May 25, 2008

Developers can't be allowed to renege on partnership deals

Posted in Ireland · 21 comments ·
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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 €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.


  1. Ger Kennedy

    Have we really run out of eejits?

    Good article again. I think many developers will run a mile because no-one know how far the value of apartments is going to go so it will be hard to price this kind of scheme over the project life. Also the banks will probably be offering little or no credit to already extended developers for schemes like this. I would imagine that Mr McNamara is pretty canny and I would say that he knows or suspects something that the rest of us mere mortals don’t. I would agree that in a perfect world this “pull out” should be used as a “black mark” against him in his prison bid but I dont think that that is allowed under EU rules. As far as I know, If he is financially qualified to do it and he is the lowest bidder then he has to get the work no matter how much he allegedly messes the state around on other contracts.

    I often wonder how the French get around this rule. If you ever go to France you will see that virtually all the public vehicles are of French manufacture. I wonder how come they are always the “lowest bidders”. Hmmmm…

  2. Stephen Kenny

    Why should the government fight for a good deal for the taxpayer? PPPs are a bit dodgy in the first place: At best, the basic premise seems to be, effectively, that the state is selling planning permission. At worst, and this is usually the case, the government is taking out, quite unnecessarily, an outrageously over priced mortgage, with a property developer.
    In the first case the government says “You can build 1,000 houses in this area if you build this new school/prison/social housing/whatever, for free”. The government gets their new piece of infrastructure, and the developer makes money on the new houses. The developer will get the highest prices they can for the houses, irrespective of the free building, so the net effect is that the developer has purchased planning permission for the price of some social housing/school/whatever. To me, this one has the smell of the medieval church selling indulgencies, but no matter, there is a certain sense to it.

    In the second case, where there’s no other development, the government says “Who wants to borrow some money on our behalf, build a prison, manage it for us, for 25 years, and we’ll pay you an all-in monthly fee, plus costs”. Well, that’s completely mad: The government can borrow money more cheaply than anyone else, so it’s absurd that the funding element should be outsourced; The outsourcing of the funding further means that the client (the state) has no control over the project life (“We’re not paying you for that mate, not until you’ve put the roof on properly, and the toilets actually work”) beyond the contract; Finally, in the maintenance phase, the definition of a “Good job”, as in “The contract ensures that the management company will do a good job in maintaining the buildings” sits four square on where the interests of the management company lay. If the management company has no financial interest either in the future value of the development (a prison?), or on the effect on future possible work because there is no effect, then the client might as well just sign all the cheques in their cheque book, and pop it in the post to the contractor’s client manager.
    In fact, this second form of PPP is so full of contradictions that the only conceivable reason for it to exist at all, is to take the debt off the governments balance sheet, and so screw the taxpayer in the future. Because that’s exactly what they’re doing.

  3. MK

    Hi again David,

    I never thought I would see you write: “Just do it. Get the houses built.” You, a property promoter !!!

    There are a couple of things wrong with the situation. One, PPP’s are a poor vehicle for any type of government investment. Private businesses dont enter PPP’s unless they can make a guaranteed buck, yet the government takes on usually most of the risk. They are a nice idea on paper but country after country has found them to be poor value for money for Governments. The Comptoller is thinking likewise, although the FF/PD government hasnt. That may change slowly over time or perhaps another government would reassess it carefully. PPP’s dont work (for governments). (They do for privates usually, eg: westlink toll bridge).

    2nd, in these particular PPP schemes, the profit for the private entity was predicated on properties being sold to the open market at prevailing rates. Those property rates are no longer attainable. Unlike say the bad beef insurance scam which you will recall from the Beef Tribunal where the state picked up the tab and the risk (and allowed a scam to be carried out), the State in this case I understand will not be bound contractually to meet the financial deficit of apartments sold.

    In terms of the eejits you mention. The property bubble in this county wasnt so much supported by the supply of eejits (of which we still have plenty, believe me!). It was structural with the availability of credit, low interest rates, etc, and on the back of a real economic boom. It just got out of hand and people believed their own guff and it was a feeding frenzy, akin to a bar promotion for 18 year old students with all drinks 1 euro each. The Government and most people partook in it and few put their heads above the parapet and said that it was all crazy. Like any pyramid scheme where people are making money, its hard to say stop and be heard. You said it, I said it and many others did, but unless there was some structural change, it wasnt gonna stop, for example in preventing people taking out 40-year interest-only mortgages, for example. The Government by their inaction allowed it to happen, that is for sure. The lemmings, the people, just went with it, flipping here and there. Indeed, many of the eejits made quick bucks by flipping. Lots of people got rich during the south sea shares bubble, the tulip one, and the US stock market of the 1920′s and the 1990′s. Easy money for some that perhaps didnt realise the risks they were taking. Sometimes being an eejit has an advantage. And like the Zebra crossing the river full of crocs, safe passage can be down to timing luck, not with skill or brains.

    PPP bad …. as for McNamara …. he’s made his money now.

    MK

  4. Stephen Kenny

    It seems that I forgot the conclusion to that rant: State contracts, by definition, have no measure of future value, so the only possible way of achieving the necessary commercial tension to ensure that the contractor at least attempts to do their job in way that actually gets the roof on and more than one in four toilets actually working, is to have the threat of with holding future work. If they can’t do that, then they just shouldn’t do them. Even if they can restrict future work, it relies upon the public sector staff responsible saying “These guys are totally useless, the toilets don’t work, and we’re spending 100k a month in court arguing whether the damp is from a leaky roof or condensation from a kitchen where we’re still arguing about their insistence of buying gas ovens for a kitchen with no gas supply. We won’t use them next time”, which, at first glance, seems reasonable, but is it? Why should public sector staff go out of their way to make their own jobs more difficult for no benefit to themselves? Or even worse, it may actually cause extra costs to the state, and so reflect badly on themselves: They may have to provide formal reasons for excluding an important company; They have fewer companies to chose from; The contractor might join a consortium to apply for a contract, then what? No, they won’t exclude large contractors. Ever (except for PR purposes, in the very very short term, and before the company changes it’s name, or merges with another company).
    The whole reason that we have a public sector, is to do the things that don’t fit into the private sector commercial model (e.g. to stop people dying of hunger on the street, or being turned into slaves by some invading army), so trying to fit them into a commercial model is actually self contradictory, and relies on hopelessly excessive costs in either case.

  5. Garry

    I heard McNamara on the radio yesterday…. sounded like he wants to go ahead. the real scandal is 27M of public money has been spent on these projects so far… Without a hold dug or any cement mixed and not including the money he’s spent!!!!! wtf?.

    He knows apartments wont sell for the prices projected back last year…whether this means he will lose money or not make as much is unclear….. He may be telling it as it is….. It may be that new planning conditions break the deal and make it unworkable. Dealing with planners is very very frustrating; they are continuously changing the rules with absolutely no consistency or regard for previous decisions or even agreements with them; they enjoy making work and expense for themselves and others. I could well imagine how they could work thru 27M if there was no one to shout stop. Though he should know how painful it is to deal with planners, it was never a real problem when prices were going up 20% but theres no wiggle room now.

    One other possibility is other developers who are sitting on partly finished apartment blocks will be more than happy to sell to local authorities and see this as an opportunity.
    If this happens, the losers are the eejits who paid over the odds 2006, who cant wiggle out of their contracts and who find their shiny new overpriced apartments are now in social housing blocks –> serious negative equity. And of course the taxpayer will lose but only if we buy them off the developers at anything like the banks valuation; there may well go for very little after the bank calls time and needs the cash… and the banks will call in some developers, it has to happen.

  6. Philip

    Garry, I think you are spot on. Developers are in deep trouble now and the way out is a retweaked PPP which buys out these guys on existing stock.

    There are also a lot of apartments out there with poor/ non existant management companies due to the daft idea that owners would somehow auto-organise and keep the said companies running correctly. It’s funny how a lot of these places have owners who are also the original builders.

    Let’s not fool ourselves, a lot of the apts out there are defacto social housing. A PPP which grasped the nettle of tidying up the management company mess, turfed out the builders at cost plus a few % could deliver the accomodation required and get these places operational using local council support with private support as needed (I may be asking for too much there).

    There is the issue with a lot of these existing places that they are not designed for families. A lot of this stems from inadequate washing/storage facilitie that in my opinion could be added in attached cummunal areas as in other European countries.

    We need to fill out the existing stock we have and make them operate correctly before we start building more units.

  7. [...] at the Galway Races means he can talk the talk of reforming the way we do our business in this counthttp://www.davidmcwilliams.ie/2008/05/25/developers-cant-be-allowed-to-renege-on-partnership-dealsAzizi increases land portfolio AME InfoDubai-based property developer Azizi Investments has [...]

  8. VincentH

    I certainly do not want to go back to the days of ever moving cost over runs. Where the builder had a drip feed to the printing presses of the exchequer.
    This seems to be the cards being played at the moment.

  9. David’s article above says

    ‘Of the five projects, McNamara had signed contracts on two’. Is McNamara getting out of the signed contracts?

  10. Garry

    Philip,

    I think a new PPP on the existing stock would certainly be a way out for the developers but it could be a nightmare for the taxpayer…. although yes, it would be better to fill the empties first. But I’d hate to see us bailing out the banks again, they have made enough profits to absorb this with a few bad years.

    Yeah, its funny that most private apartments wouldn’t be good/big enough for social housing. Like you say they weren’t designed for families. But they weren’t build for students either, who would bring the washing home at the weekend. Or maybe the ‘spirit of gracious living’ being flogged at The Grange didn’t involve laundry :) Screw it, I take it all back, I’d pay a couple of extra % to see the oul clothes horses and washing hanging over the balconies there!

  11. Nostramartus

    garry and philip have hit on the developers intention all along, their involvement in PPP’s is all about delaying the construction of social housing because they know this would deflate the property bubble. When they print their brochures they sell a lifestyle that doesn’t include a guy kitted out in a hoodie, wearing sovereign rings and white trainers waving from the second phase sister developement opposite. I believe their ” final solution ” lies in the ghost estates ( ghost estates now are recently completed housing developments that are unsellable and vacant )that can be found in the commuter belts of every city in the country, we are slowly going to start to see the government buying up these estates or trading for inner city property so Cowen will be able to smile down from his next election poster wearing a Che Guevara beret. At first they’ll rent from desperate rookie investors drowning in debt who bought in the commuter belts, this will be the new SSIA introduced to buy the middleclass vote, the tenants will be exactly the same as before , ex-construction industry employees soon to be followed by ex-financial services and ex-multinational employees. Any asset you can’t sell is worthless regardless of what you paid for it or what you believe it’s future value will be, any respite from inflation and crushing negative equity however brief will be greeted with devotion and another five year term, to take a leaf from Mr.Cowen’s book I’m sure he’s thinking “when you have them by the balls their minds will soon follow”. An opposition offering a short sharp property correction rather than waste badly needed state funds to bail out a market that’s already sunk will be staying in opposition.
    After the election these estates will become ireland’s answer to brigadoon, they’ll be left as the are with no services for a hundred years, a myth in the minds of public servants, St Michael’s Estate residents will be offered little choice , they can either stay in a two bedroom apartments with three children in the city centre or move to what to them is the moon and in a world where oil potentially exceeds 200 dollars a barrel that’s where these estates may as well be.

  12. Your best article yet David, well done. If the Fianna Fail connected coterie of developers-like Mr McNamara -who have been constructing jerry built apartments for the past decade, feel badly done by when they are obliged by the Green Party to build decent sized habitations, properly insulated etc it stretches the boundary of credulity that they will be “unviable”.
    The PPS deals to which Fianna Fail are so addicted, because they postpone (for ever) their having to use the peoples taxes to provide services and infrastructure-will- in the years to come- prove the greatest disaster that they ever inflicted on the irish people.
    Essentially the speculators will now own the nations “family silver”. They will “rent” back to us taxpayers, our schools ,our toll roads, our public buildings, our private health service, ad infinitum. Meanwhile Fianna Fail will enrich themselves, their farmers and their obscenely wealthy developers,with the current tax take, and generations unborn will still be picking up the tab.
    Even opportunistic Australian banks are queuing up to get in on the scam.
    Unbelievable. I will not be around when all the postponed shit hits the fan-index linked pensions etc, but God help my children’s children-unless of course they own a farm or have a secure public service job.!
    “Ireland” has effectively been pawn-brooked by that little trickster Ahern, and no doubt his successor will continue his rotten work.

  13. naesa daly

    If the decline in the property market was Ireland’s only problem things would be manageable in the medium to long run.Ireland has to import all of it’s oil and faces a crippling overvaluation against sterling and the Dollar.These 2 factors will bring the economy to it’s knees just as they did in the seventies and eighties.At least the property market hadn’t caused the same level of indebtedness as it is now doing.How will tourism fare over the coming months?.

  14. “How will tourism fare over the coming months?.”
    I am constantly amazed by the number of Austrians, Australians, etc. who have a desire to visit ireland.
    I think they are living on old fables of an age gone by. I try and let them down gently, whenever I meet these people.
    The “Riverdance” show has done more than the hundreds of millions spent by Failte Ireland to convince these people that Ireland is still a green paradise where comely maidens dance at crossroads (and so on.)
    I just tell them, if they insist in going, not to drink the water-unless it comes out of a bottle!

  15. Garry

    http://www.ireland.com/newspaper/frontpage/2008/0531/1212156448865.html

    Quote….
    =========
    “There were further signs that the Republic’s housing boom has turned to bust at the High Court, as a provisional liquidator was appointed to two related property development companies.
    The court heard that houses built by Denis Finn Ltd (DFL) were “simply not selling”. The company, which has a number of unfinished sites in the Howth and Sutton areas of Dublin, was experiencing serious cash-flow problems and had been unable to raise further financing.”
    =========

    So the banks are starting to call in developers…. . I guess the speed and value the assets can be sold for will tell if the housing crash is minor or only just getting going…. The banks will be absolutely desperate to realize some value; with the credit crunch they are all eying each other up looking to see who’s most exposed and most liable to a takeover etc…

    So, would it not be better value for the taxpayer to take advantage of the current credit squeeze; cherrypick stuff like this off the banks/liquidator at pennies in the pound and subcontract completion to small builders? The taxpayer will be able to pick and choose the sites, planning is already sorted and we end up with social housing distributed around the nicer parts of the city… (Isnt that what the 20% rule was for anyways)

    To date 27M has already been wasted screwing around on strategy for the existing PPP’s. Im sure that kind of ready cash will go a long way in the current climate, assuming of course; that the tribunals, the justice system and revenue are functioning effectively and will do their job in stopping corruption.

  16. That´s an interesting post. I wondered why my B of I shares had halved in recent months.(nobody tells anybody anything ,nowadays ?)
    Guess I just join the long line of suckers.!
    It looks like the banks will be going into the building business shortly.
    All the big fish(developers) have already left the country for greener pastures years ago.
    Only the numerous small fry builders countrywide are now facing ruin.
    Maybe they will turn on Cowan-now that even the annual Ballybritt bash has been abolished.
    Dont buy shares in helicopter companies, either, this year ..
    Even the Lisbon Treaty could be in jeopardy.

  17. A previous post mentioned “hanging out the washing on balconies”,in the hundreds of thousands of jerry built, high rise apartments, which now ring the city of Dublin.
    It´s forbidden of course.!
    Can you imagine the carbon footprint (and the expense- now that oil is 135 dollars a barrel) of drying all the dirty laundry in electric drying machines.?
    All those apartment owners are really going to be “hung out to dry” themselves, in more ways than one.!

  18. laura

    Some good points. Reality is though, if you’re on social welfare in Ireland what you are “entitled” to right now is a lot better than what you will buy on the open market with your own cash. Whoever said that apartments were defacto social housing was 100% correct: I have lived in houses split up into flats where I was the only tenant out of maybe 5 or 6 living there who actually had a job, and that was right at the height of the celtic tiger. At the moment I’ve read that around 1/3 of the private rented sector is taken up by such tenancies, so I figure that could easily rise to 50% or even 2/3rds if things continue down the economic swanee.

    What nobody has pointed out is that this itself already contributed to rent hikes as most landlords just charge the tenant the maximum rate that the local council are permitted to pay them for that type of property and the number of dwellers. This became and still becomes the new “market” rent. This of course, will keep private rents artificially high, while the sector becomes increasingly downgraded by an increasingly percentage of out-of-work tenants (who are far more likely to develop or bring with them social problems). The losers here of course are people like me who are stuck in the sector because I never earned enough to save enough to put down a deposit and I don’t have rich parents who can foot it. At least Canada have dropped their points for the skilled migrant visa…..cya!!

  19. Excellent point from Laura.The exchequer (taxpayer) is propping up the overpriced rental market-has been doing so for years.! Time they lowered their rent allowances to help sanity return to the market.
    The fact that now new social housing is in the pipeline will only continue to benefit speculators-but thats the new Europe.!

  20. The big developers like McNamara are “a state within a state”.
    They own Fianna Fail.

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