An Bord Snip: Energy, Environment and Transport

An Bord Snip Nua has a number of recommendations in the intertwined areas of energy, environment and transport:

1. End energy, environment and climate awareness programmes

2. Water charges and road pricing

3. Reduce energy subsidies to the price of carbon; abolish said subsidies when the carbon tax is introduced; end subsidies to regional airports and domestic flights

4. Discontinue selected train services

5. Merge water authorities, market regulators, and safety regulators

6. Privatise Bord na Mona and Bus Eireann Expressway

I agree with all of the above.

On 4, I would also end public subsidies to the planned interconnector to Wales. This is a commercial proposition; there are few externalities, it is not a public good, nor is it a natural monopoly.

On 5, Sean Lyons pointed out that the Irish Aviation Authority is a market regulator and should therefore be merged with other market regulators rather than with the Road Safety Authority, the Railway Safety Commission and the Maritime Safety Directory. I confused the Irish Aviation Authority, the safety regulator, with the Commission for Irish Aviation, the market regulator. The safety regulators should all be merged into Safety Ireland. The market regulators should be merged into Competition Ireland.

On 6, I would go further. An Bord Snip Nua argues that state-owned companies should pay higher dividends, but I would sell them at the first opportunity. 2010 may be too soon, but we should be able to get a decent price from 2011 onwards. I would also end the monopoly of Dublin Bus.

An Bord Snip Nua is silent on waste management.  While two incinerators are being build, the government is trying to divert future waste away from incineration towards other, more expensive forms of treatment. If the government succeeds, it will (1) destroy capital and (2) increase costs. Arguably, this is not in the budget yet and therefore outside the remit of An Bord Snip Nua, but the investment is measured in hundreds of millions of euros.

43 thoughts on “An Bord Snip: Energy, Environment and Transport”

  1. There is no potential windfall from early privatisation of such State companies as the ESB and components of CIÉ.

    These companies appear to be in control of the trade unions, and it seems that the only way they could be prepared for a credible floatation is the development of significant competitor services.

    The managements wouldn’t clearly be able to engineer change and who would want to pick a serious fight with uncertain if zero support from politicians of all hues?

    Bord Gáis has developed as a competitor to the ESB in recent times but there must be a limit to its ambitions as it operates in the same straitjacket as the former.

    It took years of turmoil ante and post floatation during a different backdrop, for Aer Lingus to adapt to competition.

  2. @Michael
    I hear that argument too often. We can’t do this or that because of the unions. Perhaps it is time that the unions start to realise the damage they are doing to the economy in general and their members in particular, and adopt a more sensible policy.

  3. The IAA is primarily a safety and licensing regulator similar to UK CAA. If a Transport Canada” style cross-mode body is envisioned then much (most?) of IAA will be going there, with air traffic services demerged to a NAVCAN NATS type operation. I’m at a bit of a loss as to what market IAA regulates – air traffic slots maybe?

  4. Richard,

    “An Bord Snip Nua argues that state-owned companies should pay higher dividends, but I would sell them at the first opportunity. 2010 may be too soon, but we should be able to get a decent price from 2011 onwards.”

    This is a fairly sweeping statement – I presume that you would consider keeping the electricity and gas networks in public ownership, considering the less than happy experience with eircom ? I have no issues with contracting out services etc, but ultimately I think the actual assets as natural monopolies should not be sold out of public ownership.

  5. @Richard,

    Many thanks for your post on these aspects of the An Bord Snip Nua report, but it appears, once you raised the prospect of privatisation of the remaining semi-states (which sit in the territory covered by your post), you are atttracting the usual, and what apears to be, unfortunately, under-informed, criticism.

    1. Privatisation does not require an IPO; a trade sale would be the best option. The energy semi-states would have to be formally separated into supply and network businesses and sold separately. The likely bidders for the networks, as recent experience in Britain shows, would be infrastructure and pensions funds aligned with network management businesses. There is no reason why the existing managements of the energy network businesses could not form consortia of this nature. Bidders would have to demonstrate that they had no affiliation with supply businesses operating in in Ireland or in the EU. The network businesses currently operate under licence and this is sufficient to ensure that they invest in, maintain and operate the networks. The residual electricity and gas supply businesses should be rolled into one and sold on that basis. Electricity supply competition between the ESB and BGE is an optical and expensive illusion. BGE uses excessive network revenue awarded by the energy regulator to cross-subsidise its electricity generation and supply business. All gas consumers pay higher prices so that a relatively small proportion of electricity consumers can get lower prices. (And then BGE goes and loses the lap-tops on which the details of these privileged electricity consumers are held.) Futhermore, genuine competitors are disadvantaged by this cross-subsidisation.
    2. The energy regulator sets network revenues at levels that compel energy consuemrs to pay up-front for a significant proportion of investment in the networks. This is one of the principal reasons that electricity and gas prices are among the highest in the EU. This is to compensate for zero direct Exchequer financing and to allow the ESB and BGE to minimise their borrowings for this purpose and to allow them to allocate borrowings to their overseas empire-building (the ESB) or their gas and electricity ambitions in Ireland (BGE). In the ESB’s case this also is implicit compensation for the enforced reduction of its share of the electricity generation market on the island of Ireland – another aspect of the optical illusion of competition. This restriction on the ESB’s generation market share leads to another unjustified increase in final prices. To ensure that sufficient generation capacity is provided by other generators all generators receive a capacity payment which is based on the costs of a new peaking plant – this is the so-called Best New Entrant (BNE) price. All available generating plants that are required to maintain supply receive this payment. But it is far in excess of what the ESB would need to provide supply (and what it would have have needed were it allowed to retain and expand its generation capacity). This is another unnecessary cost burden on consumers – and all all in the name of the promotion of competition. This simple fact is that the market on the island of Ireland is too small to create the conditions for sustainable, consumer-benefiting competition in electricity and gas. This is now recognised by the European Commission and the European Regulators’ Group for Electricity and Gas and regional energy markets are being actively promoted. A full integration with the electricity and gas markets in Britain would bring prices down to British levels. However, successive governments delayed the approval of an electricity interconnnectro in the hope that private investors would construct it on a merchant basis. For gas a second interconnector to Sctland was approved when an upgrading of the link between Scotland and Northern Ireland or LNG were the logical choices. Now that LNG is scheduled to be supplied by 2012, consumers will end up paying for redundant capacity on the two interconnectors as consumer-benefitting intregration of the markets recedes into the distance.
    3. Privatisation proceeds would have no impact on the General Government Balance, but it could be used to leverage the financing (in combination with private sector financing) of investment in telecoms, broadband, water and waste water, smart energy networks, renewable energy, waste management, etc. Ironically, it might even be used to take the fixed telecoms network back into public ownership following its imbecilic flotation at the height of the dot-com bubble that attracted the interest of greedy institutions and retail investors seeking to stage the market.

    All of the above may be clearly evidenced and documented. This is the reality. It is measure of the failure of governance that 20,000 or so workers can hold all other citizens to ransom. Will anything be done? I’m waiting for the flying green pigs.

  6. @Sean, Paul
    The gas and power networks are natural monopolies indeed. I am indifferent between holding them in public ownership and selling and tightly regulating them.

    The semi-states also hold assets that are not natural monopolies. These should just be sold. An IPO is an option, of course. I’d say that these companies are too small to survive on their own, so we might as well save the IPO fees and sell them to the highest bidder.

  7. @Richard Tol
    Well, IPO’s dont have to have huge fees. A web based auction system would work fine. Tell someone in Finance to purchase a decent book on auction theory, and off we go. Fees come from three things
    a) money on the table (usually thought of as an incentiive for further ipo’s)
    b) legal and accounting fees (we have those in the state sector)
    c) roadshows (a webcam would do nice)

  8. @Paul Hunt

    Re: “you are atttracting the usual, and what apears to be, unfortunately, under-informed, criticism.”

    “Privatisation does not require an IPO; a trade sale would be the best option.”

    I don’t know what your own experience of business is, be it domestic or international , but it should be reasonable to assume, when I refer to IPOs, I would be aware of the alternatives such as trade sales, private equity investments etc.

    In a brief comment, I used the current status of potential State company sales in the context of an IPO, but the same requirements would apply to any alternative.

    You say: “All of the above may be clearly evidenced and documented. This is the reality. It is measure of the failure of governance that 20,000 or so workers can hold all other citizens to ransom. Will anything be done? I’m waiting for the flying green pigs.”

    You can say whatever about “implicit compensation” and more but as I said in my original post, given the control the unions have on electricity supply and in the State transport company, I do believe that the best way to break the stranglehold of the vested interests, is to promote credible competition?

    How long are you prepared to await flying green pigs?

    Barack Obama is faced with similar choices in Washington where through legal bribery of $5 billion via lobbying and political contributions, the financial industry have served their own interests over the past decade.

    @Richard Tol

    “I hear that argument too often. We can’t do this or that because of the unions. Perhaps it is time that the unions start to realise the damage they are doing to the economy in general and their members in particular, and adopt a more sensible policy.”

    Perhaps…indeed!

    The reality check from a pub in someplace like Bandon, is that there have been much bigger pigs at the trough.

    I’m within reason a libertarian myself, or aspire to be one, but as I said elsewhere on this site earlier this week, the very poor pension cover in the private sector, would surely prompt people to wonder should they have the use of collective power like public sector workers and farmers?

    The threat of a transport strike or a tractorcade by millionaire farmers, through Dublin, does wonders to get the attention of politicians!

    I’m not arguing for surrender to unions but there are some realities that cannot be easily waved away.

    Take the example the US and last May, Barack Obama’s former Illinois colleague in the US Senate, Dick Durbin, who remarked: “The banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

    Corruption is also endemic in Crony Ireland, but it cannot be easily wished away.

  9. On 6, I would go further. An Bord Snip Nua argues that state-owned companies should pay higher dividends, but I would sell them at the first opportunity. 2010 may be too soon, but we should be able to get a decent price from 2011 onwards. I would also end the monopoly of Dublin Bus.

    If you are to have a functioning public transportation system then you need to have a homogenous environment – which means a monopoly, public or private. Now, is there any evidence that a private monopoly is any better for the public or even less of a drain on the public finances (directly or indirectly)?

    I think that we only need to look to the example of the rail privatisation (and now the creeping re-nationlisation from necessity) in our nearest neighbour to see the answer to that one.

    So why is privatisation being pushed so hard, then? I think that one answer has to be that the public sector in general is seen by the big business interests (and their cheerleaders, here as elsewhere) as being the one great stronghold where the unions can survive, out of the reach of union-biusters like Ryanair. there certainly seems to be much glee, even in this very thread, at the destruction of unions in and of itself as an outcome of privatisation. We’ve seen as well how this turns out for the citizen with respect to such provisions as private pensions (even leaving aside the numerous cases of companies bilking the pension fund for their own ends), as noted above.

    Another would be tht the modern state is associated with ‘socialization’ as they call it in the States (i.e. the money from taxes going to public services and benefits for everty citizen, not at all in accordance with those to whom Ayn Rand appeals). Hence, any rolling back of state-provided services and welfare appears to be seen as steps in the long war to our great capitalist future.

    So, Richard Tol; given that it is unlikely to offer any benefitt whatsoevr (and probably the reverse) to the public, why is privatisation a good thing that the we should supportto our detriment?

  10. @EWI
    A comparison of Irish and British trains; or of British trains then and now may open your eyes. You may also want to compare the cost structure of ESB to its peers abroad. Or if you think that foreign companies are inherently different, perhaps you could investigate Bus Eireann and Dublin Bus versus private bus companies. Better service for less money is what you’d find.

  11. @ EWI
    “If you are to have a functioning public transportation system then you need to have a homogenous environment – which means a monopoly, public or private.”

    That’s the kind of statement that really ought to be accompanied by some sort of justification. What exactly is the benefit of homogeneity?

    Incidentally, you lean towards ad hominem in your response. It’s not very useful to imply that people who disagree with your view are ‘cheerleaders’ or to invoke Ayn Rand on their behalf. It’s no more fair than people trying to equate your views with communism (I can’t stress enough that I’m not actually doing that).

    I wholeheartedly agree with Richard’s call for a breakup of the existing monopoly.

  12. @Michael
    I agree that large scale labour disputes are the last thing we need right now. At the same time, we should recognize that the unions are part of the problem — or rather, that the current leadership of the unions is very shortsighted.

  13. @Richard –
    I think it important that the discourse not become confused by mixing different levels.

    The prime importance is cost reduction; other idealogical goals like elimination of collective bargaining (not that i completely disagree that union leadership are self-serving and shortsighted) should occur in a different context.

    Though the elegant models suggest that privatisation creates efficiencies, it is important to let the theory have it’s big day out and see if it actually flies.
    Experiences with e.g. Eircom, British Rail, show that actual results aren’t always predicted by the theory.
    We should therefore tread carefully, when contemplating leaping into the unknown whilst throwing the taxpayer-built resources to the oligarch wolves..

  14. @Michael,

    No intention to cause offence. Comment should be free; facts are sacred. And I accept that blog posts rarely convey the breadth of knowledge and expereince possessed by a poster. And by way of background and experience I was a Maths and Economics undergrad in UCC when you were doing your B.Comm and have worked mainly in the international energy sector since then. Obviously I focus on the energy sector, but I do so not only because of my experience, but because, in microcosm, it presents clearly much of what has gone wrong in Ireland in terms of democratic governance, policy, regulation and competition policy over the last 10 years. Much of the data and information is in the public domain (though it takes some serious effort as the powers-that-be are parsimonious in what they choose to reveal). The functioning of this sector impacts on all businesses and citizens and it presents the potential for significant consumer-benefiting reform that has a read-across to most other sectors in the economy.

    Your arguments against the case I am advancing (and Richard Tol’s recommendations) seem to hinge on two factors. First, “that the best way to break the stranglehold of the vested interests, is to promote credible competition” and that, “given the control the unions have on electricity supply and in the State transport company” no direct Satte intervention may be countenanced.

    With regard to the first, the key point is that the electricity and gas markets on the island of Ireland are simply too small to support sustainable and effective consumer-benefiting competition. The current process operates on the self-defeating premise that “we have to increase prices to attract and retain new entrants who will compete and bring down prices eventually”.

    On the second, the current economic and financial crisis presents symptoms of a much deeper malaise. And that is a crisis in democratic governance. One key feature, that is relevant in this context, is the ability of the so-called “Social Partnership” arrangements to allow the trades unions to engage directly with government and to bypass the Oireachtas. Another is the huge expansion of statutory and non-statutory regulatory bodies that are not subject to effective democratic scrutiny or control and that allow gvernment to evade scrutiny and restraint.

    Nothing much will happen until there is a widespread recognition that this is not simply an economic or financial crisis, but a crisis in democratic governance. The Government, the “permanent government” and the business and union elites are hoping against hope that some treatment of the symptoms will allow an eventual return to “business as usual”. I’m long enough in the tooth to realise that these formidable forces are likely to prevail – that’s why I waiting for flying green pigs, but it’s not going to stop me calling it as I see it.

  15. I’m sure Richard, if he so chooses, will be well able to respond to the doubts being expressed about his proposal to privatise many of the remaining semi-states, but I suspect he may be constrained both by his proper focus on economics and his role in the ESRI. There is a solid economic case to be made (and I welcome John’s suggestion “to let the theory have its big day out”), but it rapidly veers into the area of politcial economy.

    The basic contention is that private sector participants operating in genuinely competitive markets and subject to tight regulation where markets are not possible will generate efficient outcomes. The politcial challenge is to design and enforce policy and regulation that will create these conditions.

    It is very easy to identify bodged or ill-conceived privatisations or inadaquate policy and regulatory arrangements and use these these to damn the entire approach.

    Eircom serves as the classic bete noir in the Irish context, but, of course, instead of learning from the mistakes that were made, it is used to bash anyone with the temerity to raise a head about the parapet and mention privatisation. The privatisation of the British rail industry is frequently fashioned into another useful cudgel, but little, if any, attention is paid to the privatisations that have been successful with a view to learning what aspects might be replicated successfully in the Irish context.

    In passing a key feature of the problems with British rail is that it has been continuing government policy not to impose the full costs of road transport on road users and to subsidise the rail industry instead to facilitate switching from road to rail. However cleverly designed this distorts the incentives for private sector operators and easily leads to unintended outcomes.

    In general these distortions do not arise in the communications or energy sectors. As I have pointed out previously, the principal reasons why Irish gas and electricity prices are among the highest in Europe are (1) wrong-headed network investment decisions, (2) excessively high levels of network revenue awarded by the energy regulator to compensate for inefficient financing of network investment and (3) and an entirely inappropiate competition model.

    The cumulative sequence of policy and regulatory decisions that have led to this gloriously inefficient (and consumer-damaging) outcome may not be unwound without removing state ownership in the sector. No internal reform mechanism is possible as the energy regulator cannot retreat from the basis on which it has made decsions without blowing its credibility. Privatisation is the only catalyst for the necessary regulatory and legislative changes.

    And this also applies to the other regulates utility sectors.

  16. @Paul

    I can see that you know more about energy markets than I do.

    Today’s UCC students have the benefit of adjunct professor of economics and ex- AIB chief, Michael Buckley’ insights on such issues as risk.

    At an Institute of Engineers conference in 2007, Colm McCarthy said:

    ‘…a rough rule of thumb states that a market needs a minimum of four or five roughly equal generating companies and ease of entry for new parties before effective competition can take place..’ (IEA Review of Ireland).

    http://www.engineersireland.ie/Conferences/Conf07/Documents/Colm_McCarthy-Promoting_Competition_in_Energy_Markets.pdf

  17. @Paul
    Without getting into another public v. private ownership debate since we have had one previously, I was just curious as to how exactly you think privatisation of the ESB will lead to better regulation?

    If there has been a “cumulative sequence of policy and regulatory decisions that have led to this gloriously inefficient (and consumer-damaging) outcome” that we are in now, why do you assume we will suddenly make all the correct policy and regulatory decisions with a privatised ESB?

  18. @Donal
    For starters, the Electricity State Board, a state-owned company under the Department of Energy, is regulated by the Commission for Energy Regulation, a state body under the Department of Energy.

    Note that two other significant players in this market (Bord na Mona, Bord Gais) are also state-owned and fall under the same department.

    It’s all very cosy.

  19. @Michael & Richard,

    At first sight it appears that the numbers exist for competition in electricity generation, but appearances can be deceptive. Colm McCarthy’s quote from the IEA Review refers to “generating companies”. And this, in practice, requires generating companies with a portfolio of plants (peak, intermediate and baseload) ideally employing a range of techologies and inclusing some price-setting plants. Single plant or single technology generating companies will rarely impact on price-setting in the gross pool in Ireland.

    Throughout the EU very large, pan-European, vertically integrated across generation and supply (and along the gas supply chain), multi-plant and multi-technology are becoming the norm, viz. E.on, RWE, ENEL, EdF. The European Commission (via DG TREN) is somewhat behind the curve, but (via DG COMP) is having some success in forcing these behemoths to divest their transmission networks (thereby allowing genuine non-discriminatory access), abolishing non-compete agreements and preventing market foreclosure – despite opposition from national governments (primarily Germany and France) seeking to preserve the integrity and heft of their “national champions”.

    The extent to which consumer-benefiting competition will emerge is debatable, but if sufficient pressure is exerted these companies (and similar smaller ones operating in other member-states) have the potential to reduce costs because all their plants are not carrying the full cost burdens of new-build, new-entrant plants.

    In the Irish context only the ESB has the appropriate portfolio of generating plants (inclusing price-setting plants) and every effort is being made by policy-makers and the energy regulator to reduce its generation market share. Long-term (anti-competitive) PPAs were used initially to attract and retain new generating capacity and guaranteed capacity payments (based on the full costs of a new entrant peaking plant) are now being used in the all-island single electricity market (SEM). The market simply doesn’t have the scale to support a number of generating companies with similar portfolios to the ESB. It should not come as a surprise that Irish consumers are paying (and will continue to pay) a considerable premium to create the optical illusion of competition.

    The policy-driven and regulatorily-approved inefficient financing of network investment is imposing another significant premium on Irish consumers. Privatisation of the networks is the only way to remove this premium.

    Given the extent of interconnection, an integrated gas market on the islands of Ireland and Britain could be established immediately; electricity market integration will have to wait until the completion of the much-delayed East-West interconnector. Government policy remains focused on maintaining the full corporate integration of the ESB and BGE (even if it has been forced to transfer electricity transmission assets to Eirgrid). It appears that the costly SEM arrangements will have to be maintained in place, but it would make sense to work towards the integration of electricity generation and supply activities of the ESB and BGE in the context of an integrated market on the two islands and to privatise the integrated business.

  20. @Paul
    I wrote that the numbers are there. ESB should sell parts of its portfolio to its state-owned competitors, and then the three should be floated.

  21. @Richard,

    Thank you. I realise you put names to the numbers in response to Michael’s reference to Colm’s reference to the IEA Review. And I have no objection to your suggestion that the ESB’s portfolio should be allocated among the other semi-states. Building the electricity interconnector when it was first proposed, integrating the markets on both islands, businding up the semi-states (divested of their networks) to compete in these markets and then privatising them would have been the best solution. But we are where we are and I’m seeking to tease out options that might reduce the excessive “competition-promotion” premium being imposed on Irish consumers until the electricity interconnector will be built.

    With regard to your suggestion, it should be remembered that the ESB’s share of generation capacity is being reduced to 40% on the island and that Endesa has recently acquired some of its plants. The ESB will fight tooth and nail to hold on to its price-setting plants. We are rapadly getting back to the point where the physical scale of the Irish market when confronted with the scale of efficient generating technologies rasies a serious doubt about the ability to sustain efficiency-generating and consumer-benefiting competition. However, I would welcome further ideas and suggestions.

    @Donal,

    I agree. No point in re-visiting our previous useful exchange, but in response to your question I would make the following points.

    With regard to network valuations and revenues the CER is impaled on a hook crafted by the 1997-2002 government, but, at the time it seemed to welcome the fact that it would be impaled. As I have pointed out on many occasions previously, when it was confronted with a huge demand for network investment, a Government refusal to part-finance this directly from the Exchequer and an unwillingness by the ESB and BGE to allocate an appropriate share of thier borrowing capacity the CER was compelled to set network charges and revenues that would compel network users, and, ultimately, final consumers, to pay up-front to finance a signifciant share of this investment. The Exchequer currently (and for the foreseeable future) has no ability to part-finance network investment. The CER cannot retreat from its network revenue determinations (or the basis for these determinations). It is wriggling on its hook and can’t get off.

    A carefully structured privatisation is the only way to get it off its hook. Under specific licence conditions the obligation to invest would be imposed on the buyers and the bidding would reveal a rational, market-based valuation of the network assets that the CER could then use in its revenue determinations.

    And this benefit is quite separate from those the privatisation proceeds would generate.

  22. A fairly decent discussion on energy, but relatively quiet on public transport. Is Ireland really big enough to regulate significant transport entities such as first group and national express? Probably not, given experience in other sectors (telecoms, energy, banks)

    @Richard Tol
    “A comparison of Irish and British trains; or of British trains then and now may open your eyes. You may also want to compare the cost structure of ESB to its peers abroad. Or if you think that foreign companies are inherently different, perhaps you could investigate Bus Eireann and Dublin Bus versus private bus companies. Better service for less money is what you’d find.”

    Really? I’m not aware of any decent comparison previously performed. Perhaps you can provide one.

    In my own experience, they are reasonably similar in standard, except that the Irish Network is tiny compared to the British one. All of which is good bit below continental European standards.

  23. @LL,

    There is no “one size fits all” solution when addressing the remaining semi-states that are network businesses. Solutions must be tailor-made to address specific economic, physical and technical features. The solutions are more clear-cut for the energy networks. Network economies mean that gas is generally supplied to final consumers using low pressure distribution pipes. In specific circumstances, it may be economic to use compressed (CNG) or liquefied (LNG) to supplement or extend supply, but pipelines usually win. Electricity is distributed using wires – there really is no other way. And because there is no direct substitute for electricity, consumers will often make a capital contribution to defray part of the costs of connecting them. There is less incentive for prospective gas consumers to do so, as there are fairly close substitutes available.

    And, over time, the full costs of consuming these fuels and competing fuels are being internalised in final prices. Putting a value on carbon abated (via the EU’s ETS) and incorporating this is in prices of fuels is a good example.

    Public transport (bus and rail) pose challenges in all these respects. There will always be competing modes of transport. Bus and rail must compete with the costs and convenience of these modes. Governments are reluctant to impose the full costs of using these substitute modes – meaning bus and rail will always look for public subsidy. Governments will also seek to ensure that services are provided in remote or sparsely populated areas and public transport operators will, or will be encouraged to, use profitable routes to subsidise unprofitable ones. In this situation the introduction of competition frequently encourages “cherry-picking” where new entrants will compete on the profitable routes, the profits of the incumbent will be squeezed and pressure will mount to drop unprofitable routes.

    This does not mean that the potential to introdcue effciency-generating competition does not exist. Numerous options may be considered. For example, competition should be facilitated in densely-populated regions where most routes are profitable without subsidy and time-limited franchises should be opened to competitive tendering in more sparsely populated regions where some routes may be unprofitable and public subsidies might be required.

    For the national rail and bus network some lessons might be learned from BGE. As semi-states go, BGE is probably the most operationally efficient – and could hold its own with – and probably beat – its international comparators. John Fitzgerald of the ESRI has frequently alluded to this. (My problem with BGE relates to wrong-headed, big-ticket networks investments and the gloriously inefficient financing of all network investment.) Indeed all other existing semi-states could usefully examine BGE’s operational model.

    In relations to the fixed telecoms network, it may prove necessary to take this back into public ownership – and this strengthens the case for privatising some other semi-states to generate the required funding.

    Different problems; different solutions. All are challenging, but they must be tackled. Infrastructure and utilities provide the backbone of the economy. We must believe that economic flesh and muscle will grow again.

  24. @LL,

    Finally, in response to your question about Irish regulatory capability, hire some people with international experience of regulation and the design of competitive markets. There is no shortage and they would recover their salaries 10 times over.

  25. Paul,

    My own background is in public transport. As you point out, energy markets are very different to those of public transport due to the inter-connectivity possible with energy markets. I would suggest that when an energy crisis comes, and this will happen, many will be saying we are not in control of our market. Given your involvement with CER, amongst other energy bodies, I would be interested to know how energy security could be guaranteed.

    Ireland’s long history of poor planning means public transport poses a very unique challenge. I’m not sure how privatized public transport can meet these needs, it has not previously worked in urban landscapes similar to Ireland (mid-sized cities in the UK).

    Essentially, it all comes down to is poor governance. Whether private or public, it has been proven that public service is incapable of managing or regulating bodies charged with providing services.

    Regarding regulation,why has nobody hired “some people with international experience of regulation and the design of competitive markets.” It seems obvious to me.

    LL

  26. @LL,

    Your’e opening a can of works, but deserve a response.

    1. Security of energy supply is as much an EU matter as an individual member-state concern – similar to the ECB providing almost limitless liquidity to Irish banks and, indirectly, funding a portion of Exchequer borrowing. The electricity interconnector to Britain and LNG import (both of which should have been in place long before now) are positive steps. We can do more with renewables (and energy efficiency), but not as much as the Greens believe, and nuclear will have to come back on the agenda.
    2. You’re absolutely correct to focus on governance. This is the single most important failing – most of the economic and financial disasters which have been visited upon us can be traced back to this. But, just because it hasn’t been done or has been done badly, doesn’t mean it can’t be done. However, we are now into the area of democratic governance and the empowerment of citizens via collective action and this takes us right off this blog.
    3. It must be conceded that some international experience has been recruited, but, assuming they have genuine capability, the legislative and policy framework has succeeded in fettering them. Andso we are back to the previous point.

    I continue to live in hope, but despair is never far away.

  27. What about the subsidy for internal aviation – isn’t there a call for a cut in that too? Would seem an obvious one to eliminate.

  28. One company announced this week that it was creating 300 new high tech ‘green’ capital jobs. It is a profitable company and maintains a highly skilled workforce. As far as innovation goes, this company is second to none. It began as a turf cutting organisation and now plans to expand into green technology operations. It will be investing €7 million in developing mechanical and biological treatment systems for biodegradable waste such as wood and plant cuttings.

    It made operating profits last year of €23.8 million and paid €12.9 million to its shareholders. A sustainable, healthy growth by any comparison (given size and industry).Yes, that organisation is the semi-public sector dinasour: Bord Na Mona.

    Transfering semi public sector enterprises into 100% private ownership does not neccessarily lead to more productive, efficient or competitive organisations. The unconditional benefits to private ownership are more often than not based upon theoretical-ideological arguments not empirical fact. The creation of public enterprise in Ireland (which provided thousands of jobs) and across the EU, provides just as much evidence of innovation than stagnation (think about state owned ‘Statoil’ in Sweden).

    One of the rationales behind the creation of public sector enterprises in the 1950’s – 1960’s, in Ireland, was to create demand for local human capital. The state offered skilled employment to an existing workforce that could otherwise only be got through emigration. The public sector enterprises of CIE, Bord na Mona, Telecom Eireann, ESB, IDA amongst other public sector agencies gave employment to a whole new generation of Irish workers. It helped build a local culture of work, industrial development, applied skills and management that would have never occurred in the private market. It created the initial wave of networks for Irish business that exist today.

    This important role of public sector enterprise has been neglected by economic commentators during the past 15 years. The fact that ESB and Bord Gáis over priced consumers during the ‘boom’ years was a regulatory-market fault. They like any organisation will rationally decide to maximise their profits given certain incentives. They, like every other private sector organisation and professional service over priced, and lets be honest, ripped off consumers. If anything, the introduction of the proft motive to these organisations was the causal factor (and incentive) for their overpricing. This coupled with a lack of competition would be an objective explanation.

    The same arguments being propogated by esteemed economists about the benefits of privatisatising ESB, Bord na Mona etc are identical to the arguments that led to the privatisation of Telecom Eireann in 1999. A decision that has led to one of the most inefficient telecommunications network in the OECD. Private does not automatically equate to productive, efficient or competitive. It can lead to the flotation and reflotation of a very healthy organisation on the stock market, where speculators run rampant.

    All organisations, whether public, semi public or private can lead to waste and inefficiencies. This is usually the result of a whole variety of causal factors. Identifying the ‘public’ nature of an inefficient organisation is just as simplistic as arguments against the ‘market’. Given the current unemployment crisis, the state should consider creating more, not less public sector enterprise.

  29. @James
    Indeed. The public service obligation for domestic aviation should go, and so do the subventions for regional airports (according to both An Bord Snip Nua and me).

  30. @Aidan R,

    You make a number of valid points, but you come close to damning any of us who propose some form of privatisation for some of the existing semi-states as being simplistic and, perhaps, blindly ideologically driven. Others can respond as they see fit, but my focus is on the circumstances in each sector where these semi-states operate and I seek to examine the economic and industrial organisation and the extent to which sustainable, efficiency-generating and consumer-benefiting competition may be introduced.

    Your acknowledgement of the electricity and gas “rip-off” is refreshing, but it was not occasioned by a “regulatory-market fault”. This results from the policy of successive governments not to part-finance a huge expansion of network investment and, in some vague way, to “promote competition”. The energy regulator has simply implemented this policy, much to the delight of the ESB and BGE, and households and businesses have suffered.

    Privatisation of the energy networks makes sense because it will reduce network tariffs, and, thereby, final prices, and open access to investment finance that the Government either would struggle to provide or should not be called upon to provide. What to do with the remaining electricity generation and electricity and gas supply businesses is more problematic. Genuine competition in supply will only emerge in the context of integrated gas and electricity markets on the islands of Ireland and Britain – with the potential to integrate these markets further with the North West Europe (NWE) gas market and Ireland-Britain-France regional electricity market as progress is made to create the single EU market in electricity and gas. Compelling the ESB to divest generating plants so that its share of the generation market on the island does not exceed 40% was particularly idiotic. The ESB should have been built up to participate effectively in the Irish and the emerging EU and international markets. It has a world-class reputation that should have been leveraged. Instead it is being cut off at the knees in the Irish market to pomote this optical illusion of competition. I would be largely indifferent as to whether it was in the public or private sector. The only factor that would push me towards the private option is the constraint on the State’s ability to provide investment finance.

    I agree with you that more, rather than less, public sector involvement may be required in some areas, for example, renewables. But it should be more as a facilitator given the constraints on public sector investment. However, privatisation of some semi-states will generate proceeds to finance participation in other sectors where the public sector may have to take the lead. I have previously made the case for privatisation proceeds to be used to bring the fixed telecoms network back into public ownership so as to begin to undo the damage casued by the bodged privatisation of Eircom.

    Fine Gael has advanced an interesting proposal to take the water and waste services out of the local authorities and to create a single public sector body. This has the potential to generate significant efficiencies, but it will require service charges and the development of an appropriate regulatory revenue model. Again, the duration and extent of public sector participation should be clearly assessed.

    Rail and bus transport present the biggest challenges, but it should not be beyond the wit of man to develop more sensible arrangements than those we have now.

    I think my approach might be summed up as “selling some existing public sector assets to finance investment in new, and badly-required, assets”. However, any changes will need to be accompnaied by signifciant reforms in regulation and competition policy that will allow more democratic scrutiny and consumer representation in the competition and regulatory decision-making process.

  31. @ Aidan R
    A few points re. State bodies
    1. How much of Bord na Mona’s income comes from (Government-imposed?) sales of milled peat for electrcity generation? This source of CO2 emissions then has to be counterbalanced by purchasing emissions credits abroad!
    2. IDA cannot be put into the same category as those state companies selling goods and services eg. Energy, transport -in short, trading entities.
    3. Most of the trading state companies were created before the adoption of free-trade policies by Irish Governments from the late 1950s on to the present.. Two exceptions spring to mind ie. NET and Eircom.
    4.Some were created in response to a kind of ” technological imperative” eg. ESB was created to build Ardnacrusha which had huge overcapacity for the demand at the time and took over existing electricity businesses; Bord na Mona for industrial scale turf production arising from energy security issues during WWII. Others were created to fill gaps arising from failing private companies eg. CIE for railways, BGE for gas. But note that this model was not followed for mineral resource production, despite the creation of a state-mining company Mianrai Teo.
    5. IMO, the state owned and operated trading entity suffers from the same inertias as do private monopolies eg. there was a “do-minimum” approach to using the natural resource of wind, until Airtricity started to sell electricity. There was no grant or subsidy. This was driven by the vision and know-how of a few, taking the opportunity created by external EU policies on energy and climate change,allied to the gradual maturing of wind turbine technologies. Similarly, the Eircom ESOS behaviour, suggests that trade unions favour getting more money for their existing (and retired) members as opposed to devoting resources to providing improved levels of service to customers eg.successive generations of broadband,
    6. In short, our experience of state bodies set up in traded sectors suggests that, after a first generation burst of innovation and delivery, Galbraith’s “culture of the contented” dominates, supported by the monopoly position that the staff then protect, ruthlessly. Just as Irish policy-makers saw during the 1950s (and 1980s?), the resulting stagnation can only be overcome by opening up to outside pressures.
    7. Just as we benefited from the freeing of markets on joining the EU(IDA promoted free access to European markets as part of the case for FDI), We need to learn how to benefit from free markets by clever regulation and law-making as opposed to direct intervention. This is what Colin Scott, Paul Hunt and others call for.

  32. @Donal
    Well said.

    I would add that government ownership of corporations increases the risks of (1) cronyism and (2) using companies for public policy.

  33. @Richard Tol

    > government ownership of corporations

    > increases the risks of (1) cronyism and

    > (2) using companies for public policy

    Looking at AngloIrish, one could also conclude that (1) cronyism and (2) private corporations hijacking public policy — results in public ownership 😉 😉 😉

  34. Correction to my comment about BGE.
    BGE was set up in 1976 as the state gas development agency, following confirmation of commercial quantities of natural gas disocvered by Marathon in what is now known as the Kinsale Head field. Initially it focused on building the gas transmission network.
    In 1987, BGE purchased the assets of the Dublin Gas Company then in receivership. It thus became the monopoly supplier in the largest single gas market in Ireland.

  35. Regarding selling Born na Mona and Coillte, these two companies own a huge amount of the property of the State, BnM own 7% and Coillte owns more.

    I’d end most internal flight subsidies, especially any where there is another subsidised public transport option. There’s very little point paying IÉ, BÉ and FR to bring people to Farranfore from Dublin and Back.

    Regarding Electricity supply, CER allow 3c per kWh for transmission/distribution costs, before generation costs. Off peak electricity costs 4c per kWhr in total in France…..

  36. The report recommended that government spending on energy efficiency programmes should be serious curtailed, finding that “in total, these [energy efficiency] schemes will cost €100m of capital expenditure in 2009, up from €44m in 2008. In light of current economic circumstances, this large increase should be substantially unwound to realise Exchequer savings of at least €40m.”
    The efficiency schemes identified by the group, for the most part, provide grants to homeowners to improve the energy efficiency of their dwelling. These grants have in fact led to the creation of a whole new industry and thousands of jobs, leveraged hundreds of millions of private sector investment, not to mention save energy and emissions. The cost-benefit evaluation of the Home Energy Savings scheme, for example, shows an enormous benefit to society, and, in most scenarios, cost neutrality or better for the exchequer.

    The report explains the logic somewhat when it proposes that “energy efficiency schemes should only be funded in the future if the cost of achieving the reduction in carbon output secured by them is equal to or less than the market price for carbon credits”. Presumably the logic is that the exchequer will have to buy credits if emissions are not reduced, and that this simplistic cost-benefit payoff is all that matters at this time of crisis.

    This is an almost incredible argument. One wonders if this same logic should apply to all capital spending projects? Not too many roads would get built under such restrictive criteria. Surely investing in energy efficiency should be assessed like all other capital spending and not singled out?

    A further insight into the authors’ logic is perhaps unintentionally provided further on, when they state that “furthermore, the introduction of a carbon tax, in due course, should obviate in economic terms the need for any such schemes”. Ah – so markets are perfect and once the correct price signal is provided any truly cost-efficient and sensible investments with reasonable pay-offs will be made.

    The only problem with this logic is that it is nonsense. Markets consistently fail when it comes to energy efficiency and numerous well-understood and intractable market failures can be identified in the area of residential energy efficiency. There are split incentives, ill understood benefits, information deficits, lack of trust, uncertainty of payoffs, high up-front costs etc.

    The swift withdrawal of funding from programmes proposed would pull the rug out from under an emerging industry which will likely be worth billions in years to come. While the suggestion “to transfer responsibility for appropriate schemes…to the energy companies” is probably a good idea in the medium term, this transition must be managed in a way that doesn’t strangle a vital and rapidly expanding sector of the construction industry.

  37. @ Richard

    I can’t sorry. It hasn’t been published. If you really want to see it I can ask SEI if it can be made available.

    The findings will come as no surprise as CBAs on efficiency retrofits generally come to similar conclusions.

    eg:http://erg.ucd.ie/publications.html (Homes for the 21st Century)

    By the way, is there some logic that I have missed for considering energy efficiency projects differently from other capital spending projects? I mean this as a genuine question.

    JC

  38. @ Richard

    I don’t believe it is confidential, it just hasn’t been published. I will email you a copy further to clarification with SEI that this is ok.

    While we are on the subject, I note from a previous post “If Irish home owners do not sufficiently invest in their house, that is their business”.

    Do you not believe that the market can fail?

    And:

    “Third, will it reduce carbon dioxide emissions? Yes, if the subsidies are taken up. Direct emissions of carbon dioxide by households are some 7 million tonnes of carbon dioxide.

    You forgot about about another 5Mt of emissions comes from energy use in homes.

    “Let us assume that 5 million tonnes of that are for home heating (too high)”

    No too low.

    “and that the insulation programming reduces the energy bill by half (too high)”

    depends on the intervention, but about right in many cases

    “for one percent (too high) of houses”.

    about 4%, but many will only choose one or two interventions which would reduce the energy savings

    “Then 25,000 tCO2 is saved this year, but this is an investment so let us multiply by 10. Saving 250,000 tCO2 for €100 mln is 400 €/tCO2. Last Friday, emission permits traded for 8.65 €/tCO2. The 400 €/tCO2 is conservative on the one hand, but it omits the benefits of warmer homes…”

    a positive with ancillary benefits on health and morbidity

    “…and lower energy bills”.

    If we accept your estimates, ie: half average bills (=€1000 on 2008 prices) on 1% of homes (175,000), that’s €17.5 million saved per annum, -20% comfort take up (this is where the health etc benefits come from) is €14 million p/a energy savings. That’s starting to look like money well spent all of a sudden!

    “If the two cancel…”

    That’s two positives. How can they cancel?!!

    “…..the government overpays for CO2 emission reduction by a factor 50! (This factor is comparable to getting your hair cut in Florida rather than in Dublin.)

    Clearly not.

    Am I missing something?

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