Downside risks and up

There are two pieces in today’s Irish Times on state guarantees for downside risks. The first is on toll roads: We apparently guaranteed an income stream. The second is about the power network: There is no need to budget properly and hedge your bets, as the cost can always be passed on to the customer. Other examples are the REFIT scheme, which puts a price floor under renewables, and the put-or-pay contract for the Poolbeg incinerator.

Such guarantees reduce the downside risk and hence the cost of capital for the investor. That is fine if the investment is in a public good.

However, the downside risks are transferred to the taxpayer, while the upside risks are enjoyed by the shareholders.

I would therefore introduce a special profit tax, which applies to operations that have a state guarantee against downside risks. In that way, the taxpayer shares in the good times as well as the bad. It would also make companies think twice before demanding a guarantee.

62 thoughts on “Downside risks and up”

  1. I knew about this when the M4 Oral Hearing into the tolls was being held – in 2006. Us locals asked the NRA questions about this compensation scheme but they were tightlipped and no one seemed to care about the implications. “Commercial sensitivities” prevented them revealing the deal. Joe Costello and Eamon Gilmore tried to get Dempsey to answer questions in the Dail about what compensation is being paid, but of course, there were told it was nuttin to do with him and the business of the NRA.
    It’s mad that the taxpayer will have to foot this bill – but the bill is a secret!

  2. However, the downside risks are transferred to the taxpayer, while the upside risks are enjoyed by the shareholders.

    Should pin that onto every ESB bill:

    We appreciate your mandatory contribution to shareholders profits!

    November will be interesting when the EU Energy Commissioner Oettinger comes forward with his infrastructure plans that the german paper Handelsblatt reported on. Of course, consumers are required to pay.

    I wrote about this here:

    http://www.greentechbubble.com/file/Blog/Entries/2010/10/6_Centralization_dawns.html

  3. The closer this government gets to its end the fuller of grandiose new dreams its busy propaganda spinners are.
    Last week we had a plan to create 300,000 new jobs during the next four hairshirt years of suffering,deprivation and penury for the citizens of Ireland who have not left for distant shores.
    . The plan was conjured up by Mr Cowan’s spin doctors in the Goebbels Memorial Institute in government buildings. It will be a “great leap forward” Stalinist like, ” four year plan.
    Take for example our tourist industry-probably one of the few areas where we have it within our power to generate wealth and jobs:
    A powerful lobby group of Irish hoteliers are
    currently demanding the closure of a plethora of bankrupt hotels/golf
    course/spa, country clubs, built during the so called “Celtic Tiger
    era”, with generous tax breaks funded by the taxpayer citing unfair
    competition.

    Why should this proposal be entertained. Now that the state is
    controlling most of the banks is there any good reason against
    permitting the same banks to manage these developments.?
    Where I live in Spain,the Spanish “Paradores” are government operated
    hotels for luxury accommodation in Castles, Palaces, Fortresses,
    Convents, Monasteries and other historic buildings. There are also
    modern hotels, built in traditional style, in areas of outstanding
    beauty.

    These hotels can be found from Galicia in the North West through
    Catalunya to Andalusia in the south of Spain, the Canary Islands and
    in the Spanish cities in North Africa.

    The hotels in the Parador Group were set up by the state to use
    quality tourism to act as guardian of the national and artistic
    heritage of Spain and to assist regions with fewer economic resources.
    Guests of the Paradors receive the high standards for which the group
    is renowned at prices which are very reasonable by international
    standards.
    Troubled developments in Ireland such as the prestigious “K club” must
    be brought into mainstream affordable tourism immediately and cease to
    be the playground of the rich and powerful.
    In conjunction with regeneration of existing tourist facilities, the
    horrendously expensive “Terminal 2” at Dublin Airport must be
    mothballed and placed into a NAMA style vehicle.
    For God´s sake what is another billion Euros added to the NAMA bill,
    if it might be the salvation of the country?
    That the current government can continue to discourage foreign
    visitors from landing in Ireland ,by planning to systematically
    increase landing charges each year in order to make up the shortfall
    of revenue to pay for this “white elephant”terminal, when we as a
    nation are facing national bankruptcy, defies logic and beggars
    belief.!
    This week Mr Noel Dempsey was interviewed in Prime Time RTE, and he
    had the gall to suggest that people booking flights on line never look
    at the charges and taxes element of the cost of the ticket.
    As a very frequent traveller between my home in the Canary Islands and
    Ireland,I can vehemently give the lie to that statement.
    The charges and taxes element of the outgoing ticket I buy from Dublin
    to Gran Canaria is consistently about 38 Euros
    It frequently amounts to 50% of the cost of the ticket.
    I hope the incoming administration-when they arrive-will bring some
    sanity to this kind of head-in-the-sand stealth tax regime, which is
    currently driving Ireland towards ruin.

  4. I do not have the skills and tools to run such numbers, but I always wondered, with every 1% austerity plus x% new stealth taxes imposed, how much GDP is lost?

    Can something like this be calculated to a reasonable degree at all?

    I would not be astonished to see number like loss of 3,0 % for every 1%+x imposed.

    I am not an economist, so this may be just a naive assumption.

  5. @ George

    that’s the multiplier effect. its not very big in ireland because our economy is very open. keep an eye on Kevin o rourke’s posts on this blog, its his kind of area

  6. I would therefore introduce a special profit tax, which applies to operations that have a state guarantee against downside risks. In that way, the taxpayer shares in the good times as well as the bad. It would also make companies think twice before demanding a guarantee.

    An interesting suggestion Richard.

    Worth looking at it in a wider context… Haven’t thought about it enough but if a business is getting funding from the state, whether directly through grants or indirectly through guarantees etc, why not have them pay a slightly higher tax rate.

  7. If the decision is taken to tax more motorways or national roads etc are we not just drivng the cost of doing business up, making Ireland a more expensive place to live and work?

    In addition there appears to be a divorce from basic logical thinking in this country.

    Why do we toll vehicles which bypass a town or city?
    I realise the M50 toll is a legacy issue due to the bridge and unforeseen traffic growth etc etc etc.

    But logically I would have thought tolling drivers who go through the city center and not tolling those who bypass the city would be correct.

  8. I don’t think a tax on guarantees is a good idea because it fetters the state in its freedom to contract and it gives an illusion of protection where there is none. The State would end up giving the guarantee and compensating the other party for the tax cost some other way.

    The tax will be included in the financial considerations on both sides of the deal. Therefore the net result will be the same as if there were no tax.

    A better idea might be either to ban make such guarantees ultra vires the state unless a particular ratification procedure is followed wherein it would have to be declared by named officials that proper economic analysis had been undertaken and had justified the measure.

  9. After the experience with the West-Link a clawback clause on the upside risk should have been part of any subsequent PPP on roads.

    Giving a guarantee on the downside risk makes little sense if the schemes were designed for the expected level of traffic. Of course if the design exceeded that required for the likely level of traffic, any sensible contractor would look for a guarantee onthe downside risk. In other words, if what we hear about the contracts is true, then either there is an issue with the design or the contract.

    With regard to more tolls as a revenue raising exercise I have some reservations. Firstly, there will be a significant cost attached to providing toll infrastructure. Secondly, in many cases there will be significant displacement of traffic to worse roads, undoing the benefits of building better roads. Thirdly, tolls do not incentivise better transport choices. I would favour either a proper congestion charge (I called for that back in 2000), which will take some time to implement or a shift of motoring taxation towards fuel duties. At least the latter incentivises less car travel and more efficient cars.

  10. @ Edgar

    Couldn’t agree more. I’ve lived in London just over a year and the congestion charge makes getting around much more efficient (tube strike this week was a sobering reminder of how sitting in traffic feels). that said, it’d be bit harsh to introduce it without a fast integrated transport network… would Dublin bus be able to step up if there was less car traffic? I doubt it…

  11. @Pat
    Agreed.

    I was at this workshop the other day. Two state-owned companies said they could not deliver data because of commercial sensitivities. Both companies have a monopoly. Both manage to lose money nonetheless.

  12. Richard, your proposal re tax would be an excellent example of a sovereign changing the rules after the entrepreneur has invested. It would create massive distrust.

    I do not understand how you think a PPP partner can be expected to underwrite volumes on a wildly overspecced motorway.

  13. @Antoin o lachtnain – “I do not understand how you think a PPP partner can be expected to underwrite volumes on a wildly overspecced motorway.” – that is my point. Either the schemes are designed for more traffic than is expected (and one has to question why that should be the case) or the NRA/NDFA did not protect the tax payer sufficiently in the contracts.

    With respect to the M3 things are actually worse in the sense that the planned rail link would reduce traffic on the M3, presumably resulting in more cost for the tax payer. One would have to seriously question the rail project in the context of the M3 contract.
    Of course this is all contingent on what we know about the contracts.

  14. @Edgar

    Re the M3 – I think its even worse than that. The correct policy would have been to build the railway and the motorway together – at the very least do the land take and CPO’s together – it would have been very economical – but of course that wouldn’t be done because then the railway would be in competition with the motorway and the tolls. The state should have just paid a company to build the motorway and taken control of the tolls themselves. Under the current system – we all lose.

  15. @Antoin
    Indeed. I propose what would be a windfall tax to past investors, with all problems of windfall tax.

    It would not be a windfall tax to future investors. It can be introduced without a problem for all projects that apply for planning permission in 2011.

    For current and past investment, a lower tax would be appropriate.

  16. Yes, that would certainly be ok. An alternative would be to put a cap in the PPP contract. It would not solve the problem with infrastructure which is underused.

  17. The government’s policy in regard to new roads has been a huge success. Economists can argue all night about the nitty-gritty of how they should be financed. But, at the end of the day, it is delivery of them that counts. Are those attacking the system of financing them so certain that, if their advice had been followed, we’d now have the road network that we do? If construction companies need guarantees about return on investment, before forking out billions to build the things, I don’t think it is unreasonable. The roads they are building provide a service. Such companies need to think ahead and cover all possibilities. For example, the possibility of some left-wing government of environmental crackpots coming to power, and, motivated by hostility to private motoring, deciding to quadruple car and petrol taxes.

    Thanks to the various government initiatives, and in partnership with the construction companies, Ireland now has a world-class road and motorway network. I drove from Belfast to Cork in 3 hours 25 minutes last Sunday week, and back to Belfast the same day. Think how long that journey would have taken in 1990. If this was 1990, I still wouldn’t be back across the border. The improved road network has also led to an 80 per cent reduction in the road deaths rate since the early 1990s.

    Look at the organisations mentioned in Frank McDonald’s IT article:

    An Taisce
    Friends of the Earth
    Friends of the Irish Environment
    Feasta

    These are fanatical anti-motorway organisations, as is Frank. These organisations have campaigned against every proposed new motorway or dual carriageway in the history of the state, as has Frank. They oppose them now, at the end of a recession, when there has been a small dip in road traffic, citing that as the reason. But, it is spurious. They opposed them equally vehemently in the 1990s, even as the economy took off, and, thanks to the huge increase in road traffic it triggered, every road in the country was at a standstill, and the road deaths rate was horrendous. If these organisations had had their way over the past couple of decades, it would still take a week to drive from Belfast to Cork, not the 3 hours 25 minutes that it took me last Sunday week, and, in the unlikely event of not being killed in a head-on collision on some narrow country road on the way, one would have to buy a new car on reaching Cork, since the one that the journey was started with would have hit so many potholes on the way, it would be a wreck. Now that same journey is a pleasure and safe.

    Making long-term projections for traffic growth, based on a small dip in a recession, is daft. It is like saying that, because a hot sunny weekend is being forecast, there is no need to put roofs on houses from now on.

    Go back and read the Irish Times from the late 1980s. Especially Sarah Carey, since she works there. They do have an excellent archive online. I sometimes log on and read what was being said back then. Surprise, surprise! The very same people, Frank McDonald in particular, were saying the very same thing then. No need to build lots of roads, they said, road traffic is down and the population is going to fall because of emigration. Result: a decade later you coudn’t move on Ireland’s roads as they were so clogged up.

  18. @JtO

    I can’t disagree with you there. The motorways are brilliant – we didn’t blow the Tiger completely! Lots of great infrastructure. I don’t mind paying tolls either to pay for them (though the WHO recommendations are as outlined above – tolls should be used to persuade people off roads – so e.g. all the HGVs using the old national routes, now in Co. Co. care is a big problem). However, the issue here is not motorways good/bad, but
    1. why are we compensating the operators for downsides, when we get no upside
    and
    2. why can’t we even find out what the figures are! (since we’re paying).

  19. Well said JTO.

    I drive to Waterford every week normally off peak. The M9 is uncongested and is a joy to drive. Time saved each way is about 30 mins, it is safer, less tiring – so more productive on arrival, emissions, pollution and fuel spent/mile are lower because of cruise control (I believe??), regional traffic is sucked off the by roads onto M9 helping the serenity of the country, travel times are more reliable, helping scheduling etc. Finally, more holidaying is done at home.

    Yes it’s far off topic but I just wanted to submit some of the many benefits of motorways.

  20. While it’s great to have good roads – there is certainly no denying that – the point of why we have to cover downside risk and have no gain on the upside is valid. Typical of most PPP ventures – losses are socialised whilst profits are retained on the private side.

    Why these are needed in first place has always baffled me as the Irish motorist in particular has always been flogged by successive governments for various taxes (low tax economy my a**e) and even in the “boom boom” the govt still had to rely on private shysters to fund roads. It’s just another sign of how totally inept and how totally interlinked FF and the construction industry are.

  21. I had been waiting for JTO to come in on this. Of course he tackles the man rather than the ball – regardless of the organisations mentioned as Sarah points out the issue is not motorway good/bad but value for money and transparency.

    The point of going for a PPP is to transfer risk – if you don’t transfer risk why do it? It seems that the contractor only carried the construction risk and the financing risk. The latter is usually straightforward to handle as that can be offloaded anyway while serious issues with regard to construction risk are not that common (a notable exception is the motorway down to Limerick where the contractor took a hit due to subsidence).

    As late as the late 1990’s we had a dense network of predominantly poor quality roads – something had to be done about that. What we needed was to take through-traffic out of towns and to provide roads with a straight alignment and a decent average speed. Yes, motorways do that but where the traffic volumes are low and will be low for any forseeable future a wide single would also provide that (and has done so for quite some time), and that is the standard practice in other countries including Germany (is anyone suggesting Germany does not do roads properly??). People get hung up on the type of road rather than what they do for them – we did not need motorways to everywhere to get around safely and quickly, but clearly we needed some motorways.

    By going for motorways everywhere we got the improvements we needed but in a number of cases at a higher cost than was necessary. So while we did not ‘blow the Tiger completely’ we did waste some money. Unfortunately, despite the straightened times we live in this approach does not seem to have changed. I would prefer if we spread the scarce resources around more roads schemes rather than focusing on a few unnecessarily gold plated schemes. There are still lots of important improvements necessary but providing roads that will never reach even half their capacity is nonsense.

    @Neil – I have been down to Waterford too – peak and off peak – not much difference between them as you will find yourself all alone. You are of course right it is great to drive on, I am not disputing that. As the chairman of the NRA put it on RTE radio – no point putting a toll on the M9 as it won’t make money given the low level of traffic. QED!

  22. When the currency collapses the high oil price needed to fill personal transportation vehicles will make it difficult to justify single lane roads maintenance – never mind motorways.
    They are the function of a national socialist mindset mended to a Bretton woods system that deliberately ignores fossil fuel capital depletion in its accounting.
    But I guess we will continue to dance until we can’t – burn baby burn.

  23. I don’t really understand the rational for limiting the upside.
    Surely at the point of tendering the companies involved are given the paramaters by which the deal will operate. If they are offered little or no downside risk then they can secure finance cheaper and will therefore submit a better value tender.

    The certainty of allows them to operate at lower margins.

    If they are optomistic about the prospects of a potential windfall they may even drop margins very low (very good price for society) in the hope that it may pay off with greater returns than are obviously foreseeable.

    I submitted a public tender for work over 3 years (with possible extention to 5 years) in the begining of 2008. The customer could not give very accurate information with regard the works involved, so there was a degree of uncertaintly with regard our costs (plus or minus about 20%).

    Clearly I would be in trouble if I submitted the tender at the lower end of my estimated costs had the costs incurred been at the higher end. The ‘carrot’ of the tender was that it was for 3-5 years and that our equipment (already bought and financed) would have a guaranteed customer for a good 100 days of each year. Anyway, the final tender was 20% lower than the competition and we won the contract. My costing worked out very good and we started the operating the contract at extremely low margin (which was good considering it was Jan 09, at least we could make the repayments on the equipment and keep guys employed). As it turned out rates and costs in my industry dropped signicificantly and we are now making a fairly decent margin on that particular contract.
    My point is, the better information and certainty the contracting authority can give the better the tender price that can be submitted. Our tender submitted was 20% cheaper that the competition mainly becuase we had specific experience with a very similar work and could therefore estimate the costs more accurately.

    On a related topic, I never understood during the boom why for large PPP projects the financing was provided by the private sector. Public sector borrowing was always much cheaper than private, so it doesn’t make sense for the borrowing to be funded by the private sector when it costs more. This higher cost is then passed on to the taxpayer (society) through an increased cost for the project. This amounts to off balance sheet borrowing by public body, but ultimately amounts to increased costs and liabilities.
    A dramatic example of this is the renting of prefabs for schools.

  24. “The improved road network has also led to an 80 per cent reduction in the road deaths rate since the early 1990s.”

    The road network would have been more “improved” and more lives would have been saved if we spend more money on secondary and local roads, and less on stretches motorways that will never have the traffic density, even if the population quadruples.

    Secondary and Local roads are where most of the accidents take place!!

  25. That should read ‘If they are optomistic about the prospects of a potential windfall they may even drop margins very low (very good price for society) in the hope that it may pay off with greater returns than are NOT obviously foreseeable”

  26. @Colm
    Your right. A Motorway from Waterford to the M8 (Cork motorway) connecting near Cashel or thurles would have been way better value, but then those in Carlow might have something to say about that.

  27. @Sam – you are looking at this from the contractor’s point of view, but that is not what I am looking at. As a tax payer I am not worried about the poor contractor but about overall value for money.

    The fact that the State eliminates the downside risk for the contractor does not mean that risk goes away – it is simply transferred to the tax payer. So yes you can borrow at a lower cost but now the tax payer is paying for the risk and in this case there is no provision to share in the upside risk. Because that cost is not explicitly identified, what might look like very good value (to you) might well be poor value once the risks that are borne by the tax payer are properly included.

    There is lots of evidence across Europe that toll revenues have been very poorly predicted (it would make an interesting exercise to see why this is the case). In that context there should always be a provision for sharing in the upside, especially if there is a transfer of the downside risk to the tax payer.

  28. One more thing – we can get holes dug and filled again cheply but that is hardly value for money for the tax payer. What really matters is that the project delivers on reasonable objectives at lowest cost. Overspeccing roads means that while we deliver on objectives, compared to simpler alternative designs the benefits are marginal but at significantly higher cost.

  29. In relation to the M9, I thought its function was to serve Waterford / Dublin.

    Waterford was identified as the main export / import point for the south east. I think this came from some National strategic survey several years ago.

    While the M9 may have fairly light traffic at present, this is no indication for the future. A motorway is a long term piece of infrastructure.

    Hopefully when the global upturn comes we will be able to use our infrastucture to good effect.

  30. @Edgar, my point was that the ‘carrot’ of potential upside should mean the contractor provides a low price and therefore better value (excluding less interest costs).

    I’m point is a general one, where private operation of infrastructure is appropriate only.

    I don’t support tolls as a mechanism of paying for roads. The NRA should finance and run all motorways not private companies and therefore the upside/downside argument wouldn’t apply.

  31. @Sam – I understand your point that is why I argue for upside risk sharing rather than elimination. You are right to make the more general point about the financing of roads – this is something that needs some serious analysis.

  32. @sporthog

    You are not wrong, but it comes down to a question of proportionality. Apart from necessary stretches of motorways around big cities, a network of dual carriageways and good wide roads would be more than adequate for the volume of traffic, at much lower cost.

    Even if the population suddenly doubled, dual carriageways still be would be more than adequate.

  33. @Sarah Carey

    why are we compensating the operators for downsides, when we get no upside

    JTO again:

    Two separate issues:

    The things wouldn’t get built if the investors weren’t protected against downsides. It is not as if they were risk-free. There are political risks. Massive sums of private sector investment are involved. If I was forking out 5 billion euros of my own money to build a major motorway, I’d want some protection from the risk of Frank McDonald, or one of his disciples, becoming Minister for Transport and implementing some crackpot plan to reduce road traffic to its 1927 level.

    As for the upside, surely we do get an upside in the form of corporation tax that the companies pay on their profits? I assume that they pay corporation tax. If not, they obviously should. But, I assume that they do. But, there definitely should be no special profits tax over and beyond the corporation tax that every company pays. It would send out the wrong signals. Pharmaceutical companies, computer software companies etc, all of which are creating 1000s of jobs in Ireland and making massive investments, would think that they’d be next in line for a special tax. It would also be unfair. There is no more reason for a special tax on road toll companies, because traffic volumes turn out higher than (surprise, surprise) economists predicted, than there would be for a special tax on Irish Times profits, because they hire Sarah Carey to write brilliant articles and their sales quadruple as a result.

    @colm mccarthy

    Do you think the M9 south of about Carlow was good value for money?

    JTO again:

    Yes. But, I’d have to qualify by saying that it is not an area of the country that I am too familiar with. Isn’t that on the route from Waterford to Dublin? I definitely think that a motorway from Waterford to Dublin is beneficial to the economy, even if, like any long motorway, it has to go through some pretty quiet areas.

    Rather than continually whinging about the lack of congestion on their brand new motorways, people in inland areas should be highlighting the fact that goods can now be transported from the heart of the country to ports in double-quick time. This is a big plus for places like Athlone, Portlaoise, Tullamore, Carlow, Mullingar, Cashel, and so on. They should be making the most of it.

    @Kevin O’Brien

    The road network would have been more “improved” and more lives would have been saved if we spend more money on secondary and local roads

    JTO again:

    It would be hard to beat a 75% to 80% reduction. The secondary and local roads have been massively improved. Look at the roads in Donegal: Ballybofey to Donegal Town, Donegal Town to Sligo, and lots of others. A few decades ago people from Tyrone, crossing over to Donegal, fell about laughing at the prehistoric roads that were in Donegal then. It was Tyrone people’s way of getting back at their cousins in Donegal, because their gaelic football team was so superior to Tyrone’s then. Today, the roads in Donegal are much superior to those in Tyrone, even if their football team is now much inferior. However, some projects seem to be getting delayed, like the Ballybofey bypass. Not sure what its current status is, but it needs to get a move on.

    @Edgar Morgenroth

    is anyone suggesting Germany does not do roads properly?

    JTO again:

    NO!

    Although I do note that, barring (touch wood) a major increase in Ireland’s road deaths toll in the final few months of 2010, it will be lower than Germany’s in 2010 for the first time in ages.

    Germany was the first country to have motorways. It had them in the 1930s. What was the volume of traffic in Germany then? OK, so 1930s Germany isn’t the most politically-correct example to take.

    Most European countries had extensive motorway networks by the 1960s. I’d wager that the volume of traffic in those countries back then was less than in Ireland now. Northern Ireland had its first motorways in 1964, at a time when most roads south of the border were bog roads, with grass growing in the middle of them. There was a motorway from Belfast to Dungannon by the late 1960s, which I travelled on frequently. The reason the unionist government didn’t extend the motorway beyond Dungannon to Omagh, Strabane and Derry was nothing to do with cost or environment, but political – those areas had nationalist majorities and the unionist government deprived them of investment in every sphere. I’d again wager that the volume of traffic in N. Ireland back then was a fraction of what it is in Republic of Ireland now. Most people I knew didn’t have cars then. But, the unionist government went ahead and built motorways, confident that the volume of traffic would increase dramatically over the years, which it did. The correct technical term for this is ‘forward-planning’.

    Regarding how the things are financed. It is possible to legitimately pick holes in any system of financing. Economist A will propose one system. Economist B will then come along and say that economist A is talking through his derriere and propose another system. Economist C will then come along and say that both economist A and economist B are talking through their derrieres and propose another system. By the time you get to economist Z, half a century has gone by and they still aren’t built. There is a long long cultural tradition in Ireland of vital infrastructional projects being delayed for decades, as committees of economists seek unattainable perfection in the system by which they are to be financed, and publish report after report. It took someone like Bertie Ahern to put a stop to the nonsense, make a decision, and get the damned things built, which they now are, even as economists A, B, C to Z continue to engage in a frenzy of debate post-hoc about their system of financing. Ireland’s brand new world-class motorway network is one of Bertie’s great triumphs, for which future generations will thank him. If the matter had been left to economists A, B, C to Z, they’d still exist only on paper. It is a shame that he wasn’t as successful in getting Ireland a world-class stadium for international soccer and rugby. He may have defeated the economists and the media in getting his plan for a world-class motorway network though, but they got their revenge by forcing him to back down on his plan for a world-class soccer and rugby stadium with a 75,000 capacity. Far too grandiose, they screamed. We don’t need anything that big, they cried. It will never be filled, they yelled. You think you’re Caesescu, they bellowed. The result is the laughable Aviva Mini-Stadium, which holds only 50,000 people, while Edinburgh and Cardiff have 75,000, which comes nowhere near satisfying the demand for tickets for major internationals in Ireland, to the extent that they are putting the prices up way way beyond what the average punter can afford. That’s what happens when too much attention is paid to economists predictions.

  34. @JTO – lets just summarise your argument – you accept that Germany does roads properly but you don’t think their approach to deciding where to build a motorway and where to build something less should be applied here.

    Other than that you deflect in the usual way by giving out about economists and you show yet again that the consepts of budget contraint and opportunity cost have passed you by. You seem to think it is ok for the tax payer to subsidise your hobby horses – where should the money come from and is there anything you would not subsidise heavily??

  35. @JtO

    Would you get away with this “look at the donegal road” guff?

    Why no look at my part of the world – near the L’ford / W’meath border which hasnt seen any meaningful road improvements on local roads in 25 years. The network isnt bad in terms of surface , but there are countless blind corners and turns than need to be worked on.

    Considering that motorway journeys account for only a small proportion of the overall daily number of car journeys. It is completely wrong to attribute the decrease in roads deaths to the expansion of the network.

    Aviva is a fine stadium. Importantly one that will plausibly be a revenue generator in a couple of years. If I had my way I would have build something like the Millenium stadium in the Docklands.
    Bertie’s Stadium Ireland thing was beyond a joke. It would never attract the non-match day business (conferences, concerts ) it would need to be viable all the way out there in Dunsink.

  36. @Kevin O’Brien

    I don’t see why I should look at Longford/Westmeath roads. I haven’t been there for years. I prefer to look at ones I know. Clearly, there has been a massive improvement in Donegal roads in the past couple of decades, especially when compared with those across the border in Tyrone and west Derry. Look at the Donegal Town to Sligo road now, compared with what it was in the 1970s and 1980s.

    Aviva might be a fine stadium for conferences and concerts. It might even be good for Evangelical Crusades, the World Ping Pong championships, wrestling matches, beach volleyball, and a host of other things. Fact is: for international soccer and rugby matches, it is utterly useless – it is far too small. Its roof and view from far away might be the bees’ kness, as far as Frank McDonald is concerned. But, for Ireland’s top-rank international soccer and rugby matches, it is absurdly tiny. It is what you get when economists, journalists and environmentalists, with their paltry ambition and dismal outlook, get to dictate. Wait until the next time there is an Ireland v England Grand Slam decider. Tickets will be going for 5,000 euros on the black market. We needed a stadium of 80,000 capacity at least.

  37. I dont see why everyone else should consider Donegal roads. The road network in Donegal tells us nothing about the Road netweork in the rest of the county. Why brings it into the debate. It didn’t further your argument one bit. Completely pointless.
    The Standard of the secondary road network across this country is really poor. That is a fact.

    Re: Aviva – Cut to the case “We needed a stadium of 80,000 capacity at least.” No . We Dont !!

  38. @Kevin O’Brien

    Sorry to be the bearer of bad news. But, Donegal is part of the 26-county state. Only a few economists living south of the line from Ballina to Drogheda know that. You’re obviously not one of them. Therefore, pointing out that there has been a massive improvement in its road network does advance the argument quite a lot. There has also been a massive improvement in Sligo, Monaghan and Louth, other counties I spend a lot of time in. In fact, every county I spend a lot of time in has seen a massive improvement. I find it difficult to believe that these 4 counties, usually among the least favoured by the 26-county government, are unique in respect of their improvement in roads.

    We do need an 80,000 capacity stadium. How do I know? Well, nearly every first-rank competitive international soccer or rugby match Ireland played at Croke Park attracted in or around 80,000 spectators. Simple really.

  39. Ah ,would you give over with this maudlin nonsense!!! Get over yourself.

    The quality of the road network across the country is substandard. That is why we have still have high levels of road deaths. There has not been adequate improvements, because too much money was diverted into building unnecessary stretches of motorways.

    “massive improvement in Sligo, Monaghan and Louth”

    Actually I know the northern part of this Island quite well, and I know that the quality of the secondary road network up there (in the ROI) is as poor as it is on the southern half.

    re: Aviva
    For the record , the FAI never filled Croke Park ever. -Not once – not even the France Playoff was a sellout.
    As for Rugby – They play France and England at home every second year. So once a year on average – they might sell out an 80,000 seater.

    So you are saying we should build an 80,000 seater because of one game a year? That is just nuts!!!
    You clearly know very little about the economics of irish sport.
    We should stick to the road network for the time being and leave the stadium stuff for another day

  40. @Kevin O’Brien

    We don’t have high levels of road deaths any more. We now have one of the lowest road deaths rates in the developed world. We have Bertie Ahern to thank for that, not the anti-development clowns who delayed every motorway for years over snails, viking stones, allegedly rare types of grass, proximity to ancient battlegrounds, and a hundred other ridiculous reasons.

    Your claims about attendances at Croke Park are nonsense. I’m afraid you’re bluffing. You know nothing about attendances at Irish internationals. Read this:

    http://www.sportinglife.com/rugbyunion/news/story_get.cgiSTORY_NAME=rugby/10/03/18/RUGBYU_Croke_Park_Overview.html

    In case my link doesn’t work, it says:

    “The problem now facing the Irish Rugby Football Union is their return to Lansdowne Road will see attendance figures drop from 83,000 to 50,000. Italy was the only regular fixture they struggled to sell out at Croke Park and they are now facing a considerable drop in revenue from the reduced capacity at the Aviva Stadium.”

    Confirmed by my own experience. Actually, even Italy pulled in 75,000 to 77,000.

    The internationals against France, England, Wales and Scotland regularly got just above or just below 80,000, with a tendancy to be higher in more recent years, due to the success of the Irish team and growing popularity of rugby. I can’t swear that every last ticket was sold. Who can? But, the attendances at those matches were regularly around 80,000. Not important if a little above, or a little below. The point is they were all miles in excess of the 50,000 the Aviva can hold. The autumn friendly internationals regularly got around 75,000. Soccer qualifiers against the top teams got around 75,000. I believe capacity was reduced a bit for soccer matches, as compared with rugby matches, because of FIFA rules. I think the capacity for soccer matches was set at 75,000. In addition, the Heineken Cup semi-final, Leinster v Munster, attracted a world club record attendance of 82,208.

    The actual attendances at Croke Park were:

    rugby 6-nations:

    Ireland v France 2007: 83,000
    Ireland v England 2007: 83,000
    Ireland v Italy 2008: 75,387
    Ireland v Wales: 75,000
    Ireland v Scotland 2008: 74,234
    Ireland v France 2009: 79,000
    Ireland v England 2009: 82,000
    Ireland v Italy 2010: 77,686
    Ireland v Wales 2010: 81,340
    Ireland v Scotland: 80,313

    rugby autumn friendlies:

    Ireland v New Zealand: 76,254
    Ireland v South Africa: 74,950
    Ireland v Australia: 75,921

    heineken cup:

    Leinster v Munster 2009: 82,208

    soccer qualifiers:

    Ireland v Wales: 72,539
    Ireland v Slovakia: 71,297
    Ireland v Italy: 70,640
    Ireland v France 74,103

    against lesser teams:

    Ireland v Georgia 65,000
    Ireland v Cyprus: 53,500

    So, there was an attendance in the range 75,000 to 80,000 plus on 14 occasions at Croke Park, and in the range 70,000 to 75,000 on 4 further occasions. All these matches will now have to be crammed into a 50,000 capacity mini-stadium, the result of an unholy alliance between the anti-developer lobby, sections of the media, and some economists. The Aviva isn’t even big enough for Ireland v tiny Cyprus. Enough said.

  41. What time frame are we talking about for these games – Spring 2007 to Spring 2010 !!! Four Campaigns of the six nations!!!

    As for the soccer matches – you proved my point . Only 4 big turnouts.
    ( as regards the other matchs – the FAI were doing package deals – you had to buy tickets for both games. )

    Anyway – Does that sort of usage – using those exact figures you give over a 38 month period justify an 80,000 seater stadium? A whole world of NO!

  42. Your Georgia figure is wrong : The FIFA Website reports 45,000.

    Bertie Ahern doesnt have anything to do with this one way or the other. He has nothing to be specifically credited for , not nothing to be personally blamed for in this regard. Bringing him into the debate is just another pointless non-sequitor.

    I accept the point that we aren’t the worst compared to other nations. But that is no excuse to ignore the problem. That statistic is no comfort to the families of those who died. And there are still too many people dying needlessly. We still have thousands of dangerous stretches that need to sorted out.

  43. @Kevin O’Brien

    Generous of you to concede that Ireland ‘isn’t the worst’. In fact, Ireland’s road death rate is now the 6th lowest in the EU 27. So, 5 countries better, 21 worse. A lot to do with Bertie Ahern, for pushing through a massive road-building program againt ferocious opposition from militant environmental groups.

    You also implied that the Aviva was sufficient for all but one international match a year. In fact, as the figures show, every rugby international v France, England, Scotland, Wales, Italy, S. Africa, Australia, New Zealand, can expect to pull in 75,000 to 80,000. That is 4 per year on average. In addition, as the figures show again, soccer international in qualifers v top-rank countries, like Italy, France, will also pull in close to 75,000. So, that’s another 1 or 2 a year. The fact that they weren’t all a sell-out is a cop-out. If the capacity limit is set at 75,000, but only 73,500 attend, its not a sell-out, but its still far in excess of what Aviva can handle. Add in occasional Heineken Cup matches between Leinster and Munster, Heineken Cup Finals, and you’re up to around 6 matches a year pulling in from the low 70,000s to the capacity of around 82,000. That’s at least as many as the Millennium Stadium, for, while rugby crowds in Cardiff are as large as in Dublin, soccer crowds are not.

  44. @Noel

    That is the whole point.

    Because the Aviva capacity is so low, it is unable to meet demand. So, the prices are going through the roof. And, that’s for what are really just friendly matches this autumn. See link.

    http://www.dailymail.co.uk/news/article-1305137/Mary-Hanafin-attacks-IRFU-Aviva-ticket-prices-Union-tries-fight-outcry-refusal-sell-tickets-single-games.html

    Naturally, the politicians who in the end decided a capacity of 50,000 was enough, are kicking up a stink about the ticket prices. But, I’m afraid its just the laws of supply and demand at work. If they can sell-out Aviva at these prices, and with only 50,000 capacity that’s not difficult, there is no reason why they shouldn’t hike them up much further next time around. They should have known it wasn’t enough. But, all the ‘experts’ said it was.

    80,000 had no problem affording the tickets last season.

    The mind boggles at what the ticket prices at the Aviva will be the first time there is a match like a Grand Slam decider v France, England or Wales.

  45. @JTO – the stadia are totally off topic here, but if it is so easy to fill huge stadia in Ireland why did the private sector not build bigger ones?? The answer is obvious – because it won’t stack up financially for them. The Aviva got a 46% susbsidy from the tax payer and yet the FAI is under pressure to finance its portion. I wonder how many hospital beds, schools or roads we could have built for the €191 million the tax payer put in??

  46. Further to EM, I dont really want to talk about stadia. The crucial thing is that there isnt enough frequency of these big events to justify the costs – as your own data demonstrates.
    After a capacity threshold of around 50,000-60,000, the average costs per seat increases. Compare and contrast the cost and capacity of the Aviva and Wembley!
    It is not worth spending hundred of millions extra for an extra 20,000 or so seats, that are only going to be filled once or twice a year. What you are suggesting is complete madness.

    @EM – one should balance the cost of the contribution against all the revenue generated by sports tourism, and the VAT on tickets.

  47. @JtO

    You come out with these election slogan, but you never seem to back up your arguments, except with a correlation that everyone else can recognize as spurious nonsense.

    The improvements in the road network that have taken place are a collective effort going back generations. Giving Bertie the credit is total nonsense. To be frank – I think it is highly unlikely he got involved in the road building at all, when there was bigger issues to deal with.

  48. @Edgar Morgenroth

    I wonder how many hospital beds, schools or roads we could have built for the €191 million the tax payer put in?

    JTO again:

    Are you suggesting that the government shouldn’t have put money into a national stadium? In most countries, national stadiums receive government support. Look at the Millennium Stadium. Look at Wembley. Without governments putting money in, neither of these would have been built. I doubt if you’d find one person in Wales that isn’t thrilled by the Millennium Stadium and the prestige it has brought to the country. They’d laugh at the idea that it should have been built to hold only 50,000. In Ireland’s case, Lansdowne Road was falling to bits, while, quite rightly, the GAA would never allow soccer and rugby to be played permanently at Croke Park. It was therefore either a matter of the Government putting a large sum of money into a new stadium, or Ireland playing their international matches in Cardiff or Edinburgh. Naturally, the government chose to put the money in. But, having decided to do so, they failed to ensure that the stadium had an adequate capacity. They listened to economists’ guff about anything over 50,000 being too large and that it would never be filled. Croke Park proved otherwise, with a 70,000 plus attendance on around 20 occasions between 2007 and 2010, despite the fact that, during the years Croke Park was used, the worst global recession since the 1930s was raging.

    It is relevant to the topic, because it highlights yet again the abysmal record of economists in Ireland in making accurate long-term forecasts of infrastructural requirements. Did you live in Ireland in the early 1990s? If so, you will recall the DKM (Davy Kelleher McCarthy) report, which forecast that the population would fall from 3.5m then to 3.3m by 2011. It is actually 4.5m now. Based on this and similar reports back then, infrastructural development was run down, and, as the population soared, by the late 1990s the infrastructure was hopelessly inadequate. We are now seeing the same forecasting errors again. I have raised several times ESRI’s abysmal record in forecasting population growth, even in the recession. ESRI forecast in summer 2009 that net emigration would be 50,000 in the year to April 2009. It was 7,800. ESRI forecast in summer 2010 that net emigration would be 70,000 in the year to April 2010. It was 34,500. The population today is 77,700 higher than if ESRI’s forecasts, made only last year and this, had proved accurate. Project this level of error a decade ahead, and it is the DKM report from 1990 all over again. I assume you weren’t involved in making the ESRI forecasts. You seem much too intelligent. I suggest that ESRI entrust you with the task next year.

  49. @JtO

    You have never been able to support the contention that the ESRI use the fiscal year (i.e. May-Apr). There is absolutely nothing in that report to suggest they do. Why do you keep try to make out they do?

    Yes the CSO do use the Fiscal year – but the CSO make it crystal clear that they do.

  50. @Kevin O’Brien

    You have never been able to support the contention that the ESRI use the fiscal year (i.e. May-Apr). There is absolutely nothing in that report to suggest they do. Why do you keep try to make out they do?

    JTO again:

    Simple – they say so themselves.

    ESRI’s latest quarterly bulletin (from July 2010):

    bottom of page 39:

    “With employment forecast to be constant between 2010 and 2011, the
    expected fall in the rate of unemployment is related in part to an expected
    net outflow of 50,000 in the year ending April 2011, following an estimated
    net outflow of 70,000 in the year ending April 2010.”

    Link: http://www.esri.ie/UserFiles/publications/RB20100201/QEC2010Sum.pdf

    Bear in mind that this forecast was published in July 2010, ie 2 months after the year in question was allready over, and population aged 15 plus figures had allready been published up to February 2010 in the QNHS. So, it is a bit like me coming on here today and forecasting Ireland to beat Russia at the Aviva last Friday. If Irish population forecasters can’t even forecast the recent past, why should we pay any attention to their forecasts for a decade ahead?

    Perhaps Edgar Morgenroth will post a comment on all this. Although I suspect not, as other ESRI economists on this site (not Edgar), whom I have raised the matter with, seem to be very embarassed about it and never reply to any questions about it, either from me or from others. I am sure that Edgar Morgenroth was not involved in the forecast. Germanic thoroughness would have ensured that it was more accurate, even if not as media attention-grabbing.

    Anyway, I am compiling a polite but firm letter to the head of ESRI, with copy to Brian Lenihan, detailing this and some other ESRI forecasts for 2010 that have turned out to be both wrong and damaging, and requesting better value for my tax euros in future forecasts. And before anyone says that I reside mostly outside the 26-county state and don’t pay tax euros in it, I actually do, about 5,000 euros worth last year, which I think could be better used than on financing ESRI forecasters, at least until such time as they improve their forecasts.

  51. (washing off the egg on my face)

    Forecasts should always be taken with a pinch of salt, and when I say “pinch” I mean a Lorry load. I dont have any issue with a forecast being wrong – but damaging? Damaging who and how?

  52. @Kevin
    There’s no egg on your face. JtO is simply wrong here.

    Our annual forecasts are January-December. We do quarterly forecasts too, which can be aggregated to whatever year you like.

  53. @Richard Tol

    So, how do you explain this:

    “With employment forecast to be constant between 2010 and 2011, the
    expected fall in the rate of unemployment is related in part to an expected
    net outflow of 50,000 in the year ending April 2011, following AN ESTIMATED NET OUTFLOW OF 70,000 IN THE YEAR ENDING APRIL 2010.”

    It is at the bottom of page 39 of the following link (ESRI summer 2010 quarterly bulletin):

    http://www.esri.ie/UserFiles/publications/RB20100201/QEC2010Sum.pdf

  54. @Richard Tol

    What sort of a daft answer is that?

    It is called QEC because it is published every quarter.

    Same as the Dail Mail is called that because it is published every day.

    Nothing to do with what period the forecasts it contains are for.

    The words of the forecast could not be clearer:

    AN ESTIMATED NET OUTFLOW OF 70,000 IN THE YEAR ENDING APRIL 2010

    Why don’t ESRI simply say they got it wrong and move on?

  55. “Why don’t ESRI simply say they got it wrong and move on?”

    Why? – there is nothing interesting in a forecast turning out to be “wrong”. Forecasts are best guesses based on the data available at the time they are made. No forecast is every “right”.

    There have been forecasting methods that made predictions got quite close to the outcome, but only by complete fluke.

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