There is no “value for money” in giving away public assets for nothing.

Paul Sweeney: The Minister for Health Simon Harris insists that “his ‘golden share’ in the new €300 million State-funded national maternity hospital means the public interest will be protected and the facility will operate independently.”

But why give away public assets, to anyone, to any company, to to any charity or to any religious order? Why is a so-called “Golden Share” needed when we, the people, should own the asset?

St Vincent's Hospital with €300/500m Free Gift Investment in red

Beacon South Quarter crisis reflects the worst of Turbo Capitalism

Paul Sweeney: De-regulation, privatisation, outsourcing, low taxes, bad housing policy, speculation, regressive tax policy, and poor public services reflect turbo capitalism. This is the tragedy that is hitting many in the Beacon South Quarter.  

Apollo House Homeless Occupation

Paul Sweeney: Last week the Irish state borrowed a load of money. The interest rate we will pay was minus 0.42% Yes, the lenders competed with each other to PAY the NTMA to take their money. The offer was 2.6 times oversubscribed. 

We Have the Money

Yet when the nationalised banks, AIB etc. are sold off by the state, the money is all to be used to help repay the national debt. Why repay some of it when interest rates are negative? 

Has the State any Business in Business?

Sinéad Pentony: TASC held its first lunchtime seminar yesterday. Paul Sweeney considered the question - ‘Has the State any business in business?’. Paul’s presentation put the issue of privatisation in the current context; identified the winners and losers in privatisation; and how/where it fits into industrial policy. The presentation draws a number of conclusions including the need for a more nuanced approach – privatisation is not a black and white issue; and there is a need for more diversity in the forms of ownership, as set out in the recent report by The Ownership Commission, which was chaired by Will Hutton.

The false economy of selling state assets to fund job creation

Sinéad Pentony: Today’s announcement provides us with some more details on the government’s thinking in relation to the role of state assets in our economy. The position has become more nuanced in some regards, as the sale of the ESB appears to the off the table (with the exception of some power generators) along with the sale of Bord Gais’s transmission and distribution systems. However, privatisation remains a clear policy focus for the government and a bitter pill is being sweetened with the promise of the proceeds of privatisation being used to fund job creation. But this is false economy.

We are hearing a lot about supporting job creation at the moment. Last week it was the Action Plan for Jobs, this week the sale of state assets will be used to support job creation and tomorrow the government will launch its Pathways to Work - the Government Policy Statement on Labour Market Activation.

Last week's TASC report on the Strategic Role of State Assets, along with today’s statement, clearly articulate the trade-off between short term and longer term investment priorities, with the latter increasing the capacity of the economy to grow and compete with other advanced knowledge-based economies. So the sale of strategic assets is a critical issue because it could actually cost us jobs in the medium-long term if we don’t have the infrastructure that facilitates and supports the functions of a dynamic advanced economy competing globally.

Last week the Action Plan for Jobs was announced. Any initiative aimed at promoting job creation is to be welcomed, and the focus of the Plan is on improving the conditions for doing business in Ireland. While ‘bold ambitions’ are to be admired, it’s difficult to see how the target of increasing the number of people in work by 100,000 – from 1.8 million to 1.9 million jobs by 2016 - can be realised, when the next three budgets are expected to take a further €9 billion out of the economy by 2016. One can only imagine the sorry state that the country will be in, in three years time - if we continue on the current path of austerity piled on top of more austerity.

On Monday night the Frontline programme was devoted to discussing the Action Plan. One of the panellists was businesswoman Glenna Lynch whose business has been struggling since the onset of the crisis and she has been forced to let people go. When asked what she thought about the Action Plan, she said that there was very little in it for her and that the problems she faces relate to the fact that successive austerity budgets are sucking money, demand and confidence out of the economy.

Pathways to Work is being launched tomorrow, the objective of which is to “drive the introduction of measures to improve the conditions for job creation across the economy and to ensure that the creation of these jobs feeds into a reduction in unemployment”. Our labour market activation policies have long been in need of reform, and they must reflect the complexities of the labour market in a modern economy.

In general the Action Plan for Jobs and Pathways to Work can be described as ‘supply-side’ measures, aimed at creating the conditions for businesses to create jobs and for people to be in a position to the take up jobs.

But how can businesses create jobs when the demand for their goods and services is static or shrinking because of budgetary measures?

What’s needed are a series of ‘demand-side’ measures aimed at creating demand for labour, and this requires investment. But this investment should not be financed from the sale of state assets, which should rather be used to support investment in the medium term. Instead, much needed short-term investment should be financed through the €4.7billion remaining in the NPRF, along with an initiative that allows part of the €5.3 billion held by Irish pension funds to be invested in infrastructural projects.

The EU-IMF Deal Does Not Require Privatisation

Michael Taft: Whatever about the case-by-case merits of the Government’s announcement today regarding the sell-off of state assets, we should be clear: the EU-IMF Memorandum of Understanding does not require privatisation, in whole or in part. In addition, the discussion of the sale of state assets in the Memorandum does not take place in the fiscal section but rather in the section regarding obstacles to competitiveness. In other words, if there is to be a sale of state assets, the objective is not to write down debt but to improve competitiveness. Indeed, it is hardly likely that the Troika would demand that state assets be sold in order to reduce the projected debt of 115 percent in 2015 down to 114 percent (which is what the Government’s announcement today would do).

The quarterly reviews conducted by the Troika make it clear that the provision for selling state assets did not come from them – it came from the Government and its Programme for Government. And it was Fine Gael that was the driver of the privatisation provision in the Programme – Labour campaigned against privatisation in the last general election.

What we have had is an elaborate choreography around the issue of privatisation, shifting blame and inventing targets which have had the effect of obfuscating the issue. Nonetheless, this should not blind us to where the demand for privatisation is coming from. Senator Shane Ross, writing about the meeting between the Troika and the Technical Group of TDs, reported this exchange on the subject:

‘The troika delegates insisted that they had not prescribed any privatisations. They wanted to see certain semi-states "restructured" and competition in the market. Contrary to media perceptions, they were not pressing the Government to raise any specific amount from the sale of State assets. The figures in the public arena of between €2bn and €6bn did not come from them.’

That this is confirmed by Sinn Fein, from their meeting with the Troika, only reinforces this point.
The demand for privatisation – and the paying down of debt – does not come from the Troika. It comes from our own Government.
For a detailed overview of this issue you can read this post I wrote back in October.

Incoherent privatisation policy a cause for concern

Donal Palcic: Eoin Reeves and I have an opinion piece in the Irish Times today on the information that emerged in relation to the government's plans for privatisation during the latest visit by the troika.

They're making a list, but are they checking it twice?

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.

Public = Bad, Private = Good

Donal Palcic: I couldn’t let this one go. Marie O’Halloran in the Irish Times reports on Michael Noonan’s defence of the planned sale of state assets in the Dail yesterday. The opening quote in the article caught my eye:

The Minister said the European authorities believed and were backed by “any economic theory you’d like to read” that “assets in private hands will be used more efficiently for the public good than assets in public hands in general terms”.

It is a major concern that someone as important as the Minister for Finance, who is likely to make crucial decisions in relation to privatisation, makes blatantly incorrect assertions such as this. Even a cursory glance at the theoretical literature on the impact of privatisation on performance would show that the grounds for making such a claim are extremely shaky. No less than Nobel Laureate Joseph Stiglitz has stated that “the theoretical case for privatization is, at best, weak or non-existent. It is strongest in areas in which there is by now a broad consensus – areas like steel or textiles, conventional commodities in which market failures may be more limited. But by the same token, these are precisely the sectors in which abuses can most easily be controlled, appropriate incentives can best be designed, and benchmarks can most easily be set.”

In other words, privatisation can lead to improved performance when firms that are sold operate in competitive markets. Where firms operate in imperfectly competitive markets, the case for privatisation is weak at best. The regulatory structure in place and the degree of competition faced by firms in such markets are far more important determinants of performance. Numerous empirical studies on the effects of privatisation on the financial and operating performance of divested firms have been carried out in recent years. My colleague Eoin Reeves and I review a large number of these studies in our recent book and argue that, overall, the empirical evidence with regard to the impact of privatisation on enterprise performance mirrors the thrust of relevant economic theories and is inconclusive. In general, the empirical literature can be divided into two main groups: broad-based international studies which by and large find that privatisation leads to improved performance, and more in-depth country-specific studies that find more ambiguous results, and suggest that privatisation does not automatically lead to an improvement in company performance. The general conclusion we can draw from the empirical (and theoretical) evidence is that privatisation leads to improved enterprise performance in some, but not all, cases.

The Minister therefore needs to be far more careful when making wild claims that any economic theory you’d like to read shows that assets in private hands will be used more efficiently for the public good than assets in public hands. It is interesting (and worrying) that the Minister makes such comments at a time when Fine Gael’s NewERA plan which was launched last week places public enterprise at the heart of efforts to lay the foundations for economic recovery.

Full privatisation of Aer Lingus

Donal Palcic and Eoin Reeves: Yesterday the Minister for Transport signalled the possibility of selling the remaining 25 per cent stake in Aer Lingus (as recommended by the report of the Review Group on State Assets and Liabilities published last April). News of other planned sales, such as the sale of a partial stake in the ESB, is expected over the coming days. So does the sale of the remaining government held shares in Aer Lingus make sense? This can be assessed in terms of the government’s objectives. First, this is about raising exchequer revenues, so how much can the government expect to realise? With shares trading at 67.5 cent as of this morning (compared to the IPO price of 220 cent) a 25 per cent stake is likely to be worth in the region of €90m (leaving a lot more to be sold if the €2bn target in the programme for government is to be reached). Net revenues will of course be reduced when professional expenses and discounts are taken into account.

Are there any other advantages to be accrued from the mooted sale? The common argument in support of selling state owned enterprises (SOEs) is that performance will improve under private ownership. But Aer Lingus operates as a privately owned enterprise and is not subject to obvious political interference (a problem traditionally faced by some SOEs). So selling the remaining 25 per cent will not have any impact in terms of improving enterprise performance.

What are the likely downsides to the possible sale? The obvious one is that the 25 per cent stake constitutes an important degree of state influence over the island economy’s airline. We have discussed the importance of the state retaining control over strategically important industries before here and here. But suffice to say that Eircom provides an example of one of the biggest privatisation failures worldwide and this could have been avoided if the state had not relinquished complete control when it privatised the company. The lessons in relation to Aer Lingus are obvious.

One of the big strategic issues in relation to Aer Lingus concerns the Heathrow slots. The Minister for Transport stated that the strategic reasons for retaining a stake in the airline no longer exist and that the issue of Heathrow landing slots was not as important as it was since people are now using connections other than Heathrow. Aer Lingus has 23 landing slots in Heathrow. Currently 13 slots are being used on the Dublin route [BMI also operates on this route and has 4 landing slots], 4 on the Cork route, 3 on the Shannon route and 3 on the Belfast route.


Data from the UK’s Civil Aviation Authority shows that, in 2010, over 9.5 million passengers travelled from the Republic of Ireland to the UK, with just over 51 per cent of all passengers travelling to London. A quick glance at the traffic on the Dublin, Cork and Shannon to Heathrow routes for 2010 (see table above) illustrates the importance of the Heathrow link, with slightly over 44 per cent of passengers to London going through Heathrow. In general, the vast majority of passengers from Ireland to Heathrow are carried by Aer lingus (they are the sole operator from Cork and Shannon; while on the Dublin Heathrow route they operate significantly more flights than BMI).

While the number of passengers travelling to airports in London other than Heathrow has increased considerably over the years, based on the above figures for 2010, it is hard to see how the Minister can claim that the “strategic” argument for retaining a stake in Aer Lingus no longer applies. For an island nation like Ireland, which is heavily dependent on international connectivity, the Dublin/Cork/Shannon to Heathrow routes are of considerable strategic importance. Although the sale of the government’s 25 per cent stake does not mean that flights on these routes will stop overnight, it does leave the government powerless to prevent an undesirable change in ownership in the future (think Eircom).

Given the relatively small amount of cash that is likely to be raised, one must question whether this mooted proposal makes sense. Our scepticism appears to be shared by the company itself, which reportedly is not in favour of a quick sale. Moreover, Joe Gill of Bloxham sounded a sceptical note when interviewed by Matt Cooper on Today FM yesterday. Mr. Gill raised the issue of the Heathrow slots and also highlighted the difficulties posed by the company’s pension deficit (in the region of €400m). He also suggested that a special dividend by cash-rich Aer Lingus (it has cash balances of approximately €350 million) offers an easier way for the government to raise much needed cash from the company. Notwithstanding the issues that arise in forcing a special dividend one wonders if this route makes more sense than relinquishing full control over the airline.

Palcic and Reeves on privatisation

Given the week that's in it, PE readers may be interested in a new book by Donal Palcic and Eoin Reeves, Privatisation in Ireland: Lessons from a European Economy. Further details are available here.

Facing Up to Reality II: The Methodological Flaw in An Bord Snip Nua

This post follows on from a previous contribution.

Michael Taft: In the previous post, we saw how billions of fiscal contraction has led to little deficit reduction. After that post was written the IMF published their latest projections. They estimate the deficit this year to be -10.8 percent this year. Between 2009 and 2011, we have experienced a fiscal contraction of €10 billion - or over 6 percent of GDP. Nominal GDP will fall by €4 billion. The deficit is expected to fall by less than 1 percent. Does the Government get this connection?

In this post we will examine why the notion that cuts equals savings is one of the more pernicious that has come to dominate the debate; why there is a fundamental flaw at the heart of the methodology employed by the Special Group report. With Government ministers threatening more cuts, this is certainly topical.

The Special Group Report used the word ‘saving’ or ‘savings’ 1,096 times. It neatly equated ‘savings’ and ‘spending cuts’ when no such relationship necessarily exists. Fortunately, we have a simulation of the effects of one of the ‘savings’ that the Special Group highlighted: cutting public sector employment.

Flawed Methodology: The ESRI Stress Test

The Special Group recommended that public sector employment be cut by 17,000. According the ESRI model, reducing public sector employment by 17,000 would mean a reduction of €1 billion in public spending – or 0.6 percent of GDP. What would happen?

• GDP would fall by 0.8 percent. So, for every €1 billion cut, the GDP falls by nearly €1.3 billion.
• More worryingly, GNP would fall by 1 percent. That represents an even more deflationary impact.
• Consumer demand would fall 0.5 percent in the first year, rising to 1 percent in the second year. That’s nearly €1 billion cut from consumer spending – putting considerable pressure on domestic businesses.
• Employment would fall by 1.1 percent. In 2009, that would mean a loss of over 20,000 jobs. Unemployment would rise by almost the same amount.

These are all the factors that must be included before we can assess the ‘savings’ to the Exchequer. So what did the ESRI conclude?

• The deficit would fall by 0.2 percent in the first year and 0.1 percent in the second year.

According to the ESRI, the ‘net saving’ to the Exchequer would be 25 percent of the cut, falling to less than 15 percent in the second year. This is because when you factor in the:

• Loss of tax revenue from reduced spending
• Increase in public sector spending arising from unemployment costs
• Decline in GDP/GNP

The gain to the Exchequer diminishes greatly. This simulation – along with measurements for other spending cuts and tax increases – was available to the Special Group report. It was, and remains, the best estimate of the impact of cutting public sector employment. They didn’t utilise it or even refer to it.

The Special Group could have commissioned, through the Department of Finance, other stress-tests regarding social transfers (nearly 40 percent of the ‘savings’ in the Report was due cuts in direct and in-kind social transfers) and Government purchases of private goods and services, which make up approximately a third of spending on public services They didn’t. They have yet to explain why. But that it would have undermined their basic premise – that cuts equals savings – is fairly certain. For its methodology adopted a crude ‘arithmetic’ approach to spending cuts, not an economic one.

When Government ministers proclaim progress on public sector employment reduction, they are, without realising, actually proclaiming very little progress on deficit reduction but significant progress on deflating the economy, driving up unemployment and cutting domestic demand.

But when this realisation hits home – falling growth, continued high deficits – these same Ministers demand more of the same, again not realising that more of the same is likely to produce the same results which produces more demands for cuts until the economy gives out.

It is a vicious circle, legitimated by the false methodology at the heart of the Special Group report. Cuts do not equal savings. But common sense should tell us this – without resort to models and projections. During a jobs crisis, does it make sense to cut employment levels from the largest employer? Why should we be surprised when the result is so dismal?

****
We are facing into another round of cuts. Employees are now being threatened - with job losses and pay cuts; in the public and private sector. Why? Because past Government ministers either could not or would not subject their policies to economic stress-tests (any comparison with the banking crisis is not co-incidental). They assumed propositions that had little empirical justification. They suffered from ‘escalation of commitment’ – having committed to a particular strategy, they could not extricate themselves when it became clear the strategy was failing.

It is still not too late for this Government to take a step back from the brink. There is still good will towards it. They could adopt a set of transparent and public measurements whereby fiscal options are assessed on the best data available. And on the basis of such informed analysis, adopt the policies that flow from that.

The last thing the Government should do is merely continue failed Fianna Fail policies with only the most cursory of makeovers. If they do, then people will have the right to ask – what was the election for?

Flogging off our best assets not the solution.

This Government has made some stupid and costly economic decisions – the bailout of Anglo Irish Bank and Irish Nationwide, the Nama valuations, the blanket bank guarantees, its fiscal policy. Now it plans to flog off indigenous companies at a time when solid enterprises are needed.

These actions and the economic policies of tax-cutting and deregulation generated the biggest crash in any economy. Now the Government is going to make things worse by selling a huge swathe of productive indigenous Irish industry to foreign multinationals, speculators and friends.

You can read the rest of Paul Sweeney's opinion piece in today's Irish Times here.

Selling the family silver: bad for the economy and citizens

Tom O'Connor: The newly established government Review Group on State Assets and Liabilities has been assigned a task: ‘To draw up a list of possible asset disposals’. The range of state owned enterprises which could be up for grabs is breathtaking and includes: all the main Irish ports; Bord Gais; the ESB; RTE; An Post; CIE; Dublin Bus; Irish Rail, the National Oil Reserves Agency and many others.

The plan is to raise billions for the state coffers from the sale of many of these companies. The hope is that this could be set off against the projected exchequer deficit of €26 billion for next year and the national debt which now stands at €84 billion. Many of these companies are indeed valuable. The values put on Bord Gais and ESB are €3.5 and €5 billion respectively.

However, it would be a serious mistake to sell off these state owned enterprises. The proposed sales are a smash and grab exercise aimed at raising quick money for the government without any real consideration of the consequences. The problems which the sale of Eircom continues to cause for the Irish economy highlight the dangers of privatisation.

The sale of Eircom raised €8.4 billion for the government but has done untold damage to the competitiveness of the Irish economy: the company has been bought and sold several times, and has had four different owners in recent years. The sale has resulted in the company not been able to develop its broadband infrastructure to anything like the level which is required in the modern business environment, and this has hampered the development of high speed internet in Ireland ever since.
In the aftermath of the various sales of the company in the hands of ruthless venture capitalists, it now owes nearly €2 billion. Previously it owed very little. It has also started to shed considerable numbers of workers and has only limited ability, as a result of its debt, to finance the rolling out of high speed broadband.

The privatisation of state enterprises is based on an ideological position which assumes that private companies achieve higher levels of performance than state owned enterprises. However, a study of companies privatised by the Irish government from 1991 to 2003 by Reeves and Palcic (2005) found no evidence for this assertion. They also found that shareholders and employees who receive 15% of the shares tend to be the main winners in privatisation, not the government.

Perhaps one of the most compelling arguments against the sale of State Owned Enterprises is the loss of national control overall in hugely strategic areas which determine our economic viability and competitiveness. If the two largest energy producing companies where sold to private investors, industry and consumers could end up being at the mercy of super-profit-seeking business owners which could drive up costs and make Irish businesses uncompetitive. At present, the government by way of the energy regulator can control the price of energy.

It is precisely due to super-profit-seeking privately owned businesses controlling goods and services that should be kept in state ownership, that health care is so expensive in the USA. There, private Health Management Companies (HMOs) own most hospitals and charge exorbitant fees. The result is that basic health insurance is at least 800 dollars a month per person in the USA. The same argument can be cited to oppose the privatisation of the countries ports, RTE and others. It has been reported that Ruport Murdoch is interested in purchasing RTE. In that event, once in an almost monopoly position, the cost of TV viewing would be likely to rise significantly.

The sale of ports would put the country at a huge strategic disadvantage. The UK government in recent years has privatised its ports for a return of 6 billion and has sold the London-based Thames Water company for 9 billion. If Ireland were to sell its ports and its domestic water infrastructure, it is likely that these utilities would be run as public-private partnerships (PPS). These are exceptionally costly for the state and the taxpayer in the long term, and it is likely that hefty charges for water and the use of ports would ensue to the hardship of consumers and the disadvantage of businesses. One might also argue that the loss of ownership and strategic control of a country’s ports strongly compromises national sovereignty.

Also, in Ireland at present, the ESB is responsible for integrating its supply grid with that in Northern Ireland in a move towards closer economic co-operation, which was been lauded only this week by Northern Ireland’s Deputy First Minister Martin Mc Guinness at the Magill Summer School. If the ESB were owned by private shareholders, there is no guarantee that this would happen.

Of course, the biggest problem is the loss of employment. In the wake of the privatisation of ACC Bank and Aer Lingus (amongst others) since 2005, the Central Statistics Office has shown that the numbers employed in state owned enterprises fell from 57,400 to 52,300 by 2009, a loss of 5,100 jobs, which the CSO attributes mainly to privatisation.

The privatisation of Bord Gais, ESB, An Post and other semi-state companies would result in a dramatic downsizing of the workforces in these companies. At a time when unemployment stands at 450,000 and where the government is content to sit out the recession without stimulating the economy, the prospect of the state itself putting thousands or even tens of thousands people out of work, due to privatisations, would seem to be unthinkable.

Interestingly, it is the opposite course of action which is now being proposed in the global post-financial meltdown world: Prof. Aldo Mustacchio of Harvard Business School has written several papers in the past two years in which he highlights the need to use state owned enterprises as vehicles for employment creation and to help significantly in national economic recovery.

Many large state owned enterprises have been performing exceptionally throughout the world, he says, from the state owned oil company Petrobas in Brazil to Statoil in Norway and the State owned Gazprom company in Russia. There are many other companies in other economic sectors also in countries such as Singapore and India. The mistake in Ireland has been to allow private interests to take control of valuable natural resources with no return to the exchequer. The case of the Erris gas field in Mayo, which was essentially given away free of charge by then Minister for Energy, Ray Burke in the mid 1990s, is a case in point.

However, it would be a mistake to think that new state owned enterprises would be flabby and inefficient which many politicians and economists from a right-wing persuasion would have us believe. There is a future for lean and competitive state owned enterprises in Ireland where performance and productivity would be high and where performance management systems would predominate.

State owned companies of this type have existed in Sweden for many years. At present there are 55 state owned enterprises in Sweden. In 2006 these companies turned over 50 billion and generated net profits of 8 billion for the exchequer.
It is for these reasons that any hasty attempt by government to sell the family silver in an ill thought out and hasty fashion to reduce indebtedness should be strenuously opposed by Irish society.
This piece first appeared in the Irish Examiner

The Privatisation Board: What will it do?

Jim Stewart: The composition of the Privatisation Board, and its terms of reference, makes inevitable that the conclusions will be: privatisation of all major state Commercial State Bodies as a preferred solution; if not full privatisation, part privatisation via public/private partnership; and as a final option drastic reduction of any State subsidies as in the case of the CIE Group. Cutting subsidies to CIE was already one of the recommendation of the McCarthy/Department of Finance Report (p. 74, reduce Public Service Obligations to CIE; replace lightly used rail services with bus routes, etc.). Cutting public transport has been a particular obsession of McCarthy, who opposed Dart electrification. It is one of a few examples of proposed cuts in the Report of the Special Group on Public Service Number and Expenditure, not contained in evaluation papers published by the Department of Finance.

The same procedures used in producing the McCarthy/Department of Finance report will likely be followed in this new report. Officials in the Department of Finance will draft chapters, proposals and conclusions which will be largely accepted by the Privatisation Board.

Who is driving these policies?
These recommendations are likely to be as already described. The reason for this is that prevailing IMF views are largely held within the Department of Finance. While privatisation was not a policy recommended by the recent IMF Article IV consultation, the report in several places acknowledges IMF staff agreement with “the authorities” (not defined but referred to elsewhere as “the officials of Ireland” and also states the IMF report also states that meetings were held with senior officials from the Department of Finance, etc.). The IMF together with the World Bank helped establish privatisation as part of the Washington consensus, often with disastrous policies for developing countries. These discredited policies are now being reintroduced as conditions for IMF loans to countries with large budget deficits such as Greece.

Why privatisation is not a solution
Privatisation largely involves an exchange of ownership. The State will obtain financial assets in exchange for real assets. These financial assets could be invested in other real assets, but this is unlikely, rather Government borrowing/debt will be reduced. This exchange will be costly. Firms such as Goldman Sachs, Merrill Lynch, PricewaterhouseCoopers, Arthur Cox, etc.(all featuring in advice to the Government in relation to the banking crisis) will again be paid large fees. Apart from the cost, privatisation is no solution to Irish economic problems. The States net Balance Sheet remains the same, but the policies privatised companies may pursue will be very different. Some firms such as the ESB are natural monopolies. Regulation is key - an area where Irish agencies have a particularly poor track record. State control of monopolies can address deficiencies in regulation. What about commercial policies? Paul Sweeney has argued coherently that commercial policies of formerly State owned companies have been disastrous for Ireland’s economic success the best known is Telecom Eireann. But policies pursued by other privatised firms have added to the economic crisis for example the former ICC and ACC banks. The operations of the former Irish Sugar company (Greencore) are now focussed largely outside Ireland, and as such are unlikely to contribute to the development of agribusiness within Ireland as recently expressed in the 2020 Food Harvest Report.

In the current crisis we have been badly let down by former and current employees of the Central Bank, the financial regulator, those who designed and encouraged our gross over reliance on tax incentives, those in charge of our planning process, but in particular by institutions largely in the private sector, banks, building societies, professional firms such as auditors. Corporate governance has not been an issue in Commercial State Bodies in contrast to private sector firm such as Banks, the Quinn group, and DCC. The solution is not more economists with their misguided views on ‘efficient markets’, and ‘rational behaviour’. Banks in recent years have lost billions, competition policy as implemented by the EU Commission has lost billions more. Nor is the solution privatisation.

Arguments against privatisation are compelling. It is important that they are expressed.

Costly Business: Privatisation and Exchequer Revenues

Donal Palcic and Eoin Reeves: The recent revelation that the government has established a group to report and advise on – among other things – the potential for privatising state-owned enterprises (SOEs) raises a number of important issues. These issues concern the precise rationale for any sell off, the method of sale adopted and the likely outcomes in economic and social terms.

It appears that the principal rationale for any potential privatisation is to raise revenue for the exchequer in order to deal with the country’s acute fiscal crisis. Although privatisation can raise useful revenues for the exchequer in the short- to medium-term it cannot, however, be justified on this basis alone. In a recent article published in Administration, we show that the revenues generated from privatisations, both in Ireland and abroad, are rarely maximised.

In Ireland, ten SOEs have been privatised to date and the exchequer has accrued over €8.3 billion. However, we show that the exchequer has foregone over €2.1 billion as a result of a combination of costs related to the underpricing of shares, debt write-offs, fees to advisors, underwriters etc., and the establishment of employee share ownership plans (ESOPs), which account for approximately half of the foregone revenues.

This is shown in the table below, where direct costs refer to advisory fees etc, and indirect costs refer to the cost of debt write offs and the underpricing of shares. Admittedly, the aggregate costs are dominated by the biggest divestiture to date (Eircom), however, there were questionable decisions in relation to a number of other sales. For example, when the refinery and terminal operations of the Irish National Petroleum Corporation (INPC) were sold in 2001, the sale involved a large debt write-off and other costs which amounted to €76 million. The Whitegate and Bantry assets were sold for €116 million, but six years later the new owners put the Whitegate refinery up for sale for a price of approximately €350 million.

The cost of ESOPs in the table above is calculated as the difference in the revenues received by the exchequer for the 14.9 per cent transferred to employees and the value of that stake based on the sale price of the firm. For example, in the case of the TSB, employees received a 5 per cent stake in return for accepting a transformation agreement, and purchased a further 9.9 per cent stake for €25.15 million. Based on the €430 million price paid by IL&P for the TSB, the 14.9 per cent stake was worth just over €64 million.

In the case of Eircom, employees also received a 5 per cent stake in exchange for the acceptance of a transformation agreement, and purchased a 9.9 per cent stake for €241 million. Based on the proceeds from the flotation of the government’s 50.1 per cent stake in July 1999 (which raised €4.2 billion), the 14.9 per cent stake transferred to the ESOP was worth approximately €1.25 billion. The difference between the amount received by the exchequer for the 14.9 per cent stake and its actual value amounts to over €1.01 billion.

Some degree of privatisation appears inevitable but sales will undoubtedly involve the exchequer incurring big costs in order to bring in some much-needed cash. Can this be justified? Perhaps, if there are compensating gains such as improved enterprise performance and public service delivery. However, the Irish track record is not hugely impressive in this regard.

The question of privatising public enterprises requires careful consideration of all the costs and benefits. Ideally the decision to sell these companies should be made in the context of an overall strategy for the sector, but this doesn’t exist. Instead, the issue of privatisation is under consideration as a revenue raising measure. Past experience shows us that there are reasons to be fearful about the quality of decision making in relation to the disposal of such assets. The firesale approach that appears to be imminent is a worrying development.

Eircom: topsy-turvey economics

Paul Sweeney: The bid last week for Eircom is yet another nail in the coffin of the Anglo Saxon model of liberal economics. Even Fine Gael called for its nationalisation. In the same week, 20 economists, some of them on the hard Right, called for all Irish banks to be nationalised!

The bid of a mere €95m for Eircom is in stark contrast to the market value of €8.4bn when it was privatised almost ten years ago. The taxpayer got €6.2bn on an investment of only €562m (plus a pension contribution of €1bn)

The low offer price is because Eircom is now laden with debts. This is in stark contrast to the debt free, rapidly growing and heavily investing state enterprise which Mary O’Rourke stupidly privatised. Of course, O’Rourke was not alone in 1999. The whole country was gripped by the privatisation hysteria. Nearly everyone with money wanted to make a profit from the sale of the company they already owned. Nearly all got badly burnt and so learned a hard lesson about stock markets.

But the real lesson was strategic. Sadly, it has not yet been absorbed by official Ireland, constrained as it is by ideology. Eircom, as a state company, was investing massively. Broadband was vital for the knowledge economy. The second set of new owners, private equity firms, led by Tony O Reilly and George Soros, sweated the company and used its cash to pay off the cost of buying it. (The new bidders are proposing similar moves, hence the opposition by the unions). The rapidly growing mobile arm was flogged off to Vodafone.

On an investment of €676m, the private equity firm (and the ESOT) made a gain of €954 in a few years (for the details see Chapter 3 of my book Selling Out? Privatisation in Ireland). These gains included huge dividends on losses. Investment was cut to one-third of its peak when it was a state enterprise.

When Forfas, the intellectual arm of the Department of Enterprise and Employment, made a study of the deficiencies of Irish broadband, the strategic error of the privatisation was not mentioned, even in a footnote! This indicates that official Ireland does not learn lessons which are not ideologically acceptable. With mass nationalisations, will Forfas and this government now learn to put aside its out-dated ideas?

The ideology of privatisation and marketisation has collapsed as a panacea for economic efficiency. The state was portrayed as inefficient, plodding and bureaucratic. Commercial State companies, which have contributed much to Ireland’s economy and society since 1927, are not perfect. But they still have a major role to play in the economy, especially given that it is small and open. Ireland, unlike some countries, has some very fine and well-run state enterprises. With some minor changes, the lagging state companies can be made much more efficient.

With the collapse in the Anglo-Saxon model of Capitalism, will a new government learn that commercial state enterprises still have a major role to play in our future economic well being?

Fine Gael, in addition to nationalising Eircom, recently proposed setting up a State Holding Company, (remarkably similar to Congress’ proposal of some years ago). This shows that some Irish politicians are finally shaking off the defunct Anglo-Saxon economic ideology and are being innovative.

One thing is sure. We have seen clearly that banking, as the artery of capitalism, is too important to ever again to be left in the hands of the private sector. When this crisis is sorted out, it is vital, in my opinion, that one substantial Irish bank must remain in state ownership, run at arms length from the government.

In the meantime, we should re-nationalise Eircom. It’s a steal at €100m. We are spending more on subsidies to private firms on haphazard broadband provision.