Treat calls for capital spending with caution

Infrastructure investment is a huge business.

Worldwide, there are estimates that upwards of a trillion dollars extra per annum are required in investment in water, power, sewerage etc.

Total global infrastructure needs are estimated to be of the order of $60 trillion over the next couple of decades.

The changing regulatory environment, combined with weaker banking systems, and the need to find attractive returns for pension funds are also combining to make financing of infrastructure more complex and involving more partners. Globally, infrastructure has been a good bet for investors. Infrastructure and related indices are consistent outperformers over equity and bonds.

So, what does all this have to do with Ireland?

Despite what we might think, and perhaps surprisingly, we have good infrastructure here. Every year, the global competitiveness report produces a survey of perceptions on infrastructure. We perform well. On a ranking of 1-7, where 7 is global leader, we score 5.2 — Switzerland, Hong Kong and Finland are at 6.6. Our overall infrastructure is seen as being approximately the same overall as that of Australia, the UK or the Baltics. It is not markedly worse, in perception, to infrastructure in Japan, Belgium, or the USA.

This “pretty good actually” evaluation is across the board: roads, ports, air traffic — are all at or around the overall average; rail is poorer, while we are world-class in electricity.

Thus, the calls for increased infrastructural spending which come about every year in the run-up to budget time, should be treated with the exact same degree of caution as calls from any other lobby group.

The arguments put forward for increased capital spending typically are usually one of following three; we need this thing; building this thing will generate X jobs or this thing is a good investment.

We might well cast a cynical eye on all these: While we may need a thing, the thing we need and the thing we get — are often far apart.

The phaoronic tendencies of planners and engineers need to be curtailed. Take roads, for example. We have a shiny new motorway, the M9. This has a capacity for 40,000 vehicles per day and is carrying 10,000.

The new Gort to Tuam motorway will carry even fewer — 8,000 per day.

We have continued investment in peripheral, but political rail routes despite, in some cases, only a few dozen passengers per day taking these. Not all capital spending makes sense.

Capital spending has two effects. One is a pure Keynesian effect — the money spent on building the thing. The other is an induced effect — how much more efficient or effective is the economy after the thing has been built. Note that even if these are negative, there may well be good social (but more usually political) reasons to go ahead with it. The problem we have is that while the first is easy enough to measure, the second is much harder.

It typically involves heroic assumptions about what people will do with the €20m saved on a road, or the increases in total factor productivity arising from a new power station etc. All too often we see cries for what are, in effect, subsidies. Again, these are not in and of themselves bad, if they are there for a social or other reason.

A recent IMF working paper casts a lot of doubt on the efficacy of public capital drives. These should not be confused with the regular “ticking along” of capital spending, but are instead the government-popularised rapid ramp-ups in spending on particular areas. A road that is not used is money that could be used for a slightly less fancy road that would be used (but perhaps not in a marginal constituency). We need less glamour and more pedantic capital spend.