Governmental Failures in Infrastructural Investment

Irish economists broadly agree that a slowdown in the Irish economy is inevitable, the big question is when? Nothing imminent but over the next few years seems to be the consensus, the slowdown could be gradual or a marked slowdown such as a shock event.

I don’t want to seem overly pessimistic; a number of multinational IT and fund management companies continue to see Ireland as a hub for their European operations and have invested accordingly. To add to this positivity, the construction industry being led by the commercial sector is continuing to expand, albeit at a slower pace, due to expenditure on Foreign Direct Investment projects and by renewed activity in the commercial office sector due to rising rental levels. The residential sector is catching up, the required volume of 36,000 units per annum are far from being met with around 20,000 units to be completed in 2019, there is still massive scope for growth. The benefit of increased levels of supply is the easing of house price inflation which is slowing to a more sustainable pace. The missing piece of the jigsaw is investment in infrastructure, there is huge scope for civil engineering projects which is currently posting the weakest activity of all construction sectors. If a slowdown or even a recession were to occur then it is obvious that investment in infrastructure is required to support Ireland’s growth and this lies firmly on the shoulders of the Government.

The title of this article is ‘Governmental Failures in Infrastructural Investment’. I am not just including our own government in this disparaging title I am including Europe and in particular Germany who hold the purse strings. The eurozone budget sanctioned by Berlin under pressure from Paris is so small as to be invisible. Germany has more to lose than any other country and as it continues to obfuscate its responsibilities it will be hard to see growth in the EU within the short to medium term. There is huge scope for massive infrastructural investment in Germany and Europe that would have massive positive impact for all European countries including Ireland.

The Irish Government on the other hand is completely in control of its own investment decisions and is at fault when it comes to the lack of investment in infrastructure in Ireland. To support Ireland’s, not just Dublin’s, long-term growth lies firmly on the shoulders of this Government.

The National Planning Framework 2040 with a potential spend of €116bn should put some certainty back into the construction and the civil engineering market for the long-term but it won’t due to the boom and bust cyclical nature of our governmental policies which are clearly outlined in this wish list, it’s certainly not a defined plan that would give me long-term comfort.

To put this into context, the Department of Transport’s total budget for 2019 is €2.36bn is made up of €755m in current spending and €1.61bn for investing in infrastructure on the roads network. The level of spend for new projects is completely inadequate, as Tom Parlon said at the National Construction Summit 2017, “a lack of State spending on infrastructure could make a prolonged recession more likely in the future.”

This point was further highlighted in an article on 1 October 2019 in which David McWilliams quite rightly points out: “Every country needs an infrastructure plan dictated by demographic realities and national vision – rather than by the ebb and flow of the business cycle. After all, this is what long-term interest rates are for; they enable a state to borrow for up to 30 years, ironing out cyclical economic blips and peaks.

Public infrastructure building should pre-empt demand, not catch up with it. Remember when Dublin’s Terminal 2 was built during the recession. People criticised it for being empty, overblown and far too big for the temporarily diminished traffic. Ten years later it is bursting at the seams.”

From a governmental point of view investment in infrastructure has a high rate of return, IBEC estimate that all road improvements carried out between 2006 – 2010 lead to an annual beneficial contribution in GDP of €525m and in present value terms over a 30-year period this would equate to €9.5bn.

If the Government were to address many of the road projects listed in the 2040 National Planning Framework, then not only would that alleviate congestion but it would encourage investment in other regions and give the State a decent return on that investment over a ten to twenty-year period.

Infrastructure lasts lifetimes and while interest rates on government borrowing are at an all-time low it seems like a no brainer to make a decision to invest in Ireland’s future now not continuously kick the can down the road as successive governments have done.

Article prepared by: Colm McGrath, MD, Surety Bonds.

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