Building the way to manage our boom/bust cycle better

Nobody wants a return to the construction industry’s past instability, so how should we dampen volatility in future,

THIS year is looking like the construction industry’s resurrection will fully manifest itself. It looks set to increase output by 30pc on 2016 to reach about €16bn, or around 8pc of GNP. By mid-2018, it will have hired an additional 50,000 employees at a rate of 1,000 per month since the nadir of 2013, having lost over 100,000 employees at that point.

DKM consultants estimate that the industry could grow by 9pc per year up to 2020, making it a €20bn industry employing over 200,000 people. Before any alarm bells start ringing, this would mean the industry is about 10.5pc of GNP at current levels; well below the 12-15pc range most agree is sustainable in mature economies.

These projections are based on the industry delivering the Government’s targets of 25,000 housing output and €43bn in capital expenditure alone. SOLAS estimates that the industry will require 110,000 additional workers by 2020 to deliver this activity. These figures are challenging for industry and Government to achieve but are all well below 2006/7 levels.

Nobody wants a return to the boom and bust of the past; so what should we do differently now to dampen volatility in future?

Firstly, a review of how the sub-sectors of the industry performing can provide early warnings to policy-makers that, if responded to, can prevent problems building up. For example:

• The commercial sector has been going strong since 2013. Look at the Dublin skyline and you will see over 70 cranes mainly working on commercial buildings. Two caveats. 1) These cranes are not related to housing and 2) A crane-watch in every other city in Ireland would hardly reach a third of this amount.

• Housebuilding in major urban centres is recovering to meet nearly a decade of pent-up demand. We have seen the daft. ie report identifying an increase in house prices due to this scarcity of supply. However, housebuilding activity remains unviable outside urban centres. The prohibitive cost of finance and Government tax take (estimated by the SCSI to be 45pc of the cost of building) means new houses can’t be built for anywhere close to the cost of existing stock.

• Worryingly, civil engineering, the sector in charge of delivering infrastructure, is flat-lining and negative growth is forecast to 2020. Essentially, this means there are no critical infrastructure projects in the pipeline. This is the canary down the mineshaft for Ireland’s economy, particularly in the face of Brexit which could take 4pc off Irish GDP in the next decade.

Closely monitoring the housing market is, of course, prudent after our recent experience. However, we are falling into the trap of ‘fighting the last war’. We have missed two significant inter-related threats to the Irish economy: a decade of underinvestment in infrastructure and resultant economic imbalances.

To address these problems, the CIF recommends that Government adopts the ‘Whitaker’ formula named after Ireland’s greatest civil servant, who in the late 1950s opened-up the Irish economy to investment and shifted Government spending towards productive infrastructure.

The formula is simple: ensure construction’s capacity to deliver worldclass infrastructure that connects Ireland’s economic clusters to generate sustained national economic and social progress.

A key learning from the last recession is that infrastructure investment in the early Noughties laid the path for today’s recovery. To paraphrase the Chinese proverb — the best time to start building a road is 20 years ago, the next best time is now! At the bottom of the EU 27 for infrastructure investment, Ireland faces a horrific amplification of the next economic downturn when it inevitably occurs.

The political system (with five-year electoral cycles) does not allow policy-makers to adopt the transgenerational mindset required to deliver infrastructure. We adopt a ‘sandbagging’ approach; instead of dredging the river, putting up significant flood defences and seeking to address climate change; we wait for the flood and throw sandbags at it.

In the early 2000s, successive governments maintained a long-term average investment in infrastructure at around 5pc of GDP. From 2007 onwards, successive governments have allowed infrastructure investment drop below 2pc at the same time as our population has grown by 30pc in one generation, our economy has grown at the fastest rate in the EU, a demographic wave is hitting our education sector and our population is increasingly getting older. To prepare for the future, the Government must increase investment to 4pc of GDP for the next decade. It is currently reviewing its capital expenditure programme whilst also developing a national planning framework to shape Ireland up to 2040. These strategies should be integrated so public capital expenditure supports the principles of balanced regional development in the national planning framework. The Government should then appoint a National Infrastructure Commission to insulate the delivery of the infrastructure from the rampant IMBYism of the Irish political culture.

Finally, I believe that the Government and our industry needs to collaborate more effectively to deliver construction more effectively for the Irish citizen. Deeper collaboration is required in the planning system, meeting skills demand, reducing the cost of construction, in adopting modern procurement processes, and in long-term planning. Construction is the solutions industry and it enables all other sectors to operate. For example, about 70pc of FDI in Ireland is expansion of multinational companies already in situ. This is facilitated by our industry’s ability to deliver specialist buildings, competitiveness through infrastructure and housing for employees.

The Government should establish a high-level construction sector group tasked with delivering housing and infrastructure in the most efficient and sustainable way. This approach has been utilised to great effect in the food, tech, and financial services industry. We believe it could make a significant difference in future-proofing our economy from the effects of Brexit and future volatility in the property sector.

‘To prepare for the future, the Government must increase investment...’