Frank is excellent in today’s IT on the role of incentives in Ireland, and a need for a review of those incentives.
Month: September 2011
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.
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.
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)
This European Commission annual report is now available here.