CAPACITY OF THE CONSTRUCTION INDUSTRY

As discussed below, significant Measures have been taken on the supply side to try and ease constraints and increase production. However, in the absence of Measures to tackle demand they have proved incapable of halting the rise in prices in the housing sector. As discussed later in Section 13.4, it will be important if the NDP is to deliver on its targets over the coming years that demand in the housing market is managed more effectively than in the past through the use of suitable fiscal Measures. Problems in the housing sector can affect the rest of the building and construction sector through the labour market.

Outside of the housing sector, there are signs that the slow down in the economy has eased pressures on prices. While current demand conditions persist in the private sector, the industry should have the capacity to deliver the current level of output of non- housing infrastructure, or a moderate increase in output, without adding to inflationary pressures.

In an effort to address the construction capacity constraints, which became apparent towards the end of the 1990s, the Government identified Measures to increase the capacity in the industry to ensure that it was geared up to deliver the NDP in a timely and cost-efficient manner. However, it became clear, that the publication of the Government’s Action Plan in September 2000 coincided with the peak in the construction industry.

The industry sought to expand capacity in three key areas:

• Increasing the supply of skilled staff;

• Promoting the introduction of innovations for building materials, products and systems;

• Improving the planning and regulatory environment.

In relation to staffing, the concerns about labour market shortages were addressed by more than doubling the intake of

13 _{An overview of the housing section of the macro-model is given in Duffy}

MACRO-ECONOMIC BACKGROUND 25

14 _{However, it is also possible that it could occur through a sudden fall at some}

time in the future.

apprentices, increasing the output of skilled personnel from third level institutions, upskilling existing employees and by augmenting domestic capacity by encouraging greater participation by overseas contractors, bringing in skilled workers from overseas, using subcontractors and recruiting from employment agencies.

At the height of the construction boom, total direct employment in the construction sector had more than doubled from 92,000 to 190,800 (seasonally unadjusted) between April 1994 and October 2002. The latest Quarterly National Household Survey reported construction employment at 190,400 (unadjusted) in April 2003. It is likely that employment has been holding up due to the flexibility of large and medium-sized contractors who have been switching their resources to sectors where construction demand has not been affected by the economic slowdown, notably housing.

The industry has invested in innovative products and systems in an effort to speed up the construction process and reduce the dependence on skilled workers in scarce supply. Housing, for example, has started to introduce prefabricated units, timber framing and more modular systems for high rise developments. However, key issues raised at the time of the Action Plan were the problems and delays in securing approval/certification from the Irish Agrément Board (IAB), the national body responsible for certification, innovative building systems and materials/products. The IAB has prepared an Action Plan, which calls for additional funding over three years to address the backlog of applications before the Board.

The Government is planning to further improve the planning process for major infrastructural projects. Such action will be important if the State is to get value for money over the rest of the planning period. Whether it will be sufficient to deal with the problem of delays due to recourse to the courts remains to be seen.

In addition, there is a need to tackle the problems concerning the inflation of land prices. There are a number of possible solutions, including using fiscal remedies to capture a significant part of the development gain for the state.

Once the current boom period is over, the sector faces a period of slow growth or even contraction over the coming decade. At some stage over the next few years, when the demand for housing has been largely met, it is likely that real house prices will fall to levels closer to the EU average and this will be the signal for a winding down in capacity in the sector. Bergin et al., 2003, assume that this will happen through a standstill in nominal prices over a sustained period.14 _{In the civil engineering sector it is likely that}

demand will continue at an elevated level well into the next decade as there are likely to be major infrastructural needs still outstanding. However, the inevitable process of adjustment to lower demand for building and construction output, which is still some way off, will

prove painful for the sector. This means that long-term employment in the sector can not be guaranteed to all those currently working there. This has implications for planning for staffing in the future.

Looking at the civil engineering sector, it would appear that under current economic circumstances it has the capacity to continue producing at the current level of output without serious inflationary problems. It is to be hoped that the weakening in demand will actually see a fall in prices to levels more in line with experience elsewhere. It is possible that the industry could even absorb some limited increase in demand without adding to prices. However, if as suggested in this chapter, the economy returns to quite rapid growth from 2005 onwards, there could be a return to the inflationary pressures of the past. This could be aggravated by an increase in demand for construction output in a recovering wider EU economy. Under such circumstances it would be necessary for Policy Measures to be introduced to manage demand: preferably through reducing private sector demand; otherwise it might be necessary to reconsider the phasing of public sector demand.

While there is scope for increasing investment in non-housing infrastructure, in the case of the housing sector there is a continuing problem with capacity, as evidenced by the continuing rapid rate of inflation. Any further demand will further raise prices above their current level, aggravating Ireland’s competitiveness problems. Under these circumstances it is important to reduce demand pressures to make space for the investment under the NDP. This issue is dealt with in more detail later in Section 13.4.