Beyond the Spin - Finally a Good News Story: Investment Works. The Recession Diaries - July 27th

Fair dues to the Government. They take old news, an old set of policy projections, repackage it with a shiny new bow, and launch a fresh programme – which is presented as a stimulus and investment-driven job creation programme. And a lot of folk go along with it (though some like Miriam Lord sees the three-card trick being played). Let’s look at the headline figures behind the new capital infrastructure review - for there is spin, but there is (finally) a good news story.

The Government announced as early as December last year that capital investment would be cut to €5.5 billion annually from 2011 to 2014. Yesterday, the Government announced that capital investment would come in at €5.5 billion annually from 2011 to 2016. Same ol’, same ol’.

Actually, the Government has been taking a hatchet to capital spending projections. In January last year, they projected capital spending to come in at €27 billion for the period between 2011 and 2013. Within a few weeks, this was cut to €17.5 billion. Now it will be €16.5 billion.

This is important as here lies a big spin. It is claimed that since tender prices have fallen by 30 percent from a peak in the second half of 2006, the volume of spending and, therefore, the level of activity, won’t be affected. However, the tender index published in the review shows that tender prices have fallen by about 20 percent since 2008. Yet, capital spending in nominal terms will fall by nearly 40 percent. The volume cut is still considerable.

Any growth and job creation arising out of the new capital review was already factored into projections last December. Yesterday’s launch doesn’t change those macro-numbers. And capital spending has been cut – whether measured in nominal terms or in volume. So much for stimulus.

But let’s look at one set of figures that can help us reconstruct an alternative perspective. The ESRI asserted that capital spending is inefficient when it comes to creating jobs. As mentioned before, they asserted this but didn’t put forward any arguments or data to back up this assertion. They did cite another ESRI study, by Edgar Morgenroth, but this hardly backed up their contention.

The Department of Finance measured the job creation element of the programme. They found that there are between 8,000 and 12,000 short-term jobs created for every €1 billion spent (with HSE capital spend having the highest job density and water services having the lowest). These numbers are consistent with Morgenroth’s study.

Of course, these numbers don’t include downstream, or induced employment (arising from sourcing, extra demand, etc.). Again, Morgenroth’s study suggests this element – which remains in the medium-term after the project has been completed and the direct jobs are gone – is about half the number of direct jobs created.

So let’s examine the benefits of a significant, temporary boost in capital spending. If it were increased by €3 billion over and above what the Government projects, this could create:

• Between 24,000 and 36,000 jobs directly
• Between 12,000 and 18,000 indirect jobs

That would be quite an accomplishment. With some boldness, some vision, some courage (I like using that latter word, since deflationists are forever advising the Government to be ‘courageous’ when it comes to fleecing pensioners, the jobless, the sick and low-paid), the Government could make serious inroads into growth, employment and the fiscal deficit.

On the latter, the Morgenroth study quotes Construction Industry Federation numbers showing that – adjusted to our sample €3 billion extra boost – tax revenue would rise by about €900 million with a further €900 million saved on the social welfare budget. That’s a big turnaround – and probably doesn’t include further tax revenue arising from increased consumption.

So capital spending can be a useful instrument in terms of job creation and the fiscal deficit. But the real benefit is the long-term addition to our economic base. For instance, IBEC estimates that installing a Next Generation broadband network to cover 90 percent of all household and businesses would cost €2.5 billion – with about two-thirds of that cost composed of civil engineering works.

If such a project were undertaken, we’d get a jobs boost and a public finance boost. But we would have an extremely valuable asset on the national balance sheet, an asset that would facilitate indigenous enterprises’ ability to compete in the traded sector. In other words, the good stuff would keep coming.

All this to say that, beyond the spin, investment works. It puts people back into jobs, it helps repair the public finances and it can leave us with wealth-producing assets for years to come.

Now, isn't that a good news story?

Comments

[Mack]

Michael -

Did Ibec define what they mean by next generation? Does it compare with this?

http://www.google.com/appserve/fiberrfi/public/overview

Also if the cost is only €2.5bn, and the government are going to hive off some Semi-states, couldn't some of that money be used to found a new high-speed broadband company?

Or, given that such a new company would be a strategic threat to eircom (as it would be able to offer carrier services to third parties for both broadband and internet telephony, maybe even IPTV?) could the threat be used to bully Eircom into building it themselves, for free?

[Michael Taft]

Mack - actually my fault for not linking the report. Here it is: http://www.tif.ie/Sectors/TIF/TIF.nsf/vPages/Broadband~Publications~building-a-next-generation-access-network-for-ireland-16-04-2010/$file/TIF%20Report%20%27Building%20a%20Next%20Generation%20Access%20Network%20for%20Ireland%27%20Final.pdf

A I understand, Fine Gael is proposing a new public enterprise company to roll out NG broadband. Donal Palcic on PE suggests that this could allow the state to bring all their telecommunicatin assets into one house. Of course, we could also re-nationalise Eircom (at least the network).

Have a look at the IBEC and let me know what you think.

[Mack]

Scenerio #1, Fibre and wireless

is the one to go for. Fibre can at least theoritically support speeds of 1Gbit/s.

http://en.wikipedia.org/wiki/Fiber_to_the_x

The Koreans are rolling out broadband of that speed to their cities over the next 2 years.

http://www.neowin.net/news/korea-to-get-1gbps-broadband-speeds

To catch up, that's what we'd need to aim for.

Nationalising eircom is probably a bad idea - a good portion of their infrastructure is probably dated / about to become obsolete. I'm not sure how much of it is used under the FTTH (fibre optic) portion of scenerio 1. The existence of a fibre optic competitor in the cities might force eircom to undertake the cost of the FTTC work (upgrading the copper infrastructure 100 mbits max) themselves. Or perhaps share some of the cost of the fibre optic network with the state. If there is obstructionism preventing access to essential infrastructure that is needed, nationalising that portion might make sense..

[Mack]

"The demand-side business case for NGA is unclear, examples from other markets suggest that revenues remain flat as bandwidth increases"

...

"The Analysys Mason study indicates that at current
prices, it would take over 12 years for a NGA network
operator to recover its investment costs – not to
mention earn a return on this investment.
Such returns are unsustainable to the private investor."

So, they've decided none of them are not going undertake this themselves (except perhaps under duress). If they were under proper competitive pressure they'd have to invest just to maintain revenues / market share (they can innovate all they like after that to increase revenues). I note the comparison they make is with Virgin media - the service Virgin offer is superior to anything offered in Ireland (50 m/bits, VoIP, Digital TV, TV on demand) at far lower prices than even standard broadband & cable tv in Dublin. They could probably charge more for that service in Dublin than UPC's prices today. Surely the only reason Virgin can't in London, is either because of competition or because they are expanding market share? (In the graph are VM going from 35% market share to 58% with steady ARPUs?). UPC have an effective monopoly in cable. Maybe we should ask Virgin Media to come and build it - if even just in Dublin for now? Or at least put it out to competitive tender..

[Mack]

This might be worth a look. Why or how South Korea is ahead in broadband.

http://www.cnn.com/2010/TECH/03/31/broadband.south.korea/index.html

Seems to be a combination of

Competition
Government Investment
Open networks
Government Programs (subsidies for low income households)

There might be an argument for the state managing the internet infrastructure (if the current private sector encumbents won't), and facilitating liberal market in services (low barriers to entry, foster innovation).