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On Tuesday 13 October, the government announced what has been called an unprecedented budget in size and scale. It includes €87.8 billion of spending and an estimated deficit of €20.5 billion for 2021. There is an allocation of €10.1 billion for capital expenditure. This is small relative to the overall spend but critically important in the context of a recovery from the economic effects of COVID-19, writes Rob Costello of our Infrastructure & Government practice.

Most of the capital allocation relates to commitments made to building and maintaining infrastructure set out in the National Development Plan (Project Ireland 2040) and the Programme for Government. This includes funding across housing, environment, climate action, education, justice, health, defence, communications, and transport.

Critical infrastructure

The infrastructure around us is critical to enable our society to function and our economy to thrive. Over the last nine months in particular, the resilience of our infrastructure has been tested. Despite the complete disruption to how our economy operates and how we live our lives, our infrastructure key workers have ensured the operation of critical services including power, water, telecoms, and transport systems. We have also seen innovative infrastructure solutions in response to COVID-19 including the rapid development of medical capacity and adaptive use of space.

Role in the recovery

In addition to keeping the lights on, infrastructure can play a wider role in our recovery.

In an environment of over 15 per cent unemployment, the right increased capital spending can create a significant amount of jobs in both the development and operation of strategic infrastructure for our society. It can also generate general economic activity, for example through greater connectivity. Investment in social infrastructure such as housing, health, and education will also play a role in driving prosperity into the future.

Leadership

When it comes to capital spending, we need strong leadership from the government. This means having a long-term vision. Capital investment by its nature takes time to deliver for the benefits to accrue, often up to 20 years. Historically as a State we have been poor to plan long term. This is why we have a water infrastructure that is creaking at the seams and such long waiting lists in our health system. But we have been good in other areas such as roads and energy.

Since the announcement of Project Ireland 2040 and as recently as this week’s budget we are seeing stronger signs of leadership in infrastructure delivery. Progress is being made when it comes to housing, climate action, and communications. However, more can be done.

Blockages

There are a significant number of projects caught up in bureaucracy. It’s no surprise that when you look at the Project 2040 tracker that most of the projects in the latter stages of development or ‘shovel ready’ are in the transport sector while others, for example in housing, water, and health, lag behind. This does not relate to prioritisation, rather the ability to get projects delivered. Across the government there are gaps in capability when it comes to infrastructure delivery and there are often inconsistencies and a lack of joined-up thinking when it comes to progressing capital investment. This is improving with updates to Public Spending Guidelines and more cross-department collaboration, but old habits die hard and more can be done to improve delivery.

Low cost of funding

Earlier this year the National Treasury Management Agency raised €1 billion of debt, repayable in 2029 at a negative interest rate of 0.15 per cent. This marked the cheapest borrowing in the history of the State. While not all future borrowing will attract negative interest rates it is highly likely that the low interest rate environment is here for some time. This creates an opportunity for Ireland to borrow and to invest in high economic and social impact infrastructure projects and programmes, and although the debt will have to be repaid, the economic benefits generated by these projects will likely generate the GDP increases required to generate Government revenues (e.g. taxes) to repay them.

If the government can prioritise the right infrastructure, we can build now and afford to repay later. This approach has been taken in parts of Budget 2021, but a more targeted focus on capital spending is needed. Let’s hope that comes in the National Development Plan review.

A summary commentary of the capital spending set out in Budget 2021

Health

The budget includes €22 billion in spending on health, €1 billion of which is capital expenditure. This is the highest level of health spending in the history of the State. There are a number of longer-term current expenditure commitments including plans to recruit 16,000 new health workers. However, with hospitals already at capacity in a lot of cases, and ever-growing waiting lists, it is unclear where the 16,000 people will work. Capital plans to increase primary, acute, and elective care need to be progressed through delivery.

Housing

Capital funding of €2 billion has been made available for housing in 2021 with a target to build or acquire 10,300 social homes in the year. Of the €2 billion, €1.5 billion appears to be for these homes. Working that back into 10,300 homes gets a build cost of approximately €150,000 per home, which seems low. The Government currently has several models in place for the delivery of social housing including the Social Housing Lease. Despite significant interest from national and international sources of capital, concerns in relation to some of the lease terms will need to be addressed to attract investment and accelerate delivery.

Communications

In recent years, the Government has made significant steps in the development of our communications infrastructure and in addressing the urban/rural digital divide through the National Broadband Plan. This contract was signed in November 2019 and the 2021 Budget includes an allocation of €132 million to pay for subsidies towards the plan. In the backdrop of COVID-19, where more and more people are working and being educated from home, a resilient high-speed broadband network will be critical in the coming years. The communications budget also includes funding for the National Digital Research Centre and the National Cyber Security Centre, which involves protecting critical national infrastructure.

Climate action

Budget 2021 includes commitments to meet the Climate Action Plan including funding of home retrofits, continued provisions of grants for electric vehicles, and grants for home and public electric vehicle chargers. It is light on detail with respect to models of delivery for retrofits, but we expect further information as part of the National Home Retrofit Scheme. It is also silent on the Renewable Energy Support Scheme auctions which are ongoing.

In addition to the above, the rise in carbon tax from €26 to €33.50 will help drive private sector investment, as well as take up of low carbon alternatives, such as electric vehicles.

Education and Higher Education

The 2021 capital allocation for education of €740 million is predominantly aimed at funding school building projects to increase capacity by 23,000 school places. The 2021 allocation shows a continuation of this plan to increase capacity to address demographic and population growth.

The 2021 capital allocation of €270 million for higher education involves funding for 20 building projects, six of which are under a public private partnership (PPP) programme, an energy efficiency pilot and funding for innovation and research. As one of the areas most critically impacted by COVID-19, with international student fees falling off a cliff, it is likely that the higher education sector will need further funding to deliver their ambitious master plans in the years to come.

Transport

Budget 2021 includes €2.7 billion in capital allocation towards transport, the highest of any sector across  Government. The majority of this funding relates to the progression of well-developed programmes within the remit of the National Transport Authority including BusConnects, Metrolink and the DART expansion. There are also commitments to invest in cycling and walking, rail network and station upgrades and the purchase of rolling stock for the InterCity and DART network.

Justice

There has been €258 million allocated to capital expenditure in justice on Garda information and communications technology (ICT), a forensic science laboratory, prison upgrades, and courts modernisations. The long-awaited Garda Stations and Family Courts PPP projects have not yet been announced.

Defence

The 2021 capital allocation has increased to €131 million for replacement and upgrade of essential military equipment, necessary building and maintenance works and ICT projects across the Army, Air Corps and Naval Service.

This article originally appeared in the Business Post, and is reproduced here with their kind permission.

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