Cantillon

Inside The World Of Business

The IDA is from Venus and the Government from Mars

THERE IS an interesting “parallel universe” aspect to the Irish economy as viewed from the offices of IDA Ireland and from Government Buildings.

From the cabinet room the period 2002 to 2008 was no doubt viewed as a time of growth and optimism, with full employment and public finance surpluses.

From the IDA offices in Wilton Place in Dublin, it must have been the cause of increasing concern, as declining international competitiveness worked against marketing Ireland as a location for foreign direct investment (FDI).

Barry O’Leary, chief executive of the IDA, has unveiled its plan for creating 62,000 FDI jobs in the period to 2014. The target compares with the 53,000 FDI jobs created in the 2004 to 2008 period (2009 is ignored, as it was such a disaster).

In citing the 53,000 figure, O’Leary pointed out that 2004 to 2008 was a period of declining competitiveness, whereas the competitiveness of the economy is now increasing. As an example he cited the €16 per square foot rent agreed recently by Dun Bradstreet for office space in Sandyford, Dublin, saying the cost would have been €42 per square foot two years ago.

From the point of view of the IDA, the empty commercial buildings that litter the country, and all the hotels that are half empty, are a competitive advantage.

The dramatic inflation in land and property values that occurred during the Ahern years was always a drag on Ireland’s economic performance, though you’d wonder if that is a notion that sits easy with Fianna Fáil, even now.

Too many hotels

IT’S NO secret at this stage that the Republic has too many hotels. FBD chief executive Andrew Langford pointed out yesterday that there are 60,000 hotel rooms in the State, about 15,000 too many by some calculations.

The problem is largely due to the Government persisting with a tax break that had long outlived its usefulness, and the chicken is going to come home to roost, as the State is about to inherit between 100 and 200 hotels through Nama.

FBD may be an insurance company, but it has a direct stake in this as it owns a number of hotels around the country. It had to write down the value of its hotel investments - some of which are in Spain - by almost €32 million at the end of last year.

Langford argued yesterday that Government action is needed to tackle the oversupply in the Republic’s market, possibly by allowing investors to get out of their failing investments before the time limit that qualified them for the tax break without having to return any cash to the Exchequer.

Even allowing for the fact that FBD is in the hotels business, there’s merit in the argument. The Government originally intervened in the market by creating an artificial stimulus, and then persisted with it long after it was needed.

At this stage, the investors’ money is gone, and with it is the tax that they might - or might not - have paid had the incentive not existed.

Anyone who believes that it can ultimately be recouped has fallen victim to the same fantasy that had the banks believing that they could manage their way out of their bad property loans.

Impact of Big Mac

CANTILLON’S favourite line in the Indecon report on the contribution of McDonald’s to the Irish economy is the one where it states “caution is necessary” when evaluating the overall impact of the home of the Big Mac to gross domestic product (GDP).

Although McDonald’s 78 restaurants were estimated to contribute almost €200 million to the Irish economy in 2008, “these estimates do not imply that if these expenditures were to disappear from the economy, national income would fall by the same amount”. Indeed, Cantillon surmises that if McDonald’s did not exist here, the McNugget-shaped hole in the food service market would be filled by other outlets.

Still, Indecon has carved what must be a lucrative niche in providing globalised consumer-facing companies with whatever negotiating leverage they are seeking from the production of such independent assessments of economic worth.

Cantillon recalls that not too long ago (in 2007), Tesco Ireland paid Indecon to write a report that independently found that the group’s Irish presence was worth €2.5 billion a year to the Irish economy. At that time, Irish exports to the international Tesco Group as a whole were calculated to be a bigger export market than France and second only to the UK.

McDonald’s, too, was keen to emphasise the export angle: some 20 per cent of the beef used in McDonald’s restaurants in Europe now hails from Irish cows.

It is, undeniably, a success story and one that can be attributed to the business strength of Ireland’s food groups as much as it can to any benevolence on the part of McDonald’s. But as the experience of Tesco suppliers since 2007 has shown, such success stories can be unwound. Irish food producers have not only lost ground in the Tesco export markets, but they struggle to get their products into its domestic stores.

Calculating what large corporations such as McDonald’s and Tesco “contribute” to GDP may be an interesting exercise, but it’s not quite the same as saying that these companies are an inherently good thing for the Irish economy.

Today

The Iseq reporting season continues with builders merchants and DIY group Grafton due to announce its 2009 results this morning.

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