Delivering Growth & Jobs - Funding a major new investment programme for Ireland Irish Congress of Trade Unions
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Revised and
Irish Congress of Trade Unions
Updated
Delivering
Growth & Jobs
Funding a major new
investment programme
for IrelandSummer 2012
Irish Congress of Trade Unions
Contents
Delivering Growth & Jobs
Executive Summary 2 1
Introduction 3
1 The Case for Investment in Jobs & Infrastructure 6
2 Where Will the Money Come From? 9
3 Proposals for Investment in Particular Projects 16
4 Impact on Employment and the Economy 21
Conclusion 24
References 25
Appendices 28Irish Congress of Trade Unions
Executive Summary
Delivering Growth & Jobs
2 Congress is proposing a targeted, (a) Help to restart domestic economic
frontloaded, strategic investment of activity;
upwards of an average of €3bn each year
over the next three years, in addition to (b) Meet vital long-term infrastructure
the committed public capital programme; needs and reduce the deficit;
an annual boost worth almost 2% as
a share of GDP to the Irish economy. (c) Boosting private investors’ confidence
Our objective is to deliver much needed and giving people greater hope;
strategic infrastructure at a fair cost that,
where possible, would be kept off the (d) Reduce long-term, structural
State’s balance sheet. This would expect unemployment, and;
to generate in the order of 30,000 jobs
per annum. (e) Boost long-term growth and
competitiveness.
It would begin to offset the deflationary
impact of fiscal austerity, which has already We set out where the funds for such a
taken €24.4bn out of the economy over the stimulus could be sourced. It would be
past four years. from a mix of public, private and European/
international sources and in turn it would
While this economic initiative would not mean a reduction in the public sector
solve the problem of unemployment deficit because of higher revenues and
immediately or secure full economic lower payments as unemployment falls
recovery, it would: (see Figure 1).
Figure 1: The proposed sources of funding
Commercial
Private
semi states/
pension
State Holding
funds
Company
European
Investment NPRF
Bank
Upwards of €3bn
per annum over
3 yearsIrish Congress of Trade Unions
Introduction
Delivering Growth & Jobs
At last the political winds have begun to These developments alone, however, 3
shift direction. Recent events in France, will not be sufficient to lift Ireland onto a
Italy and the Netherlands have awakened sustainable growth path. The challenge
EU leaders to the reality that one sided faced by our Government is on a scale
austerity policies can no longer feature as few others have ever experienced. By the
the sole course of action in this economic end of this year, Ireland will have recorded
crisis. It is now recognised that Europe the largest loss of jobs of any economy
needs a coordinated fiscal stimulus if it is across the advanced industrialised world
to have any chance of emerging from this since the Great Depression, with a drop in
double-dip recession. Tentative signs of employment by end 2012 of close to 17%
this are already beginning to emerge and over just five years.
we are seeing a more accommodating
stance on the part of those pushing the The Irish domestic economy is set to enter
fiscal retrenchment agenda in the EU. In its sixth successive year of contraction
Germany, the deeply conservative Finance in 2013, weighed down by a burgeoning
Minister Mr. Schauble has spoken of the unemployment problem and persistent fear
desirability of wage increases for German and uncertainty regarding the future of both
workers. The German metalworkers union the Irish and European economies. The
has negotiated an increase of 4.4% over numbers on the Live Register may have
13 months. In addition, some two million peaked, but this masks a growing problem
public sector workers have secured an of structural long-term unemployment
increase of 6.3% over two years, with the and forced migration. Without investment
deal front-loaded to deliver an initial rise of in skills and training, in the country’s
3.5%. Meanwhile over 50,000 chemical infrastructural capacity and in businesses,
workers have won an increase of 4.1%. The there will be no growth with any real impact
Bundesbank has also softened its stance on employment or demand.
on inflation.
In their review of the capital investment
For Ireland, these are very significant needs of the Irish economy 2012-2016,
developments. We can hope to benefit the Government argued that “while there
from any increases in funding for may be advantages to continuing with high
infrastructure and human capital and from levels of capital expenditure in order to
innovations in how this funding is delivered. give stimulus to the economy, the need to
For thousands of Irish businesses and jobs reduce public expenditure and close the
which depend on the EU single market to fiscal deficit is a more compelling policy
sell their goods and services, any boost to goal at present.”
EU GDP will also bring a positive spillover
to export demand in Ireland. This country On the contrary, we don’t believe this
depends on intra EU trade for 58.2% of its trade-off is necessary. A type of fatalism
goods exports and an even higher share of has crept into certain quarters of the
61.3% for its services exports.1 Government with a view taking hold that
with Irish General Government debt and
1 Faes Cannitto F. et al (2010).Irish Congress of Trade Unions
Delivering Growth & Jobs
4 the General Government deficit at such a For the ESRI and others, it is simply not
high level, very few initiatives of significant good enough to dismiss any attempt to
scale can be undertaken. kick start to the domestic economy by
fleeting reference to previous chapters
Instead, we argue that an imaginative in Ireland’s economic history. There are
and innovative approach to promoting important lessons to be taken from the
investment in the country may actually have experiences of the 1950’s, 1970’s and
the potential to reduce both the deficit and 1980’s, but abandoning any hope of
the national debt. According to current reviving the economy is certainly not one
Government forecasts, Ireland will record of them. The 1950’s marked a period
primary surpluses by 2014 – this is where when protectionism ran out of steam,
the gap between current income and indigenous companies failed to adapt to
expenditure, less interest payments will be changing economic circumstances, rising
effectively closed. consumerism saw imports increase and
a balance of payments crisis ensued. The
However, the scale of our debt servicing lessons for today’s Ireland is that the Irish
payments, relative to our rate of economic domestic sector must remain competitive
growth, means that Ireland will be grappling and we have seen a 16% improvement in
with structural budget deficits for a long the harmonised competitiveness indicators
number of years. Indeed, Ireland has no (deflated by whole economy unit labour
choice but to put in place a sustainable costs) over the 3 years since Q3 2008,4
growth strategy. domestic consumption has remained in a
slump thereby depressing import demand,
The ESRI2 has argued that any stimulus wages have remained relatively flat, with the
programme would be futile; that the result that balance of payments surpluses
openness of the Irish economy would have been recorded since 2010 and this is
imply high leakage of any fiscal boost and expected to continue for future years. Fears
that access to funding would prove too of a future balance of payments crisis as a
difficult. Yet compared with other sectors, result of stimulus appear unfounded.
construction has a relatively low import
content at 20%3 and while this will vary The late 1970’s saw a fiscal expansion
according to different civil engineering engineered to stimulate the economy and
and building projects, the important point reduce the exchequer deficit, but paying for
is that the rolling out of much needed this coincided with a time where inflation
infrastructure projects can be prioritised was high and rising, there had been a jump
according to their import content and in global interest rates and a slowdown in
labour intensity. the UK economy. The mistake made then
was to pursue a policy where spending
effectively chased inflation and the national
debt ballooned. On the contrary, Irish
fiscal policy during this current crisis has
2 ESRI (2012).
3 Source: CSO Input- Output tables, 2005. 4 Source: Central Bank Quarterly Bulletin April 2012.Irish Congress of Trade Unions
Delivering Growth & Jobs
been pro-cyclical, in that efforts to reduce 5
the deficit have further exacerbated the
decline in the domestic economy. With
interest rates at an all-time low, there is little
prospect of inflationary pressures taking off
in today’s economy.
The current Government has recognised
the need for a strategy to deliver jobs
and growth for the country and while
the initiatives taken to date must be
acknowledged, ultimately they are but
one very small step. Their success will be
measured only in terms of the quantum and
the speed in reviving domestic demand,
boosting confidence to spend and invest
and returning the large numbers currently
out of work, back into sustainable and
high quality jobs. More must be done and
more can be done. The Government itself
concedes that there are alternative sources
of funding.5 The scale and timing of any
new strategy will be key.
5 Dept. of Public Expenditure and Reform (2011).1
Irish Congress of Trade Unions
The Case for Investment in
Delivering Growth & Jobs
Jobs & Infrastructure
6 Investment is the key to future economic Further Infrastructural Development
growth. It would generate its own Ireland’s investment record over the
multiplier effect in terms of jobs created eleven years until the Crash averaged a
and increased purchasing power. More very strong 5.7% of GNP. This was one
importantly it would tackle the medium of the highest levels of public investment
term infrastructural deficiencies in the Irish in the world, although with the exception
economy that have such a bearing on the of our inter-city road network, few in this
long term growth potential of the country. country would argue that we now enjoy
‘superior’ levels of education, health and
In 2008 and 2009 at the start of this global telecommunications facilities7.
crisis, a large number of Governments
across the world responded to the However, it is incorrect - as some
series of financial and macroeconomic have argued- to assert that Ireland’s
shocks with stimulus packages to bolster infrastructure has now attained continental
domestic demand over the short term. European standards. Children are still
In terms of financial weight, investment being taught in prefabs located on school
into infrastructure, education and green grounds, large queues exist for public
technologies received the largest allocation health facilities and public transport
of funding, above tax cuts and cash linkages, particularly on the Western
transfers6. We propose a significant seaboard, remain inadequate. We were on
investment worth almost 2% as a share of the road to catching up with Europe, but
GDP each year over a three year period in we were stopped short.
addition to the committed Public Capital
Programme. Forfás identify a number Nor is it the view of business that we
of key infrastructure projects and we attained European levels of public
discuss them in greater detail in Section 4. infrastructure from the eleven year
Ultimately, a comprehensive stimulus investment boost. In a World Economic
package needs to incorporate investment Forum Study (2011), business executives
into physical economic and social ranked Ireland a low 24 out of 28 countries
infrastructure as well as human capital. for our quality of infrastructure and
significantly below the OECD average.
7 White R. (2010). The paper makes the argument that
much of the capital investment between 2000-2008 was
6 OECD (2009). misallocated.Irish Congress of Trade Unions
Delivering Growth & Jobs
The National Competitiveness Council unemployment rate which is still above 10% 7
(2011) has said “deficiencies remain.” in 2017 indicating a continuing high level of
long-term ‘structural’ unemployment.8
It says there is improved value for money to
be had now: The biggest single obstacle to creating
employment is the depressed state of
“Notwithstanding the challenges for domestic demand in the Irish economy.
the State in raising external finance, The way to tackle this problem is through
infrastructural investments offer a potentially economic growth, investment and job
attractive investment opportunity for private creation which can generate new revenue
sector finance” e.g. far above what pension and save on spending by getting people
funds have generated (a mere 0.7% over a back to work. There is, therefore, an urgent
decade to 2011). need to redress the deficit in demand
for work through a balanced investment
Stimulating Job Creation stimulus that is driven by the Government,
With a permanent contraction in the but which mobilises investment from
construction, retail, hotel and some private sources.
traditional manufacturing industries the
challenge now is to mitigate, in the ESRI’s The investment stimulus proposed here,
words “the painful permanent scar” that is only one part of a long-term strategy to
has been left on the Irish economy. This achieve economic recovery, sustainable
will involve massive efforts to stave off a development and greater equality. The
hysteresis effect among highly qualified timing of an investment stimulus is crucial.
workers and will require adequate facilities It will take time to put in place additional
to upskill those who are not. Unless serious investment. A lead-in is required to secure
inroads are made into reducing the level additional funds, make necessary changes
of unemployment, the long term costs to legislation where such is required and
associated with entrenched social and evaluate the benefits of any proposal,
economic problems will far exceed the in terms of its social, economic and
short term gains accrued by cuts in current environmental impact.
expenditure under a fiscal adjustment
programme. Already, some 43% of those
jobless or on part time hours are signing on
the Live Register for 12 months or longer.
The true extent of unemployment
is understated by the ‘standardised
unemployment rate’ of 14.8% in March
2012. The total level of under-employment
in the Republic is currently estimated by
the CSO at 25% of the ‘wide’ Labour
Force in the final quarter of 2011. The most
recent forecasts of the IMF project an
8 IMF (2012).Irish Congress of Trade Unions
Delivering Growth & Jobs
8 Spare Capacity and Lower Prices The range of projects is set out in Section
Currently two out of every five persons 4. An injection of a given amount of capital
signing on the Live Register were previously investment has a short-term impact on
employed in the craft trades or as plant employment and outlook. It would be
and machine operatives9. Many, but not all necessary to phase out the stimulus
of these individuals would have originated gradually over time.
from the construction or construction-
related sectors. It should be noted this recommendation
is less ambitious than that from the
At a time when very significant spare Construction Industry Council in its
capacity exists in terms of available skills submission to Government in 200911, as
and where competition in the sector has well as the proposals made by one of the
reduced tender prices back to 1998 price Government parties in 201012.
levels10, there is considerable potential
to procure infrastructural works at pre
Boom prices.
9 Source: CSO (2012). Live Register data for April. 11 CIC (2009).
10 DKM and RICS (2012). 12 Fine Gael (2009).2
Irish Congress of Trade Unions
Where Will the Money
Delivering Growth & Jobs
Come From?
In the context of a general government infrastructure investments and which in 9
debt set to peak close to 120% by 2014, time will attract in other investors. However,
the constraints to additional government two obstacles must be overcome to ensure
borrowing are very clear. With Irish 10 that the Fund’s resources are maximised
year sovereign bond yields now trading in a strategy for growth and jobs in
in excess of 7% on the secondary bond this country.
markets, the Republic remains effectively
shut out of international capital markets. The Fund’s mandate for infrastructural
The Public Capital Programme 2012-2016 investment is limited to 5% of the value of
has been stripped back to just €3.9bn, the Fund. At the end of December 2011,
with a number of key investment projects there was €5.4bn in the discretionary
mothballed and the budget for other portfolio of the National Pension Reserve
significant sectors reduced to maintenance Fund (NPRF). We call for this limit to be
of existing facilities. raised and propose that half of the current
value of the discretionary fund be allocated
Imaginative ways must be found to leverage to domestic infrastructure projects.
in additional investment into the Irish
economy. Our plan for jobs and growth, To date, interest by private and the
which would be largely ‘off balance sheet’ State’s own pension fund in investing in
is based on four main pillars; infrastructure in Ireland appears limited
to the taking of equity stakes in particular
(i) Direct investment by the National utilities. This has to be overcome. New
Pension Reserve Fund. ways will have to be established to
ensure the Fund invests in both so called
(ii) Incentivised investment by Irish private ‘greenfield’ (new) as well as ‘brownfield’
pension funds through exemption from (existing) projects.
the pension fund levy.
(ii) Occupational Private
(iii) Co-financing with the European Bank Pension Funds
With upwards of €80bn held in Irish
(iv) Co-financing with the Commercial occupational pension funds and the
Semi states. vast majority invested abroad, there is
now a real opportunity to attract some
There is also a suggestion that Nama of this funding into Irish projects and
could play a role in developing commercial assets. Across the Irish Sea, the Greater
and office space to attract in foreign Manchester pension fund is a prime
direct investment. example of how the pension funds of
ordinary workers in local authorities,
(i) The National Pension academies and housing trusts can be put
Reserve Fund to use by investing in the local area on a
The establishment of the Strategic commercial basis.
Investment Fund in September 2011 is to
be welcomed, and places the NPRF as
the cornerstone investor in key strategicIrish Congress of Trade Unions
Delivering Growth & Jobs
10 Furthermore, the CBI and the British The first payments of the pension fund levy
Chamber of Commerce have hailed local were made in September 2011 and we are
councils for investing locally, during their proposing that this payment be rebated at
call for greater investment in Britain13. Here a future date, on condition of investment in
in Ireland, pension funds have already specific Government approved projects or
signalled a willingness to invest some qualifying funds.
€300m-€400m in Ireland through the
Irish Infrastructure fund14. This qualifying In order to qualify for a rebate, pension
investment fund is a joint venture between funds would have to invest a fixed multiple
the NPRF, Irish Life Investment Managers of the levy which amounts to 2.4% over
and AMP capital - a world leading four years. If the fixed multiple is set at 5%
Australian infrastructure investment fund, over the three years, the net cost to the
which will focus on purchasing state pension fund of the investment amounts
assets, when and if they become available to only 2.6%. In value terms, this has the
for sale. potential to inject upwards of €4bn into
the Irish economy over the next 3years.
The challenge must be to go beyond Alternatively, a tax credit could be issued to
this and incentivise pension funds to pension funds for investment into specific
invest in projects and schemes with a projects located here.
commercial return that will add to the
productive capacity of the economy, either In effect, the levy would constitute a
through new infrastructure or upgrading short term loan for the Government to
existing facilities, and not just reduce the ensure cash flow for the jobs initiatives,
overall debt levels of existing semi state whereas for pension funds, the rebate
companies or privatise them. The Irish would be an incentive to invest that would
Infrastructure Trust confirms that it is add to the total value of the assets of the
not opposed to venturing into greenfield pension fund.
investment, but the challenge remains to
identify projects which these funds could With regard to the minimum funding
be attracted into. standard for pension funds, the levy
would be rebated over a period of years
Although Congress supports the and as such it appears that it could not
Government’s Jobs Initiative, it is opposed be classified as an actual asset of the
to the pension fund levy as a tax on pension fund until it is paid. However, a
occupational pension funds. We believe legislative provision could be put in place
the pension fund levy can be used to to ensure that in the event of a winding up
incentivise investment by the pension of a pension scheme, the rebate would
funds, into the domestic economy be payable immediately and in full by
in Ireland. the Government.
13 Financial Times, April 10th, 2012.
14 Shields Richard (2012).Irish Congress of Trade Unions
Delivering Growth & Jobs
(iii) New & Innovative Financing: To date, take up by Ireland of EIB loans 11
Working With the EIB has been low. In 2010, only €241 million or
The call for greater investment in strategic 0.96% of all EIB loans were for projects in
infrastructure and the difficulties associated the Republic and Forfás in its 2012 report
with funding it are not just confined on Infrastructure17 has pointed to the scope
to Ireland. for greater take-up of these loans on the
part of the Irish authorities.
The EU Commission estimates that
infrastructure investment across the EU Existing EIB investments in Ireland range
of between €1.5tr-€2tr - in the areas from a combined-cycle gas turbine power
of energy, transport and ICT - will be plant in Co. Cork (€197m), construction
required by 202015, yet a number of factors of 23 post-primary and four primary
have combined to result in a massive schools in the Republic (€44.2m) and
funding gap16. the demolition, upgrading, refurbishment
and construction of social housing in the
By way of response, the European Republic (€105m).
Commission established the Connecting
Europe Facility to accelerate infrastructure As part of the proposal for growth and
development across the EU and in October jobs, additional exchequer-funded projects
2011 it unveiled proposals for a Project could be matched with funds from the EIB
Bond Scheme. and the Council of Europe Bank (CEB) to
invest in infrastructure. The EIB and CEB,
If successful, the participation of the EIB together, could match a total of €5 billion
in a Project Bond Scheme will attract in (including funds via NPRF and CCSCs).
additional private sector investment. The
first project bonds are due to be piloted (iv) Commercial Semi-State Company
during 2012 and 2013. Added to this, (CCSC) Borrowing
it is also expected that EIB resources Already, the commercial semi state
will be further bolstered during the June companies are engaged in the
summit of EU leaders as part of the shift reinvestment of earnings back into their
towards the new Growth agenda at the EU own capital investment. There is also a
level. Ireland should hope to benefit from precedent for some of the larger semi
these developments. state companies to co-finance projects in
the areas of telecommunications with the
State having previously collaborated with
the ESB, Bord Gais Éireann and the local
authorities to roll out broadband networks.
15 European Commission (2011).
16 The constraints in the public finances of individual member In the context of the state’s asset disposal
states is the most obvious reason, alongside a lack of
appetite in capital markets for bonds of very long maturity
programme, the Congress concept of the
to the contrary we have seen a flight to shorter maturities. State holding company is more relevant
Added to that, there was the collapse of the monoline
industry, which in its time was an effective substitute for
investor expertise and the need for due diligence when
investing in a particular project. 17 Forfás (2012).Irish Congress of Trade Unions
Delivering Growth & Jobs
12 than ever. The establishment of NewEra current market prices for utilities and state
goes some way towards this but it falls owned infrastructure, it is far from clear that
short in that the government intends to sell such sales will be completed.
off, on an individual basis, key strategic
parts of various semi state companies. The Bringing the funding together
State Holding Company concept differs Since 1999, there has been a growing
from this in that it provides the potential dependence by successive Irish
for the assets of existing and new semi Governments on private sources of capital
state companies to be pooled together to deliver the public capital programme18.
in common ownership, and with better
governance, from which additional capital Although significant budget surpluses
could be leveraged. were recorded in the pre-recession
period, Government policy was effectively
A minority passive stake could be taken following the growing trend set by other
in this State Holding Company, by private countries in the English speaking world
investors that yields a regular income which had outsourced the construction
without impacting on the strategic direction and the maintenance of vital infrastructure
of the companies themselves. Conditions to the private sector. In a period of
have been set down in the bailout very high economic growth, this policy
agreement for once-off revenue-raising shift was justified on the grounds that
measures and it seems that such revenue Ireland needed to speedily ramp up
raising could be undertaken though the infrastructural development19. Greater
sale of a minority of corporate bonds in a value for money and timely completion of
State Holding Company. projects were promised on the basis that
the private sector had superior scale and
(v) Sale of State Assets technical efficiencies.
Although the Government has made an
agreement with the Troika to allocate However, recent evaluations of these
upwards of 50% of the proceeds from projects have suggested otherwise, thereby
the sale towards a jobs and investment confirming traditional trade union concerns
strategy, we do not consider this as part of about the excessive profiteering of the
our funding model. private sector operators and the sponsoring
banks, at a major cost to the State.
Congress remains opposed to the
planned disposal of state assets. There The current fiscal circumstances now
is no economic or strategic justification demand that new and innovative ways are
for the sale other than to raise money considered to draw in sources of private
for the State and in a depressed market capital at a fair cost to the State.
the assets would only command bargain
basement prices.
The Government has committed to
proceeding with the disposals only when 18 Reeves E. (2011).
market conditions recover. Based on 19 Ibid.Irish Congress of Trade Unions
Delivering Growth & Jobs
In order to minimise the impact on the There appear to be four main issues in 13
General Government balance sheet and to terms of drawing in occupational pension
avoid up front capital costs, two models for funds into infrastructural investment.
investment must be considered:
(i) Commerciality of Return
(a) Use existing commercial semi state There are a number of economic
enterprises to channel funding from the infrastructure projects which would
EIB and other funding sources. deliver returns which should satisfy the
commerciality criteria.
(b) New form of Public Private Partnership
that would see private pension funds (ii) Liquidity of Investment
replace the banks as one of the chief While infrastructural investment offers a
sponsoring agencies. O’ Rourke and good fit in meeting pension funds need
Barrett (2011) 20 adapt the traditional for long dated maturities, the relatively
PPP to a model based on 60% senior illiquid nature of a physical building,
debt, 20% subordinated debt and infrastructure etc creates difficulties in
20% equity. terms of compliance with the minimum
funding standard. It is proposed that a
The appropriateness of either model will be Special Purpose Vehicle (SPV) or qualifying
determined by each sector. investment fund would be established
which would pool a number of projects or
The severe tightening of the banking investments, thereby minimising exposure
sector’s liquidity along with the collapse to any one project. Investment into this SPV
of the monoline industry means that the by the private pension funds would be by
traditional PPP model is now in abeyance. way of a securitised Project bond.
The need to replace banks as the (iii) Risk sharing
traditional main source of finance is now While there appears to be a degree of
causing a rethink on how to harness other willingness on the part of Irish pension
forms of private capital and the creation of funds to participate in this plan, this comes
the European Infrastructure Bond is one at a high cost in terms of state guarantees
such response. and demands for excessively high returns.
Co-investment by the EIB could go a long
Here in Ireland, we propose that the private way towards overcoming these demands.
pension funds can play a major role in Under the EU project bond proposal,
filling that funding gap and if appropriately private pension funds would invest the bulk
structured, we believe that capital can of the debt but that this would stand senior
be made available for the roll out of a to the EIB subordinated debt. In effect,
significant number of key infrastructural the EIB would be underwriting the private
projects along with funds flowing into pension fund investment. Investment
venture capital and SMEs. by other sources of capital such as
commercial semi states or the NPRF would
have to stand parri passu with the private
20 O’Rourke C. and Barrett R. (2011). pension funds.Irish Congress of Trade Unions
Delivering Growth & Jobs
14 (iv) Credit rating procedures for their investment strategy.
The credit rating of the Irish State currently Participation of the EIB in the scheme
stands at BBB+ and in effect, this largely overcomes this issue in two principal
extends to the commercial semi state ways. Firstly, it will complete its own
companies and other entities established assessment of the scheme and thereby will
by the State. Depending on the structure draw in additional private investors due to
of the investment, participation by the EIB reputational effect.
would have the effect of enhancing the
credit rating21 up to a level ranging from A Secondly, it will usually underwrite the
to AAA, therefore making the project bonds scheme as subordinated investors thereby
eligible for consideration by pension funds placing private pension schemes as
and other institutional investors, who must senior creditors. The only major exception
comply with funding standard criteria. to the EIB participation may be in social
infrastructure. The EIB has already invested
(v) Capacity to undertake in schools projects here in Ireland, but
due diligence under the EU project bond proposal,
With the exception of very large pension investment will be confined to energy,
schemes, few occupational pension telecommunications and transport.
schemes rely on their own due diligence
Figure 2: Suggested SPV model for investment
Project bonds/private
pension funds
(Senior debt) 60%
Special
User charges/ purpose EIB
availability fee vehicle (Subordinated debt) 20%
NPRF/State
(Equity investor) 20%
21 EIB (2011).Irish Congress of Trade Unions
Delivering Growth & Jobs
The proposed composition of debt to Alternatively, when the State is the sole 15
equity follows from Barrett and O’Rourke’s procurer of a service or user of a facility,
(2011) adaption of the traditional PPP model but where the operating lease stipulates
to developing infrastructure in the current that that the construction and demand
economic circumstances. risk is borne by the contractor, this project
is also likely to be kept off balance sheet.
Under the conventional PPP model, the This is perhaps best illustrated in the
project sponsor, usually the construction case of a school in that the Department
company, would hold 10% of the project. of Education is locked into a contract for
But in current market circumstances, it use of the school facilities insofar as those
is believed this would need to be closer facilities fulfil the Department’s needs in
to 20%. terms of adequacy of space to handle a
particular number of pupils, fully functioning
Traditionally, banks provided debt worth facility etc.
up to 90% of the costs of the project.
Barrett and O’ Rourke (2011) estimate that In cases where the State bears a portion
securing senior debt worth 60% of the of the demand risk and availability fees are
cost of the project is now the maximum paid by the State above or below a certain
in current market conditions. Some 20% demand threshold, this too also appears
of the costs of the projects would then to be possibly compatible with off balance
need to be secured from the EIB as sheet status.
subordinated debt.
However, where the State is the sole
Keeping Projects ‘off Balance Sheet’ procurer of services or user of a facility
Although Eurostat determines on a case and where it bears the majority of demand
by case basis whether a project should risk in terms of ensuring that it is open and
be allowed off balance sheet, there are fit for purpose, such as in the case of a
a number of guiding criteria contained hospital, the State’s share of the project
within national accounting rules ESA has to go on the State’s balance sheet.
1995. Construction risk, demand risk and
market control appear to be the key factors
in designing a model for the delivery of
an infrastructural or other public project
that aims to minimise the impact on the
Government’s balance sheet.
In general, in cases where the state
controls and owns less than 49% of the
scheme and user charges are charged at
a commercial rate and recover more than
50% of the total cost of operations, the
scheme can remain off balance sheet.3
Irish Congress of Trade Unions
Proposals for Investment
Delivering Growth & Jobs
in Particular Projects
16 There are four core objectives to our plan a much larger issue exists in upgrading
to deliver economic growth and generate existing high speed broadband in the main
jobs; (i) leverage additional funding for the urban areas.
commercial semi states, (ii) draw in private,
non governmental sources of capital, (iii) Resolving these issues requires not only
deliver infrastructure in a cost effective way financial investment, but also enhanced
and (iv) where possible, keep the projects co-ordination at planning level between
‘off balance sheet’. the various utilities and local authorities.
In terms of investment, there are currently
Following on the infrastructure needs two developments which have the potential
assessment in chapter 2, it is important to radically improve broadband in this
to identify the delivery model for those country. The unveiling of the European
projects and the possibility of keeping them Commission’s €50bn Connecting Europe
off balance sheet. Facility in October 2011 should have a
significant impact on this sector. The
i) Investing in Broadband second development will be the publication
Forfás and the National Competitiveness of the National Broadband Plan by the
Council have identified the roll out of Department of Communications, in July of
advanced broadband as the number this year.
one infrastructural priority to enhance the
productive capacity and competitiveness of Delivery
this country. The Government must maximise the
potential benefit from the Connecting
To date, the overwhelming dependence on Europe Facility by leveraging as much non-
the private sector to invest in broadband - governmental capital as possible for the
with the State only stepping in to address roll out of broadband projects. To do this, it
locations of market failure - has meant will first need to set down concrete targets
that Ireland severely lags behind other for fibre roll out. Failure by the private
competitor countries, in terms of upgrading sector operators to step forward with a
the local broadband access network to plan to address the shortfall over a short
fibre and offering very fast broadband period, should mean that the Government
speeds over fibre. In Ireland only 0.5% of would look to the existing commercial
connections are over fibre compared to an semi states to co-fund the project. As user
OECD average of 12% and 55% in Japan. fees charged to the market for broadband
Of the 28 OECD countries, Ireland ranks should cover more than 50% of the
14th in this area22. operating costs of the scheme, this scheme
should stay off balance sheet.
While the perception may be that
broadband access in remote areas and ii) Retrofitting & Energy Efficiency
locations on the Western Seaboard is In the 2009, the Government’s National
the only deficiency in this sector, in reality Energy Strategy committed to achieving
a reduction of 20% in energy demand
through energy efficiency measures across
22 Forfás, (2011). the whole economy by 2020. ResidentialIrish Congress of Trade Unions
Delivering Growth & Jobs
stock is expected to contribute 35% to a large variation in the improvement to a 17
meeting this target and retrofitting will house’s energy efficiency depending on the
play a significant part in improving energy works undertaken.
efficiency. While retrofitting needs are
not confined to residential housing, it is Curtin (2009) suggests - based on the
arguably the most difficult sector to reach grants allowed under the previous schemes
in adequate numbers and to fund. and total investment levels - that it would
take 85 years for the entire housing stock
The Better Energy National Upgrade to reach a minimum C1 level.
Programme was launched in May 2011,
replacing previous energy efficiency and To ensure that energy efficiency savings
renewable energy programmes and it accrue across all the population and that
set out an ambitious target of upgrading fuel poverty rates are reduced in a uniform
one million homes, businesses and manner, a strong economic case can be
public buildings. made for a deep retrofitting strategy for
Ireland. The funding requirement would
Yet, just €76.1m was allocated under be up to €1b-€1.5bn per annum, to cover
the public capital programme for energy 100,000 households each year over the
efficiency measures in private residential, next 10 years and would generate 23,000-
low income households and public 32,000 direct new, green jobs25.
and commercial buildings for 2011.23
Furthermore, the Government is committed Delivery
to moving to a system of non exchequer The commercial semi states in the energy
funded energy efficiency schemes by 2014. sector already play a key role in this area
While ambitious targets for retrofitting and and will be even more crucial to the roll out
energy efficiency upgrade works have been of retrofitting post 2014, when the State
set down, there is much less certainty exits the financing of retrofitting. In this
about the sources of funding of this work. regard, any funding initiative will remain off
balance sheet.
Estimates of the number of energy-
inefficient homes in both jurisdictions vary iii) Public Transport
with some estimates putting the number at Over the past decade Ireland’s road and rail
over one million in the Republic24. network has received significant investment
leading to a transformation in journey times,
Notwithstanding the fact that a number quality and capacity, particularly in the main
of homes have already availed of the inter-city routes.
State’s grant schemes to improve one or
more parts of the house, there remains However there remains a significant job
of work to be undertaken in a number
of primary road projects. A number of
23 DKM and RICS (2012).
24 Curtin J. (2009). 25 Curtin J. (2009).Irish Congress of Trade Unions
Delivering Growth & Jobs
18 these projects is listed in Appendix 1 delays. The introduction of new forms
along with their estimated total costs and of capital, such as from the private
associated employment. pension funds, should help to overcome
a number of these problems.
Furthermore, a large amount of public
monies has already gone into the planning • Investment in the cycling network is
and design of key rail and light rail projects, important, including tourism routes such
particularly in the Dublin area. Where the Green Way in Mayo (on a defunct
projects have already passed the planning train line to Achill). The Dublin Bay
stage and have a proven potential (a cycleway - Bray to Howth - should be
positive net present value for the excess started now.
of benefits over costs for the lifetime of
the project) stimulus funding should be Rail, Light Rail and Bus
allocated and the projects undertaken. • Congress proposes that the BDX
In the case of other projects, economic connecting Luas line be given the go
evaluation work should proceed for ahead immediately (its Liffey bridge is
these projects ideally so that they can being constructed now).
commence from 2015 onwards, if they are
demonstrated to be worthwhile (benefits • Additional work needs to be undertaken
exceed costs). to speed up rail including passing loops
for single tracks, improved signalling
Road which will also increase speed and
• The Government must bring forward frequency.
its financial commitment to the A5.
Already the Northern Ireland Executive • Priority should be given to bus priority
has decided to forge ahead with schemes including Bus Rapid Transit
plans to commence in 2012/2013, and high frequency bus lines with
notwithstanding the significant scaling special vehicles with multiple doors
back by the government in the Republic for fast delivery, for all the major cities
of its share in the project. of Ireland – Dublin, Cork, Limerick,
Waterford and Galway.
• The N11 Arklow/Gorey and the N7
Newlands Cross Interchange projects • In order to improve the customer
have been bundled but have been service, there should be investment in
delayed to date due to financing issues. smart transport including building on the
The EIB recently confirmed loan approval phone apps for timetable for buses and
for this bundle along with the N17 Gort- trams and the National Journey Planner.
Tuam road. All three projects should be Much could be done to integrate the
commenced as soon as is possible. various modes in the public transport
system using new smart applications.
• The New Ross-Enniscorthy road, the
Galway city outer bypass (N6) and • The rehabilitation of the Limerick to
the Ballaghadereen bypass have been Foynes railway line for freight traffic is
identified for delivery, but are subject to a viable project. This would connectIrish Congress of Trade Unions
Delivering Growth & Jobs
the most important deep water port on Irish water was established in 2011 and 19
the west coast with the national railway work is currently underway to transfer
network. This proposal is supported the water investment maintenance
by the Shannon port company, and the programmes across from the 34 local
cost is estimated at €10- €12m down authorities. Congress disagrees with the
from an original estimate of €24m. The approach currently being adopted.
National Transport Authority is believed
to be sympathetic to this proposal. The public capital programme has
Freight is profitable division within Irish allocated over €1.4bn to water services
Rail, accounting for 1% of train mileage investment over the period 2012-2016,
and 10% of revenue. with €165m going to the rural water
programme. Water metering is an additional
Delivery component of this plan and will be funded
There is a long history of PPPs and by loans/project bonds from the NPRF
concessions in the delivery of road projects and the user charges payable over a 20
in Ireland and for future projects it should year period.
be possible to keep the bulk of those
discussed above off the State balance In the context of our plan to deliver jobs
sheet. While availability payments will have and growth, water and waste water
to be paid in the case of the N11 and N7 investment will be a key pillar but the
projects26 it appears that the State will sector presents two challenges in terms
not bear the full demand risk and so the of (i) generating sustainable and decent
projects should be eligible to remain off employment that represents value for
balance sheet. In the case of investment money for the State and (ii) the status of
in bus and rail, an issue does present in the investment projects on the State’s
attempting to keep these off the State’s balance sheet.
balance sheet. However innovative
mechanisms could potentially be found to Delivery
get around this. To date, all PPP projects in the water
sector over the last decade have been
iv) Water & Waste Water Treatment on the Government’s balance sheet. With
Over the past decade, significant over 80% of operational costs of water
investment has gone into the upgrade of supply and treatment typically attributable
water and water treatment facilities in this to capital costs, it would be impossible
country. But with leakage rates averaging to generate water charges of the scale
43% across the country27, particularly necessary to cover these costs28.
around the Dublin area and spare capacity
levels at crisis point, the scale of the v) Health & Education
remaining remedial works and work on new Demographic change will continue to place
sources of water supply is enormous. pressure on public services like education
and health. In the education sector, the
26 Dept. of Public Expenditure and Reform (2011).
27 Forfás (2008). 28 IbidIrish Congress of Trade Unions
Delivering Growth & Jobs
20 Government has already initiated the in the range of €250m, with the potential
construction of a new bundle of primary for 2750 jobs to be created during the
and secondary schools. This will be the construction phase.
first of two bundles to be delivered by 2017,
along with upgrade works in another 180 The Government has also committed to
existing schools. the roll out primary health care centres. If
commenced, an estimated 2671 jobs could
To date, school construction projects have be created from the construction, design
been delivered by PPP and it is expected and ‘off site’ works associated with the
that this will be the case in future bundles. delivery of 30 primary health care centres.
The medium term capital investment Delivery
plan (2012-2016) has also committed to To date, it appears that all publicly funded
delivering two very large infrastructure health construction projects have been
projects in the areas of both health and carried on the State’s balance sheet. While
education. Yet the delivery dates of these the National Children’s Hospital may benefit
projects remain far from clear. from non exchequer sourced money, the
project is likely to be on the State’s balance
The Grangegorman development agency sheet. In contrast, most of the PPP funded
was established in 2006, planning school construction projects in recent years
permission has been secured for the site, have remained ‘off balance sheet’ and it
but construction has been delayed due envisaged that such an arrangement will
to a lack of funding. Upon completion, it continue for future projects.
will concentrate all DIT teaching activities,
its 22,000 students and 2000 staff into
a single location, bringing with it a major
positive spill over effect to the north inner
city of the Dublin. Some 450 full time
construction jobs will be created each year
over a 10 year period and it is expected
that an additional 1161 jobs will be created
when DIT is fully functional from the site.
The total construction cost is expected to
be of the order of €220m.
Development of the National Children’s
Hospital awaits agreement on the preferred
site and planning permission. The
Government expects to allocate funds from
the auction of the National Lottery licence.
Although construction cost will depend
on the final design, it is estimated to be4
Irish Congress of Trade Unions
Impact on Employment
Delivering Growth & Jobs
and the Economy
Work has been undertaken by Nevin relationships especially since the onset of 21
Economic Research Institute29 (NERI) who recession in 2007 all models are subject to
have used the HERMIN model to project qualifications in the short-run.
the short-run impact of an investment
stimulus on employment and GDP30. NERI calculated the economic and
The model uses a series of equations employment impact based on a €15bn
to estimate the impact of changes in stimulus over 5 years (see table overleaf).
underlying conditions and outcomes (for The Congress plan targets upwards
further discussion of HERMIN refer to of €10bn over a 3 year period and is
Bradley, Whelan and Wright, 1995). The conscious that estimates produced by a
model makes use of historical data over a partial equilibrium model cannot account
long period to estimate relationships. Due for the deflationary impact of other
to uncertainty and volatility in underlying budgetary measures.
Table 1: NERI; Estimated impact of a combined public, private and European
investment stimulus of €15bn over five years
2013 2014 2015 2016 2017
Additional Employment
Additional numbers 46,052 64,353 54,451 55,040 43,127
% increase 2.4 3.4 2.8 2.9 2.3
Lower Unemployment
Fall in unemployment % -2.1 -2.3 -1.8 -1.2 -1.1
Additional GDP
Additional € billion 4.639 7.219 7.084 7.830 7.203
% increase 3.0 4.5 4.3 4.6 4.1
Source:
Calculated using HERMIN macroeconomic model. See O’Farrell forthcoming (2012)
Notes:
The additional investment is based on €3bn in 2013, €4bn in 2014, €3bn in 2015 and €3bn in 2016 and €2bn in 2017.
The additional GDP calculations are in constant price terms.
29 NERI (2012).
30 The HERMIN macro model of the Irish economy is part of
the Cohesion System of HERMIN models currently used
by DG Regional Policy for the purposes of analysis of the
impacts of Structural Funds on long-term development.Irish Congress of Trade Unions
Delivering Growth & Jobs
22 Multiplier Effects a long-period of time may underestimate
It is frequently assumed that the GDP the short-term positive impacts of a
and jobs ‘multiplier’ effect of additional stimulus today.
investment in capital is low in Ireland as
it is a small open economy. However the Job Creation
import content associated with various Estimates vary as to the number of jobs
sectors varies greatly across the economy. that would be potentially created in different
A number of studies undertaken here in construction projects. The Construction
Ireland suggest a significant multiplier Industry Council estimate that for every
effect associated with successive national €1m invested into a construction project,
development plans and public capital an average of 11 direct and direct jobs are
programmes, (Lane and Benetrix, 2009). created – see appendix 1. In 2009, the
Department of Finance surveyed other
It is worth noting that a number of these Government departments to establish the
studies were undertaken when the Irish employment intensity of particular capital
economy was on average recording growth investment projects- see table 2.
rates above trend. In the context of Ireland’s
current growth trend with major excess
labour and productive capacity in the
economy, it is reasonable to assume that
multipliers estimated in the past coveringIrish Congress of Trade Unions
Delivering Growth & Jobs
Table 2 Estimated Labour Intensity of the Construction Phase of 23
an Infrastructure Investment
Based on the projects identified in section 4 and the potential costs of these projects, we
estimate that somewhere in the region of 30,000 direct and indirect construction jobs could
be generated per annum over the lifetime of the programme.
Investment Sector Jobs per €1 million invested
Health capital 12.0
Regional and local roads 11.5
National roads 10.0
Prisons 10.0
Schools 9.3
Housing 8.0
Public transport 8.0
Water services 8.0
Small-scare refurbishments, fit-outs etc Above average
Source: Department of Finance (2009:14-15).
Return to the Exchequer from a a permanent increase in the long term
Stimulus Programme productive capacity of the economy.
The returns to the Exchequer would be
over the short term and in the medium We have set out additional information on
to longer term. Over the period of project the type of projects identified in Section 4
itself, there is a direct and indirect gain in the Appendices.
to the Exchequer in terms of the income
and construction related revenues and the Appendix 1 provides estimates of the
savings accruing to the Social welfare fund labour intensity associated with different
from numbers exiting the Live Register. For types of construction projects as estimated
every €1 spent on an infrastructure project, by the Construction Industry Council.
it is estimated that close to 51% of this
accrues back to the State, representing a Appendix 2 provides a list of road projects
very significant return to the Exchequer. which have passed through the planning
process but have been delayed due to
Over the longer term, Exchequer savings financial and other difficulties.
are accrued in terms of delivering
infrastructure in a period of cheaper input Appendix 3 lists other infrastructural
prices and there is a gain arising from projects that have been costed in terms of
both design and construction costs.Irish Congress of Trade Unions
Conclusion
Delivering Growth & Jobs
24 Since the Crash of 2008, Congress has The economy may be technically out of
advocated an inclusive approach to dealing recession but this is relatively meaningless
with the downturn. Our 10 Point Plan when the domestic economy remains
for National Recovery (November 2009) in recession.
was the first major initiative with detailed
proposals on how to deal with the crisis. That is why a growth initiative is now
required. Investment is the key to future
Our Pre-Budget Submission of March 2009 economic growth in this country. Not only
had many innovative ideas on job retention does the investment itself generate its own
and maintenance. multiplier effect in terms of jobs created
and increased purchasing power, more
For over three years, Congress has argued importantly it would tackle the medium
that while it is essential to get the public term infrastructural deficiencies in the Irish
finances back on track, doing so within economy that have such a bearing on the
too short a period would exacerbate the long term growth potential of the country.
domestic recession. This, sadly, has proven
to be correct. €24.4bn has been extracted Ireland must have its own major targeted
from the Irish economy over five budgets investment programme. The time for
with a major deflationary impact. action is now.Irish Congress of Trade Unions
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