Speech by Construction Industry Federation (CIF) Director General Tom Parlon at
The Sunday Business Post National Infrastructure Summit, April 5th,
Aviva Stadium, Dublin, 2pm
Thank you for the opportunity to talk to you today to discuss what is now becoming a national crisis.
Last week, there was a lot of déjà vu going around. We had several warnings that the economy is beginning to overheat. That we were experiencing a new property bubble and that the rate of house-price increases were back to Celtic tiger levels.
A taxi driver, who I have great time for, summed it up like this; the Celtic phoenix had risen from the flames and was now flying too close to the sun.
In the past, you might expect me to minimise these warnings, deride the economists and tell a positive story.
However, we’ve been through too much over the past decade to do that.
The truth is that the industry welcomes these warnings.
To us, they are the signs of a healthy early warning system for prudent and sustained economic growth.
The system is working.
The ESRI, the Central Bank, the Irish Fiscal Advisory Council, the EU Commission, the European Central Bank, and many others including the budgetary oversight committee are all circling the property sector keeping a watchful eye on property and its potential impact on the wider economy.
So, when you see house-prices going up and unemployment falling, you would expect the system to notice and comment.
All I would say at this point about our approach to the construction industry and house prices is that in trying to avoid the mistakes of the past, we must also try to avoid the mistakes of the future!
Our current system is fixated on the previous housing market to such an extent that we have missed two significant threats and inter-related threats to the Irish economy: Regional imbalances and a prolonged lack of infrastructural investment.
They say that generals always fight the last war and that’s what we’re doing here in Ireland.
So, my first major point is this. We must remain vigilant about the housing market of course.
CIF members are working within the Government’s Rebuilding Ireland strategy and finance is strictly controlled with the ECB and the Central Bank ensuring our domestic banks are not involved in speculative development.
But we should be fighting a different war now. We should be concerned about the fact that Galway has only built one estate over 10 houses in the last 7 years and that delivering 3,000 homes in Cherrywood has taken a decade. And that apartment building continues to be unviable everywhere except in a few codes in Dublin.
The last war was housing. The war we’re in now is around infrastructure.
I genuinely believe that the chronic lack of investment in infrastructure has the potential to damage the economy more in the long-term than the previous property crash.
I don’t say that lightly. In preparing for an appearance for the Budgetary Oversight Committee I noticed an interesting statement delivered by my friends in ICTU. They said the seeds of our current recovery were sown in the early 2000s when we invested heavily in productive infrastructure.
Consider that for a moment.
A full decade for the impact of the investment in roads, rail, air, schools, and hospitals to filter through the economy and provide the basis for our current recovery.
In the early 2000s, successive Governments maintained a long-term average investment in infrastructure at around 5% of GDP. It was considered a ‘golden rule’ of economic development.
Now consider this, during the recession from 2007 onwards, successive governments have allowed to infrastructure investment drop below 2%.
A decade of underinvestment in infrastructure is about to hit like a storm surge at a time when our population has grown by 30% in one generation and our economy is the fastest growing in the EU.
Our civil engineering side will tell you that a new road from funding allocation, through planning and procurement, to the inevitable photo-op with the Minister for Transport at the time takes on average 13 years.
Unlike housing, there’s no fast-tracking infrastructure I’m afraid. Unlike housing, we can’t ignore the problem until there is a sufficient crisis to sting the political system into action. If tomorrow, the Government gave the go ahead to the Cork/Limerick M20, a piece of road that would create an economic corridor to counter-balance Dublin, and save many lives lost in road accidents, it would be 5 years at least before construction could begin due to planning and procurement.
Even if we fast-track these processes, the construction will take and will always take about 5 years. What is the opportunity cost of delaying this critical infrastructure over that period in terms of lost economic activity but also in terms of FDI lost, hours spent commuting, accidents and lost connectivity?
Every year that this road and others like it are not built further increases our overall economy’s dependence on Dublin.
And think about this: what will be the cost of not having this infrastructure in place when the next inevitable downturn in the economic cycle arrives.
The lesson from the last recession should be that long-term investment in infrastructure provides the basis for recovery.
If we have a recession within the next decade, it will have been nearly 20 years since we adequately invested in infrastructure. To paraphrase the Chinese proverb ‘what’s the best time to build a road? Answer: Twenty years ago, the next best time is today.
So, I’m hear with a clear warning today, the historic lack of investment in infrastructure today is making a prolonged recession in our future more likely.
The facts are stark. Ireland is last in terms of the EU28 in terms of GDP invested in infrastructure. Today, we are investing only 2% of GDP. The importance of productive infrastructure investment in economic growth is well-established within Irish political culture and until recently in our civil service structures but more on that later.
In the late 1950s, our greatest statesman, TK Whitaker, adopted an economic formula for success by firstly, opening our economy to foreign investment and then shifting capital expenditure towards productive infrastructure. The success of his document ‘Economic Development’ laid the foundations of the modern Irish economy and was based on significant investment in roads, rail, and telecommunications.
We were still following this formula up to 2006 or so. The recession unsurprisingly saw investment drop, but Ireland is strongly recovering and there is cheap finance available from the EU through the Junker Funds. Did we forget the Whitaker formula somewhere along the way?
The answer is no.
Unfortunately, we are prevented from increasing investment in this area by the EU’s fiscal constraints. It’s morally reprehensible that the EU is dangling funding in front of us through quantitative easing on one hand and preventing us from accessing it with the fiscal space, especially considering Ireland was more than a model citizen during the EU’s banking crisis.
Through quantitative easing and the establishment of Juncker Funds the EU have established what the NTMA when they appeared before this committee called ‘a supportive backdrop for our borrowing activity. In short, the State is now borrowing at lower rates, for longer durations and from a wider investor base than was previously the case.’
With this sort of funding available, including a 100-year bond!, the Government must pull up trees to have the EU relax the constraints of the fiscal space that is suffocating infrastructural investment.
Are we being model citizens again by accepting the EU’s constraints on this critical investment? What I understand of the calculation of the fiscal space is based on a look back at Ireland’s unemployment rate over the past decade.
Unfortunately, due to the recession our average unemployment rate is quite high at around 7%. As our economy recovers, and unemployment has dropped below this arbitrary level, the EU considers us as overheating. As a result, they place significant limits to our ability to invest.
Most economists agree, no mean feat, that total employment in Ireland is 4.5%. Surely, our Government can make the case that a more realistic view of the Irish economy is used to assess our economy, particularly in the face of exceptional threats such as Brexit estimated by the
ESRI to have the potential to wipe 4% off GDP over the next 10 years.
However, I suspect we would have to demonstrate that this additional space would be invested in infrastructure.
Our track record is not good as our current expenditure far outweighs our capital expenditure by a factor of almost 10 currently. Other countries have adopted ‘golden rule’ legislation to link current income and expenditure allowing more space for investment in productive infrastructure.
There is a consensus across Ireland, at EU level and international level that Irish infrastructure is grossly inadequate:
- The Taoiseach has stated that infrastructure investment is critical
- ICTU, IBEC, Chambers, ESRI, National Competitiveness Council, Engineers Ireland, Irish Fiscal Advisory Council
- A number of CEOs of FDI companies such as Google, Apple and Paypal
- The EU Commission’s recent country report identified as a threat to medium-term growth
- IMD and WEF Global Competitiveness Surveys rank Ireland poorly for infrastructure
Even more worryingly, our analysis shows that nearly half of that additional money identified in the review of the Public Capital Review is allocated to the delivery of housing.
Of the remaining half, 40% of this will be devoted to maintenance and dealing with depreciation – not new projects.
I understand from our civil engineering side that tender prices are relatively low at the moment as the sector is still pricing very competitively. Now is the cheapest time for significant investment during this economic cycle.
We understand that more fiscal space may become available in 2018 if Ireland meets its medium-term growth target. However, waiting until 2018, and indeed any additional monies allocated in the Public Capital Review in 2017, means significant projects are unlikely to start until 2020 or 2021.
The opportunity cost to the Irish economy in this five-year period is incalculable.
I am convinced that the Irish government could do more to increase the fiscal space. The Department of Public Expenditure is in an unenviable position – they are tasked with reducing government expenditure or increasing taxes to facilitate more expenditure. Politically, the ROI on investing in a road that will take 10 years to build is negligible.
In this scenario, investment in productive, connective, transformative infrastructure becomes public expenditure. They also have not been served well by Eurostat in the past who have classified spending as off balance sheet only to retrospectively calculate it within the fiscal space. They also face significant pressure to allocate available funding to current expenditure particularly in wage restoration.
Simply put, people have suffered from the recession, some wage increases are inevitable. But they shouldn’t have to trade personal wealth with public squalor ie poor infrastructure and reduced economic growth over the next 20 years.
The EU must be convinced of Ireland’s case to enable increased investment by our politicians. I think it would be a tremendous legacy for our current Taoiseach to achieve a relaxation of the fiscal space at this time.
What’s very frustrating is that there are several tools we could use relatively easily to increase investment even without a relaxation of the fiscal space.
Firstly, both industry and Government could work more closely to access EIB and EFSI funding. Our track record of drawdown of these funds isn’t very strong and we welcome the opening of an EIB office in Dublin.
The review of PPP usage in Ireland currently underway is to be welcomed and these should be used strategically to help address bottlenecks in the short-term.
From a cost perspective, the Government can by upgrading the public procurement processes deliver cost savings and value for money for the state along with industry.
The introduction of the medium-term strategy for public contracts including concepts like early contractor engagement can significantly reduce the time and cost involved in the delivery of infrastructure.
The Government could apply for additional space under the structural reform clause like other countries such as Lithuania have.
Finally, Ireland should make a case to the EU for a special dispensation in the face of Brexit for a relaxation on the fiscal space, possibly on an all island basis.
The CIF recently appeared before the Budgetary Oversight Committee to discuss the upcoming Public Capital Programme review.
We recommended amongst other things that a national infrastructure investment target is put in place along with a delivery unit to address bottlenecks and blockages in the system. The UK established about two years ago, a National Infrastructure Commission to deliver critical strategic infrastructure to drive economic growth and balanced regional development. Projects like High Speed 2, one of Europe’s biggest mega-project, that will connect London to Manchester, is being delivered under its aegis.
The concept, like our National Roads Authority, insulates as much as possible infrastructure from the vagaries of the political cycle – the most volatile of them all as we know.
It’s interesting to note that the UK, looking into the abyss of Brexit, has decided to try to build a bridge over it. Last December, they announced a £500 billion infrastructure pipeline with every project outlined, costed and time lined, unconstrained as they now are by the EU fiscal space.
The message should be delivered clearly to our Government and the Commission that infrastructure enables economies to provide opportunity to the very groups becoming disillusioned with politics and the EU project.
And before anyone accuses me of simply seeking infrastructure to benefit the construction industry independent analysis estimates that 12 direct and indirect FTE (full-time equivalent) work years are generated per €1 million of construction investment. In terms of Gross Value Added (GVA), the direct and indirect multiplier associated with a €1 million investment in construction raises economic activity by €0.7 million. When induced impacts are included, the employment multiplier increases to 12 and the GVA multiplier increase to almost €1 million.
So, every billion invested in infrastructure, yields around 12,000 construction jobs, and generates about a billion. That’s before the improved connectivity, quality of life, connectivity, and attractiveness to FDI is calculated.
I mentioned the Whitaker formula earlier – where the government shifted expenditure towards productive infrastructure.
I would say that a strong dynamic construction industry is an important part of the formula. We’re an enabling industry and all other sectors depend on us to deliver the productive infrastructure that dictates their competitiveness.
Without Irish construction there are no Irish tech, financial service, bio-tech, food or pharma or data centre success stories.
So, the government need to take more interest in the future capacity of the industry to deliver their ambitious targets in housing, infrastructure, renovation, and specialist buildings related to FDI.
It is not sensible policy for the Government to simply set the industry a target without supporting measures to increase the industry’s capacity. For example, the Government’s target of 25,000 houses output per year by 2020 and the delivery of €43billion in infrastructure was created without consideration of the additional 110,000 employees we estimate it will take to deliver this output.
Currently, the industry accounts for about 6% of GDP and the accepted sustainable level is about 10% of GDP – probably 12% in Ireland’s cases as we catch up with the rest of the recovery economy. DKM economic consultants have predicted that the industry will grow on average by 9% up to 2020 reaching output of €20b.
We believe that industry and Government need to work closely together to ensure that this growth happens in the most efficient and sustainable way, shaping the economy and society through the NPF and ensuring we generate quality jobs and careers. We strongly encourage the Government to reactivate the construction sector group established under construction 2020 with a view to setting out a strategy for this industry and to ensure it has capacity to deliver for the economy.
It is incredible that the industry that facilitates the growth and competitiveness of other sectors, delivers all accommodation for Irish citizens and is the largest employer in the state has no industrial strategy to support its growth and to ensure it has the capacity to deliver these critical aspects of an economy and society.