Irish Economy
Irish structural reform is needed to deliver enduring cost competitiveness - - National Competitiveness Council
By Finfacts Team
Jun 23, 2011 - 2:28 PM

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Figure 4.2: Cost of Constructing a Prime Industrial Unit, 2005 - 2009

The National Competitiveness Council (NCC) today published its latest study on theCosts of Doing Business in Ireland 2011 (pdf) and it said Irish structural reform is needed to deliver enduring cost competitiveness. The report evaluates Ireland’s relative cost competitiveness, identifies barriers to competitiveness and sets out actions needed to improve and sustain Ireland’s competitiveness.

Dr. Don Thornhill, chairman of the NCC commented: “Costs in Ireland are moving in the right direction and as a result Ireland has become a more attractive location to do business, but we cannot rest on the oars. Cost reductions have resulted primarily from cyclical factors like the collapse in consumer demand, domestically and internationally. If we are to face down emerging threats such as increasing global oil prices and a resumption of inflation, Irish policy must deliver outcomes which embed lasting, structural reform. Only structural reform will ensure that the gains are permanent and will not be quickly be eroded upon any resumption in growth.”

The report highlights that restoration of cost competitiveness is central to any economic recovery. As a small, open economy, dependent on trade as a source of revenue, Irish enterprises need to be in a position to compete successfully for business in international markets and cost competitiveness is one of the key determinants of any firms’ success.

The report finds that while there have been significant improvements in cost competitiveness over the last two years, further progress is required.  Even though prices in Ireland have fallen since 2008, the cost of a range of business inputs remain relatively expensive compared to other jurisdictions, including property costs, calls from landlines and legal fees. The NCC notes that a large number of these inputs arise in the locally traded sector.

Martin Shanahan, chief executive, Forfás commented: “The cost of doing business in Ireland is falling and this is very much to be welcomed.  We need to keep focused on the how Ireland can return to a sustainable growth path.  Cost competitiveness is a key part of Ireland’s international offering and implementation of the Council’s recommendations would represent a major step in ensuring Ireland’s future competitiveness and prosperity.”

The NCC says labour cost growth rates in Ireland slowed significantly in 2008 and through to 2010. Over this period, growth rates were lower than the EU-27 and euro area-16 average growth rates. Meanwhile the cost of constructing and renting both industrial and office units declined sharply in Ireland during 2010. However, the impact of these decreases on Irish cost competitiveness has been reduced as there have also been significant cost decreases in many other countries.

The cost of industrial electricity for large energy users in Ireland decreased significantly (-27%) in 2010 and costs are lower than the euro area average. Despite reductions also being recorded for electricity costs for SMEs in 2010, Ireland remains the fourth most expensive location benchmarked. The NCC says cost reductions would appear however to be temporary in nature - - the phasing out of a temporary rebate for large users and global fuel price changes are likely to result in higher prices in the future.

The average cost of treated water services in Ireland increased by 0.85 between 2010 and 2011. Based on the internationally comparable data (2009 is the most recent data available) Ireland is competitive with our main trading partners on this measure.

The NCC says based on 2010 survey data, the average price that could be negotiated for landfill fees in the Irish market ranged from €86 to €111 per tonne (including the levy). Ireland’s cost competitiveness is likely to have improved as Irish prices have continued to fall sharply over the last year.

Ireland is the eighth most expensive location of the 13 countries benchmarked for a basket of business calls and is the fourth most expensive for a high usage basket of mobile calls including VAT.

The NCC said over the course of the economic downturn, most business and professional sectors have shown substantial corrections in prices. Since 2006, however, CSO price data shows that legal services prices have increased by 12%.

In 2005, health and education cost indices (which are influenced by public sector policy, but  which contain significant private sector elements) were 15% above the overall CPI. Despite falls in the overall CPI in 2010, prices for both health and education continued to rise. In March 2011, they were 28 and 35% higher than the CPI respectively.

Minister for Jobs, Enterprise and Innovation Richard Bruton TD said he is writing to Government colleagues with responsibility for each of the recommendations asking them to report next month to the cabinet sub-committee on jobs and economic planning, of which he is convenor, on the possibilities for implementing the recommendations. 

“I have been saying for some time that if we are going to create the employment and economic growth we need so badly, we must focus on three things: increasing competitiveness, improving access to finance, and encouraging innovation. 

“A key finding of this report is that although competitiveness has improved substantially in recent years, most of that has been due to the downturn in the economy and risks being immediately reversed when growth returns. Price levels in Ireland remain above euro area averages despite three years of negative economic growth. 

“If we are to get back to the formula that created the real economic success of the mid/late 1990s and achieve sustainable growth, we must urgently address the structural problems in the economy identified by today’s report: in the labour market, in property, in utility costs and in business and professional services. 

“For too long reports like this have sat on shelves and gathered dust: and although many of these recommendations are already being progressed by the new Government, it is crucial that we achieve reform across the board if we are to achieve growth again. That is why I am immediately starting a process across Government to set about implementing the recommendations, by writing to relevant colleagues asking them to identify what can be done, and asking them to report on this to the cabinet subcommittee on jobs and economic planning at its next meeting next month. 

“I am determined that we must act urgently to implement reforms across the economy, in order to achieve real growth that can get people back to work both in the short term and for years to come”. 

Main Recommendations:

Labour Market

  • Additional taxation measures must be designed to protect job creation and facilitate a recovery in consumer demand.  A competitive wedge between take home pay and gross pay  is vital;

  • High replacement ratios between social welfare and net pay for employment weaken the incentives to return to the labour force.  A major challenge exists to protect those on low incomes and social welfare benefits while ensuring that incentives to remain in or return to the labour market are strengthened and that businesses are incentivised to take on additional staff;

  • There are risks of workers disengaging from the labour force as they experience long term unemployment.  The education and training system must address the challenges confronting the unemployed and workers in vulnerable sectors through activation, upskilling and targeted interventions designed to boost participation.

Property

  • To provide certainty about the long term viability of the commercial property market, NAMA should provide more information on the loans that it has acquired and how it proposes to deal with unfinished developments, as well as its criteria for future provision of development finance, and on how NAMA assets will be disposed of;

  • The Property Services Regulatory Authority should collect data on both purchasing and leasing relating to (1) Price (2) Quantity (e.g. floor space) (3) Quality (e.g. location, finish) for commercial and residential property.

  • A broadly based and equitable valuation based residential property tax should be introduced as quickly as possible;

  • The feasibility of introducing legislation to facilitate downward rent adjustments for existing leaseholders should be explored further;

  • Local authorities need to develop more robust and transparent charging mechanisms for local authority charges that match levies with the economic cost of providing development;

  • Coordination in the rollout of different infrastructure services should be improved to maximise efficiency and reduce costs.

Utilities

  • Subsidies for peat generated electricity should be phased out due to the cost implications for electricity customers and the impact on the environment;

  • Applying much higher, or new, waste levies will increase the costs of doing business further, particularly for those in manufacturing. Increases in the landfill levy should reflect the pricing of externalities (i.e. putting a price on environmental and other damage caused by landfill);

  • A waste-to-energy levy should not be considered until a competitive waste-to-energy market is established here;

  • A volumetric levy on incineration levels should not be introduced as it stands to inhibit economies of scale which are essential to bringing Irish waste costs more into line with our competitors.

Business and Professional Services

  • Government Departments should be formally required to consider and respond to recommendations of the Competition Authority, with specific timelines set down for such consideration and implementation of recommendations;

  • Stakeholders and the Central Statistics Office (CSO) should continue to work together to further develop the Services Producer Price Index, and to develop comparable data on price levels.

Legal Services

  • The NCC recommends the establishment of an independent regulator for the legal profession. This new body should incorporate the regulation of training for solicitors and barristers, and would be tasked with approving those institutions who wish to provide such training;

  • In order to deliver increased transparency and efficiency to legal services costs the NCC recommends that a Legal Costs Assessment Office be established to replace the Taxing Master’s Office. The Legal Costs Assessment Office should have a remit to cover costs arising from all courts, not just the High and Supreme Courts;

  • Legal costs should be assessed on the basis of work done, rather than on the size of awards. The general practice of allowing junior counsel’s fees at two-thirds that of senior counsel has been recognised as anti-competitive - parties with responsibility for overseeing legal costs should ensure that the practice is no longer tolerated;

  • Where practicable, legal services to be provided to the State by solicitors and barristers in private practice should be procured in accordance with the guidelines set out by National Public Procurement Policy Unit (NPPPU), requiring prospective legal service providers to compete with one another on the basis of cost and quality;

  • Consider the creation of a single tier counsel system;

  • Solicitors should be permitted to act as lead counsel when advocating in court with a barrister;

  • Suitably qualified professionals, in addition to solicitors, be allowed to provide conveyancing services.


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