Selling State Assets

The following is not a question but a statement:

“Liquidity. If a government faces funding risk, selling valuable-but-illiquid assets may reduce the risk of a funding crisis”

So,

How will selling assets reduce the risk of a funding crisis? Is this not a simplistic ‘raise revenue’ to fill the expenditure gap logic? If so, would it not be more rational to alter our low tax regime to raise revenue?

What EM said. Some activities should be split off, others retained. Whether privatisation is appropriate or not depends on the details.

Discussions need to include transparency about pension obligations and current price-setting mechanisms.

Crucial infrastructure or services should not be privatised IMO but neither should the Irish public be held ransom to overly-wellpaid workers (ESB comes to mind) or management.

Unions can be excellent for avoiding or redressing exploitation. In some cases unions are now being used to protect the privileged.

There has been a need for a wider debate on the role of public enterprise in the Irish economy for some time. Unfortunately the current crisis has narrowed the focus of any debate to the question of privatisation. In this regard the key question is whether the transfer of ownership to the private sector will improve the performance of the enterprise in question as well as improve wider economic efficiency. The theoretical and empirical literature does not provide unequivocal results. There is no clear case for privatisation in terms of performance. It depends on other factors such as the extent of market power held by the privatised company, effectiveness of regulation etc. The Irish experience with privatisation has not been a good one. Besides Eircom, the performance of privatised companies has not improved dramatically after the change in ownership. The current economic crisis highlights the folly of simplistic arguments in favour of private ownership as well as the challenges of regulation. Privatisation accompanied by ineffective regulation is not a good idea.

So should public enterprises be sold to raise exchequer revenues? Like Edgar Morgenroth, Paul Sweeney, Donal Palcic and others to contribute on this topic, I am against a fire-sale of assets. Paul Sweeney makes the point that there is not an immediate funding crisis that requires any such fire-sale. Moreover, the full value of assets is unlikely to be realised.

In the absence of convincing arguments for privatisation we come back to the need for a wider debate on the role of public enterprise in the near future. The case for a state holding company which Paul Sweeney refers to in his article has never received the attention it deserves. It addresses key governance problems that are relevant to all state owned enterprises. Moreover, it does not rule out a degree of privatisation. Selling stakes in public enterprise can yield advantages in terms of improved governance as stock markets monitor the the commercial performance of partially privatised companies. This should have happened in the case of Eircom. A wider debate might also address Edgar’s question about whether public enterprise should be involved in certain types of business. Personally, I don’t have a problem with state owned enterprise as long as it is efficient. But this is a question that can be addressed in a wider debate.

The recent Forfas paper on State-Owned Enterprises (SOEs) provides an excellent summary of the main issues in relation to the Irish SOE sector going forward and serves as a useful starting point for wider debate in relation to SOEs.
(http://www.forfas.ie/media/Forfas20100730_Role_of_SOEs.pdf

The mian policy implications highlighted by Forfas in relation to the SOE sector are:

1) The need for a national policy on the role of SOEs
2) The need for an evaluation of the mission and goals of SOEs
3) The potential to implement clearer governance structures
4) The potential to implement stronger corporate governance frameworks
5) The development of clear criteria to guide the potential sale of state-owned assets
6) The need to develop contestability in certain markets
7) The need to develop a clearer policy towards SOE internationalisation

It seems that most people have become totally accepting of the fact that Irish gas and electricity prices (excl. taxes) for most of the last decade have been among the highest in the EU. It seems to have become like the weather – and any public reaction is probably deterred by the deliberately obfuscating reasons and data advanced by those who benefit. (And the current global gas supply glut has allowed Ireland to move down the rankings – in particular relative to other EU member-states locked into higher oil-linked prices for Russian supplies.)

During the last decade, Irish electricity and gas consumers have paid close to €5 billion more than they should have (a) to compensate for the lack of any direct exchequer financing of a huge backlog of electricity network investment and of a surplus gas interconnector to Britain, (b) to maintain the ESB and BGE as financially integrated businesses with relatively low gearing that allows them to pursue their empire-building ambitions in Ireland and abroad and (c) to create the optical illusion of competition in supply.

Irish electricity and gas consumers are no longer in a position to continue being so generous to these pampered semi-states and the bill is likely to increase to finance Minister Ryan’s green whizzo schemes. This, more than anything else, is probably driving consideration of restructuring and privatisation of these semi-states.

My guess is that the existence of substantial State assets actually improves Ireland’s funding capability, people sort of say well if the worst comes to the worst they can start selling the family silver.

If sold, there would be a one off reduction in debt, but that would soon be eaten bread.

It seems a very bad to be considering selling any assets; isn’t NAMA all about postponing asset sales.

I think the main argument missed is that ‘selling’ any state asset, can easily be operated in the form of ‘selling the service’ but not the infrastructure. By taking that approach you could have competition for operation of water, transport and many other services, but ultimately the state owns the infrastructure/broadcasting equipment/powerstation/lines etc.

Everybody points out what is wrong with the private sector when it comes to providing certain services, they don’t do this when it comes to its contribution toward GDP or employment capacity. There are countries where the transport is privatized and it works well, of course, they regularly get omitted from these arguments.

Instead we have a power company forced to sell at a higher price to allow for competition! Why not let all the power companies bid for operation of the service and deliver the lowest price and if they make a profit in doing so everybody wins, in particular the state who will receive a steady rent roll,.

Something is being missed here. Assets like power and transport networks are indeed good businesses to be in. That is not the issue. The issue is that we need money and don’t have any. This is not a lecture hall cost benefit exercise. There is a real limit to how much we can borrow. At some point we have to release some of the value we have created if we want to fund new projects.

@EWI
The ESB is squeezing the rest of the economy through price 30% above the EU average. If that money creating huge profits for the government to fund education, health care etc, or reduce taxes on individuals then it wouldn’t be so bad.
They appear to be squeezing us for the benefit of themselves (mgt. & employees) as if the ESB was not owned by all of us.

”The job of unions is to protect the pay and conditions of workers, for which no apology is necessary”.
If you support (by paying union fees) a group of highly paid negotiators who achieve the artificial enrichment of a small group in society (i.e workers in ESB paid 80k for example) at the expense of the rest of society, including much poorer people who have no choice but to purchase the services provided by that elite group, then in my opinion you are doing a diservice to society and should be sorry.

Anybody on a salary above twice the median industrial wage should IMO have to justify their salary as an individual, and not hide behind even better paid elite negotiators who can threaten to distrupt the operations of a company owned by and providing vital services to all 4.2 million of us.

@ EWI

“The job of unions is to protect the pay and conditions of workers, for which no apology is necessary.”

Eh, actually, thats only one of its jobs. From the ICTU’s ‘mission’ statement:

“Congress will strive to achieve economic development, social cohesion and justice by upholding the values of solidarity, fairness and equality.”

Perhaps you should get your union handbook out and see what exactly you signed up for, something which isn’t supposed to, in theory, be purely about simply looking after overpayed public sector workers in certain situations (note im not saying all public sector workers are overpaid, indeed, far from it).

I have many points but the key one at present, is very important. There is an enterprise deficit in Ireland. Can we afford to sell working companies to private equity firms? After the collapse of many of our finest, biggest and once most valuable companies, all companies are needed, public and private.

I do not take a public good private bad view. Both are interdependent, but I make the point that at present, the private sector does not look good, all all. The total inefficiencies of the all the whole public service for decades would not add up (if it were possible to do so) to the loss of value of the banks and construction/developer companies etc. and the cost of taxpayer subsidies to subsidise the banks since the Crash of 2008 in Ireland.

Phillip, I do not think that liquidity is an urgent issue, thought I accept that this is an area where opinions differ. Further, this group will not report till year end, I heard Colm McCarty say on the radio. Govt will deliberate on its report for months and probably not make decisions for a while then. The privatisation process through an IPO take a long time and even a trade sale takes time. There is the scale of the debt against the value of these companies. So privatisation will not address perceived liquidity. Finally, despite the ambitions of Michael Noonan of FG in favour of unfettered privatisation and even private monopolies over state monopolies, the next government will not engage in major privatisation.

I have plenty to say about inefficiency in the state sector. Indeed I have spent some time over the years assisting in reducing them in several of the companies ( and in private companies too). These state companies are much more efficient than in the days of political patronage. There is room for improvement and I fully support achieving this. But this should not be undertaken simply to make privatising easier or to generate bigger sell off bargains, but improve the companies. Unions typically complain about change initially, as members often fear it, but then we get on with negotiating it.

On regulation, I have had a strong interest in this area for a long time and support major reform, amalgamation of bodies etc. In Selling Out, Privatisation in Ireland, back in 2004, I was taken aback at the number of state bodies and I listed all of them in an Appendix, simply to make a point: reform.

Edgar, you assert “the terms of reference do not necessarily imply a wide ranging privatisation of state owned companies.” Yet three of the four terms call for privatisation / disposition /disposal. However, I agree that the Review group could interpret the terms more widely.

On monopolies – this does change in time with technology and definition. I would argue that a port has a monopoly within a defined geographical area. Edgar you ask “plywood and fibre board. Does anyone think that the State should be involved in this.” I ask why not? If a forestry company is somewhat integrated and is owned by the state or part owned and is making money etc we can do with the jobs etc. It is important that the companies are well run, can invest when they want to etc. You say it must pass “ the market failure’ test, but many people do not accept this narrow view. It is a mantra of some economists – generally those with a certain political view point (sorry, I know these very economists like to think they are above political economy).

I did not have space or time to cover all points and would agree that there are subsidies to elites/entertainment sectors etc through state bodies. I agree the ESB has made additional profits due the bizarre regulation system which seeks to encourage “competition” through high prices, as an aid/subsidy to competitors. I would also differentiate between promotional bodies and commercial ones.

Like Brian J, I have been intrigued by the state seaweed company, Arramara for years, ever since I was a kid on holidays in Donegal watching some local men collect slat maras on the shore for income! I checked their website for profit figures and they fail to provide such information! Proving again that some state companies are poor at providing information on their operations.

I do think that Eoin Reeves is correct that “unfortunately the current crisis has narrowed the focus of any debate to the question of privatisation.” But so did the terms of reference and deliberately so.

He asks “the key question is whether the transfer of ownership to the private sector will improve the performance of the enterprise in question as well as improve wider economic efficiency”. And answers that “The theoretical and empirical literature does not provide unequivocal results.” This point was made by John Kay, columnist in the FT, myself and several others back in the 1980s.

Michael H criticises me for failing “to present a balanced argument”. Surely in an argument one takes one side? I am taking a counter view to the mainstream as I often do and it would be better for Ireland if there were more dissenters. I was one of the few strongly opposing the privatisation of Eircom, for example, on the night before it was sold off, 7 July 1999, I claimed it would be a strategic error for Ireland’s economy and that it be owned by a group of foreign speculators within a few years. I was surprised at how correct I was. Everyone else promised that it would deliver almost Nirvana as a privatised company, but it failed in so many areas. Its failure was not due to bad management, but to its ownership. It has had four owners since privatised in 1999 – three of them straight asset strippers.

When Eircom was privatised, it had no debt, was investing heavily, had the leading mobile subsidiary and monopoly on fixed lines. If retained in majority state ownership Ireland would be better served today. All citizens and businesses would have had access to fast broadband years ago! The government’s ambition of the so called “Smart economy” might not look so silly.

@ Paul Sweeney

you keep using the banks and developers as proof positive that privately owned companies are inefficient. They are a very seperate example in the Irish economy compared to other sectors. Why not use CRH, Ryanair, Kerry Group, or the likes of the multinationals operating in this country? For every privately owned banks im gonna throw a DDDA at you.

While you are right to worry about private equity being involved, ala Eircome, we could quite easily insist on only selling to dedicated trade buyers who are committed to the business for the long term.

@Pope Epopt
“The notion that privitisation will somehow lower prices is, I realise, part of the core belief-set of neo-classical economists, but the rest of us have experienced otherwise.”
You must not be of an age to remember Telecom Eireann. Five year waiting lists for a phone line. Many phones in the country had a lock on them and a box beside so that neighbours could pay for their calls. In an era of unlocked doors, phones were locked. They were really expensive.

You can argue many things about Eircom, but you cannot really argue that it is either more expensive or more inefficient than Telecom Eireann. That Eircom in not keeping pace with international peers is likely; that this is the result of looting by successive managements is also likely. It does, however, provide a better service than Telecom Eireann used to.

@ Paul Sweeney

As an owner of a small manufacturing business, I agree with your point that there is an enterprise deficit in Ireland today. The main reasons, I suggest, are (a) the absence of capital (equity or debt) to fund businesses, particularly manufacturing/processing, and (b) the prohibitive costs associated with many essential services – utilities, transport, labour (and, here, I’m not talking about the minimum wage but instead the plethora of add-on costs of employment – PRSI, training, working time directives, bureaucracy etc. We employ one person full time simply to fill in the paperwork required for CSO, Fas, Social welfare offices etc (we were on a 3 day week for a 6 week period in February/March and we are still filling in forms about it). Why we cant submit all the info, once only, on our annual tax return is a mystery to me.)

The latter problem requires immediate and radical action such as the complete elimination NOW of all quangos but, with our lame duck Govt, there is little chance that this will happen in the near future.

However, the McCarthy review presents an opportunity to address the first of these issues in a strategic manner. My proposal would be
(a) through a state holding company, the flotation of large stakes in all of the essential state enterprises with their operations conducted/’guaranteed’ by a licence from government with regular reviews/competitive tenders. In this way, transparency in operations and funding might be achieved and these firms would have access to the capital markets (our pension funds for example) for worthwhile investments/expansion and
(b) ending all grants/ subsidies via IDA/Forfas (or whatever its called today)and, through a second state holding company, replacing them with ‘equity’ stakes in local/foreign enterprises who meet qualifying criteria (we can be flexible in how we provide the equity). Crucially, the performance of each equity stake would be the subject of public commentary at least annually and good governance in private business would become the benchmark for future industrial development.

As an aside, in the Eircom fiasco, I would argue that the Govt and its advisers (spivs??) actually were the major winners. If memory serves me right, the flotation price was €3.90. I recall that two friends and I conducted seperate analyses of the company at the time, based on publicly available information about its balance sheet and future prospects. The company’s costs were so far out of line with comparable yardsticks and its pensions liabilities and maintenance capital investments ignored that our valuations ranged from €1.20 to € 1.50 and we passed on the opportunity to make ‘bubble’ profits. That episode was a warning of what later occurred in the celtic tiger era when, once again, the spivs won out .

@hoganmahew
I think you are confusing Telecom Éireann with its predecessor, the Department of Posts & Telegraphs. When the telecoms service was corporatised from the civil service in 1984, the service was indeed in a very sorry state, with long waiting lists and unreliable service.

However, as a commercial SOE, Telecom Éireann invested heavily in the telecoms network, reduced waiting lists, improved the quality of service, reduced prices and vastly improved efficiency. Despite the fact that Telecom Éireann was saddled with the large debts built up by the telecoms service while it was run by the civil service, it was able to finance all of its borrowing requirements internally, mainly through its financing subsidiary Irish Telecommunications Investments and never had to resort to the Exchequer for funds since its establishment in 1984.

A study of the economic performance of European telecoms services by Dassler, Parker and Saal (in 2002) showed that Ireland achived the highest rate of TFP growth between 1978 and 1998. A separate study of the productivity of European telecoms firms by Pentzaropoulos and Giokas (in 2002) found Telecom Éireann to be fully efficient relative to its peers in 1999.

The main driver of the reduction in prices of telecoms services since the 1990s has been competition, not privatisation. Under private ownership, Eircom introduced successive hikes in line rental charges such that Ireland currently has the highest line rental charge in Europe. Hardly a shining example of privatisation leading to less expensive services.

@ Donal Palcic,

And just to be clear in my point, on the issue of inconsistency. Take a look at former minister for finance, Brian Cowen’s approach to electricity generation. At one stage he instructed the ESB to raise prices of power, because new EU guidelines stipulated, that Ireland needed to include competitors in the market. In other words, in order to attract competitors to Ireland from abroad, we had to raise the price of electricity to provide sufficient margins for them to come. But when Ireland’s economy as a whole, tanked in late 2008, Taoiseach Cowen instructed the ESB they needed to lower the price of electricity, in order to re-build competiteness of the economy. If you talk to people who work in the semi-state sector, they are familiar with the inconsistent policy approaches coming from government level. It is the same in the energy market, the property market and everything else. One invisible hand doesn’t know what the other hand is doing. BOH.

Sam,

Any chance you could point me in the direction of the statisitcs table which shows that Irish electricity prices are 30% above the EU average? I assume you are referring to domestic prices or is this just a figure you imagined up?

Its just that when I look at a recent SEAI publication, table 15 at the following link, it appears that Irish energy prices are in fact just 6.9% above the EU average for the most recent period Jul to Dec 09.

http://www.seai.ie/Publications/Statistics_Publications/EPSSU_Publications/Electricity_and_Gas_Prices/Electricity_Gas_Prices_in_Ireland.pdf

6.9%….not bad considering our geographical location, lack of interconnection with our european partners, heavy (almost complete dependence) on imported fossil fuels and legacy of under investment in the network infrastructure.

Mr.O Hanlon, I would be really interested to see the correspondence you note from Mr.Cowen to ESB instructing them to higher/lower their prices at particular stages. Could you post a link or would I be able to find it on wikileaks?

Many Thanks

@Paul Sweeney,

“..the next government will not engage in major privatisation.”

There is an ‘ex cathedra’ quality to this pronouncement that is quite interesting. Perhaps you are privy to discussions/negotiations that us lesser mortals will only learn about when we have to adjust to the malign impacts of any binding decisions made.

One version of the DOF’s announcement on the State Asset Review indicates that the Group will report before the end of the year; another indicates that an interim report will appear then. My sense is that the Group will present a comprehensive report by the end of the year that will present options and make recommendations. But it wouldn’t surprise me if the Group were retained to examine some specific options at a later stage.

I have seen nothing to alter my first impression that the Government is simply buying time. Establishing this Review Group sends a useful signal to the markets – even if the Government has no intention of following through. It is also good politics as it has the potential to drive a wedge between FG and Labour. Even if the Government is successful in sticking to its preferred 5-year stint in office, by the time any decisisons are made in this area a general election will be looming. And that, for all intents and purposes, will be that.

But, with FG being ultra-cautious in its NewERA document and Labour apparently vociferously opposed, it is probably reasonable to speculate about how this circle will be squared. Any number of opinions may be expressed, but this, ultimately, will be a political decision.

In the meantime, for anyone super-energised, the DoF has invited submissions:
http://www.finance.gov.ie/documents/publications/other/2010/revbodyadd.pdf

Thanks to Anglo, we will end up owning hotels, department stores, condos in New York, pharmacy chains, insurance companies, cars, paintings, houses etc etc etc….

They are probably just doing a housekeeping exercise to see if they can make room for our newly acquired assets.

Ed says:

EirGrid tell ESB what to build on the transmission system while ESB go off and do it.

Not quite as simple as that. ESB Networks have to outsource the construction of networks to private companies often. So a large part of the work is already being done (in the short term) by private companies, but managed in the longer term on behalf of the state, by ESB networks. There is a danger in economists trying to work out arguments for semi-state companies. The people who work in other utilities, such as power generation and the refuse industry should also be consulted. I mean, people who actually had careers in these areas, and were not merely business school graduates who are looking to become the next county manager. As someone told me not so long ago, Everyone tries to get into waste these days. When I was in waste, in Dublin City Council, no one wanted to touch it. You listen to Eddie O’Connor speak about Bord Na Mona for ten minutes, as I have done, and you can learn a great amount. You talk to folk involved in the management of water infrastructure, and you see how difficult their position was. The levies attached to grants of planning permission were only introduced recently, and many of those levies were never paid because of the property crash. You talk to people who work in Eircom still, who were around in the days before privatisation. There aren’t many left, and those that are left, have to operate under very different conditions. We should find people, who have recently left Eircom and enquire from them about their experience. The feedback I keep on getting, is that telecommunications infrastructure in Ireland is under-priced currently. Anyone who cared to buy it, could pick it up for much less than it is worth, and make a very handsome income.

Eoin says, is the fall in prices directly related to the increased competition in the electricity and gas markets in Ireland in 2009, and indeed the first chance for consumers to purchase these services off a private sector operator in Airtricity? I sincerely hope that Airtricity will not turn into another ‘smart’ telecom. I had a pal who invested some of his net worth in ‘smart’ telecom, and what was that sold for? A euro, or something. BOH.

For all those commentators that are saying that electricity prices are being kept artificially high to ‘support competition,’ how is that possible?

The breakdown of electricity costs is about:

54% Generation (60% for business)
34% Transmission and Distribution
12% Retail. (6% for business)

http://www.cer.ie/GetAttachment.aspx?id=3837429b-96cd-4ce5-8ec5-51324e0a14d4

Generation is done through the SEM, which, i think it’s fair to say, is an open and transparent market where competition drives price.

Transmission and distribution are monopolies regulated on a cost plus allowed margin basis. I doubt the government are ordering increases in prices there to encourage competition there!

That leaves us with the retail segment. ESB Customer Supply is currently regulated on a cost plus allowed margin of 1.3%. See this letter from Bord Gais to the regulator complaining that the margin is too low to allow for competition:

http://www.cer.ie/GetAttachment.aspx?id=a97c644c-2cf0-4403-893e-91d776f06b47

The artificially high margin given to ‘encourage competition’ is 1.3% of 12% of the cost of electricity!

@ tull mcadoo,

The big question is why we need 88 distinct planning bodies for a small island. By that I mean, bodies tasked with doing development plans, zoning maps, area development plans and so on. One needs to ask the question, is there amalgamation which can be done to the plethora of planning departments? I don’t mean, a single centralised system. But each local authority likes to keep its own planning department running, for the sake of pride. In the same way, we hang onto a national airline or such, again, for the sake of pride. Be it at national level, or local level, pride seems to enter into the equation too much. Housing departments at local authority level likewise, would have been much better handed over to responsible private companies – even multi-nationals, a long while ago. But the local authorities do have several departments in their headquarters, many of which could be run differently. Water, waste, drainage and so forth. When you make things too local, it is hard to know if resources are being provided where they should be. Maybe if we go back into the history of things to Sean Lemass’s time, and earlier, we might find that much influence was removed from the local level, and channeled into the new semi-states. At one stage in history, that was a very modern and progressive thing to do I imagine. Not so long ago, I had a conversation with the man who wrote the first computer program in Ireland. He moved from the sugar company to AerLingus along with other scientists of their day. His own admission was, they never got the chance to develop technology or innovation while at AerLingus, except for the early days. That is going back decades. So clearly, even back then, there were people, who obviously had vision and capability, who felt very limited by the system. BOH.

@ed, brian
Ownership is important, as companies listen to their owners. Would ESB dabble in transport and give away electricity if it were privately owned?

@ Richard Tol,

Lets state a couple of things that are obvious, for the sake of doing so. BOI or AIB, were privately owned. But we never thought of BOI or AIB as privately owned institutions. Everyone knows someone who is an AIB or BOI shareholder. Our banks were kind of like state institutions for so many decades. Indeed, that may have been the problem. In the case of banking system, did private ownership lead to a great amount of innovation and greater service? The idea of a privately owned monopoly is well tested in our banking systems. We all know what it is, to pick up the pieces. We know if something goes wrong with any of these critical systems, the state is always run in to save the day. One could argue, many critical services in Ireland are privately owned 90% of the time, but become publically owned for the 10% of time, when the going gets the tough. With a privately owned monopoly, the shareholders may enjoy respectable dividends much of the time, which keeps them happy. I have spoken to many shareholders of Irish banks, and many of them are bitter today – when they think, they might have extracted their capital and put it to some other use. But many were quietly contented to leave their money in the banks. The Irish banks became wise to the fact, their shareholders were quite a passive lot, and gradually took advantage of that. I doubt the small shareholders will get caught out as easily the next time. I felt sorry for many of them, because they weren’t overly creative with their money. But professor Lucey (himself a bank shareholder) and many others, will point out that private capital is private capital. It is always exposed to a level of risk. BOH.

hogan,

I take your point. I was thinking that there might be a reason to retain ownership of the land and allow a private operator to run it on a long term basis. That way, if the operator proved untrustworthy or incompetant his license could be pulled.

It is funny how Mr Sweeney and his ilk put forward the ESB as the epitome of an efficient state owned enterprise providing good service, satisfactory employment conditions and a dividend to the state. However the awkward squad here view it as a price gouging, rent seeking, rampant bureaucracy.

Hogan

When did semi states become SOEs. I thought the SOE was a shadowy organisation whose mission was to overthrow the despotic NAZI regime. Now I find it is a cuddly, nice, social progressive, altruistic, developmental organ of the state.

How many time did the ESB charge you for putting in the connection?

@ Tull, Hogan,

Btw, to clarify, those in the food industry tell me that sugar is a major ingredient in all kinds of other processes, to do with critical food supplies. Sorry for not clarifying that above. BOH.

@tull
We could do with some SOE action on the bankers and the Dail…

Only the once… unlike the HSE who charge me every time I need to renew a prescription. 25 euro for a printout of a piece of paper…

@tull:
“Great, now explain to me why the state has to own an unprofitable national stud. ”

I thought Charlie Haughey was dead.

bjg

@ Paul Sweeney

Paul,

It’s good that you have made a direct contribution to help the rest of us from jumping to conclusions!

As regards the review, appointments to public taskforces usually suggest the desired conclusions, the Innovation Taskforce being a classic example — most of the 28 were public insiders and multinational mangers who had no experience of entrepreneurship.

The impression I have is that unless we focus first on the rotten head of the fish, there will be no cure for the ‘Irish disease.’

Irrespective of what Colm McCarthy & co may say, what credibility would any amateur political leader have in arguing a case given the dismal record of failure of the political institutions and the enduring power of vested interests?

Apart from reform at the Central Bank, it’s business as usual elsewhere despite the terrible human toll of Irish conventional ‘wisdom.’

Even in big spending plans such as the capital spending announcement last week, the spin continued with gross job estimates provided to continue fooling the people and much of the media.

So the current issue is a sideshow to the amazing fact that despite the avoidable destruction of the lives of tens of thousands of fellow citizens, there is no constituency for significant reform.

I have for long regarded the term ‘trade union’ as much wider than the original focus of the Trade Disputes Act of 1906 e.g including the IFA which forced the Government in 2001 to give farmers 23% of the €18.5bn national roadbuilding budget.

I even argued that Adam Smith, who warned against business combinations and the desire to keep wages low, should be the patron of 21st century traditional trade unions!

http://www.finfacts.ie/irishfinancenews/article_10004429.shtml

What is also amazing is that the traditional Irish trade unions are as conservative as the other powerful combinations defending vested interests.

ICTU is in the same boat as IBEC in avoiding advocacy of progressive reform.

A just and an enterprise society do not have to be incompatible.

Frenchman Dominique Moïsi wrote in yesterday’s FT: “Today this model of excellence is most visible in the ‘northern lights’ of Scandinavia, where power is modest and honest, where women play a major role in society, where a human brand of capitalism is practised, and where respect towards migrants is the rule.”

I worked in a Swedish group for 13 years. It was founded in 1873, just a few years after Nokia.

@ Brian O’ Hanlon

Brian,

Try using paragraphs.

Then you may extend the audience beyond insomniacs!

@bazza,

One of the reasons gas and electricity prices are higher than they need be is precisely becasue of state ownership. The failure of successive governments to contribute one cent to finance a huge increase in network investment (and to direct the semi-states to increase borrowings for this purpose) has compelled the regulator to extract over 70% of this financing from consumers – ergo higher final prices.

@ed,

Cross country comparisons often conceal more than they reveal. But rather than looking at a single point in time comparison, some useful information may be gleaned by looking at final prices excluding taxes over time and how these final prices are split among production/generation, transmission and distribution (T&D) and customer supply. Interestingly, Ireland does not provide this breakdown for Eurostat. It might show how out of line its T&D costs are.

@bork,

At first sight you seem to make a compelling case, but you may need to dig a little deeper. When the curent regulatory regime for electricity was established in 1999 the ESB was prevented from building new generation capacity so as to allow space for new entrants to create competition in generation.

As the years passed, with demand increasing and hardly any new players queueing up, the CER started to panic and was forced to approve some high-priced contracts for new generators – the details, of course, are commercially confidential. In the run-up to the establishment of the Single Electricity Market (SEM) on an all-island basis, the ESB was allowed to invest in some generation (the Synergen JV and a revamped plant at Aghada) but it had to divest some older plants to get its share of the market to 40%.

The SEM market is based on avoided costs and is supported by a ‘capacity pot’ to pay for the provision of generation capacity. The Irish market is simply too small to generate the market liquidity that would generate efficient prices. In addition, huge expense has been incurred – ultmately borne by consumers, to create the conditions for the roll-out of full retail competition.

Adding all these extra costs up and I reckon consumers of electricity and gas have paid up to €5 billion more than they should have over the last decade – irrespective of what is happening in other EU member-states (all of which have their own inefficiencies and quirks).

@Michael H,

Trades unions would like to see full employment with every worker enjoying the pay and conditions of ESB staff. It’s a perfectly legitimate position to adopt. And I can understand why they would oppose attacks on pay and conditions of workers in the semi-states just because everyone else is suffering.

On the other hand private enterprise is in business to make money and to make it whatever way it can. Let’s can all this nonsense about ‘corporate social responsibility’ and ‘ethical behaviour’. Owners of resources and capital – and those who manage resources and capital – are out to maximise their share of the economic pie. Kevin O’Rourke’s recent post presented some analysis that shows that income inequality has grown enormously in the Anglo-Saxon developed economies since the mid to late ’80s.

This is a constant battle on which governments in these countries must adjudicate and they have failed gloriously. Some private businesses will always fail – and sometimes fail gloriously, but those that achieve systemic importance (mainly by lobbying and financing the political decision making process) rely on moral hazard – the taxpayer will clean up the mess if things go pear-shaped. The current crisis stemmed from policy failures – and not a failure of markets and private enterprise. It is the invidious and difficult task of governments – in the face of intense lobbying and the requirement for corporate financial contributions – to ensure that the inevitable failures of businesses do not bring the entire system crashing down.

The extent of the crash in Ireland is directly proportional to the extent of the policy failure. Until this is widely recognised there will be no effective reform in the process of democratic governance to prevent a repetition.

But this is not an argument for curtailing the role of private enterprise; or for preserving or advancing the role of state-owned businsses.

Paul Hunt says:

It is the invidious and difficult task of governments – in the face of intense lobbying and the requirement for corporate financial contributions – to ensure that the inevitable failures of businesses do not bring the entire system crashing down.

Paul, you have written some brilliant paragraphs above, on the subject of private organisations which attain systemic importance – and that is not a failure of the market system, but rather a failure of government to cave in too easily to lobby interests. That is a brilliant analysis of the problem, and I would stand by it. However, the question is now, are we in Ireland intelligent enough to know how to response rationally? What I mean is, we face the enormous danger now in Ireland of a knee jerk reaction, to throw the baby out with the bath water. We face the enormous danger now in Ireland of confusing one thing with another. In the blog entry I linked to above, I presented the case, that local interests and feedback from local level is enormously valuable and important to the functionality of entreprise and the economy. What happened in Ireland is we became too suspicious of feedback from local interest. We did the opposite to Kaizen, we tried to push everything from the top down, and not listen to people who work in various local appointments. That had the ill effect, that it forced people to rally around lobby groups to force progressive changes through the system. Rather than having a deeper and more meaningful structure, as suggested by the Kaizen, kind of approach, where useful feedback is actively pursued by the central management. The people who study Kaizen, say, in the west the worker asks the manager what to do. But in the east, the manager asks the worker what to do. BOH.

Paul Hunt says:

Semi-states have a role when the regulatory and market conditions exist that discourage or prevent the private sector from participating. This was true in the past – as it was for most developed economies. But it is no longer the case in developed economies.

Very true. To firmly establish that point, I think McCarthy & co’s investigation should enable them to refer to examples of state agencies which are no longer with us. One example of a state agency whose job was to intervene directly in markets, was the ‘Land Commission’. As far as I am aware, it was still in operation until the 1980s. It had been founded to deal with the land issue in the aftermath years of the Irish famine. By the time of the 1980s, the Land Commission was not serving its original purpose. Many land owners who were getting old for instance, had to deal with a ‘wolf pack’ in the form of neighbours, who would circle around hoping to divide up land acquired at a discount price from aging landowners. That behaviour was enabled by the existence of a state agency, even through the land boom of the 1970s (I don’t think Morgan Kelly refers to it, in his studies of the same). There are other recent examples of ventures. An Post bank, I think was a composite of public and private institutions, intended to offer alternative banking services to local communities, and competition in the market. One of the biggest arguments against public ownership, is that public institutions can become monsters that are hard to kill off. The investigation by McCarthy & co. might look at some institutions such as the ‘Land Commission’, or the Irish Sugar Company, to understand their contribution over a wider timeframe. It needs to be viewed in the wider context of centuries, rather than just seen in the moment. State agencies fulfill very different roles for communities at different times. Unless we gather that history now, from individuals on the ground, we will not obtain a decent picture of how our economy operates. BOH.

@ PQ,

For the sake of a balanced intellectual argument though, I thought it was worth presenting an alternative way to look at things. BOH.

@ Paul Sweeney,

The favoured favoured in relation to telecommunications infrastructure seems to be one where the state develops the infrastructure and allows the private companies to compete for market share while operating on top of the infrastructure provided.

How well would that translate into other sectors other than telecommunications? Take banking for instance.

We recently saw the ‘An Post Bank’ effort, which was something along the same lines as the telecommunications model I mention above. Of course, the difference being, you can easily accomodate multiple carriers in the same fibre optic cable – and thereby create competition – because you don’t need to occupy physical space as such. However, one cannot accomodate ‘competitors’ all operating out of the same An Post branch office. It could be the case that if one could accomodate multiple competitors on the An Post physical branch network – that same infastructure would become more valuable, as there would be more demand for it. I think economists use the terms ‘rival’ and ‘non-rival’, but I don’t have the vocabulary.

Anyhow, it is something to think about in terms of grids, networks and magnetic spectrums and so on. Clearly if there is to be true competition in those media, there needs to be a clear regulator who does their job properly. We certainly learned important lessons recently in the banking scandals, with regards to our skills in regulation. It is not as straightforward as opening up an agency, and giving them headed notepaper. I thought that NTR’s Jim Barry’s comments in that regard were interesting. That he appointed the commission for energy regulation in Ireland, prior to having established a policy in regards to our energy generation for the island. We got the sequence all backways. A bit like installing a telephone in a house, without connecting it to a wire. BOH.

@ Paul Sweeney

re trade unions being vested interests – they quite clearly are when it comes to public sector pay negotiations/issues, as they represent i would guess around 95%+ of workers in that sector. As such, though public sector pay is an issue for all taxpayers, and for all of society, trade unions cannot credibly claim to be able to be acting evenly on everyone’s behalf.

It is important to understand what state companies are and are not.

ESB networks and eirgrid have nothing to do with energy security. They are distribution businesses. ESB also has power generation but again it has little or nothing to do with energy security, as the energy source is ‘bought in’.

BnM and Coillte have some commercial activities but they are basically rural land holding and stewardship organisations. It is hard to see any benefit from selling the land, either for the seller or the purchaser. You need to look at the other parts of these businesses to understand what you could actually develop and/or sell.

No, the most critical aspect of energy security for us in ireland is making sure we do not run out of energy. All the rest is very interesting and has to do with energy policy for sure but they are not security issues.

The state would still control a privatised power grid and distribution company through regulation. This company would have its profits set by reference to an allowed return on capital, much as it is now, and the State would indirectly set the capital investment requirements. It would make little or no difference to the private company what capital investment the State required, because it would be guaranteed its return on capital.

(This was purposely not done in the case of eircom, or was done in a pretty lax, retrospective way, partly because doing so would have reduced the sale price of eircom, to the detriment of the government and the unions).

@ Antoin O Lachtnain,

Or to put it in another way, for sake of argument. The state of Nevada or a country such as Morocco, may not own any physical PV solar generation plant of its own. But it may be in a position to issue quota’s for generation from the solar resources by competitive tender. Much of that solar generated power might end up in other countries or states outside of Morooco or the state of Nevada. Who knows where the eventual consumer for that power may be. But the point is, without spending a dime on physical infrastructure, the state has created a source of revenue for itself, which can be re-assessed based on value, at intervals so that society is rewarded. BOH.

@ Antoin o lachtnain,

Thanks for the response again Antoin. I know it takes a lot of time and effort to imagine these scenarios and weigh them up. We undoubtedly will not come up with any brilliant answers now. Maybe auctions are most useful for resources that are under-developed, and need brand new investment, as opposed to resources which are compartively well exploited already.

I was turning this over in my brain since, and it made think about agriculture. About the disasters in the old USSR for instance where agricultural land was transformed into a kind of common resource for the benefit of the state. But even today in Europe, we have a quota system that is administered centrally. In other words, it is not so much productive capacity which is valuable, but the authorisation to fill a certain amount of production. That authorisation or license, in turn is traded in various ways between individual producers.

Many say that the agricultural quotas were incorrectly set from day one. In that many landowners had not reached anything like their potential productive capacity when their quota was issued to them. Which leads me to think, that energy resource maps on quite local regional levels could be useful. They would not measure existing output from existing local areas, but would measure the potential output from the same.

In other words, even though we cannot harness very much energy output from the oceans at this minute, the potential output is very, very large. A badly organised system on the other hand, would skew the market in favour of existing onland wind resources, because that is the one most utilised in 2010. I believe to manage a resouce, it is important to give due weight to that resource which is not tapped into currently. For instance, the carbon storage capacity of 20% island cover in forestry versus the 10% we have right now.

That 10% of under-utilised capacity, is an asset to be managed in terms of carbon trading going forward, and should be of value to someone, in terms of its potential. Whether we should expect a single state monopoly to exploit the same potential, or allow multiple private players to have a go, is a question worth debating maybe. But the important thing is the potential is properly measured and developed. BOH.

Brian, I think you have it the wrong way around. This is a market economy. That means that you bring your supply of products and services to the market where supply and demand determines price. (This is an oversimplification.) In our system, generally speaking, you cannot ‘buy’ a quota of demand in advance. In agriculture, you could (and can) do this, oddly enough. For example, it is forbidden to buy milk off a person who does not have ‘quota’, i.e. a share in the milk production oligopoly. The reason why this was done was to stop a price drop from happening even though our continent was overproducing perishable products but we did not want prices to fall. This is not a market in the modern western tradition.

Well, no. The EPA and the local authority set standards, the providers meet them, and then the consumers decide who they want to give the business to.

There was never a quota auction in the Dublin waste market. If there had been, McKechnie would have ruled differently.