The Road Safety Authority (RSA) could see its financial surplus eliminated due to the impact of inflation-linked contracts with driver and car testing companies.
The contracts leave the RSA exposed to absorbing the costs of inflation, according to an independent review into the operation of the agency.
According to an internal RSA board committee analysis referenced in the review, there is a risk that the agency’s surplus could be reduced or eliminated “due to having to meet the costs of contracts indexation, [which] would impact on the ability to deliver on the road safety commitments”.
The review by economic consultancy Indecon was delivered to the Government last month and is due to be discussed by the Cabinet soon.
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It finds that the use of “indexation clauses” in contracts with suppliers has combined with very high inflation and “increased the costs to the RSA of contracted services and has reduced (its) share of any revenues received”.
Indexation clauses typically allow prices to vary in line with inflation, but the RSA has not been able to pass this cost on to the consumer because its fees have not increased. It outlines that the RSA receives about €90 million annually from services like licensing and testing, with a small exchequer contribution.
A spokeswoman for the RSA defended the clauses, saying it is satisfied that they align with best practice across various industries and sectors.
“This approach has in general served both the RSA and consumers well, especially during the many years of low inflation, with some contracts in place for as many as ten years.” The RSA said it does not have the authority to increase fees independently of government.
According to the review, the RSA is now absorbing the cost of indexation from its three largest outsourced services – the National Car Test (NCT), its commercial vehicle equivalent, and the National Driver Licence Service.
[ Price hikes for drivers sought as ‘unsustainable RSA’ funding model highlightedOpens in new window ]
“The cost of this indexation compared to a scenario where there was no indexation in the costs of outsourced services is estimated to be €16.8 million in 2024,” the report finds, adding that this “reflects an element within the design of the original contracts”.
It outlines that the RSA is contractually liable for indexation arising from inflation even if service level targets are not being met. “This is because the current contract does not link these elements and any failure in meeting targets is addressed only through service credits”.
Testing times have suffered in recent years as the RSA struggled to deal with the aftermath of Covid-19 and recruitment difficulties.
The research examines the specific impact of the clauses on the NCT contract, which is operated by a commercial party called Applus – which has been publicly criticised over backlogs in the system.
It found that in 2023, even though testing volumes were 13.3 per cent higher than in 2022, revenue for the RSA was 4.9 per cent lower due to the impact of indexation. If this had not applied, revenues would have been approximately €4.8 million higher.
Modelling in the report finds that if customer fees remain frozen, the RSA’s resources “would be wiped out and the organisation would not be financially viable”.
Under a variety of scenarios modelled, including those with some fee increases and greater exchequer contributions, the report indicates that within a three-year period “the RSA would no longer be able to operate sustainably as a going concern”.
The report recommends hiving off some functions of the RSA around road safety and education and allocating them to the Department of Transport.
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