Towards a private ESB

Judging from Pat Rabitte’s comments on Morning Ireland last Monday it definitely seems like the troika are forcing the Government’s hand on this decision. I agree with Richard that selling the network element of the business makes little sense but the reasons they don’t want to unbundle are obvious enough… it raises the value of the partial stake that will eventually be sold and it avoids having to tackle the unions on the issue.

Thankfully the Government are indicating that they are only going to sell a minority and not a majority stake (myself and Eoin Reeves have commented on the issue of retaining control over key strategic industries before, see http://www.irishtimes.com/newspaper/finance/2011/0617/1224299067839.html). I would hope that the Government ensures it never retains less than a majority stake in the ESB in the future if the plan is to keep the comapny in its current integrated structure.

The big question (apart from how much the Government plans to sell, the sale method that will be used etc.) is what will happen to the proceeds from the sale? Will it go towards paying down debt (as the troika will no doubt push for) or will it go towards investment in infrastructure (as per Fine Gael’s NewEra plan)?

The substance of this announcement was reasonably predictable, but it (and Richard’s assertions) raise a host of questions.

1. How does the proposed review that will be presented to Government by end-Nov. fit with the detailed assessment of the electricity and gas sectors on the Troika’s ‘to-do’ list which is slated to kick-off by the end of this month and finish end-Q2 2012? The Troika tem will want to tick their box. And where does this leave BGE – and the other semi-states? The EU/IMF MoU requires outline privatisation proposals by year end.
2. And what is this nonsense about the energy policy and regulatory framework? The areas where genuine efficiencies may be achieved that would benefit consumers are related to the ownership, structure, regulation and financing of the ESB. Does this mean, as Richard seems to suggest, that nothing of any substance will be done in these areas and final consumers will be hosed even more than they are at the moment?
3. How does this ‘integrated utility’ fit with the EU Third Legislative Package which requires effective unbundling – even if it falls short of full ownership unbundling (the preferred option)? The minimum requirement should be effective financial ring-fencing of the network businesses. Richard notes that the ESB uses the network as collateral for cheap loans. But it could raise these cheap loans as a stand-alone, regulated network business. Indeed, its borrowing costs would be even lower as borrowing for a financially integrated low risk network business and a higher risk energy business results in a higher cost of borrowing.
4. Does the market power of this integrated utility not raise concerns for DG COMP – not to mind DG ENER? Richard sees this market power as a barrier to entry, but it is much more than this. The lack of a financial ring-fence around their networks mean that the ESB and BGE can cross-subsidise their energy supply businesses. (The excessive network revenues awarded by the CER allowed BGE to discount its electricity prices to pull customers from the ESB.) The fact that they can do this and that government will never allow the value of their capital to be damaged is a much bigger deterrent.
5. Why does the monopoly nature of the networks prevent consideration of privatisation? Other countries manage perfectly well with private sector ownership of energy networks. The biggest problem with public ownership is that the state has directly invested not one cent to part-finance massive increases in investment. The book value of the ESB networks has more than trebled under regulation and the CER has been forced to extract financing up-front from consumers to compensate for the failures of successive governments – in addition to the normal return of, and return on, investment. That’s one reason why electricity and gas prices in ireland are so high.
6. Why should the sale of the transmission network to Eirgrid be considered? The Government has set its face against this and is seeking to exploit a loophole in the 2009 Electricity Directive. The assets should have been transferred when Eirgrid was established. There’s little point doing it now.

This is a perfect example of the usual half-arsed, half-baked fix that ticks all the boxes for the players exerting pressure on the Government, but will leave final consumers even worse off. It should meet the Troika’s requirement (the early announcement moderate the Troika’s desire to sell a bigger share); the minority stake should keep Labour and the unions on board; and this and the retention of the integrated utility should satisfy the management.

The irony is that splitting the network and supply business and letting the latter fend for themselves would allow the Government to sort out regulation, revalue the networks, increase the gearing and extract some equity that would exceeds the likely proceeds of the minority stake it is proposing to sell. The supply business would have to compete on a level playing field with new entrants and consumers and citizens would benefit via lower network charges and more effective retail competition.

@Richard

“It would make more sense to sell the network …..”

Quite probably you are right but IMHO it would probably be better wait ifor at least two years for the following reasons :

1) There is too much market uncertainty to calculate an appropriate price.

2) As the ESB workforce will probably get some part of the shares (as was the case in previous privatisations) the possibility of an attractive sale would also make it easier to negotiate more competitive salaries with the ESB unions.

3) We have no idea if the Euro is going to dissolve or not . If it does dissolve it could could spark a crisis if it is not dissolved amicably.

4) If a European crisis erupts a strategic asset like ESB would have to remain in the stateś hands until the “all clear” was sounded. Even if the network was sold to Eirgrid who would the eventual owners of Eirgrid be?

5)If Ireland feels it has to recourse to Zero deficit rather than three percent in a “Post Euro currency” European Union than the income (after the “all clear” has sounded) would come in very handy.

Your post was very informative and the arguments worth considering. I just feel that Ireland needs to be very cautious at the moment. Hopefully if relevant European leaders stop “can kicking” we can consider the proś and cons in a more certain economic environment.

@Richard
I am not sure what to say – but you just don’t know where wealth comes from , you are a fully paid up member of the depletion economics school.

Ardnacrusha would never had been built under the current market state dogma – it would have been seen as a waste of capital , because in some peoples eyes capital has a short half life.
Yet even after all these years it has value.
The west is on the eve of destruction.

I guess this is why fiscal spending is so ineffective in the west – it just goes to making profits which is just one side of the profits / wages coin.
The commons can go to hell – I am dismayed – why should utilities pay a dividend ?
That means less money flows into capital projects….. down and down we go -where it stops nobody knows.
The nation state is dead , but they should make it official.
All republican ceremonies should stop – they are making a mockery of a 400 year experiment that is now over.
But this destructive depletion of the commons for private gain is a old one – it is always a hallmark of empires on the road to perdition & dissolution.
Begins at 6.00
http://www.youtube.com/watch?v=qMMU6_CjQtQ

@The Dork

Yes. Silvio, fair bunga play to him, has just issued a health warning to those good folks around Vesuvius not to touch the Ash from All those Anglo_Irish Promissory Notes burning in the big FIRE – even the cremated anglo_irish_ash remains Toxic.

Course we could have put them in The Ould Tee_Shock’s Peat Burning ESB plant in Ferbane Offaly … but the anarchic turf-cutters were having none of it – and the environmentalists were out in force as well.

“The network is a natural monopoly, and should probably not be sold. The rest of the ESB can be safely left to the market (if properly regulated).”

If, as you suggest, the transmission asset were transferred to Eirgrid (not sold because Eirgrid have no assets to speak of and would find it hard to leverage such purchase), there would hardly be anything left of value.

The value of ESB is in the transmission assets and its generation portfolio, or at least those parts of generation portfolio developed overseas by ESB International.

The legacy generation (in the past known as ESB PowerGen) is less attractive because of the fixed costs associated with grossly overinflated salaries, heavily unionized workforce and inefficient make-work practices. Legacy generation was in recent years merged with the new generation portfolio under the new name ESB Energy International in the hope that some of the commercial acumen would rub off the old PowerGen. Spinning the generation off on its own would make commercial sense and would attract interest. However, the current owner would be well advised to deal with the fixed costs and other inefficiencies first.

The ESB Networks is in a better condition but as a business it only makes sense with the assets. Without the assets ESB Networks is a large O&M business which would struggle to maintain the scale against the competition. Move assets to Eirgrid and they will tender out the O&M work that ESB Networks do just like they do with the engineering services.

The consultancy business derives 80% of turnover from ESB Networks. It used to be an overseas consultancy brand but these days it has few projects abroad and has lost the competitive edge. At one stage ESB International was wining high value contracts for managing utilities (Georgia, Kosovo, south-eastern board in the US for example) but that business has disappeared. The few T&D and O&M contracts abroad pale in comparison with the scale of the likes of PB Power or Mott MacDonald. ESB International suffered loss of competitiveness due to overinflated wages (little less so compared to ESB Networks and the PowerGen). It has also suffered from a loss of strategic direction, largely because for years ESB wasn’t really sure whether ESBI should pursue external business or focus on being an engineering back office for ESB Networks. The wages in ESBI are 20-30% higher than those in the Irish branches of PB Power and Mott MacDonald and the only reason this was possible for ESBI to sustain is that ESB Networks are giving work to ESBI without tendering. Float the consultancy on its own and ESB Networks would immediately be obliged to tender out the engineering services. If anyone was to buy the consultancy, to make it a viable business in the competitive environment in Ireland and abroad, they would have to deal with renegotiating employment contracts and restructuring the business. This would be a lot easier in ESBI than in the Networks and generation as ESBI is a lot more of a commercial business and majority of workforce are on standard private sector contracts. But even restructured the consultancy may be worth about one week of interest on bailout funds.

Finally, I cannot think of any reason why anyone would want to buy Customer Services or Electric Ireland as they are now called as a separate entity.

To top it all, there is an elephant in the room in the shape of the deficit in the legacy defined benefits pension scheme. This is a civil-service like pension scheme but unlike their civil service brethren the ESB defined benefit retirees are not paid by fleecing the taxpayer (they are but in a different way). Instead this scheme is funded and – you’ve guessed it – underfunded to the tune of E2b.

To derive maximum value from this sale, it would probably make most sense to restructure the consultancy business and the generation and to spin them off as separate entities. The networks (with the assets) together with Electric Ireland also make sense but would also need to be restructured and made to operate in a more cost-effective manner. This would mean picking a fight with the unions and I know where my money is when it comes to the willingness of successive Irish governments to do so.

It is not at all surprising that the government is going to exercise the least-hassle option and sell a stake in the integrated utility without attempting to maximize the value of the company first.

We will see what the markets will say. And you are right – we know who is paying for all this and will continue to do so.

@all

And Aer Lingus 25% (flying under the radar ….)

‘Informed sources said last night any sale would involve clauses that would protect Aer Lingus’s valuable Heathrow slots being used for access to Irish airports and would also ensure a continuance of the brand name.’

??? clauses??? santa_clauses I suppose
http://www.irishtimes.com/newspaper/frontpage/2011/0915/1224304143716.html?digest=1

@all at all

An Bord Skip Neu_Nua on Disposable State Assets

(1) NAMA
(2) Dublin Docklands Development Authority DDDA
(3) Moriarity Tribunal (all personnel included)
(4) AIB
(5) BOI
(6) The Entire Justice System (no justice so why do we continue to pay)
(7) A N Others

@Richard Tol

Were you wearing the Green Gansey on the radio this morning? Your snapshot is working wonders down under – I hear Richie McCaw is on medication for nightmares (we have Tony Buckley walking around with a wig and a ponytail roaring ‘I’m TOL – WHERE’s ME_CAW) – I’m makin a killin with PaddyPower.com on Samoa – get back on the Telly and don’t shave whatever you do – don’t even think about a haircut.

If those workers get a cushy tax free windfall I’ll scweam and scweam and scweam.
Whatever is sold, and for how much, we are the shareholders, not de workers.

Richard,

In my view, the entire debate on ESB pay-cuts is pretty confused. The ESB is a commercial company and the logic that the ESB should take a pay cut just because the public service did, does not stand up to scrutiny.

Rather than imposing across the board cuts (which are equally as bad as the across the board raises – the result of collective bargaining) the ESB should be made to operate as a commercial entity with the sole purpose of providing customers and the owners with value. Thus the wages woukd be determined by the market and the ESB would be in position to reward talent and cut the wages of slackers. This would also address the public sentiment towards ESB wages. Neither is the case now.

The non-transparent and ad-hoc manner in which ESB has dealt with the matter so far (random cuts to senior and middle management – largely unknown to public) did not help either.

@ Richard Tol
+ 1

I cannot believe we are thinking of selling another network.

The State should always try and avoid doing things it does poorly (especially HR management), but retain things it does well (like investment in infrastructure, and control of natural monopolies).

I really don’t know what will have to be done to get this message across to government

@Aidan R
“SB has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value” ….What are these?….

What about the amounts of ESB sponsorship for various events? What has these to do with delivering cost-effective electricity supplies where it is the dominant incumbent?

Why is it inappropriate to conduct public policy through the ESB?

If ESB is a commercial company then why does it discourage its customers from using its product? ESB is a regulated monopoly utility with commercial subsidiaries like ESBI. ESB is regulated by the Commission for Energy Regulation. The Chairman and CEO are answerable to the Oireachtas energy committee and to the major shareholder, the minister, who is democratically elected.

What is the alternative means to reach the European and Irish policy objectives for renewables use by 2020? Are you thinking taxation or subsidies or something else? I would be very interested to hear the alternative.

@Ger,

We have been handed a fait accompli. There will be no consideration of any restructuirng or regulatory reform. The Government has decided to exploit the Article 9(9) loophole in the EU Electricity Directive to keep the transmission assets in ESB Networks. The selected group of officials will assemble the details of the decision in principle of the Government to part-privatise the ESB as an ‘integrated utility’. That’s it and that’s all.

The only options left are:

1. The vague hope that consumers will wake and realise they have been ripped off, are being ripped off and will probably be ripped off even more – and decide that they are not going to take it any more;
2. A legal action contesting the Government’s abuse of its executive dominance by presenting this decision in principle as a fait accompli;
3. A legal action seeking to establish the grounds on which the Government and the EU/IMF appear to have pre-empted the detailed assessment of the electricity and gas industries specified in the EU/IMF MoU. The efficiency of these industries was intended to be a key focus of this assessment. The decision to maintain an integrated structure (and the implict decision to maintain current regulatory arrangements) closes off the possibility of identifying and implementing key reforms that would contribute to increased efficiency.

But there has been little public outrage at even more egregious rip-offs so it would be futile to expect this would provoke any concerted public outrage. The Oireachtas is so docile it might as well not be there. And who would be sufficiently foolhardy to initiate these legal actions?

Apologies for double submission.

@Paul
Theres a difference between efficiency & productivity.
For instance in a closed system a efficient element will just transfer its surplus to another.
No new net productivity is created.
Market state solutions do not add anything to productivity because they do not have any strategic ambition , the company is just one element in a hypothetical closed system.
Private companies will not decide for example to reduce the coal / gas dependency of a country and the political administration will have no power to achieve any objectives in a market state.
Essentially the banks control the spice – they do not want any country going off in a tangent.
Although the French Nuclear project was a example of Bankers gone native – but these were old republican values , completly obsolete in these strange feudal times.
I suppose people now realize there is no reason to hold any loyalty to the state – its a parody of itself.
History is rhyming again…………
When the situation becomes truely farcical there will be a reaction – there always is….its sad really but predictable.
Begins at 0.00 ends at 4.10
http://www.youtube.com/watch?v=qgC3jJljGg8

@Aidan R,
Even a cursory examination of the interplay between government and ESB over the last 80 years would provide evidence of determined attempts to gain electoral advantage from ESB and other semi-state’s policy and project deployment.

This subject was referred to by T.K Whittaker as early as 1956.

Re “What is the alternative means to reach the European and Irish policy objectives for renewables use by 2020? Are you thinking taxation or subsidies or something else? I would be very interested to hear the alternative.”

Ireland does not actually have a hope of meeting these objectives under current conditions.

@Richard Tol
“EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them).”
and @George Johnstone Stoney
“Actually ESB receives the electrons Richard, I should know.”

Sorry for being picky but this description of electricity shows a basic misunderstanding of the phenomenon and is irritating. It would have been more accurate to have just said “electric current” rather than suggest that ESB is selling electrons!

On the news at one, Brendan Ogle was asked would some “gravy” help get the unions onside.

He took umbrage, but then spoke unprompted on the 5% employee share while sounding like a man who was considering how to make money from that share. Perhaps by including some of the employee share in the sale.

Shame Rabitte’s starting point in the negotiations is probably where the unions would have liked to end up post the usual sham 4am union/government/employer round of negotiations.

As it is, we’ll now get the worst possible privatization and the unions undoubtedly will ask for a greater employee share while simultaneously selling off a portion. And they’ll want this tax free thanks to the Eircom precedent.

@George

Growth & Stability Pact targets were “legally binding”. Then the world changed.

EU renewables targets are a badly thought out nonsense that other countries will miss by a mile. We should stop wasting precious capital on this nonsense.

@Sarah Carey

“Cushy”? You’re a jornalist for f-ck’s sake.

Do yez still have the 4-day week?

@Richard Tol

Better to be approximately right, and have fun, than elegantly wrong, and have none.

I like a version of the 3rd Harvard Law of Biology: ‘with a careful research plan, under controlled conditions, using selected agents, complex adaptive systems do pretty much as they damn please’. [John Holland, Hidden Order; Ulam Lecture Series] Trick is to sense a CAS – where hermeneutics trumps explanatics; methinks we are all in one in the EZ at the mo, and the best in Santa Fe could not model it.

@Mickey
Generation can appear to become private when all is needed is a gas turbine engine (low capital costs).
When fuel costs rise the low capital investment will be externalised over the long term.
Bank utilties have made unnatural profits through decapitalisation of their balance sheets – it seems we are going to make the same mistake with physical electricity generation.
You really can’t make this stuff up.
If everybody extracts profits & wages the company becomes super efficient – banks were super efficient / that is the definition of leverage – then they blew up.
We need to redirect huge amounts of money into rational CAPITAL investment.
We spent 50 billion on all physical capital investment in 2006 alone – now we cannot spend 7 billion on a EPR over 10 years.
Something is deeply wrong with our investment culture.
This is really tear your hair out stuff.

@Sarah Carey,

One issue you may wish to ponder as you make your mind up on the larger issue is that the ESB is valued by its lender bank’s at up to €12 billion, with a large amount of that valuation being attached to its transmission and distribution assets.

The amount of transmission and charges charged to your domestic electricity account are small, at the level of Intel or similar, who in effect do not buy from the retailers those charges are very significant and affect investment decisions.

There are some jurisdictations where the Transmission network is partly privatised but in every case the national regulator has been given clear direction and powers to keep transmission and distribution charges low.

There is a particular danger to Ireland in this respect because of the SEM market mechanisms.

@Sarah,

I suspect you may not have read my comment of 8:46 this morning (I know it’s a bit long and wonky), but the key issue isn’t who owns the business, it’s how can low-cost financing be secured to finance the huge amount of investment required into the future. And this is linked to the structure of the business and who performs various activities and how efficiently these activities are performed.

Government ownership has been a disaster for Irish consumers as successive governments have failed to contribute their share to finance investment – and the regulator has been forced to extract the extra dosh from consumers. And there has been an awful lot of investment – making up for serious under-investment in the past, investing to support huge demand growth, investing in various pet political projects and ESB investments in various foreign ventures.

But selling a part of the integrated business to a private sector investor won’t improve this. It’s likely to make it worse as the new investor will want the regulator to up the regulator’s cash extraction from consumers to pay his divvies – and a new investor will probably prove just as reluctant to provide some new equity (over an above his purchase payment) to part-finance investment as the government is.

The Government will get some dosh – though maybe not as much as the IMF would like, the ESB will be able to carry on regardless, workers will probably have to get some ‘gravy’ and consumers will be worse off.

But any possibility of the major structural shake-up that would benefit consumers and the economy is totally out of the question.

“Since there are only 6,900 workers in total cutting their pay by 20% would yield a saving to the company of approx. €85mn. In light of a €28bn recession, this is a trivial amount.”

ESB already has a target to reduce pay & expenses by 140m in the next three years. They have to in order to retain the rating and be able to finance development.

“Instead, there would be a loss of revenue arising from the lower consumption of ESB workers themselves.”

Provided lower operating costs would result in cheaper electricity, there would be no lower consumption as the electricity consumers would have a few more quid to spare.

@ Paul Hunt
“For example, in Ireland, the CER provides a capacity pot (paid for by consumers) to pay generators to construct plant and make it available. And it awards the ESB and BGE Networks whatever revenue they will settle for (again paid for by consumers) to make sure the electricity and gas stays flowing..”

your comments are generally well thought through but the capacity pot mechanism does not indicate that the CER have been captured by the ESB / Bord Gais. They do not get what awarded whatever they will settle for.

The SEM “directed bid” mechanism was designed to limit market power of ESB, by removing the possibly of strategically removing capacity to drive up prices. Pricing is dicatated by plant characteristics and is designed to deliver a “true” SRMC price for the marginal plant. Since competitors in the market do not benefit from the incumbent’s market power they can, and do, report any bids which appear to be high. As the market price is SRMC, a capacity payment mechanism is then a logical necessity to deliver a market return. It is not evidence of capture.

The second point is that the capacity payment is based (roughly) on 3 things:

(i) the per MW value of capacity is based on the cost of a “Best New Entrant”, which is calculated on the basis of the cheapest technology for providing reliable capacity – open cycle gas turbine. If a market for OCGT exists in Ireland, it is a very niche one and consequently this is likely to underestimate the cost of any capacity that is likely to be built. However, in itself this is not a bad approach as more expensive capacity will earn a return in the market (while OCGT will rarely be dispatched). However the baseline is not set on any ESB plant, but on something much cheaper.

(ii) the required capacity is based on the amount of capacity which the CER determines is desireable – essentially a margin over peak demand. The required amount of capacity is substantially below the current installed capacity, which results ina proportion of the BNE being paid per installed MW. This is not intrinsically a bad approach as there should be no reward for over-capacity. In the current market (which is awash with reliable capacity) there is little reward for the incumbents (never mind the new entrants).

(iii) All available capacity gets a share of the pot. This is crazy. It is paid not only to the “reliable” (thermal/hydro/pumped storage) bidders (which a capacity payment should be rewarding), but to all capacity including wind. Paying wind for capacity from this pot increases the investment in wind while diluting the payments available to providers of reliable capacity. Therefore it incentivises unreliable capacity, while reducing the payments to the market segment which will be needed when wind dies.

At each stage it could hardly be said that the ESB as the main provider of installed thermal plant is getting an unfair advantage via this mechanism . It is a consequence of the fact that there is no reward for capacity in the market price. It could be argued that the ESB thermal capacity is older and therefore has lower costs than a new entrant. While this is true, it should be clear that the capacity payment underestimates the value of capacity in the SEM. To an extent this reflects the fact that no investments will be made in thermal capacity in Ireland for 5-10 years. In the meantime, all recent investors in generation (Bord Gais included) can expect to see their investments stranded.

@ michael burke

“There were €2,707mn in ESB revenues in 2010. So, even if all the €85mn in savings were passed on from a 20% pay cut then bills would be lower by just 3% (ignoring the wider effects on demand in the economy). But it is notable that all the scourges of ESB pay never propose any mechanism for ensuring that consumer charges would be lower.”

It does not matter what the percentage of reduction of an average bill would be when the aggregate saving for all consumers would equal the aggregate reduction of ESB salaries so there would be no net effect on consumption, which was the argument you were making.

“By contrast, using the tax regime (windfall taxes) to lower charges and increasing productive investment, based on €858mn in profits, would benefit the economy and govt finances.”

I have no idea what this means. You want the windfall taxes to stimulate companies to make less profit so that they can pay less tax? And that somehow benefits the economy and the government finances? That makes absolutely no sense.

@Dom K.

Market forces? In this country?

@ Dom K

if you can’t see how higher taxes on SOEs would benefit govt finances, bearing in mind the govt is the beneficiary of those taxes, then no further discussion is likely to be fruitful.

@Richard Tol

Ta for bringing up Waldrop & Complexity – didn’t know that Brian Arthur of ‘increasing returns’ fame was a Belfast Lad … of course things were a wee bit ‘chaotic’ up there at times – and when he got mad, he got even. Ability, environmental influences, and real class I assume. Possible that Van Morison similarly influenced? & that thought just emerged …

http://www.tnellen.com/ted/tc/complexity.html

‘Asset stripping’ is in fact a process in which a company becomes leaner and scales down the asset base to match the returns it can realistically obtain. In a market view what matters is the return on assets. In the Marxist view however, which is rather materialistic’ the more tangible assets the better and if anyone wants return on those assets he is a ‘private thief’. Having a bunch of assets without the adequate returns cannot generate growth. Unless assets are creating value there will be no surplus to create new assets. The commies in USSR, Yugoslavia and bunch of other countries have learned this lesson in a rather painful way. Given that you refer to yourself as Snr, Mr. Brian Woods, you should be aware of this development. And as far as excessive leverage is concerned, I think this is now a thing of the past. Credit is necessary but in the future it is unlikely to be as abundant as was the case in the previous decade and hopefully it will come from savings generated by productive activities rather than from Central Banks randomly hitting accelerator and brake pedals as they see fit. I am not as optimistic about the last one though. But I am optimistic about the markets because they always seem to make different mistakes, unlike the socialist brethren who are committed to the same failures over and over. Socialism was in agony for over three decades in USSR and Yugoslavia and yet only the complete crash has led to reform. Market capitalism on the other hand reforms itself every decade or so and emerges leaner and better.

@Dom K,

I think you’re taking us off the pitch. A lot could be done with the ESB in public ownership before one would consider privatisation.

And an earlier comment seems to have disappeared:

The problem is that most people cannot get their heads around the idea that an organisation, almost as old as the state itself and which is a deeply embedded and respected part of the fabric of society and the economy, is ripping them off to the extent that it is – with the full sanction of the regulator and the approval of successive governments behind it. The banks exploited this long-standing trust and respect – and look where that got us. The ESB is doing exactly the same. But people just don’t want to believe it. And the Government lives in fear and dread of bringing it to heel in the public interest.

Those who prevent government from doing what is necessary in the public interest are the government.

Dork,

I am not talking about appreciation of capital goods as the business model here. I am talking about increasing the company value through a productive use of assets. Assets should generate returns which should lead into procurement of more productive assets and expansion of the company. Capital appreciation in the sense that it has been perceived in the past decade is a credit driven folly.

Productive assets can only appreciate in value in two scenarios. One is in case of expansion of credit and the other scenario is when the capacity to produce the productive assets has been limited or the demand has gone up because more investors are getting into that business. Once you as an investor / company have made a strategic decision to enter this business, the matter of demand/supply is out of your control and should not form the basis of your business model. There is no scenario in which a power transformer will be anything else than scrap metal after 30 years. You can increase the value of your company by managing it properly and these are the operational efficiency savings that come from labour cost and operational practices / company structure. And this is what we are talking about.

The failure of capitalism you are talking about (funny capitalism has failed so many times and each time the left prepared a coffin) is the failure of credit expansion / FIAT currency model and I am afraid that both are in the remit of the government and government bodies. The businessmen have only acted as they always do – play to maximise gain within the current business environment created by the government and by the market demand (often also stimulated by the government).

Someone said on this topic that we should not blame the ESB workforce for extracting the maximum possible outcome under the circumstances. I agree with that assessment and disagree with the emotional language surrounding the debate on ESB wages (I agree these are out of line and have to be reduced for pure business reasons – which is something ESB is already doing faced with market realities of having own rating and borrowing needs). But the same argument should extend to the ‘greedy’ businessmen. Unless they broke the law they should be treated in the same way as ESB workforce: it was nice while it lasted but now its time to be real.

Dork,

There is no significant strategic value that ESB can provide. The energy strategy is determined through a set of policies all companies must follow. In terms of strategic development and operation of the transmission network (and let us not confuse this with distribution which merely follows the urban/rural development plans) is within the remit of Eirgrid and this is driven by energy market exchange mechanisms set by the government and also by the envisaged growth and geographical allocation of load centres. ESB has little to do with this. Transmission master plans are done by Eirgrid. The investment to develop the transmission network comes from leveraging/use of the transmission assets and there is nothing that ESB do here that can’t be done by other competent companies. Other activities include construction and maintenance and this can be done by any competent company. No strategic value there either.

Secondly, I think the reality is that you will have to continue to pay market rate for resources such as oil and that the mass use of oil is here to stay for a while. Even if you wish to run all road transport on electricity (and you can’t because the technology for 30 ton trucks which go 400km/day on average is not there and won’t be there for foreseeable future – this is 40% of road transport) the electricity has to be generated from somewhere. Your options are oil, gas, nuclear and renewables. Nuclear is off the table for now and renewables are expensive and erratic in supply.

@Richard,

Is it not a bit late in the day to talk about persuading the IMF to agree to a sensible approach?

The Government has made a decision in principle to part-privatise the ESB. The team of officials which will flesh out the details for the subsequent more substantive decision at end-Nov or early Dec. presumably has its riding instructions.

A huge amount of effort has gone into crafting this win-win deal for the parties concerned (with consumers and the economy getting hosed as usual). Maybe the IMF is at odds with the EC/ECB – as was rumoured previously on other matters – but I can’t see how a formal Government decision in principle can be overturned easily.

I must admit I was very disappointed with the IMF apparently going along with this nonsense. Maybe they’re not happy, but it’s a bit late now to be getting cold feet.

Might I suggest that there could be a good idea to study what happened when Germany reunited?

DDR owned all capital in former east Germany, after the reunification a lot of the state-owned assets were sold to private investors. Some of the privatisations went well, some went badly and people involved in the process are still around. I’ve met people in east Germany who were and still are angry about some of the deals that were made.

I believe studies have been done about the privatisations in former communist countries, some of the experience gained from there should be possible to apply in Ireland.

@Dom K.,

Good question, but the narrative and the nature of the players provide the answer. The intense lobbying by the semi-states (in particular, the energy states) kicked off shortly after the Colm McCarthy-chaired State Asset Review Group was established in Jul. 2010. The report of the Group was expected by end-2010, but it had to be dove-tailed with the Troika deal and slipped into Jan. 2011. The general election and the need to give the new government some review time pushed the report publication out close to Easter. And the 9-month detailed assessment of the electricity and gas sectors was pushed out to begin at end-Jun. And a further revision of the EU/IMF MoU pushed this out to the end of this month.

It’s very easy to lose a year when a lot of very powerful and influential people are intent to prevent something they don’t like happening.

I’m intrigued. The suggestion seems to be that the decision in principle by the Government to part-privatise the ESB could be applied in practice by identifying a vanishingly small piece of the ESB and selling it. And that the demand for near-term privatisation proceeds could be satisfied by selling all or bits of other semi-states where the structural, regulatory and policy issues are much less complex than those surrounding the energy semi-states.

Since there is no limit to the slipperiness of an Irish civil servant, I could see how this might be achieved. I must admit I just couldn’t see how the EU/IMF could abandon the detailed assessment of the electricity and gas sectors. Slippage, revsion, refocusing, yes; but abandonment, no.

@Dom K.,

Agreed, but see my last comment which reflects what Richard is suggesting. I would like to believe this is possible and is being considered, but my hopes have been raised and dashed too often previously.

Very cunning. All the Troika wants is the sound-bite “Ireland is privatising state-owned businesses; Greece isn’t.” Anyone who says: “Wait a minute. What, how much and when?” will get blown away by the spin.

Richard,

I must say I was intrigued when you mentioned ESBI Computing Ltd so I looked it up. I don’t want to go into too much detail but I stand by my previous comment. This is not an off-the shelf business you can float. The bits you can sell are generation and ESB without any overhaul of regulation.

Dork,

Power plants and distributions are radically different businesses. Unless you run an isolated network with one plant hooked up to a distribution network there is absolutely no reason they should be bundled.

Richard,

A legal entity / trade name can easily be confused for a working company. Look at ESB books for 2010. ESB Energy International is a working company that can be sold on its own but even that has made 150m profit last year on 4.5b of assets. Good luck selling even that. ESBI Computing isn’t worth mentioning in this context.

Dork,

Your opinion that the Energy Minister should go to one mane with a brief on electricity infrastructure is just that – an opinion. And it is so absurd that is it beyond logical reasoning.

@DOM K
The old fashioned top down – buck stops with me culture was much better then this farce.
Once States began to atrophy they outsourced judgement and decision to private actors – a disaster.
I blame Yes Minister for much of this absurd crap.
It was extremely funny but very damaging.
I cannot imagine any state now embarking on a French scale nuclear programme – imagine how many consultants with skin in the game they would have to consult.
The just do it culture is lost in the west.
American managerial theory beginning with the McNamara era has gutted all ambition.
Its all body counts – the strategic goal is lost in the bullshit ether.

Dom K.
Reality is what you make of It I guess – I have no interest in inhabiting the market state reality – it has been tried and tested and found wanting.

@Dom K: “Chaps, I think we have exhausted this topic.”

Actually, no! Your interest, maybe.

“I have no interest in debating subjects so widely outside of realms of the reality.”

Pity. You would have learned something. Perhaps you need to re-frame your image of reality.

Brian Snr.

Pat Rabbitte says sale of ESB to take place next year. But what will the buyers pay for a minority stake in a company with fundamental problems which is also supposed to be a part of this New Era business envisaged to fund god knows what pet project the govt comes up with?

It’s with sadness I write this reply as we look at our country going under because of the private vultures that destroyed our great country.
Is it now time that we looked at the formation of the ESB in the past and why we decided then to create a semi-state company to develop and run this business in the interest of the Irish people and the greater development of our country?
Why did the Minister then, in his wisdom, in the Irish Government refuse to offer the private speculators (i.e IFA, Newspapers, and people like Eddie O’Connor) the opportunity to start Electricity Company?
Why now does it seem right for Mr. Pat Rabbitt to reverse this policy and give it to the very people who were not accepted in the early years of the country’s development?
I believe the vision of the first government of the time has proved them right and what we now need is a debate around the creation of more new semi-state projects that will help pay over dividends (i.e. ESB in 2012 paid 80 million and over 2 Billion in the last number of years to the Irish government to support our schools, hospitals, and the poorer sectors of our society. This money in the past has helped fund those people who need to be cared for. Other Semi-state companies have also paid over dividends.
What will selling the Gas Company and some ESB Generating Stations prove? Yes we will be able to pay a bill belonging to someone else and keep the German’s off our back.
I believe what we need now is more aggressive Semi-state company’s with new ideas that will again dig us out of the hole that private corruption has made for us.
We now need vision and leadership in bringing the likes of ESB and Gas Company together with the huge amount of expertise, with their financial strength that they have and form a new energy company in bringing both our oil and gas ashore for the benefit of our country in the long term (not short term bill paying with the obvious destroying of these two great Irish company’s).
Forget about this stupid wind farm in the midlands that has nothing to offer in job creation in the long term and which will contribute to destroying the Irish landscape.
We now need to start building a future for our country and use these assets to help support and bring back home all our young intelligent people so that we (the older people & disable) will have some support in the years ahead.
.
Remember it’s only a short few years since we closed our sugar factory (another fine semi-state company) because our government did not understand the incorrect figures that were supplied from Europe. People need to read up on these decisions.
Now we are going to build a Sugar plant again, this time in private ownership. What will be the dividend paid to the Irish Government from this plant in the future?

Out of all the cars we drive today is it not possible that we could design and build one type of car for this country. Where are the Tyres made now that are required?

WAKE UP MODERN IRELAND.

It’s now time that the ordinary people spoke up and take back their country and our future direction in the interest of all our people. Remember it’s our children that we have sent to far off lands to work in.
Politicians its not there choice they would rather be working here like any Irish person in developing their own country for the generations of people who would follow them…

My only hope is to create some HOPE for the future, no money gain for me.