Oireachtas Joint and Select Committees
Tuesday, 28 March 2017
Committee on Budgetary Oversight
Review of the Capital Plan: Construction Industry Federation
I welcome from the Construction Industry Federation Mr. Dominic Doheny, president; Mr. Pat Lucey, senior vice president; Mr. Philip Crampton, chairman, investment taxation and public spending committee; Mr. Tom Parlon, formerly of this parish, director general; and Mr. Hubert Fitzpatrick, director. They have been asked to give evidence to help the committee in its review of the capital plan.
I remind members and delegates to turn off their mobile phones as they interfere with the sound quality of the transmission of the proceedings. The presentation can be limited to ten minutes and will be followed by questions from members. Will members, please, ask questions rather than make statements?
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I invite Mr. Doheny to make his opening statement.
Mr. Dominic Doheny:
The committee offers the best hope in averting a national crisis. We are giving a clear warning that the lack of investment in infrastructure poses a threat to Ireland’s economic and social progress which can be averted through innovative thinking and flexibility on our behalf and that of the European Union. We must, however, act quickly as the situation is stark.
Ireland is last in the EU28 for gross domestic product invested in infrastructure. We invest only 2% of gross domestic product in productive infrastructure. The importance of investment in productive infrastructure in stimulating economic growth is well established. The late T. K. Whitaker identified the need to invest in productive infrastructure in his economic development document in the late 1950s which acted as a blueprint for the modern Irish economy. However, we are prevented from increasing investment in this area by the European Union’s fiscal constraints. The Government must seek a relaxation of the rules to enable capital investment in productive infrastructure to be made.
There is a consensus from independent bodies across Ireland, the European Union and internationally that Irish infrastructure is grossly inadequate. The Taoiseach has stated investment in infrastructure is critical. The Irish Fiscal Advisory Council told the committee that the level set out in the capital programme by historical and internationals standards was low. ICTU, IBEC, Chambers Ireland, the ESRI, the National Competitiveness Council, Engineers Ireland and the Irish Fiscal Advisory Council have all called for increased investment. Several chief executives of foreign direct investment companies such as Google, Apple and PayPal have identified it as a threat to further expansion of their sector. The European Commission’s recent country report identified inadequate investment as a threat to medium-term growth. The IMD World Competitiveness Centre and the World Economic Forum global competitiveness surveys rank Ireland poorly for infrastructure.
The construction industry is at the forefront of infrastructure delivery. We can confirm these facts on the ground and amplify the warnings. Our civil engineering sector which delivers productive infrastructure entered into negative activity levels last year according to Ulster Bank’s purchasing managers' index, PMI. DKM Economic Consultants forecasts that this negative cycle will continue to at least 2018, as the project pipeline dries up. This is an indication that the pipeline of Government investment will be dangerously low for the next few years. We need to radically increase the level of investment in infrastructure in the economy to 4%-5% of GDP to deliver sustained growth in the coming decade. The review of the public capital programme is under way, with a reported extra €5 billion becoming available as identified in the spring economic statement. This additional funding is inadequate, however, when one considers that 50% of it has been allocated for housing delivery. Of the remaining 50%, an increasing proportion will be spent in covering deprecation. DKM Economic Consultants states the proportion of investment spent on deprecation has grown from 20% in 2006 to 35%-40% since 2010.
If this trend continues, less money will be available for new investment each year.
The European Commission is among the chorus of bodies and institutions advising the Government on the need to increase investment in infrastructure. Through quantitative easing, the European Union has established what the National Treasury Management Agency, when its representatives appeared before the committee, described as "a supportive backdrop for our borrowing activity." In short, according to the NTMA, "the State is now borrowing at lower rates, for longer durations and from a wider investor base than was previously the case." With this level of funding available - Ireland's first 100-year bond was launched recently - now is the time for the Government to have the European Union relax the constraints of the fiscal space. I understand from our civil engineering side that tender prices are relatively low as the sector is still pricing competitively. This is the time for significant investment.
Owing to long construction lead-in times and public procurement processes, every year of delay in the allocation of capital investment is magnified. For example, additional allocations to the public capital review of 2017 scheduled for budget 2018 will likely see start dates for major infrastructural projects delayed until 2020. We understand more fiscal space may become available in 2018 if Ireland meets its medium-term growth target. However, waiting until 2018, combined with the time involved in the procurement process, would mean the positive economic benefits of new infrastructural projects would not become manifest until the mid-2020s. It is imperative that we act now, particularly in the face of a potential 4% decrease in gross domestic product arising from Brexit in the next decade.
DKM Economic Consultants estimates that every €1 million invested in infrastructure generates approximately €1 million in the economy through construction alone and also generates and sustains 12 jobs per annum. Applying these multipliers, the additional €2.5 billion in the public capital review, if invested correctly, could generate €2.5 billion in economic activity and 30,000 jobs over the course of construction. This is before the economic and social benefits of additional infrastructure are calculated. One of our recommendations is that a national, cross-departmental infrastructural investment target be put in place to tie investment to growth. A delivery unit should also be established to address bottlenecks and blockages in the system.
What is most frustrating about the current infrastructural crisis is that the Government is not using all of the tools available to it to increase investment and maximise the return on existing investment. What can we do? The Government must redouble its efforts to persuade the European Union to relax the fiscal space constraints for infrastructural investment in Ireland's case. It must access more of the available European Investment Bank funding, given that Ireland is in the lowest quartile for drawing down EIB funds. We must access more European funds for strategic investment, including EIB funding, and from the European Union's transmissions system for quantitative easing. We must increase the usage of public private partnerships, where appropriate, and improve the efficiency of the process. The current process adds 18 months to PPP timelines. The Government must adequately resource the modernisation of the public sector procurement process, as outlined in its medium-term strategy for the public contracts Act.
I thank members for their time and hope the committee can chart a path with us on this critical issue. Mr. Crampton will present some further slides.
Mr. Philip Crampton:
I thank the Chairman and members for inviting us to appear before the committee. The Construction Industry Federation made a detailed submission to it which I will attempt to summarise in approximately nine slides. I hope members will then have questions for us.
The first slide shows the economic scope and scale of the construction industry. The generally accepted sustainable level of investment in construction as a proportion of GDP is between 10% and 12%. As the figures show, the Irish construction industry falls far below this accepted norm. DKM Economic Consultants which helped us to prepare the submission predicts that the industry will grow by an annual average of 9% until 2020, reaching an output of approximately €20 billion. The construction industry and the Government must work closely together to ensure this growth occurs in the most efficient and sustainable manner, shaping the economy and society and ensuring we generate quality jobs and careers.
The next slide shows that the construction industry is one of the largest sources of employment in the State. We have forecast demand for an additional 110,000 employees, based on the targets outlined in the Government's Rebuilding Ireland house building strategy and the existing public capital programme. This will present a challenge to the industry and the State education and training system. We are working with SOLAS, the education and training boards and the Department of Education and Skills to attract people into the industry through the Central Applications Office, upskilling some of those on the live register and attracting members of the diaspora to return home. The slide shows the significant employment capacity of the construction industry. We expect to add approximately 50,000 new employees by the second quarter of 2018. We have established a skills forum with SOLAS to identify blockages in the system and ensure we will meet future demands for skills to deliver infrastructure and housing targets.
The title of the next slide, "Infrastructure Investment Dangerously Low", sums up our view of the current state of infrastructure and provides a sense of the scale of the problem. Ireland is at the bottom of the investment table. Slovakia, Latvia, Malta, Poland and Estonia all invest more than we do in infrastructure as a percentage of GDP.
As the Chairman noted and the committee will no doubt have found in its deliberations, there is consensus that Ireland's construction infrastructure is inadequate. The slide gives a sense of the scale of the problem. The comments made by the chief executives of the predominant foreign direct investment companies located here are worrying. Country managers of these companies are all being asked questions from their headquarters about housing, water and transport. Increasing investment is imperative, especially as we are spending an increasing proportion of investment in maintaining what we have, rather than developing new infrastructure.
The Irish civil engineering sector is competent and world class and relies, in the main, on public sector construction projects. However, the sector has been static for a number of years. This year it slipped into negative activity levels for four months in a row. DKM Economic Consultants predict zero growth or negative activity levels in the industry in 2017 and 2018. This essentially means that the public sector pipeline has dried up, making planning, investment and forecasting in the sector very difficult and threatening its capacity to deliver. Without a strong civil engineering sector, the housing and commercial and residential property sectors and overall competitiveness are damaged.
At this point, I will hand over to our vice president, Mr. Lucey, who is a former chairman of the Civil Engineering Contractors Association.
Mr. Pat Lucey:
The warning sign in civil engineering is that we have negative activity levels in the sector, with no sign of an improvement until 2019 at the earliest. As we know, civil engineering projects link the country, improving connectivity and accessibility and thereby creating opportunities for house and non-residential building, reducing journey times and improving safety and the work-life balance. With such a poor outlook, civil engineering contractors are pursuing opportunities in the United Kingdom and further afield. When current projects come to an end, they will move their resources out of the country. While the Construction Industry Federation welcomes this morning's announcement of €226 million for local infrastructure, available capacity is such that civil engineering contractors could do much more for the economy.
Mr. Philip Crampton:
Economists, including in the Department, repeatedly use the term "fiscal space". From where do we get the money to build the extra infrastructure we need? What can the Government do? The European Commission should take a more realistic view of Irish unemployment figures when calculating the fiscal space. It erroneously considered the Irish economy to be overheating because the unemployment rate had dropped under the long-term average of 7%.
Locally, we know that 4.5% to 5% is full employment in the Irish economy. This should be taken into consideration, as it would remove a major constraint on capital investment.
The Commission methodology is getting rules changed in Europe, which is something for which we should all be lobbying, but the structural reform clause already exists. It could be used under the existing rules to release up to €1.3 billion of additional investment in one go. We understand that Italy and Lithuania have already used it. We recommend that the Department examine the structural reform clause. We do not need to change EU rules to use it.
As to whether we actually want to solve the problem, there are existing solutions that we are not exploring. I have referred to pursuing the EU for a relaxation of fiscal space constraints in terms of infrastructure, but there is also European Investment Bank, EIB, funding. We are in the lowest quartile for draw-down in that regard. We have had a low infrastructural uptake of the Juncker plan and are 13th in the EU. Irish public-private partnership, PPP, usage is low by historical and international comparisons. Procurement processes require updating because they have been a blockage. Thankfully, the Government contract that was introduced in 2007 was changed in 2014 or 2015. There is a medium-term strategy for procurement and other types of building contract. We would like to work with all Departments on that. We have made a submission to the relevant ones on the strategy. Capital receipts, such as proceeds from the national lottery for the children's hospital and so forth, can also be used to solve our funding deficit.
The last slide sets out our main recommendations, which the president and I have covered. We recommend that Exchequer investment in public infrastructure increase to at least 4% of GDP, the Government should secure a recalculation by the EU of the fiscal space, public procurement process modernisation should be adequately resourced, there should be a mid-term review of the capital plan and there should be greater transparency of upcoming projects. Interestingly, the UK has released a £500 billion construction infrastructure pipeline that outlines in detail the projects that will be delivered up to 2020 and 2021. We have nothing of the sort. Perhaps we should reconsider publishing our public capital programme, which we used to do every year.
The Department of Public Expenditure and Reform should investigate the scope of a rainy day fund and structural reform clause. Introducing a rainy day fund is a good idea, but perhaps it should be done a little later once we have our infrastructure up and running. We could use some of that funding in the meantime to invest. We strongly recommend that the construction sector group, which involved all stakeholders, should be reactivated to monitor and address the industry capacity issues. Doing this would ensure that, if we were to increase investment, we would have the capacity to deliver on same.
This has been a synopsis of a long submission. I am sorry for taking up so much of the committee's time.
I thank the witnesses for their presentations. The increase in employment was mentioned. That there are more construction jobs is welcome. I am a Deputy from the west, which was particularly badly hit in employment terms. Many people either retrained or emigrated. Are there enough suitably qualified persons to take up the new roles? Have they returned or are new people joining the construction sector? There was a drop-off in the number of people attending college to study construction or related degrees.
I was struck by Mr. Doheny's remark that there was a clear threat to Ireland's social and economic progress. That strong statement will resonate with us in our work. In terms of investment in infrastructure, apart from lobbying at EU level to relax the fiscal rules, has Mr. Doheny any other advice for the committee on how we might tackle those rules? As he can imagine, we have discussed this difficulty at length. It is not lost on us that we could do with the rules' relaxation and access to more funds.
It was also mentioned that tender pricing was low and competitive. Do the witnesses foresee an increase in tender pricing? If so, will it be in the short term or otherwise? We should be aware of that as regards value for money for the State in infrastructural projects.
I was struck by something as I went through the slides. Am I correct in saying that the CIF is advocating that we postpone the establishment of a rainy day fund? I would appreciate a discussion on or explanation of that. Given where we have come from in recent years, Fianna Fáil is a strong advocate for the establishment of such a fund. In the context of Brexit and the volatile economic world in which we now operate, is the CIF's position a wise one to be adopting?
Mr. Tom Parlon:
I will take those questions. I am unsure as to whether we circulated the skills shortage document. We worked on it with DKM to get an idea of the potential shortages. The DKM report considered the Government's plans on housing and the capital programme, the IDA's pipeline for inward investment and refurbishment. Nothing happened in recent years, but now, regardless of whether one is in the country, there has been a large uptake of the Government-sponsored home renovation scheme. A great deal of refurbishment is under way, be it of hotels, private houses, offices or whatever. That is where the activity is.
It is predicted that we will grow by 9% year on year and that we will need approximately 120,000 jobs in the next four to five years, which is colossal. We lost 180,000 people. We are rehiring at a rate of an extra 1,000 per month. Since the situation has picked up, we have rehired approximately 48,000. A large segment of the diaspora could return to Ireland. Alongside a number of agencies, we appealed to the diaspora before Christmas. That work is ongoing. People are coming back.
Construction went out of fashion among school leavers. Members will understand that many people who were on apprenticeships were left high and dry when the industry went over the cliff and were unable to finish their terms. That left a bad taste. We are trying to lift the industry's image and encourage people back into it. I visited GMIT's construction conference in the past month. All of GMIT's courses are full. Its largest theatre - 300 plus students - was full on the day of the conference. There is interest. There are also 500 million people around Europe who potentially could come to Ireland just as our people went around the globe seeking work. Construction skills are mobile.
We are not too worried. Currently, we do not have a capacity problem. As Mr. Lucey mentioned, there is overcapacity on the civil engineering side. As soon as the Cork-Tuam motorway project that his company is involved in finishes, there will be no home for the machines, qualified drivers or engineers working on it. That is a major concern. They will not be left rusting in the west, rather they will be on a boat to England to take up the High Speed 2, HS2, project or the like. The promoters of that particular project have held a number of events in Ireland encouraging Irish contractors to consider going to England.
The threat to the social infrastructure is real. We must make our case at European level. We are not saying that the fiscal rules are the entire reason, but it is ridiculous that they do not allow investment in badly needed and productive infrastructure. The Taoiseach has been making representations in Europe and we hope that there will be some flexibility. As soon as Article 50 triggers Brexit tomorrow, Irish infrastructure and competitiveness will be under major pressure. Whatever way the ball hops, I suspect that the north west and northern parts of the country will suffer. Having infrastructural investment and good connectivity between the north west and the rest of the country will be essential.
In terms of tender prices, there is negative inflation on civil engineering projects. House prices have increased in the capital and, in many cases, that is from an extremely low base. If one takes the national figure for house prices, they are still below the cost of building or replacing a house. We do not see that big threat in a big way with the level of activity we have at the moment. Mr. Hubert Fitzpatrick showed me a report today that a number of the raw materials in use are increasing in price. That may have an impact. We are following the lines of general inflation in terms of tender prices.
On the rainy day fund, the proposal is to put €1 billion aside in 2019. Our view is we cannot afford to put €1 billion aside in 2019. We need it to invest in the housing infrastructure, the social housing infrastructure or whatever else is most needed at that particular point. I was at the launch of the European Commission's country report and a Bulgarian economist gave a shrug when he mentioned a rainy day fund. He said it was the most inappropriately named fund for Ireland that he had ever come across. We could deem to draw it down every day of the week. That is just our point. We certainly favour a rainy day fund but we think in 2019 we will still need to have a more urgent investment policy rather than to put it on the long finger.
Mr. Dominic Doheny:
I apologise to the Deputy. It is absolutely critical that our industry can allocate and plan over a number of years. If we are trying to attract people into the industry at second or third level, they have to see there is a ten-year plan. If they are going to be an engineer or an architect, they must see an industry funded in all areas, including infrastructure, so they can invest their education into it. That is something we are looking for that our companies can plan around.
Mr. Parlon alluded to the rainy day fund. We see it as critical investment to fight off the negatives of Brexit and anything else coming down the tracks. It is critical investment. If we were to choose between a rainy day fund and critical infrastructure investment, we would choose the critical infrastructure.
Everybody agrees we have very low levels of capital spend. That is just a fact. In European Union terms it is very low. That is because capital spending was the easy cut when cuts had to be made. If we are going to call for increased spending in capital we have a responsibility to say where the money will come from. If we are going to increase capital spend, how much will it be in monetary terms? Will it be from increased revenue or current expenditure? When the Construction Industry Federation says investment in public infrastructure should be 4% of GDP, is that essentially a way out so it does not have to say where the money will come from? If it is the case that the money should come from existing taxation and expenditure, that is existing revenue, and it is just 4% of GDP. That means the Construction Industry Federation is not looking for any increased revenue which means something has to be sacrificed. What is it that should be sacrificed?
GDP as an indicator of economic activity has been somewhat discredited. We now have GDI and all sorts of other indicators. When the Construction Industry Federation says 4% of GDP, is that really the best way to be planning investment? GDP can fluctuate widely in this State for all sorts of different reasons, so why was it picked as the percentage of spend?
The witnesses talk about a central database of capital projects, which is obviously very sensible, but the Departments have that anyway. Departments have a full database of what capital expenditure is needed across all of their areas. They make a pitch every year and get an allocation. I assume it is already there but the witnesses are talking about it being more publicly known. A cross-departmental committee was also mentioned. In terms of making decisions about where the capital spend should be, has any consideration been given to how that should fit in with the national planning framework because it would be crucial? The Minister, Deputy Coveney, is saying that we need to build up regional cities. If we take the south east as an example - I am sure the Chairman will agree - Waterford is the regional city of the south east. If the Construction Industry Federation is going to look at directing capital investment, it should be into those areas. Has it looked at that in policy terms? If that is where it is going, where should we prioritise? How do we link prioritising capital spending with policy in terms of the national planning framework? Has the Construction Industry Federation made a submission to the national planning framework in the context of capital spending?
My final question is to almost all the witnesses because it is something we can somewhat agree on, which is the inflexibility of the fiscal rules on capital spend. Is it something on which the Construction Industry Federation has lobbied Government? Specifically what has it lobbied Government on? The witnesses spoke about the structural reform clause and the investment clause. IBEC has called for capital investment to be classed as separate when it comes to the calculation of spend in terms of the fiscal space. That would require a change in European policies. What proposals in policy terms has the Construction Industry Federation made on the application of the fiscal rules on capital spend?
Mr. Tom Parlon:
When we say 4%, we are referring to the target. We propose that there should be a target because 1.8% is not sufficient. It sneaks under the radar. I agree with the Deputy and I can understand why it is much easier to cut or delay the capital programme, which is in effect cutting it, than it is to cut the current one. Clearly we will reap the results of that. We need the fiscal space to-----
I do not want to interrupt. My question was if the Construction Industry Federation is saying 4% of GDP, which would mean increasing the capital spend, is it essentially calling for increasing the capital spend not by raising revenue but from the existing expenditure benchmark? Is it just saying it will take GDP as a percentage and it will then go up? If that is the case, we then have to make decisions in budgetary terms as to what should be sacrificed.
Mr. Tom Parlon:
We want to do it across the board. We want to take it out of current expenditure. The indications this year is the economy will grow very substantially, even in excess of the target that is laid out, by perhaps 4%. Whatever excess there is should certainly go towards it. The Government has indicated that in the capital review it plans to make extra funds available.
As a general body representing the contractors of the country, on the one hand PPPs bring on board projects that could not be funded otherwise, but on the other hand they are very elitist and really only deal with the really big contractors. They exclude many of the small ones so we have reservations there, but we certainly feel that some of the projects that could not find financing otherwise should be funded through PPPs. We understand the cost of funding a PPP is substantially lower now because of our improved financial rating.
The European Investment Bank has just opened a branch here. We have two vice presidents. We have an event in Dublin shortly which will be attended by Commissioner Hogan, the vice president of the European Investment Bank and the Minister for Public Expenditure and Reform. It will be a big colloquium of other professionals and we will all be presenting papers there. There is scope where the European Investment Bank opens local offices for its lending to that particular country to expand very substantially. While there have been 13 or 14 projects in the past 15 or 18 months, it is still minimal in terms of the scope that is there. We see that as a direction. We then have the Ireland Strategic Investment Fund, ISIF, which should be used to full effect.
As an industry representative group, we do not mind where the funding comes from.
We know it is not going to come out of thin air. That funding needs to be an absolute priority in terms of the infrastructure deficits that exist.
First, we do not know what the NPF will be. There is a concept of these regional cities. In the context of prioritising, what has CIF recommended specifically in its submission to the NPF? I do not ask for too much detail, but what was the CIF's big idea specifically and what is it calling for in policy terms?
Mr. Dominic Doheny:
In policy terms, the last time out infrastructure did not follow the NSS. This time it has to follow it. The Deputy mentioned the cities. The NPF will make a decision on where the regional growth areas are going to be. One cannot have regional growth areas without the requisite infrastructure programme. That makes absolute sense or else the NPF should follow the infrastructure programme. We believe it should be the other way around. We are launching our national regional policy document next Tuesday. It sets out, very clearly, the importance of regional growth. We support the strength of Dublin, which is a huge asset for the country, but it should be complemented as opposed to competed against. It is about trying to find the secret behind that. One cannot do it if one does not have the proper infrastructure spend to support the other counter cities to Dublin, as a region.
Mr. Tom Parlon:
The Minister for Arts, Heritage, Regional, Rural and Gaeltacht Affairs, Deputy Heather Humphreys, is launching the policy document in Tullamore on Monday. On connectivity, there are substantial industrial clusters around the country but they are not connected. We do a road show every year with our members which starts in Waterford. To get from Waterford to Cork is quite a challenge given the particular road, as Deputy Cullinane will know well. It is also a challenge to then get from Cork to Limerick. The connection across three of the most important cities in the south west involves dreadful infrastructure. For them to be a counter to Dublin seems a no-brainer. While a €1 billion tag has been put on it and it is certainly a challenge to come up with the funding, the DKM report says that a €1 billion investment in infrastructure will leak back into the system within 18 months.
Mr. Tom Parlon:
We have not. We are not the strongest in terms of economists over here. We have met the different Commissioners as they have been over here and addressed the EU Commission. Certainly, we need flexibility but we are not too worried about how it is done. The structural reform clause certainly gives scope for substantial extra investment, but we do not mind what clause is used. Certainly, the restrictions must be lifted.
There is an ongoing debate between Lorcan Sirr, a lecturer in housing, and the Department on the number of houses completed last year. The official figure is 15,000 based on ESB connections, but he argues that if one looks at building control management system completions, one gets perhaps half that number. Can the CIF give us an accurate figure? How many housing units were completed in 2016?
Mr. Hubert Fitzpatrick:
There can certainly be confusion there. Many of the 15,000 units might have started a number of years ago and been mothballed during the recession. That is where one is not talking about real construction activity. The current process of counting electricity connections is as good a record as one can have in respect of actual completions whereby units are ready for occupation. The point made by Lorcan Sirr is that this entailed the final occupation of a number of houses that were half built and were mothballed during the recession. As such, real construction activity did not take place on the entire 15,000 units during the past year.
Where is the demand for housing? If I read the NPF correctly, it is all about going back into the centre and strengthening our towns, villages and city centres. It is about stopping the sprawl and going back to the centre. Does the CIF see that? Where are the houses that are being completed being built and what is the CIF's submission to the NPF in that regard? Will construction be brought back to the centres of our cities and towns? Where is the demand for sites? Where is the activity happening?
Mr. Hubert Fitzpatrick:
There is still very strong demand in the greater Dublin area and the greater Cork city area. We do not see a strong demand as yet throughout the regions. It is fair to say that the sale price of many units in the regions is not yet equivalent to the replacement cost of those units. That is why there is a slow recovery in the level of building taking place throughout rural Ireland. In our submission to the NPF, we supported the rejuvenation of town centre areas. There is a lot of scope to bring life back to many town centre areas. By and large, however, the real housing demand is in the greater Dublin area and the greater Cork city area, spreading across to Limerick. It is primarily cities and larger towns.
Is it in city centres? Everyone abandoned Cork and evacuated to Douglas, Carrigaline and Ballincollig. The population in the city centre collapsed. The same happened in Dublin. In most of the old suburbs, population declined. Is development in Cork and Dublin going back into the real city centres or is it still out around ring roads on the outskirts?
People have said that in London and elsewhere there are brilliant new building technologies and prefabrication solutions that can be brought on site very quickly. They say that the Irish construction industry is old-fashioned and has not advanced with the times. Are there any examples of cutting-edge and new technologies being put in place in house building?
Mr. Hubert Fitzpatrick:
We are working actively on a committee with the Department of Housing, Planning, Community and Local Government to look at overall housing costs. On that committee are representatives of the Society of Chartered Surveyors, architects and engineers. It is intended that the committee will report on housing costs by the end of quarter 2 and include comparative statistics as to what applies elsewhere. We hope that will produce some findings as to how overall costs can be reduced. The physical costs of building a house are approximately 45% to 50% of the overall cost of a house. That is something of which we are very mindful. We are mindful that all those other additional costs must be addressed in that process.
Mr. Dominic Doheny:
In the context of innovation, the precast concrete industry in this country is ahead of the curve in a European context. The majority of precast units for tunnelling, bridges, etc., for the UK market are manufactured here. The majority of the work of Shay Murtagh Precast, Banagher Concrete and Oran Concrete is in the UK and all of that technology is based here.
I attended the annual conference of chartered surveyors and all of the talk there was about build to rent. It was interesting to hear the Nevin Economic Research Institute, NERI, suggesting yesterday that there is a need to move to a cost-rental housing model of social housing. I agree. Is there any example from the CIF's perspective of a real pick up in the build to rent or cost rental housing model?
Mr. Hubert Fitzpatrick:
The Department of Housing, Planning, Community and Local Government has just revised the guidelines as to what applies in respect of a build to rent model. The guidelines were launched only three to four months ago and are just finding their feet. They are being actively examined. By and large, one must ensure that one has a funder in place who is prepared to fund long term development of these houses and hold them on the books. The regulations and standards have been changed and are under active consideration by a number of parties.
I am conscious we have been told by a whole series of people that we must build roads. They include IBEC and Transport Infrastructure Ireland. They have no public transport project plans at all and their civil engineers will not be working on public transport in this country any time soon. I presume many CIF members are construction companies in the roads sector. That must colour CIF's submission. We are facing complete congestion in our cities. I am very interested in cycling. We do not have any money for cycling infrastructure in Dublin. The situation in similar in Cork, Galway and Limerick. If we are to develop them, we must go to public transport. If all the development is taking place in the cities and we cannot get any roads to solve Dublin's problem, why should we put all our money into yet more roads in respect of inter-urban journeys when our real problem is the fact that our cities are gridlocked? Why should we build roads when we need public transport, cycling, walking and other infrastructure that creates cities that work?
Mr. Dominic Doheny:
We do not really mind. We are in the construction industry. All forms of infrastructure keep our members busy. For example, Sisk is the main contractor on the Luas cross city project. No matter what the item of infrastructure is, be it water, rail or electrification, our members are involved in it. If it is wind, our members are involved in it. That is a large part of the engineering solutions relating to the wind industry. We are not lobbying for any particular sector within the overall infrastructure. The Minister has made it known that our cities are not big enough and we need a counterbalance to Dublin. They need to be interconnectable to become bigger so our industry will be at the forefront of delivering whatever pieces of infrastructure are needed to connect them and make them sustainable.
I again disagree with Deputy Eamon Ryan. Not all areas have the luxury of the roads about which the Deputy is speaking. Unless we put a proper regional plan in place, the cities will get worse. There is general agreement in the committee regarding infrastructure gaps. In his opening remarks, Mr. Doheny outlined the rather bizarre coalition that has come together around this. I cannot imagine that CIF and ICTU agree on too much at times but there is agreement on infrastructure gaps. Mr. Doheny spoke about the pipeline drying up. To return to what Deputy Lisa Chambers said about careers, the number of CAO applications for engineering this year has fallen. Is this connected to the point made by Mr. Lucey about the civil engineering pipeline drying up? Transport Infrastructure Ireland appeared before this committee last week. The presentation was utterly depressing in respect of what is not in its pipeline. Roads take between eight and 13 years to develop. How are we going to address that urgently? Have we gone too far in terms of the underfunding of infrastructure to avoid the pipeline drying up for a couple of years?
Mr. Dominic Doheny:
I will ask my colleague, Mr. Pat Lucey, to answer that question. My opening statement was very well thought through in that we are here today to give a clear warning and that warning is what we are sensing. It is very palpable in respect of our members, Mr. Lucey being one of them, and what we see coming down the pipeline. I will ask Mr. Lucey to talk about his experience involving matters like lead-in times and engineering applications through the CAO.
Mr. Pat Lucey:
Deputy Lisa Chambers raised a point close to my heart. When we talk about civil engineering, we talk about roads and bridges but it is a people industry. We are all about people. We produce brilliant construction people. Thankfully, we got a lot of really good engineering professionals, quantity surveyors and architects back to the country when we started picking up again a couple of years ago. Deputy Lisa Chambers mentioned the west of Ireland. We have some great people back from Australia and New Zealand who wanted to be back and work in the west of Ireland. They wanted to have the quality of life that the west of Ireland gives. There was a gap for a number of years where engineers stopped coming out of the colleges in the numbers we normally had before. When work started picking up, we found that there was a countrywide shortage of engineers with two, three or four years' experience because we stopped producing them as a country. What the contractors did at that stage to encourage more people into it involved picking graduates, running graduate programmes, setting them on a four-year course to chartered status and giving them a very concentrated training routine. This has produced great benefits. The worry we now have is that we see the pipeline drying up. Unfortunately, when a pipeline relating to public infrastructure dries up, it cannot be restarted overnight. What has to be done is the small money on planning, deciding routes and deciding the form of transport, which does not have to be roads but can be rail. We need to improve connectivity for our people.
Deputy Eamon Ryan is correct. We cannot really build more roads in Dublin to improve it but we need to go underground. The metro and the DART are needed. Those types of projects need to be accelerated. Yes, we will lose a certain amount of time but if we look at the models that are available and if we take early contractor involvement as one, that can knock three years off that eight or ten-year cycle to get through planning about which the Deputy spoke. Done correctly, we can knock time off that. We need to do that now in order to restart that pipeline. Unfortunately, it is not an overnight solution and as one of the other Deputies said, when a problem arises, the easiest thing to cut is capital spending.
Mr. Pat Lucey:
In terms of hard money, what we would say as an industry is that we will sit down with all of the Departments to work through what can be done in the fastest possible time. I would say as a priority, the Dublin metro and the DART need to be pushed. As a priority, we need to complete some of the major gaps in the road network. Some people might be against building a lot of roads but what we built has been such an asset to the country that the gaps like the Cork-Limerick route do need to be filled. If one was to spend €5 million this year on the Cork-Limerick route, one would get an enormous amount of value through the planning process and get an enormous amount of work done. It is the same with the DART underground project and the metro. There is a lot that can be done with what is small money in overall terms regarding the value of the project but it moves it through planning quicker.
I note Mr. Parlon was at pains regarding tender value a few minutes ago. The Department of Health wrote to this committee a couple of weeks ago regarding concerns we had about the new national children's hospital and the manner in which that budget has grown. The Department is saying that building cost inflation on that project is 9%. What was building cost inflation between 2002 and 2007 and what does Mr. Parlon think it would be were we to start ramping up expenditure? Would we end up in a situation where much of the extra expenditure and capital went on inflation?
Mr. Tom Parlon:
It is complicated in that I do not fully understand it myself. First of all, I do not understand the figure that was used for the national children's hospital because we still do not know the exact specification that is there. Clearly, plans change and extra stuff is added. When the economy and construction were growing previously, I think there was inflation of up to 40% between 2002 and 2007. It then dipped by 40%. An awful lot of jobs were quoted for and tendered for at below cost. It was unsustainable and caused six of our top ten companies to go bust because they were trying to buy turnover, hang in there and keep their people employed. The recovery did not happen quickly enough for them. We have gone through a horrendous dip and with the increased activity, which is normal, things are picking up again. There are some constraints on that. Finance is still very scarce. Previously, money was being thrown at projects and at the speculative development of housing.
Now, however, there is no speculative housing development and a developer will not get lending, either from a bank or a mezzanine fund, without a guaranteed pipeline of approved mortgages. The situation is a lot more conservative but, as work increases, we expect to see some higher inflation and higher interest rates.
Mr. Pat Lucey:
The residential market is different from commercial building, which is different from civil engineering. Civil engineering produces connectivity infrastructure, in which there is incredible competition in this country. If there have ever been rises in inflation they have been negated by people being innovative and coming up with better ways of doing work.
Mr. Pat Lucey:
I do not know what the percentage was but the cost of producing a unit, such as a kilometre of road, went down in that period. Other countries might ask how we can build so economically because we are good at building and have good building people. We also tend to be very competitive in overseas markets. There have not been price rises in civil engineering and some contracts are actually going well below cost, which is of no benefit to the country or the contractors involved.
The Government has an aversion to PPPs and TII said last week that it cannot use PPPs for new road projects. What has the construction industry's experience of PPPs been? If we were to relax our rules on PPPs how quickly could we get things moving and begin to fill the pipeline?
Mr. Pat Lucey:
We could move things quite quickly but an unfortunate negative with PPPs is that financial modelling and third party equities add to the duration of delivery. PPPs should be used appropriately. We would advise that they be used for projects further down the line where we would have the time to get value out of them. To restart a pipeline quickly one needs to go down more traditional routes and enhance them with early contractor involvement.
I agree with a lot of the points made on the need to significantly ramp up capital investment and the madness of the EU fiscal rules. Without wishing to score a point, we flagged this at the time of the fiscal treaty and opposed it for that reason. Did the CIF see this coming too?
Our main reason was the effect it was going to have on our ability to spend, both in terms of capital and current spending. We described it with a catchphrase, "neoliberal straitjacket". Some of the people who are now rightly complaining supported this neoliberal straitjacket. We need to ramp up infrastructure investment in a whole range of areas.
Are CIF members the best people to carry through an investment programme? I ask for a number of reasons, including cost overruns and public-private partnerships. There is a scandalous history of cost overruns in public-private partnerships. It is a history of projects being tendered at one price but consistently coming in well over the original estimate. The Luas cost much more than we were originally told it would cost.
Yes. The port tunnel cost far in excess of what we were originally told. The controversial library headquarters in Dún Laoghaire ended up costing some €10 million more than we were originally told and the national children's hospital will go way over budget. How can we have confidence in CIF members when this consistently happens? That is what Joe Public is asking. The State puts a lot into PPPs in terms of land, infrastructure and upfront capital investment but, because of commercial sensitivity rules, we do not have transparency about the arrangements between the private and public sectors. When one asks questions the reply is that there is commercial sensitivity and I find this deeply problematic. One of the main reasons I am opposed to PPPs is that one cannot find out what is going on because of commercial sensitivity agreements so why should we go down that road?
I am a left winger.
I make no bones about it. Is the profit builders take out not just an extra cost? It inflates the cost and it would be cheaper for the State to do these things directly, to build up its own capacity and deliver infrastructure directly. NERI has spoken of a semi-State company but we think a State company should deliver the housing we need. What happened between 2002 and 2008 is proof that this is the way we should go. In that period it was primarily the private sector which was given money and it was primarily the private sector which policy favoured to deliver infrastructure and housing but it did not work for us. It caused a massive problem and led to a crash. Even when the construction industry was delivering between 70,000 and 90,000 houses per year they were unaffordable and the housing crisis got worse. It has got doubly worse now but even in that earlier period housing lists grew and social and affordable housing was not delivered. There was a complete failure to connect supply and demand and I contend that it was because development at that time was profit-driven rather than need-driven.
Mr. Tom Parlon:
It is a pity somebody did not listen to the Deputy when fiscal rules were brought in. I doubt if we were in a great bargaining position as the gun was to our head at the time. I do not remember the Deputy making those points but I accept that he did.
The Deputy mentioned the Luas and the port tunnel but they go back a long way and tendering procedures have changed massively since then. All of our main motorways were delivered on time and within budget. It comes down to the quality of the tendering documentation. If one tenders for 50 km of road, with so many junctions and so many bridges, and the client decides they need something else the contractor has every right to ask for extra moneys for it. In my time the need to connect Roscrea to a project became an issue as it would have otherwise required a severe turn to the left and its exclusion was an oversight.
There is the new tendering process now. We have been in good negotiations, and in terms of Government involvement, we find that Mr. David O'Brien, who is now the representative at the Office of Government Procurement, is a very good professional. We have a good liaison with him, and he represents his job very well. That has come a long way.
A Japanese contractor was the main tunnelling contractor for the Dublin Port tunnel, and it had some issues. It cost much more than it was expected to cost, but I am not sure on the brief that was given. I believe that we are the right industry in the current situation. We can deliver the projects and have a very good history of delivering some excellent projects. The bulk are excellent, but there are a few that we cannot be proud of that. As a result of that, the CIF has proposed a construction industry register for Ireland. We have worked on it with the Government and the Department of Housing, Planning, Community and Local Government. We heard the Minister say as late as last Friday evening in Cork that he is bringing a memo to Government shortly which will make the construction industry register of Ireland a mandatory register and which will lay out strict rules as to who can be a contractor and who can be involved with construction projects with regard to competence, tax compliance, health and safety, insurance and so on. It is going to mean that it is professionals who will be involved in future. That is what we are pushing very strongly. Some of the so-called cowboys brought a bad reputation upon the industry that we still have to live with and that left us with many legacy issues.
I think that we give good value for money now. On the one hand, we are here collectively as the Construction Industry Federation. If there is a €50 million road project up in the morning, I can guarantee that our civil engineering firms will be at each others' throats over it and there will be a very aggressive and competitive tender put in. It will be exactly as per the terms of that contract. If somebody left out something or if there are some extras, that is a different issue. We have some flexibility. Previously, all of the risk rested with the contractor. That made it very contrarian. Everybody had to mind their Ps and Qs. There was a bit more balance there.
Mr. Dominic Doheny:
To follow up on that, in my company, we develop projects, we build them ourselves etc. The Deputy's focus is on the tendering procedure and looking at overruns. The question for our industry is how we can explain why there have been so many tender overruns. The one thing that we have to get right when developing a project is our budget. If the budget is wrong, the tender is never going to be right. I would propose that budget information has to be looked at as opposed to tender information. The Deputy uses the language of "we were told". Who told him that and what information was behind that? That should be examined. As Mr. Parlon said, when one goes to tender, it is extremely competitive. One goes into tender and one then has to deliver what has been tendered for. It is a very rigid, controlled process. If the budget was wrong in the first place, the tender will never make up for it.
Mr. Pat Lucey:
I have to add a few points to this. I am not a great fan of public private partnerships, PPPs, myself. That is purely because we like the builds and we do not like to get involved in all the financial modelling. They are sometimes a necessary evil if there is no funding. On the question of whether we are the right people, I have no doubt that we are the right people. I thought for an instant that the Deputy was going to suggest contractors coming in from wider Europe to tender for our work, something that has failed miserably-----
Mr. Pat Lucey:
-----in the past.
I can tell the Deputy that there a couple key things on the matter of tender versus outturn. The matter Mr. Doheny mentioned about the budget that is originally set up is something we have seen happen before. We saw it happen with the early part of the roads programme, where there was a massive difference between the contract cost and the original estimate. The National Roads Authority, NRA, recognised that and put in a robust system for getting its estimates right. It brought in the correct professional people to get its estimates right. We will always recommend that clients, either private or public, make sure they have the right professional advice beside them to get those things right.
The second thing that feeds into tender versus outturn is the form of contract used. A form of contract that deals with change is needed in construction. Anyone in this room that has built anything knows that things change. An agreement needs to be in place that deals efficiently, cheaply and does not require the assistance of solicitors to hammer out an agreement. Change and how change is dealt with are very important in construction projects. On the matter of a State building company versus the private sector that we have, we have incredible construction people in this country. We see small companies starting all the time. People that break away start up their own company. They are very efficient. They are coalface people. They deliver. It would be very hard to set up a State company in any sort of a sustainable long-term fashion that would last and do the same thing. That is my take on it.
Can I add a brief follow-up? I do not imagine, short of the socialist revolution or whatever, that we are going to completely get rid of private involvement in construction of infrastructure or housing. Can the construction industry seriously deliver the low-cost housing that is needed? I have many concerns about water infrastructure, energy infrastructure and so on but the most urgent question is the one of housing. Huge numbers of people are never going to be able to afford market prices, in my opinion. Look at what is happening in urban centres around the world. People on low to middle incomes cannot afford to live in these places. They have to go into the wilderness, which causes its own problems, to get something they might afford, if even that. Has the Construction Industry Federation any serious role to play in providing low-cost, social and affordable housing? I do not doubt they will play some role in providing housing for those on higher incomes who can afford it. It seems to me that affordable housing has to be subsidised. It has to be below market price. I do not really see how it is in the Construction Industry Federation's interests or that there is any likelihood that it will deliver that. If that is the case, I think we have to return to something that we used to do even when this country was quite poor, which was that the State directly built housing. It was up to 30% to 40% of housing at some points. It did it directly. It had people working in the local authorities who had the skills. I agree that there is a problem there with that skills base running down in local authorities and in the State generally. I think that is a problem. Do we not have to return to that?
I have one other brief point and my friends in the building industry would be very unhappy if I did not raise it. A very controversial issue over recent years, as employment has been picking up, has been the push for people working in the construction industry to go onto the C45 scheme. Many workers have said that this is contractors forcing people to declare themselves as self-employed when they are not self-employed and should be employed directly by the builders. They have also suggested quite a wide level of abuse of the category of self-employment, given the high proportion of it. Do the representatives of the Construction Industry Federation have any comment on that? It is a sore point for construction workers.
Mr. Hubert Fitzpatrick:
Some 45% of the cost of every house is made up of taxation. About 45% of the cost of the house is reflective of the actual construction costs. We want to reduce the cost of building houses. I referred in an earlier response to how we are actively working with the Department of Housing, Planning, Community and Local Government to see how the cost can be reduced. We have to ensure housing is affordable to people who need the houses. We can see if we can reduce the cost, maintaining the standards but looking at the design of the units to see if we are overdesigning units when it comes to size. The unit size in some local authorities in this country is up to 20% larger than it is in the UK. Maybe we need minimum size standards to be determined by the Department. That could actually work.
Could we look at how the development levies are applied in housing or at VAT, which is an applicable cost that does not apply in the UK or Northern Ireland? We have significant contributions to various utility companies. On social and affordable housing, the industry will certainly deliver houses on a very competitive tender basis to any local authority. We will certainly be able to compete with any direct-build teams that any local authority would put in place in respect of housing. It is in all our interests to ensure we can build the required number of units in the right locations that are affordable to everybody. We certainly will not be found wanting in our attempts to try to reduce costs wherever we can. It will require co-operation from the State to ensure that can happen.
Mr. Tom Parlon:
We all have kids trying to get on the housing ladder. I know personally that unless one digs into one's own pocket, it will not happen. For a €300,000 starter home in Dublin, it is very difficult for two civil servants to get a mortgage together to afford the house. The mortgage would then hang over them. There is a challenge. On the other hand, if a person decides to build in the "wilderness", as mentioned, or buy down there, he or she might not have a job. Within our members and those who work for them, many are commuting five hours per day to work in Dublin because this is where they work. They get into vans and get stuck on the M50. They cannot to stay overnight in Dublin because of a lack of accommodation and so on. It is a challenge.
We have raised the VAT issue time and again with the Government. There is 13.5% VAT on housing, which is €30,000 or €40,000 on a general house. The builder must pay that the day the contract is signed. It is not in the North of Ireland or the UK. I used a figure lately and if one has a meeting in a room with Department of Finance officials, they go ballistic at the notion of touching VAT because it is so important to them. We had a report done by Grant Thornton that indicates by reducing VAT and increasing output, it would pay for itself in a short time. A 16% increase in output would pay for a 4% reduction in VAT. As Mr. Fitzpatrick stated, €100,000 from a €300,000 house goes to the Exchequer. It is a bonanza for the Exchequer if we are building houses. The Economic and Social Research Institute raised concerns that if house building reached 25,000 units per year again, there might be a danger of the economy overheating. As it is labour-intensive it would provide many extra jobs and so on. It is a dilemma we must deal with and there is very little scope on the hard construction side to reduce costs. We must look at the other 50%, whether this equates to VAT, levies or whatever else.
The issue of self-employed contractors was raised and a Deputy also commented on the matter of strange bedfellows coming before the committee, in that the Irish Congress of Trade Unions, ICTU, and the CIF are promoting additional investment. We have a very good relationship with ICTU and Ms Patricia King is coming to speak at our event with the Commissioner and the European Union. It raised the very same issues in meetings with the Government and I have sat beside its representatives. They argued that if housing was more affordable and available, they would not have to take such a hard line on pay increases. That is where they are coming from. We had a registered employment agreement set up 60 years ago - it was in being for a long time - but it was eventually deemed by a Supreme Court challenge to be against the Constitution and has been dropped. We have a live application to the Labour Court to set up a sectoral employment order. The unions are supporting us in this and that will lay down all the conditions. Eventually, the Labour Court will recommend the rate that will apply there. I am touching wood but currently we have a very good industrial relationship. We understand entirely that we must pay decent wages and provide good and safe working conditions in order to attract people to the industry. That must be passed on to the client, whoever engages us, and that was a major problem for us in the past when we did not have an registered employment agreement. Some companies that were not paying the proper rate were able to undercut others and there was a non-level playing field. We are pushing very hard through the Department of Jobs, Enterprise and Trade and the Labour Court to have the sectoral employment order applied across the board to construction. That will certainly outlaw the particular practice mentioned by the Deputy.
Before finishing, the matter of fiscal rules has come up time and again. Mr. Parlon mentioned strange bedfellows but everybody on this committee is in agreement with his position that there must be some relaxation. Mr. Crampton made a point about the structural reform clause and it is probably the most realistic route of a change occurring there that will not require a treaty change. We have spoken with several people and we will continue to lobby the Government and speak to as many people as we can in that regard. I am intrigued as Mr. Parlon mentioned a Bulgarian economist who spoke about urging Ireland to increase infrastructure funding. There are lectures from the European Commission on increasing infrastructural funding but at the same time there are stringent rules to which we must adhere and which lump current and capital expenditure into the same category. There is a bit of a contradiction there.
We do and we are in agreement on that. A final point is on long-term planning. Deputy Boyd Barrett regards himself as a socialist but I am not. As I recall, one thing the Soviets used to get right was the 20-year plan. I was a child at the time so I do not have much recollection of that era. In Britain, following from Brexit, they are talking about a 30-year horizon on capital investment, with an assessment carried out every five years. Is there more detail on that, as it is an area we have never been very good at? I was a member of a local authority for years, as was Deputy Boyd Barrett, and local authorities have a five-year plan for the development of infrastructure. That is much too short as an overall timeframe for planning the economic development of any region, county or city. If the witnesses have specific suggestions in that regard, we would certainly welcome them. There has been far too little long-term economic planning.
I accept the point regarding obvious bottlenecks in the Irish economy and the establishment of a rainy day fund. I sat for a year and a half on the banking inquiry, for which I got little thanks, but what was emphasised by many of our witnesses was the need to promote anti-cyclical investment in the economy in general. The witnesses have spoken about how when we went into recession, the capital spending was first to be cut but that should not be the case. Just as it should not be the case when recession hits, when things improve and bottlenecks in areas like housing have been dealt with to some extent at least, we should establish such a fund to smooth out some economic ups and downs that we know we will face. Are there are any specific points on that? We welcome any views on long-term planning.
Mr. Tom Parlon:
We looked at a UK model, which has an infrastructural council. An individual who is not political heads that up with expertise and looks at long-term matters. As the Chairman indicated, we need to be thinking of 20 years down the line. We might forward what we have to the secretariat.
The witness had a point on the European Investment Bank, which is now here. I have spoken to the clerk and we could get its representatives before the committee. I will discuss it with other members and follow up on that.