have an input in respect of that derogation or was he involved with it in any way? Not locking things down, an incomplete plan, a change of orders, poor site management - all of those contribute. Will Mr. O'Brien explain his role in this?
Mr. David O'Brien:
I chair the GCCC. It is a committee made up of representatives of all of the main capital spending Departments, primarily people with a construction or technical background. We are a forum or an advisory body for the establishment of construction procurement policy. Government policy is governed by the capital works management framework, which is an online matrix or toolkit for public bodies.
Mr. David O'Brien:
Of course. The derogation process is set out under a circular. With regard to public works contracts, when the capital works management framework was introduced, it was mandatory, so it is a default position that one must use and the suite of contracts is published there. When these were published, provision was made for bodies whose project parameters did not fit within the delivery mechanisms, typically for a lump-sum contract. In addition, there is an early contractor involvement form of contract which is published under the capital works management framework and which also requires Government contracts approval if one is going to use it. That is how we became involved in the process. We regularly advise public bodies - members of the GCCC - on these issues.
There are industry norms for many of these things. For example, a programme shown on RTÉ in recent nights put some of the points succinctly, particularly the fact that the lowest tender was 20% lower than the second lowest and the third lowest was 45% higher than the lowest.
Mr. David O'Brien:
Yes. Throughout that process, there was quite a spread of prices in tenders. Where this project is concerned, it is, as the Deputy stated, a bespoke project and, because of its size and scale, it carries particular risks. Therefore, the market is going to take a view at a given point in time as to what it believes the construction cost is going to be. The reason the two-stage process was chosen in this case was because of the scale of the project in comparison with the standard market.
What is very clear is that there is a process failure in terms of the way this was proceeded with, and we can see in hindsight that it is a very costly way of doing things. Indeed, had this been presented as a project that was going to cost over €1.7 billion, whether it would even have been proceeded with is in question. It was incredibly important that this was not a guesstimate but a serious estimate. The way this was proceeded with shows there is a serious lack of expertise feeding into this, to all appearances.
Mr. David O'Brien:
That would not necessarily reflect the actual situation. The Department of Health set up a specific delivery board and an executive group that have the requisite expertise. That is not normal where projects are concerned, and there is expertise there. Context is very important. We had an industry that did not show any signs of life until September 2013. The issue is that when the meetings and the discussions were being had about this two-stage process or the procurement strategy, there were serious concerns on the part of the project development board and the hospital board as to whether the industry here had the capacity to deliver this project at the outset, as the initial engagements were being had. The tendering strategy had to reflect this and that is why there is this different approach.
What really concerns me is that there is a serious institutional gap, as can be seen with regard to the derogation. I do not see where the learnings are. While we are discussing this as a real-time project, there is another project that is being dealt with on this list which is being dealt with internally in the Department of Communications, Climate Action and Environment. What we are hearing is there is a possibility of the €500 million that was outlined when it was announced becoming several billion. How can we have any confidence that there is control in respect of matters when they are announced?
We are not saying these projects are not needed. If only a particular amount of money is available, however, the way they are proceeded with might be very different. The two-stage process was probably because of the site selected. Would that have happened if that had been a greenfield site?
Mr. David O'Brien:
It is a capital investment so it belongs there. There are Irish Water projects, for example. Irish Water is a commercial semi-State company and such projects do not come to the GCCC either. It is only direct, Exchequer-funded, construction projects that come through the GCCC. Coming back to the point, the difficulty we have is an ever changing market. Deputy Catherine Murphy is talking about certainty and cost and so on. As I pointed out, in 2013 we were not quite sure where construction was going. Within two to three years, we now have skills shortages in that sector as a result of investment. That is the issue. A construction project can only be delivered with cost certainty at a point in time.
Mr. David O'Brien:
I am sorry, yes. Returning to the greenfield site, it is not necessarily the site alone. That is, of course, part of it. That site adds complexity to the project. The national children's hospital, however, is a complex project in terms of its brief and scale no matter where we put it. It is enough for the market to take a look at that it to realise it is a big project with a lot of associated risk.
Mr. David O'Brien:
Generally speaking, where prices come in and there is a difference, the contracting authority will look at those prices. Because one has a price breakdown, one is looking to see where that low price might be. Construction contracts and their pricing are inordinately complex. There will not be an item suggesting 300 individuals will be working on this site and the resulting labour cost will be a certain amount. All of the costs are linked into work elements of the job. There is a degree of forensics required and the contractors are encouraged, through the process, to drive value for money. That is partially why we have the competitive process. It is to ensure we are getting the best possible price. The Deputy is absolutely right. If the price is determined to be abnormally low, then the contracting authority has an obligation to investigate, raise issues, seek clarification and reach its conclusions. If the contracting authority is then of the view that the price is abnormally low, it may reject it but is not obliged to do so. It is only obliged to reject the tender where it can be determined that the price is abnormally low or where there is a breach in labour, environmental or social security issues.
I welcome Mr. Watt and his team. I will stick entirely to the basis upon which he has been invited here because I have respect for his office. It is up to him, as the Accounting Officer, to ensure that respect goes both ways. I return to Mr. Watt's opening statement and his point that "the selection, appraisal and delivery of individual public sector capital projects is the responsibility of each relevant Department". That is correct. There is no quarrel from this committee with that. He noted that his Department "is responsible for overseeing the implementation of the National Development Plan within Project Ireland 2040, supporting value for money and protecting sustainable capital investment." We also agree with and support that view. There are ten major projects contained in Project Ireland 2040. All of them are worthy projects and important for the State. We certainly also agree with that. Which of those ten projects is the most advanced? There is MetroLink, the national children's hospital, the water supply project in the eastern and midlands region, the N20 from Cork to Limerick, the Galway city ring road, the public private partnership for the M11 from Gorey to Enniscorthy, the greater Dublin drainage project, the N21-N69 from Limerick to Adare and Foynes, the PPP for the N25 New Ross bypass and the national broadband plan. Which one of those is most advanced?
Mr. Robert Watt:
I am not sure. There is the water supply project which is due to be submitted to An Bord Pleanála this year. That will be a while. Then there is the N20 from Cork to Limerick, which is at a preliminary stage. The Galway city ring road went to An Bord Pleanála in October 2018. It is hard to-----
We will continue then and work through the list to give all the projects due credit. What is the next most advanced project on the list of ten major endeavours? We have gone through four or five and there have been no significant cost overruns. That is good news at least.
I do not want this meeting to descend into either me or Mr. Watt being accused of playing games. This is not a game. It is very serious. To be helpful to Mr. Watt, the national children's hospital is probably the next most advanced project. It is certainly very advanced. It is the only one of these ten projects where I can see a significant cost overrun for State. Is that a fair assessment?
That is very good. I come back to Mr. Watt's opening statement and his point that he is responsible for overseeing "the implementation of the National Development Plan within Project Ireland 2040, supporting value for money and protecting sustainable capital investment." Of those ten projects, the one which jumps out where there is a significant cost overrun is the national children's hospital. Did Mr. Watt's Department ensure we got value for money in that project? In doing so, have we protected sustainable capital investment? I ask that given that, of the ten projects, the children's hospital is the one where we now know there is a significant cost overrun.
We already agreed a few moments ago that of the ten major projects - we are dealing with the major projects - the national children's hospital is, thankfully, the only one with a major cost overrun. I am assuming Mr. Watt and his Department can take credit for the other projects which have come in on budget.
However, the one of which we are aware, on which there is a significant cost overrun, is the national children's hospital. There is the potential for it to be the most significant.
Mr. Robert Watt:
Nobody is taking credit. What I have set out in the opening statement is a valid point, lest the people watching these proceedings think otherwise, that not every project faces significant challenges of the type faced by the children's hospital. Not every project is delayed, nor are there overruns on the scale we have seen. We wanted to contextualise the debate because it would be disappointing if people thought all projects were subject to the overruns we have seen on the children's hospital project.
I have to be precise in my questions and hope Mr. Watt will be equally precise as I only have a ten minute slot. What I am repeating to Mr. Watt is what he has given us in his opening statement, which is that he has a responsibility to support the obtaining of value for money. As Accounting Officer for the Department, is he confident that we have achieved value for money so far at the national children's hospital which is one of ten major projects?
Mr. Robert Watt:
The Accounting Officer for the project is the Accounting Officer for the Department of Health. On achieving value for money, the issue, if we are building a national children's hospital and on that site, is if an alternative procurement process or way of going about it would have led to a different price or cost outcome. We do not know the answer to that question.
Mr. Robert Watt:
Everybody has regrets. The Ministers have been clear in regretting what happened and are disappointed at the fact that the cost is coming in way above what was expected in the spring of 2017, but that is not to say an alternative approach would have delivered better value for money. That is not clear. In terms of the overall value-----
I hear what Mr. Watt is saying and I am trying to be extremely fair to him in the sense that I am repeating what he stated in his opening statement that it is his responsibility to ensure there is value for money. The line Ministers and Departments can have their views. I asked Mr. Watt for his. He has somewhat given me a response, but I want to test it in coming back to one report that examined this issue - the Mazars report. It also looked at the cost overrun. In general terms, it showed that the guaranteed maximum price had ballooned, that the design team had made guesses about the cost, that the value engineering savings had not materialised to a significant degree and that the philanthropy had fallen through, the accommodation to be provided by McDonalds being one example. It also found that the procurement process had added to the cost overrun and that it raised questions about the fast-track two-stage tender procurement model. The Mazars reportis the only report of which we know so far that has examined the project in any detail. Does Mr. Watt's Department have to sign off on the fast-track two-stage tender procurement model?
Mr. Robert Watt:
We have discussed this issue in detail. We have set out the position. The contracts committee had discussions with the national children's hospital board which came with a proposal and sought a derogation from the requirement for a lump sum contract. It sought the derogation, as Mr. David O'Brien mentioned, because of the complexity of the project. In setting out a detailed design for it and bringing it to the market to have a lump sum contract, there would have been not only very significant costs incurred in developing the design but also a time delay.
Mr. Robert Watt:
Let me repeat what we said earlier - the Deputy may not have been here - the contracts committee granted a derogation. It is chaired by Mr. David O'Brien and there are people from different sanctioning authorities on it. It is not the only derogation to be granted; there were ten projects in the past few years in respect of which derogations were granted. A derogation was granted from the normal lump sum contract because it was the collective view of those on the committee that it would not have been possible to deliver the hospital project within the timescale and have a competitive process for it on the basis of a lump sum contract, given the inherent risks involved in such complex projects. As Deputy Catherine Murphy mentioned, this goes back to the fact that when it comes to repeat projects such as motorway, school and primary care centre projects, we have a much better idea of the unit costs. We know, for example, that it costs €10 million to €12 million to build 1 km of a motorway.
Mr. Robert Watt:
I am merely contextualising it because it is very important to do so. For a lot of what the State does, we have a reasonably good idea of the cost because we build the same over and over again, but, obviously, in the case of the children's hospital, it is a once-off bespoke project.
All of the other ten projects we have discussed have not come in above cost. My point is, as a consequence of using not a unique but a very unusual process, that, lo and behold, it resulted in an overspend of €400 million.
I will be quick.
Following on from the previous questions, I seek clarification on the issue of the derogation to allow the two-stage tender process to be followed. Are the Dunkettle roundabout and the national children's hospital projects the only two ever to have it applied? I am not sure because Mr. O'Brien said one thing-----
Can I have the position clarified for the committee? There are ten to 12 projects. One of my colleagues said 12, but Mr. Watt said 10. For how many two-stage model projects has a derogation been granted in the past few years?
Mr. Robert Watt:
To clarify the position, we will write to the committee to make sure there is no confusion. We have had 12 derogations from the lump sum contract since 2011, but not all of the projects have been subject to a two-stage process. There are other options, including the lump sum contract.
The Dunkettle roundabout project is one and the other is the national children's hospital. Mr. O'Brien was on the contracts committee. We have discussed this issue. Can he give me the year when it was discussed? When was the derogation granted? In what year did it happen?
Mr. David O'Brien:
The problem is that it took a little longer than a year. There were meetings and presentations were made to the committee on two occasions. One was on the preliminary procurement strategy, while the second, I suppose, was on the final procurement tendering strategy. On the first, there was a note to the committee in May 2014. The presentation by the board on the draft proposal was made a year later in May 2015.
They came back again in April 2016 to finalise a couple of issues.
Mr. O'Brien's expertise is that he is an architect. I have just looked up his profile. His experience is in social housing and urban regeneration. I have an interest in architecture; it is one of the things I read about. We have heard and argued here about the cost difference in building a house compared to a project like the children's hospital. We are not building houses so I throw that back at Mr. O'Brien. Perhaps I missed something in his profile, but where is his expertise in delivering large projects? Perhaps I am wrong and I missed a massive chunk of his CV, but I see no expertise in delivering large infrastructural projects.
As an architect with expertise, be it in building houses or otherwise, would it not be obvious to Mr. O'Brien that a two-stage process would be fraught with overruns because of the complexities involved?
I am trying to be helpful. We have had many meetings on this issue and constantly hear from people watching at home. For those people, the question is how we went from a cost of €650 million to €1.73 billion. We want the answer to that. Normal people at home who are building a shed, or whatever, with a budget of €650 have to build the shed for that amount because they do not have €700. For people at home, can Mr. O'Brien explain how we went from €650 million to €1.73 billion?
Witnesses from the Department will come back in again with the hospital board. The OGP has no responsibility for the carrying out of the contract. The Department and the hospital board will come in again. The specifics of that matter are for the board, the HSE and the Department of Health. They will be back before the committee.
Mr. David O'Brien:
Absolutely, and not only myself but other members of the committee raised those issues as part of the engagement. We accepted that the contract could not be delivered using the lump sum, standard form. There is usually a discussion process about the merits and demerits of the solutions and so on. Issues were raised, of course, about that. We are well aware of the risk of a contract re-measurement bill. Prior to the introduction of public works contracts, we had re-measurement contracts. The strategy was designed to arrive at a cost certainty at the GMP. We got the expertise of the contractor to deliver and de-risk so that we were not going to be left with a nasty surprise four years down the line, which quite often happens on large infrastructural projects. That is how this form of contract-----
Would Mr. O'Brien be happy to say this is a good way to go about business in the future? We have lessons to learn but he can leave that aside. I may have misinterpreted Mr. Watt but I understood him to say he would not be up for this type of contract again. Are there varying views? I may be misinterpreting.
Mr. Robert Watt:
My view is that we should not commit to a contract which has significant preliminary works unless we have greater clarity around the ultimate design and final costs. One of the issues that arose was that the Government had committed to spending on significant works on the hospital site before we had final sight of the tender.
Mr. Robert Watt:
My view is that we should not do that. It is not only my view but the view of Government. The Minister for Finance brought a number of measures to Government a few weeks ago, which I have set out in my statement to help the discussion. Those measures were designed to try and learn the lessons from this experience and ensure we do not commit to that type of spending again. The Government is ultimately caught in a bind.
Mr. David O'Brien:
We still have to understand what happened in this process and that is the point of the review. Steps will be taken to address the issues when that is known. The issues of risk and cost certainty were raised with the board at that point, and how the project was going to be delivered, not to mention procurement risk. We were given to understand that the project would be measured accurately and the process would bring greater certainty.
The issue for people watching at home is that we have come out of a time of austerity during which everybody in Ireland suffered and it is disappointing for members of this committee and the public to have this in front of us and hear references to lessons learned and what will happen in the future. Why would lessons be learned on the job on a project of this scale?
Mr. Watt said, in his opening statement, referring to lessons learned and new ways of going about projects:
Second, and finally, a number of high-profile projects have highlighted issues with the performance of advisory firms. We will [seek to] link payments to advisory firms to clear performance standards. We will bring in performance standards linked to payments in future contracts [with those firms].
That is longhand for a bonus. Is that right, or am I reading it wrong? Does that refer to a bonus culture? It is saying that we are going to pay the lads money to deliver the job on time. That is what I take from that.
I will not go over everything that has been said so I will try to be less than ten minutes. I cannot leave here today without asking something about the hospital because it is the subject of the day that is on everyone's mind. To carry on from what Deputy O'Connell asked, why was only the preliminary cost known? We have some expertise here now. Why did those involved not know that costs which started at €600-odd million would probably end up at €2 billion? That is the question that all the Joe and Mary Soaps, the taxpayers, out there want to know. Why did professional people not say that the preliminary cost was €600-odd million but there were to be add-ons and whatever it was, so the cost would end up at €1.4 billion or €2 billion? Surely someone knows that, in this day and age.
Mr. Robert Watt:
I think somebody does and it has been set out in the Mazars report. Someone mentioned a moment ago that the Mazars report and the review by PwC set out those elements of it. The committee will have further conversations about it.
There is no mystery as to what happened here. The reasons for the cost overruns are very clear now. The issue for us is-----
Mr. Robert Watt:
I characterise it that, from the point the Government was asked to decide, in spring 2017, when the cost was €980 million, to where we are now is when the project did not develop in line with what was expected.
That is absolutely legitimate and that is the source of a lot of the debate and discussion. There are reasons for that including the mis-measurement of the bill of quantities, the value OF engineering savings that were not secured and there was some design scope, which can happen with the scale of the contract and other issues. That is the question. The people on the National Paediatric Hospital Development Board know and they have set it out and the documentation is going to be available-----
We know that the Department of Health is responsible for this project but the Department of Public Expenditure and Reform also plays a part in public expenditure. Where does the buck stop? What power has the Department of Public Expenditure and Reform to come in and say that as it is responsible for the money since the project started at €900 million and now it is at €1.5 billion? Who is responsible for this happening and for not explaining it to ordinary people? Is it the hospital board and the Department of Health?
Mr. Robert Watt:
The Government made that decision in December on what to do. It had to make a decision on whether to stop the project, not move to phase two, write off the money already spent and start again on a children's hospital on whatever site for whatever cost at some time on the future, or to proceed with the decision on the current hospital even though it was going to cost us more money. As the Deputy is aware, that is the decision the Government took.
The issue of the children's hospital has been controversial for some 20 years now. There was the Mater site, then there was Crumlin, then it came to the St. James's site and now there is talk of a new greenfield site out in the western environs, which many people still believe should be the site because they maintained that the St. James's site can cater for only half the project. There should be a maternity hospital, a children's hospital and a general hospital. People feel that it should be built on a greenfield site. That is another issue and is a decision for the Government of the day. I understand that it is not a decision for the Department of Public Expenditure and Reform. What effect will this have on other projects? Mr. Watt spoke about the New Ross bypass, which is in my constituency, and other projects. They are all going to be finished but there are other projects. There are eight primary care projects in the pipeline. These people have approached me because they feel the projects may be withdrawn. The money for the children's hospital bill has to come from somewhere. As the responsible body does the Department of Public Expenditure and Reform know from where this money will be taken from and who is going to suffer? Where will we in rural Ireland lose out again? Where will projects lose out?
Mr. Robert Watt:
-----with regard to the projects and how it is going to be funded for this year. The capital plan in Project Ireland 2040 by its nature will be iterative. We need to be honest about this with people. There will be projects that will accelerate, there will be projects that will not go as fast as we expect, and profiles will have to be adjusted in the future no matter what Government is here. That is the nature of it and it is a longer-term plan. These are the key projects the Government feels should be supported and most of them are supported by every Deputy in the House. It is common sense to improve roads, schools and hospitals and so on. How the plan is delivered over time, however, will evolve. It is not cast in stone. It will evolve and-----
Somebody is going to suffer in the short term because €1 billion is a lot of money. Somebody is going to suffer now. Perhaps it is a project that should have been going ahead but because of this overrun on the children's hospital it will have the brakes put on. The money has to be got somewhere and somebody is going to suffer. That is logic and we cannot deny that. We are not going to get another €1 billion.
I am worried about my constituency. I am worried about the sewerage system that was promised for Mullinavat. It was supposed to there next year for my own little parish and it could now be put back three or four years. I give this as an example. Politics are all local, as Mr. Watt will know himself. We all have connections locally as well.
I want to ask the witnesses about broadband. The Taoiseach has said that the quote for broadband, which has been mentioned already, could be a multiple of the original price. As the Department with responsibility for the money and spend perhaps Mr. Watts will comment on this given that the broadband scheme that was not rolled out in the past five years might not be rolled out for another five years.
But if it is a case that the cost for broadband is a multiple of the original quote, are we back to square one as we are with the children's hospital? If we start with a roll-out of a broadband network for €500 million could we end up paying €2 billion? This is being flippant about money that is saving us nothing: €1 billion is still €1 billion.
I am asking the Department of Public Expenditure and Reform if the costs for the broadband network are going to rise 400%. Surely the Department, if it is responsible for the money and how it is spent, has a comment to make on that. I know the Department has a responsibility for the money overall. For the benefit of the public who are listening to this meeting what is Mr. Watts's comment on the possibility of that cost going up 400%?
Mr. Watt cannot answer that question yet.
This meeting will stop on the button. There are about two minutes apiece for Deputies who remain to speak, which we will take in the sequence they started. I will start with Deputy MacSharry. The Deputy has three minutes maximum.
Earlier the Secretary General referred to inflation. This is an estimate. The witness spoke of the two-stage process and that there was an understanding of an estimate. We established that it is not going to be €1.7 million and that it will be more because of the inflation tied in. Where does Project Ireland 2040 stand? Mr. Watts touched on this earlier but if the same 4% above construction inflation applied one would want to have an awful lot more in the drawer than €116 billion to cover the projects that were announced in the 2040 plan. Would this not be the case?
Mr. Robert Watt:
The Deputy knows this in terms of the school building programme. The Department of Education and Skills has its allocation and is committed to deliver various schools. The committee will be aware that it has always been the way that the Department was able to deliver more schools if the tender prices became softer: if prices fell one could deliver more schools. All of this ultimately depends on the capacity of the sector. This affects the price.
I have only a short amount of time and I have some very quick questions. With regard to the business case on the children's hospital, did the Department of Public Expenditure and Reform ask, insist or request that the development board at the hospital - or delivery board as Mr. O'Brien referred to it - do a cost-benefit analysis on the business case price?
My next question is about process - it is not about individual Ministers or Governments - and it is just to get an understanding. Mr. Watts has served through various Administrations. Projects have gone well and badly for all parties and none over the years. As a matter of practice is there a process by which on a weekly, monthly or quarterly business the Minister of the day - I do not refer specifically to the current Minister - sits down with the Secretary General and says "These are the 50 capital projects and here is the update"? Does this process happen at all and, if so, how frequently?
Mr. Robert Watt:
This is important to respond to. We now have a tracker, which we did not have previously, of 180 to 200 of the top projects. There is now a tracker on those in our Department, which we publish. I believe we are updating a version of it currently and it will be back up on the website soon.
I promise this is the final one because it follows on. I loved the last statement in the Secretary General's opening contribution which Deputy O'Connell captured very well. He feels that the performance relationship in terms of actual delivery rather than bonuses is the way to go. What tangible sanctions is he recommending by way of reform for State personnel who may be asleep at the wheel or do not do a good enough job? What tangible sanctions can the public feel are in place if officer A or Secretary General B did not perform? What kind of oversight or recourse will we have in terms of the proposed reforms?
Mr. Robert Watt:
Ultimately, it has to come back down to the nature of it. I talked about what this contract is about. Someone is asked to do a particular project and to spec something - a discrete piece of work - whey they can then define afterwards how well they did in speccing it. They said they would need ten windows but how many did they actually need? I know that is simple, but the Deputy knows the point I am making. What I am suggesting is that we should link payment to the ultimate delivery, so they said something and then they said what. That is relatively straightforward.
I want to ask about the water supply project. I speak from experience in a previous occupation I had. The project is coming from across the road from where I live. A full environmental impact assessment report and a Natura impact statement, NIS, are being prepared. If the Secretary General does not have all the information, he can supply it to us in writing afterwards. What are the timelines for this project over the coming years because obviously the Department plans ahead? I understand it goes to An Bord Pleanála this year.
On the scale of this project, I raise a big flag here about scope creep. Essentially, this will be an Irish Rail for water. It is not just bringing water to Dublin; it also covers the midlands, etc., which, by the way, is fine. I have covered the timelines for this project and the potential for scope creep.
Third, how will this be tendered for given the conversations we have had? Is this one project or multiple projects? Those are genuine questions because I do not know. The project kicked off a few years ago, but what is the update on timelines. It goes to An Bord Pleanála this year. Over the coming years, I am genuinely concerned about project creep. How will the project be tendered for? Will it be in blocks or one big project? Has that been decided? Surely something must have been decided if we have plans going out for the next few years.
I accept that Project Ireland 2040 is not the Secretary General's area. As a public servant he implements policy. I have concerns about Project Ireland 2040 as regards regionalisation and its scale given that we need to redesign how our population is going. However, that is a different story. I ask the Secretary General to deal with those three questions.
On any information Mr. Watt does not have to hand, I ask him to get it. I know Irish Water is Irish Water. He is dealing with capital projects. This document states that regarding Irish Water projects, €6.8 billion is direct Exchequer funding and €1.7 billion comes from Irish Water. The overwhelming majority is still coming from direct Exchequer funding.
Mr. Robert Watt:
It is a fair point and obviously there are projects here that are funded through user charges and there are PPPs. We will come back to the Deputy in relation to the projects. I do not know the details of it. This is an enormous project. I do not know if it is one lump sum or if there are parts of it.
Mr. Watt can come back to us. If he does not have the answer now, that is fine. I seek a briefing on it, covering the status of it, what is planned over the next few years, the tendering and scope creep. I have a genuine interest. There is a big difference between a pipeline from Birdhill to the outskirts of Dublin or an Irish Rail-type network that goes off into Mullingar and other places in the midlands. Those are two totally different projects scale-wise.
I have two quick questions and a comment. The Galway city ring road project is with An Bord Pleanála and the Secretary General does not need to comment on it. The document states the project is at "detailed appraisal stage". What does that mean? Is that appraisal being done by the Department of Public Expenditure and Reform?
What role, if any, does the National Development Finance Agency have in the national children's hospital?
Example from the top is extremely important as is accountability. I refer to two operating theatres in Galway. The Secretary General may ask what this has to do with anything. However, it comes down to accountability. Two operating theatres went out of action in 2017. We have been waiting for a year and three months for procurement. We were told that contracts were exchanged in February 2018. We are in March 2019 and we are informed that contracts are still being exchanged. The language and accountability at this level is not acceptable. We in Galway are left being told in February 2018 contracts had gone out to be signed and in 2019 we are told that they were not contracts but letters of offer and all sorts of waffle. I do not expect the Secretary General to comment on that, but I expect an answer on the other two.
In taking on a project we need to know we can pay for it. In 2016, the national children's hospital was announced and the figure given by the Taoiseach was €650 million all in. Where would that figure have come from? Under the big capital projects, did the Department of Public Expenditure and Reform have had a guesstimate at that stage?
Is the same the case for the national broadband plan? Is it a guesstimate or an estimate? How does that play out?
Mr. Robert Watt:
My own view for once-off bespoke projects of the type we have been talking about is that it is a guesstimate until one actually gets to a detailed design and one tenders for it. It might be based on some cost matrix, unit costs or some approach, or somebody may have said a children's hospital in the UK was built and had these specs and what was the cost of it.
Mr. Robert Watt:
I would not want that to be seen as a pejorative term because one has to have some idea of where we are looking at. This is where we need to get away from saying that that project cost that amount. We only really know when somebody is willing to say, "I will charge you €100 million for doing that."
I have a memory of there being a delay because finances were being put in order. We had to be able to show we could pay for it. There was an upper limit on that as well. There should have been some tolerance within that guesstimate that it would be at least an average.
Mr. Robert Watt:
That is why we are talking about the risk premium. What we are saying in the future is that if the Department comes to us and says, "We think that is going to be €200 million", we will say, "Well, based on our experience of doing certain types of projects, if it is a brownfield site or whatever we will add 50% and say in actual fact it is €300 million now." That has to happen because otherwise the system would be gamed where people will, of course, come in low to get the Government to commit to it and it will be much more than that ultimately.
That is fair enough. I will conclude this session here. I thank Mr. Watt and his officials for attending. We will suspend until 2 p.m. when we will deal with routine correspondence. We will then discuss our periodic report, which will be launched on Wednesday next at 11 a.m., in private session. The report, which covers our meetings during the period from September to December 2018, has had a couple of readings already by members of the committee. It should not take long to finalise. Hopefully the meeting in the afternoon will not take too long.