For companies, the question of how much to invest has been studied backwards and forwards and is pretty well understood. 

Companies should keep investing until the returns from investing in new projects are lower than their cost of capital. 

Or, if their access to capital is constrained, they should rank investments by their expected returns, and go down the list until they run out.

Investors search heaven and earth for companies with the right investment profile. For ones with great returns on their growth investments. Or for ones who don’t need to invest much to keep things ticking over. 

But governments… I don’t have a good idea of how much governments are meant to invest. What’s too much? What’s too little?

It feels like Ireland is bad at investing. In Europe, public-owned things seem nicer.

But infrastructure is a big category. It takes in everything from roads to schools and hospitals. Is my gut to be trusted? How does Ireland really compare to other places?

Individuals and companies invest to make money. The goal is simple, which makes the decision-making process simple too. Invest when returns are higher than the cost of capital.

Governments have a cost of capital, and they have a target, which is something like “national well-being”, which could be shoehorned into a return on capital framework. But obviously, well-being is not easily measured. Better to use a different framework.

The trends

What’s meant by state investment?

What I mean is buying things that can be used over and over again. The things are often, though not always, used to produce other things. The biggest category of investment is buildings of various kinds. Other categories of investment include roads, ports and machinery. I’ll call it infrastructure.

Do we have enough infrastructure? It’s a hard question to answer. Infrastructure is big. It takes in much of the physical stuff in the country. How do you meaningfully measure the sum total of a country’s productive stuff? How do you compare it to another country’s?

The CSO takes as a stab at it. By its calculations, Ireland’s public capital stock has stayed pretty stable over time, at around 65-70 per cent of GNI*. The following chart is from the Irish Fiscal Council:

But as we’ve seen, the public capital stock is hard to measure. The IMF estimated it at 48 per cent of GNI* in 2015, a full 15 per cent lower than the CSO. 

The World Bank comes at it in a different way. It surveys business managers in every country and ranks their responses. This gives a sense, not of how much Ireland’s infrastructure is worth, but how it compares. Which gets to the heart of the matter.

The chart below shows how Ireland does on the World Bank survey. The number on the Y-Axis is where Ireland ranks globally. And the data is from 2017.

According to the World Bank survey, Ireland’s infrastructure is far below what you’d expect given its level of income. Ireland’s infrastructure ranks behind almost all high-income European countries. For clarity’s sake, I didn’t include them all in the chart. 

Ireland’s infrastructure ranks around the level of Poland, Czechia, Chile and Italy. For reference, those countries have an average GDP per capita of €20,700 and Ireland has a modified national income per capita of €38,000. 

The IMF conducted an in-depth report on the quality of Irish infrastructure in 2017. It found, similarly to the World Bank survey, that the quality of Irish infrastructure is behind where it should be, given what we spend on it. 

The key chart from that report is the following one. It shows Ireland gets a poor bang for its buck — that despite fairly high investment, the quality of Irish infrastructure is lacking compared to other rich countries.

So far I’ve talked about the national stock of infrastructure. What about flows? How much are we spending per year? 

Infrastructure is composed of physical things, primarily buildings, and buildings depreciate. They need to be renovated and replaced every year just to stand still. 

There are two trends in Irish public investment. The first is that, in the very long term, investment has fallen. According to the Fiscal Council, the percentage of government spending that is invested has shrunk from an average of 12 per cent between 1970 and 2016, to 8 per cent between 1985 and 2016. This is largely down to EU transfers and catch-up investment in the 1970s and 1980s.

The second trend is more short-term: investment fell by more than half between 2007 and 2009, as the financial crisis started to bite. It has recovered since then. The latest investment plan is the National Development Plan 2021-2030. Under that, investment will rise from 2.5 per cent in 2017 to 5 per cent in 2025, and stay there until 2030. 

Is 5 per cent a lot? Among OECD countries, median spending is about 4 per cent. But then, Ireland’s population is forecast to rise by the second-most in the EU. So maybe it isn’t.

The bottlenecks

So Irish infrastructure doesn’t compare well to other rich countries. But we’re spending a good bit of money on it. Should we be spending more, to catch up? Back to the original question — what’s the right amount of government investment?

Given our infrastructure deficit and our fast-growing population, it seems to me there’s a good case for spending more. But ultimately it’s a political decision. There is no formula, as in corporate finance, that will make the decision for us. 

The economists would say, whatever amount we decide to spend, to keep two things in mind.

First — is the figure sustainable? A big problem with Irish investment up to now is that it’s been pro-cyclical. As former Minister for Finance Charlie McCreevy said, “when you have it, you spend it”. 

This is a bad way to invest. One reason is that infrastructure investment is by its nature a medium-term process. You don’t build a hospital or road network in a couple of years. The funding plans should match the delivery plans. That’s how to get better value for money.

I once asked the transportation researcher Marco Chitti how Italy was able to build its rail network so cheaply. He said Italy’s rail infrastructure is handled by an autonomous agency with medium-term funding. That allowed it to plan appropriately for long-term projects, attract good staff, and get better at delivery over time. 

By contrast, our investment comes in fits and starts. We often take on projects at the top of the market, paying top-of-the-market prices. And our government doesn’t have the in-house expertise to deliver the projects efficiently. Exhibit A is Metrolink, which is forecast to cost roughly twice the average cost per kilometre of other underground metros.

So, when it comes to getting value for money on infrastructure investment, it’s important funding is stable. Whatever number we choose, we should commit to delivering it year-in-year-out for the coming years.

For that reason, the spending should be fiscally sustainable. The government should be willing and able to fund investment over time. It’s no good promising to invest six per cent of modified national income if you end up breaching EU fiscal rules or growing an unsustainable national debt.

The economists also point to the supply side of the economy. Funding is one thing, but what can it buy? Do we have enough builders, cranes and concrete? During the last boom, construction ballooned because we imported huge numbers of workers from Eastern Europe. But in the meantime, Ireland has gotten more expensive and Eastern Europe has gotten richer. Ireland isn’t as attractive as it once was. 

And finally, related to the question of how many workers we can marshall, there’s the question of how well the state can oversee the spending. Overseeing giant capital projects like the children’s hospital or the rural broadband scheme is a huge amount of work. The state needs people and it needs practice.

For all these reasons, it’s far from clear that doubling investment in euro terms would translate into twice as many homes, roads and schools.

So if we want nice things, the big bottleneck isn’t a lack of investment. It’s about wasting less money.