The government has responded to the country’s critical infrastructure deficit in housing and other sectors by committing to increase public investment over the next few years but given the scale of our infrastructural shortcomings the planned increases will not be enough. Also, with the economy operating near full capacity there is a danger that new investment will not provide value for money.
In the summer of 2016 the government committed an additional €5.14 billion to its Capital Investment Plan 2016-2021. This is good news given the savage cuts in capital spending during the recession. These cuts were excessive and inflicted lasting damage on the economy and societal welfare.
It is worth reminding ourselves of the scale of collapse in public investment during the crisis. Between 2008 and 2013, exchequer funded investment fell from a historic high of €9 billion to €3.4 billion. This led to the cancellation of much needed infrastructure such as roads, school and university buildings, social housing and public transport facilities. Moreover, the five year period of annual reductions commenced at a time when the quality of Ireland’s infrastructure was still poor in international comparative terms despite record levels of investment during the boom years.
Now that public investment is set to increase again it is vital that that the best decisions are made about: (1) the appropriate level of public investment; (2) how that investment will be financed and funded; (3) how fiscal policy remains controlled and sustainable; and, (4) the institutional framework required to ensure that infrastructure spending provides the best economic and social returns.
In relation to the size of exchequer financed investment, the most recent announcement indicates that the government plans to spend €35.5 billion over the period 2016-2021. This is a vast improvement on the original plan to spend €27 billion announced in September 2015 but is it sufficient to meet current needs? Unfortunately not. Given the growth rates forecast for the economy over the next few years, it is generally agreed that public capital spending should be running at three per cent of GDP. But the government does not expect to meet a three per cent target until 2021. In fact, given the poor state of Ireland’s infrastructure, the case could be made for capital spending at a rate closer to 4 per cent.
Even if public investment hits the three percent target there is a danger that it will contribute to the economy overheating. As the economy is close to operating at full capacity there is a real danger that tender prices will increase and value for money will not be achieved. Increased capital spending will have to be balanced by reductions in other expenditures or increased taxes.
Of course the government is constrained by the need to maintain control over the public finances and to abide by the EU fiscal rules. But in relation to public capital spending these rules are inflexible and inappropriate in the Irish case. In that sense there is a strong case for introducing a so-called “Golden Rule” in the EU fiscal framework that would exclude capital expenditure from the computation of budget deficit requirements. The Taoiseach has publicly backed the case for a ‘Golden Rule’ and every effort should be made to gain support for its introduction at a European level.
On the question of financing and funding, Exchequer-financed investment can, of course, be supplemented by Public-Private Partnerships (PPPs) and investment by state-owned enterprises such as the ESB and CIE. These approaches to investment can provide vital public infrastructure and may be counted as ‘off-balance sheet’ thus making it easier to obey the EU fiscal rules.
Should the government seek to increase usage of the PPP model? The answer to this question should be informed by how PPP has performed in the past. In relative terms Ireland is one of the world’s leaders in PPP procurement. The PPP approach has delivered vital infrastructure such as motorways, schools and court facilities. However, the Irish (and international) experience with PPPs has been mixed and it is clear that PPP contracts must be carefully managed if they are to deliver on promises such as value for money and better quality of infrastructure assets. Given that Ireland has 17 years of experience with using PPP it is about time that a comprehensive review of PPPs was conducted. It is vital that decisions to expand the usage of PPP are based on sound evidence.
Given that Ireland has 17 years of experience with using PPP it is about time that a comprehensive review of PPPs was conducted. It is vital that decisions to expand the usage of PPP are based on sound evidence.
Whereas significantly increased public investment is critical if Ireland’s infrastructure needs are to be met it is important to note that there is even bigger potential in making infrastructure spending more effective. This would require effective governance of infrastructure policy. The McKinsey Global Institute identify the general scope for better governance in three key areas: (1) fact-based project selection; (2) streamlined delivery and (3) making the most of existing infrastructure spending. McKinsey estimates that improvement in these elements of governance can save almost 40
The McKinsey Global Institute identify the general scope for better governance in three key areas: (1) fact-based project selection; (2) streamlined delivery and (3) making the most of existing infrastructure spending. McKinsey estimates that improvement in these elements of governance can save almost 40 per cent of spending.
Another important element of the governance of infrastructure policy will be the planning period adopted by policy makers. It is therefore encouraging that the Irish government has announced a strategic ten-year plan for capital spending that will be underpinned by the National Planning Framework.
Long term planning, sound governance and locked-in spending plans that are part of sustainable fiscal policy (permitted within a reformed EU fiscal framework) are the building blocks upon which Ireland can develop effective infrastructure policy. The alternative is to muddle through and face crisis after crisis with potentially disastrous consequences for economy and society.
Professor Eoin Reeves is Head of the Department of Economics at University of Limerick which is hosting an International Conference on PPP on September 21st-22nd.
For further information, please contact:
Nicola Corless
Communications Officer
University of Limerick
061 234921 / 086 141 4640
Nicola.Corless@ul.ie
