One more hurdle

BUSINESS COSTS:DURING THE BOOM years, we got used to the government announcing major new infrastructure projects. Each project would then be reviewed, announced again and reviewed again. Finally, it might get the go-ahead.

As a result of this laborious process, the country still has an infrastructure deficit, ranking near the bottom of the standings in that category of the 17 countries surveyed in the European Competitiveness Index in 2007. As Ireland is expected to become a net contributor to the European Union shortly, juicy structural funds effectively will dry up. Without that help, the country does not have the money to begin some worthwhile projects.

Much of the money to fund public infrastructure andpublic services in general came from the property industry during the boom years. Now, a country that grew fat on property taxes, such as stamp duty, has shrivelled in tandem with the housing bust. So the money is no longer there to fund projects that would be profitable and create employment.

“These development levies are needed most at times of economic depression, which is exactly when they can do most harm in terms of deterring potential investors,” says Dr Lorcan Sirr of the Dublin Institute of Technology’s School of the Built Environment.

That is the consequence of the infrastructure deficit: it puts the private sector off investing in expansion during a downturn because they may be levied to pay for improvements to public infrastructure.

They are also not sure when they will get their money back if a project is delayed. It can take years to get a refund of any money the company has already paid out. For example, supplementary levies for infrastructure projects, such as Metro West, may be held for up to 30 years, unless a decision is made not to proceed with the project, in which case the monies, along with accrued interest, are refunded immediately, according to Fingal County Council.

Sirr says: “Common sense would suggest that being asked to pay upfront for something for which there is no guarantee of delivery, is a significant potential disincentive for investors and development.”

The IDA says it welcomes recent developments in Kerry and Louth where development levies were cut by 50 per cent. “In light of the need to ensure businesses set up in Ireland, it’s critical that all local authorities should review their levies and charges for enterprise, particularly in light of the national focus on cost competitiveness in Ireland,” a spokesman said.

There was much surprise when Dún Laoghaire Rathdown County Council announced plans last year to implement a levy of nearly €43,500 on each new residential unit in Kilternan and Glenamuck in south Dublin to help pay for a distributor road scheme and for water treatment ponds that would allow more development. More than €34.7 million was also due to come from the commercial and retail sectors to fund the scheme.

“The development contribution levy rates are considered reasonable given the benefits the infrastructure will bring to the area,” the council said at the time. “By reducing traffic on the existing road network and facilitating access to zoned lands, it will improve the area’s attractiveness and marketability for both residential and commercial developments.”

It was planning to spend nearly €240 million on land and professional services for the project.

But things have changed. An internal review of aspects of the Kilternan-Glenamuck Local Area Plan by the council is nearing completion. The scale of road and drainage infrastructure required for the area’s development is being reconsidered as is the cost.

“Based on the outcome of this review, it’s hoped to revisit the supplementary levy scheme,” said a council spokesperson. “It would not be appropriate to revisit the levy scheme in advance of a review of the scale and cost of infrastructure required.”

Local authorities have also faced criticism that the levies raised for projects from development do not always go where they are supposed to. Although in favour of levies in many cases, former developer Simon Kelly thinks the amounts being charged in some cases reached “extortionate” levels during the boom years because local government began to take advantage of the revenue from the property industry to boost staff numbers and pay increased wages.

“It was easy money for them. In theory it was there for a levy but in practice it paid for public service wages and extra personnel,” he says, adding the current system is broken.

“In one town, they asked us to put in things like traffic lights and new roads instead of paying levies. Now developers are all broke, so we can’t develop the project and the town won’t get that basic infrastructure. The current levy system is out of date and archaic. The local authorities should be getting refunded for their investment by the levies raised, rather than getting paid by the levies to make the investment.”

Sirr agrees that levies should be ringfenced for the specific projects for which they were charged and this does happen on some projects. However he also stresses that monies paid to local authorities as levies should not be allowed to be used as leverage for them to borrow more money.

“You wouldn’t put a deposit on a new car for delivery next January only to be told, if the car doesn’t appear, you can’t get your deposit back,” he says. “It’d be worse if you knew the car dealer had used your deposit as the basis to borrow more money to put an extension on his showroom.”

He also says that if construction on a project does not start within a specified time frame, or does not reach a certain stage by a specified date, the money should be returned.

The flipside to all this is that local and national authorities have proved inept at collecting funding and levies for infrastructure from the developers. In 2009, it emerged that developers owed more than €500 million to local authorities in unpaid development levies in major urban and county areas.

The previous year, it was revealed that the struggling border, midlands and west region was to miss out on €1 million from the European Regional Development Authority – which funds infrastructure linked to transport, environment and energy projects as well as research, innovation and telecommunications – because it hadn’t been spent quickly enough.

So how can the system be improved? Sirr says those closest to the infrastructure should pay more on a graded system or that the levy should be brought in as a recurring charge for a number of years, based on a measure such as the number of users. That would allow a company to budget for the cost rather than trying to raise it while also trying to fund their expansion. Another alternative he suggests would be bringing the levy into the rates system for commercial property so that it gets built into a company’s annual bill.

Scotland is looking to follow the US system of using tax increment financing. Bonds are used to raise the finance for public infrastructure and development and local tax revenues are used to repay the bond. That would require significant reform of local government, but with the new Government determined to ensure a steady supply of funding to local authorities, it’s not an outlandish idea.