Incoherent privatisation policy a cause for concern

Eoin Reeves and Dónal Palcic write in today’s Irish Times on the issue of privatisation, and they don’t pull their punches. From the piece:

Not only is there a lack of clarity about the companies to be sold and the timing of any sales, but it has also emerged that there are significant differences between the Government and the troika on the role privatisation should play in contributing to any economic recovery. These differences do not bode well in terms of making the best decisions about the future ownership of critical infrastructure industries.

At this stage, two key points of difference between the Government and the troika can be discerned. First, the drip-feed of information provided during the latest visit indicates that the troika views privatisation as a structural reform issue that should be implemented to improve the overall competitiveness of the economy. The Government, meanwhile, appears to be focused on privatisation as a means of raising exchequer revenues.

The second point of difference concerns how the proceeds from privatisation should be used. Whereas the Government wants to direct revenues towards job creation, the troika views proceeds as a means of paying down the national debt.

The troika’s view of privatisation as a tool for reducing costs and improving competitiveness is an orthodox proposition that is traditionally associated with multilateral organisations such as the International Monetary Fund but it is one that can be readily challenged.

Palcic and Reeves finish by making an important point about the dangers of short term political thinking applied to long term strategic assets. This problem is rarely discussed, as far as I can see, in Irish public policy. Hopefully we’ll see some more discussion in the comments about this problem.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

23 thoughts on “Incoherent privatisation policy a cause for concern”

  1. Hard to see ny success stories where even PPP’s (Public, private partnerships) have worked in Ireland. The roads, the building of schools, Eircom floatation, all proved disastrous costing way more than they should have. Rich pickings in the public sector are looked with enviously by international finance. The evidence in Ireland is that privatisation does not reduce costs; it increases costs over the long term. Public utilities should not be privatised; they should be made more efficient. Often, costs in the private sector follow a pattern of one to one eg in the provision of private health care; then costs soar or failing this eg in private healthcare, nursing home facilities, the facilities are closed down when the company gets in to trouble re falling standards or other losses. Hopefully the troika are not considering the selling off of Irish schools and hospitals to international finance capital; so Irish taxpayers now got to pay school fees and health care costs or lose entitlement to both, but it seems we’re getting there.

    http://www.wsm.ie/story/1250

  2. Are ye all not getting a bit clannish down there is Limerick? And no post on Colm McCarthy’s latest – and magnificent – piece in the Sindo? 🙂

    I realise Colm just mentioned semi-state reform in passing as a ‘work in progress’. Presumably he’s somewhat constrained due to his role in the State Asset Review Group. But that should not stop Government being more forthcoming about what it plans to do. Presumably, it submitted an outline plan on semi-state restructuring and privatisation to the European Commission at the end of last year to comply with the relevant condition in the EU/IMF MoU.

    Why is this not in the public domain? The Government exercises its ownership rights in these businesses on behalf of the Irish people. It would only be manners to inform the ultimate owners, at least a little, about what their elected agents are minded to do with these businesses. And it might staunch the flow of speculation and propaganda – with this op-ed being a prime example.

    What is it about these ‘strategic assets’? These are simply long-lived, specific assets that provide important infrastrucure and utility services. The challenge is to ensure that investment in these assets is efficient, that the financing of investment is efficient, that the operation of these assets and the delivery of services is efficient and that consumption of the delivered services is efficient.

    The primary requiement is for a long-term binding contract covering ownership, investment in and operation of these assets that will ensure full recovery of investment, and thereby, at the lowest cost of capital. In the case of energy, for example, where most of the semi-states’ value resides, it would ideally involve long term contracts between monopoly local suppliers (drawing on the almost indefinite commitment of final consumers to consume and pay) and large volume users, on one side, and suppliers of pipe, wire, supply and generation services, on the other.

    The EU’s half-arsed energy market liberalisation programme, with its insistence on full retail competition and the full operational unbundling of retail supply and distribution services, has destroyed any hope of achieving this first best outcome. Given that it has pursued its misguided efforts this far and ensured there is no potential to return to the status quo ante of vertically integrated monopoly supplies, most in full public ownership, with exclusive rights to purchase, import and supply – which wasn’t very clever in any event, we are left with a range of distinctly sub-optimal options.

    There is absolutely no requirement for the state to own these businesses, but, given the mess the EU has created by unbundling networks and supply (absolutely necessary on transmission systems), but then failing to prevent consolidation and vertical integration along the electricity and gas supply chains (absolute lunacy), the state is being forced to be the counter-party, in some shape of form, in the long-term contracts required.

    In general, so-called ‘independent’ regulators have been forced into the breach to provide long-term guarantees of revenue recovery to providers of network services and of capacity payments to electricity generators. And, of course, these regulators have been captured – and the Irish regulator has been captured more than most and consumers have been hosed. (Does anybody in their right mind really think that the failure of economic regulation occured only in the areas of banks and financial institutions? Policy and regulatory failure was, and is, endemic.)

    But investors in these businesses realise that regulators are not as independent as they claim and cross-border activities get really messy when two or more regulators are involved. So, with this madcap rush to renewables and the need for more cross-border interconnections, the EU and its member-states are being forced to put taxpayers money on the line and to enter into all sorts of commitments and supports for whizzo investment financing schemes.

    The Irish Government doesn’t have any money to put on the line. Consumers are being hosed beyond any reason, fully authorised by the CER, to generate whatever revenue the ESB and BGE desire. It’s time to fully unbundle the networks as separate businesses, replace some state equity with debt (this could generate up to €3 billion), establish the businesses as a long-term ‘yield stock’ backed by a long-term regulatory guarantee and sell them to pension or long-term infrastructure funds. The long-term regulatory compact would be based on a licence requiring commitment to investment to meet the quality and level of service required – with a failure leading to licence revocation.

    This would also need effective, statutory representation of the collective interests of final consumers in any regulatory determinations – in place of the farcical public consultations currently conducted.

    This is the best sub-optimal solution available, but, while we have propoganda, ideological posturing, expressions of atavistic nationalism and partial, self-serving analysis of international experience masquerading as informed comment, it won’t have a snowball’s chance iin hell of being secured.

  3. With the right attitude, privatisation could reap significant benefits for these companies. Unfortunately the approach taken by most commentators, and especially politicians is usually ideological. It should all be sold or it should all be retained, with little thought for making these companies work properly in either public or private ownership.

    In a particularly unsatisfactory exchange with a government party politician, I was recently informed that the reason the electricity grid was to remain with the ESB after part privatisation was to ensure that future governments would not be able to fully privatise the company. In other words, the political classes think it is clever for them to sabotage the functioning of the energy market to make sure that the Irish flag will always fly above ESB head office.

    Whether a company is public or private, our only concern should be that it functions well. Planting the seeds of future disasters in order to fulfil ideological aims is a desertion of the responsibility of government.

    For the record, I believe that the grid should be transferred to Eirgrid regardless of whether the ESB remains a public or private company. The current arrangement serves no purpose except to give the ESB leverage over government decisionmaking on this issue. After that, I am not concerned whether either company is public or private as I don’t see that the functioning of either would be greatly enhanced by privatisation. Although a small part-privatisation may serve some benefits in scrutinising management.

    In general, I am in favour of privatising transport companies and part privatising transport infrastructure.

    Bus Eireann and Dublin Bus are both decent services really, and would thrive outside of public ownership. Their only real problems derive from lack of ownership -hence noone feels responsible for repairing buses when they are worn down by wear and tear. I believe that in private ownership they would reach new heights. They have good equipment (which just needs to be tarted up a bit), and strong branding.

    Whereas the ports and airports couldn’t really be privatised without creating monopolistic situations -nevertheless, the scrutiny of non-political owners would be of benefit. DAA in particular has had significant cost overruns in recent years and seems impervious to political scrutiny. It needs some owners whose primary interest is commercial. Part privatisation seems like a very good idea in this scenario. Even a 10% stake would open up a forum for commercial interests to advocate commercial minded reforms.

    Finally, I note that Aer lingus is to surrender some assets to the State in return for promises in regard to its pension commitments. These assets must include foreign landing slots, (including Heathrow). The slots can then be leased back to the airline on a long-lease, conditional on their use for flights into Ireland.

  4. 3 posts and no mention of eircom. Any contribution to this debate, (however ‘magnificent’ – by the way, is this the first time anyone has called a Sindo article ‘magnificent? – outside of another Sindo article?)

    No comment advocating privatisation should really be allowed here, if this site pretends to observe the rules of evidence based science, without first proving that the advocated privatisation would not go the way of eircom and Greencore.

    And if there is any concept of ethical responsibility left in academia, all articles by academics should accept that privatisation will inevitably lead to a welching on the pension schemes of the effected companies. The anonymous representatives of the ‘finacial services industry’ are excempt from this plea – we have come to expect little from them.

  5. @Ger, I think that when you strip away all the semi-reasons and fluff, ownership of the grid is being left with the ESB mainly to protect jobs and conditions of employment in ESB Networks. As long as ESB owns the infrastructure, it is easy to retain enough work in-house to keep everyone busy.

    If ownership moves to Eirgrid, everything will have to go to open tender.

  6. @ Tim,
    for the sake of contrarianism:

    It could be argued that the sale of Eircom was a triumph. The state sold the asset at the absolute peak of its value, invested the money in a large pension reserve fund (which we have subsequently wasted on banks), and got out of an industry that was about to be rocked by newly emerging technologies.

    If we had held on to Eircom -or even the transmission network- we would now be complaining about having to support a loss leading, 20th century enterprise that has long been overtaken by new technologies (mobiles, wireless broadband).

    So I’m not saying that someone somewhere had a masterplan, but I think holding on to all or part of Eircom would have actually been worse than our rather clumsy privatisation.

  7. Incidentally -and a slight deviation- I expect that Bus Eireann and Dublin Bus will similarly be rocked by new technologies in the coming decade.

    The self-driving vehicle, long a pipe dream is developing slowly, but it is now so technically feasible that it seems only a matter of time before PSVs, agriculture vehicles and freight vehicles start shifting over to it. The cost savings are so huge that it will be irresistible. An company with a large, secure employee base like the 2 State bus companies will not fare well when this happens.

    Call me crazy -but this is coming.

  8. @ Ger: “Call me crazy -but this is coming.”

    I shall not call you crazy Ger, just a tad excitable. Self-drive vehicles on Irish roads? Now those will not need liquid hydrocarbon fuels? No. Good, ’cause by the time the SDVs appear, LHFs will be a tad on the short side.

    In 10 years time, if business-as-usual continues, then China and India combined will be importing ALL the available exports of LHFs – like ALL, with nothing left for the remaining 158 nett LHF importers. Think that will be ‘allowed’ to happen? It will in its glue!

    Trains will be the next bubble. Bye-bye RyanAir, hello RyanRail!

    And yes, RyanRail will use SD locos, and passengers will hang onto straps! 😎

  9. Ger,
    You make some good points in your first comment but I disagree with you on your subsequent comment that if we held on to Eircom (or even the network) we would now be supporting a loss leading enterprise overtaken by new technologies.

    Eircom had a thriving mobile business in Eircell (the first mobile company in the world to introduce a branded pre-paid package – its ‘ready to go’ plan in 1997) prior to the demerger in 2001 and would have been well placed to keep abreast of any new technologies in the mobile market.

    More importantly, in March 2001, Eircom had net debts of approximately €200m and had the lowest gearing ratio of any former national telecoms operator in Europe meaning the company would easily have been able to finance investment in broadband infrastructure post-2001 without any ‘support’. Indeed, when Telecom Eireann was corporatised in 1984 it inherited a loss-making enterprise with debts of over €1bn. It managed to restore the telecoms service to profitability within four years, significantly improve efficiency, invest in the rollout of the network across the country and reduce the company’s indebtedness over time, all without any support from the Exchequer.

    While nobody can accurately predict counterfactual scenarios I definitely don’t think you can argue that holding on to all or part of the company would have been worse than privatising it. Nothing could have been worse than the highly leveraged buyouts by Valentia and Babcock, their lack of investment in Eircom’s network and policies of cash extraction and the consequent impact on the rollout of fixed-line broadband services in Ireland.

  10. @Ger

    Ultimately the 10B from the eircom sale that is going to the bondholders is only going to them because it’s there. The final negotiated bill would be 10B less had it not been there.

    The 4.5B or more that was extracted from eircom by Soros and Babcock and Brown is as economically parasitical and damaging to the economy , as the payment of the Anglo bondholders.

    Only the most ideologically blind could see any upside in this, though many of the contributors here will secretly delight in the welching of the eircom pension fund. There is something perverse in the delight taken by right-wing economists in the destruction of the rewards for honest labour and the delight in the enrichment of idle parasites like George Soros and Tony O’Reilly.

    Actually eircom is not the worse privatisation , that award goes to the privatisation of the Sugar Company, forgotten it seems now by everyone except the unforatunate workers who did not even get redundancy payments , and the sugar beet farmers. But what is that compared with the fortunes made by the wealth creators?

  11. @Tim O’Halloran

    No comment advocating privatisation should really be allowed here, if this site pretends to observe the rules of evidence based science, without first proving that the advocated privatisation would not go the way of eircom and Greencore.

    Unless you’re in the “transitions don’t matter at all at all” school of things, you should accept that privatisation is not an on/off button but rather one broad heading for a few different things. I like naively comparing it to democratisation: it can be done well, or it can be done horribly, and you would hope that a terrible attempt to bring democracy to e.g. Iraq is not considered an argument against democracy per se.

    Not holding onto the telecommunications network was a mistake. Most everybody accepts that. It doesn’t mean the state should still own the Irish Steel Company or the Dairy Disposal Company.

  12. Of course Telecom Éireann appeared to be successful when it was operating as a profit-seeking company with a monopoly. Look to the end of the monopoly for an explanation of eircom’s weakness, not just the ownership structure!

  13. Readers of this strand may want to read Doug Andrew’s presentation from Friday’s conference which considers the efficiency/fiscal trade-off from, I think it’s fair to say, the opposite perspective. See paper here. Doug’s presentations uses many abbreviations, including private sector participation (PSP), and nproductive and dynamic efficiency (PE) (DE). Of course no one needs to be told that “government BS” is about balance sheets.

  14. @Enda H.

    All that may be true, but if you say TTID, this time its different you must indicate why it will be different. It seems to me there is in fact no way a privatisation can be structured that will not inevitably lead to asset-stripping, “leveraging”, and the theft of the workers pensions.

  15. @ Enda H and Paul Hunt
    Maybe Paul Hunt can tell us why TTID. His post indicates a very postive view about privatisation, the potential for effective regulation, complete contracts and a transaction cost – free world. John Fingleton appears to hold a different view. At last weeks economics conference in Dublin Fingleton was quoted by the Irish Times as follows – privatisation itself “does not drive economic growth”, and that many people behind the sell-off of state assets in the UK now accepted that efficiency gains only took place after markets were liberalised. Yes, the basic disctinction between ownership and competition that Paul Hunt and the other know-alls gloss over. But they know better. Privatisation will really help this island economy on its knees. No need to worry about the dangers of ineffective regulation. mmmmmmm and all this in the week that Eircom is close to going into examinership. The mind truly boggles.

  16. If people fail to see, or refuse to see, that the current almost total state ownership of the semi-states and the long-standing and continuing refusal of the state to finance investement directly or to restructure the businesses to allow efficient financing are imposing a significant implicit financing tax (to the tune of 100s of millions of Euros a year) on consumers, then, I fear, the grounds on which they rail against alternative ownership arrangements are extremely weak. This has nothing to do per se with competition; but it has everything to do with the efficient financing of investment in long-lived specific assets.

    If they genuinely believe that the current arrangements are optimal, then there is no basis to engage in debate. I can engage in debate with those whose positions are based on facts, evidence and analysis. Faith and belief I leave to the theologians or to the ideologues.

  17. @ Paul Hunt
    Theologians, ideologues? Thats a bit rich to say the least.

    Lets say we accept your basic point that current arrangements are not optimal. But you propose privatisation as the solution? There is a lot more in the mix than ownership. Levels of competiton, regulation, corporate governance and a myriad of other factors determine whether any arrangement is optimal or not. So lets say the ESB and BGE are privatised. Its over to the regulator to protect consumers etc in that case. But you have already dismissed regulation on the basis of regulatory capture. Where does that leave us?

    On the quesiton of evidence and analysis. I note you didn’t comment on John Fingleton’s point quoted in my last post. Here it is again.

    privatisation itself “does not drive economic growth”, and that many people behind the sell-off of state assets in the UK now accepted that efficiency gains only took place after markets were liberalised.

    More pertinently, I recommend that you should familiarise yourself with the vast theoretical and empirical evidence (Vickers, Yarrow, Parker, Stiglitz) that demonstrates the fallacy of the simplistic argument in favour of privatisation. Ignoring these writers opens you up to the charge of being an ideologue. Its easy to call names but challenging them by publishing peer reviewed papers on the topic might strenghten would be far more useful. In the meantime, keep articulating the problem, as you see it. But spare us the naive view that privatisation offers a panacea to the problems as you see them.

    On a specific point. If the ESB is privatised do you really think that the money will be made available to the company to invest? The dogs on the street know where that money will go.

  18. Where to begin? I have written so much on these topics on this blog and highlighted so much evidence and analysis, but it appears there are none so blind as those who will not see.

    Economists frequently ignore, or choose to ignore, the impact of political economy. The programme of privatisation in the UK was driven by a desire (a) to generate proceeds (in the same way that North Sea oil and gas were depleted to provide proceeds) that would compensate for the hollowing out of Britains’ industrial base that accompanied the subjugation of labour and the trades unions, (b) to create a share-owning, docile, Tory-voting electorate that had too much at stake in terms of share and property ownership to resist the damge being done to their interests, and (c) to roll back the Keynesian-inspired post-war social democratic settlement to provide a profitable playground for the capitalists who had been restrained and shackled, quite rightly, during this period.

    There was no intent to promote economic growth. The focus was on maintaining sufficient economic activity while these objective were being achieved. The requirement to ‘liberalise’ markets – even if it was done in the most half-arsed way imaginable – was almost an afterthought. BT was privatised intact in 1984 with the idea that a new entrant Mercury might create a duopoly that would impose some competitive discipline. The huge changes in IT and communications technology blew that one out of the water fairly quickly. British Gas was privatised intact in 1986 and it took more than 11 years before a reasonably sensible structure of the industry emerged – even if it ended up with virtual pricing of transmission and totally unnecessary full retail competition. When proposals were being developed to privatise the electricity supply industry the idea was to have a generating duopoly, National Power and Powergen, with the latter disposed in a trade sale and the former being much bigger to carry the monkey of nuclear, but the City took one look, said no way, and nuclear was kept by the state and IPOs were used. Again it took more than 10 years to arrive at some sort of half-reasonable industry structure and market arrangements. And then they went and screwed it up by forcing full retail competition and removing the capacity payment mechanism from wholesale pricing.

    So the UK experience is a text-book example of how not and why not to proceed on a programme of privatisation. So I fear that anyone using the UK experience – or programmes elsewhere that were insired directly by it – as a means to demolish the case for privatisation is simply barking up the wrong tree. It never ceases to amaze me that people devote so much effort into searching for mistakes to make the case that something shouldn’t be done, rather than seeking to learn from the mistakes. Learning from mistakes is how humankind has advanced.

    Now if people were prepared examine the potential to restructure the semi-states while they are wtihin state ownership so as to increase efficiency – and then to examine rationally the most efficient ways of financing investment in the long-lived, specific assets involved – we might have a productive engagement.

  19. Its not just the UK. The international literature (theoretical and empirical) does not support the case for privatisation as you do repeatedly in your posts. The hope that Ireland will get it right is hopelessly naive. Similarly, recommending that the revenues from selling state assets will be used to finance investment is not very useful as it simply won’t happen. The troika will see to that.

    As you say, focusing on re-structuring state assets while they are still under public ownership should indeed be encouraged.

    But the reality is that sell-offs are on the agenda right now. Seeking to ensure that’s resisted is imperative.

  20. “The hope that Ireland will get it right is hopelessly naive”

    I suspect that many people would find this deeply insulting and profoundly – and unjustifiably – pessimistic.

    Ireland has no shortage of competent, dedicated public servants to implement and administer sensible policies. My constant complaint is that the political policy-making process frequently requires them to administer and implement stupid policies or not to do what they should be doing (as previously occured in bank supervision and regulation). The huge variety of constraints imposed on these competent and dedicated public servants prevent them speaking out in the public interests when they are compelled to implement stupid policies or not to implement sensible ones.

    But you give the game away in your final sentence.

    “Seeking to esnure [privatisation] is resisted is imperative.”

    So, in your view, privatisation at any time or anywhere is just wrong and you will search and search for evidence to justify this prejudice. In my view, this is not how public policy should be designed – and I’m confident I’m not alone in this.

    It might surprise you to find that I am totally opposed to the decision ‘in principle’ announced by the Minister on 14 Sep to part-privatise the ESB as an integrated business.

    However, you seem totally committed to your prejudice, so I suppose I’ll have to leave you at it.

  21. @ Paul Hunt

    It really would be more productive if you read my posts carefully before trying to re-write them on my behalf.

    For the record, as somebody who is sceptical about the merits of privatisation I can assure you I have no problem with public servants. Nice try!

    I am not inclined to repeat previous posts for your benefit just because you won’t read them carefully. But just this time I’ll give you the benefit of a brief synopsis.

    Unless all the pieces are in place (i.e. adequate levels of competition and regulation etc) privatisation makes no sense on efficiency grounds. Take from that, what you will. But I would expect you to understand that I believe privatisation might have merit if these pieces are in place. Thats a big IF.

    There is no point in privatising in the naive belief that the revenues will be ploughed back into investment. You have repeatedly called for privatisation in order to meet this goal. I would agree with you if the “pieces are in place” as described above. But lets get real. Thats not going to happen right now. So, as you say yourself we should push for sensible re-structuring of public enterprises.

    If thats prejudice , so be it!

  22. We are not as far apart as you seem to assert – or, perhaps, desire. I’ve only ever advocated privatisation when it emerges as the most efficient means of financing investment in the long-lived, specific assets that characterise the infrastructure and utility sectors. In the energy sector, since its inception, the CER has been imposing an implicit financing tax on electricity and gas consumers to compensate for the failure of the state to contribute directly to financing investment or to restructure the businesses to secure efficient external financing.

    It is bad enough that the CER has imposed this financing tax which increases prices to all consumers, but it is a regressive tax because low income consumers and welfare recepients spend a larger share of their disposable income on energy than those on higher incomes. And it has led to a further deadweight loss because welfare transfer payments have been higher to compensate recepients for this financing tax. It is a total mess.

    This has to be resolved. Consumers can no longer afford the burden of this financing tax and the state can no longer afford the extra compensation of welfare recipients. So, I agree, the first step is restructuring.

    But, even if the government manages to increase the gearing of financially unbundled networks, the financing gap will still remain – unless the government re-invests any equity extracted. You may think it should or that it won’t be allowed to. I don’t think it should in either case. That’s where I expect we part company. Privatisation them becomes a valid option.

  23. .”Almost all semi state businesses in Ireland have been poafitrble.”Similiarily almost all have been loss-making as well. “Greed is greed. Is he taking less pay and holidays as well? “The terms and conditions of Aer Lingus employee’s are well above industry average – presumably they are greedy for looking out for what is best for themselves?”Basically privatisation is bad.When has it been good?B & I ferries?”B&I was a loss-making company, whose existence as a semi-state was only of benefit to its staff – why should the tax-payers of this country subsidise its existence? The same can be said for Irish Steel.Even in the case of Eircom, there is no particularly convincing argument that if they had remained a semi-state company things would be better. The experience of ESB over the same time wouldn’t inspire confidence.Has Aer Lingus’s partial privatisation been unsuccessful? For whom? The only people with a problem with it, seem to be Siptu – the only reason to keep Aer Lingus on the state’s book was in relation to the slots at Heathrow.

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