KYRAN FITZGERALD: Investment needed, but at what cost?

New Taoiseach Leo Varadkar may be inheriting an Ireland that is back in the money, but the investment challenges facing him remain daunting, writes Kyran Fitzgerald

Heavy traffic on the M50/ N4 interchange. Picture Colin Keegan, Collins Dublin

Mere days in office, Leo Vardakar is already engaged in fire fighting. He may, this weekend, be reflecting ruefully on his government’s handling of the judicial appointment of long-serving Attorney General Máire Whelan.

But he needs, above all, to keep an eye on the bigger prize, for he has been elected to preside over a fundamental overhaul of governance and not to run around flapping frantically, like a walker who has just disturbed a nest of wasps.

What, then, is the biggest priority in economic management terms facing this new administration?

The answer to this question can be found on the traffic-clogged M-50 and in a field just offloaded by RTÉ at a figure close to one half greater than the guide price.

The root cause of our current traffic congestion and surging housing costs is in our recent history of spectacular public capital under-investment.

According to employer group Ibec, we have, in effect, been eating into our capital stock in recent years.

In London, last week, the tragic effects of neglect and short-term thinking, when it comes to the maintenance of housing stock, have been there for all to witness.

We can’t be sure that we will not be visited by a similar event. So, why have we — as a society — stood by as investment has been put off? The reasons for this are clear.

We have just gone through a long fiscal emergency, during which the emphasis was on the short-term, on simple survival. This goal has been achieved in large part. Our national debt is approaching world norms and all going to plan, the country will run a primary budget surplus of more than €12.5bn between now and 2021.

We may be back in the money, to a degree, but our ability to achieve our potential as a nation could be stymied without the necessary infrastructure to underpin recovery. Already, growth in the capital city is being held back by infrastructural deficits.

As ever, the politicians have given priority to current spending. Various insistent groups must be bought off. Many households are still struggling. The voters prioritise tax cuts and greater social transfers, not to mention spending on education and health, over projects that could take decades to yield a return.

Rigid European rules have not helped in this regard. In a recent submission to the mid-term review of the Government capital plan, Ibec has argued with force that the country must spend on public projects an additional €5bn a year over that already planned so as to reach an internationally acceptable level of 4% of GNP.

Remember that the Government, itself has, since completion of the 2015 capital plan, raised the planned spend from 1.6% to 2.5% of GNP.

Questions do have to be asked whether our construction sector is equipped to handle such a big increase in activity.

Already, we are experiencing shortages in skilled tradespeople while the sector has been left with a shortage of machinery following a huge firesale of equipment during the crash.

We need to train up people, encourage returned migration and attract people from overseas, some on short-term contracts. The concern is that such an upsurge in public investment activity could raise costs and displace badly-needed activity across the rest of the building trade.

Presiding over a successful ramping up in investment in physical infrastructure, following a long fallow period, is no easy matter.

Many of the managers active during previous phases of high activity will have retired or departed otherwise from the scene.

There will have occurred considerable loss of corporate memory and project management expertise. The concern is that we may be doomed to repeat some of the mistakes of the Celtic Tiger period, with damaging cost overruns and poor completion outcomes a real possibility.

Consideration has to be given to the financing of such activity. Historically low interest rates have shifted the calculus in the direction of investment.

As Ibec has pointed out, Brussels must be persuaded of the need to adopt a much more flexible approach to growth-promoting expenditure.

Mechanisms such as public-private finance and bond issues should be availed of, but only after careful consideration.

The involvement of overseas management expertise, financial and operational, in the capital expenditure ramping up may not simply be desirable, but also necessary.

The Government must not simply think in terms of bridges, roads, schools, hospitals and homes.

Last month, the ESRI published an interesting paper on the impact of investment in knowledge-based capital on productivity growth — produced by three academics, including Martina Lawless.

This form of investment is viewed as increasingly critical to the success of a modern economy and is on the rise. According to the authors, a 10% rise in investment in knowledge capital is associated with a 2% rise in productivity.

The effect on Irish firms is viewed as being higher still — with a boost of over 3.5% in prospect.

Gains in areas such as research and the development of intangible assets such as company brands are promised.

To secure this, the right human talent must be in place and its availability, in turn, depends on the availability of affordable accommodation and childcare, all of which requires the sort of investment already mentioned.

Leo Vardadkar’s statement on the day of his appointment had a practical ring about it, with echoes of his lauded predecessor Seán Lemass.

Fifty years on from that era, we could certainly do with a similar sort of ‘sleeves rolled-up’ approach at the heart of Government.


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