Analysis: The value obtained for much State investment over the past few years is questionable, writes Cliff Taylor
Additional investment in selected major road projects is now expected to be announced by the Minister for Finance on Budget day - provided he can find the required room for manoeuvre.
However, the Government faces a substantial challenge in completing the major improvements to our creaking infrastructure, with the Exchequer actually cutting the amount of funds going into this area next year.
Presenting his spending plans for next year, Mr McCreevy pointed out that total State investment spending had soared from €2 billion in 1997 to €5.7 billion last year. In this context the planned reduction to €5.3 billion next year would maintain investment at a high level, both historically and by comparison with our EU partners, the Minister argued.
The problem, however, is that much of our infrastructure is now inadequate for the size of the economy, and massive investment is needed. Otherwise, our clogged roads and inefficient transport would take a heavy long-term toll on economic growth - and our quality of life. And not completing the required investment in new hospitals and schools would have a heavy social cost.
It is impossible to put figures on the potential long-term economic cost. However, it would be substantial. Some economists argue that the Minister should be prepared to borrow more to maintain high investment levels. Final judgment on his stance will have to await the extra investment and borrowing figures produced on Budget day. However, it is important to remember that the financial rationale for borrowing to fund such projects only stands up if they can produce an economic return.
A key problem is that the value obtained for much investment over the past couple of years is questionable. A recent report by Farrell Grant Sparks showed that the cost of programmes under the National Development Programme (NDP) rose by 32 per cent on average between 1999 and 2001. In the case of road projects, the rise was 62 per cent. This raises serious questions about the management of these projects and about the overall decision to pile money into this area at a time when the economy was booming and construction inflation was soaring.
The targets set for 2006 for the NDP will not now be met, and serious consideration is needed on our investment programme. First, the project management of investment programmes needs to be considerably tightened up to ensure that more and more State funds are not eaten up by inflation and that there is some prospect of delivering projects on time. This also involves tackling planning issues.
Second, the whole financing of the investment programme must be urgently reviewed. There may be a case for additional borrowing to fund capital investment, but this case must be proven. As pointed out in a briefing document this week from A & L Goodbody solicitors, the Government must also urgently clarify its position in relation to partnerships between the public and private sectors.
This is part of the role of the newly established National Development Finance Agency (NDFA).
The Government may also consider investing some of the proceeds of the National Pension Reserve Fund in infrastructural projects, through the new NDFA. And the new agency will also examine the feasibility of raising new borrowing - probably through bond issues - to help finance infrastructure. To make sense, this borrowing would have to be raised at attractive rates, as otherwise it would make more sense for the Government to borrow money directly using its high credit rating rather than doing so more expensively through a new agency.
Due to a ruling by Eurostat, it appears that any money raised by the new agency in borrowing would count towards general Government borrowing, the measure used by Brussels in assessing the finances of member states. However, whether this is any scope to raise some money off the State balance sheet remains unclear.
The Government is also due to consider another key part of the picture this weekend, when it discusses its National Spatial Strategy, which is intended to plan economic development across the State.
It would have made more sense, of course, to have completed this strategy before drawing up the NDP. But that would all have been a bit too logical.
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