View that Government is paying too much for too little behind advice to cut NDP budget by €1.5 billion, writes Marc Coleman, Economics Editor

'The economy remains constrained by the limited stock of dwellings and public infrastructure with consequent high prices and congestion."

If one sentence sums up the the Economic and Social Research Institute's (ESRI) verdict on the present National Development Plan (NDP), that is it. Contained in the ESRI's evaluation of the next NDP, it sums up the reasons why Ireland's foremost economics institute is recommending that the average yearly NDP spend be scaled back from the €9.9 billion planned annual spend, to "just" €8.4 billion.

"A lot done, not a lot achieved," is the gist of its attitude to infrastructure spending in general. While its recommended spend is still high by historic standards, it is far less than the Government could spend, and less than bodies like the Construction Industry Federation and Ibec hope that it will.

But as far as the ESRI is concerned, the economy's experience with capital spending so far has led to a bad bout of capital indigestion.

But it isn't entirely damning about the present NDP. Acknowledging it to be better designed than its predecessor, the ESRI is more critical of its implementation than its substance.

It got its priorities right by targeting transport and allocated appropriate resources. But bad timing and worse project management got the better of good intentions. On roads, the ESRI agrees with others that too little was spent at the beginning of the programme and too much at the end.

As a 2004 report by the Comptroller and Auditor General's (C&AG) office on the road programme noted, the planning headaches and building bottlenecks that resulted caused road construction inflation to rise from a modest 2 per cent in 1996 to 12 per cent in 2000.

And this takes us neatly to the plan's most significant failure, cost overruns that are so large they would dwarf the budgets of some smaller Government departments

When launched, the present NDP proposed to spend €5.6 billion on national road improvement between 2000 and 2006.

Soon after, and with some good reason, that figure was revised upwards to €7 billion. Just two years later the estimated cost had risen to a staggering €15.8 billion and, by the end of 2003, to €16.4 billion.

The total overspend was €9.4 billion and one can only contemplate how many schools or regional hospitals might have been built with that amount, never mind how many taxes imposed on working families might have been cut.

Some 40 per cent of this cost overrun - almost €4 billion - was due to the effect of inflation on initial costings. But for some aspects of key projects no costings were done at all, a factor that the C&AG has estimated accounted for 16 per cent - over €1.5 billion - of the overrun.

Yet another 20 per cent of the overrun occurred because of last minute changes to the original plans of the project - the Dublin Port Access Tunnel and the southeastern portion of the M50 being cases in point.

But even if the projects had gone according to plan, the allocated funds could still have gone to waste. In the case of some projects - particularly urban road building - the commitment of resources should be preceded by what economists refer to as "pricing of access to infrastructure". As leading economist Colm McCarthy pointed out at the ESRI evaluation's launch last week, building more roads is not always the right response to traffic congestion.

Sometimes the problems is that car usage - an inefficient way of carrying people in urban areas when compared to buses and light rail - is not sufficiently discouraged. Alter the relative price to the consumer of using the car in such areas, compared to a bus or taxi, and you may not need to build the road. Build the road regardless and you may just find more cars appearing to fill them.

ESRI economists John Fitzgerald and Edgar Morgenroth got to the root of most of these problems when delivering a comprehensive evaluation of the next NDP - the lack of personnel in Government departments with the expertise to evaluate, plan and manage large-scale infrastructure projects.

More than €70 billion in taxpayers' money will be spent over the course of the next NDP. Despite this and for the sake of an annual cost of a few hundred thousand euro, the past and forthcoming plans will remain deprived of the trained evaluators, economists and planners whose expertise could save hundreds of millions of euro.

Given these flaws, the ESRI recommends trimming planned spending across all areas with only one exception: it says that strong population growth will justify almost all of the €888 million the Government plans to spent annually on education although, noting the disconnect between these plans and areas listed in its own spatial strategy as centres of growth, it is pessimistic about the value the Government will get for its money.

Unsurprisingly, the largest cut in spending is recommended for transport, where the ESRI proposes a cut of €668 million. It also has major doubts about infrastructure spending on the environment and enterprise sectors, calling for cuts of €200 million in each area.

More than €150 million each is shaved off budgets for both health and housing and in excess of €100 million each off public administration and agriculture.

Referring to the €1 billion to be spent rehousing decentralised public servants, it suggests that scrapping this policy might justify putting some of that money back.

It doesn't take a degree in political economy to spot the fact that the areas in which the ESRI recommends cutbacks are those most strongly represented in the social partnership model. But the ESRI shies away from making that link.

Ever with its eye on the economic cycle, the ESRI is just as concerned with how the money is spread across time as across sectors. It calls on the Government to wait until the economy is less dominated by construction and less subject to inflation - possibly until 2010 - before ramping up spending.

But while strategic issues can wait, the ESRI is emphatic that technical problems must be dealt with now. Better management procedures and more skilled personnel can and should be availed of immediately. There are still two months - and one budget - left for the Government to put the next NDP on the right track.

As for the strategic direction of the NDP and its relationship with the spatial strategy, that may be a question better decided on the doorsteps next May.