Donal Palcic: The Irish Times reports that the Government has drawn up a shortlist of state assets to be sold that includes its remaining stake in Aer Lingus, Dublin Port and parts of Bord Gáis and Coillte.
Eoin Reeves and I have previously commented on the potential sale of the Government’s remaining 25% stake in Aer Lingus and little has changed since then. Encouragingly, the Minister for Transport is examining how the company’s Heathrow landing slots could be protected in the event of a sale. However, shares in the airline are currently trading at about €0.64, valuing the Government’s stake at approximately €85 million, a paltry return for the Exchequer were it to sell now (to put this in perspective, the State spent an average of almost €104 million per week in 2011 just to service the national debt).
Although there is no detail as to which parts of Bord Gáis and Coillte the Government is considering the sale of, one must question how the sale of any element of either company fits in with the Government’s NewERA plan. The original NewERA plan proposes merging Coillte and Bord na Móna together to form ‘Bioenergy and Forestry Ireland’ which “will invest €900 million to become a global leader in the commercialisation of next generation bio-energy technologies for transport, home and district heating and power generation”. The plan also proposes merging Bord Gáis Networks with the existing operator of the national gas network, Gaslink. Eoin and I have previously commented on the inconsistency between the Government’s NewERA plan and its announcements in relation to potential asset sales here and here. The Government must provide more clarity on its plans for NewERA and how its existing portfolio of State assets fits within that plan.
The inclusion of Dublin Port as a candidate for privatisation is a worrying development. As the biggest and most important port in a small open economy heavily dependent on external trade, any decision on its sale must take account of the long term strategic needs of the economy. Port infrastructure is expensive to build and a long term perspective must be taken when making decisions to invest in such long-lived assets. In its submission to the Review Group on State Assets and Liabilities in 2010, Dublin Port indicated that, in order to be able to deal with projected future port volumes, €500 million in capital expenditure is necessary over the next 10-15 years, with half of that to be undertaken in the next five years. Were Dublin Port to be sold, the objectives of the new private owner may not necessarily be aligned with those of the State and there would be no certainty that the required investment would take place when needed.
Dublin Port’s submission to the Review Group sums things up best:
“In simple terms, we believe that if Dublin Port were in private ownership there would most likely be a market failure to provide essential port infrastructure. Our simple proposition in relation to a possible privatisation is as follows.
If it is accepted that Dublin Port is of national strategic importance, then some protections would need to be built in to a sale transaction to protect those national interests. However, experience has shown that even when the best minds apply themselves to structure transactions to create those protections, market forces have a way of subsequently undermining the original intentions. Were this to occur in the case of Dublin Port, there would be serious negative impacts on national competitiveness. It would be far better for the State to avoid such eventualities by not selling Dublin Port Company.”
Some of the above issues are also covered in this Irish Times interview with the Chief Executive of Dublin Port, Eamonn O’Reilly, last April.
For now, all we can do is wait for more detail of the Government’s discussions on the sale of state assets with the troika to emerge, and hope that they don’t result in short termist decisions that damage the long term interests of the country.
Eoin Reeves and I have previously commented on the potential sale of the Government’s remaining 25% stake in Aer Lingus and little has changed since then. Encouragingly, the Minister for Transport is examining how the company’s Heathrow landing slots could be protected in the event of a sale. However, shares in the airline are currently trading at about €0.64, valuing the Government’s stake at approximately €85 million, a paltry return for the Exchequer were it to sell now (to put this in perspective, the State spent an average of almost €104 million per week in 2011 just to service the national debt).
Although there is no detail as to which parts of Bord Gáis and Coillte the Government is considering the sale of, one must question how the sale of any element of either company fits in with the Government’s NewERA plan. The original NewERA plan proposes merging Coillte and Bord na Móna together to form ‘Bioenergy and Forestry Ireland’ which “will invest €900 million to become a global leader in the commercialisation of next generation bio-energy technologies for transport, home and district heating and power generation”. The plan also proposes merging Bord Gáis Networks with the existing operator of the national gas network, Gaslink. Eoin and I have previously commented on the inconsistency between the Government’s NewERA plan and its announcements in relation to potential asset sales here and here. The Government must provide more clarity on its plans for NewERA and how its existing portfolio of State assets fits within that plan.
The inclusion of Dublin Port as a candidate for privatisation is a worrying development. As the biggest and most important port in a small open economy heavily dependent on external trade, any decision on its sale must take account of the long term strategic needs of the economy. Port infrastructure is expensive to build and a long term perspective must be taken when making decisions to invest in such long-lived assets. In its submission to the Review Group on State Assets and Liabilities in 2010, Dublin Port indicated that, in order to be able to deal with projected future port volumes, €500 million in capital expenditure is necessary over the next 10-15 years, with half of that to be undertaken in the next five years. Were Dublin Port to be sold, the objectives of the new private owner may not necessarily be aligned with those of the State and there would be no certainty that the required investment would take place when needed.
Dublin Port’s submission to the Review Group sums things up best:
“In simple terms, we believe that if Dublin Port were in private ownership there would most likely be a market failure to provide essential port infrastructure. Our simple proposition in relation to a possible privatisation is as follows.
If it is accepted that Dublin Port is of national strategic importance, then some protections would need to be built in to a sale transaction to protect those national interests. However, experience has shown that even when the best minds apply themselves to structure transactions to create those protections, market forces have a way of subsequently undermining the original intentions. Were this to occur in the case of Dublin Port, there would be serious negative impacts on national competitiveness. It would be far better for the State to avoid such eventualities by not selling Dublin Port Company.”
Some of the above issues are also covered in this Irish Times interview with the Chief Executive of Dublin Port, Eamonn O’Reilly, last April.
For now, all we can do is wait for more detail of the Government’s discussions on the sale of state assets with the troika to emerge, and hope that they don’t result in short termist decisions that damage the long term interests of the country.
9 comments:
There is no reason why this Interdepartmental Group's report on the possible disposal of state assets couldn't be published. The 'Economic War Cabinet' has considered it; presumably something was submitted to the European Commission at the end of last year (one of the Q4 2011 delivery items in the EU/IMF MoU); and it's being discussed with the Troika's team. The next step is some discussion in the full Cabinet, but, I suspect, most of main 'stakeholders' have been squared already behind the scenes and, as per usual, a fait accompli will be issued. We will, of course, have a 'debate' - and some roaring and shouting and shape-throwing from the usual suspects, but it won't make a blind bit of difference.
How long will it take before enough people wake up and realise what a load of cobblers all of this is - and always is in relation to how all public policy is formulated, decided, enacted and implemented? Ireland is in the mess it's in because of this approach to public policy. But nothing has really changed. Yes, the identify of those around the cabinet table has changed, there's a new set of special advisers, the composition of the lobby fodder in the Dail enacting their decisions without question has changed - and there has been some change in the top ranks of the civil service - but the process and content of policy has not changed in any significant way. And the narrow sectional economic interests, even if their ranking in the pecking order has changed, are still able to exert their malign influence behind the scenes. Everything that emerges from this hidden process has to be taken on trust without any objective, transparent verification.
Until this changes there will be no possibility of policies being implemented that are genuinely in the public interest and not designed to favour or pretect the narrow sectional economic interests.
And how does this considered privatisation "programme" fit in with long term industrial policy?
Some argue, with justification that Ireland is somewhat over-dependent on FDI.
Therefore does it follow that because our four largest indigenous private companies (Anglo, AIB, BOI and Quinn Group) collapsed a few years ago that we must now sell part of our biggest (in term of operations in the state) indigenous company ESB, so that we can repay the bondholders in the banks?
Am I a following the logic of the Government's wholistic economic programme?
And remember, Ireland is not in Receivership – it is in Examinership. This is important as the government still runs the place, albeit under the “scheme of arrangement” (MOU) agreed with the courts ie the Troika.
I simply don't understand this apparent trades union opposition to the proposed part-privatisation of the the ESB. It will be business as usual as they rip-off consumers to consolidate and expand its empire. The only difference is that they will have to share, probably a small part of, these ill-gotten, but CER-sanctioned, gains with some private sector player who will pay the government for the privilege.
In return, Labour will have access to, at least, some of the proceeds to finance some pet projects and whizzo schemes - some of which shoud delight the trades unions.
It's the kind of grubby deal they should be savouring.
It’s not just trade unions who should oppose this. There is a strong economic case (borne out by the last century of economic development) that ownership provides the single best way for the state to influence the macro economy - in some cases allowing states to win wars.
Regulation and prudential supervision have proved largely ineffective - even in economies where so called sophisticated systems of utility regulation have been developed. The liberal end of the UK coalition complained bitterly last year - as private utility companies shifted price rises to customers in the midst inflation and rising unemployment - that it had no stick left to beat the economy with. The only beneficiaries are the vast numbers of highly paid regulatory economists and lawyers that it has spawned.
The only pity is that many governments have proved so dismal at using this power – but hardly any less dismal than their private sector counterparts.
Paul, you clearly did not read (I know you did but you are just being .....) my comment. Long term industrial policy requires that we build a bunch of strong indigeous firms. Our top four private ones have imploded, showing perhaps that the default position of most journos and the right which is "private=good, public=bad" is not correct. To say the least!
Finally, I write as a PE blogger.
@Paul Sweeney,
I did read your previous comment - and I read this one. I don't want to make a big issue about this, since I encounter so many pseudonymous commenters, shills and trolls, but it is a tad disingenuous for you to claim to comment as a PE blogger when you are listed on the side panel as the ICTU's economic advisor. Still, I suppose, you're entitled to change your 'hat' when ever you feel like it. I'm probably envious I don't have that luxury.
I know that, once again, and as happens so often on this blog, I am trying to use reason and evidence, entirely unavailingly, to persuade the unpersuadable. But here goes...
The four private firms you list failed primarily because they captured government and regulation to pursue their own narrow interests as they perceived them without any concern for the public interest. That, unfortunately, is capitalism and it is a never-ending challenge for those elected to govern to try to save it from itself and to harness it to generate economciclly and socially useful outcomes.
But, equally, the ESB has captured government and regulation to pursue its own interests as it perceives them and, though its pursuit of these may not be as damaging to the public interest as the behaviour of the firms you mention, there is enough evidence to suggest that its interests and the public interest do not coincide to the extent it, or its supporters, would assert.
I doubt even you would contest the evidence that in the last dozen years, since it became subject to regulation by the CER, and confronting a huge demand for investment - particularly on the networks, government has not invested a red cent directly and it has extracted considerable dividend payments. Any responsible majority shareholder (whether private or public) of such a rapidly growing business with a regulated, almost absolute, assurance of investment recovery would have re-invested most, if not all, of its profits and raised additional funds to invest directly.
Successive governments, up to 2008, could have re-invested the profits and invested additionally and made a handsome profit given the return on equity the CER was awarding. They could also have fully unbundled the networks, as intended, but not required, by EU primary legislation and directed the ESB to raise its gearing considerably, but safely, to finance investment at low cost. (In fact, if they had kicked-off with this approach they could have reached a point where they would be able to extract dividends and retire equity.) But they didn't and now this government can't invest and finds itself unable to unbundle the business.
And all the time, final consumers have been forced to pay excessively high final prices to finance up-front the share of investment financing that the state should have invested and the share that external finance providers would have provided at low cost. And all this on top of final consumers paying the full return of, and on, all investment. And so it continues as the ESB expands its empire on the back of ultra cheap financing extracted from consumers.
This extra financing charge in final prices is a tax. And it is a regressive tax as those on low incomes and on welfare benefits allocate more of their diposable income to fuel bills than those on higher incomes. It is a deadweight cost and it generates another because governments have been forced to make transfer payemnts to those on welfare or on low incomes to compensate for the impact on them of this ESB financing tax.
If you are prepared to accept that this is what is actually happening we might be able to engage usefully on possible solutions. But, if not, we might as well leave it.
@Paul Sweeney,
I did read your previous comment - and I read this one. I don't want to make a big issue about this, since I encounter so many pseudonymous commenters, shills and trolls, but it is a tad disingenuous for you to claim to comment as a PE blogger when you are listed on the side panel as the ICTU's economic advisor. Still, I suppose, you're entitled to change your 'hat' when ever you feel like it. I'm probably envious I don't have that luxury.
I know that, once again, and as happens so often on this blog, I am trying to use reason and evidence, entirely unavailingly, to persuade the unpersuadable. But here goes...
The four private firms you list failed primarily because they captured government and regulation to pursue their own narrow interests as they perceived them without any concern for the public interest. That, unfortunately, is capitalism and it is a never-ending challenge for those elected to govern to try to save it from itself and to harness it to generate economically and socially useful outcomes.
But, equally, the ESB has captured government and regulation to pursue its own interests as it perceives them and, though its pursuit of these may not be as damaging to the public interest as the behaviour of the firms you mention, there is enough evidence to suggest that its interests and the public interest do not coincide to the extent it, or its supporters, would assert.
I doubt even you would contest the evidence that in the last dozen years, since it became subject to regulation by the CER, and confronting a huge demand for investment - particularly on the networks, government has not invested a red cent directly and it has extracted considerable dividend payments. Any responsible majority shareholder (whether private or public) of such a rapidly growing business with a regulated, almost absolute, assurance of investment recovery would have re-invested most, if not all, of its profits and raised additional funds to invest directly.
Successive governments, up to 2008, could have re-invested the profits and invested additionally and made a handsome profit given the return on equity the CER was awarding. They could also have fully unbundled the networks, as intended, but not required, by EU primary legislation and directed the ESB to raise its gearing considerably, but safely, to finance investment at low cost. (In fact, if they had kicked-off with this approach they could have reached a point where they would be able to extract dividends and retire equity.) But they didn't and now this government can't invest and finds itself unable to unbundle the business.
And all the time, final consumers have been forced to pay excessively high final prices to finance up-front the share of investment financing that the state should have invested and the share that external finance providers would have provided at low cost. And all this on top of final consumers paying the full return of, and on, all investment. And so it continues as the ESB expands its empire on the back of ultra cheap financing extracted from consumers.
This extra financing charge in final prices is a tax. And it is a regressive tax as those on low incomes and on welfare benefits allocate more of their disposable income to fuel bills than those on higher incomes. It is a deadweight cost and it generates another because governments have been forced to make transfer payments to those on welfare or on low incomes to compensate for the impact on them of this ESB financing tax.
If you are prepared to accept that this is what is actually happening we might be able to engage usefully on possible solutions. But, if not, we might as well leave it.
Apologies for the double posting above. The machine seems to get 'stuck in gear' occasionally.
I look forward to engagement on the challenges as I've set them out. These are the observable and entirely predictable outcomes of the asset valuation model and forward-looking cash flow generating model employed by the CER for the ESB's and BGE's networks. So far as can be established the Government intends that these models will be applied to Irish Water because is proposed to extend the remit of the CER to become the CEWR. So we are likely to have an Irish Water financing tax in addition to ESB and BGE financing taxes. But the DECLG refuses to publish the high-level financial assessment (prepared for it by PwC) as part of the current public consultation. The focus, of course, should be on removing these taxes, rather than adding to them, since they impose excessive and unnecessary burdens on households, businesses and the economy.
But, on the basis of previous, but futile, attempts to engage on these issues here, I can confidently predict that no common ground will be secured as a basis to engage on addressing these challenges. (And just to confirm, once again, that all of this has nothing to with the terms and conditions of employment; it is focused precisely and exclusively on the efficient financing of investment in these long-lived, specific assets.)
There seems to a determination here to avoid consideration of these challenges or, if there is some limited recognition, vague proposals are advanced that are not susceptible to effective scrutiny - or crumble if it is applied.
On that basis, and in the absence of any indication to the contrary, I don't think there's any point in my continuing in my attempts to engage here.
Paul (Hunt) I would think that union protection leading to inefficiency is real in many instances, is also exaggerated in media, and also as your charges allude to - difficult for unionists to discuss.
I think in the worldview we mostly operate of sectoral interests and power groups within a society/national construct these are all to be expected and somewhat accepted and managed, and I agree with you that government needs to simply put five million people first and lead their way to holistic societal benefits, necessarily, by not being suppliant to any or all particular power groups.
The worry I would say for many on p.e. and elsewhere is that the inefficiencies (many in management & design) will be taken by those who do follow the equation Paul Sweeney outlines i.e. public bad private good and used to pursue bigger business smaller government as opposed to better government of big business.
While improvements in delivery of public goods and services are most desirable - the answer is patently not to say - 'we can't achieve these improvements therefore we will sell these bodies, which a ten year old will tell you is nose off in spite of face, short-term and failed policy.
Unfortunately we have a right wing party in power and another seeming left in position but not power, and these further sneaks to the right are smoking our way through lung illnesses.
The battle lines need to be blurred. I have said here before that we should look to incentivise the public sector instead of pistol whipping it. Why not offer public sector workers profit-sharing schemes, why not offer 10% of any savings earned that they can document and suggest to senior management. Why not hold managers culpable with their positions; but let's not jump to the conclusion that what we should do in trying to equalise public and private is have both groups live in constant fear of losing their jobs/incomes/homes etc.
For all of that - what is required, of course, is real leadership. For that you need only look to.... Who knows, not on the island at the moment. Though I gotta say bar one or two independents, unfortunately devoid of power, Sinn Fein seems to be the only party with even the possibility of a changed approach
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