Monday 20 May 2019

Colm McCarthy: Borrowing for non-essential projects will delay recovery

Projects to remove bottlenecks that never existed offer no return on public expenditure, says Colm McCarthy

Economic activity in Ireland, as measured by the level of real GNP, was down 15 per cent from the end-2007 peak in the first quarter of this year. If the economy finally begins to recover next year, it is unlikely that the 2007 level of GNP will be reattained any sooner than about 2017. There will have been a full decade of zero growth.

Government investment intentions, as expressed in the National Development Plan 2007-2013 and published in January of the final bubble year of 2007, were based on the expectation that economic activity would expand by about 50 per cent over the subsequent decade.

A big investment in infrastructure would have made sense if these expectations were likely to be realised. Once it became clear that they were not, and that a decade of zero growth was more likely, the Government scaled back the capital programme.

The case for so doing was put succinctly by the Department of Public Expenditure and Reform in their report entitled Infrastructure and Capital Investment 2012-16: Medium Term Exchequer Framework, released last November. The department stated: "The starting point for this review is the conclusion of a major phase of Exchequer-funded capital investment. Over the past decade or so, some €70bn has been invested in infrastructure and the productive sector. Judged by a range of measures, the quality and quantity of the country's stock of infrastructure has been considerably augmented in recent years."

The department reproduced the table below from the World Competitiveness Yearbook, based on a survey of business executives, whose perceptions of infrastructure adequacy in Ireland had improved from 4.5 out of 10 in 2005 to almost 8 out of 10 by 2011.

They went on to quote the influential Paris-based think tank, the OECD, to the same effect: "The OECD's most recent Survey of the Irish Economy is also consistent with this position and contends that "infrastructure spending should be deferred, as investment during the boom years means that there are few bottlenecks".

The conclusion of this November 2011 report from the Department of Public Expenditure and Reform was as follows: "While there may be advantages to continuing with a high level of capital investment in order to give stimulus to the economy, the need to reduce public expenditure and close the fiscal deficit is a more compelling policy goal at present."

It was a more compelling policy goal for about eight months. Last Tuesday the Government restored a list of infrastructure projects to the public capital programme in the guise of a €2.25bn 'stimulus' package designed to create construction jobs, allegedly without any damage to the public finances. The package includes road projects, school building, third-level expansion and healthcare facilities.

Public Expenditure Minister Brendan Howlin introduced the package, stating that: "We will invest in national roads in order to remove bottlenecks. . ."

One of the schemes chosen is the extension southwards of the M11 motorway, which has been completed to a point just south of Gorey in the northern part of Co Wexford. The next phase is to be the 28km stretch from Gorey bypassing Enniscorthy. The National Roads Authority collects traffic volume data at various points around the country and the figures for the existing road section south of Gorey are posted on its website.

Data for February 2012 were not collected. For the four months of January plus March to May, the daily average for the last five years has shown a steady pattern of decline. The averages have been 8,175 vehicles per day in 2008, 7,887 in 2009, 7,430 in 2010, 7,274 in 2011 and 6,835 in the current year. The cumulative decline is 16 per cent over these years.

A four-lane motorway of the type proposed for the Gorey to Enniscorthy section can accommodate comfortably 50,000 to 60,000 vehicles per day and the motorway sections close to the larger cities already cater for volumes at these levels. An ordinary two-lane undivided road is rarely congested at volumes below 10,000 or 12,000. The existing road south of Gorey, in other words, is not a 'bottleneck' in any normal usage of the term.

Another project which has been accelerated is the by-pass around New Ross, also in Co Wexford, and the extension northwards from Gort of the Western motorway towards Tuam. These sections are not experiencing serious congestion either.

The investment in a proper national road network was one of the few real dividends from the bubble, but the key sections have all been completed. It does not make sense, for a country that is borderline insolvent and already in an IMF programme, to construct motorway sections to serve traffic volumes in the 7,000 range of daily traffic volumes.

As recently as February 2005, the Department of Finance published a document entitled Guidelines for the Appraisal and Management of Capital Expenditure Proposals in the Public Sector. This memorandum, addressed to spending departments, state agencies and local authorities charged with the supervision of Exchequer-funded capital spending, stipulates in emphatic terms that projects should not be brought forward, much less considered for funding, unless thorough economic evaluations have been carried out.

Dan O'Brien of The Irish Times sought copies of the relevant evaluations after Tuesday's announcement but none were forthcoming. The Government should either furnish these evaluations or admit that the 2005 circular has been withdrawn.

The extraordinary growth in Exchequer capital spending in the years up to 2008 has seen some thoroughly wasteful projects completed and an excess provision of infrastructure in many cases.

The Department of Finance's 2005 circular included an eminently sensible requirement that projects should be subjected to a post-completion review. It specified that there should be: "A review to confirm whether project objectives have been met, the project has been delivered to required standard, on time and within budget and to ensure that experience gained can be used on other projects and possibly in the continued use of the new asset."

There have been substantial over-runs on several major projects, including the Luas and Port Tunnel schemes in Dublin, as well as failure to achieve usage targets, as with the Ennis-to-Athenry rail link. No post-project assessments, as required by the 2005 circular, have ever been published.

It is undeniable that the €2.25bn of extra capital spending will create some jobs. However, the jobs content of many infrastructure schemes is modest, as the ESRI has been pointing out regularly in recent years. None of the announced projects will generate revenue to the State. But somehow the financing burdens were magicked away in the press statements.

The European Investment Bank is to lend some money; there is a little left in the National Pensions Reserve Fund (NPRF); the ever-helpful private sector is to offer a donation through the PPP (public-private partnership) route; and there will be proceeds from the sale of State assets. Each of these manoeuvres will worsen the net financial position of the State if accounted for properly. Borrowing, from the EIB or anyone else, should go straight on to the balance sheet. Using what little remains in the NPRF has an alternative use, namely the liquidation of debt, as do the proceeds from State asset sales.

The PPP device, promising a stream of 'unitary payments' to private lenders in exchange for the privilege of describing the transaction as private investment rather than government borrowing, is called PFI in the United Kingdom, for 'Private Finance Initiative'. A House of Commons committee has concluded recently that this method of keeping government debt off-balance-sheet has been costly to the UK government. It is high time there was a full inquiry into the true costs of PPP borrowing in Ireland.

It is debatable whether Ireland's debts will prove to be sustainable, even with a better deal from Europe on the bank bailout costs. The economy will not recover and the creation of real jobs in the traded sector will not re-commence until the financial uncertainty is resolved. This requires resolute commitment to expenditure control.

Borrowing money to build non-essential public capital projects, particularly while pretending that the funds have been provided by magic, will delay recovery.

Sunday Independent

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