We are on road to ruin unless we increase infrastructure investment without delay
Ireland is going to change dramatically over the next 10 to 15 years and we are not preparing for it properly. I am not talking about Brexit or the future of the single currency. Neither am I talking about the impact Donald Trump’s US presidency might have on corporations and how they are taxed.
The radical change will be about people – how many of them live here; what their age profile will be; how they will get to work and where they might go if they need hospital treatment.
Having negotiated the pain of the crash and come out the far side, as a country, we are not investing nearly enough in our infrastructure to provide for the needs of our people into the future.
This isn’t just about quality of life stuff because money spent on social and productive infrastructure is really an investment in our own futures.
Based on annual growth rates, in 10 years from now the population of Dublin is expected to increase by about 150,000. That is an increase equal to nearly two Galway cities in just a decade.
A demographic model produced by DKM economic consultants concluded that by 2026 we will have 1.1 million people over the age of 60, that is almost a quarter of a million more than we have in that age bracket today.
One health insurance executive believes Ireland will need three new Beaumont-sized hospitals in the next 10 years to cope with our ageing population.
Infrastructure is a rather bland word but it is the roads, trains and buses we might take to work. It is the school we might send our children to. It is the hospital we might go to when we are ill. It is the number of houses we all have to live in. It is also the hidden pipes that bring us clean water and remove sewage cleanly and effectively.
There is social infrastructure and productive infrastructure. Both of which are ultimately forms of investment from which our society and economy get a return. The Government is fielding demands for increases in current expenditure, especially public sector wage demands, and for tax cuts from a squeezed middle in particular. They may have a case but it is easy to forget about what is happening, or not happening, in relation to infrastructure. There are few election votes in capital spending but everyone is affected when the result of underfunding in this area begins to bite.
Everybody from the European Commission to the Irish Fiscal Advisory Council, the National Competitiveness and the Construction Industry Federation have warned about the problems.
The average annual spend on public capital investment was 3.7pc of GNP between 1995 and 2015. The projected levels for 2016-2021 are 2.1pc. Capital spending has been increasing as the government has had some money to spend but the rates are worryingly low. The total exchequer capital provision was 1.9pc of GNP in 2016 and it is projected to rise to 2pc in 2017. It is projected to rise further to 2.4pc by 2019 but this is compared to 5.6pc in 2008.
Perhaps in the heady days of the boom we were still playing catch-up on infrastructure and maybe we were spending too much without adequate value-for-money mechanisms in place. But given that our population is growing, ageing and we will have more people working by 2019 than we had in 2008, we have to plan for the future.
Take roads, for example. In our Capital Plan 2016-2021 there is €6bn allocated for roads but €4.4bn of that will cover depreciation costs. So 73pc of it is effectively running to stand still.
The Fiscal Advisory Council pointed out that of the total infrastructure investment of €42bn in the capital plan, this is “barely adequate to cover the estimated cost of depreciation of public capital based on historic depreciation rates”. The public capital stock will fall as a percentage of GNP over the medium term.
So at a time of GDP growth and population growth, we will be running to stand still or actually going backwards in relative terms when it comes to our infrastructure.
The Construction Industry Federation (CIF) pointed to the worryingly low replacement rate of stock, in a recent submission to the Oireachtas Budget Oversight Committee. Michael Nolan of Transport Infrastructure Ireland, which looks after the road network, told a Joint Committee on Transport, Tourism & Sport before Christmas, that the current level of investment in road pavement renewal was “less than a third of that required to sustain the pavement condition in the long term”.
“We should be replacing about 400km of road pavement annually but we are not”, he said. He added that of the current pipeline of minor road improvements, which make our roads safer, the current construction programme of road realignments will end shortly.
“While there are 50 other such schemes at various stages of planning, none of these schemes can proceed to construction in the short term.”
Despite the publicity around how a Cork-to-Limerick motorway was now a “political priority”, the reality is more complicated. Planning approval for a major road project can take five years. Add another few years for construction and nobody will be driving this “priority” motorway for at least eight years.
Housing is a massive capital infrastructure problem that is understandably taking up a lot of political and financial attention. But other vital infrastructural investment commitments are dropping off the radar in the public clamour for higher wages, tax cuts and greater current expenditure.
The Government has stood over a relatively-active school building programme despite fiscal constraints. Yet as the CIF pointed out in its submission, of the €704m total capital expenditure in education in 2016, just €32m was allocated for higher education, excluding public private partnerships.
In health, the assistant national director of capital and property in the HSE stated that over the next 10 years, the sector would need a total investment of €9bn to implement policy and replace outdated facilities.
The CIF pointed out that construction projects in the capital plan see investment of €2.3bn to 2021. Even a further €2.5bn over the following five years would still see a shortfall of €4.2bn.
This isn’t just about quality-of-life issues, it is also about competitiveness and jobs. The World Economic Forum Opinion Survey last year looked at the most problematic factors for doing business in Ireland. Tax rates were cited by 16pc, while access to finance was cited by 16pc also. But inadequate supply of infrastructure was the most problematic for 26pc of respondents.
The Tom Tom Traffic Index, which measures congestion, found last year that among cities with a population of 800,000 or less across the world, Dublin ranked third.
There are very real obstacles to investing more money in vital infrastructure. One is the European Commission. Its fiscal rules do not differentiate between current spending and infrastructural investment when budget deficits are run up.
The EC is taking a view that based on unemployment trends over the last decade, Ireland is close to full employment. Our unemployment rate has fallen to below 7pc but traditionally 4pc unemployment was seen as full employment in Ireland.
The method used does not take into account the extraordinary circumstances of the crash and temporary high unemployment rates. It means the Commission is concerned about overheating. This restricts our ability to borrow for infrastructure, despite low interest rates and the longer term economic benefits of doing so.
The CIF called on the Oireachtas committee to encourage the Government to draw attention to what it sees as flaws in the methodology. It cited countries such as Italy, Lithuania and Finland which have applied for temporary deviations from the rules on the basis of conducting structural reforms.
We may not be in a position to borrow exorbitant amounts of new debt. However, we are stirring up enormous problems for the not-so-distant future.
Article Source: http://tinyurl.com/kbwqb42