Achieving Value for Money in Public Expenditure
Address by Mr. Brian Cowen TD, Minister for Finance
Dublin Chambers of Commerce Annual Dinner
Thursday 20th October 2005
President and distinguished guests of the Dublin Chamber of Commerce, I am delighted to have the opportunity to speak to you tonight on the occasion of the Chamber’s Annual Dinner.
I want to concentrate on the question of future infrastructure investment for the region, and also to announce tonight further initiatives to achieve better value for money in public expenditure.
Ireland continues to out-perform our European partners with growth of 4½ and 5 per cent in the last two years. This exceptional performance is continuing. The most recent figures show that the total employed now stands at nearly 2 million with employment growing by a spectacular 93,000 in the year to the second quarter of 2005. This is very good news both for business and the people of Ireland. It shows that the Government’s consistent approach to pro-employment policies in areas such as taxation, education and investment generally is paying dividends.
Whilst we have an excellent economic performance we cannot be complacent. We need to understand and deal with the various challenges that we face.
Planning must be informed by projections which show that there will be at least 360,000 more people living in Dublin by 2011, only 5 years away and that an estimated 20,000 additional homes per year will be needed in the area. It is essential that the infrastructure required to underpin this development is also put in place.
Where do we go from here?
The Greater Dublin Area has made a huge contribution to Ireland’s success story. Ireland has an open economy very dependent on trade, in the widest sense of the word. A competitive and vibrant Greater Dublin Area is, therefore, essential to Ireland’s future economic success. This view does not in any sense contradict the vision of the National Spatial Strategy of promoting gateway centres outside Dublin. The National Spatial Strategy itself stated that “it is essential that the performance of the economy of the Greater Dublin Area is built upon so that its success, competitiveness and national role be sustained into the future”.
The success of recent years has put a significant strain on the infrastructure of the Greater Dublin Area. This has presented Government, at both local and central levels, with many challenges.
Government funded investment is playing a key role in meeting these challenges and this will continue into the future. In the Transport area there has been major investment in the road network in the Dublin area in recent years. Key arterial routes to the Border and Belfast, to the Northwest, West, South and South East – either have been or are being upgraded. Further major investment is planned for the M50 and the Dublin Port Tunnel is due to open to traffic by the middle of next year. Public Transport has also been substantially upgraded and peak time capacity greatly enhanced through the introduction of the LUAS, DART upgrades, extra Quality Bus Corridors and new suburban rail fleets.
Despite the investment to date the fact is that the public transport system in Dublin needs further significant investment. I signalled in my Budget last year that I was prepared to consider a commitment to a 10 year funding strategy for transport investment. Detailed plans have been prepared, I have reached agreement with the Minister for Transport which will be jointly submitted for Government decision soon. I cannot go into detail at this point but I can tell you that a key objective of the 10 year framework will be the transformation of the public transport network in the Greater Dublin Area.
Increasing housing output and improving affordability is a Government priority. Quality affordable housing in the right location is an important part of the competitiveness mix. In 2004, we achieved nearly 17,000 completions in Dublin - up almost 80% on 2000 levels.
A new Affordable Homes Partnership - to coordinate and add impetus to the delivery of affordable housing in the Greater Dublin Area where affordability pressures are greatest, is also now in place.
The Government is committed to the creation of sustainable neighbourhoods which afford a good quality of life to citizens irrespective of the status of the housing in the area. Dublin City Council is implementing a major regeneration programme largely funded by the Central Government Exchequer.
The largest regeneration project in the State is well underway in Ballymun. The project involves the demolition of the existing flat blocks and their replacement with low rise housing, as part of an integrated strategy for the social, economic and physical renewal of the area.
The first phase of the redevelopment at Fatima Mansions is nearing completion. The redevelopment of the complex is being undertaken on a Public Private Partnership basis. This is an innovative flagship project for the Housing Sector and is the first major housing regeneration scheme undertaken by the City Council on this basis. It is heartening to see that the private sector is prepared to invest in the regeneration of what was one of the most run down areas of the inner city. These are important projects with huge social benefits. The integrated approach of good quality social and affordable housing backed by community and other facilities is the key to building sustainable neighbourhoods with benefits for all of society and not just those directly affected.
I want to see the number of projects of this type increase so that more and more citizens in the city can expect a quality environment in which to live and work.
I want to turn now to the question of achieving better value for money in public expenditure. As Minister for Finance I believe this issue needs to be tackled as an on-going priority and one which I am determined to address. I would like to take the opportunity tonight to announce and outline a series of new initiatives that I believe will be fundamental to ensuring enhanced efficiency, accountability and transparency in public expenditure projects. These measures will build on improvements in the arrangements for public expenditure management in recent years. We need to maximise benefit for the socio-economic development of our country and to ensure tax payers get value. I have no doubt that a similar objective applies as much in the organisations represented by the members of the Dublin Chamber of Commerce as it does in the public sector.
I also want to stress that any cynicism of the ability of the public service to achieve value is not something I accept. The Government is determined to ensure that tax payers get better value.
This will necessitate achieving value for money in public expenditure projects and programmes, the focus of the rest of my address tonight.
The importance of this is because public investment in capital or current projects is a form of ‘contract’ between the State and the wider Irish society on behalf of taxpayers. It is essential for the State and its agencies to deliver cost effective projects that will benefit its citizens and facilitate socio-economic growth and development.
Let me be clear about the key objective here. We are not talking about constraining the public service and there is no intention of encouraging a risk averse culture. Rather the intention is to allow people take initiatives and to do so within a framework that will recognise and encourage best practice while at the same time highlighting the need to secure optimum value for money.
As Minister for Finance, I and my other colleagues in Government are determined to deliver projects on behalf of the taxpayer that are to the highest international standards; that are on time; and within budget. Nothing else is acceptable.
A dynamic, knowledge-based Irish economy that aims to be world-class in high value added economic activities, such as research and development, needs a world-class infrastructure provided in an efficient and cost effective manner. Irish people also rightly demand similar efficiency in public services and as consumers we should demand value for money from the private sector, and prudent use of taxpayer funds from the public sector.
It is important to stress that the initiatives I am announcing tonight build on recent significant measures introduced by the Government to facilitate better appraisal and management of capital projects.
The provision of value for money in public projects is the objective of the initiatives on which I now wish to elaborate.
We need a more accountable, transparent and effectively functioning public sector. Public services must be ready to meet the requirements of an increasingly complex and, appropriately in my view, demanding society by delivering better value for money and increased quality of service in each and every area.
I am determined that solutions will be implemented. It is also important even if unpopular to recognise the commitment, innovation, competence and sometimes brilliance of many public servants and a drip feed of constant criticism could reduce the attractiveness of the public service which would be in no one’s interest.
However, in view of the need to improve value for money, and against the broad socio-economic success story that I have described, the Government have already decided to take specific action on IT projects and other initiatives. In addition I believe there is a need for a wide range of other actions and measures that I intend to form part of an integrated on-going programme to deliver value for money in both current and capital expenditures. I would now like to outline initiatives that I believe will be important in achieving this key objective for the public service in Ireland.
The first step is:
1. Full acceptance of the need to improve value for money and to ensure that every euro is well spent.
We are operating in a market-based economy and one that has become very successful over the last decade. However, there are some occasions in which markets and sectors may fail to work well for their users and this provides the rationale for Government intervention. These situations include infrastructural and network projects, where on its own the market may not deliver the outcomes that society needs. We also need to provide a wide range of public services.
It is important to recognise the principle of making sure that every euro is appropriately spent. This principle which is familiar to the businesses gathered here tonight, is equally if not even more important for Government and the public sector.
Value for money is also not simply an item to be ticked in project appraisal. Rather it is the outcome of a carefully considered appraisal system and culture that takes into account, as objectively as possible, the overall benefits and costs of a given project and seek to make sure that budget estimates are met.
2. Fixed price lump-sum contracts become the norm.
This development will be fundamental to protecting taxpayers from cost over-runs. The aim is to ensure that there is a fair risk sharing and that contractors take on those risks that they are able to manage and control. The optimum transfer of risk will ensure that taxpayers are protected from the financial consequences of unnecessary delays and in turn cost overruns. This should apply to service or consultancy contracts as well as infrastructure projects in health, education, justice, transport and other areas.
My colleague, the Minister for Transport, recently announced the introduction of fixed price lump sum contracts for all future transport infrastructure projects. This is the norm in the private sector. The Dundalk by-pass was built by the private sector and we should recognise was completed ahead of schedule and below its budget. The by-pass, which affords motorists a continuous stretch of dual carriage between Dublin and beyond Dundalk, is the first public private partnership in which more than €100m was raised. The Kilcock – Kinnegad by-pass is another example of a PPP projecting proceeding ahead of schedule. Outside of the roads area, the development of the National Maritime College in Cork is also a good example of a PPP project coming in on time and on budget.
The establishment of a Centre of Expertise in the National Development Finance Agency will provide the skills and capacity required to support the procurement of key infrastructure projects by PPP in the central Government area. This initiative, to accelerate delivery of PPPs for key infrastructure projects, will focus initially on progressing new projects suitable for PPP procurement in three key Departments – Education and Science, Health and Children and Justice, Equality and Law Reform. My colleague, the Minister for Education and Science recently announced the procurement of 23 new post-primary schools and 4 new primary schools to be provide by PPP.
The success of the projects already completed, or under completion, can be built upon and I believe the introduction of fixed price lump sum contracts throughout the public sector will herald a new era in the procurement and management of public capital projects in Ireland.
My third initiative is to address value for money concerns by putting in place:
3. Ex-ante evaluations, including economic cost-benefit appraisal, for all projects above €30 million.
Currently, Department of Finance Guidelines require that projects with value in excess of €50 million are subject to full scale cost benefit appraisal.
I believe it is appropriate to reduce the project value level to €30 million. This approach will include identification and carefully quantified analysis of all the relevant project costs and benefits, including indirect costs as well as the identification of any risks of cost escalation.
The principle of cost-benefit analysis is that a project is only desirable if the benefits exceed the corresponding costs. However, meeting this criterion is not the final word on whether a project should proceed or not. This is because other projects competing for the same limited funds may have a higher return, when future streams of net benefits are taken into account. This therefore necessitates a fully inclusive approach regarding this particular initiative.
As part of this process I am directing all Departments and Offices to review existing contract specifications with the view to incorporating strict performance criteria, including achievement of key milestones, associated budgetary and financial information, and reporting requirements.
In addition I propose that:
4. For large projects over €30 million, there will be formalised contracts review by the Departments concerned with reports to their Minister and with provision for audit by my Department.
This initiative is to help ensure two things. The first is to develop an overall, integrated approach to the management of larger projects within the public sector. The second is to signal to project managers on both the client and contractor sides the importance of ensuring that the original budget is not exceeded and to take appropriate legal or other action in any cases where this is not achieved. Knowledge of this, together with the other initiatives that I am proposing, will also significantly minimise the likelihood of budget over-runs.
Related to the last proposal is the next initiative:
5. Namely that there should be no extension of large service contracts without tendering if the extension is more than 50% of the original contract or exceeds €250,000, whichever is the lower.
This particular provision is designed to make both project managers and contractors more cost-aware and, coupled with my other initiatives, to minimise the probability of any cost over-runs. It also creates the right incentives for providers.
6 More vigorous competition for public sector contracts
The development of smaller enterprises is important and public procurement can be used judiciously to help develop this sector. Access to public sector contracts by smaller entities has been greatly improved in recent years by the development of the Government’s e-tenders website that affords smaller companies much greater opportunity to compete for public sector contracts. Following active targeting of the SME sector, the number of supplier registrations has increased to over 27,000 (with growth of 77% in the past year). Suppliers are also facilitated with free email alerts to tender notices of interest to them.
My Department also issued revised guidelines last year which require all public bodies to use a competitive process for all purchases of goods and services - whatever the value. The degree of competition and the time taken to complete the process must, of course, be proportionate to the value of the contract but it must be open and transparent. I want to build on this and see SMEs competing much more vigorously for public contracts in the future and especially for contracts under €100,000.
I recently approved a policy framework that aims to facilitate a smarter and more professional approach to public procurement by Departments by requiring them to develop Corporate Procurement Plans to set targets to achieve savings, value for money objectives and the appropriate structural changes in their organisation. Such plans will set out the strategies to implement such change and I expect them to advance that work immediately.
7. Additional specialised training for the civil service and state agencies.
This will span the areas of procurement, project management and project appraisal, including ensuring the application of the analytical tools available for ex-ante, mid-term and ex-post project evaluation.
In particular, I believe it is important to institute a training programme for executives in charge of specialised IT projects or construction contracts. In this context I have asked my Department to make the necessary arrangements with the appropriate training providers including the Institute of Public Administration. My Department will be giving this priority attention and will work with the all our training providers to ensure it is reflected in the priorities of their training programmes.
Staying on the issue of human resources, I believe that there should be:
8. Open recruitment of a number of full-time specialists to the public sector in IT procurement and Capital Project Evaluation and Management.
9. Secondment of IT procurement specialists between the public and private sectors.
Both of these initiatives are aimed at enhancing the ex-ante appraisal and ongoing management of capital and IT projects in the public sector. In the specific case of IT the objective is to increase the level of knowledge transfer between the public and private sectors in the area of IT procurement. Together, these initiatives will, I believe, greatly enhance the level of specialisation and ability of the public sector to implement and manage capital projects and the introduction of new IT systems in the public service. It will also help overcome the danger that in the current environment staff may be reluctant to proceed with necessary and cost effective IT investments.
The current partnership agreement includes measures relating to open recruitment in areas such as Information Technology, Human Resources and financial management to address skill shortages. This approach needs to be developed as a matter of urgency and I have issued the necessary direction in this regard to my Department
I also propose that there is:
10. Allocation of single individual responsibility for all major IT and capital projects.
This particular proposal is aimed at clarifying and enhancing the level of accountability on all major IT and construction projects – a key driver of delivering value for money on behalf of the taxpayer. The project manager will take the lead in ensuring that projects are delivered on time, to specification and within budget. They will be required to bring to notice of their Department’s or Office’s management committee and accounting officer any problems or overruns emerging in projects. Following further investigation a report on the matter is to be sent to the relevant Minister and my Department setting out the issue and the action to be taken to address the issue. This initiative, in addition to that providing for a more formalised contract s review, will be enhanced by the implementation of the other initiatives relating to IT and capital projects within the public service, including my proposal for the provision of additional specialised training for senior officials responsible for major IT and capital projects.
On the issue of the purchase of land, property or other assets, I believe it is important to reconsider the use of compulsory purchase orders and I propose that there is:
11. Better use of compulsory purchase orders.
A compulsory purchase order or CPO occurs when an acquiring authority puts in place the procedure to acquire some land or property in order to facilitate public infrastructure projects.
As many here tonight will be aware, the basis of compensation for property acquired is market value. In particular, the principle of equivalence requires that the affected party is left in the same financial position after the CPO as they were prior to the process. Further, the level of compensation under a CPO is meant to reflect both the actual land acquired and the diminution in value (if any) of the retained area as a result of the CPO.
There are clearly defined steps involved in the CPO process, including on issues of objections and the level of compensation.
The Government are concerned at the impact of the cost of land on the overall cost of infrastructure provision. We have already introduced a mechanism through Part V of the Planning and Development Act 2000 whereby land is made available for social and affordable housing at below market price. My colleague, the Minister for the Environment, Heritage and Local Government intends to introduce a number of important legislative changes which will assist the State in getting a better deal when acquiring land by way of compulsory purchase order in the forthcoming Strategic Infrastructure Bill. In addition, pro-active use of existing compulsory purchase orders powers in appropriate circumstances may also facilitate the faster release of lands at a cost effective price for all forms of public infrastructure and I will be directing Government Departments to this effect.
Two themes running through all of the initiatives I am presenting tonight are accountability and transparency. These drivers of value for money in public expenditure projects are reflected in my next proposal, namely the publication of a:
12. Performance table for Government Departments and state agencies regarding the extent of project outcomes versus budgets on contracts.
This will serve to make the process clearer and more open to the users of project services – the taxpaying members of the public – and will provide a greater incentive for providers and those managing projects on behalf of the State to deliver goals on time and within budget. It will also highlight and give recognition to the many thousands of projects which come in at or below agreed budget.
The above measures are in addition to the recently announced new system for management and control of ICT projects in Government departments. These measures include a new cross Department review process and independent reviews over the lifecycle of projects.
In conclusion, I intend to give the highest priority to achieving world class public services at a competitive cost and I believe this is both achievable and necessary. This will be pursued with the same determination, competence and professionalism which has enabled us to secure full employment, sustained economic growth and rising living standards.
I welcome the co-operation of the members of the Dublin Chamber of Commerce and others in business as well as the support of the public service in pursuing this goal.
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