A report prepared by the Economic and Social Research Institute (ESRI) and commissioned by the Department of Finance, provides independent advice on the priorities for public investment in the next National Development Plan (NDP) for the period 2007-2013.
| Professor John FitzGerald|
The editors of the ex-ante evaluation report of the investment priorities for the National Development Plan (2007-2013) were Professor John FitzGerald and Dr. Edgar Morgenroth
The ESRI says that taxes will have to be raised by as much as €7bn to pay for the €70bn plan if key infrastructural schemes are to be delivered over the next seven years.
"We could deliver the infrastructure, but would have to raise taxes. They cannot be delivered with the current economic conditions," Professor John FitzGerald said.
The Institute also criticised the Government for failing to carry out a cost-benefit analysis of major projects carried out to date.
According to its estimates, an extra 50,000 primary school places will be needed by the end of the second NDP. However, this had not been adequately reflected in its plans for school construction.
"It's not rocket science to find out where schools are needed, but we don't seem to have a system to do that," Dr. Edgar Morgenroth said.
The Institute focuses on the construction industry, fearing it will not be able to cope with the number of projects being promised.
The ESRI says to get better value for money and avoid waste, the average annual spending in the next plan should be cut to €8.4 billion from the €10 billion the Government intends to spend per year over the next plan, due to run from 2007 to 2013.
The ESRI's Professor John FitzGerald said the economy was not ready for significant increases in capital spending.
Strong activity in the construction sector in particular was responsible for higher wages and prices in the economy, he added. "The problem is that the construction sector now dominates the economy and it is crowding out those who live in the real world," he said.
The Institute wants investment in transport to remain a priority, but targeted spending in this category should still be reduced to €3.4 billion from €4 billion.
Dr. Morgenroth said that value for money measures were needed to justify any increase in capital spending. "All projects and this is very important, should be properly evaluated and that evaluation should be transparent . . . Most evaluations have been carried out by the sponsoring agency and that is hardly a good way to go about it," he said on Monday.
The ESRI said that new resources should be given to the Department of Finance so that proposed projects could be scrutinised.
Compared to about €70 billion due to be spent on the next NDP, proper evaluation would cost just a few hundred thousand euro, Dr. Morgenroth said.
He also criticised the lack of integrated ticketing for public transport services in Dublin.
The Institute said if the Government cut back spending to the levels it recommended in its report, the economic returns would be high. It added that "more space" could be made for higher spending if tax incentives for private sector construction were curtailed and planned spending of €1 billion on buildings necessitated by decentralisation was forgone, as this would free up private sector construction firms to work on infrastructural projects.
The ESRI also directed criticism at spending on recreational facilities, such as swimming pools, which needed to be spread more widely to be consistent with the National Spatial Strategy.
While the report finds that there is a high rate of return to efficient investment, the ESRI analysis suggests that the economy will have difficulty delivering all of the much-needed infrastructure at a reasonable cost over the course of the next NDP. The exceptional demand for the output of the building and construction sector is squeezing out the export sector through its adverse effects on competitiveness. The Institute says that the next NDP can either limit the increase in investment to a level that the economy can absorb or else use fiscal policy to sufficiently reduce private sector demand for building and construction sector output, allowing an even more substantial increase in public investment.
On the assumption that no fiscal action is taken, the Institute recommends the level of investment set out below. While still very ambitious, this would be significantly below the level envisaged in the multi-annual capital investment framework published as part of Budget 2006.
The ESRI says that its proposed level and targeting of investment would raise the capacity level of GNP by at least two percentage points above the level it would be without such investment.
“Recommended” NDP Government Capital expenditure at 2006 prices, € millions
Transport: 2,555 (2006); 3,374 (2007-2013 annual average)
Housing: 1,245 (2006); 1,133 (2007-2013 annual average)
Public admin: 1,029 (2006); 1,125 (2007-2013 annual average)
Health: 645 (2006); 721 (2007-2013 annual average)
Education: 684 (2006); 858 (2007-2013 annual average)
Enterprise sector: 601 (2006); 521 (2007-2013 annual average)
Agriculture: 214 (2006); 174 (2007-2013 annual average)
Environment: 590 (2006); 497 (2007-2013 annual average)
Total: 7,563 (2006); 8,403 (2007-2013 annual average)
The ESRI says that investment alone would not be sufficient to tackle all the infrastructural pressures. The NDP needs to be accompanied by a range of measures that ensure a more efficient usage of infrastructure, freeing up additional resources. Given the size of investment programme proposed in this report, more attention will need to be given to value for money through proper planning, evaluation and project management.
Transport: Transport remains the highest priority for infrastructural investment. This reflects the strong increase in the demand for transport, which, despite significant progress in expanding the transport capacity, has resulted in increasing congestion. The evidence suggests that the return to roads investment remains high. While substantial investment is warranted in urban public transport, given the size of the individual projects, the Institute says that it is imperative to evaluate them thoroughly, considering the potential of all public transport modes as well as incorporating network effects (consider all the proposals together rather than independently). If projects pass these evaluations a high priority should be accorded to them.
|Dr. Edgar Morgenroth|
Housing: Social and affordable housing should remain an important component of the next NDP. Nevertheless, given the limited capacity of the construction sector, in the absence of measures that reduce the private demand for construction output, the Institute recommends that expenditure in this area should be reduced. If however, measures were taken to reduce private sector demand, then this cutback would not be necessary and a better balance between private and social housing could be achieved.
Water and Wastewater Infrastructure: As there is a high level of compliance with the EU directive on waste water, and development levies will make a substantial contribution towards the investment needed to accommodate an increased population, the Institute recommends a reduced level of funding going forward. The introduction of water charges for households would reduce the demand for water substantially, thereby reducing the need for more investment, which would free up resources to be used in other areas.
Energy and Telecommunications: All of the investment in energy infrastructure should be delivered on a commercial basis without any requirement for finance by the taxpayer. The general principle should be that consumers of energy should pay the full economic cost (including negative environmental externalities) of energy. The State has an important role as regulator of the telecommunications sector, especially where there are monopoly elements to the provision of infrastructure. A well regulated market should deliver broadband to the majority of the population, limiting the need for public intervention to remote areas, where public investment is only warranted if a reasonable demand for broadband exists.
Human Resources and Research and Development (R&D): The ESRI says that Investment in human resources remains a top priority. In this respect it recommends an increase in expenditure in most areas including: measures to reduce the high drop out rate at secondary level; positioning the third level and post graduate sector to contribute fully to an expanded R&D programme; investment in training and life-long learning. R&D needs to play an increasing role if Ireland is to maintain or even improve its competitive position. Therefore, the Institute recommends a significant increase in the resources devoted to such investment.
It highlights the need for a greater focus on commercialisation and recommend reduced ring-fencing of funds for particular sectors while recognising that policy oriented R&D continues to be of high importance.
Productive Sector: At a time of full employment the need for subsidies to the productive sector should be limited. The Institute recommends a reduction in funding for all productive sector areas, including agriculture, forestry, fishing and tourism.
Health: The ESRI recommends increased funding for health investment. Its analysis suggests that demographic changes alone imply that over the period 2007-2013 between 1,800 and 3,000 additional acute hospital beds will be required. There is also need for investment in ancillary facilities and non-acute facilities.
Childcare: For the period 2007-2013, the focus of policy needs to be broadened to take account of the need to improve and expand early childhood education. This report estimates that 50,000 additional state-supported childcare places will be needed over that period.