Selling State Assets

Paul Sweeney criticises the idea of selling State-owned entities in today’s Irish Times: you can read his article here.   Paul Sweeney’s contribution is incomplete. In particular, he does not fully address some key issues (I raise these points as questions, without having answers)

  • Liquidity.  If a government faces funding risk, selling valuable-but-illiquid assets may reduce the risk of a funding crisis.
  • Ownership and firm performance.  While Paul Sweeney highlights the potential inefficiencies of privatised firms, he does not have much to say about the possible inefficiencies of State-owned firms where the management or workforce may have objectives that are not fully aligned with the common good.
  • Regulation.  Where monopoly power is a severe problem,  regulation is necessary. Can the Irish regulatory system be made more effective to ensure that sectors inhabited by monopoly-type firms deliver efficient outcomes? Does the identity of owners affect the effectiveness of regulation?

Paul Sweeney also highlights the increasing importance of State-owned firms in Asia, Russia and Latin America. It would be good to know the exact lessons to be drawn for countries such as Ireland from this development.

88 thoughts on “Selling State Assets”

  1. @Philip – you beat me to this.

    I agree with Paul that simple revenue generation through a fire sale of assets is a mistake. What we do with our state owned assets should be determined by long-term considerations. However, I disagree with him on a number of points.

    Firstly, the terms of reference do not necessarily imply a wide ranging privatisation of state owned companies. As I pointed out in my previous post, there are likely to be many assets held by these companies that are not necessary for the fulfilment of their statutory functions e.g. property or certain parts of their business.

    Secondly, a number of state owned companies he claims to have monopoly operations clearly don’t, e.g. the ports and airports (more than one) or RTE (TV3, UK stations). Furthermore, only aspects of some of the others are natural monopolies e.g. the transmission grid. A number of state owned companies have strayed into commercial areas that are hardly the role for government (they fail the where is the market failure test). Bord na Mona is now in the business of manufacturing waste water treatment systems and the distribution of heating oil and coal. Whatever about managing the state owned forests, Coilte is also engaged in the production of plywood and fibre board. Does anyone think that the State should be involved in this?

    Thirdly, while it is clear that the privatisation of Eircom has been a disaster, the experience of privatisations of telecoms companies elsewhere has been good – the lesson is that it matters how one privatises. Likewise, privately owned ports and airports have been performing well (in the case of ports for a number of millennia).

    Fourthly, the dividends, while being an income stream to the government, are not necessarily evidence of hugely efficient firms, but instead are generated of the back of customers (taxpayers) via the regulated price (ESB and Bord Gais). Furthermore, Paul omits to mention the substantial subsidies that are required to keep some of the state owned companies going e.g. €65 million for Horseracing Ireland. He also omits the potential liabilities to the tax opayer of shortfalls in the pension funds of the state owned companies.

    Finally, the prices of certain assets e.g. land may be low now compared to the boom years, but I would argue that we won’t see prices of that magnitude for a very long time if ever again. In other words selling off land at current prices does not imply a huge loss to the State, and once the appropriate discounting is incorporated the State may well get a good price.

  2. 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?

  3. @Edgar:
    “A number of state owned companies have strayed into commercial areas that are hardly the role for government (they fail the where is the market failure test).”

    My favourite candidate for the chop is Arramara Teo, a seaweed-collector, 82% of whose shares are owned by the state, but it seems to have sneaked under the radar.

    Even amongst those listed, there are three bodies that seem to exist to provide state support for people’s hobbies (horses, dogs). Off with their heads!

    bjg

  4. 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.

  5. BJG

    I agree that hobbies like horses & dogs are not crucial services. Calling breeding, racing, or gambling an “industry” doesn’t make them part of crucial infrastructure or services.

    Power grid, telecoms infrastructure, water, rail network, roads, sewage, ports, airports–those are some of the real essentials.

  6. 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.

  7. @Eoin Reeves:
    “Personally, I don’t have a problem with state owned enterprise as long as it is efficient.”

    Is efficiency all?

    I wonder about the extent to which the Irish SSB sector was designed, or acted, to keep people living in rural Ireland (and thus, the cynical might say, voting for FF). Even when they did not provide full-time jobs, SSBs may have provided part-time jobs, contracts and subsidies that made rural life viable. I wondered whether, if the maintenance of the rural population was a national aim, such provision of economic support might have provided a sort of justification for the existence of the seaweed, horse and dog bodies as well as the more obvious large employers like CIE, BnM, ESB and so on.

    I have a feeling that the topic was touched on recently, but having been away I missed many postings. If anyone can point me to any information on the rural-subsidising effects of SSBs’ activities, I will happily go off and read it.

    bjg

  8. 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

  9. @BJG – I recently published a paper on the implicit transfer of resources via the fiscal system i.e. through taxes and expenditure. There are also implicit subsidies for the provision of services such as post, electrictiy and communications. The direction of the subsidies is from Dublin to other regions.

    On the ‘hobbies’ I tend to refer to them as the entertainment industry as there is not much of what I would call sport invovled in dog racing (other than for the dogs) and horse racing (other than for the horses and jockeys).

    @Eoin Reeves – you are of course right that the evidence on privatisations is very mixed (I referred to that in an earlier post). As you say, the degree of market power is important but the overall regulatory regime is key. For vital utilities the government ultimately is the guarantor and as such privatisation does not eliminate all risk for the government (e.g. the UK Railtrack/Network Rail case).

    “I don’t have a problem with state owned enterprise as long as it is efficient” – that is OK as long as it passes the ‘where is the market failure?’ test and we are clear about the measure of efficiency. High dividends are no measure of efficiency when prices are set by the regulator.

    Yes, I am against a rushed fire sale but I am not against privatisation. It is important to have a thorough analysis of all the relevant issues. Given the clear vested interests certain groups have it is also important to expose flawed arguments.

  10. 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.

  11. Paul Sweeney, like his counterparts in the private sector who are hired to provide an underpinning for conventional ‘wisdom,’ cannot be expected to present a balanced argument.

    Coupled with that, there is the universal and enduring pattern of ideologues of Left and Right of just being unable to see any merit in the opposing argument.

    China is closer to nineteenth century capitalism than Ireland and capitalism has given the country the riches to use its state-owned enterprises as agents of state power. It is hardly a useful example.

    It’s always easy to find the negatives and Eircom is a useful example but this is in an Irish setting of what can be termed a state of failure.

    Why not look at for example Sweden, an efficiently run state where a system of social justice developed from the 1920’s alongside companies that became international leaders in their industries?

    Yes it is foolish to sell-off assets in a firesale but it’s also not in the public interest to featherbed public companies where the primary interest within the company is that of the management and staff.

    Where is the equity and fair play in a country where the government gives in to demands for shares in public -owned companies, the highest pay levels and guaranteed pensions while many in the private sector are left with crumbs.

    Paul says “the dogs in the street know the capital from selling ESB, RTÉ, and our ports and airports will go straight to the Government-guaranteed speculators who lent to Anglo Irish!”

    Maybe and many others besides them were elbowing their way to the trough with the blessing of political leaders cut from the same cloth.

  12. 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.

  13. The problem with state companies is that they are not efficient. If you take Sweeney’s numbers at face value, the semi state sector generates turnover of 10billion and profits of E500m. That equates to net margin of a meagre 5%.
    If you look at the ESB annual report for 2008, on its own numbers it made a ROCE of 6.6%, almost certainly below its cost of capital and below that of an efficiently run utility. Moreover, that is after charging its customers one of the highest level of tariffs in Europe.

    Th semi states are a nest of inefficiently run entities that are probably represent negative net worth to the state. They comprise entities rife with petty corruption, nepotism, jobs for the boys etc. A good deal serve no purpose.

  14. 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,.

  15. @Karl,
    Very good point Karl.
    This councils are finding they are making significant savings in the operation of wastewater and water treatment plants by contracting out them in the form of DBO contracts. The council have ultimate control over the asset yet the private companies are by far more efficient at providing these services where staff flexibility is key.
    They have also almost universally being out competed in the waste sector where only a few declining local authority waste services remain.
    I know these industries well, but I’m not sure how well this approach can be translated into the energy sector. CIE would be good candidate for this approach, I would think (Veolia transport would have adequate expertise for the job).

  16. 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.

  17. @ OAC

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

    The job of unions is to protect the pay and conditions of workers, for which no apology is necessary. It may be that you are regretting not belonging to one such right now, but if so you have no-one to blame but yourself.

    @ tull mcadoo

    The problem with state companies is that they are not efficient. If you take Sweeney’s numbers at face value, the semi state sector generates turnover of 10billion and profits of E500m. That equates to net margin of a meagre 5%.

    You appear to have re-interpreted ‘efficient’ to mean ‘squeezing profit out of the public who nominally own all this’. A good dictionary may help you here.

  18. @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.

  19. Those connected with friends in high places end up dining at the NAMA trough and those connected with friends in high places will end up on the boards of the newly privatised semi state companies. Hopefully, people on this site will not be to amazed or disappointed when they see the same old faces, Bruton, Hogan, Dukes, Spring, Harney, Dempsey sitting on the boards of these new companies.

    It matters not a whit for those who’s permanent purpose is to pay for NAMA, ANGLO etc. There will be a lot of chatter and noise about the “national interest”. The “national interest” was used to justify NAMA, it was used to justify the blanket guarantee, it was used to argue that Anglo was of “systemic” importance. They were to somebody. The same patriotic mumbo jumbo voodoo economic arguments will be used by the government as they dump semi states into the private sector and make a few bob in the process. The unions that have ruthlessly grabbed 20% of companies like ESB will hit pay dirt again. Just as they did when Eircom was privatised so it won’t be that bad and they can do their deals just as they did in the UK so that it will be the generation of workers coming after them that “really” have to work in the private sector.

    All these semi state monopolies have been and are run for the benefit of employees and their unions with the “national interest’ trailing in last and getting the usual bronze medal. The future is, that, they will be flogged off in the” national interest” of paying the salaries of those in the public sector, after all the government cannot continue to pile the sovereign debt high anymore. So before they have to face state bankruptcy of course they will put the bargain basement tags on and begin the fire sales. Let the bidding commence. Oh! I forgot, Colm has to do his stuff first!

  20. @ 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).

  21. @EWI

    Put another way. The job of unions is to get their members noses into the trough and expropriate as much as possible. All the fluffy stuff about economic developement and social progress is BS. Effectively, the union movement is just a modern version of the Kulaks. Come the Revolution!!!

  22. 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.

  23. @Kerl Deeter – “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.” – I made that point in my previous post. Ports can be leased long term (already the case in Dublin for operations). Likewise the LUAS experience is interesting.

    @Antoin o lachtnain – “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.” – of course, but taking the wrong decisions because of short-run financial problems is not going to make us more credit worthy. If we do this properly with a thorough analysis and and a clear plan of the benefits of any decision (to privatise) the financial markets will see this positively – panic is not the right response here! No doubt the anlaysis that is being carried out will include an assessment of the likely price as well as the liabilities (e.g. thorugh pension underfunding) – the net return might not be that large, but the real benefits might be an improvement in competitiveness and not the return from a sale.

  24. @ 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.

  25. Regarding ownership and firm performance.:

    The experience of the Telecom Éireann privitisation looms large in the minds of all but the ideologues driving government policy. Not only do we have possibly the worst broadband provision (in terms of data throughput speeds, geographical availability and contention rates) in the EU, we have broadband that is in many cases twice as expensive (comparing similar levels of service) as in other countries in the EU.

    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.

    Secondly, the ESB is not just any old enterprise. It is key, like telecommunications, to everything we might want to do in the future, assuming we can fix our governance issues.

    The notion that the beneficiaries of a fire sale will be willing to make the huge investment needed to change power generation from a few centrally located (in terms of network topology) fossil-fuel burning plants, to a geographically dispersed network of renewable power generators, is again, an act of faith rather than analysis.

  26. @Paul – thanks for coming back on the points raised. It is going to be important to debate these. Of course I understand that with limited space in your piece you could not cover all angles.

    You write that “Yet three of the four terms call for privatisation / disposition /disposal.” – the word privatisation is not mentioned once in the terms of reference. Disposal of assets is what they talk about – that can mean privatisation or sale of some assets controlled by these companies. My point is that there are likely to be assets that can be sold that do not imply privatisation or impede the companies to fulfil their statutory functions (which presumably do not include the manufacture of plywood or the distribution of coal and heating oil). The interpretation of the TOR has been to narrow them even further than they already are – I agree that the TOR are too narrow.

    You say why should the State not produce plywood or distribute coal and heating oil? If you take that view then one could ask why should the state not provide beautician services or sell cars or make ships?? Where do you draw the line? Why should the State compete with the private sector in areas where the private sector is patently able to operate efficiently? Bord na Mona and Coilte have shown initiative to develop these businesses, but to what extent did these businesses benefit from shelter from the State, which might have crowded out private sector investment? Perhaps the net effect is negative?

    Eircom was a disaster, but it is only one example and there are plenty of good examples out there too – using just the one that suits is hardly balanced. I am not arguing that privatisation is unequivically good, far from it, but I am arguing that State ownership is not unequivically good either and there is plenty of evidence for that. This is not a black and white issue, making it into one (like so many) is only going to serve vested interests.

  27. To partially address Philip’s original points:

    1. Funding risk is not the same as liquidity risk. Illiquidity is a temproary thing caused by external factors. The sov. bond markets are extremely liquid and are likely to remain so. If the government were to face a funding risk then this would not be due to a lack of liquidity, but with the quality of Ireland as an investment opportunity. Selling semi-state companies at knock down prices to private companies is likely to worsen the prospects for potential investors.

    It is depressing how many economic woes are classified as “Liquidity” problems. Like property in Ireland or Mortgage Backed Securities in the US. If something is overpriced, of course there will be fewer price takers, but this is not the same illiquidity.

    2. Efficiencies aside, semi-state firms provide services to the public. If the private sector can make the firms more efficient, so what – the extra profit will just go to shareholders.
    Of course, the semi-states could and should be more efficient, but the major question concerning ownership is which structure will provide the best outcome for the CUSTOMER (i.e. the public) and not the shareholder.

    Almost all economic assessment of firm performance focusses on ROI and EPS. Such narrow thinking skews management incentives and is detrimental to the economy as a whole. This problem is even more acute when considering semi-state or public companies, whose primary goal is to serve the public.

    @Paul Hunt:
    High electricity prices are not necessarily to do with state ownership of ESB or otherwise – it is to do with the lack of a functioning market. There is no reason why a semi-state-owned ESB could not compete in a fully deregulated market.

  28. @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.

  29. @Eoin
    Insisting that a company is sold to a dedicated trade buyer and not a private equity group does not offer protection against a future takeover by a private equity group once the public enterprise has been sold. KPN and Telia (as part of the Comsource consortium) were seen as a long-term investor in Eircom back in the late 1990s, but both firms decided to sell their stakes in the firm.

    Only the retention of a ‘golden share’ (no longer possible, look at the recent furore over the Portuguese government’s decision to block Telefonica’s bid for Portugal Telecom’s stake in a Brazilian joint venture) or the retention of a government stake large enough to block an undesirable change in ownership would guarantee that a privatised SOE of strategic importance does not end up in the hands of a short-term investor.

    @Paul S
    I’ve also always been interested in Arramara Teoranta and the fact that the government has a stake in a seaweed processing firm. It’s difficult to get information on the company, but from the figures provided in an abridged balance sheet (as at 31 Dec 2008) sourced from the CRO, a P&L loss of €874k was charged to the balance sheet in 2008, a loss of €779k was charged in 2007, and a loss of €846k was charged in 2006. At the end of 2008, the net book value of tangible fixed assets was €876k and total assets less current liabilities stood at €1.66m. The 2008 accounts also show that the company had received a total of €751k in government grants for capital expenditure as at 31 Dec 2008.

    It is hard to see why the government is involved in such a company. Perhaps it could be justified in terms of regional development goals if the company was providing much needed employment etc. in the Connemara region. In any case, given the small scale of its operations, the company is hardly a major burden on the state and its privatisation is unlikely to yield a major boon to the exchequer.

    @Bazza
    I agree that the focus on profitability indicators when assessing firm performance is a problem when considering public enterprises. Any assessment of the performance of public enterprises must be based on consideration of both their economic and social functions and not just profitability.

  30. @ 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 .

  31. Donal Palcic says,

    I agree that the focus on profitability indicators when assessing firm performance is a problem when considering public enterprises. Any assessment of the performance of public enterprises must be based on consideration of both their economic and social functions and not just profitability.

    Apologises, I will admit I have not studied the discussion above in detail. But what I want to insert is this comment. The point that Bazza tried to make I think, is that over-priced property in Ireland, is just that, over-priced property. That is not the same as illiquidity. We are faced with two choices in Ireland currently. On the one hand, the hoarding of property loans and associated land assets by a state entreprise, NAMA, might prevent further down-grade-ing of the value of the same asset portfolio. Or at least delay the down-grade-ing of the same. In time, the hoarding of suitable development land has the effect of causing inflation in the property market. So much so, that politicians such as the current minister for Health, Ms. Harney, complained about it in 2004 – when it was private companies doing the hoarding of zoned development land. But now that a state agency is the one doing the hoarding, there is no outcry from the former Progressive Democrat. Here are some corollarys to the above. We have no idea how this intervention by a state agency is going to affect the long term functionality of the property market in Ireland. What un-predictable impacts will it have? But there remains the point – that allowing the property loans to be substantially marked down – will trigger an automatic re-capitalisation of banks to avoid insolvency. But would the arrival of competitively priced property in an Irish market, result in an improvement in competitiveness of the economy as a whole? In other words, are we throwing away the possibility of inward investment in Ireland’s overall economy – just to support a portfolio of un-performing financial assets? In 2004, Charlie McCreevy (was he in finance at that time?) introduced a new form of public works contract, to transfer more of the risk involved with public works onto contractors. Obviously, the dept. of finanance who issues contracts amounting to €8.0 bln per annum, felt that Ireland should aspire to better competitiveness in projects executed for strategic advantage of Ireland’s economy. So it appears, the dept. of Finance think it is important for Ireland to be competitive in construction of projects on land. But the land itself, the value of which underlies a lot of decisions, doesn’t have to be as competitive, and inflation is tolerated. In fact, inflation of land values, is considered to be desireable. Does anyone else spot the inconsistency there? BOH.

  32. @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.

  33. @paul sweeney: [i]”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.[/i]

    Nonsense, just look at our structural deficit (taxes v.s. spending) and what we are spending it on. That spells it out clearly: our public sector cost (in terms of the deficit) equals NAMA every two or three years. Of course, you could argue that we should just tax more to keep funding our out of control spending, but the truth is that NAMA is cheap in comparison to the shambles that exist elsewhere in our finances

  34. @ 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.

  35. @Donal P
    You may well be right. My memories are from the 1980s and I wasn’t here in the 1990s. Given that, what changed to make the P&T into TE? Can the same be done elsewhere?

    This one believe that the rush to sell assets is more out of an unwillingness to address the problems that exist in them (either poor performance, contribution to uncompetitiveness, etc.). Mind you, some (many) of those issues can be put down to political interference, so perhaps if we privatised the management of the public service and Parliament we might get a better outcome?

  36. 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

  37. @hoganmahew
    The major change back in 1984 was the transfer of the responsibility for the telecoms and postal services from the civil service to commercial state-owned enterprises. The transfer of the telecoms service to commercial SOEs was recommended by a review group established during the late 1970s which found that the management structure of the civil service was unsuited to commercial operation.

    Much of the improvement in performance in Telecom Éireann during the 1990s was arguably driven by the prospect of competition as well as the emergence of actual (albeit limited) competition. In relation to Ireland’s remaining SOEs, particularly those in the energy sector, ownership is a secondary concern. As Paul Hunt has often argued on this site and over at the tasc blog, fundamental restructuring of most SOEs is necessary before any form of privatisation is considered.

    Political interference is indeed a major issue in the SOE sector… solving this by privatising the management of the public service and the Oireachtas is a novel approach!

    I also agree with BO’H on the inconsistency in the government’s policy approach in relation to the SOE sector. In this regard, the recent recommendations by Forfas in relation to the definition of a national policy on SOEs, as well as the need for an evaluation of of the goals and objectives of each SOE would be helpful.

  38. @ Ed,

    You are more than welcome to enquire yourself, amongst many of the hundreds of semi-state ESB employees all over Ireland. You will not have to dig very far in order to verify what I have said above. But to put what I said into a broader context, you can look at changes to policy direction at various periods. The new Smart Economy document appeared to erase earlier policy approaches to invite competitors into the tiny Irish market for power generation, tele-communications and so forth. The old confidence in privatisation of state owned companies, was replaced by a new confidence, in doing more with less. The Smart Economy policy direction is similar to that of the new public works procurement system, which is about reducing the exposure of the state to cost overruns on projects, where private contractors are involved. I mean, it is all good – and we will give credit to Brian Cowen for moving us in the ‘smart economy’ direction, the public procurement direction and so forth. That is all good, and aimed neatly at improving the competitiveness of the Irish economy. But then you tack on NAMA to the end of it, and it simply doesn’t tally with the direction of everything else. That is my problem, the inconsistency. NAMA is a regressive step compared with everything else, that Taoiseach Cowen has personally pushed for (giving him all due credit). We are looking for competitiveness in our utilities, and tax on water charges to improve that infrastructure, and get projects built with less waste of funds. That is wonderful. But why should the cost of land be different from everything else? Maybe you can explain it to me. BOH.

    Please note: The ownership of the ESB company wasn’t so much the issue, that economists here think is so importance. The big issue with the ESB was it was a conglomate of different interests, all fighting for the same resources. The key decision was to sub-divide it into different branches, and dispose of some which made no sense in this day and age. That in turn, allowed the resources to flow into the right areas, where they were needed. That was the mistake that Ireland made in telecommunications. That we didn’t enable the resources to flow into the right area, of building broadband infrastructure. The issue of ownership is not important, compared to the issue of accurate target-ing of investment where it is needed. Either form of ownership doesn’t preclude the accurate target-ing of investment, and proper breakdown of structure in an organisation. The issue of ‘ownership’ is really not the issue, that everyone tries to make it out to be.

  39. @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

  40. Brian, I agree ownership is irrelevant. As many of the esteemed economists above have noted the monopoly networks will still have to be regulated no matter who owns them. In my humble opinion, I think it would be a good idea to sell of ESB assets. Sure why note make a few quid.

    What a lot of commentators have failed to note but as im sure you are aware, under the current Infrastructure Agreement between EirGrid and ESB, EirGrid tell ESB what to build on the transmission system while ESB go off and do it. Decisions on what is built is 99% with EirGrid on transmission – that is the crucial point. So if the Irish public do lose ownership of the assets (no biggie) critically we wont lose the abililty to decide on what is built (through our elected Minister for Energy). I cant see that changing under private ownership – unless the government are complete idiots (relax there now). So as long as Eamo Ryan holds on to EirGrid he can plug away at his renewable ideals.

    Sorry I lost you on your NAMA rant there and Im not a semi-state employee. Im just a big nerdy fan of statistics with a bit of an interest in energy.

  41. 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.

  42. @ Ed

    re that link – 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?

  43. 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.

  44. Is it the job of Government to be generating/transmitting electricity, selling gas, making and selling peat briquettes, running train and bus services, running airports, operating seaports, broadcasting on radio and TV, delivering letters and parcels etc etc on a Monopoly basis ???

  45. 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!

  46. @ Edgar
    Why do we have so many ports, all with seperate boards (politically appointed) well paid management etc.? Would one port company with one board & 1 executive team not be more efficient. Why does the state have to operate the ports, why could it not lease them?

    What function does Horse Race Ireland & Bord na gCon serve.Surely we could just send a cheque to the Turf Club and the dog tracks and cut out the middle man. Should we not just sell the TOTE?

    What is the National Stud for?

    Why do we need Bus Eireann?

  47. @ 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.

  48. @ All,

    Yeah, the best thing the committee spear-headed by Colm McCarthy and others could do, is to gather as many opinions and experiences of real people who worked in the various semi-states down through the years. And to see if it can all be compiled together into some document, which might provide useful guidance – and most importantly – an overview, over time of how these agencies operated and what was their lasting contribution. I find it interesting that people here cite Eircom as an innovative and well-structured company. Many it was getting there, prior to it being sold. But if you speak to people in ESB Networks, they look at Eircom and shudder to think – wow! we could have ended up on the same slippery slide. That is what Colm McCarthy & co. should do also – ask people who have working in semi-state institutions, to comment on how they perceived other semi-state institutions, operating in different fields. Just a suggestion. BOH.

  49. @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?

  50. @tull
    “Why does the state have to operate the ports, why could it not lease them?”
    You might better ask “what does the state need to even lease ports for”?

    @Bork
    Irish electic prices were the cheapest in the EU at the turn of the millenium. In the early noughties it was decided by the regulator to increase the price chargable by the ESB to encourage competition. It appears that electricity abhors a vacuum too, particularly if it involves management getting rich…

  51. @ 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.

  52. 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.

  53. @tull
    To be fair to the ESB, they came and put a connection into my house long before Eircom (both having been asked at around the same time). Now, they didn’t put the poles where they said they were going to or where I wanted, but I’ve learned to drive round them most of the time…

    I have a little knowledge of Eircom, not personally, but anecdotally. Many of the operational problems the company faced were down to the legacy of state ownership (some poor management and some entitled workers) and the structure of the IPO (in particular the ESOT – return to point 1 (and not just the workers…)).

  54. 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?

  55. @ Tull, Hogan,

    To understand any state owned component of the economy, you must not view it in isolation, but view it in tandem with other things. For instance, the state owned sugar company (which went on to become Greencore and is privately owned today), was a VERY strategic asset during the second world war. Because we could not import sugar from anywhere, as Nazi U-boats were patrolling the north Atlantic and Irish seas. That seems like the dim and misty past nowadays. You mention the port authorities around the country. Well, until quite recently all of the ports were crucial for the importation and storage of refined petroleum reserves. The real economy would grind to a very sudden halt, if the fuel of transportation ran out. We currently operate on a just-in-time delivery system for our transportation fuels. We have no strategic reserves to speak of, and much of the two days of reserves we do have, sits in privately owned tankage at the various ports. The problem is, our ports around the country are so small, that no outside refinery will send us supplies in boats small enough to fit in our ports anymore. So many of the ports are no longer of strategic value anymore. But they were in the past, because if industrial action broke out in Dublin, some other port could be used. We are looking at the moment to build a 90-day nationally (or perhaps privately owned) strategic reserve of fuels. That in turn will take pressure off of the Irish state to retain ownership of so many ports around the country. But until we have the strategic reserve built, which will cost around €250 mln, there is no point in selling port infrastructure. Furthermore, as oil prices spiral in future, we will have to source finance from somewhere to build a port (possibly in Dublin or near) large enough to accomodate tankers from as far away as south America, if necessary. Because refined oil product may become too expensive to buy locally in smaller shipments. BOH.

  56. @ 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.

  57. Brian,

    Great, now explain to me why the state has to own an unprofitable national stud. Is it to guard against a sudden witdhrawal of services by private sector stallions?

  58. @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…

  59. @ Tull,

    Have you seen the documentary about Vincent O’Brien that was aired on RTE? The story of Vincent O’Brien was very interesting. He had to gamble on most of his own races in his early career, in order to make enough finance to establish himself with a farm and facilities etc. That was back in the days when only local business people at bank accounts. No one would extend credit to a guy such as O’Brien. He travelled to the United States and brought back a blood-line of race horse, which went on to dominate the industry in Europe. Think of it like Vincent O’Brien setting up his very own, old Trafford down in Tipperary. Heck, we cannot even field one team in Ireland capable of playing in the English League, at any division. That is our state of development in soccer. Horse racing would be the same without O’Brien. Now, I am no expert on this, but my guess is that horse racing is a sustainable revenue producer for the Irish economy. But it is deep and complex. Because at the moment, in the show jumping area, Irish Olympic entrants have to buy their horses from Germany. They haven’t got the choice of a suitable beast here in Ireland. Which is ironic, because in the 1960s, and 1970s, the state owned horse asset management agency in Ireland, followed a policy whereby we exported all of our best horse show jumping blood lines to Germany! Can you see the irony in that? A native show jumping blood line was given away by the state agency, and a private individual called VO’B, imports a world beating one at the same time, from north America! Anyhow, like I said above – this semi-state entreprise thing is a closet full of skeletons, and there are many stories the Colm McCarthy led commission could and/or should investigate. I know that is miles outside of their brief, but really I believe, unless we tap into that knowledge acquired over several decades of mis-management, I don’t think we will learn the right lessons. Just my humble opinion. BOH.

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

    I thought Charlie Haughey was dead.

    bjg

  61. @ Tull,

    Final comment, I promise: I don’t have any expertise in forestry and the breeding required to produce the best timber. You need to beat a few bushes there (metaphorically speaking), and you will be surprised what falls out. That is another subtle reminder to Colm McCarthy & co. Bear in mind also, that forestry has changed in significance radically. It used to be a problem of how to grow timber as a sale-able product. But increasingly, it will play a part in policy with regards climate change. So we need to think about forestry in tandem with transportation fuels, port authorities and so on. We need to start thinking in terms of electrical vehicle fleets, renewable energy generation and things like forestry. In the forestry arena, there is as usual, with semi-state activity, a history of merry dancing going on between, state and private enterprise. Complicated stuff. Landowners were paid to set aside very large acreage for forestry plantation for periods of twenty years. But payments weren’t index linked and became miserable small over time – sort of like a person who takes an early retirement pension. Many of the big forestry land deals were done, prior to Ireland entry into the EU. In other words, if landowners had waited a little longer, they would have got much better premiums from Europe. Like with the show jumping bloodstock, the landowners got the wrong end of the stick, in forestry (metaphorically speaking). What we really need, are agencies with are tight and compact, and capable of efficient communication between each other. In fact, we are at a stage in history, I believe, where an agency is required that simply looks at ways to manage other agencies in logical sequences, to gain best return. That would be most useful. BOH.

  62. @ 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!

  63. @ Michael Hennigan,

    Yeah, I take you point Michael. The brief summary of everything I tried to say above is – we go to an enormous amount of expense in this country to create the 88 separate planning bodies that you sometimes refer to. We go to enormous expense to build this local level, governance infrastructure, with associated legislation, rules and regulation for local representatives of communities. We spend a fortune trying to make things local. Each politician has to worry that he or she gets ‘enough’ for their local area, to justify their existence at a local level.

    But for all of that, much of the discussion and debate in Ireland comes only from the top down. What I advocated above, and I hope the point does come across is: What we don’t do in Ireland is we don’t gather feedback from anyone working at local level. By that, I don’t only mean geographically. I mean talking to the person who has worked in AerLingus for two decades. Talking to the person who has worked in agriculture for the same. Talking to the person who has worked in health, or refuse disposal, or the police force.

    There is a wealth of human experience, which is never tapped into. And that is after we have spent so much investment in good times, and in bad, creating local authorities with multiple staffed departments. We haven’t received much return on the investment at local government level, because we haven’t learned about things like Kaizen, in Ireland yet. We roll out this atrocious policy document called the smart economy, from the central government. But we don’t receive the benefit of any feedback from people at local level. That is a resource we haven’t tapped into. BOH.

  64. @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.

  65. 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.

  66. @Brian O’H,

    Thank you for your response. We may be going a little off-piste. My intent was to show that the ability of private enterprise to push the boundaries as far as possible – and, sometimes, to fail spectacularly, is not evidence of ‘market failure’ – or that it provides an unanswerable case to advance public ownership and control at the expense of private enterprise. They simply demonstrate policy failures to prevent or moderate excesses and to have procedures in place to deal sensibly with the inevitable failures. These bigger issues of policy failures and failures of democratic governance are important, but separate.

    The recent personnel and organisational changes in financial regulation demonstrate that the statutory powers exist; they just needed to be applied effectively. The same is true for regulation in those sectors where the semi-states operate – with. perhaps, some limited modifications. 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.

  67. 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.

  68. @ Michael H

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

    The situation is a product of history. We are a small peripheral, poorly industrialised region, where landed property remains king. The Irish trade union movement is an offshoot of the British movement, which has been generally hostile to private enterprise. (perhaps woth good reason).

    Absent industrialisation, and post UK 80s restructuring, our TU movement found itself based increasingly in the public sector. The leadership became incorporated into the state through the social partnership model and jobs for life was the watchword. Secure pay packets, secure union dues and secure career ladders for union officials.

    Perehaps we have an entitlement approach to economic development. The entitlement of our property owners. The entitlement of our professions. The entitlement of business sectors to state contracts, monpolies and bailouts. The entitlement to subsidised third level education. Etc etc. All union leaders are guilty of is modeling their aspirations on their ‘betters’.

    @ BO’H

    Kaizen may have reached its limits. I suspect that subcontracting is the most powerful tool for quality improvement, as it forces former colleagues to compete against each other for business.

    The national/local thing is very confusing in Ireland. We have a very small centralised state, in which most decisions take place behind the scenes. Localist factors are always at work, and are probably best regarded as a variety of vested interest.

    Is pulling a stroke for ‘the town’ or ‘the county’ that different from doing it for the ‘clan’ or the ‘business associate’ ? The end result is in any case bad, as it contributes to a feeling that the economic game is rigged.

  69. There are many interesting points being made here, so I’ll just take a few of them. Edgar said “I am not arguing that privatisation is unequivocally good, far from it, but I am arguing that State ownership is not unequivocally good either and there is plenty of evidence for that. This is not a black and white issue, making it into one (like so many) is only going to serve vested interests.”

    Clearly we need both. We know that private is not unequivocally good – AIB, Ulster, Anglo Nationwide (a private mutual) etc. and the state end up taking over even Arnotts! I favour reform to the governance of the state companies too and re-structuring, in the companies’ and public’s interest, not destructive break-ups to enable privatisation.

    I think it is important not to mix up the promotional bodies like Horse Racing (which is both a state owned gambling body which also gets taxpayer subsidies) and Irish Stud, IDA Ireland, Failte Ireland etc. from the commercial state owned bodies.

    I also think that strategic state ownership/control, with blocking shares for certain assets, is very important. For example, I think that energy security will be one of the biggest economic issues for the next 50 years. Why 50? – until we develop the technology to efficiently move from carbon. Thus the ESB, BGE, BNM and NORA may become especially strategic.

    As I said in the article, state companies are important worldwide. Further they will always be around and so we must ensure they are well run. Indeed on finishing a book on the subject in 2004 I said state ownership ebbs and flows, but I never ever imagined it would flow so, so strongly here and in the West. Did we think that all the “Commanding Heights of the Economy” (the Banks) would be state controlled within a few years. NAMA and the guarantee are truly the worst Socialist Nightmare! And maybe the worst Capitalist Nightmare too?

    Michael says “Apart from reform at the Central Bank, it’s business as usual elsewhere despite the terrible human toll of Irish conventional ‘wisdom.’ And I quite agree. He also said “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!” Having read the man, many trade unionists might agree. He was quite moral, an ingredient missing in most of both business and economics today.

    On the critics of trade unions, some interesting points and one response. There is a literature on whether trade unions are “vested interests.” The general consensus is that they are not because they are so widespread in the economy. We generally find that we have members on both or various “sides” of disputes/issues. ICTU has 850,000 members of which 250,000 are in NI; in the Republic 45% in the public sector; strong in manufacturing as one person noted, including MNCs (excluding most but not all ICTs); membership slowly growing steadily for years, but now falling; and density at 38% of the workforce today (actual members, not the CSO survey, which has less).

    Finally, go for a walk on Dun Laoire pier or in a state forest soon. For next year, if certain economists get their wicked way, you may have to pay a fat toll!

  70. @ 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.

  71. @Paul S,

    “I favour reform to the governance of the state companies too and re-structuring, in the companies’ and public’s interest, not destructive break-ups to enable privatisation.”

    I presume the reform you favour is in line with the document issued some time back by the ICTU:http://www.ictu.ie/download/pdf/governanceof_state_companies.pdf

    Has your, or the ICTU’s, thinking moved on further from this? Is there any possibility that the ICTU’s perceived willingness of Irish pension funds to participate may have changed in the context of the current economic and financial crisis? Has the ICTU developed its thinking and published proposals on its preferred restructuring of individual semi-states? Does the ICTU have a view on the appropriate mix of retained earnings, new equity and borrowings required to finance significant new investment in the energy sector, particularly in response to climate change and security of supply policies? Is the ICTU’s preferred restructuring (if such exists) of the Irish energy sector consistent with the current and prospective EU directives, regulations and institutional arrangements for the energy sector throughout the EU? Does it support the full unbundling of network and supply businesses and the financial ring-fencing of these businesses? Does it take account of the regional energy initiatives being pursued by ERGEG (the EU’s group of energy regulators) which will subsequently be directed by ACER (Agency for Co-operation of Energy Regulators)? Does the ICTU subscribe to the full roll-out of retail competition in electricity and gas as required by the EU’s Directives? And, if the ICTU has concerns in any of these areas, what alternative restructuring does it propose?

    These are the kind of detailed issues that I expect the Asset Review Group will be addressing. It would be good to hear the ICTU’s views on these as opposed to grandstanding on the alleged lack of morality of economists and business and the wickedness of the private sector.

  72. @ 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.

  73. re trade unions and vested interests: you cannot consider the sad case of eircom without also considering the fact that through their shareholding in the company, the unions played the role of kingmaker a number of times in the history of privatised eircom and also extracted enormous amount of cash out of the business.

  74. 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.

  75. Antoin O Lachtnain says:

    ESB networks and eirgrid have nothing to do with energy security.

    Energy security is a term which could be carefully defined. Because the energy security has several dimensions to it. The most critical is transportation. So many businesses nowadays operate with slim stock inventories, and rely on people and/or goods moving around quickly to carry out their contracts. The very dispersed nature of development only adds to the problem of course. Then you have the energy security to do with thermal energy, that is air conditioning etc – where our building stock might have had too much glass etc, and we have grown a dependence on artificial means of indoor climate control.

    Then you have issues to do with industrial power supply, which is a real factor with FDI. In the 1960s for instance, there was a rolling black out on the east coast of the United States, which could be traced back to a very miscellaneous part of the infrastructure shorting out. It caused production problems for factories up and down the east coast. Especially in stuff like semi-conductors where product, which had been moving through its process for several months all had to be ditched. I mean, that happened in the wealthiest country on earth in the 1960s.

    Not so long ago, even Intel threatened the state of California they would simply move out, if the situation did not improve. All you need is one incident such as that in Ireland, and it would make a great difference of outside perceptions. It may even drive up our cost of borrowing, because those who buy Irish debt would have further reason for doubt in their minds. That is what is really risky in handing over power generation etc, to a private company. It is one less factor we retain some control over. When we moved away from the Punt in 2002, for instance, we never had a proper mature discussion about its implications. It has now become more apparent the risks involved when you hand off responsibility for economic policy instruments.

    The large renewable energy generation companies would love a situation whereby Ireland was attached to a European wide supergrid. Perhaps it is miles down the road, but we should factor it into decisions. Certainly, if we did have a supergrid tomorrow, it would not be Eirgrid who would get to manage it. Many of the contracts that ESB would handle with larger industrial clients would have penalty clauses built in, to compensate for outages. If we had a supergrid, I imagine there would be a similar penalty clause between a European central power system, and ourselves, as a peripheral nation and supplier of power. Maybe we need to think along those lines. BOH.

  76. 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).

  77. Antoin O Lachtnain says:

    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.

    You have made your point very well indeed – and explained to me the nuts & bolts of a government regulated market in the process. I have to confess, my understanding of the economics of the same are about nil. I get away too carried away with the engineering magnitude of these affairs, to realise how the actual economic model works. Thanks for taking the effort to set me straight in that regard.

    But reading your response above, the idea of the managed ‘commons’ is what keeps coming to my mind. Especially with regard to things like the electro magnetic spectrum, where it might not be sold at all, but rather auctioned. I recall David Wetzel who worked in Transport for London, much of his life and elsewhere in the London transport infrastructure, noting how a strategic bus station in the city was privately owned. I forget exactly, but the city had to tender each year to acquire the privelege of using the station as a bus transportation hub.

    From that point, he got onto the subject of the spectrum and how portions of it, were held up for competitive auction on a set period. But I guess the ‘spectrum’ and other such commons do not require on-going maintenance, in the same way as an electricity supply grid would do. But is there some way, that the land over which the grid is constructed could be managed through some form of taxation or otherwise? You see what I am getting at? Maybe it is a silly point to make. But is there any evidence of a ‘commons’, when we think about electricity generation and distribution? Is there a case to be made, that wind, waves & hydro belong to the state, and there is rent income to be generated from the same?

    The reason I say that is Arup Engineering Consultants, were engaged in some interesting work to map the energy resources on a county by county basis all over Ireland. The idea being, that renewable energy generation would not be processed through the planning system (which is inefficient, as the planning system is optimised for housing stock in the main), but each county would issue an energy ‘quota’ and that would be auctioned off I imagine. In fact, there are specialists such as Solearth would compile energy resource maps for individual farms. This assessment can be carried out from the national scale, down to the very local. Maybe our thinking about energy should reflect this? BOH.

  78. @ 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.

  79. Ok. First, bus stops since this is my expertise. DAA, a state company regularly auctions bus stop privileges. It’s not just a private sector thing. CIE refuses to auction or otherwise allocate station capacity.

    Second, stewardship of ta resource like the power grid is a responsibility not a right. The network owns you as much as you own the network.

    I would be very reticent in auctioning monopolies. It may not raise much money (as with the Irish 3G auction) and will drive up consumer prices as sure as a vat increase would.

  80. @ 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.

  81. @ Antoin o lachtnain,

    Good reference for the above, is Joseph Stiglitz’s book, Making Globalisation Work, in his chapter Saving the Planet. Stiglitz really opens the instruction manual to the Kyoto protocol in that chapter, and explains some of the challenges in making it work. BOH.

  82. 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.

  83. @ Antoin O Lachtnain,

    I was thinking about three sectors off the top of my head, which are today treated as a ‘resource’ in a sense, we never did before. You have competition over the waste produce of Dublin city. You have competition to supply battery storage capacity on the national grid, for renewable power generation. You have competition to supply a carbon sequestration resource to allow offsetting of Co2 production in other areas of the economy. These are three kinds of resources that have been created through normal productive activities in other parts of the economy. In waste we see a lively debate about policy and whether the market aught to be dominated by a private monopoly, who effectively bought into the market and obtained the largest quota. Or whether, quotas should be distributed amongst more players. You have exactly the same debate in electricity storage, between one player who wants to provide large storage facilities for power, and another player who says, it needs to be divided up into smaller portions. These are the parties who say we need to have some form of pumped hydro, which converts kinetic energy of water back into electricity thorugh a series of tubine generators. This is about managing the over-production of the renewable energy industry, and turning it into a marketable product. The ‘waste’ from one activity, becomes the raw material for another. In carbon sequestration there a similar thing happening, where the waste Co2 emissions from many activities, becomes the raw material for another enterprise. All of these ‘waste management’ contracts will have to be worked out and distributed to either large players, or multiple smaller ones. BOH.

  84. 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.

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