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Delivering the infrastructure Ireland needs

Jul 20, 2017
The stop start nature of infrastructural development has been a feature of the economy since the foundation of the state. Resistance to well-structured and thought out capital planning is counterintuitive and only serves to slow down future economic growth, explains Michele Connolly.

After several years of recession, we have entered a period of sustained but fragile growth. However, with fiscal policy mainly focused on current spending, there is a need to promote the benefits of a more planned approach to infrastructural development. The extent of the challenge is heightened by the fact that, while we perform well in many global indices, it's infrastructure that often lets us down.

The most recent edition of the IMD Global Competitiveness Report ranked Ireland 23rd out of 138 countries. However, an inadequate supply of infrastructure was identified by respondents as a problematic factor in doing business in Ireland. One of the most obvious challenges has been the fact that the economic cycle and infrastructural investment appear to be almost counter cyclical. Following a peak of 5.2 % of GDP in 2008, public investment collapsed to a low of 1.8 % of GDP in 2013 before slightly recovering to 1.9% in 2014 and it remains well below the EU average.

The benefits to be gained from refining our approach are significant. It stands to reason that there is a better way to deliver large scale infrastructure that is not dependant on fiscal, economic and electoral cycles. It’s not just business that suffers when there is a lack of planning or investment in infrastructure. Our economic recovery has been overshadowed to a large extent by significant issues in areas such as housing and health. However these issues did not arise overnight and gaps in our infrastructural development are obvious. 

Capacity planning and funding

To avoid repeating the mistakes of the past, we need to be far more rigorous in our approach to planning for future infrastructure needs, and when funds become available, we need a suite of prioritised projects that can move to construction immediately.

In determining where we should prioritise our spend, we need to develop the concept of long-term strategic planning on a cross-sectoral basis as distinct from the current funding envelope allocated by Government departments. This would require us to succinctly define and understand the problems the Government is trying to solve and the suite of solutions available. The scale of these projects and the need to get it right also requires us to prioritise projects that will deliver measurable social and economic benefits. Demographic assessment, growth in student numbers, an ageing population, pressure on water quality and supply, and increasing congestion are all examples of predictable challenges. There is also the housing crisis, which has developed due to years of inaction and lack of proper planning. Such an approach to planning could, for example, focus on addressing current and future bottlenecks, assessing the economic benefits, ensuring a positive impact on equality and social inclusion and being consistent with the achievement of climate and energy goals.

Meanwhile, there are funding solutions that can help mitigate against challenges to short-term spending constraints. Low cost funding that does not count as part of Government debt is available. What we are missing is a scaled-up programme of projects ready to spend it on. Recent changes announced last week are still just a drop in the ocean compared to we need to do and could achieve.

In addition to central Government funding, the European Investment Bank (EIB), private investors and pension funds are all potential sources of funding that can be accessed without adding significant risk to the Exchequer. Despite these options, resistance to using private capital remains. This is typically on the premise that the government can borrow cheaper themselves. That is technically correct (although it does ignore all the benefits of transferring risk to the private sector). So, why isn’t Government doing this if we so badly need infrastructure investment to protect and enhance our competitiveness? Because we are currently choosing to pay off our debt burden rather than investing in capital for our future. However, Conor Kelly, CEO of the NTMA, recently commented that investors in Ireland’s debt burden are ambivalent on whether we pay down debt or invest in infrastructure. The critical point is we can do both.

Technology

Technology also has a role where it can be embedded in current infrastructure and/or manage a suite of infrastructure assets to drive efficiency. It also means introducing greater competition to the delivery of public services to increase performance and drive efficiencies.

Limitations

I do recognise that there are limitations on how fast and how much new infrastructure we can build but we are a long way from that being a problem at present. I do believe Government should be balancing its attention between building new infrastructure and driving efficiency across all aspects of the infrastructure life-cycle to drive incremental and valuable improvements.

Governments increasingly recognise that they can’t increase national productivity without improving infrastructure. The only way to do this is to think strategically now to plan for the long-term, prioritise projects and open the mindset to all available funding options – whether additional government investment or private sector funding.

Michele Connolly is Head of Corporate Finance at KPMG