Ibec’s infrastructure ambitions

Michael McKernan reviews the business group’s proposals on boosting capital projects in order to meet a growing economy’s needs.

Between 2008 and 2013, public expenditure in Ireland was cut back sharply as the Government set out to reduce Ireland’s yawning budget deficit and bring the public finances back under control. As a result, total voted Government expenditure fell by 12.5 per cent over that time, but within that overall figure capital expenditure was cut back the most. In fact as projects were reviewed, questioned, dropped, and put on the back burner, voted capital investment fell by some 60 per cent between 2008 and 2013 or from over 5 per cent of Ireland’s GDP to less than 2 per cent.

The Government’s current plans for capital investment are set out in the Public Capital Programme (PCP) which covers the period 2012 to 2016. This shows committed capital spending levelling off at around €3.3 billion in 2014, 2015 and 2016 but still falling as a percentage of GDP, to just 1.7 per cent by 2016.

With growing signs of economic recovery, rising GDP, rapid jobs creation and buoyant exports, Ibec has recently produced a report making the case for increasing infrastructural investment. ‘Infrastructure 2020: Building beyond the bailout’ essentially argues that given that there is now a clear growth dynamic in the Irish economy, the Government must revisit its capital spending plans and raise the level of ambition and commitment on infrastructure now, if it is to sustain recovery and growth in the medium term.

Spending more

Ibec’s starting point is that Ireland needs to spend substantially more on infrastructure. The current level of planned public investment is little more than what will maintain the existing capital stock and there is the danger that the opportunity to tackle existing and future bottlenecks in a planned way – avoiding hugely expensive solutions further down the road – could be lost.

Although it is understandable that major cuts were required to balance the public finances, Ibec argues that Ireland cannot meet the future demands of changing demographics and maintaining its economic competitiveness if it does not invest more from now. The rapidly rising Irish school population is instanced as a good example of where demographic change dictates that more investment is needed now. Education, and ultimately the economy, will suffer if much needed new schools do not get built.

In terms of economic competitiveness, Ibec cites the fact that Ireland has slipped way down the international league of infrastructure competitiveness. Ireland now registers 35th in the world in the World Economic Forum’s assessment of infrastructure quality and 22nd out of 34 OECD member countries. In spending terms, Ireland has slipped from being the 4th highest infrastructure investor in the EU-26 in 2008, to 21st place in 2013. It is clear that continued underinvestment will ultimately cost Ireland competitiveness, as leading countries move further ahead while others catch up and overtake.

Ibec therefore recommends setting a target for overall infrastructural investment of 4 per cent of GDP. This is lower than the pre-collapse level of 2008 but more than double the current level of spend.

Better planning

‘Building beyond the bailout’ not only says spend more, but also calls on the Government to spend smarter. There is a recommendation that the Government develops a new medium- term infrastructure plan to 2020 and constructs a much more robust project evaluation and prioritisation methodology.

Ibec’s contention is that project evaluation has not been done as rigorously and consistently in the past as it could have been and often projects have been assessed in isolation without taking account of other related investment proposals which may have a significant impact. There has also been a lack of co-ordination across departments and other public bodies in relation to capital requirements.

For this reason, Ibec also argues for a new co-ordinated national spatial strategy to inform the 2020 investment plan. It should replace the existing 2002-2020 document which has substantially “failed” because of a focus on too many gateway cities and hubs. Most importantly, Ibec recommends that the whole area of infrastructure, in its entirety, should become the remit of one existing government Minister who would have responsibility for co-ordination and delivery. This Minister would be a designated government “champion” for infrastructure.

In addition to focusing on a new project prioritisation methodology, the Ibec report offers some of its own suggested priorities. A focus on projects should start with the imperatives of meeting population growth, eliminating existing bottlenecks and supporting exports. However, it should also take account of the short-term benefits such as employment creation (particularly in the construction sector where unemployment is very high) and the extent to which the project is “ready to go”. Priorities should include the unfinished parts of networks and networked projects, particularly where this would prevent obsolescence of infrastructure projects already completed. Ibec also highlights specific projects related to supply chain competitiveness as worthy priorities including additional runway capacity at Dublin airport and upgraded road access to ports (particularly Rosslare and Cork) as well as electricity and gas system infrastructure.

The report also calls for better and more streamlined project administration and delivery. Unnecessary and avoidable delays in the procurement process and in the management of planning permission and other consents should be tackled aggressively. Such delays added costs and damaged Ireland’s reputation. The Government should also establish a transparent ‘pipeline’ of projects, indicating firm timetables for initiation and delivery. This would enable potential investors, contractors and suppliers to plan more easily – which would ultimately result in better value.

Paying for it

The Ibec report’s central recommendation of raising public infrastructure investment to 4 per cent of GDP implies an additional annual spend of around €3.5 billion per annum. However, Ibec recognises that the Government cannot be expected to deliver a doubling of investment on its own and points to greater use of the “key delivery mechanism” of public private partnerships (PPPs) which it argues has already been successful in Ireland. This approach would draw in substantial private sector finance in the short term and spread the costs to the Exchequer, manageably, over the longer term.

The report also calls on the Government to maximise drawdown from the European Investment Bank (EIB) and from EU programmes generally, including some which have not been prioritised before. Ibec also recognises the commitment the Government has made in setting up the Ireland Strategic Infrastructure Investment Fund (ISIF) which makes up to €6.4 billion available (from the National Pension Reserve Fund) to support commercial investment in the economy and recommends pursuing other international pension funds and institutions which are investing long-term in infrastructure. The Government should be open to considering new innovative financing options and should continue with the sale of State assets, using the proceeds for investment.

Overall, ‘Building beyond the bailout’ offers a comprehensive and useful list of recommendations to improve infrastructural investment in Ireland. Although much of the analysis is already well understood in government circles, the report serves as a timely reminder that capital investment has borne the brunt of government expenditure cuts and should now become the priority as the economy emerges from recession.