Monday, 26 July 2010

Selling the family silver: bad for the economy and citizens

Tom O'Connor: The newly established government Review Group on State Assets and Liabilities has been assigned a task: ‘To draw up a list of possible asset disposals’. The range of state owned enterprises which could be up for grabs is breathtaking and includes: all the main Irish ports; Bord Gais; the ESB; RTE; An Post; CIE; Dublin Bus; Irish Rail, the National Oil Reserves Agency and many others.

The plan is to raise billions for the state coffers from the sale of many of these companies. The hope is that this could be set off against the projected exchequer deficit of €26 billion for next year and the national debt which now stands at €84 billion. Many of these companies are indeed valuable. The values put on Bord Gais and ESB are €3.5 and €5 billion respectively.

However, it would be a serious mistake to sell off these state owned enterprises. The proposed sales are a smash and grab exercise aimed at raising quick money for the government without any real consideration of the consequences. The problems which the sale of Eircom continues to cause for the Irish economy highlight the dangers of privatisation.

The sale of Eircom raised €8.4 billion for the government but has done untold damage to the competitiveness of the Irish economy: the company has been bought and sold several times, and has had four different owners in recent years. The sale has resulted in the company not been able to develop its broadband infrastructure to anything like the level which is required in the modern business environment, and this has hampered the development of high speed internet in Ireland ever since.
In the aftermath of the various sales of the company in the hands of ruthless venture capitalists, it now owes nearly €2 billion. Previously it owed very little. It has also started to shed considerable numbers of workers and has only limited ability, as a result of its debt, to finance the rolling out of high speed broadband.

The privatisation of state enterprises is based on an ideological position which assumes that private companies achieve higher levels of performance than state owned enterprises. However, a study of companies privatised by the Irish government from 1991 to 2003 by Reeves and Palcic (2005) found no evidence for this assertion. They also found that shareholders and employees who receive 15% of the shares tend to be the main winners in privatisation, not the government.

Perhaps one of the most compelling arguments against the sale of State Owned Enterprises is the loss of national control overall in hugely strategic areas which determine our economic viability and competitiveness. If the two largest energy producing companies where sold to private investors, industry and consumers could end up being at the mercy of super-profit-seeking business owners which could drive up costs and make Irish businesses uncompetitive. At present, the government by way of the energy regulator can control the price of energy.

It is precisely due to super-profit-seeking privately owned businesses controlling goods and services that should be kept in state ownership, that health care is so expensive in the USA. There, private Health Management Companies (HMOs) own most hospitals and charge exorbitant fees. The result is that basic health insurance is at least 800 dollars a month per person in the USA. The same argument can be cited to oppose the privatisation of the countries ports, RTE and others. It has been reported that Ruport Murdoch is interested in purchasing RTE. In that event, once in an almost monopoly position, the cost of TV viewing would be likely to rise significantly.

The sale of ports would put the country at a huge strategic disadvantage. The UK government in recent years has privatised its ports for a return of 6 billion and has sold the London-based Thames Water company for 9 billion. If Ireland were to sell its ports and its domestic water infrastructure, it is likely that these utilities would be run as public-private partnerships (PPS). These are exceptionally costly for the state and the taxpayer in the long term, and it is likely that hefty charges for water and the use of ports would ensue to the hardship of consumers and the disadvantage of businesses. One might also argue that the loss of ownership and strategic control of a country’s ports strongly compromises national sovereignty.

Also, in Ireland at present, the ESB is responsible for integrating its supply grid with that in Northern Ireland in a move towards closer economic co-operation, which was been lauded only this week by Northern Ireland’s Deputy First Minister Martin Mc Guinness at the Magill Summer School. If the ESB were owned by private shareholders, there is no guarantee that this would happen.

Of course, the biggest problem is the loss of employment. In the wake of the privatisation of ACC Bank and Aer Lingus (amongst others) since 2005, the Central Statistics Office has shown that the numbers employed in state owned enterprises fell from 57,400 to 52,300 by 2009, a loss of 5,100 jobs, which the CSO attributes mainly to privatisation.

The privatisation of Bord Gais, ESB, An Post and other semi-state companies would result in a dramatic downsizing of the workforces in these companies. At a time when unemployment stands at 450,000 and where the government is content to sit out the recession without stimulating the economy, the prospect of the state itself putting thousands or even tens of thousands people out of work, due to privatisations, would seem to be unthinkable.

Interestingly, it is the opposite course of action which is now being proposed in the global post-financial meltdown world: Prof. Aldo Mustacchio of Harvard Business School has written several papers in the past two years in which he highlights the need to use state owned enterprises as vehicles for employment creation and to help significantly in national economic recovery.

Many large state owned enterprises have been performing exceptionally throughout the world, he says, from the state owned oil company Petrobas in Brazil to Statoil in Norway and the State owned Gazprom company in Russia. There are many other companies in other economic sectors also in countries such as Singapore and India. The mistake in Ireland has been to allow private interests to take control of valuable natural resources with no return to the exchequer. The case of the Erris gas field in Mayo, which was essentially given away free of charge by then Minister for Energy, Ray Burke in the mid 1990s, is a case in point.

However, it would be a mistake to think that new state owned enterprises would be flabby and inefficient which many politicians and economists from a right-wing persuasion would have us believe. There is a future for lean and competitive state owned enterprises in Ireland where performance and productivity would be high and where performance management systems would predominate.

State owned companies of this type have existed in Sweden for many years. At present there are 55 state owned enterprises in Sweden. In 2006 these companies turned over 50 billion and generated net profits of 8 billion for the exchequer.
It is for these reasons that any hasty attempt by government to sell the family silver in an ill thought out and hasty fashion to reduce indebtedness should be strenuously opposed by Irish society.
This piece first appeared in the Irish Examiner


Mack said...

Hi Tom,

"In the aftermath of the various sales of the company in the hands of ruthless venture capitalists"

Wikipedia gives this definition of venture capital :

Venture capital (also known as VC or Venture) is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company

Normally when people use the phrase Venture Capitalists they are refering to investors that help startups scale.

Babock and Brown is more general private equity firm. As far as I am aware they do not invest in hi-tech startups, but even if they do, in this instance (Eircom) they weren't acting as Venture Capitalists.

Venture capitalists are unlikely to invest in our semi-state companies should the government sell them. Other private equity firms might..

Paul Hunt said...

I know it's probably a waste of time, but here are a few factually-based observations/queries that might modify some of the assertions:
1. Eircom privatisation was an unmitigated disaster, but can anyone see any government doing an IPO like this for the foreseeable future?
2. The energy regulator currently sets networks tariffs and some prices for the semi-states. Why would it stop doing so if they were privately owned? In fact the principal reason for current high energy prices is that the regulator extracts extra cash from consumers (driven by a combination of policy failures and preferences) to finance the ambitions of the ESB and BGE. And the ESB wants the CER to levy higher network tariffs to finance its acquisition of the NI networks. As a financially integrated energy business it is exposed to higher risks than a pure network business and, as such, its ability to borrow more at low cost is constrained.
3. As DG COMP of the European Commission demonstrates, effectively empowered competition bodies can be very effective at preventing abuse of market power - and benefiting consumers. Ireland's Competition Authority is notoriously weak.
4. It is a matter for public policy to adjudicate on the relative preferences of the public sector for too many staff and the private sector for too few. Interestingly, BGE is one of the most (operationally) efficient semi-states (its financial efficiency is woeful), as it outsources much of its activities.
5. Yes, SOEs in well-governed, stable, democratic societies can do great things, but the price of their success is eternal vigilance. In less well-governed, authoritarian societies they have a well-documented ability to form a state within the state and to be hotbeds of corruption and inefficiency. Wrt the examples mentioned (which interestingly are from oil and gas surplus countries which Ireland in no way resembles):
- even in one of the best regulated families, Statoil was part of the GFU - the Norwegian gas sales cartel - which was broken up by DG COMP. This has contributed to more efficient pricing of wholesale gas supplies in western Europe. Statoil, however, plays a major role in the Norwegian government's policy of building a huge pension fund to generate income flows when the oil and gas is depleted. In contrast to Norway's large, but diminishing and increasingly costly to exploit, reserves of oil and gas, Ireland's reserves are limited and probably even more costly and risky to exploit;
- Petrobras in some respects resembles Statoil, but, being in one of the BRICs, there is a government intent to use it to project economic and ‘soft’ power internationally;
- Gazprom is an important arm of the Russian state to project its economic power and to achieve its geopolitical strategy – which is actually not in the long-term interests of Russian citizens (not to mind those of citizens of the EU). (It is ironic, but not surprising, that gas prices formed in the existing, but not fully liquid, wholesale markets in Britain, Belgium, the Netherlands and Northern Germany are lower than the rent-extracting prices imposed in central and eastern European by Gazprom contracts. And these lower prices in western Europe allow BGE to hide its inefficiencies.)

The first step in this debate is to accept that the Irish semi-states present vanishingly few examples of efficiency that benefit consumers and citizens. The primary objective should be to enforce restructuring that will increase efficiency and reduce costs. Ownership and financing are important but secondary. A focus on privatisation will deflect attention from the current inefficiencies – but that, perhaps, is what the opponents of privatisation desire. And ordinary citizens will continue to lose out.