Saturday 18 January 2020

Competitiveness and productivity are keys to our economic recovery

Advising the Government on what is best for indigenous business has never been more challenging than it is now

George Garvey

With the economy still in the doldrums and unemployment at record levels, Martin Shanahan, the recently appointed chief executive of Forfas, is the man charged with ensuring that the Government gets the right advice on how to restore our competitiveness.

Ever since it was founded in 1994, Forfas, which advises the Government on enterprise and science policy, has tended to fly under the radar. Despite carrying out extensive research and playing a key role in shaping policy, it has generally been overshadowed by its sister-agencies, the IDA and Enterprise Ireland.

Unlike both of his permanent predecessors, John Travers and Martin Cronin, who came from IDA backgrounds, Shanahan started his career in the hotel sector.

"I didn't come via the conventional route. I started my career in hotels and catering. I went and managed hotels. That gives you a real sense of what it is like to manage a small business in the west of Ireland," he says.

A native of the Co Kerry village of Abbeydorney, the 37-year-old Shanahan worked in bars and restaurants as a teenager and caught the hospitality bug. After graduating from the College of Catering, Cathal Brugha Street, with a degree in hotel and catering management in 1990, he went on to work as an assistant manager at Charlie Sinnott's Connemara Coast Hotel, eventually becoming, several promotions later, general manager of the property.

In 1998 he moved to the Great Southern Hotels Group and in 1999 he joined CERT, the hotel and catering sector training body, which merged with Bord Failte to form Failte Ireland in 2003.

Shanahan was initially appointed training and development adviser for the Cork/Kerry region before becoming head of the professional development department in 2001.

Shanahan was seconded to Forfas in 2005 to work with the Expert Group on Future Skills Needs. He remained with Forfas, becoming head of its Labour Market Policy Unit, which dealt with education, training, skills, migration and labour market flexibility issues.

During his first two years at Forfas he was deeply involved in developing the current National Skills Strategy.

In 2008 he became Forfas divisional manager for science, technology, innovation and human capital before being appointed chief executive earlier this month.

Shanahan also somehow managed to fit in the time to complete a master's degree in hospitality management and another master's degree in education.

With his catering industry background and his subsequent career path at Failte Ireland and Forfas, it is a fair bet that labour market issues will occupy a lot of Shanahan's time in his new job.

"It's reasonable to say that work on the labour market side is going to be very relevant going forward. It is one of the key policy issues. We have 270,000 unemployed and 440,000 on the live register. It is a key area for the Government and the development agencies," he says.

"Most of the unemployed come from three sectors: construction, traditional manufacturing and retailing. The question that we now need to answer is, how do we train and skill these people back up so that they can avail of opportunities when they arise?"

Shanahan's timing in being appointed Forfas chief executive was good. For most of the past decade Ireland has been steadily losing international competitiveness, something which Forfas has warned successive governments about. Now at last there are signs that the competitiveness tide is beginning to turn in our favour.

Last week the National Competitiveness Council, an advisory body that comes under the Forfas umbrella, published its latest report on the cost of doing business in Ireland. The report found that there had been significant reductions in the cost of doing business over the past year with major falls in rent and electricity prices.

However, some Irish costs are continuing to rise. This is particularly true of public or administered services with waste water charges rising 18pc in 2009 while broadband costs and legal fees also remain high by international standards.

When discussing Irish competitiveness, the elephant in the room that public policy makers are loathe to discuss is the minimum wage, which at €8.65 per hour is the second-highest in Europe. Shanahan is far too experienced an operator to slip on the banana skin helpfully tossed in his path by this interviewer.

"There is too much focus on the minimum wage and not enough focus on earnings across the board. How much we pay ourselves has to be related to productivity. We can pay ourselves more if we are more productive. However, all of the indications are that we are not very productive."

In practice, only about 3pc of all of those in employment are on the minimum wage. However, this ignores the fact that the minimum wage acts as a floor and generates a ripple effect on workers earning up to €15 an hour and even more. Shanahan estimates that the wages of about 30pc of all workers are set from the minimum wage floor.

He points out that reducing the minimum wage on its own could create as many problems as it solves. The most obvious potential problem is what economists call replacement rates. In other words, a cut in the minimum wage would make it less attractive for those on social welfare to take up employment.

"The important thing is to cut all costs. If you try to cut earnings it is important that you cut costs as well. The evidence is that cost competitiveness is improving. That will help our colleagues in the IDA attract overseas investment".

But what about indigenous industry? Even during the boom years one of the stand-out weaknesses of the Irish economy compared to other smaller European countries such as the Benelux and the Scandinavian nations was our lack of internationally competitive indigenous companies.

Where is our Nokia, which started life as the Finnish equivalent of Coillte?

"We need continued investment in education at all levels. That is where you get big productivity gains. We are trying to align what is taught in the education system with the needs of enterprise.

"Undoubtedly part of the challenge moving forward is to develop indigenous companies of scale. It is probably about first growing a significant number of small [indigenous] companies."

One of the advantages of the bursting of the property bubble is that other companies no longer have to compete with a bloated property sector for labour and finance. The downside is that, with our banks effectively bankrupt, there is no finance available for most Irish companies, no matter how bright their prospects.

"Access to finance and capital is a significant issue for business. Access to venture capital tends to be good. Access to private equity is not good. Access to credit is an issue," he says.

Part of the problem is that, after a 14-year property bubble, the Irish banks have lost the ability to assess the risk of lending to knowledge-intensive businesses, such as software companies, without significant physical assets on their balance sheets.

Shanahan's appointment is for an initial five-year term. When asked what he would like to achieve over this period he replies: "To provide the best possible policy advice and to ensure that our advice has an impact on business. When Forfas was first established in 1994 there were a number of big issues including the lack of R&D and corporate taxation. Now we need to make incremental improvements across a whole range of issues. That's not as sexy."

Irish Independent

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