ECONOMY

Public works’ cost overruns

The entire process of public project procurement can be aptly illustrated by the following exemplum: Bread costs about 1 euro per kilo. The government, however, procures bread for the needs of the public sector through auctions where the starting price is 4 euros. It has set a maximum discount of 40 percent. And so it buys the kilo of bread for 2.40 euros. In addition, it pays 18 percent for taxes and general expenses at a profit for the baker. The 4-euro starting price has been determined by cost analysis 50 years ago, when wheat was processed in water mills, it was transported on donkeys and kneaded by hand. In the olden days, there was no limit to discounts and so bakers offered them generously, up to 75 percent, which meant a cost of 1 euro per kilo – but often with commensurate results in quality. Today, the avaricious bakers are not happy with 2.40 euros per kilo, but collude and decide to offer discounts of no more than 10 percent, which means they sell the product for 3.60 euros a kilo. The quality has stayed the same, European Union inspectors confirm. Bakers have formed groups and take part in the auctions with the aim of influencing the result of the tender. In order to participate, they are paid by the contractor with a direct interest in the specific project and wait for their turn to be assigned a contract with a small discount. The government, with laws, decrees and circulars does all it can to help the participants not engage in any real competition, even within the narrow bounds set. And every time it brings out a new law, decree or circular, it claims it does it for reasons of transparency, keeping the bakers happy. All the above is well known but nobody says anything. The explanation is that for a mouth to be able to say something it needs: a) to be able to speak, b) not to be full of «goodies,» and c) not to be wide open, expecting more goodies like the one next to it. Let us now see how the above homily corresponds to real public project auctions, the relevant procedures, legislation and the ridiculing of public works ministers. Any government must aim at ensuring the thorough and economic production of public projects in time; we are still very far from that. Outdated costing The pricing of projects is based on criteria drawn up 50 years ago and bears no relation to present costs. Concrete is still priced as though prepared by hand and carried to the mold by bucket. Iron bars are priced as if still produced in primitive furnaces; marble similarly. The Construction Economy Institute (IOK) was set up in 1985, with the aim of reforming price lists. To date, not a single article has been changed. If the will was there, it would have been a matter of only a few days. Public tenders to the lowest bidder have been replaced by the so-called mathematical formula. This method bears no relation to the construction costs of projects; if a firm offers a discount above a certain limit, depending on the type of project, it is excluded. The analytical price lists have cost factors usually three times the real ones: Concrete is 150 euros, instead of 54, per cubic meter; iron bars 1.30 euros, instead of 0.53 per kilogram; painting 18 euros, instead of 6 euros per square meter, and so on. This is why, before the mathematical formula was introduced, contractors would offer discounts in the region of 60 percent and why projects now could be 60 percent cheaper. To be sure, the formula is supposed to have been invented in order to prevent underbidding and the excessive discounts that were never observed. What is worse, legislation facilitates the collusion between contractors, and discounts are small, 5-15 percent. The bureaucrats that prepared an amendment to the formula for supposed transparency in 2003, and following a demand by the European Commission, ridiculed their political superiors: The only change was the removal of sanctions on the firms offering discounts with the sole intention of influencing the result of the tender. So now we see discounts of even 95 percent. (The mathematical formula rules them out of the tender but they influence the result.) The latest feat by the Environment and Public Works Ministry is a circular, dated January 1, 2004, effectively rendering useless European Court legislation allowing a bidder to explain a large discount. The circular stipulates that only the outdated price lists can apply, making discounts impossible. (1) Christos Chronopoulos is a civil engineer and public project contractor.