Paschal Donohoe: Government committed to long-term capital investment plan this year

Infrastructure Summit

Government will increase Capital Expenditure to meet society’s needs

Minister for Public Expenditure and Reform tells The Sunday Business Post Infrastructure Summit that the Government is committed to producing a long term capital investment in 2017.

Key points of Minister Paschal Donohoe’s speech at National Infrastructure Summit 2017

 

  • Government committed to increased capital spending for medium-term growth
  • Capital investment planning needs to be based on existing strong infrastructure base for Government to improve.
  • Government committed to long-term capital investment plan this year
  • Government will increase capital expenditure to meet the society needs

 

Full Speech by  Minister for Public Expenditure and Reform Paschal Donohoe TD

Good morning everyone. I am very pleased to be here today to speak to you about the Government’s plans for investing in Ireland’s infrastructure.

The Aviva Stadium has been a source of both joy and heartache for Irish sporting fans – I hope today to bring more of the former and less of the latter in my remarks to you!

I have a very simple message this morning.

The Government is determined to improve Ireland’s infrastructure over the coming years both by upgrading the existing stock of infrastructure we have and by investing in new projects.

Priorities

We indicated our intention to do that in the Programme for a Partnership Government which identified a number of priorities to benefit from such increased investment, including:

  • Transport;
  • Broadband;
  • Health;
  • Education; and,
  • Flood defences.

And we will achieve this through:

  1. Long-term strategic planning;
  2. Improved infrastructure management; and,
  3. Increased capital expenditure.

In my address today, I will outline how this approach will help address over the coming years the widespread demands for high quality infrastructure that exist across Ireland.

Because delivering this infrastructure will play an essential part in making our society a better place to live and work in the future.

IRELAND’S INFRASTRUCTURE BASE

At the outset we need to recognise how far Ireland has come over the past 20 years in terms of the public infrastructure we now possess and the economic capital that exists:

  • We have very strong ports;
  • We have high-quality international airports;
  • We have world-class motorways;
  • We have the Luas and rail network; and,
  • We have a very strong energy network.

All of this existing infrastructure will continue to be improved and developed over the coming years.

PLANNING FOR PROPER PUBLIC INVESTMENT

We are now planning how this will be achieved in the context of an economy that has returned to stable growth and the public finances that have been restored to a sustainable trajectory.

The business case for increased public capital investment is irrefutable and the benefits clear-cut.

The IMF’s Autumn 2014 World Economic Outlook contained a comprehensive analysis of the macroeconomic effects of public investment in a large number of countries.

The findings suggest that in countries with infrastructure needs, now is a good time for an infrastructure push.

And the commitment to increased public investment spending contained in last year’s Programme for Government was a concrete demonstration of the Government’s intention to act on this advice.

The IMF’s research highlighted that public infrastructure investment:-

  • – raises output in the short term by boosting demand;
  • – raises the economy’s productive capacity in the long term; and
  • – if done correctly can pay for itself.

However, the study also makes a number of key points that must guide our capital investment planning.

First of all, it cautions against the mind-set that infrastructure investment should be increased willy-nilly.

Consequently, it is essential that we ensure that increased capital spending:-

  • is efficient, achieving value for money for the taxpayer; and
  • is impactful, in terms of supporting the strengthening of Ireland’s medium-term growth potential.

Contrary to what is articulated by some in public debate, increased capital spending for its own sake is not the road to some economic nirvana.

Indeed, the IMF research makes clear that the potential gains from infrastructure investment are shaped by a number of factors.

First of all, the efficiency of public investment is crucial.  A clear prioritisation of the allocation of capital resources to high return projects is crucial.

A relentless focus on efficiency will deliver the benefits and full value of increased capital spending.

Secondly, we must be mindful of the extent to which there is spare capacity to sustainably accommodate increased public capital spending.

Measurement of the cyclical position of the economy in real-time is, of course, very challenging.

Indeed, often likened to driving while only looking at the rear view mirror.

However, the lesson from the period running up to the fiscal and economic crisis which hit almost ten year ago is inescapable:-

– if the economy is driven too fast it will overheat; and

– bust inevitably follows boom.

The performance of the Irish economy continues to exceed expectations – with most economic indicators back to pre‑crisis levels.

But alongside this, we are faced with significant bottlenecks in a number of areas that have a clear potential to erode our medium-term growth potential.

In addition, we need to plan to mitigate the ‘known unknowns’ arising from, for example, Brexit and potential developments in global trade and investment that would impact disproportionately on Ireland’s growth model.

Against this backdrop, we must strike the difficult balance of increasing investment spending in the coming years, to enhance the supply capacity of the economy, while also ensuring that economic growth overall is sustainable.

It’s clear we need a mature and reasonable debate on how we manage these trade-offs, anchored in evidence – rather than in assertion or opinion – to achieve the best possible long-term outcomes for our society.

It’s would be simply reckless and foolhardy to act as if those trade-offs don’t exist.

FUNDING OF INVESTMENT

Funding of increased investment is another key factor.

It is very important to avoid any wishful thinking on the options available for funding increases in public capital infrastructure in Ireland over the coming period.

Without stating the obvious, there are essentially two types of infrastructure: publicly-funded infrastructure and privately financed infrastructure.

Publicly-funded infrastructure is on the General Government balance sheet.

Any increases in Government expenditure, and hence in funding for public infrastructure, are constrained by the requirements of the Expenditure Benchmark pillar of the Stability and Growth Pact.

While I know there is debate about the EU fiscal rules, they have been critical in restoring the sustainability of Ireland’s public finances underpinning the sustained improvement in Ireland’s economic performance.

The Government is making use of our continued economic growth to increase capital expenditure over the coming period without the need to raise taxes.

This is clearly demonstrated by the fact that between 2014 and 2021 Ireland’s capital expenditure will grow by more than 100% – from €3.6bn to €7.2bn per year.

Privately-financed infrastructure also plays an important role in Ireland.

This can be off-balance sheet and expenditure on such infrastructure is unrestricted by the limitations set down in the fiscal rules.

Infrastructure in this category can also make use of the readily available financing options from the likes of the EIB and ISIF.

However, to be classified as privately-financed infrastructure and off-balance sheet, the private sector must bear the majority of risk of the project.

If these risks materialise, the private sector must therefore absorb them.

Privately-financed infrastructure must also source the majority of its revenue from non-Government sources such as user charges.

For any such project, an assessment needs to be made as to how viable the required level of user charges would be.

My Department is actively investigating all possibilities to encourage infrastructure projects of this nature and my officials are open to discussing all possibilities with the relevant stakeholders.

CAPITAL PLAN

You will be aware of the Government’s Capital Plan, published in 2014, that sets out a framework for infrastructural investment in Ireland out to 2021.

Total State-backed investment under the Plan amounted to €42 billion over the period.

Added to this, the Programme for Government saw an additional €5 billion in future investment announced.

As part of the Plan, to complement traditional procurement, alternative means of funding were explored, including ‘off-balance sheet’ methods allowed for under the fiscal rules as I have just discussed.

As well as the Exchequer and commercial State sector investment elements of the plan, a new third phase of Public Private Partnerships, or PPPs, to a value of €500m was announced.

Some of the major Exchequer projects included in the Plan are, for example, as follows:

  • Luas Cross City;
  • Metro North;
  • The Dunkettle Interchange;
  • The new Children’s Hospital;
  • The School Building Programme; and,
  • The Housing Action Plan.

A stock-take of progress to date on delivery of the Capital Plan will be published as part of this year’s Mid-Year Expenditure Report.

MID-TERM REVIEW OF CAPITAL PLAN

You may also be aware that a commitment was made in the Capital Plan to conduct a Mid-Term Review in order to assess such progress and provide the Government with an opportunity to reaffirm priorities.

Under the Review, there is approximately €2.6 billion of unallocated capital resources which will be allocated over the period 2018-2021.

The Review is aimed primarily at advising Government in the context of Budget 2018 on how the additional funding committed by Government for capital investment should be allocated over the remaining period of the plan.

This will examine priority areas for investment, consistent with the objectives of the existing Capital Plan and also reflecting the specific investment priorities set out in the Programme for Government.

I am on the record as saying that it is crucial that the Review is underpinned by clear priorities, strictly related to our economic and social needs and which can be accommodated within the available capital resources.

My Department wrote to all other Departments in January initiating the review process and seeking submissions, including proposals for reprioritisation in light of developments since the plan was published, as well as proposals for any of the additional capital funding available.

These submissions are currently being received from Departments.

Last week my Department commenced a public consultation to ascertain the views of the public and key stakeholders on what our national infrastructure priorities should be in the short and medium-term.

This process will be open to all, consistent with my Department’s Consultation Principles & Guidance developed under Ireland’s Open Government Partnership National Action Plan.

I would strongly encourage you all to log on to my Department’s website and share your views on the Capital Plan.

Though I suspect you hardly need my encouragement!

 A LONG-TERM INVESTMENT PLAN

Our ambitions do not stop with the seven year Capital Plan though.

As you may be aware, the Taoiseach, in his recent address to the Institute of European Affairs reaffirmed that the new National Planning Framework for spatial planning due to be finalised later this year will be complemented with a long-term 10 year capital plan.

The National Planning Framework will provide a crucial strategic plan for Ireland’s long-term spatial development.

It will inform all national infrastructure investment in the future to better influence patterns of development and contribute to wider national objectives in areas such as;

  • transport,
  • water resource management,
  • waste management,
  • climate action,
  • communications and energy network roll-out and
  • social infrastructure development in areas such as health, education and community facilities.

Producing a long-term plan such as this will provide greater certainty to businesses and society at large who depend on our infrastructure, as well as providing certainty to those involved in the delivery of that infrastructure on what construction is likely to be coming down the tracks.

This will enable the industry to plan accordingly to ensure the capacity is there to provide the infrastructure in an efficient manner.

This kind of strategic planning will need to explore both how we can manage demand as well as the impacts on demand of many different factors such as demographics, economic growth, service demand, climate change, Brexit, regional development and so on.

MANAGING OUR INFRASTRUCTURE

Technology is also having an ever increasing impact on the demand for infrastructure.

For example, technology is leading to increased demand for communications infrastructure to support increased levels of data usage and mobile technology, while alternatively it can reduce demand, such as the development of smart grid management systems or driverless vehicles which can use the existing road capacity more efficiently.

Developments such as these will assist us in planning the appropriate demand management strategies in order to ensure that we are optimising both our existing and future infrastructure over the next 10 years.

Other examples of such approaches include road pricing, smart ticketing, smart metering, real time traffic management, and user charges.

As the field of behavioural economics has shown us, pricing can be an extremely effective demand management tool, either through subsidies to increase take up or charges to reduce it.

One of the best examples in Ireland has been the introduction of the plastic bag levy which saw a huge reduction in their use.

Applying this concept to our infrastructure use is something we must strongly consider.

We also need to think about whether Ireland is fully optimising its existing infrastructure.

I believe this is an area where we can certainly improve and which will form an important consideration in our infrastructure planning going forward.

In recent years, the likes of Australia, New Zealand and the UK have all developed different variations of long-term infrastructure planning frameworks which have been considering these issues.

Each country’s framework differs in numerous ways but all provide useful insights as to how we might develop such a framework in Ireland.

The benefits of Ireland adopting suitable aspects of these frameworks are currently being examined by my Department.

CONCLUSION

So, to conclude:

  • The Government is committed to increased capital spending to enhance the economy’s medium-term growth potential firmly consistent with ensuring continued macroeconomic and fiscal sustainability.
  • Capital investment planning needs to be grounded by the fact that Ireland does have a strong infrastructure base from which this Government will further improve upon.
  • This Government is intent on producing a long-term capital investment plan this year.
  • We will focus on ensuring that we optimise the use of our existing infrastructure.
  • And finally, we will continue to increase capital expenditure over the coming years in order to meet the demands of our society.
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