Committee Reports > List of Committees > Joint > 1986 > Committee on Small Businesses > Report No. 04 - Construction

Foreword

At its meeting of January 1984 the Committee decided on the first phase of its work specifically the preparation of reports on:

Manufacturing Industry

Retail and Distribution

Tourism, Catering, and Leisure

Construction

The First, Second, and Third Reports have already been published.

This fourth Report on Construction is laid before both Houses of the Oireachtas in accordance with paragraph (6) of the Orders of Reference of the Joint Oireachtas Committee on Small Businesses.

The Committee wishes to thank all those who assisted in the preparation of this Report.

Introduction

The Construction Sector in 1984 accounted for 11.5% of GDP with output valued at £1,822m. (Construction Industry in Ireland - Review of 1984 and Outlook for 1985 - DoE). Some 84% of output was undertaken through private contractors and the remainder through direct labour employed by Local Authorities and other public bodies.

The Sector accounts for 10.5% of those at work broken down between the following sub-sectors:

(Source: An Foras Forbartha estimate contained in Sectoral Consultative Committee Report on Construction).

The Committee has already published Reports on Manufacture and on Retail and Distribution. These Reports address many of the issues of interest to materials manufacturers, builders, providers, and plant hire firms as manufacturers and as distributors.

This Report therefore concentrates mainly on issues of interest to building contracting and professional consultancy firms.

PART 1

Construction - What’s Wrong

1. Background

The Construction Sector has been the subject of several recent reports including the Reports of the Sectoral Consultative Committee (SCC) and the Sectoral Development Committee (SDC). These two reports, which were published in 1984, involved a major examination of Construction and provided a comprehensive series of recommendations for future development.

Other relevant reports include:

-The Report of the Working Group on Cost Overruns on Public Construction Contracts (1982)

-The Report of the Joint Oireachtas Committee on Building Land (1985)

-Report of the Select Committee on Public Expenditure

-Control of Capital Projects (1985).

Against this background of comprehensive investigation this Report concentrates on ways of improving Construction demand and performance, against a background of deep recession.

In this regard we look at State Construction Policy through:

-the role of the Public Capital Programme and priorities for future direction

-incentives and private sector funding

-control of the Black Economy.

We also look at the impediments to Construction Sector performance and at opportunities.

2. The Recession in Construction

Construction output grew rapidly in the 1970’s to reach 18.8% of Gross Domestic Product in 1979. Since that time the Sector has been in progressive decline and has fallen by one quarter in real terms. It stood at 11.5% of GDP in 1984. Although the percentage of GDP accounted for by Construction is now in line with that of other European countries, the decline in demand continues and the Department of the Environment has forecast that Construction output this year will be 4% lower than last year.

Figures showing the changed relationship of Construction to Gross Domestic Product do not adequately convey the trauma to which the Sector has been subjected in recent years. The effects of the continuing downward shift in demand for construction include:

A further factor affecting Construction is volatility in demand which has major inhibiting effects on planning within firms and on the development of structures more capable of availing of export opportunities.

It is time for resumed growth by the Sector but at a more orderly pace than we have seen in the past and generally in line with growth in the rest of the Economy.

3. The State and Construction

(i) Introduction

The influence of the State on Construction is huge. In 1984 some 70% of finance for investment in Construction was channelled directly through State sources. This estimate excludes tax concessions such as mortgage interest relief. (Sectoral Development Committee Report No. 4).

While this overwhelming proportion of Construction investment accounted for by the State is to an extent explained by the collapse in demand from the private sector, it is most unlikely that the State will ever account for less than 50% of total finance for investment in Construction.

Public expenditure on Construction is undertaken through a wide variety of channels including Government Departments, Local Authorities, Health Boards, State sponsored commercial firms, and a wide variety of State agencies. It usually takes the form of direct expenditure but there is also a variety of grants available for new house purchase, provision of factory buildings and other services such as certain tourism facilities.

(ii) Public Capital Programme and Role of State

All of this expenditure is through the Public Capital Programme under the following main headings:-

Against this background the State can have a powerful and positive role in assisting market stability, restructuring and improved efficiency within the Sector, introduction of new products and techniques, controlling the Black Economy, and generally promoting the orderly development of the Sector.

Although Construction impinges on all sectors of the Economy and it, in turn, depends on them, the medium to long term effects on Construction of investment decisions in other areas have never really been considered.

In this regard there have been two recent welcome developments. One has been the Government decision to establish a Construction Industry Development Council comprising Government and Sectoral representatives to consider the development of Construction in the context of national economic and social objectives. The other welcome development is the introduction of multi-annual programming into the Public Capital Programme as set out in the National Plan for 1985-87. However this welcome must be tempered by the sudden introduction of measures such as the doubling of VAT on Construction at a time of deep recession in the Sector.

(iii) Reallocation of Public Capital Programme

We have already seen how critical the Public Capital Programme is for the whole Construction Sector. Much of the PCP has been criticised in recent years in the context of major cost overruns, and to a lesser extent, investment in ‘White Elephants’.

These matters have been or are being examined by other Committees including the Committee on Commercial State Sponsored Bodies and the Committee on Public Expenditure.

However, past mistakes should not obscure the fact that much of our productive infrastructure is still below what is satisfactory and that investment in genuine productive infrastructural projects makes the country more productive and, indeed, can in itself aid economic recovery.

With the completion of major programmes such as those of ESB and Telecom Eireann and with social changes such as the decline in the birth rate, which should at least reduce growth in health and education construction, there is a need for new directions in the PCP.

In this regard we outline recommendations with regard to items such as roads and sanitary services infrastructure, housing, renovation and maintenance, and tourism/leisure facilities (recs. groupings 2 and 3, and recs. 4 and 5).

(iv) Performance

The SCC and SDC Reports found that there was a lack of good information available on the efficiency of the Construction industry. However the Sectoral Development Committee’s Report (SDC) drew attention to “the great similarity in Ireland and U.K. in terms of practices, materials, labour, plant, parallel professional institutions and regulatory processes. International studies have found that the efficiency of the construction industry in the U.K. compares unfavourably with that of a number of other countries and with the U.S. in particular. The inference is drawn that the efficiency of the construction industry in Ireland is similarly significantly lower than that of countries such as the U.S.”

Both Reports agree that there is considerable scope for improved performance in Construction here with resultant savings to the State through the Public Capital Programme and also the increased competitiveness of the Sector.

A specific example of how improved performance can be achieved may be seen in the average reduction in the cost of constructing Local Authority houses - by 4.3% in 1983 and by 4.1% in 1984. This improvement contrasts with average increases of 32.3% in 1981 and 22.7% in 1982. However, in 1983 the Department of the Environment introduced a system of simple computerised elemental cost control for this area of Construction and the system has contributed to major cost improvements.

Greater efficiency of itself would also make the Irish Construction Sector more competitive in export markets, which are themselves under great pressure, and on the home market, which may have to cope with the arrival of U.K. contractors here in the late 80’s particularly if U.K. Building Societies open branches here.

The State as the principal source of finance for Construction has the responsibility to act as an instrument for improved performance within the Sector.

Given the general view that there is considerable scope for improved performance in Construction we believe that a 10% improvement in performance is a minimum attainable target during the next 5 years, resulting in savings of approximately £180m. per annum (1984 figures).

Improved performance of this order would significantly reduce building costs and consequently increase the investment potential of any project with a significant Construction element. Therefore improved performance resulting in lower building costs would in itself lead to an increased demand for Construction. (recs. 1, and 2.5, and recs. groupings 8 and 11).

(v) Finance for Construction

While recognising the already enormous role of the State in the finance of Construction we believe that there is scope for a limited range of incentives designed to stimulate activity and bring about or bring forward socially or economically desirable infrastructure projects for which public funds are not available at present or on which there would be a marginal return.

Similarly, we feel that steps should be taken to reverse the slump of 60% over the last four years in the Market Sector of Construction i.e. Industry, Agriculture, Commercial and Retail. While accepting that market requirement is the ultimate determinent of Construction demand here, we believe that a more favourable tax regime would lead to a greater demand for Construction investment, particularly in Tourism/Leisure facilities and Retail.

The involvement of the financial institutions and their effect on Construction also needs to be reviewed, particularly the Banks and the Building Societies.

Implementation of our proposals here would bring more private finance into construction and would stimulate employment. (recs. 6.1 - 6.8)

(vi) Renovation, Maintenance, and Urban Renewal

While many European countries admit to shortcomings in the compilation of statistical information on the renovation and maintenance of their building stocks, it is clear that Ireland differs from most of Europe in the lack of priority accorded here to the preservation of our existing buildings.

Government support for building renovation and maintenance is an established part of official policy towards Construction in most European countries. The following selected extracts from international publiccations on Construction illustrate this fact:

“Total repair and maintenance work, which includes housing improvement, accounted for approximately 40% of total construction work in 1983 ........... It is largely because of the impetus given to repair and maintenance in the private sector by Government that an increase of 3% is forecast for 1984” (Address by U.K. delegate to Euro. Construct Conference - Paris 1984).

“Activity within repair and maintenance work has risen continuously during the last few years, and as the so-called ROT programme was adopted in September 1983 containing a series of built-in subsidies for repair and maintenance, it is expected that this activity will continue to grow.” (Address by Swedish delegate to Euro. Construct Conference - Paris 1984).

“There is a high and growing need for renovation work ............ The Government recognises the importance of this problem and is pursuing a heavily subsidised urban renewal policy.” (Netherlands contribution to European Community Contractors Annual Report No. 16 - May 1985).

“The number of grants for housing renovation has doubled in 1984 with respect to 1983. In the same period the number of permits for renovating non-residential buildings increased by around 10%.” (Belgian contribution to European Community Contractors Annual Report No. 16 - May 1985).

“In many countries emphasis was placed earlier on programmed demolition and replacement (of housing). But in recent years the emphasis on improvement and modernisation has grown.” (Major Trends in Housing Policy in ECE Countries - U.N. Economic Commission for Europe - 1980).

In Ireland the situation is entirely different. There is a tendency here to abandon our existing buildings and rebuild, without considering the renovation option.

To a large extent the concentration on new building, including new ‘greenfield’ construction, is readily understood against the background of demographic change in this country during the last 25 years.

Our population has increased by 25% since 1960. The population of most other European countries has remained more or less static. Against this background the requirement for the rapid expansion that took place in new construction is evident.

However, the attitude in favour of new building is re-inforced by our grant and taxation incentives which until now have discriminated almost entirely in favour of new construction.

If we want evidence of this official bias towards new construction we have only to look at the composition of State support for housing. In 1980 we had 259,000 pre-1920 houses, which represents one quarter of our housing stock. However State investment in the renewal of our housing stock is very low - £10m. in home improvement grants and loans in 1983 or 2% of total public housing expenditure of £530.5m. (capital and current) for that year.

We accept that our population structure, which contrasts with that of the rest of Europe, will give rise to significant investment in new Construction for a considerable time to come. However, the requirement for new Construction is not a justification for discrimination against our older buildings.

We also accept that in some cases the correct thing to do is to demolish and build anew rather than rehabilitate - for example when the cost of structural repair and factors such as dry rot, damp proof coursing, and area obsolescence would result in the cost of rehabilitation exceeding the value of the property.

However, many of our older dwellings are a national asset but there is a need for substantial investment in their renovation. When this investment does not take place the result is progressive decay and dereliction, as the condition of parts of central Dublin all too clearly illustrate. The decline of the housing stock in an area and the departure of its residents lead inevitably to a decline in the businesses of these areas, with similar consequences for business premises.

We believe that the case for investment in the maintenance of our existing buildings has not produced an adequate response from the State, with unfortunate results for many of our decaying inner urban areas. We also believe that this case can be made and that there is justification for more State support for renovation and maintenance as:

The Government recently announced a number of measures designed to achieve urban renewal in a selected number of inner urban sections of Dublin, Cork, and Limerick. The following incentives will be available in the areas selected:

In addition new home improvement grant schemes were announced with a maximum grant range of from £400 to £2,000 for eligible improvements and a maximum additional £5,000 grant for the refurbishment of pre-1940 houses. The maximum possible total grant combination for an older dwelling is £8,600.

These schemes represent a welcome and overdue turning point in official attitudes to older buildings and our decaying inner cities. The urban renewal schemes should be progressively extended to other cities and towns such as Waterford, Galway, and Dundalk.

Indeed, in preparing this Report the Committee was working along similar lines. At its meeting of 1 August 1985 the Committee drew the attention of the Minister for Finance to the low level of State support for the maintenance of the existing housing stock, particularly the 250,000 or so dwellings which are 60 years old or more.

The Committee subsequently agreed the following recommendation, on the basis of advice that the fabric of a house is most at risk from approximately 60 years of age:

the introduction of a scheme of home improvement grants for houses more than 60 years old. The higher rates of grant should be made available in deprived areas,

Grant rates should range from 35% to 75% subject to a maximum grant of £8,000. Exceptionally, in cases of hardship grants of up to 90% should be made available.

While there is some difference in emphasis between the Committee’s original proposed recommendation with regard to house refurbishment and the Government decision, the effect should be broadly similar resulting in more work for the Construction Sector, particularly for the smaller building contractor, for whom this labour intensive activity is most suitable.

There is now also an obligation on the private sector to respond positively to these incentives. However there are essential pre-requisites to the successful rehabilitation of inner urban areas:

Notwithstanding the recent Government announcements the Committee feels that further steps can be taken to enhance the rehabilitation of our older buildings and urban areas, and makes recommendations accordingly. (recs. 3.1 - 3.8)

(vii) Black Economy

The Black Economy, as we said in our Report on Retail and Distribution, is in essence income (earned and unearned) which is not reported to the tax authorities. The sole objective of the Black Economy is to avoid taxation and it is therefore a creation of the tax system. The magnitude of the Black Economy is very definitely influenced by the levels of taxation.

Construction has always suffered from the Black Economy, not just in Ireland but in other European countries as well. Indeed it seems to be the area of economic activity most susceptible to the Black Economy operator.

The following extract from an article in the July 1985 issue of Money Magazine, a U.K. publication, is relevant:

“Homeowners who are used to two different prices being quoted by builders depending on whether its a “cash job” know full well that the home improvement market is the tax evaders paradise ....................... If you are looking for the best deal everybody knows that you have to pay cash. In fact, in the home improvements field it has gone a stage further; small builders and decorators expect to be paid in cash and are quick to tell you what you can do with your cheque.”

By definition it is not possible to quantify the size of our Black Economy in Construction although the SCC Report refers to suggestions that the loss to the State arising from it is between £20m. and £50m. per annum. The Construction Industry Federation itself estimates the Black Economy at 10% to 15% of output and valued at in the region of £250m., two-thirds of which is estimated to be related to the housing sector. Other sources suggest that the Black Economy accounts for 5% to 10% of Construction output. While estimates with regard to the size of the Black Economy are necessarily guesswork, all of the parties involved with Construction are in agreement that it is a major and growing problem.

The following extracts from evidence to the Committee support this view:

(a)Extracts from Submission to Committee from Construction Industrial Committee of ICTU:

“A comparison between the official estimates of numbers employed in the Industry and the number of workers registered with the Industry Pension Scheme would also confirm that a substantial volume of building work is being undertaken outside the normal system of employment”.

“Most significantly however, firms who engage workers as unregistered sub-contractors are not required to have any evidence of the workers true identity and it is therefore possible for a worker to be engaged as a non-registered sub-contractor under a fictitious name while drawing Social Welfare Benefits in his own name. Once the employer deducts the required 35% of payments and pays this over to the Revenue Commissioners he has no further liabilities and it would be difficult if not impossible to trace the true identity of the sub-contractor concerned.

In the experience of the Trade Unions this is the most common vehicle by which the black economy operates in the Industry”.

(b)Extracts from Evidence to the Committee from the Construction Industry Federation:

“It is not unusual to have a decorating job, an extension or a rewiring of a house costing £8,000 or £10,000 and to find that it is not being done by a contracting firm at all. It is being done by a couple of lads “on the labour.” This is what is putting us out of business.”

“Returning to housing, could I say that I would reckon there are as many as 3,000 houses being built through the black economy.”

We have already said that the State is the pre-dominant source of finance for Construction investment. For that reason alone the State should be in a position to substantially curb the Black Economy.

Yet the simple fact is that contractors have never been asked to establish that they are employing people on a bona-fide basis, either as sub-contractors or as employees.

In the case of houses, usually once-off houses, built with the assistance of State grants, the person from whom the house is being built may use direct labour, without any deductions for tax, PRSI, or other levies.

We feel that the Black Economy is destroying the smaller builder and that the tax system in this area has now become counter-productive.

It is also quite clear that there are ways in which the Black Economy can be weakened by State action, but measures taken so far have not been equal to the problem.

The Government has now acknowledged that the Black Economy is a major problem in the Construction Industry and recently announced decisions in this regard include:

We welcome these measures and also support the implementation of the recommendations made in the SCC Report with regard to curbing the Black Economy.

The Committee also makes its own recommendations on the Black Economy, designed mainly to give a greater measure of protection to the smaller legitimate contractor. (recs. 7.1 - 7.6)

However, the Construction Sector itself could do much more to promote a real awareness in the community of the risks attached to employing “cowboy” builders. If the average person’s main investment is his dwelling, much more should be done to make him realise the greater risks and and real costs of poor workmanship and consequent lack of legal redress.

In this regard the Committee welcomes the joint Construction Industry Federation/Allied Irish Finance home improvements loan package, under which work must be done by registered contractors, as a welcome initiative.

4. Impediments and Opportunities

(i) Structures, Management, and Practice

In 1983 there were 4,872 building contractors within the AnCO Construction Designation, of which 4,407 firms or 90% of the total had fewer than 20 employees. This illustrates the importance of Construction as a major activity for small firms.

Ease of entry has always been a feature of Construction. Indeed the total number of firms covered by the Construction Industry Designation Order, which includes site based operations, furniture and timber, and building products, increased from 4,650 in 1979 to 6,100 in 1983, although output from the Sector declined in the same period. Two-thirds of these firms were employing four people or less.

We are opposed to imposing controls on entry to the sector but are of the view that larger firms employing 30 to 50 and more would be more capable of identifying and responding to new markets, products, techniques and ultimately of developing an export capability.

We therefore favour a grading system of selective tendering for Public Service contracts and on identifying selected companies for company management development programmes. (recs. 2.5 and 8.4)

We also believe that there is a strong case for closer technical liaison and integration between the design and construction phases for larger projects and that earlier involvement by the contractor during the planning stage would improve efficiency and communication, and reduce costs. We have already suggested that this is an area for early consideration by the proposed Construction Industry Development Council.

In Ireland, as in Britain, the industry has evolved from being essentially practical and craft orientated into a separation of design firms from the builders and from the manufacturers of materials. Design practice tends to concentrate on the cost of materials. The cost of materials however is but half the cost of buildings. The balance is made up of the cost of labour, mostly but also machinery, temporary works and supervision costs. It is noteworthy that the cost of materials can be regarded as finite and limitable but the efficiency by which the are put together (i.e. the building process) is not finite.

This means that designers should pay a lot of attention to this area. This is not easy because design firms are a separate entity from construction firms - which are engaged in working on building sites and in the organisation of building. The tendering system adopted does not facilitate any close collaboration at the design stage - because this would be seen as giving an unfair advantage to the firm consulted by the designer. Obviously some enquiries are made informally but a structured exchange of ideas on work practices, new machinery, and building techniques does not take place.

Interruptions to work on site are frequent and the cause is not limited to inclement weather. Much delay is caused by changes in design or from the lack of detailed information (working drawings and detailed specifications). Changes in design are often caused by the client changing his mind as he sees the reality of the building emerging during the construction process. As a general rule more time should be given to clear briefing of the designers by the Client; and in the time taken by the designers to demonstrate (by models as well as drawings) the proposed project to their clients. In general European and American practice pays much more attention to these areas.

It is not possible to concentrate on planning efficient construction if the work process is interrupted, and it is noteworthy that the building of standard houses where all concerned know exactly what is involved has in Ireland reached relatively high levels of efficiency - particularly on large schemes (in excess of say 50 units).

Large Irish building projects other than in housing have become characterised by delays and the consequent cost over-runs. Civil engineering works - which frequently have unique features where the designer is forced to consider building techniques - and which are controlled by more direct specifications, drawings and bills of quantities - have, in general, a better record.

We believe that more emphasis on selective tendering, management development, and closer integration between the design and construction aspects would improve the structure and performance of the Sector.

(ii) Legal and Administrative Environment

In its submission to the Committee An Foras Forbartha stated:

“The smaller firms find the regulatory environment increasingly complex. The growing numbers and variability of conditions attaching to planning permissions, the imminent introduction of Building Regulations, the tax gathering requirements of the Revenue Commissioners, are examples of this environment which bear heavily on firms forced to reduce overheads by current economic conditions.”

While Legal and Planning issues are a complex area we feel that implementation of our limited number of recommendations would make life less frustrating for the smaller contractor without lowering legal standards or impairing the Planning environment. (recs. 9.1 - 9.3.6)

(iii) Standards

Ireland is unique in Europe in having very few National Standards, which even where they exist are not generally known or appreciated. The range of standards must be widened and implemented to ensure that quality materials are more widely used in Construction here and to ensure that Irish materials manufacturers adhere to these standards.

The new National Standards Authority (within IIRS) needs additional funding to achieve the development of Irish standards and codes of practice.

The design sector has a critical role in ensuring the implementation of these Standards. (recs. 11.1 - 11.4)

(iv) Exports

There are at over 200 construction firms, consultants and contractors seeking work overseas at present, compared with 150 firms last year. For 1985, the projected value of overseas contracts is £145m. The value of contracts achieved in 1983 was £116m.

While this improvement is welcome it has to be recognised that there is a general downturn in the Middle East and aid dependent countries. The value of foreign work won by the top 250 international companies fell by 24% to $93.6 bn. in 1983. This accelerated a decline that began with a fall of nearly 9% in 1982.

Against this increasingly competitive background getting overseas construction work is becoming more expensive and more complex. For example the market investigations, setup, and penetration costs to develop export markets are significant. An annual marketing budget of £100,000 - £200,000 would not be unusual, although a lower outlay might be feasible in aid dependent countries covered under the Lome Convention.

While CTT is putting a welcome emphasis on developing overseas construction business there are parallel changes here relating to firm structures e.g. multi-disciplinary consortia, the tax environment, and the capital base of firms. (recs. 13.1 - 13.3)

RECOMMENDATIONS

PART 2

Section A

State Construction Policy

1. Development Council

We urge the establishment forthwith of the proposed Construction Industry Development Council as recommended by the Sectoral Development and Sectoral Consultative Reports on the Construction Industry. The Council, which would be representative of Government, Builders, Trade Unions, and the Professions, should be provided with adequate staffing and budgets to ensure that it will be able to play a pivotal role in the future development of the Construction Sector. It would provide continuous assessment of performance by the Sector for both Government and Sectoral interests, together with forecasts of output and recommendations for Construction policy.

2. Direct Role of State through the Public Capital Programme

We have already said that in 1984 some 70% of finance for investment in Construction was channelled directly through State sources. This level of finance places the State in a unique position to positively influence the development of Construction.

Our following recommendations are framed against this background with a view to ensuring a more stable market environment for Construction planning together with improved performance and structure, and Appendix 1 (Pages 55 - 66) examines in more detail the future outlook for the various sub-sectors of the Public Capital Programme.

2.1 Medium and Long Term Forecasts

A full review of Public Capital Programme construction requirements be undertaken on a continuous basis to provide the Construction Sector with medium to long-term forecasts on a rolling 3 to 5 year basis on the likely demand from its largest customer - the State. This review would be carried out under the aegis of the Construction Industry Development Council.

These forecasts should distinguish clearly between:

(i)direct PCP expenditure e.g. roads, schools, hospitals,

(ii)market led PCP expenditure e.g. housebuilding, IDA, and other grant aided construction.

Forecasting along these lines would provide the sector with a basis for medium to long term planning and a means of helping to mitigate the extremes of demand to which the Sector has been subjected in the past.

2.2 Construction Policy

The Government should develop a policy for Construction in its own right rather than simply regarding Construction as a service to other sectors. A clear Construction policy statement should be issued.

2.3 Construction as a Proportion of the Gross Domestic Product

The State should endeavour to ensure consistency in the proportion of GDP taken up by Construction. A target range of 12% to 14% of GDP on an ongoing basis is suggested as appropriate to Ireland’s circumstances.

2.4 Contract Payments by the State

The Committee encountered a widespread view that many contractors are experiencing major difficulties in obtaining payments under State contracts resulting in major pressure on cash flow. It is suggested that these alleged delays relate to funding difficulties in the relevant Government Departments.

We are not in a position to investigate these allegations but we are firmly opposed to manipulation of payments under Public contracts as these progress payments are the lifeblood of contractors and consultants.

The State as a client of the Construction Sector must be a good payer and the cash flow of client firms, within contract limits, must take precedence over the cash management requirements of the State. There should be full enforcement of interim and final payments provision on contracts with respect to dates and amounts.

Sectoral Performance

As the major client of the Construction Sector, the State has a very real concern to ensure that the Sector is efficient in both performance and standards, providing full value for money.

The issues here include:

The Construction Industry Development Council would have primary responsibility for implementation and effective dissemination of information to Construction interests.

The objective here is to develop and maintain a Construction Sector, to the highest international standards with a strong export component and fully capable of coping with import pressures on the domestic market.

2.5 Selective Tendering

To encourage better use of Construction resources and to combat the Black Economy there should be pre-qualification for builders tendering for public sector contracts. We favour a system, such as that operated by the Greater London Council, which grades contractors according to their work. As individual contractors perform satisfactorily at lower levels of work they are progressively allowed to tender for larger contracts.

It is not our intention that new entrants to the Sector would be precluded from tendering for public sector contracts and the grading system should include categories of work for which new entrants may tender.

However, the existing situation, where in excess of 100 firms may tender for one public contract, is highly inefficient and in urgent need of modification.

In considering tenders in the public sector, regard should be had to the fact that the lowest tender and the best tender are not always the same thing, if there is a risk of bankruptcy or of the application of inferior materials or workmanship.

2.6 Re-allocation of PCP

Major changes in the direction of the PCP are inevitable due to changing priorities, the run-down of major projects already undertaken and changing social circumstances.

For example ESB and Telecom Eireann have undertaken major capital investment programmes which have now peaked with a resultant decline in demand for Construction. The heavy past investment in advance factories makes it unlikely that major direct PCP investment will take place here in the foreseeable future. The overall decline in the Public Service must result in a decline in Government construction of office accommodation.

With regard to PCP expenditure under many social headings, factors such as the decline in the birth rate and expenditure already undertaken mean that there will not be significant scope for growth in PCP expenditure under these existing headings.

There are other areas of PCP interest where there is scope for expansion due to under-investment in the past or changing requirement. We have identified some of these areas and recommend a full review of the PCP to determine policy for the following priority areas:

2.6.1Roads

National and Regional

Funding for improvements to national and regional routes is being substantially improved as the provisions of the National Plan 1985-87 indicate:

A modern system of trunk roads, which meets EEC requirements is a basic infrastructural and economic necessity. Yet this need was not acknowledged until the publication of the Road Plan in 1979.

We recommend that investment in national and regional routes be maintained at a high level and that private finance in infrastructural projects be encouraged in accordance with the recommendations 6.1 and 6.7 in this Report.

Minor (County) Roads

The state of these county roads, many of which serve vital local needs, is deteriorating rapidly with funds available for repairs and re-surfacing on a cycle of 35 years or so, which is clearly inadequate.

We recommend an updating of investment in county roads on a selective basis. Each local authority would furnish a priority list to the Department of the Environment and building contractors would be involved in this area of construction.

2.6.2National Sanitary Services Plan

Within the capital allocations for sanitary services it seems that water supply provisions are generally adequate but the situation with regard to sewage and other aspects of effluent treatment is less clear.

While stringent conditions are imposed on private industry with regard to disposal of effluent there is concern at the level of effluent caused by Local Authorities themselves.

It is not clear how main drainage programmes are decided on by the Department of the Environment or the means for establishing priority or the level of investment.

We recommend the publication of a Sanitary Services Plan along the lines of the National Roads Plan, using the base data on water quality which has been compiled by An Foras Forbartha.

2.6.3Private Sanitation Programme

With regard to domestic piped water services there have been major improvements nationally and by 1981 some 90% of households had internal piped water. However in rural areas 25% of houses were without a toilet, 30% without a fixed bath or shower, and 20% without internal piped water.

While the national percentage of households without internal piped water will have fallen since 1981, as approximately 100,000 new dwellings have been built in the meantime, we are in no doubt that the proportion of rural houses without basic facilities is still unacceptably high.

Many of the residents of these houses are dependent on social welfare and do not have the resources to install basic facilities, even with the aid of existing grant schemes.

We therefore recommend a Private Sanitation Programme with the provision of 80% grants for the installation of toilet, water supply, and septic tank. This would be a new measure in addition to other available schemes.

3. Renovation and Maintenance of Existing Housing Stock and Listed Buildings

These recommendations are designed as a contribution to restoring the balance between Renovation and Maintenance, and new construction. They take into account the recent Government announcements in this area.

3.1The provision of 50% refurbishment grants to apply only to listed buildings and designated conservation areas such as Georgian houses and squares, subject to a maximum grant of £10,000 or the extension of Section 23 of the 1981 Finance Act to all rehabilitation in such buildings and conservation areas. Our listing procedures should be made more consistent with international criteria supplementing local authority listings as our expertise grows in this area.

3.2That the existing Local Authority revolving fund of £1.5m. for the rehabilitation of rundown housing be increased to £5m. and extended to include non-residential building. Consideration should be given to applying portion of this fund to combatting the risk of dereliction in areas adjacent to the inner urban areas designated under the recent Government package.

3.3That a nationwide inventory of the non-housing building stock should be undertaken under the aegis of the Department of the Environment to provide a basis for future renovation schemes. The initial emphasis should be on identifying buildings and conservation areas relevant to Tourism.

3.4 That the State as a renter of office space should make known that competitively priced refurbished office space of appropriate quality will receive priority in considering future Public Service office space requirements.

3.5That Local Authorities avail of the provisons of Section 14 of the 1963 Planning Act which enables the release of staff to assist local communities in developing area rehabilitation programmes. This practice is quite common on the Continent e.g. Amsterdam and Rotterdam have each established seven district project offices where local authority officers from several departments of the city administration are accessible to the public to assist and co-ordinate individual rehabilitation and and renewal projects within the district.

In addition we recommend special emphasis by Local Authorities and Gardai in the areas designated for urban renewal incentives to:

3.6To facilitate a greater degree of equity between renovation and new construction the incentives facing the private sector and public sector practice (mainly spending by local authorities and State Agencies) should be neutral as between renovating existing buildings and purchasing new buildings.

3.7With regard to the recently announced home improvement grants schemes we recommend that, in the case of hardship, the maximum grant limit of two-thirds of building costs applicable under the Disabled Persons Grants Scheme be increased to 90%, subject to the existing requirements of medical supervision.

3.8Under the home improvement grants schemes rewiring must be part of other works for which a grant is payable. We recommend that re-wiring in its own right should qualify.

4. Housing White Paper

The last White Paper on Housing was published in 1969 and we recommend that publication of a new White Paper be undertaken within a year. The topics to be covered would include:

-forecasting demand and requirement,

-public finance for housing

-standards and housing mix

-co-operative schemes

-average household size with regard to smaller family units, more single parent families, and proportion of single people in housing market

-mix and role of finance agencies

-the role of rented accommodation.

The NESC and An Foras Forbartha have estimated the housing requirement for the 1980’s as:

The total number of completions for 1981-84 was 106,798. Given that there has been a further decline in construction in 1985 it is probable that completions for 1981-85 will barely exceed the minimum NESC forecast.

However the housing stock per 1,000 of population here is low by European standards. Statistics from the U.N. Economic Commission for Europe show that Ireland has 268 dwellings per thousand of population compared with a European average of 347 dwellings.

While care needs to be taken in drawing conclusions from this comparison a review of housing must take into account social changes here and the likelihood of housing demand here converging towards European patterns. (Appendix 2 - Housing, Pages 67 - 79)

5. Tourism, Leisure, and Community Facilities

There is an urgent need to invest in Leisure facilities to meet the needs of both the resident population and tourists. This investment should aim at updating existing facilities to the highest international standards, and providing new facilities in strategic locations to meet the requirements of the market.

Areas of investment would include:

-indoor leisure facilities;

-restoration of historical buildings and industrial architecture;

-development of marinas and facilities for pleasure craft users;

-swimming pools;

We are particularly concerned to ensure the early provision of community facilities in new housing areas, rather than several years later, as is often the case at present.

Each Local Authority should produce an action plan for the development of leisure related facilities in its own area and ensure that sites are available. Private institutions and contractors should be involved in the provision of these facilities in the context of recommendation 6.5 of this Report i.e. Private Finance for Public Buildings and Facilities.

6. Private Sector Funding and Incentives

These recommendations are designed to stimulate private sector investment in Construction, particularly in the areas of infrastructure, privately owned and rented accommodation, tourism and leisure facilities, and commercial premises.

6.1 Section 23 of the 1981 Finance Act

Section 23 of the 1981 Finance Act provided that expenditure incurred in the period January 1981 to March 1984 on the building of a house or flat for letting is an allowable deduction against the rental income from the property or other property. This concession was designed to encourage the provision of moderate-cost rented accommodation. In 1984 the qualifying time limit was extended to 1987 but the relief restricted to the amount of the gross annual rent from the dwelling in respect of which the expenditure was incurred. This year expenditure on the refurbishing of premises now or previously let in multiple occupation was brought under the scope of the relief.

This section should be restored in full and amended to cover public infrastructural projects such as toll roads, bridges, tunnels, and car parking facilities.

6.2 Building Societies

The only innovation introduced by the Building Societies this Century is the endowment mortgage. The Societies are now among our largest financial institutions and should come forward with proposals on matters such as:

-salary or wage related mortgage repayments

- mortgages for co-ownership schemes on the lines operated by the Northern Ireland Co-Ownership Housing Association

-mortgage schemes tailored to changing career circumstances i.e. the growing proportion of the population that will not have fulltime pensionsable careers with the one employer for the duration of their working lives.

6.3 The Banks and House Purchase Loans

The Associated Banks accounted for only 3% of new house purchase loans in 1984, and 5.1% by value of all house purchase loans. The corresponding percentages for the Building Societies were 53.5% of new house purchase loans and 62.9% by value of all house purchase loans.

We feel that the Banks should be more involved in the provision of house purchase loans.

However, having taken evidence from representatives of both Allied Irish Banks and the Bank of Ireland we feel that the banks have a case for equality of treatment with the Building Societies in the case of interest on deposits under house purchase savings schemes.

With regard to the Banks, annual deposit interest exceeding £50 in the case of a single person and £100 in the case of a married couple is subject to income tax, and returns of interest paid to individuals must be made to the Revenue Commissioners by the Banks.

Building Societies on the other hand pay a composite income tax rate of 28% (80% of the standard rate) in respect of interest on deposits of less than £25,000. Responsibility for returns to the Revenue Commissioners, of Society interest, as paid to individuals is a matter for the individual depositor.

We recommend that equality of tax treatment be introduced in the case of savings under house purchase mortgage saving schemes, as between the Banks and the Building Societies, to the extent that Bank interest on savings for house purchase be taxed at the same composite rate as that on the Building Societies.

6.4 Housing Finance Agency

The State was responsible for 43% of new house purchase loans in 1984, through the Housing Finance Agency and through Small Dwellings Acts loans provided by Local Authorities.

We also took evidence from representatives of the Housing Finance Agency and were impressed with its performance in providing 11,000 house purchase loans totalling £217m. since its inception in 1982.

We accept that the issue of long term index linked stock is the most appropriate form of funding for an Agency which, in effect, provides 30 year house purchase loans.

However we feel that present restrictions confining the issue of this stock to insurance companies and pension funds should be eased to include other financial institutions. Such a change would give the Agency greater flexibility in arranging its funding.

6.5 Private Finance for Public Buildings and Facilities

We recommend a pilot scheme involving the construction of a range of public buildings such as libraries, police stations, and social centres, where there are little or no long term current costs, on the basis of design and construct packages put out to private tender. The public authorities would provide the serviced land and the buildings would pass into public ownership subsequent to a lease/purchase agreement for say 30 years.

We feel that construction by this method would involve a lower capital cost which would more than offset the more advantageous funding costs available to the Exchequer.

6.6 Business Development Scheme

The Business Development Schemes should be extended to include building firms

6.7 Interest Subsidies on Marginal Projects

Consideration should be given to interest subsidies on certain marginal projects which are not suitable for privatisation e.g. some by-passes may not realise sufficiently attractive rates of return on traffic volumes to warrant an investment.

By a sliding scale interest subsidy the scheme might be implemented without any strain on public capital borrowing, and without a full service charge.

6.8 Tax Write-Offs on Business Premises

Provide for the write-off for tax purposes of capital expenditure on non-manufacturing business premises, at the rate of 10% per annum.

7. The Black Economy

These recommendations are designed to undermine the Black Economy which has become the scourge of the legitimate Construction Sector.

The Committee acknowledges the comprehensive recommendations with regard to the Black Economy contained in the SCC Report and the Government decisions announced on 23 October, referred to on Page 19 of this Report.

Our own recommendations are designed to further strengthen the campaign against Black Economy operators.

7.1 VAT

As long as there is no distinguishable lower VAT rate for services, including Construction and related professional services, the incentive for Black Economy operators will be substantial.

Within a VAT structure with a three band maximum we recommend a low VAT rate of 5% for all labour intensive services including Construction. Such a move combined with effective anti-evasion measures would effect a major reduction in the Black Economy and in consequence widen the base of the legitimate Economy.

7.2 Residence Related Employment Scheme

The Residence Related Employment Scheme which operated from 1979-1983 provided tax relief for the labour element in excess of £50 for the maintenance and repair of a principal residence. The work had to be carried out by a registered contractor and the maximum allowable deductions were £450 for a single person and £900 for a married couple.

The cost to the Exchequer of this scheme was of the order of £1.5m. per annum.

The Residence Related Employment Scheme should be re-introduced for home improvements which are not eligible for existing or recently announced grant schemes. The scheme would be confined to registered contractors and the allowable annual labour content for tax relief would be £2,000 per contract.

This measure would represent a major blow to the Black Economy in the residential sector, particularly in the case of more modern housing.

7.3 C.2 Form

The standard deduction from sub-contractors not in possession of a C.2 form should be increased from 35% to 50% but there would be a right to appeal with regard to this form.

7.4 Claims Forms for Housing Grants

Claims forms for housing grants and mortgage subsidies, in the case of work undertaken by direct labour, should include the names and PRSI numbers of those employed in the construction work. In the event of this information not being supplied properly a deduction of 50% should be made from the grants and subsidies until this information is forthcoming. A receipt of payment to the builder should be produced.

7.5 Revenue Commissioners Task Force

While welcoming the recent Government announcements with regard to strengthening Revenue Commissioner activities against tax evasion, particularly in the Construction Sector, we believe the situation in Construction to be so serious as to justify a special Revenue Commissioner Task Force to concentrate on uncovering Black Economy building work.

7.6 Site Inspections

Regular site inspections for Public Capital Programme contracts should extend to ensuring that all work is taking place within the legitimate economy.

RECOMMENDATIONS

Section B

Construction Industry Performance

(a) Impediments

8. Management, Training, and Company Development

8.1 Construction Industry Training Committee

A Statutory Construction Industry Training Committee exists to advise AnCO on all training related matters. This Committee represents the interests of Employers, Trade Unions, Professions, and relevant Government Departments.

There is an immediate need to ensure that all manpower development services should be co-ordinated under the auspices of the Construction Industry Training Committee.

8.2 General Management Programme

A General Management programme with emphasis on

-Financial Control

-Cost Control

-Quality Control

-Safety

-Site Management

should be incorporated in selected third level education programmes, directed at potential employees for the Construction Industry.

8.3 In-Company Training

Increase the availability of in-company training on a fee-paying basis, through assignment type services in management and supervisory skills.

8.4 Development Programmes for Selected Companies

Selected companies in specific segments should be identified which would be likely to be most receptive to the proposed development programmes, as outlined in the Training and Employment needs of the Construction Industry in Ireland Report (1980-85) prepared for AnCO and the EC Commission by Stokes, Kennedy, Crowley.

8.5 Craft Apprentice Sponsorship

Significantly improved levels of craft apprentice sponsorship and utilisation of approved off-the-job courses are now required if these programmes are to remain relevant to the needs of the Construction Industry.

8.6 Training for Technical and Administrative Staff

The provision of up-dating of skills for technical and administrative staff should be a matter of priority to meet the needs of new technology.

8.7 The Professions

We took evidence from representatives of the Professions - architects, engineers, and surveyors - involved with Construction, who advised us that most professional firms, probably 75%, have less than five professional/technical staff.

They claimed, that apart from the effects of recession, the workload and level of responsibility had been progressively increased by Legislation and Regulation, including various Acts of the Oireachtas, Codes of Practice, British and Irish Standards, and Common Law decisions affecting professional liability.

The Professions state that the existing fee structure does not take account of this additional workload.

On the other hand there has been criticism from a number of sources of the system of mandatory scale fees imposed on their membership by the professional bodies, on the grounds that there is no reason why professional services should not be open to price competition.

Consultants fees are set by the National Prices Commission which last reported comprehensively on this subject in 1975.

We feel that the time has come to establish new conditions of engagement and levels of remuneration for the Professions, taking into account criticism with regard to such aspects of the existing system as mandatory fees, but also having regard to the increased complexity of the demands made on the Professions.

We recommend that the National Prices Commission be asked to investigate and report accordingly.

We also draw the attention of the Professions to the need for a greater input from them on issues which will be of increasing relevance to better Construction performance, such as Contract Management and, Design and Build. In Britain similar developments are taking place under the aegis of the National Joint Consultative Committee on Building.

9. Legal and Administrative Environment

9.1 Simplified Form of Contract

Notwithstanding the need for improved enforcement of standards in the Sector the professional bodies should take the initiative in introducing simplified short forms of contract appropriate to small works.

9.2 House Purchase and Sale

9.2.1Legal and Conveyancing

As a first step in reducing legal fees and simplifying the conveyancing system the requirement that the house purchaser and lending agency each have their own solicitor should be dispensed with. Serious consideration should be given to ending the Solicitors’ monopoly of conveyancing.

9.2.2Mortgage Redemption Fee

We can see no justification for the present Building Society practice of imposing a mortgage redemption fee equal to three months interest in respect of mortgages redeemed before the full term and not replaced by another mortgage from the same Society. This practice should cease.

9.2.3An Foras Forbartha Report on House Purchase Transactions

At the end of 1982 An Foras Forbartha published a comprehensive report entitled “Problems of Delays and Expenses associated with Private House Purchase Transactions”.

This Report contained a range of recommendations on this issue. The Department of the Environment which commissioned this Report has as yet announced no decisions on it and these are now overdue.

We particularly favour the following recommendations contained in this AFF Report:

(i)Bridging Finance

The Government should examine with Building Societies the possibility of advancing mortgages at the closing date of sale in order to minimise the need for bridging finance. Alternatively, if this option is not acceptable, a system of title insurance should be investigated and encouraged. It could be provided by either the National House Building Guarantee Co., the private insurance industry, or the Government.

(ii)Issue of Cheques by Building Societies

The Government should discuss with the Building Societies alleged delays between the bespeaking of the mortgage cheque and the issue of same.

9.2.4Land Registry

We have encountered many complaints with regard to delays encountered in the Land Registry due to the effects of the Public Service embargo on recruitment. The fee structure for Land Registry services is designed to cover the cost of these services. As there is therefore no cost to the State in the operation of the Land Registry we recommend that it be given the necessary staff resources.

9.3 Planning and Local Authorities

9.3.1Local Authority Planning Sub-Committees

We recommend that each Local Authority form a sub-committee of elected members and planning officials to which an applicant for planning permission could make an oral or written case if he felt that the restrictions attached to the consideration of planning applications were too onerous. Having considered the case the sub-committee would in turn make appropriate recommendations to a full meeting of the Local Authority.

9.3.2Local Authority Department Requirements

A Planning Authority should be prevented from stipulating adherence to the requirements of one or more of its departments as a condition of planning permission, except where a list of these requirements is issued with the notice of decision to grant permission.

9.3.3“Development Control Advice and Guidelines”

Each Planning Authority should have copies of “Development Control Advice and Guidelines”, issued by the Department of the Environment, on display and easily accessible to the general public.

9.3.4Housing Layouts and Densities

Planning Authorities should allow greater flexibility in housing layouts and density. A cost exercise comparing the traditional layout of 10 houses to the acre with the “Cheshire” type layout of approximately 15 houses to the acre, and a modest reduction in house sizes, can show a saving of up to £4,000 per house.

9.3.5Determination of Appeals - Time Limit

An Bord Pleanala should determine appeals in three months notwithstanding the lack of a default provision and oral hearings should be granted on request.

9.3.6Development Levies

Each Local Authority should publish a standard list of development levies annually.

10. General

10.1 ESB Capital Charges

The imposition of capital charges by the ESB should be subject to review by the National Prices Commission.

10.2 Insurance

Premiums, particularly in respect of Employers and Public Liability, have increased alarmingly in recent years. Some builders claim that in certain cases the increases have exceeded 100% per annum. While insurance costs have become a problem for small businesses generally they are particularly acute in labour intensive businesses such as Construction.

We recommend a full Government review of insurance costs on Business and the Committee takes this matter so seriously that our next Report will be devoted entirely to this problem.

10.3 Information to the Sector

To improve the flow and quality of information to the industry the present annual Review and Outlook should be broken into two meetings at the Dept. of the Environment:

(i)a Review meeting at the beginning of the year, concentrating on the provision of accurate figures,

(ii)the outlook meeting to be held later in the year.

(b)Opportunities

11. Standards

11.1 Development of Irish Standards

The developing National Standards Authority must be given teeth and there should be an insistence on all materials used in public contracts meeting standards, with effective inspections - these standards to be enforced by the consultants in PCP projects.

11.2 Standards - Private Housing

The bodies issuing finance for new house purchase should ensure that the relevant codes of practice have been adhered to and materials used which conform to Standards.

An applicant for mortgage finance must pay a surveyor’s fee to the lending institution of the order of £1.25p per £1,000 of loan sought. The institutions between them should be able to co-ordinate an intensive ‘spot’ examination of at least one house on each new estate to ensure compliance here.

11.3 Standards and the National Interest

That National Standards and certification be promoted in the National interest, particularly in the building sector. The development by Ireland of a comprehensive set of Standards, as in other European countries, would assist in countering dumping of inferior building materials and components on the Irish market.

11.4 Standards and Component Dimensions

In Europe considerable progress has been made in the adoption of standards of building materials which relate to the dimensions of building components. This means that components manufactured by different firms to international sizes, specifications, and dimensional tolerances can be assembled into buildings very efficiently. Obviously a lot of attention has been paid to jointing techniques. It would be relatively easy for this approach to building to be adopted and it has in fact been encouraged by the recommendation of the Sectoral Development Committee to apply the principles of dimensional co-ordination to all public sector building “to achieve efficiency in the undertaking of these projects”.

The implementation of this recommendation by the National Standards Authority would offer the material manufacturers an opportunity to increase their exports and encourage the development of computer aid drafting and design.

12. Import Substitution

12.1 “Use Irish” Campaign

The Building Materials Federation, the C.I.F., and the Professions should develop a joint “Use Irish” promotional campaign to encourage the use of Irish made materials and components.

12.2 Manufacturing under Licence

The Irish Goods Council, IDA, and Building Materials Federation (CII) should implement a special programme to identify building materials which could be made here under licence or on a sub-contract basis.

13. Exports

The SCC Report dealt comprehensively with a strategy for export of Construction and Consultancy services which we support and make the following recommendations:

13.1 Income Tax Rebates

To encourage exports of goods and services we reiterate that special income tax rebates be made to marketing personnel who spend more than 30 working days per annum outside the country and we would extend this recommendation to include design and technical staff.

13.2 Multi-Disciplinary Consortia

Firms within the sector, and particularly on the consultancy side, must change to gear themselves for export business by forming multi-disciplinary export only practices which would qualify for company tax at the 10% manufacturing rate e.g. combined services of architects, engineers, surveyors.

13.3 Taxation on Retained Earnings

The Professions claim that the tax surcharge of 20% on earnings retained for more than 18 months is a major obstacle to building up an adequate capital base.

The surcharge was introduced to combat avoidance of tax by individuals who, by operating through a service company, would be subject to corporation tax rates rather than high personal tax rates.

We recommend that this restriction be re-examined by the Revenue Commissioners to see how it can be applied more flexibly to design firms, provided retained earnings are used to build the strong capital base necessary:

(i)to fund investment in marketing

(ii)to cope with the cyclical nature of construction activity, and

(iii)to provide funds for the capital cost of the type of equipment, such as CAD (Computer Aided Design), which is becoming essential for design firms to compete in terms of economy and efficiency.

14. General

14.1 Design Competitions

We support design competitions for public buildings and would also like to see at least some design competitions introduced by Local Authorities for the design of housing estates.