John FitzGerald: State needs to get better at running the rule over big projects

EU structural funds have played a key role in facilitating investment in Ireland's modern physical infrastructure and human capital. Over the 1990s the EU transfers to Ireland came to €8.5 billion (1.5 per cent of GDP), falling to around €6 billion in the subsequent decade.

These EU transfers were obviously important, particularly in the early 1990s, in enabling Ireland invest more than our constrained domestic public finances would allow. But another benefit was to persuade us to ramp up public investment at a time when, after the depressed 1980s, Ireland had lost confidence in its own future.

To draw down the EU money the Irish government had to commit additional taxpayers’ funds to investment in physical infrastructure like roads, water and sewerage systems, and, even more important, in education and training. So the injection of EU funds got us to restart these essential public investment programmes.

A second, less obvious, benefit of the funding was that the EU required Ireland to account for how well it used the funds, and show whether EU taxpayers were getting value for money.

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This resulted in the development of a sophisticated methodology for deciding whether major projects should be undertaken, and these appraisal techniques have been further improved over the years.

Decisions on direct public investment, and on IDA support for private investment projects, are subject to a system of formal evaluation of their likely cost-effectiveness. While the improved methodology cannot guarantee that public investment decisions are always wise, it has substantially improved on the practice of the 1970s and 1980s.

Another factor guiding better decision-making has been a concern to maintain a good reputation in that regard with our EU funders. Having shown that we had made good use of the first round of EU structural funds at the start of the 1990s, Ireland’s positive reputation helped it attract additional EU resources in subsequent rounds.

Wise investment

However, now that the EU is no longer a significant investor in Ireland we don't benefit from its focus on value for money, nor are we still seeking to uphold a reputation in Brussels for wise investment.

Irish taxpayers, who now almost fully fund our public investment programme, appear to show more tolerance than Brussels officials wherever a major project goes ahead in spite of it being poor value for money.

In assessing the value of any potential investment, key parameters are how much the State should pay for projects that create additional jobs, and what is the cost to the economy of raising tax revenue to pay for new projects.

In valuing projects the number of jobs to be created is a very frequently used metric. However, over the last quarter of a century we have seen that when the economy is working well, we operate close to full employment. In those circumstances, there may be no net new job creation where there is no slack, or else the new employees have to be attracted in from abroad. Those new workers in turn will need to be housed.

So for Dublin, the value appraisal methodology only counts for 10 per cent of additional jobs as adding net value, and it factors in the extra congestion costs. In the Border Midlands and Western (BMW) region, where congestion and housing issues are much less acute, the methodology assumes that 20 per cent of additional jobs add net value.

Public funds

Another important parameter is the cost of the public funds needed to finance a project. While the cash cost of the children’s hospital is heading for €2 billion, a hidden cost is the effect on the economy’s output of raising the revenue to pay for it. Other things being equal, higher taxes on income discourage work, and a knock-on effect can be lower participation in the workforce and lower national output than would otherwise be achieved.

While the sophisticated methodology for assessing the value of public investment projects is now widely applied, this does not guarantee that final costs will reflect initial estimates, the children’s hospital being a clear example. However, across the huge range of projects undertaken by the State, undoubtedly this appraisal system is helping to deliver more sensible decision-making.

As a democracy it is open to governments to undertake projects like rural broadband that may offer poor value for money – where politicians see other benefits, for example to rural society, that may tip the balance.

However, when the value-for-money calculations are out in the open, the public can see what gives poor value for money. That welcome transparency may encourage better decision-making in the future.