John Simpson: We may wait some time for action after report
Evidence from three recent large capital projects shows the financial consequences of cost overruns. At the time of writing this report, the Auditor General said that:
- The A5 road may cost an extra £301m: 38% more than first budgeted;
- The critical care centre at the Royal Victoria Hospital may cost an extra £57m: 60% over budget;
- University of Ulster at York Street may cost an extra £110m: 43% over budget
These three are the projects that incurred some of the largest cost over-runs.
The Northern Ireland Comptroller and Auditor General has published a review comparing the original approved costs for 11 large projects, each costing over £25m, and the expected final costs.
It confirms that most (but not all) of these projects eventually cost significantly more than the original approved costs.
The Auditor General backs up his financial figures with a review of the causes of cost over-runs.
This analysis contains some surprises but, in the main, touches on issues which the public sector tries to minimise but, almost inevitably, sometimes fails to adequately anticipate.
The Auditor General is planning to reconsider the impact of more carefully anticipating planning conditions and seeks to learn lessons from the frequency with which public sector contracts have faced successful judicial review applications.
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Commenting on the latest evidence, the Auditor General draws on an advisory report that was originally issued in 2013 saying that the present systems for the award of public sector capital projects were no longer fit for purpose and suggesting the adoption of an action plan based on a centralised model. This would in turn require departments to adopt a delivery based culture.
In June 2014 the action plan proposals received support from some, but not all, members of the procurement board.
In April 2016 the Department of Finance, in the absence of ministerial agreement, decided not to submit the action plan for approval to the Executive.
The Auditor General has now repeated the recommendation for an improved methodology and is still awaiting Executive agreement. Godot may get there first.
The A5 road: Newbuildings to Strabane, Omagh, Ballygawley and Aughnacloy
The major upgrade to the A5 was identified as needed in 2007, the route was chosen in 2009 and work might have started in 2012. At the end of 2019, major works had not yet started. In total, combining four stages, this work is estimated to cost £1.1bn. Work on the first stage, Newbuildings to Strabane has been in detailed preparation for some years and in 2017 was expected to cost £168m.
A series of planning objections commenced with a legal challenge where one objection was sustained under the Habitats Directive. In several sequential separate steps there has been a public inquiry, a judicial review and latterly in late 2017 the department concluded that a further public inquiry is still needed. Result awaited.
University of Ulster: York Street buildings
The University of Ulster made a decision in 2010 to build a large campus in central Belfast. The original budget was for £254m, to be offset in part by land sales at Jordanstown. More recently, the final cost is estimated to be £364m.
Finance for the project was expected to include a £150m loan from the European Investment Bank, a £16m grant from the Department for the Economy, and a Financial Transactions Capital Loan (from HM Treasury) of £73m.
The project was significantly delayed when the original ground basement work was found to be faulty. The long delay resulted in the withdrawal of the offer of funding from the EIB.
Lagan Construction, a partner in a joint successful bid for the contract, went into administration and, after negotiations, the other partner firm recommenced the main contract.
There remained a funding gap which would draw £62m from the university reserves and might draw on a further £20m from the university. In late 2019, a final funding gap remained.
Company report: SSE Renewables Onshore
SSE Renewables Onshore Windfarm Holdings is the NI-registered parent company for a large group of subsidiaries, some with NI-based renewable businesses.
This company is essentially a holding company.
The overall SSE organisation has chosen not to prepare consolidated accounts which would have include the trading impact of subsidiaries.
That explains why the turnover figures are low compared to the operating profits, and why the holding company has no direct employees.
The accounts are heavily influenced by the inclusion of exceptional income, added to the operating profit, of £483.6m resulting from net gains from transactions for the disposal on interests in three subsidiaries.
Consequently, the pre-tax profit attributed to this company is the largest known which can be linked to an NI-based business.
Within the holding company structure there are direct subsidiaries and, in turn, some of these are the owners of wind farms located across NI as well as elsewhere.
As information becomes available on the finances of renewable sector assets, there is emerging confirmation that the trading arrangements for wind farms, which are registered to earn, renewable trading operations certificates (ROCs), offers an attractive trading prospect.
The opportunity for developers to register to earn ROCs was closed three years ago. There is, at present, no direct subsidy for new operators, although the current review of energy policies will examine the possible merits of possible future incentives.