Supplementary Budget How much capital investment stimulus will the public sector actually be providing to contractors over the next three years, asks Tomás Kelly, Davis Langdon PKS Since 2008 the domestic economy has continued to decline on the back of a global financial crisis. An exchequer deficit of €3.7 million was recorded in the first quarter of 2009 which was considerably worse than that projected at the time of the October Budget thus the government had to take action and introduce the recent Supplementary Budget. Last year saw the value of construction fall to €30 billion from €38 billion in 2007 – a 21% reduction in 12 months. This was primarily driven by the collapse of the new housing market from 78,000 new residential units built in 2007 to 51,724 in 2008 – a 33% reduction. Alas, the tidings for 2009 are not good. The near total collapse in the new housing market will continue and, all the indications thus far are that we will only construct in the region of 18,000 to 23,000 residential units this year. Public sector investment, as set out in the October Budget, was due to show an 8.8% reduction however the recent Supplementary Budget introduced further cuts in capital spending of circa €600 million resulting in a “real” reduction in public sector spend in 2009 in the region of 20%. This of course is on the basis that all this planned expenditure occurs which, based on past experience and the grave economic situation, there has to be significant doubts over. Probably of equal if not greater concern however is the projected expenditure in the multi-annual Public Capital Programme. The figures indicated for 2010 through to 2013 do not offer much hope that it will be the public sector providing the necessary stimulus in terms of capital investment. Private sector investment is likely to continue to fall in 2009 also. Notwithstanding some positive noises on the international stage in terms of a recovery we think domestically it is widely accepted that it will be 2011 at the earliest before we see signs of a recovery. All in all we expect a total construction spend of circa €15 billion in 2009. Looking in more detail we briefly review the prospects in each sector over the next 12 months.

Public sector Construction in the Public Sector has experienced a number of significant transformations in the last two years. The single biggest change has been the wide ranging reforms in construction procurement of public projects. Almost exactly in tandem with this (there is no linkage intended here) has been a sizeable change in output from sustained year on year growth in the wider construction industry as well as in public sector capital expenditure to a downturn in capital spend in 2008 and the projections are for further decline in the next couple of years. In terms of the public sector the Public Capital Programme published with the Budget in October 2008 had an overall projected expenditure of €7.77 billion for 2009. This represented approximately an 8.8% reduction on 2008, which bearing in mind the dramatically changed national economic situation at the time; it was broadly viewed by the industry as a good outcome. Unfortunately the Supplementary Budget has adopted further cutbacks which will in effect mean the “real” reduction on 2008 is in the order of 20%. The key changes in this recent budget are shown in the box overleaf. The implications for the key public sector departments for capital spend are as follows: Health The HSE Capital Plan was severely hit in the October ’08 Budget. It has taken a further 5% reduction of €20 million in the recent budget, the combined effect of both is a 28% reduction on capital spending in 2009. This will undoubtedly impact on a number of projects which had previously been earmarked for progression in this current year. Education Education was highlighted in October as one of the few departments that registered an increase in capital spending. It is not surprising that it has seen a €54 million reduction in the April ’09 Budget. This reduction has been apportioned between the School Building programme (€30 million reduction, equivalent to circa 5%) and Higher Education (€24 million reduction, equivalent to circa 10%). Notwithstanding these reductions, Education is still registering a 4% increase on capital spending over 2008 which given the current deflationary trends in tender prices represents a real growth area in 2009. Environment & Local Government €200 million in additional savings (10%) are been targeted in the Department of Environment & Local Government and within this the Social Housing and Water Services programmes will be the principal areas of savings. Transport Infrastructure Over 50% of the Capital Investment Framework under the NDP is allocated to Transport and Environment & Local Government projects. The Department of Transport has an overall capital envelope of circa €2 billion and is the largest individual department spends. As such it is a major contributor to the construction industry output. For this reason the €300 million reduction announced in the April Budget was a major blow to the civil engineering sector. As 2009 expenditure on the major inter-urban routes is largely contractually committed the cutbacks will primarily effect the regional and local roads. There will also be some deferrals and rescheduling of public transport projects. Private sector Energy The energy sector is a potential growth sector particularly in the area of renewables. This will be in the form of significant investment in wind energy and the ongoing upgrade of many of the old power plants following the de-regulation of the power generation industry. Commercial offices Following strong demand in recent years, driven by confident developers, funders and occupiers, the commercial office market shuddered and contracted dramatically on all fronts in the second half of 2008. With occupier demand down and liquidity funding restrained by tight credit conditions, the sector is unlikely to show any significant recovery before 2010/11. Hotels, sports & leisure The hotels market is currently competing very aggressively for market share and room rates have been slashed with specials and deal offers. One benefit of the market conditions is that it is forecast that there will be increased levels of families travelling within Ireland rather than abroad. In turn, this may lead to some activity however for the moment most hoteliers are more focused on survival rather than investment. Retail The retail sector experienced a steep decline in sales during 2008 reportedly down 10% by year end. Apart from the global economic crisis retailers in Ireland have been further hit by the exodus of shoppers to Northern Ireland to avail of the cheaper prices. It is expected that the majority of the retail growth over the next 10 years will be in main cities including Dublin, Galway, Limerick and Cork, owing to several planned new centres and large extensions. Residential sector Thus far 2009 has seen the residential market come to an almost total standstill. Many factors have influenced the sector performance, most notably the “credit crunch” and the ongoing banking crisis. In addition there is weak buyer activity in the housing market due to an understandable lack of confidence and fear that prices will drop further rather than a lack of demand. Completions in 2009 could be as low as 20,000 units which include 10,000 units of social and affordable house completions, one off and some scheme housing. Industry & manufacturing The industrial and manufacturing sector is likely to be quite flat in 2009 with only a few large scale new start faculties planned. There are however constantly upgrade and expansion projects within the Bio-pharma, Microelectronics and Food & Beverages sectors some of which can represent significant investments in their own right. On a positive note falling construction costs and extremely tight tendering by contractors equate to excellent value for money and should help to balance project development appraisals and secure finance when the banking sector returns to some form of normality. In addition most schemes that are in design/planning stage are being re-examined with renewed vigor to ensure that the most economic design is being achieved. Areas such as servicing strategy, parking, security, mall treatment, clear heights, grid spacing and alignment are just some of the cost and value drivers being re-assessed prior to final commitment. In terms of the market there are great opportunities for clients who are resolute enough to brave the current economic climate. They will undoubtedly get exceptional value for their investment however the rules for success can be somewhat different for working in a recession. Securing a low entry price will be relatively easy, converting that into a low exit price will require hard work by all involved. This article appears in the May edition of the Irish Construction Industry Magazine, for more information, please click here>>