Tom Parlon: We must spend on infrastructure now

Extra funding for strategic investment is welcome - but we cannot delay using it

Minister for Finance Paschal Donohoe. Photograph: Brenda Fitzsimons

Minister for Finance Paschal Donohoe. Photograph: Brenda Fitzsimons

 

Minister for Finance Paschal Donohoe’s announcement of a significant increase in public capital expenditure is to be welcomed. This critical funding, however, must be insulated and protected from the phenomenon of “IMBYism” (In My Backyard) as it will significantly reduce its transformative potential for the Irish economy and society.

But first to the positive. After a decade of underinvestment, we are beginning, but only beginning, to aim to bring investment up to the EU average. We’re currently last in the EU27 for this sort of investment.

Unfortunately, our success rate at strategically investing in infrastructure has not been good – dust off your copy of the National Spatial Strategy and you will see a sound plan rendered obsolete by the vagaries of our political system.

Selected projects have often not undergone serious cost-benefit analysis

The very real risk is that the additional €500 million announced to be delivered from 2019 to 2021 may never translate into the critical road, rail, broadband, water and social (housing, hospitals, schools, etc) required to sustain our rapidly growing economy.

To offset this risk, the Government should consider establishing a national infrastructure commission, similar in set-up to the Irish Fiscal Advisory Council, whose role would be to advise on strategic infrastructure.

Currently, investment is allocated through an opaque trade-off of “wish lists” from Government departments and special interest groups around the country.

Selected projects have often not undergone serious cost-benefit analysis. How they combine or interact is never analysed.

To protect investment, a national infrastructure target could be put in place along with a special delivery unit to address bottlenecks and blockages in the system.

Optimal outcome

This approach has been used in the UK and Australia to ensure that the optimal social, environmental, and economic good is derived from infrastructure investment.

In Australia, states and cities can submit holistic infrastructure proposals (think of Cork and Limerick submitting a regional development plan) that have undergone full cost-benefit analysis and economic modelling to secure national funding.

This approach is critical to get real value, because when you peel back the layers of the Public Capital Programme only about 60 per cent of the direct government expenditure is focused on construction-related infrastructure such as roads and hospitals.

Analysis by the Construction Industry Federation shows that in the mid-term review of the programme, of the estimated additional €5.14 billion, €2.2 billion was allocated to housing.

Of the remaining balance, only €1.15 billion could be spent on productive and social infrastructure. The remainder was spent on depreciation of existing assets.

Up until Wednesday’s announcement, we found there was only €350 million a year up to 2021 for new, essential infrastructure projects. So, you can have Metro North or the M20 but you can’t have both.

Donohoe needs to ensure a higher proportion of the investment announced is spent on productive infrastructure rather than grants, equipment and “other miscellaneous” as it is described.

The fiscal space was the backdrop of Wednesday’s statements. Many commentators are suggesting that we should seek a relaxation from the EU on fiscal constraints due to our infrastructure deficit, particularly in the face of Brexit. These arguments are fundamentally undermined because our current to capital expenditure ratio is about 10:1 – in other words, we spend 10 times as much on day-to-day spending as we do on investment.

However, the Government could still apply for additional fiscal space under the structural reform clause other countries, such as Lithuania, have.

Housing and broadband

While a commitment to increase infrastructure investment is welcome, waiting until 2019 to increase funding makes little sense. If it is a good idea to invest in 2019 to improve the economy and address the housing issue, lack of broadband and creaking road and rail infrastructure, why not start today?

Each €1 billion invested in infrastructure in 2019 will yield less return for the economy than if it was invested today in 2017, due to depreciation and tender price increases in the interim.

Ireland spends the least on infrastructure among all EU countries as a percentage of GDP

Waiting until 2019 to invest in a major road project such as the M20 will mean that we won’t see that road completed until nearly 2030. We cannot solve the housing crisis without also addressing our infrastructure deficit.

In addition, there are immediate actions that can be taken, particularly with respect to transport projects, to accelerate these ventures in advance of 2019’s injection of investment.

There are also examples of projects that could be delivered more speedily either directly with exchequer funding or through public-private partnership arrangements.

Why wait to invest when independent analysis estimates every billion euro invested in infrastructure, yields about 12,000 construction jobs, and generates about €1 billion in the domestic economy. That’s before the improved connectivity, quality of life and attractiveness to foreign direct investment is calculated.

Ireland spends the least on infrastructure among all EU countries, as a percentage of gross domestic product (GDP), at 1.7 per cent in 2015.

The average rate was 2.7 per cent for the euro zone and 2.9 per cent for the EU27. Ireland needs to spend 4 per cent of GDP for a sustained period to catch up and prepare adequately for the future.

Tom Parlon is director general of the Construction Industry Federation

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