Ireland's challenge is to compete on productivity, Mary Harney tellsCliff Taylor, Economics Editor

If Ireland does not remain competitive, then many of the economic gains of recent years could be reversed. So warns Ms Harney, the Tánaiste and Minister for Enterprise, Trade and Employment. And with the economy no longer competitive purely on wages and other costs, the challenge is to compete "on productivity and performance", a policy area that crosses many Government departments.

Next Tuesday the Cabinet will sit down at Farmleigh to discuss these issues, at a time when high inflation and a rising euro are squeezing many businesses and unemployment is rising for the first time in years. Inflation here will converge with that of our EU partners at around 2 per cent, Ms Harney believes. The question, she says, is whether this will happen through a process of linking wages to productivity and performance, or by a painful process of job losses.

So far there is some evidence that part of the price is being paid through job losses, with redundancy levels rising.

The task of retraining and reskilling workers who lose their jobs will now be a significant one, the Tánaiste said, speaking in an interview with The Irish Times.

She also sees some hopeful signs. Just back from the US where she visited some firms with major investments here, Ms Harney reports that the inward investment pipeline is strong. "If 80 per cent of what we expect comes to fruition, then we will have a good year." Most of the potential projects are in pharmaceuticals, healthcare and internationally traded services, she says.

While there are not many new projects in the pipeline from the information technology sector, "I see for the first time in two and a half years confidence coming back in the electronic and telecommunications side. For the first time, people are beginning to say we have turned the corner." Many of the companies she visited also welcomed the Government's decision to allow US use of Shannon, she says.

The strategic value of a number of the recent investments is important, says Ms Harney. In this area, boosting research and development capability - through measures such as yesterday's announcement of new research centres at three universities - is vital. The regional spread of recent projects, which will benefit areas such as Sligo and Longford, is also vital, she believes. IDA Ireland is now actively pushing companies to locate investments outside of the Dublin region.

Decentralisation of the public service can also be a key contributor to regional development, she says, and is on the agenda for next week's meeting. "I believe the time for decisions has come," she says. "In an era of modern telecommunications, there is absolutely no reason why everything has to happen in the capital."

Cheaper housing outside Dublin could make it an attractive proposition for civil servants, she says. "We need to pick a key number of locations and make things happen."

While loath to put a number on the likely scale of decentralisation, Ms Harney says that by the end of the term "close to a five- figure number" could be moved outside Dublin. This would suggest a figure close to 10,000 civil servants.

Encouraging regional development - and remaining attractive as an investment location - also requires a new approach to tackling the infrastructure deficit, she believes. Issues such as poor roads, availability and cost of broadband communications and electricity are a negative for some US companies, particularly those based in the west.

To combat this, Ms Harney believes the time has come to increase borrowing to fund major infrastructural projects. "We are, in my view, underborrowed," she says. "We should always run a current budget surplus... but I do think it is sustainable to borrow for much needed infrastructure."

She will not be drawn on how much should be borrowed, but refers to a recent study by IFO, a respected German institute, which made the case for borrowing of up to 4 per cent of GDP in certain cases to fund infrastructure. This would, however, require changes in the operation of the EU Stability and Growth Pact, which says that countries should keep their budgets close to balance and never go above borrowing of 3 per cent of GDP.

There is a need for a debate about how the pact is interpreted, the Tánaiste believes. "A couple of hundred million here would make an enormous difference to what we could do in the short term on infrastructure. We have had to long-finger and delay some projects under the National Development Programme and I think that is a tragedy."

With major road and rail projects suffering from delays and spiralling costs, how can value for money be ensured in these massive investments? "We have to change the way we do business," the Tánaiste argues. In Madrid, the cost of building a Metro is less than a fifth what is estimated here. "I think we have to deal with things on a larger project basis," she said.

The LUAS project was dealt with as one, "but we don't seem to have the capacity to do that with other pieces of infrastructure and I think we need to give ourselves that capacity".

Seeking tenders and planning for a few kilometres of motorway, split between various local authorities, "is not the way to put in place a national motorway infrastructure for a small island economy like ours".

What is required is changes in planning and financing to allow major stretches of road to be completed as one project, in a reasonable timescale. Crucially, she believes, this would attract more interest from major international construction companies, thus increasing competition in the building of these major projects and cutting costs. Competition is, of course, a major item on the Harney agenda.

The philosophy is that "the State should only be involved in activities where there is no alternative". The goal should be "to divest ourselves of some of these activities and use the money for essential pieces of infrastructure - for health, for education, for things that we find it difficult to finance at the moment". While she declines to outline a list of possible "sell-offs", she says there is a need to examine the options for Aer Lingus "sooner rather than later", with the company needing capital and the Government unable to supply it.

Ms Harney has also made insurance reform a priority and believes that the pay-back for these and for traffic safety measures is now starting to come through in falling premiums. She has established the personal injuries assessment board (PIAB) on an interim basis and the heads of legislation to allow it to operate fully will be ready shortly. In terms of reducing premiums, she believes that if the current players in the market do not respond, the reforms will attract new entrants who will see an opportunity to charge less and still make money.

Together with her Government colleagues, she will, over the coming months, receive the Competition Authority recommendations on how to increase competition in professions such as the law, pharmacy and medicine. A preliminary study, conducted for the authority, has already pointed to a range of anti- competitive practices.

"Both the Taoiseach and I are determined that the findings of the authority will be implemented," she says. "We must as a Government be prepared to look at barriers for entry in some of the professions or the protection of vested interests through particular regulations that are anti-consumer."

Ms Harney said the competition and reform issues must now take priority. "It can't be delivered easily," she says, but with a Dáil majority the Government is, she believes, in a position to push through this agenda.