Ireland’s key challenge is to provide critical infrastructure for its citizens – housing, transport, energy and water – investments that will shape our society and determine our economy and way of life in a profound way.
Private investment, in the form of domestic and foreign savings, can support and augment the State’s efforts in meeting these needs.
The alternative of the State paying for everything from tax or borrowing is a legitimate alternative, but it severely limits what can be achieved. This is not ideology – it is maths.
Therefore, an informed debate on private investment’s role in helping to provide infrastructure in a small, open economy such as Ireland is highly relevant. Often, however, the debate lacks rigorous analysis.
For example, investment funds providing housing in the social and affordable sector do so under a long-term lease, a form of investment that has been subjected to negative commentary.
An analysis of the long-term lease shows that things may not be a simple as a politician’s soundbite.
Discounted rent
The basis of the lease is that the local authority pays a discounted rent – nominally, a discount of 20 per cent from the market rent – in reality, a discount of 25 per cent and above.
Using actual cases of new homes being provided under long-term leases in Dublin today, the net monthly cost to the taxpayer for an apartment with a market rent of €1,750 is about €700 per month.
This net amount takes account of the local authority discount, the tax paid on the rental income and the rent received by the local authority from the ultimate tenant.
Given the taxes and contributions paid by the investment fund in delivering the property, the actual net cost to the State for delivery of the new home is zero for at least the first six years. And this is to say nothing of the indirect benefits accruing to the economy.
After then there will be an ongoing net cost to the taxpayer – though at a fraction of market cost. All in all, we estimate that the cost to the State of leasing a new property for 25 years to be about a quarter of the cost of delivering the property.
A compelling argument against the long-term lease is that the property is not owned by the State at the end of the lease.
This is a weakness in the model – even though there is a benefit to the taxpayer.
Under accounting rules, if the State were to own the property at the end of the lease the rent payable under the lease is added to general government debt.
And despite what some might say, there is, as a matter of inexorable fact, a limit to what the State can borrow.
The long-term lease provides new housing to local authorities today, without adding a euro to State debt, thereby increasing funds available for other social objectives.
The investors in long-term leasing or in infrastructure seek long-term income.
For example, a pension fund, having made a commitment to pay someone a fixed monthly sum, requires a steady income to match that commitment.
These funds are not interested in owning properties and would prefer for the State to own the property at the end of the lease.
It is for the State to determine how this could work – taking account of the effect on its balance sheet. But there should be no doubt, the State owning the properties after a lease has ended would be supported by investment funds.
The long-term lease could also be used for the cost-rental model.
The cost-rental scheme is being developed by government to make new rental properties available at affordable rents and on a permanent basis to people who do not qualify for social housing.
Again, long income funds could provide properties at discounted rents – in exchange for long leases. Long income funds could provide thousands of cost rental properties where tenants pay affordable rents and be in permanent and high-quality housing.
It would be even better if, at the end of the lease, the property transferred to the State.
In the interim, there would be no net cost to the State. In fact, it is highly likely that the State would be a net beneficiary over the term of the lease.
Poor infrastructure
Ireland has poor infrastructure, despite being a rich country. There is a reason for this, and it has, in part, to do with an underdeveloped understanding of the way investment works.
Investors, or capitalism generally, are not the enemy.
There is no dark conspiracy out there among a rich cabal to rob from the poor.
In fact, the so-called vulture funds are just collections of Irish or other pensioners, or collections of insurance payments or university or other charitable endowments, looking for a return on investment – and increasingly in forms that are socially good.
Ireland was transformed by opening its doors to foreign direct investment. Prior to this the Irish economy did not best serve its people, and the tens of thousands of young people emigrating each year proved this beyond doubt.
Foreign direct investment turned one of the poorest countries in the western world into one of the better off, while at the same time positively transforming almost every aspect of Irish life.
Capital, like water, seeks paths of least resistance. There are reasons why some places have first-class infrastructure and others do not.
The overriding reason is openness.
Ross Maguire is a barrister and co-founder of New Beginning, which provides housing to the social and affordable sector via partnerships with international capital
