Whatever about kite-flying emails calling for a million more workers, all Irish people should care a lot about capital spending. 

Ireland has a problem with infrastructure. There is a plan to build more: the current National Development Plan will be the biggest ever, as a percentage of GNI*. But Ireland has a chronically bad record at getting value for money on its capital spending. 

If the government can get better at capital spending, Ireland could have the highest living standards in the world. An Ireland with Northern European infrastructure would be hard to beat, liveability-wise. And we have the economy to fund it. 

In-house engineers

Ireland isn’t alone in being bad at this. It’s an illness common to English-speaking countries. That’s one finding of the Transit Costs Project (TCP), which set out to find out why there’s a 10x variation between countries in the cost of building 1km of metro. The TCP found the countries worst at building subways tended to be English-speaking – the US, the UK, New Zealand, Hong Kong, and Singapore. By comparison Spain, Portugal, and Italy can build subways for about 10-20 per cent of the cost of the US.

Subway projects are interesting because they allow for apples-to-apples comparisons between countries. A tunnel is a tunnel. Though, to be sure, all capital spending isn’t like building subways. Subways are complex and expensive. A country that’s bad at building subways might be good at building schools. 

The TCP built a database of construction costs from 900 projects in 59 countries. From all those projects, it identified three factors that drive higher costs in English-speaking countries: labour, design, and procurement.

This finding fits with the one from the Liscow et al paper I wrote about last week. That one found road-building projects were more efficient in states with a) a competent bureaucracy and b) lots of competition. A competent bureaucracy gives you efficient procurement and design; a competitive market helps keep labour costs low. 

The important thing, said the TCP, is that officials shouldn’t serve as mere managers. They should have technical skills: 

“What matters is that public agencies are entrusted with the powers and the technical capacity to guide the procurement and delivery process. Public agencies should retain the legal and technical capacity to supervise crucial in-construction decisions, such as major change orders, by having wide access to information and by leveraging in-house technical expertise.”

What does a technical capacity look like in practice? Look no further than the Metropolitana Milanese (MM), the in-house engineering arm of the Milan city government. 

The Metropolitana Milanese

Since the 1960s the MM has overseen the construction of 110km of metro (by comparison Metrolink North will be 16km long). The MM is recognised as a world leader in its field and wins projects from around the world.

The MM has a strong track record of delivering projects efficiently: 15 out of 17 separate metro projects delivered for less than $200 million per kilometre (adjusted for inflation). $200 million per kilometre is good going. Dublin’s Metrolink North is forecast to cost $500-600m per kilometre, and that’s before cost overruns kick in. New York’s second avenue subway, recently completed, cost around ten times that amount. 

Milan is a reasonable comparator for Ireland. Its population is 4.9 million to Ireland’s 5.1 million. Its GDP is €207 billion, and Ireland’s GNI* is €234 billion. 

The MM is an independent company that’s 100 per cent owned by the Milanese administration. It was set up in the 1950s to design and build the city’s first subway lines. It has evolved. Now it builds metros, trams, sewers, bridges, and public housing. 

Because it’s independent, MM has the incentive and the capability to win contracts from outside Milan. It has consulted with other Italian cities and recently won contracts in Greece and Saudi Arabia.

It made sense for the MM to be independent because it doesn’t sit naturally within a government department. Its core competence is engineering, not administration. It has a different culture. It seeks to attract different candidates on a different pay scale. 

The culture that makes MM good at building infrastructure would probably not be suited to operating transport infrastructure. The inverse would be true of a government transport department.

Ireland has tried something like this before with the National Treasury Management Agency (NTMA). The NTMA’s original mission was to manage the national debt. That job had, before then, been handled by the Department of Finance. But in 1990, there was a recognition that the management of Ireland’s £25 billion debt was too specialised a task for Finance officials. It was decided the country needed a new, independent agency. 

In the Dáil at the time, Ivor Callely said: “Specialised financial personnel have proven very cost-effective and create massive savings for the private sector where they are working, and we should avail of that in the public sector. We should not be the losers. We must attract the right personnel by offering the right package. [The NTMA is] being set up to ensure that we can, without public service restrictions, recruit and attract the expertise to work under the Minister for Finance but with increased flexibility.”

“The Minister in his speech referred to the significant and valuable savings that can be made and he said even one per cent shaved off our interest payments would yield £20 million per year in savings. Given the right expertise, the right personnel and the right techniques, I envisage greater savings than one per cent,” he added.

It turned out that the Irish state really did need an in-house financial services arm. The NTMA did a great job of managing the national debt, and it was rewarded with further responsibilities. Now the NTMA manages Ireland’s national debt, its sovereign wealth fund, its development finance, and provides commercial advice to state bodies.

A worthwhile investment 

Ireland plans to spend around €15 billion per year on infrastructure for the foreseeable future. Not all of it will be super complex, like the Metrolink North or Children’s hospital. But some of it will be. 

Relative to the amount of investment Ireland has planned, the cost of establishing an engineering agency would be buttons. The MM — a mature agency with 1,300 employees — spent €70 million on staff last year. 

Recall that the paper by Liscow et al found US states whose officials were rated “neutral” had almost 30 per cent higher road-building costs than one whose officials were rated “moderately high quality”. 

We should invest heavily in infrastructure. To get the most bang for our buck, we should invest in technical experts to oversee projects. And we should give them their own agency. They should get all the latitude, money and status they need to get the job done.