If we build it, will they come back?
Published 24/03/2011 | 05:00
For an industry used to cyclical downturns, the collapse of the Irish construction industry shocked even recession-hardened executives who have worked in the sector for decades.
The figures at the heart of the collapse are truly astonishing.
At its peak in July 2007, the construction industry had annual output of €38bn; this year it is estimated the industry will have an output of just €10bn, a crippling fall of 74pc.
The employment numbers illustrate the scale of the plunge even more starkly. At the peak there were about 285,000 people working in the sector, but this year this number stands at about 120,000, meaning employment numbers have more than halved.
While demand has collapsed for much of what the industry does, economic life goes on and demand today, while way off the boom-year peaks, has not been fully extinguished.
Instead, a range of companies are changing what they offer the market and are also expanding their geographical footprint.
But more than good intentions will be needed to rehabilitate the industry. In that context, firm policy decisions will have to be taken to reinvigorate the industry, although everyone warns that inflating a new property bubble is certainly not advisable. But there are still ways to bring the industry out of the doldrums:
1 Protect and expand the capital budget
While the money available for roads, rail, bridges and other infrastructure is due to reduce under the EU-IMF programme, Ireland is still committed to spending €4.6bn in gross terms on capital projects this year. The best way to revive the industry is to protect this level of spending, which is the nearest thing Ireland has to a stimulus programme. What Ireland needs, however, is the right kind of capital spending that creates jobs but also boosts the productivity of the economy overall.
2 bring private money into the building industry
This can be done in a range of ways, from public-private partnerships to pension fund investment, to private equity joint ventures, to greater use of tolling and other user-pays approaches. At present, many of the larger building and development companies are either insolvent or desperately short of fresh capital. However, they do own assets, so there is a chance of giving up equity and ownership in their companies and in that way a fresh wall of cash can come flooding into the market. Several companies have already done this, including O'Flynn Construction.
3 Push retrofitting aggressively
This is a great idea that has yet to fully pay off. The industry believes retrofitting of houses and other premises can mop up surplus labour and make Ireland more energy efficient, boosting the domestic economy and throwing the sector a lifeline. However, retrofitting will need some level of continuing government support at a time when budgets are tight.
4 Build more houses when the market recovers
Demand is depressed now for residential housing, but Ireland will in the future need more than 10,000 houses a year, which is the current rate of building. Economists believe the sustainable level of housing is between 20,000 and 30,000 houses per annum. Already Dublin is quite restricted in space terms, but in other counties the supply is vastly overwhelming demand. While prices are highly unlikely to recover in the immediate future, the level of activity in construction industry can pick up quite quickly if sentiment changes. Already developers thinking ahead have applied to have lands they own rezoned, although this is often about adding value to NAMA-owned assets.
5 Lower costs for the industry
From VAT, to development levies, to energy costs and local authority rates, there are a range of costs that could be lowered to provide a fillip for the industry. But the outcry from other industries not benefitting from a similar regime would be deafening.
6 The smart economy The last Government was in favour of this somewhat nebulous concept, but never really managed to energise the public or business about it. But smart grids, fibre optic broadband, cloud computing and renewable energy are attracting investment from around the world and the building industry will have to be part of it in some way. While major infrastructure projects get tendered right across the EU, Irish firms are likely to pick up the lion's share of the domestic work.
7 School-building programme
Despite having an unprecedented boom up until 2007, Ireland's school buildings remain below standard. The Department of Education, through the capital programme, could hugely ramp up spending in this area, giving a lift to the industry on a nationwide basis. It would also help education standards and banish the era of the school prefabs.
8 Change the planning laws
Not likely to be popular with many, but those in the industry believe restrictions and bottlenecks in the planning laws remain endemic. Not enough projects are allowed to be fast-tracked through the system as national priorities and the rights of objectors are still cast too wide.
9 Move overseas If your own industry collapses, take your efforts elsewhere. Many Irish construction firms are spreading their wings, reaching into markets in the Middle-East, Asia and eastern Europe. Of course, many of these are emerging markets and can be unstable, but many Irish firms have built long-lasting links in these markets.
10 Diversify into wholly new industries
Building firms can do more than just build. Many Irish companies have reinvented themselves, finding opportunities in healthcare, facilities management and outsourcing.