10/06/2011: Capital Assets Acquisition in Industry - Q4 2010 data

Another data update for Ireland - Capital Investment in Industry, based on the CSO data for Capital Acquisitions.

Updating to Q4 2010:

• Total volume of new capital acquisitions in the industry in Ireland reached €911mln in Q4 2011, up32.5% yoy.
• New investment in capital acquisitions in Ireland for 2010 reached €2.333bn, down 25.4% on 2009 and less than half the level recorded in 2008 (€5.033bn). This was the lowest amount of capital acquisitions over the years 2006-2010.
• Combined investments into capital acquisition in Pharmaceutical, Computer and Machinery sectors reached €261mln in Q4 2010 up 43.4% yoy. Total annual level of new investment in capital acquisition in these sub-sectors stood at €592mln in 2010, down 42.7% on €1.034bn n 2009 and down on annual levels in 2008 (€1.695bn), 2007 (€1.603bn) and 2006 €1.054bn)

Chart to illustrate:

Economics 26/7/10: Old Capital Investment 'news'?

Updated: per some detailed feedback from the DofF, see updated text below.


The latest announcement of the extended capital investment programme for 2010-2016 is sounding like a PR exercise. Majority of the projects announced in the programme are the left-overs from the previous National Development Plan. So there is no real news on spending volumes / stimulus extent in the Taoiseach's announcement.

This does not imply that the programme is without a merit, but it does imply that the media circus about 'major new investment programme' announcement is seriously overdone.

There are, however, some details worth covering.

First, the level of 'new' investment. At €39 billion over 7 years it is hardly a 'significant' increase on the historic levels. Taken as an average of 2008-2010 gross voted capital spending, the six year plan that would have stuck to the average would imply a capital spending of over €51.8bn through 2016. Well in excess of Mr Cowen's latest 'Great 7-year Leap Forward'.

DofF latest projections submitted to the EU in SPU2010, prepared in December 2009, show expected capital investment of €5,500 per annum in 2011-2014, which, is now exactly matched by today's 'new' announcement.

Chart below illustrates, drawing on data from Department of Finance own projections delivered for the Budget 2010.

The news component of the announcement is in the detailed breakdown of the numbers by department and within departments - by the specific lines and projects. This is a significant improvement on the SPU 2010, where the same €5,500 million in annual investments was just a number. And then there are cuts in some of the really less economically feasible (or I would say 'White elephant') investments envisioned in the original NDP.

These are welcomed changes that are worth the report that DofF did produce to accompany the announcement (links here). Where credit due...


Second, Department of Finance SPU submission to the EU has built in (Table 9: Additional Annual Measures to be delivered in 2011 and 2012) as "Capital already identified and incorporated into the base" the following cuts to capital investment: 2011=1bn, 2012=2bn.

If Taoiseach's announcement relates to the new investment on top of the planned NPRF contributions, then the future (2013-2014) savings will have to come out of some other lines of Exchequer balance sheet. Croke Park deal effectively closed the doors on generating new savings from the non-welfare lines of current spending. This means that our Taoiseach, in making today's announcement will be aiming for clawing at least €3bn in new taxes on top of the at least €2bn already planned in Budget 2010 for the years 2011-2012.

Now, recall that the same SPU - which is now replicated in the 7-year plan for capital investment - had its validity questioned by the IMF as being too optimistic on the assumptions, imprecise on planned savings and at a risk of failing due to the possible Government fatigue to cuts. Are we now seeing the very things that IMF was warning us about unfolding in front of our eyes. The IMF also said that it is likely that the additional (not planned in SPU) adjustments to fiscal balance will require savings and/or tax increases of ca 2.3% of 2014 GDP, or roughly speaking €5bn.

So in the nutshell - either we will be borrowing more to finance that which we already announced years ago, or we will be taxed to death to pay for it. Or both.


Oh, and on a funny note - the Irish Times (here) reported that Government is hoping that the new 'investment' will create some 270,000 new jobs, directly and indirectly.

My original comment was: so we spend ca €6,500 mln to generate 270,000 new jobs? At this rate of 'expected' jobs creation, we should have some 6.5 million workers in Ireland, using 2009 GDP levels. Was someone in the Government buildings smoking something funny coming up with these numbers?

A person close to the report came back to me with their explanation of the numbers. The figures quoted on the aggregate are multi-annual 6-year forward projections that incorporate previously announced jobs targets from IDA and EI. So the direct jobs creation (remember - indirect jobs creation is highly uncertain, while IDA and EI targets are not subject to the announced investment measures) is around 1/2 that number. Now, at 130-140,000 per 7 years and at €39bn total would be in the region of €280-300,000 per job in one-off gross investment.

It still looks to me like something a tad too optimistic is happening here:

• Suppose we spend €5,500 million in year 2011 building stuff. This means we hire builders etc. Suppose we manage to get them at a pittance of €100,000 per job (a very low number). We just increased employment by 55,000.
  
• Suppose in 2012 we spend €5,500 again on building some more stuff, plus spend more funds on running the stuff just completed in 2011 (remember, we cannot use €5,500mln allocation in 2012 to operate the stuff just built in 2011, as it would be a current expenditure item). So we have to hire new and re-hire old, but the same number of 55,000 workers.
  
• Between 2 years, new jobs creation is 55,000. Not 110,000.
  

And this is what worries me here. Despite the explanations I got from DofF, the document numbers on the jobs front still do not add up to me.

Worse than that. Some of the programmes envisioned in the plan will require people to run/operate them in the future, post-construction, and will also require considerable spending of funds on amortization and depreciation, maintenance and operations.

Are there any estimates as to what will be the budgetary impact of these 'new investments' on the current expenditure in the future?

Let me explain here. Suppose I spend €2mln building a school building. Unless I get the existent staff to run the building, I will have to hire new teachers, new service providers, and I will have running and operating costs. For a school, suppose I will need 2 teachers and 1 service personnel (split into part-time admin and part-time maintenance staff). That's ca €150K annually in wages, plus mark ups for pensions etc - roughly speaking €280-300K per annum. Utilities etc, plus scheduled maintenance, say another €50K. So my initial investment of €1mln creates a continuous liability of up to €350K. Of course, I can cut my construction workforce hired in 2011 and divert 'investment' to funding staff operating my new facility. But that makes it a current expenditure. And it means that the rate of jobs creation will be crowded out over time by the newly added infrastructure demands.

Note, these are illustrative figures, but they add up.

• In 2012: projects from 2010 come on-line, implying (using above assumptions) that current spending side swells by €1,100 million (gross side);
• In 2013: projects from 2011 come on-line, yielding another €950mln, adding to 2012 to generate a permanent increase in gross current spending of €2,050mln.
• and so on...

These are crude illustrations, but you get my concerns? Yep - these current costs will have to be paid by us, the taxpayers. And it scares me.

And yes, I still do not believe that 270,000 figure. In fairness to the DofF - they have been stressing since yesterday that the figure is there just because they needed some anchor to the economic impact. It is neither rigorous, nor definitive.


Lastly, I would like to thank DofF for engaging in the debate and providing some very fair clarifications and explanations of their position on the paper.

Economics 30/10/2009: Assets/Liabilities data - How IFSC beats domestic investment sectors

See as ever entertaining press release from Ryanair below.

Per CSO release today: End-December 2008, Ireland’s international investment position (IIP) was:

• stocks of foreign financial assets of €2,194bn - a drop of €76bn on the end-2007 level of €2,270bn
• liabilities were down by almost €7bn from €2,307bn to €2,300bn
• Irish residents therefore had an overall net foreign liability (or deficit) of just over €106bn at the end of last year, up over €69bn from 2007 figure of €37bn.

Now, decomposition of these net liabilities is telling: In overall commercial financial sector:

• Monetary financial institutions (MFI - i.e. credit institutions and money market funds) had assets amounting to €1,065bn at the end of 2008. On the liabilities side, the MFI sector accounted for €1,146bn so total net liabilities of MFI sector in Ireland were at €81bn.
• Other financial intermediaries (OFI i.e. investment funds, insurance companies and pension funds, asset finance companies, treasuries, etc) accounted for €980bn of foreign assets. OFI liabilities were €921bn, implying net assets (not net liabilities) of €51bn.

Thus, our commercial financial sector at the end of 2008 had foreign assets of €2,045bn (or over 93% of total foreign assets) and liabilities to non-residents of €2,067bn (or almost 90% of total foreign financial obligations), resulting in a net foreign liability of €21bn.

But the real gem is in the bottom section of CSO report. For months now CSO and Ireland’s CBFSAI were at pains to distance themselves from the IFSC. Every time someone pointed to a massive debt mountain Ireland Inc is bearing on its (private sectors’) shoulders, our Central Bank shouts ‘Foul – it’s all the fault of the IFSC’. Few (including myself) made arguments that this is too simplistic: IFSC is both an asset and a liability to our economy, and thus one cannot simply ignore its debts when one wishes to do so.

Well, CSO’s data actually shows that IFSC is hardly a culprit in the All-Ireland race to become a leading sector in net liabilities: “At the end of 2008, IFSC assets abroad amounted to €1,663bn or over 81% of the sector’s foreign assets (and almost 76% of Ireland’s total foreign assets).” IFSC liabilities stand at €1,646bn (nearly 80% of the commercial financial sector aggregate and over 71% of Ireland’s total foreign liabilities).

Yet IFSC recorded a net asset position at the end of 2008 of almost €18bn. While much smaller in size relative to IFSC, non-IFSC commercial financial enterprises (17% of total foreign assets and 18% of total foreign liabilities) have managed to run up a net liability of €39bn. That is a swing of €57bn between IFSC’s healthier books and non-IFSC’s sicker ones.

Think non-IFSC guys are now firmly on track to win the leading position in that All-Ireland race to highest indebtedness? Nope. The monetary authority, general government and non-financial enterprises had end-2008 foreign assets of less than €149bn (about 7% of the total) and liabilities of almost €234bn (just over 10% of the total). So the public sector net liabilities were a whooping €85bn, a swing against IFSC position of €103bn.

Scary stuff? Well, not yet - look at the following charts:
Chart above shows assets side of our International Investment Positions (IIP). All point to clear declines in 2008, except for 'Other' (aka derivatives written by our speculation-prone folks) and 'Direct Investment' (aka completion of Bulgarian and Romanian property syndicates)...
Chart above illustrates liabilities side of our IIP. All liabilities are up except for FDI into Ireland (which is falling - more on this below), and Portfolio Investments - which were hammered by global equity markets meltdown.

So net positions next:
Clearly, comments in the charts are self-explanatory. Good stuff (FDI) is falling, bad stuff is rising (Portfolio Investment Liabilities, Other Liabilities and Total Liabilities)... But take a closer look at Foreign Direct Investment (FDI) into Ireland, and our Direct Investments out of Ireland:
No more comment needed.

The last standing is the pesky IFSC issue - is it a problem for clean Ireland Inc, or is it actually an asset for lagging Ireland Inc? Take a look:
Conclusion - obvious. Can we get the IFSC guys to run our domestic financial services sector? Please!

Why one has to love Ryanair? Because it does what it promises on the tin:
No comment needed. As always.