Regenerating the Regeneration Project

We learn that a new, scaled-down regeneration project for Limerick is to be sent to cabinet next week. The revised plan will cost 924 million euros, approximately 57% of the cost of the original. This revision of cost is a recognition that we live in straightened times, but also that the cost of construction has gone down quite a lot. Overall I'm not too surprised or upset by this downward revision. Most of the work of the regeneration project's initial phases will be completed using these funds.

There is something to get upset about though. The revised plan will be delivered over a much longer period of time, meaning the present benefits to the residents of the regeneration areas are much less than envisaged. Given that the Fitzgerald report is explicitly designed to alleviate the conditions currently being experienced by residents today, the revised plan is not and should not be accepted as it stands.

Every student of economics knows about discounting. The present value of a cash flow is the cash flow divided by one plus the interest rate for each period of time that passes until the project is complete. That interest rate is known as the 'discount factor', which we normally assume to be the cost of capital. We can calculate on the back of an envelope what the present value to the citizens who live in regeneration areas would be.

Assume 924,000,000 is the total to be spent, and that, now, the total will be spent over 15 years, not 10 years. We have to discount future payments, because they haven't happened yet. A bird in the hand is worth two in the bush, after all. They've told us 60 million or so a year will be paid out, and assuming a discount rate of 5%, then the total value of the payments to the contractors working on the regeneration project, and therefore the agency itself, looks like this:

(Here is the code I used to draw these figures, you can manipulate the little program to your heart's content by downloading and installing this player, it is free.)

The total payment is worth only 627,000,000 to the residents of the regeneration areas today. But wait. This is economics, and things can always get worse. Assume the discount factor gets larger, from 5% a year to 15%, or in other words, the historically low cost of capital we've experienced in recent years returns to something like its long term trend. Look what happens.

Suddenly, with a different cost of capital, the benefit to the people living now in regeneration areas like Moyross from the new plan is nearly one thirds of the already-halved amount.

Now let's see the effect of a change in the length of time the project will be rolled out. Return to the original 5% discount rate for a minute. Here's the original 10 year time frame, with the new budget:

Now stop.

Read the Fitzgerald Report closely. Here's a snippet from page 5:

The Moyross and Southill areas of Limerick suffer from some acute problems of disadvantage. In particular they have a high unemployment rate (5 times the national average), a high proportion of one-parent families, significant educational disadvantage with educational attainments well below the national norm. In terms of socio-economic status, CSO analysis shows that these estates are among the most deprived in the country. They also have the lowest scores in terms of socio-economic status in Limerick city (see map at Appendix 2). There is a high rate of crime, particularly violent and drug-related crime, which has come to particular public attention in the past 12 months as a result of a number of high profile incidents. Criminal elements in certain parts of these estates exert a highly negative influence on young people, and cause fear and intimidation among residents. The situation with regard to drug use is also serious. The National Drugs Strategy Team has identified Limerick city as the area of most concern with regard to problematic drug use combined with indicators of social deprivation.

The regeneration project, with all its flaws, many of which I've pointed out, is the only chance of beginning to change some of the problems dealt with in the Fitzgerald report. The existence of the four regeneration areas, and others like them, around our country, after 15 years of unprecedented economic growth, is unacceptable. The fact that the two children, whose injuries precipitated the regeneration agency in the first place, will be in their late twenties or early thirties before the project is complete, is unacceptable. That's another generation of residents, left to experience some of the same conditions outlined in the Fitzgerald report. How can a supposedly civilised society, even one as fiscally challenged as ours, contemplate this as a reasonable course of action?

We could regenerate the regeneration project, based as it is on hard targets like buildings, and infrastructural construction alone. Note that the soft targets-reductions in criminality, increases in educational and labour market outcomes, community initiatives, are soft targets, only really dealt with in the now-shelved third phase of the project, where a centre for some of the areas is planned. Another approach, first dealing with the governance issues around council boundaries, then empowering residents to refurbish their own homes through training and grants, micro-finance type initiatives to spur enterprise creation, community gardening initiatives, strengthening of local ties with law enforcement, crime management, health promotion and educational initiatives, and volunteer-based building programs, could be tried.

What would you do in this situation?

You can't conjure money out of thin air--any cash spent on regeneration must be borrowed, and at some cost. Here I'm with Colm McCarthy, we shouldn't be moved to borrow money because of a need to do something. However, most of us would want to do something. We have a reserve of unemployed workers trained in construction, a vast inventory of unused construction materials, a real need for the kinds of investment the regeneration project outlines, and a reason to do something.

What might that something be?

3 Replies to “Regenerating the Regeneration Project”

  1. The two types of regeneration project which happens in Ireland are those with a sustainable income stream and solid management of the program. Or those which do not have the income stream or the program management. Dublin Airport Authority are closer to being the former. Dublin Docklands Development Authority were more like the later.

    In Friday April 9th 2010, Colin Keena wrote a piece in the Irish Times, Do question marks hang over the heads of auditors?

    http://www.irishtimes.com/newspaper/finance/2010/0409/1224267970377.html

    I mean seriously, should those auditors who signed off on business plans for Zoe developments, Anglo Irish or the DDDA, be allowed to retain their audit license from the Chartered Accountants Regulatory Board?

    I wrote at the Irish economy blog site last December,

    It is unfortunate and inappropriate that DDDA adopted the same business model as DAA. Because DDDA doesn’t have a continuous and sustainable income stream like DAA enjoys. Indeed, Turner and Townsend main priority in DAA’s capital investment program, was to program construction work dates sos that DAA’s continuous project investment stream would be able to release funding at ‘major milestones’ so that construction could be bought at the lowest possible price.

    http://www.irisheconomy.ie/index.php/2009/12/29/politics-and-economic-policymaking/#comment-30276

    November 30th 2009, John McManus writes in the Irish Times newspaper, Docklands disaster serves as warning on Nama.

    http://www.irishtimes.com/newspaper/finance/2009/1130/1224259710165.html

    It's a measure of how conditioned we’ve become to failure and incompetence in public life that the revelation by the Dublin Docklands Development Authority (DDDA) that it has blown €213 million of taxpayers’ money is met in the most part by weary shrugs and eye-rolling.

    [break]

    First and foremost is the way in which the organisation became involved in the Glass Bottle Site deal and is now being set up to be the patsy for the whole thing. It has gone from being some sort of junior partner to the prime target of the raft of litigation surrounding the collapse of the billion-euro project.

    We still having learned how to manage these projects in Ireland without messing up the chances of viable private enterprise in the process. I offered some of my views in a blog entry on North Wall Quay.

    http://designcomment.blogspot.com/2010/02/north-wall-quay-time-line.html

    One also has to ask, why organisations such as Dublin Airport Authority are not set up in some sort of way, their mandate is to look at the horizon and see how 500 quality engineering jobs should be saved at Dublin airport, by building simple hangar buildings for instance.

    DAA could have driven some investment into Hangar construction. It was peanuts in financial terms, compared to the other stuff. Granted, it takes time to go through the rigourous planning and construction process for 'air-side' projects of any kind.

    But DAA should have seen it as their business, to provide hangars for both airlines, because it was obvious there were 2 no. strong airlines present on site.

    Futhermore, DAA should have done it, to protect the interests of a sub-set of the Irish tax paying population - the native Irish aeronautical engineering and maintenance workforce.

    http://designcomment.blogspot.com/2010/02/liars-poker.html

    The trouble with all of these re-development and regeneration organisations is they define their briefs as being too wide, and in the process of promising too much to too many, end up missing some really important opportunities to provide and sustain employment.

  2. Another part of the matrix for looking at regeneration projects in Ireland is those projects where land is a state owned asset. Versus those projects where no land exists in public ownership.

    The public housing regeneration projects in Dublin or Limerick, such as Ballymun regeneration limited etc are obvious examples of the former. The Dublin Docklands is an example of the latter.

    Dublin Airport Authority owns the land upon which Hangar 6 was built. But as we heard in the Oireachtas joint committee meeting on transport, the leases to the hangar building were not state owned.

    I wrote a blog entry, Who is dealing here with whom?

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