May 25, 2008
Developers can't be allowed to renege on partnership dealsPosted in Ireland · 21 comments ·
Never mind the tent at Galway Races, Cowen needs to deal robustly with builders who mess the state about.
The Taoiseach’s decision to abandon the tent at the Galway Races means he can talk the talk of reforming the way we do our business in this country. That’s the easy part. The hard part is how he reacts to Bernard McNamara’s shock pullout from five public/private house building partnership projects.
If the developer can walk away, and the state is left to pick up the tab for social housing, the true nature of the sorry Irish story of the past few years will become evident and Cowen’s PR stunt with the Galway Races tent will be shown as nothing more than a hypocritical stroke.
This column has argued for years that much of the boom in Ireland was little more than a scam. Ireland was the victim of a financial coup d’etat whereby a cabal of the banks and developers, with the blessing of the government and cheer-led by various vested interests who were getting their grubby cut, took over our economy.
They colluded in the farce that saw one of the least populated countries in Europe having the highest land prices and, in the process, terrified thousands of young workers into years of indentured commuterism.
In the process, the psychology of the nation was altered, leaving us,140 years after the Land League, back where we started, owned by landlords. In the past ten years, land ownership – rather than enterprise, creativity and most importantly hard work – became the single biggest arbiter of wealth.
This led to a culture of the fast buck, where the ‘flipped’ deal and the easy profit were lauded and difficult things like innovation, service and production were frowned on.
So hotels and other businesses were closed down to make way for the property juggernaut, which was always based on the ‘greater fool’ theory, that there was always a bigger eejit that would buy the assets from you – until we eventually ran out of eejits.
Now that we have run out of eejits, the main players in the coup d’etat are running for cover. The banks won’t lend to their erstwhile stars, the developers, and in turn the developers are reneging on deals they had signed with the state.
Meanwhile, badly-off places like O’Devaney Gardens – which never got a look in – are left carrying the can. This reads like Dickensian fiction, but it is fact. The state can solve this problem. First, it needs to restore the credibility of the entire public private partnership (PPP) approach to public infrastructure.
At the moment, voters would be right to conclude that PPP is too often a one way bet for developers. PPPs seem grand in a boom, but at the first sign of a downturn, are the developers to be allowed to walk away and the taxpayers to be left carrying the can?
Bernard McNamara has argued that planning delays and changes have had a key impact and, of course, that the market has now changed. However, surely these risks should have been assessed when the deal was signed.
For the future of social housing in Ireland, the impression that PPPs are a one-way bet has to change.
Secondly, this government could send a signal that things are different now and that there is a penalty to be paid for messing the state about.
Of the five projects, McNamara had signed contracts on two, while he was the preferred bidder on three others. This is over â‚¬800 million-worth of work, which in the current downturn would be welcomed by any developer, provided the terms were workable. It looks unlikely that the McNamara deal can be resurrected, so Dublin City Council should act swiftly and go to the under-bidders with offers immediately.
If they are not prepared, for whatever reason, to move judiciously, Brian Cowen should take charge of this and do it. Obviously, given that apartment prices are dropping precipitously and the PPP was based on using the cash from the sale of private apartments to subsidise public housing, the numbers will have to be reworked. The state will have to accept fewer public houses and more private houses in the schemes. However, this should not be a deal breaker.
No one expects a developer to build and lose money on the project, so both sides might need to lower their expectations. There need not be any panic now, just clear commercial decision making. If McNamara doesn’t want the business, someone else will. Just do it. Get the houses built.
Thirdly, questions are being asked about whether it was wise to give one developer all five contracts. Was this the best way of getting value for the taxpayer?
Junior Cert economics tell us that the state, acting on our behalf, would cut us a better deal by having several contractors competing with each other. The impression that a small number of builders have benefited from state business during the boom is overwhelming. This has to change. There is little point in abandoning the tent at the Galway Races if the philosophy that underpins it remains alive and well.
The fourth issue at stake is Thornton Hall, another multi-million euro state contract to build a new prison. Apparently, McNamara is very close to signing this deal too.
A prison deal is much less risky than a PPP to build social housing, which is dependent on the housing market cycle. In a prison deal, you simply build the prison for the state, get a stream of income and take no risk. This is a no-brainer for a developer.
There is a strong argument that McNamara’s action in the past week, cherry-picking the PPPs he wants, should come into the equation when the government is deciding how to dole out this contract. If you mess with the government – taking projects when they suit you and abandoning them when they don’t – you should pay a penalty.
Cowen is sending clear signals that he wants to break with the recent past. He talks about patriotism and duty, invoking images from the past like that of Sean Lemass (who, by the way, most people under 40 have never heard of). If he is sincere, he needs to stand up and be counted on this McNamara saga and, for once, do the right thing.