Doing business in Ireland: Not quite the best small country for businesses

Picture: Sam Boal/Rollingnews.ie

Enda Kenny made big claims five years ago. Yet businesses, and particularly SMEs, are facing the same old problems, writes Peter O’Dwyer

In January 2011, Enda Kenny claimed Ireland could be the best small country in which to do business within five years.

The Fine Gael leader, then in opposition, set out his vision for an Ireland that by the centenary of the Easter Rising would see the country’s business environment change utterly and take its place among the world’s finest.

It was a trope we would hear time and again over the coming years.

However, with Mr Kenny’s self-imposed deadline now passed, has his vision become reality?

A quick look at the hard facts suggests not.

A host of leading European and international rankings place Ireland in the upper echelons of the most enterprising countries but not quite at the top table.

The World Economic Forum’s Global Competitiveness Ranking puts Ireland in 25th position, as does an information technology report by the same organisation.

The World Bank’s latest Doing Business report, which considers labour market regulation, countries’ tax regimes, and the ease of starting a business, among other factors, sees Ireland as the 17th best country globally.

As a financial centre, Dublin ranks 19th in one major ranking while the European Digital Forum Startup Nation Scorecard puts Ireland fourth.

All told, a solid if not exemplary performance.

Ask any business owner in the country to reel off such rankings and you’ll more than likely be met with blank faces and quizzical looks, however.

They’re far too busy worrying about cashflow, funding, hiring, paying suppliers, and, in too many cases, extremely slow internet connections — the nuts and bolts of what feeds into these rankings.

Doing business in Ireland: Not quite the best small country for businesses

“Despite all the assertions that Government has made, the banking situation for many SMEs is tortuous. In a nutshell, bank credit is hard to get and very expensive. Access to finance is still among the top three main concerns of SME owners, behind the uncertainty over Brexit and the cost of doing business,” says Isme chief executive Mark Fielding.

“Banks are still not lending to the level appropriate to an economy ‘in recovery’. The statistics from our own Central Bank, the ECB, and numerous economists demonstrate the dearth of appropriate credit.

“We must put an end to the fiction that bailed-out Irish banks are functioning properly. Despite assertions from the banking PR machine, access to credit is patchy and the application process is getting more tortuous with 21% of applications still pending at end of May 2016.”

Access to credit has been a long-time bugbear of firms, as has the cost of credit.

Despite recent improvements, firms continue to pay exorbitant interest rates in comparison with their European peers.

An Irish business taking out a loan of up to €250,000 will pay an average of 5.45% interest for the pleasure. Across the eurozone, the average is 2.89%

The same SME in France would face a rate of 2.19% while the average rate an Austrian equivalent would have to contend with is 2.29%.

The Strategic Banking Corporation of Ireland and Microfinance Ireland were established by the Government to increase flow of credit to businesses and have had some success but overall, Irish businesses tend to fork out more than their European neighbours.

Ibec senior economist Gerard Brady says: “Lending conditions have no doubt improved for Irish companies compared to previous years but we are still short of where we need to be. SMEs remain too reliant on bank financing and are paying interest rates over two percentage points higher than competitors in other EU countries.”

Put simply, it looks like a lot like gouging.

General business costs, too, are persistently high, according to both experts, with Mr Fielding succinctly describing the country’s price profile in his best weather forecaster impersonation as “high cost; rising slowly”.

“As the National Competitiveness Council has pointed out many times, Ireland still has a relatively high cost base for business. As we navigate through this unwelcome period of uncertainty, we must be vigilant on those costs,” says Mr Brady.

The uncertainty he refers to is, of course, the fallout from the UK’s decision to leave the EU and the consequent head scratching that has prevailed as we scramble to make sense of what it all means for Ireland.

Doing business in Ireland: Not quite the best small country for businesses

On the one hand, the UK has flagged its intention to compete aggressively with the sacred cow of Irish economics: Our 12.5% corporation tax rate.

On the other, leaving the EU should make the UK less attractive to foreign multinationals who may look to the Emerald Isle as their new home, to add to the multitude already based here.

SMEs are undoubtedly the backbone of the economy — accounting for 99% of all businesses and employing close to seven in ten workers — but for all the stick they take, those multinationals are pretty important to Ireland’s recovery too.

Most importantly, they bring jobs: 187,056 at last count.

“Following the outcome of the UK referendum on EU membership, maintaining and improving our competitiveness is now, more than ever, of critical importance. Once British-EU exit negotiations commence, it is essential that the interests of Ireland and our business community are protected and the importance of Ireland’s special trading relationship with the UK is reflected at the negotiating table,” says Mr Brady.

The question is, can we handle an influx of investment with a creaking national infrastructure after years of underinvestment?

For starters, where will we house all those new workers?

“There’s an aspect of the market there which really hasn’t been getting a lot of comment — certainly not politically — that there’s a requirement for rental space, particularly in large urban centres like Cork and Dublin with access to public transport which is a key requirement, particularly of larger businesses who are hiring people,” says Cork Chamber chief executive Conor Healy.

Conor Healy
Conor Healy

“[Foreign workers moving to Ireland with multinationals] are non-car owners, they’re dependent on public transport and they’re dependent on good quality rental accommodation. I suppose the traditional model of having houses developed and built in the suburbs with people renting rooms or renting houses has served the Cork market well for many, many years but the employment market in Cork has changed and we now have a different employment market.

“We now have a requirement for a different type of accommodation in Cork and while there are some plans in terms of apartment development in the city, the focus very much seems to be on suburban housing development and I think we need a mix of both.”

Investment in housing is a concern for Ibec economist Mr Brady too.

“Even with the welcome addition of expenditure flagged in the programme for government, the exchequer contribution to the new capital plan will be the smallest on record proportional to the size of the economy. The reality of the low level of public investment was laid bare in recent reports by both the European Commission and the Fiscal Advisory Council which showed the vast majority of public capital spending would be committed to maintenance and repair with little going to new builds.

“This is at a time when Ireland is facing into rapid demographic growth and overheating pressures in transport, education, water, broadband, health, and other public infrastructure which are affecting Ireland’s competitiveness. In previous crises the first budget item to go was capital [investment]. This simply cannot be repeated if the scope for future discretionary spending diminishes in the face of Brexit. Given the low carry costs of debt, strong nominal growth rates, a primary surplus, and considerable infrastructure gaps, investment can be achieved while reducing the deficit in the prudent manner.”

Mr Brady adds: “On the housing front, Ireland needs between 35,000 to 40,000 new homes each year to meet demand. Property Industry Ireland’s recent Property Watch report predicts a completion rate of only 11,000 new homes in 2016, of which around a third will be self-build houses which are not intended for the market. Housing is now among the top labour market issues employers are facing and is posing a serious challenge to our competitiveness. At a fundamental level we need to reform how we deliver social and affordable housing in Ireland.”

Doing business in Ireland: Not quite the best small country for businesses

Office space and rental costs are also a concern.

Prime Dublin office rents became 12% more expensive during 2015 and while there is a significant amount of new supply in the pipeline, rents are expected to continue to increase.

A recent Ibec report warned that the lack of grade-A office accommodation is a common thread across driving rents up in other urban markets too, most notably in Cork, where office rents rose 8% in the first quarter of the year.

Then there’s broadband; grindingly slow, business-killing rural broadband.

THE Government has a plan to address it — a plan that now stretches to 900,000 homes and businesses across the country — but for the time being, poor internet connectivity is a major issue for SMEs nationwide. As long as it persists the urban-rural divide will continue to widen.

There’s no doubt the country’s major cities will continue to be the main economic drivers but in the absence of basic 21st-century infrastructure, rural Ireland isn’t even being given a fighting chance to contribute a greater share.

Based near Ballyhaunis in the Taoiseach’s constituency of Mayo is one company swimming against the tide.

Poor internet connectivity means a fully-functioning website, cloud technology, and even a modern email system are beyond agricultural equipment manufacturer Cashels Engineering.

“Our IT infrastructure lags behind due to poor quality broadband infrastructure in the Aghamore/Ballyhaunis area. Where 10mbs is now considered a basic connection speed, our download speed is a mere 0.4mbps,” says production manager Simon Cunnane.

“The slow speed means that sending emails with attachments can literally take hours. Senior staff often take work home with them as it’s not possible to complete during normal hours. Market research is extremely difficult as internet browsing speeds are so slow.

“Cashels are not the only business with this problem. Agrispread and Major Equipment are also significant local employers in the area and suffer from similar problems. While work-around solutions may be found short-term, all three of us are in a similar positions.”

CashelsEngineering
Cashels Engineering

It’s an issue replicated across much of the country, according to Mr Fielding.

“On broadband, we are so far behind the rest of the world, especially in rural areas. An essential part of the future of business is broadband and our government have been so out of touch. We have so many rural businesses who cannot use their internet for commerce.”

If a society is best judged on how it treats its most elderly, perhaps the inverse is true of a country’s business environment.

The obstacles entrepreneurs have to contend with in establishing a business are instructive of a Government’s attitude to enterprise.

In the wake of the Brexit vote last month, Dublin Chamber called on the Government to “roll out the green carpet for entrepreneurs”.

“The UK has stolen a march on the UK in recent years by following through on David Cameron’s 2011 promise of rolling out the red carpet for entrepreneurs,” said Dublin Chamber director of international and public affairs Aebhric McGibney.

The comment was accompanied by an analysis which showed that in 10 of the main 12 tax rates, the UK held the whip hand over Ireland.

BuiltInCork founder DC Cahalane says Ireland tends to lavish attention on the youngest startups but neglect them as they grow older and seek to find their way in the big bad world of business.

“Ireland’s attitude towards entrepreneurship? I heard it recently described as a culture of handouts, not handups,” he says.

“The majority of state supports are designed to help those starting out, which is commendable and has in the past made Ireland a great place to start a business.

“But many of these advantages have now been superseded by far more attractive schemes in the UK with more and more startups moving aspects of their business to Northern Ireland and London. We just focus on a very narrow wedge of helping those getting started, there’s little or nothing for those trying to scale up.

“The problem in general is that little is being done to address making Ireland a great place to do business for start-ups… Issues like workable share ownership schemes for employees, tax incentives for early investors, which are getting harder and harder to attract would be far more meaningful [than corporation tax changes] and a far better incentive for businesses.

“The simple truth is that we just don’t incentivise employers in Ireland to hire more staff and especially in cash-strapped startups. The additional costs in terms of payroll, taxes, and regulatory compliance can just make [available talent] outside the league of many businesses just getting started.”

Share options, equal tax treatment for entrepreneurs, early and mid-stage funding, capital gains tax reform, a seed investment scheme — these are all issues raised every year in the run-up to budget day.

To be fair to the last Government, it took the first step along the road of levelling the playing field for entrepreneurs. Mr Kenny declared an end to the “discriminatory tax treatment for the self-employed and small businesses, starting in the next budget”.

A €550 tax credit was introduced for the self-employed and the entry point to the top rate 10.75% rate of employers PRSI was increased by €20 to €376 while capital gains tax on the disposal of business assets up to €1m was reduced to 20%.

Doing business in Ireland: Not quite the best small country for businesses

Much progress remains to be made but at least the wheels were put in motion.

As a country, we have a lot going for us.

Some of it is no doubt lip-service to gloss over the gleaming 12.5% corporation tax rate that attracts many to these shores but the many multinationals from Pfizer to Facebook and Apple to Airbnb like a lot more of what they see.

We have a well-educated, English-speaking workforce which, time and again, we hear has a work ethic unparalleled anywhere else.

We’re located at the gateway to Europe, have strong links with the US, a world-class FDI agency in the IDA, and a diverse range of exporters.

A lot of what Ireland has, the world wants.

Back in 2011 when the man who has now been Taoiseach for five years was currying favour on the campaign trail, he promised to get Ireland working again after the trauma the country had suffered.

Highlighting the scale of the hurt that had been endured after the collapse of the financial system, Mr Kenny turned to WB Yeats for inspiration.

“For too many of us, life has changed. Changed utterly,” he proclaimed.

Some may well argue the same can again be said of the country but five years on Mr Kenny’s goal of making Ireland the best small country in the world in which to do business remains elusive.

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