Friday, 23 July 2010

The Privatisation Board: What will it do?

Jim Stewart: The composition of the Privatisation Board, and its terms of reference, makes inevitable that the conclusions will be: privatisation of all major state Commercial State Bodies as a preferred solution; if not full privatisation, part privatisation via public/private partnership; and as a final option drastic reduction of any State subsidies as in the case of the CIE Group. Cutting subsidies to CIE was already one of the recommendation of the McCarthy/Department of Finance Report (p. 74, reduce Public Service Obligations to CIE; replace lightly used rail services with bus routes, etc.). Cutting public transport has been a particular obsession of McCarthy, who opposed Dart electrification. It is one of a few examples of proposed cuts in the Report of the Special Group on Public Service Number and Expenditure, not contained in evaluation papers published by the Department of Finance.

The same procedures used in producing the McCarthy/Department of Finance report will likely be followed in this new report. Officials in the Department of Finance will draft chapters, proposals and conclusions which will be largely accepted by the Privatisation Board.

Who is driving these policies?
These recommendations are likely to be as already described. The reason for this is that prevailing IMF views are largely held within the Department of Finance. While privatisation was not a policy recommended by the recent IMF Article IV consultation, the report in several places acknowledges IMF staff agreement with “the authorities” (not defined but referred to elsewhere as “the officials of Ireland” and also states the IMF report also states that meetings were held with senior officials from the Department of Finance, etc.). The IMF together with the World Bank helped establish privatisation as part of the Washington consensus, often with disastrous policies for developing countries. These discredited policies are now being reintroduced as conditions for IMF loans to countries with large budget deficits such as Greece.

Why privatisation is not a solution
Privatisation largely involves an exchange of ownership. The State will obtain financial assets in exchange for real assets. These financial assets could be invested in other real assets, but this is unlikely, rather Government borrowing/debt will be reduced. This exchange will be costly. Firms such as Goldman Sachs, Merrill Lynch, PricewaterhouseCoopers, Arthur Cox, etc.(all featuring in advice to the Government in relation to the banking crisis) will again be paid large fees. Apart from the cost, privatisation is no solution to Irish economic problems. The States net Balance Sheet remains the same, but the policies privatised companies may pursue will be very different. Some firms such as the ESB are natural monopolies. Regulation is key - an area where Irish agencies have a particularly poor track record. State control of monopolies can address deficiencies in regulation. What about commercial policies? Paul Sweeney has argued coherently that commercial policies of formerly State owned companies have been disastrous for Ireland’s economic success the best known is Telecom Eireann. But policies pursued by other privatised firms have added to the economic crisis for example the former ICC and ACC banks. The operations of the former Irish Sugar company (Greencore) are now focussed largely outside Ireland, and as such are unlikely to contribute to the development of agribusiness within Ireland as recently expressed in the 2020 Food Harvest Report.

In the current crisis we have been badly let down by former and current employees of the Central Bank, the financial regulator, those who designed and encouraged our gross over reliance on tax incentives, those in charge of our planning process, but in particular by institutions largely in the private sector, banks, building societies, professional firms such as auditors. Corporate governance has not been an issue in Commercial State Bodies in contrast to private sector firm such as Banks, the Quinn group, and DCC. The solution is not more economists with their misguided views on ‘efficient markets’, and ‘rational behaviour’. Banks in recent years have lost billions, competition policy as implemented by the EU Commission has lost billions more. Nor is the solution privatisation.

Arguments against privatisation are compelling. It is important that they are expressed.


Anonymous said...

Given the recent revelations surrounding the events leading up to the bank guarantee, it is shocking to learn of the substantial benefits that accrue to the likes of Goldman Sachs from any privatisation of state assets.

In the immediate time frame leading up to the bank guarantee we now know that the Government received advice from institutions such as Goldman Sachs and Merrill Lynch that was astonishingly erroneous in terms of their estimates of the extent of the losses that they advised that the Government could anticipate in our financial institutions.

For example Goldman Sacks advised the Government that losses in Irish Nationwide were likely to be in the hundreds of millions whereas we are already out of pocket to the sum of almost three billion and counting with that institution.

Has our Government sought the return of the generous fees paid to Goldman Sachs for this erroneous advice? If not, why not?

Has our Government instituted legal proceedings against Goldman Sachs for punitive damages to the extent of the billions of euro that we are now incurring as a result of a Government decision that was greatly influenced by erroneous advice received from Goldman Sachs? If not, why not?

Why are those who are now advocating privatisation of our strategic national assets from which these very same investment bank charlatans can extort monstrous fees for themselves not demanding instead the return of the generous fees paid to Goldman Sachs and their pursuit in court for punitive damages for their crucial role in misleading our Government on the eve of the guarantee?

Why indeed not?

Anonymous said...

Ironic given that McCarthy is making so much money off the taxpayer.

David O'Connor said...

Some salient points (part I) to be added about the proposed disposal of strategic assets: -

The "interim" list of "assets to be reviewed" includes 28 items, not listed in alphabetical order. So therefore we can assume it is a prioritised list. We see that the first 16 items are

transport entities. The next 4 are energy agencies. Add in Coillte and the National Oil Reserves Agency - both energy related - and fully 22 out of 28 organisations, more or less at the

top of the list, are in transport and energy. The conclusion can only be made, then, that this is an idelogical policy to fully privatise this sector.

Transport and energy are fundamentally strategic and only a myopic idealogue with no grasp of economic history could not see how relative control of these are vital to a nation's

sovereignty. Selling these assets will cede national control over pricing, planning, delivery and operation of movement of people and goods, as well as how we power our economy. This is

madness, whether times be good or bad.

Of course those proposing this idiotic and idelogically-minded programme will say that we can regulate private interests. But private interests can hire lawyers and instead of framing and

delivering policies in the national interest we will be reduced to adversarial raproche with capital market organisations wherin they will retain vital information and data. And, without

casting aspersions on capital markets (although they are hardly covered in glory during these times), if the assets in question are of value to private interests, how are they not of value

to the state? This is purely discussion in monetary terms, however the true value of these assets is in strategic terms. We are a small island nation with an export economy. Therefore

these assets need to be controlled by the state and operated in service of this society and economy.

David O'Connor said...

Some salient points (part II) to be added about the proposed disposal of strategic assets: -

None of this is to even reflect on the appalling record of the state in recently disposing of assets, principally Eircom and Aer Lingus, both categorical disasters. The Aer Lingus disposal

was aborted thanks to some blindingly poor planning (apparently nobody foresaw that the largest operator might be interested in purchasing the second largest operator out of Dublin

Airport). The Eircom failure has slowed up delivery of broadband infrastructure - considered a social right in some countries - indeterminedly.

Further, the terms of reference make dismal reading. They are brief (five bullet points) and really only the first two matter. These refer to "the indebtedness of the state" and "to draw

up a list of possible asset disposals". This is spin for " we're broke, lads, what have we got to flog". Frankly this is a humiliation for a sovereign republic and nothing other than an

absolute dereliction of political responsibility. It doesn't even bear thinking that such a sale would take place at the BOTTOM of an economic downturn. A firesale, as it were, and a real

bargain-bonanza for the likely bidders. It also suggests that our political leaders are panicing.

It is a pity that in the midst of this panic, strategy over our entire transport and energy infrastructure is being handed over to idealogues brandishing discredited economics. As far as

transport is concerned, the argument between privatisation and public delivery is both warped and irrelevant. What is needed is integrated and effective delivery of services to our economy

and society. This, sadly, has never been part of the debate in administrative circles. Actually, many of our agencies perform very efffectively within the terms of their brief. Much

independent review attests to this. Coordinating these services is where it falls down, and that is an issue of governance. No marks for saying whose responsibility that is. The

important point is that selling them off will, in this practical instance, make things worse not better.

Finally, the following organisations appear to be the only transport entities of significance ommitted from the list: RPA and the NRA. Go figure!

Donal Palcic said...

While I agree that the fees paid to financial advisors such as Goldman Sachs are high, they are in fact the least costly element of the ten privatisations to date in Ireland (as myself and Eoin Reeves showed in a recent post to this blog). As a percentage of privatisation proceeds, the advisory fees paid in Ireland have also been lower than those experienced internationaly.

The main cost to the exchequer in Ireland in past privatisations has been the foregone revenues from factors such as the underpricing of shares and the transfer of sizeable ESOPs to employees, as well as the debt write-offs agreed in the case of some companies.

"The States net Balance Sheet remains the same, but the policies privatised companies may pursue will be very different."

To me this is the most important point. The privatisation of public enterprises, particularly those operating in key strategic sectors, leads to a substitution of private markets for the social welfare and industrial policy objectives that existed previously. Where divestiture leads to an influx of international investors into former state-owned industries, economic power is transferred out of the country, leading to a decline in government control over the economy.

Ireland’s experience with the privatisation of its telecoms industry is a salient example of this loss of control. The decision to relinquish complete control of Ireland’s telecoms network eliminated the scope for the government to prevent any undesirable changes in ownership. The subsequent takeovers by private equity groups in two separate LBOs resulted in a deterioration of the financial structure of the company, with debts soaring to unsustainable levels. This severely reduced the resources available for capital investment and contributed to the slow rollout of broadband infrastructure in Ireland. The government was then forced to re-enter the telecoms market and begin investing directly in broadband infrastructure itself through the MANs programme and the NBS.

While one might argue that the problems above can be addressed by effective regulation, this poses challenges in itself (again, as we saw in the case of Eircom). It is imperative that the government learn the lessons from Eircom's privatisation in relation to its remaining network SOEs. Substantial restructuring of each company and sector would be required before the question of privatisation is ever considered.

Paul Hunt said...

Contrary to what some might think, I am not advancing privatisation as a panacea. My focus is on the efficient production and delivery of goods and services in the semi-state sector (and in the LA and state sectors generally). Ownership and financial structure are very important, but are very much secondary - and the most efficient and effective ownership and financing arrangements will be determined by the initial focus on efficiency.

There seems to be little possibility of any real engagement and analysis while (a) there is no acknowledgement that the current arrangements for financing energy network investment are imposing excessive costs on consumers, (b) there is a limited recognition that the current model for competition in energy is deeply flawed - and the principal response is to allow the existing semi-states to use the largesse provided by the regulator (and extracted from all consumers) to bribe each other's customers to switch, (c) there is no recognition that government policy favouring the semi-states has undermined regulation at every turn (similar to that of the banks) and (d) there is no acceptance that it is vital for any measure of economic sovereignty to reduce dependence on the (frequently maligned as fickle and irrational) international capital markets.