Towards a private ESB

The government has announced that it will sell a minority share of the ESB. This is welcome news. Privatization of non-core activities is a matter of principle. The ESB has paid poor dividends. It has frequently been used to bankroll projects of dubious commercial (yet clear electoral) value. Selling a minority share is a low risk strategy for price discovery and much better than a fire sale.

So far so good. However, the government also announced that it would keep the ESB “as an integrated utility”. The ESB is a conglomerate. It generates power, it owns the transmission network, it sells electricity, and it provides consultancy services.

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).

As an integrated utility with a natural monopoly, The ESB enjoys considerably market power. The nominally independent transmission system operator, EirGrid, gets electrons from ESB, transmits them over lines owned by the ESB, and delivers them to the ESB (who then retails them). The ESB’s dominant position is the main reason why few companies have entered the Irish electricity market.

Today’s announcement suggests that the government plans to continue the current situation. It would make more sense to sell the network to EirGrid. The price of such a sale matters because the ESB is part-owned by an ESOP; and because the ESB is using the network as collateral for cheap loans.

The future ESB will therefore face three demands, compared to two now. The workers will want well-paid jobs, as they had in the past. The political masters will want their pet projects, as they had in the past. And the private owners will want dividends. The consumer will have to pay for all of this.

Seminar on R&D and Climate Change Innovation

On the 21st of September Professor David Mowery of UC Berkeley will give a seminar entitled ‘Mission Driven R&D and Climate Change Innovation: Lessons from US Experience with Information Technology’ at the ESRI (Whitaker Square, Sir John Rogerson’s Quay, Dublin 2).  This is a lunchtime seminar starting at 1pm. More details can be found here.

EU Commission proposes better financial terms for EU loans to Ireland and Portugal

Good news, it seems, from the Commission, allowing us to extend the maturities of our loans, and service them at much lower interest rates, essentially the cost of funds from the EFSM. It also looks like there will be a retrospective reduction (but that’s my reading of the text, I’m open to correction).

From the press release:

The Commission proposes to align the EFSM loan terms and conditions to those of the long standing the Balance of Payment Facility. Both countries should pay lending rates equal to the funding costs of the EFSM, i.e. reducing the current margins of 292.5 bps for Ireland and of 215 bps for Portugal to zero. The reduction in margin will apply to all instalments[sic], i.e. both to future and to already disbursed tranches.

Furthermore, the maturity of individual future tranches to these countries will be extended from the current maximum of 15 years to up to 30 years. As a result the average maturity of the loans to these countries from EFSM would go up from the current 7.5 years to up to 12.5 years.

Two comments. First, this is very welcome news, and well deserved given the levels of austerity we’ve endured and the cooperation the Irish State has given, relative to other EU countries. Second, were this proposal to come from the Irish side, rather than the Commission, in the current climate it would be seen as a call for a controlled default. The fact that we (and our Portugese cousins) are being allowed to do this shows that the EU Commission is aware that the sustainability of Ireland’s and Portugal’s public finances are in question, and they have decided to act decisively to change the probability of our finances becoming unsustainable in the medium term. So: a good news story for once. Commenters may have differing views, of course.

(Ht to Liam Delaney for showing me this)

Kenmare Conference Programme

The programme for the Dublin Economics Workshop 2011 Economic Policy conference, to be held in Kenmare, County Kerry, October 14-16, is as follows:

Friday October 14th.

18.00 Understanding the Irish Banking Crisis

Dermot O’Leary (Goodbody Stockbrokers), Don Walshe (UCC): Debt De-leveraging, the Banks and Economic Recovery

Cathal Hanley, Andrew Rae (Competition Authority): Competition, Financial Stability and the Irish Banking Crisis

Pat Farrell (Irish Banking Federation): Building a New Banking Architecture

Continue reading “Kenmare Conference Programme”

UK Banking Commission Report

The Vickers report is directly relevant for Ireland in view of the inter-connections between the Irish and UK banking systems, while also providing some guidance for possible future reform strategies across Europe.

The FT editorial provides a useful overview (it also highlights the proposal to rank depositors ahead of senior bond holders), while the full report is here.

Public Pay and the Sindo

Former Bertie Ahern Seanad appointee, Eoghan Harris, writes in the Sunday Independent today that he is confused that I can believe public sector pay should be cut and yet also believe that his newspaper has demonised this issue. His silly comments about academics and the Irish Times aren’t worth responding to but I’m happy to clarify what my position is.

In relation to public sector pay, one can argue until the cows come home about whether public sector workers in Ireland are paid more than private sector comparators or comparable public sector workers in other countries, and about how these premia have been altered by the pay cuts of the past few years. However, that debate doesn’t change the fact that Ireland has a very large budget deficit and every major component of expenditure will need to be cut to put the public finances back on an even keel. And that must include public pay.

I’m sceptical about whether an approach that doesn’t see pay rates cut can deliver substantial savings and would also prefer pay cuts to reductions in numbers of front-line workers that will affect the delivery of key public services. So my position is that public sector pay rates need to be cut.

If that’s my position, then what’s my problem with the Sunday Independent? My problem is its focus on high rates of public sector pay as the single cause of the budget deficit. Its coverage repeatedly gives the impression that “we are borrowing to pay for the public sector”. Other areas of spending such as welfare rates receive comparatively little coverage and topics such as our narrow tax base and generous income tax exemptions receive no coverage at all.

An examination of the figures reveals that a focus on public sector pay as the source of the deficit is misplaced. This year, the government will spend €18.1 billion on pay and pensions for the public sector. The general government deficit is projected to be €15.6 billion.

You might think this means we can eliminate the deficit via an 86 percent cut (0.86=15.6/18.1) in public sector pay. But, even if you did manage to get anyone in the public sector to work for 14 percent of their current salary, this strategy still would not work because public servants pay PAYE, PRSI and a pension levy and most of these payments would have disappeared. (They also pay VAT when they spend their salaries.)

I don’t believe the government releases figures on the net cost of the public sector pay and pensions, subtracting taxes and levies, but I would be surprised if it was more than €11 billion. So you could fire every public servant in the country and still not close the deficit.

Back in the realms of reality, even substantial cuts in pay rates will still leave a yawning deficit. For example, consider a cut of 25 percent in pay rate, reducing gross pay by €4.5 billion. The marginal tax rate on public pay rates above €36,000 is 62 percent. (See tax calculator here) so the deficit would only be reduced about one-third of the amounts cut for people on salaries above this level. I suspect the net reduction in the deficit, before accounting for reduced VAT revenues, would be less than half of the gross amount, i.e. somewhere below €2.25 billion.

So, sadly, if the enormous deficit is to be closed, then other categories have to be looked at. These include spending on social payments (which will cost €26.8 billion this year and are largely exempt from income tax), on capital programmes (which will cost €6.1 billion this year) and on the narrowness of our tax base.

The idea that public sector pay is the source of the deficit has a satisfying ring for many. It means that an identifiable group of “other people” is responsible for all our problems. And it allows people to think that the pain of all the spending cuts and tax increases they are being hit with is unnecessary and is only occurring because public servants are being protected: Nothing sells newspapers quite as effectively as rage. I suspect the commenters on this blog have well above the average level of economic literacy and I can tell from repeated comments that many of them believe the deficit is solely due to high rates of public sector pay. Unfortunately, the arithmetic doesn’t support this position.

So that’s why I dislike the Sindo’s coverage of public sector pay. It leads its readers to believe that there is a simple single bullet solution to the deficit and, via that logic, to a demonisation of a particular group as the cause of our problems. Ultimately, this kind of coverage is unhelpful because it undermines public support for the additional measures that need to be taken, over and above public sector pay cuts, if the public finances are to be stabilised.

No doubt Eoghan would still diagnose my position as being down to status anxiety twitch or some other mysterious condition but I’m happy to take a few shots from the Sindo if the result is a more informed debate about the options for closing the deficit.

Ireland’s Fiscal Strategy

This article is in today’s Sunday Business Post (link tomorrow) and released here with kind permission of its editor.

There has been an intensification in the debate over Ireland’s fiscal strategy over the last couple of weeks, with Minister Noonan’s recent appearance before the Joint Committee on Finance, Public Expenditure and Reforms, the political party think-in events during this past week and the preparations for the imminent new Oireachtas session.

It is important to realise that Ireland retains considerable fiscal autonomy under the EU/IMF programme, such that there are genuine and substantive issues to be decided by the government during the coming weeks. The programme sets down a set of minimum targets for the overall pace of fiscal adjustment but there is considerable latitude in determining the appropriate mix of spending and taxation measures. Moreover, the government is free to pursue more ambitious targets that exceed the lower bounds that are specified in the programme.

For 2012, the government is required to introduce fiscal consolidation measures of at least €3.6 billion (importantly, including the carryover impact of the tax changes introduced in 2011). In addition, it is required to deliver a general government deficit that is no larger than 8.6 percent of 2012 GDP. Indeed, at the time of the deal in November 2010, the assumptions concerning the projected growth of the economy and the projected interest rate on the government debt meant that fiscal consolidation of €3.6 billion would deliver the minimum target of a general government deficit of 8.6 percent of GDP in 2012.

A closer look at the makeup of the overall target balance of 8.6 percent of GDP shows that it consists of three components. According to the Department of Finance’s Stability Programme Update (April 2011), the target overall balance is the sum of a cyclical budget deficit of 0.5 percent of GDP, debt servicing costs of 4.7 percent of GDP and a structural primary (non-interest) balance of 3.4 percent of GDP. (This breakdown does not allow for temporary or one-off factors that can be quite considerable in any given year.)

Continue reading “Ireland’s Fiscal Strategy”

Establishment thinking

According to the Irish Times,

The pessimists argue the euro is going to collapse and that will make it all irrelevant, but these are the same people, from far right and far left, who urged burning bondholders, collapsing the banking system and refusing to accept the terms of the bailout.

So, if you are worried that the euro is facing an existential crisis and may be on the brink of collapse, if the right policy choices are not taken quickly, then you are on the far left or far right. Take that, Wolfgang Münchau! And you are also on the far left or the far right if you were not in favour of Irish taxpayers paying back unguaranteed bondholders. Take that, Morgan Kelly, Karl Whelan, and many others too numerous to mention! And of course, if you were in favour of not paying back unguaranteed bondholders, then this meant that you were either in favour of collapsing the banking system, or prepared to accept such a collapse as a consequence of the policies you were advocating (their wording is a little ambiguous here, but the last nine words of that quotation suggest that the former interpretation is what the IT had in mind).

(As an aside, who are these pessimists who argue that the collapse of the euro “will make it all (i.e. getting Ireland back to creditworthiness) irrelevant?” And should Irish policy makers not be thinking hard about what to do in such an event? Would it not be irresponsible for them to refuse to contemplate such an eventuality? And should we not be doing our bit to head off such an eventuality by pointing out to governments with more fiscal space than ourselves that the Irish experience clearly shows that even in a small, open economy the confidence fairy does not exist, and that a policy of generalised eurozone austerity will be disastrous?)

Nice to see such rigourous and nuanced thinking from the IT.

ECB Statement: Jürgen Stark resigns from his position

The statement is here.

Update: from Reuters, German Deputy Finance Minister Joerg Asmussen will replace Juergen Stark on the executive board of the European Central Bank, a source familiar with the plan said Friday.

(Asmussen was heavily featured in the recent VF article on Germany by Michael Lewis.)

Higher education and research

Higher education and research was again in the news today.

The latest batch of bad news on the labour market in Waterford seems to have triggered a decision to establish Waterford University. I am not convinced that universities are necessarily good for regional development. Some universities sure have a positive impact, but I don’t think this holds for any university. With the newly build highways, Waterford is closer to Cork and Dublin, taking away some of the would-be benefits of a local centre of learning and research.

Furthermore, Ireland has plenty of universities already. The largest university has 18,000 students (UCD, 2009) — which puts it below average in the Netherlands,  60th in the UK,  38th in Germany, 35th and just above average in France. Ireland has the 8th highest number of universities per capita in the world already. (A new university would not change the latter rank, just push us closer to Norway.) This matters for two reasons. There is a fixed cost in running a university. International rankings are not normalized for size; small universities cannot do well.

The 2010 annual report of Science Foundation Ireland also made the news today. The press release emphasizes collaboration, which has increased with both researchers abroad and companies in Ireland. This is not a measure of success. It may just reflect the changing nature of SFI funding and its increase in size. The annual report itself has more indicators, but is annoyingly glossy for an academic organization. We learn that SFI-funded researchers have published 22% more papers in 2010 than in 2009, but we are not told the number of researchers. We learn that Ireland has gone up 16 places in the citations-per-paper ranking (36th in 2003, 20th in 2010), but for all we know that may be because of the social sciences and humanities (who are not supported by SFI).

The SFI 2010 Census has more numbers. Two things stand out: Few patents, few spin-outs. Emigration numbers are high: 47% for all, 66% for non-Irish (post-doc and below). SFI’s mission is to bolster innovation in Irish manufacturing.

Rugby World Cup Special

The Rugby World Cup is putting the media spotlight on New Zealand.   The New Zealand macroeconomic experience is fascinating – very similar to Ireland in some respects but also with major differences in terms of its exchange rate and banking-sector policies.  In this new paper, I examine the New Zealand situation, with a particular focus on its external imbalances.

This paper argues that large external imbalances pose significant macroeconomic risks for New Zealand. While New Zealand has coped well in recent years, the global financial crisis has underlined the vulnerability of deficit countries to financial shocks. New Zealand can draw important lessons from the global crisis by adjusting its macroeconomic policy framework to further mitigate the risks embedded in its international balance sheet.

Full Privatisation of Aer Lingus

A guest post by Drs Donal Palcic and Eoin Reeves from UL:

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

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

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

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

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

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

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

Sharing the Burden of Adjustment

From the IMF report:

  • Sharing the burden of adjustment: the authorities’ commitment and performance to date give confidence that fiscal targets will be met, and the authorities are working to develop a medium-term fiscal framework and supportive fiscal institutions. It should be recognized, however, that there is a strong sense that burden-sharing between taxpayers and creditors for the cost of supporting the banks has been unfair. In this respect, the authorities have reiterated their absolute commitment to servicing sovereign debt and the debt of the pillar banks (AIB/EBS and BoI) that will meet the banking needs of the Irish economy. Regarding the banks in resolution (Anglo and INBS)—which have received €34.7 billion (22 percent of GDP) in capital from the government—the authorities have stated that any burden sharing with holders of unsecured and unguaranteed senior debt (about €31⁄2 billion remaining) would be undertaken in consultation with the European authorities. Staff stressed that to effectively mitigate contagion risks such burden sharing would need a robust legal and institutional framework that strikes a reasonable balance between creditor safeguards and flexibility.

Waste collection

The proposed reform of waste collection policy was again in the news today.

The Examiner has a funny story. The proposed reform would cut costs (5,000 people less on the payroll) and increase charges at the same time. The Times is more thoughtful, although it is still curious. In our textbooks, regulators fight against market power. Here, the regulator wants to establish private monopolies and the companies that would likely obtain those are dead against.

Mr Kells issues an implicit threat of court action. Presumably, the companies would argue that they have a customary right and reasonable expectation to compete in any waste collection market.

A lot of the fuss is due to poor communication. As far as I know, the department wants to sell waste collection concessions to the highest bidder, rather than take waste collection back into the public sector (as the private waste companies seem to think).

Here is one way to get around this. Instead of auctioning concessions, they could be grandfathered.

AFAIK, there are four private waste collection companies in DLR. Counting bins on my way to work, I guess that one company has 50% of the market, two have 20%, and one has 10%. DLR should thus be carved into 10 concessions, with 5 going to company A, 2 to companies B and C, and 1 to company D. In two years time, the first concession should be auctioned, the second one two months later, and so on.

Transfer Payments

A previous post looked at the overall government accounts using Table 21 from the CSO’s National Income and Expenditure Accounts.  Here we use the figures from Table 24: Transfer Payments to focus on the largest expenditure item.  As we saw in the previous post expenditure on current transfer payments rose from €21.3 billion in 2006 to €28.9 billion in 2010.

Table 24 provides a breakdown of current transfer payments in 43 different categories.  Here we combine many of them together to form ten main groups.  For example, Pensions includes contributory, non-contributory, retirement and invalidity pensions, Unemployment includes unemployment assistance, unemployment benefit and redundancy payments.  Other transfers such as Child Benefit and the Supplementary Welfare Allowance are used as standalone groups. 

The two largest named categories in the Other Transfer Payments group are the local authority housing rental deficit (€660 million in 2010) and the social employment scheme (€361 million).  Apart from miscellaneous categories all other elements of this group are smaller.

If required Table 24 provides the figures for all 43 categories but the ten categories used here provide sufficient detail for this glance into our transfer payments where the purpose is to inform rather than advocate.  Some details and 2010 figures of the classifications  used by the Department of Social Welfare are available here.

Anyway this is the table produced using the ten groups.

About 40% of the increase since 2006 is as a result of the increase in direct unemployment payments.  The increased level of unemployment will also have led to the increase in other payments.  Pensions form the largest category and account for about one-fifth of the increase.  Child Benefit payments were actually lower in 2010 than they were in 2006.

UPDATE: An extended table with details going back to 1997 can be seen by clicking here.

Ireland’s economists in the world (part 2)

I’m getting better at scraping the web and I’ve now been able to calculate some things that IDEAS/RePEc does not.

This graph has the number of economists in Ireland registered at IDEAS/RePEc. It is not a natural number to account for joint appointments. The number has been rising steadily over time. I expect that trend to reverse in the coming months.

This graph shows Ireland’s position in the total population of economists. We’re a small country. I highlight Massachusetts because it is ranked highest by IDEAS/RePEc.

This graph shows the number of unique publications per person. In recent times, Ireland has done reasonably well in terms of productivity.

However, visibility cq interest is less impressive, as shown in this graph. It should be noted, though, that “abstract views” is the metric that can be most easily manipulated. That said, Ireland does not do so well either on the number of citations per publication, as shown in this graph, or on the number of citing authors per person, as shown in this graph.

As always, these results can be interpreted in a number of ways. In order to improve Ireland’s standing at IDEAS/RePEc, we’ll need to convince more people that our papers are worth citing.

The great thing about the Public Data Explorer is that you can make your own graphs. You need to go back two positions to return to this blog.

I used these Matlab scripts to scrape the web.