Driving Irish construction
Matheson’s Rhona Henry, partner and head of the Construction and Engineering group, and Garret Farrelly, partner and head of the Energy and Infrastructure Group, outline the series of prevailing drivers within Irish construction today.
There are a number of prevalent factors driving construction in Ireland in 2017. These include a significant increase in construction/development lending (and not only by traditional/domestic lenders), multinational companies and financial institutions continuing to establish here or to expand their existing presence in Ireland together with the re-emergence of project financing.
Construction/ development lending in Ireland in 2017
In addition to the more traditional investors and funders, there are a number of international private equity lenders and institutional investors who have entered the market and are actively seeking out the acquisition and development of investments and assets in Ireland. These private equity lenders and institutional investors are sophisticated, have significant experience in construction lending, know what to look for in the context of a construction lending contract package and focus on key issues.
The more traditional/domestic lenders that we have previously seen in the market are now once again very active. Both types of lenders understand and focus on key issues including insurance requirements, caps on liability and budget control. This can be challenging in an environment where, equally, contractors have re-assessed their approach to projects and the risk profile that they are willing to underwrite generally in relation to such projects. Negotiations on construction security packages, however, generally have a well informed and practical focus to them which is sensible and right.
International companies’/financial institutions’ continued allegiance to Ireland
Another key driver of construction activity at the moment is the continued commitment to Ireland of international companies and financial institutions doing business in and through Ireland.
There are very significant capital expenditure projects currently under construction across the Dublin skyline and nationwide.
The sectors behind these projects include the data centre, renewable energy, student accommodation, hospitality and commercial development. Growth in the commercial development sphere is primarily associated with foreign direct investment.
Brexit poses both difficulties and opportunities for the Irish economy. Approximately €1.2-1.4 billion of trade between Ireland and the UK takes place each week (around 7-8 per cent of our GDP). Over half of Irish exports in the construction and timber sectors go to the UK each year. We simply don’t know at the moment what kind of customs/tariffs will affect this flow of business into the future. Of course, a ‘hard’ Brexit may present great opportunities for the construction industry if Brexit related relocations begin to materialise.
Capital investment/project financing
The decision of the Government to bring forward the mid-term review of the Capital Plan to early 2017 was very much welcomed by the construction industry. We understand that the Minister has now commenced this review. However, the Minister will only make his recommendations to the Government in Q3 2017, following the 2017 Mid-Year Expenditure Report and submissions from stakeholders. These recommendations will then inform the Government’s decisions on capital allocations in the context of Budget 2018.
“A key driver at the moment is the continued commitment to Ireland of international companies and financial institutions.”
Recently, the Government has also informally committed to preparing a new 10-year national capital plan in response to Brexit. No details have been made public as of yet and it is not clear how this capital plan will interact with the current Capital Plan, but we believe that this is a positive move by the Government.
This Capital Plan, published in 2015, sets out a six-year framework for infrastructural investment in Ireland out to 2021. Given its importance for driving growth and employment in the Irish economy, capital investment in Ireland’s critical infrastructure is vital. The Government’s commitment to spend up to €47 billion on key infrastructure is significant.
In addition, the presence of the European Investment Bank in Dublin is a good indication of commitment to funding. These kinds of measures will reduce costs for businesses in Ireland and guarantee the supply of vital services to them. One way of delivering these measures is through the Government’s public private partnership programme (PPP). We have already seen the re-emergence of the PPP model in Ireland in the last 12 months with the closing of the first primary care PPP in the summer of 2016.
In October 2017, the Construction Industry Federation will unveil its 10-year vision for the construction sector – ‘Constructing Ireland 2027’. We look forward to Constructing Ireland 2027 and hope that it will provide a valuable insight into the future of the construction industry in Ireland.
Focus on transport infrastructure
In the Department of Transport statement of strategy 2016-2019 which was released in late December the Department of Transport committed to invest €3.6 billion across the lifetime of the next Capital Plan to enable a number of major public transport projects to proceed, and to fund additional capacity to meet existing and future commuter needs. These will include completion of the Luas Cross City project, progression of the New Metro North and further planning of road projects to complement the National Action Plan for Jobs.
Luas Cross City is the next phase of Dublin’s integrated light rail network. Luas Cross City will extend the existing Luas Green Line from St Stephen’s Green West to the Iarnród Éireann Broombridge Station in Cabra. Transport Infrastructure Ireland (TII) is delivering the project with funding being provided by the National Transport Authority. The project is being undertaken in collaboration with Dublin City Council. Construction commenced in June 2013 and it is scheduled to be in operation by the end of 2017. Metro North, the high-speed rail link from Dublin city centre to Dublin Airport and Swords, has also been given the go-ahead with construction planned to begin in 2021, with a completion date predicted for 2026/27.
The cost of the ‘optimised’ New Metro North light rail link to the airport was most recently estimated at €2.4 billion, while the design of the DART Underground heavy rail interconnector (and associated DART Expansion programme) is currently subject to review in an effort to reduce the original total cost of approximately €4 billion.
In January 2017, Minister for Finance Michael Noonan and Minister for Public Expenditure and Reform Paschal Donohoe officially noted that an additional €2.6 billion had become available for capital projects up to 2021. All Government departments were instructed to submit applications for a portion of the €2.6 billion in extra capital project funding by the end of February, in advance of a public consultation on the various proposals. During the announcement, Minister Donohoe expressly referred to the New Metro North, DART Underground, Dublin and Cork ports and Dublin Airport in the context of the Government’s capital expenditure priorities.
The official announcement of the review of the Capital Plan came at a time of wide press speculation regarding the potential to accelerate the commencement of the construction of the New Metro North light rail project, currently scheduled for 2021. It is not yet clear whether such an acceleration is feasible. However, favourable comments made by both Minister Noonan and Minister Donohoe with respect to the use of the PPP funding model to deliver large infrastructure projects (coupled with frequent references to long-delayed transport projects) suggest that they are seeking ways to expedite the delivery of key large-scale projects in the transport sector.