Taking the long view of infrastructural development | KPMG | IE

Time to take the long view of infrastructural development

Time to take the long view

Ireland could reap huge benefits from refining its approach to infrastructural development, writes Michele Connolly.

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Partner & Head of Corporate Finance

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After several years of recession, we have entered a period of sustained but fragile growth. However, with fiscal policy mainly focused on current spending, there is a need to promote the benefits of a more planned approach to infrastructural development.

The extent of the challenge is heightened by the fact that while we perform well in many global indices, it is often infrastructure that lets us down. The most recent edition of the IMD Global Competitiveness Report ranked Ireland 23rd out of 138 countries - but an inadequate supply of infrastructure was identified by respondents as a problematic factor in doing business in Ireland.

One of the most obvious challenges has been the fact that the economic cycle and infrastructural investment appear to be almost counter-cyclical. Following a peak of 5.2 per cent of GDP in 2008, public investment collapsed to a low of 1.8 per cent of GDP in 2013 before slightly recovering to 1.9 per cent in 2014. It remains well below the EU average.

The benefits to be gained from refining our approach are significant. It stands to reason that there is a better way to deliver large-scale infrastructure that is not dependent on fiscal, economic and electoral cycles.

It's not just business that suffers when there is a lack of planning or investment in infrastructure. Our economic recovery has been overshadowed, to a large extent, by significant issues in areas such as housing and health. However, these issues did not arise overnight, and the gaps in our infrastructural development are obvious.

To avoid repeating the mistakes of the past, we also need to be far more rigorous in our approach to planning for future infrastructure needs. To counter the vagaries of economic trends, we need to plan now for the requirements of the future. Then, when funds become available, we need a suite of prioritised projects that can move to construction immediately.

In determining where we should prioritise our spend, we need to develop the concept of long-term strategic planning on a cross-sector basis, as distinct from the current funding envelope allocated by government departments. This would require us to succinctly define and understand the problems the government is trying to solve, and the suite of solutions available.

The scale of these projects and the need to get it right also require us to prioritise projects that will deliver measurable social and economic benefits. Demographic assessment, growth in student numbers, an ageing population, pressure on water quality and supply and increasing congestion are all examples of predictable challenges - and, of course, there is the housing crisis which has developed due to years of inaction and lack of proper planning.

Such an approach to planning could, for example, focus on issues like addressing current and future bottlenecks, assessing the economic benefits, ensuring a positive impact on equality and social inclusion, and being consistent with the achievement of climate and energy goals.

Meanwhile, there are funding solutions that can help mitigate against challenges to short-term spending constraints. Funding is available that is low-cost and does not count as part of government debt. What we are missing is a scaled-up programme of projects ready to spend it on. Recent changes announced last week are still just a drop in the ocean of what we need to do, and what we could achieve.

In addition to central government funding, the European Investment Bank (EIB), private investors and pension funds are all potential sources of funding that can be accessed without adding significant risk to the exchequer. However, there still remains a resistance to using private capital.

This is typically on the premise that the government can borrow cheaper themselves. That is technically correct (although it does ignore all the benefits of transferring risk to the private sector).

Yet why isn't the government then doing this, if we so badly need infrastructural investment to protect and enhance our competitiveness? Because we are currently choosing to pay off our debt burden, rather than investing in capital for our future.

However, Conor Kelly, chief executive of the NTMA, commented recently that investors in Ireland's debt burden were ambivalent on whether we paid down debt or invested in infrastructure.

The critical point, though, is that we can do both.

We do recognise that there are limitations on how fast and how much new infrastructure we can build. We are a long way from that being a problem at present. However, the government should be balancing its attention between building new infrastructure and driving efficiency across all aspects of the infrastructure life cycle to drive incremental and valuable improvements.

Technology also has a role, where it can be embedded in current infrastructure and/or manage a suite of infrastructure assets to drive efficiency.

It also means introducing greater competition to the delivery of public services to increase performance and drive efficiencies.

Governments increasingly recognise that they can't increase national productivity without improving infrastructure. The only way to do this is to think strategically now in planning for the longer term, prioritise projects, and open the mindset to all available funding options - whether additional government investment or private sector funding.

Michele Connolly is Head of Corporate Finance at KPMG Ireland.

This article was originally posted in the Sunday Business Post on 29/07/2017 and is reproduced here with their kind permission.

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