Speaking material for Minister of State Brian Hayes



Society of Chartered Surveyors Conference -

Thursday, 25th October, 2012

Speech by Minister Brian Hayes - “An Outlook on Public Built Environment Expenditure”.

I want to say at the outset, that as a Government we are determined to press ahead in overhauling the State’s property portfolio. It is a key part of our Public Service Reform Plan. The old ways of providing public sector office space - and indeed utilising that space – have to change.

So what have we done in the last 19 months since coming into office?

• Firstly, we have stopped the madness of decentralisation which was a project dreamed up in a totally different time. It was bad for public administration, bad in inflating property prices and bad in dislocating the public sector throughout all parts of the country.

• Secondly, we have continued to reduce the rental costs of leased buildings for the public sector, and I have asked that any new leases we take would have my approval as Minister. This is ensuring political accountability and proper scrutiny for the number and total cost of leased buildings.

• Thirdly, we will shortly bring to Government new proposals to transform the way in which we manage the State’s property portfolio.

The new public sector will need a new approach to office accommodation. It will have to be led by a strong central organisation which has been given a mandate to efficiently use office space in a totally new way.

The state currently has about 2,200 buildings under its control. About 60% of these are in the owned estate and the remainder are leased buildings. In a circumstance where the funding available to us is very limited, we have to look at new models of funding public buildings. Once you have buildings you have to maintain them. But equally we have buildings which have real value, and I want to see how this value can be realised in terms of a public private partnership approach which will be good for the private sector and good for us in the Public Sector.

Crucially we need also to have a whole of government approach to property across the entire public sector. This government is determined to bring to an end the vanity projects and empire building that became such a feature of the alleged Celtic Tiger economy.

With fewer public bodies, given our decision to rationalise state agencies, I am very confident that the entire property portfolio of the state can also be rationalised. This government is determined to bring to an end the silo mentality that has taken hold within the public sector for far too long. Never waste the opportunity of a good crisis – that’s the advice from all change management consultants. And that is the approach we are taking in bringing much greater efficiency and savings in this area.

After pay and pensions, the cost of office accommodation is the Government’s biggest administrative overhead.

The fall in Public Service numbers from a peak of 320,000 in 2008 to 282,500 by end 2014, coupled with organisational rationalisations such as shared services and the abolition of agencies, will facilitate a reduction over time of the amount of accommodation required by the Public Service.

I will shortly bring a new Property Management Plan to government. The Property Management Plan will review and recommend accommodation policies such as space norms and standardisation of office accommodation fit-out. I have asked the OPW Chairman to lead a working group of Public Service managers with expertise and responsibility in this area to drive this initiative forward and work in this area is progressing.

The Reform Plan also provides that we develop an incentive policy to encourage Departments and Offices to make the most efficient possible use of their accommodation, including the possibility of allowing them to re-invest a portion of the proceeds from any property disposals.

We are also working to improve our strategic decision-making capability in this area through the development of a map-based Public Service property inventory. This will enable users to see the locations of all State-owned property and provide access to all information on the property through a link to the property management system of the relevant owner.

Furthermore, I believe the public has a right to know what we own, what we lease, and

the use of that space which is enjoyed by the entire public sector.

We also need an asset management strategy across the public sector.

This strategy will look at greater use of open plan workspaces, more efficient use of office accommodation and greater energy conservation. These measures will yield further significant reductions in the cost of accommodation. In addition, my proposals will provide for the more efficient sharing of property assets across the public service.

A key element of this strategy is a draft Memoradum for Government which confirms OPW's role as the sole procurer of accommodation for the Civil Service, and most importantly, proposes to enhance the powers of OPW to manage the central Government property portfolio.

What powers should we have at our disposal?

• to direct Departments to vacate and/or occupy accommodation on foot of decisions by OPW in the context of the management of the overall State property portfolio

• to surrender, dispose of or re-allocate particular accommodation in order to achieve expenditure savings and efficiency gains

• to set and enforce norms for the allocation of space, the rental and the fit-out price per square metre that may be paid for office accommodation, and

• to develop formal reporting and accounting arrangements by which Government Departments will report annually on the use of the space allocated to them

There is a need for clear long-term policy on which Departmental functions and staff need to be exclusively located in central Dublin locations. I am referring here to Dublin 1, 2 and 4 specifically. Being blunt, there is much greater value on the outskirts of Dublin and if we are serious about saving money not all functions need to be city centre based.

My Department’s drive to reduce the cost of property services has been focused in the areas of rationalisation of the existing portfolio, rent reductions and disposals.

Let’s look at the facts. In 2009 we spent €131m leasing property - this year the figure is €112m. I want the State’s annual bill below €100m on by 2015. In the last two years the OPW has shed half a million square feet of office space in recent years and surrendered over 150 leases countrywide.

The programme of getting out of leases has sent a strong signal to the market that we as landlords are determined to pursue rent reductions.

Funding will be required in the coming years for the upgrade of properties to facilitate ongoing rationalisation. Leveraging value from the existing State portfolio for reinvestment in the owned portfolio is being examined. This may be by way of sale and leaseback, joint ventures or other structures which would allow for private sector investment. We need to exploit commercial opportunities, an obvious example being the creation of income streams from public property. This could include licensing of property for commercial purposes.

My Department is also in the process of disposing of assets that are surplus to requirements. This disposal programme will involve a number of approaches such as transferring assets to other State bodies that have specific requirements, e.g., Community Care Facilities, disposal on the open market or use by communities such as the recent provision of the former Finglas Garda Station to a Community Creche.

There is also great scope for maximising the potential for the sharing of accommodation between public bodies. At a practical level, these changes are already having an effect with HSE staff being allocated accommodation in two OPW-owned buildings (Tullamore and Tipperary) and it is expected that this interaction will grow into the future.

The reduction in the overall space requirement is a consequence of the ongoing programme to reduce public service numbers. Part of that process involves comprehensive surveys of all OPW's owned office portfolio to determine the exact capacities available to us in our larger office buildings and this programme of survey is well advanced.

OPW have a very successful energy conservation programme, working closely with the

building occupants. The programme targets the larger buildings, over 1000 sq.m. This

includes approximately 270 buildings at present and to date savings of 17% have been

achieved (€13.3m cumulative savings). The programme is based on encouraging

behavioural change and is low cost. The next step is to include water usage and also

smaller buildings in the campaign. Government policy is to achieve 33% energy savings

by 2020 and OPW envisages investment in the building stock to achieve this.

OPW is the first organisation to introduce Measured Term Maintenance contracts as a method of procuring maintenance services from the private sector. Contracts are based on schedules of rates that are applied to minor maintenance works and are operated in the Dublin region at the moment. It is planned to extend this form of maintenance contract to other parts of the country.

WIDER ECONOMY

A properly functioning construction sector is essential in assisting our recovery as a country. At one stage construction represented about 20% of GDP. Clearly this level of activity was totally unsustainable. We need to get back to a normal level of construction activity. This will be difficult after the collapse of our economy since 2008. But there is no reason why a normal level of construction activity, say 8-10% of GDP, should not be set as a modest target for this country as economic growth re-emerges.

We all know the very difficult re-adjustment that the construction industry is going through. Five years ago, the construction sector’s output was close to €39 billion and it employed 270,000 people, or 13 per cent of total employment. This year it is estimated that output will fall to €7.5 billion while the total number at work in the sector has shrunk to around 100,000 or less than 6 per cent of the economy wide total.

There is no doubt that these are very difficult times, not just for the property and construction sectors, but also for the wider national economy. It is worth pointing out that about 60% of people who have lost their jobs since 2008 were directly or indirectly connected to the construction sector. Obviously those jobs will not come back any day soon. So the number one priority for the Government is to do everything we can to retrain and re-skill these people who are left with very limited prospects. But I want to say this, we do need to get the property and construction sectors of our economy working and moving again. They are essential in any healthy economy.

There is no way to avoid the adjustments that the government has to make. Since 2008 about €24bn has been taken out of the economy by way of tax rises and expenditure cuts. If there is any good news, it’s that we just have about €8.5bn to go between now and 2015. We are making progress. The deficit is coming down and internationally there is recognition that Ireland is confronting its problems. Of course, we are looking for support particularly on the issue of debt and will continue to negotiate with our EU colleagues to get a deal on bank debt.

The economy has returned to growth with GDP increasing by 1.4 per cent in 2011 – the first full year of growth since 2007. The exporting sectors are leading the recovery - exports grew by a healthy 3½ per cent in the first half of this year compared to the first half of 2011. The growth in exports reflects substantial improvements in competitiveness and the continued willingness of multinationals to locate in Ireland. So we are ‘trading our way’ to recovery – the only sustainable way in the long run.

Cost competitiveness is unsurprisingly a key consideration for multi-national firms in deciding where they will invest. During the boom we allowed our cost competitiveness to deteriorate, but we have taken very significant strides in restoring it over recent years.

Put simply, the cost of living in Ireland, including the cost of commercial and industrial premises, was not conducive to attracting investment. Prime office rents in Dublin have now fallen by about half while construction tender prices are about 30 per cent below peak levels. The severe correction in these costs has been extremely painful but necessary. Dublin has fallen from being the 6th most expensive rent in the world in 2008 to 49th in 2011.

When we talk about competitiveness, people often automatically think of the major multi-national firms as making up the whole exporting sector. In contrast, the construction and property sectors are often thought of as being purely domestically-focussed industries. In reality, they are key contributors to our competitiveness and to the health of our economy both through the export of construction goods and services and by facilitating FDI. For example, to enable ten investments announced by the IDA earlier this year requires the construction of 1.5 million square feet of new buildings.

The economy has experienced a very significant shock over recent years and the construction and property sectors have been at the forefront of that readjustment. However, just as the wider economy can return to sustainable growth, so can these sectors. Many of the underlying strengths of our economy remain. We have a young, well-educated and English-speaking workforce that provides easy access to European markets. We have a flexible labour market and we must continue to work hard to maintain our pro-business environment. A healthy and competitive construction and property sector will support these factors and help to maintain Ireland’s attractiveness as a location for foreign direct investment.

I am optimistic about the future of this country. While we are closing the deficit and bringing into balance the difference between tax and expenditure, we as a Government are absolutely determined to reinvigorate and reform our public sector. Your industry will be a key driver in the future fortunes of the economy. We have an open mind on how to do our business. We have an open door policy in listening to your industry in how we can reposition this country. Working together we can get the country to a better place.

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