Wednesday, 22 February 2012

The false economy of selling state assets to fund job creation

Sinéad Pentony: Today’s announcement provides us with some more details on the government’s thinking in relation to the role of state assets in our economy. The position has become more nuanced in some regards, as the sale of the ESB appears to the off the table (with the exception of some power generators) along with the sale of Bord Gais’s transmission and distribution systems. However, privatisation remains a clear policy focus for the government and a bitter pill is being sweetened with the promise of the proceeds of privatisation being used to fund job creation. But this is false economy.

We are hearing a lot about supporting job creation at the moment. Last week it was the Action Plan for Jobs, this week the sale of state assets will be used to support job creation and tomorrow the government will launch its Pathways to Work - the Government Policy Statement on Labour Market Activation.

Last week's TASC report on the Strategic Role of State Assets, along with today’s statement, clearly articulate the trade-off between short term and longer term investment priorities, with the latter increasing the capacity of the economy to grow and compete with other advanced knowledge-based economies. So the sale of strategic assets is a critical issue because it could actually cost us jobs in the medium-long term if we don’t have the infrastructure that facilitates and supports the functions of a dynamic advanced economy competing globally.

Last week the Action Plan for Jobs was announced. Any initiative aimed at promoting job creation is to be welcomed, and the focus of the Plan is on improving the conditions for doing business in Ireland. While ‘bold ambitions’ are to be admired, it’s difficult to see how the target of increasing the number of people in work by 100,000 – from 1.8 million to 1.9 million jobs by 2016 - can be realised, when the next three budgets are expected to take a further €9 billion out of the economy by 2016. One can only imagine the sorry state that the country will be in, in three years time - if we continue on the current path of austerity piled on top of more austerity.

On Monday night the Frontline programme was devoted to discussing the Action Plan. One of the panellists was businesswoman Glenna Lynch whose business has been struggling since the onset of the crisis and she has been forced to let people go. When asked what she thought about the Action Plan, she said that there was very little in it for her and that the problems she faces relate to the fact that successive austerity budgets are sucking money, demand and confidence out of the economy.

Pathways to Work is being launched tomorrow, the objective of which is to “drive the introduction of measures to improve the conditions for job creation across the economy and to ensure that the creation of these jobs feeds into a reduction in unemployment”. Our labour market activation policies have long been in need of reform, and they must reflect the complexities of the labour market in a modern economy.

In general the Action Plan for Jobs and Pathways to Work can be described as ‘supply-side’ measures, aimed at creating the conditions for businesses to create jobs and for people to be in a position to the take up jobs.

But how can businesses create jobs when the demand for their goods and services is static or shrinking because of budgetary measures?

What’s needed are a series of ‘demand-side’ measures aimed at creating demand for labour, and this requires investment. But this investment should not be financed from the sale of state assets, which should rather be used to support investment in the medium term. Instead, much needed short-term investment should be financed through the €4.7billion remaining in the NPRF, along with an initiative that allows part of the €5.3 billion held by Irish pension funds to be invested in infrastructural projects.


Paul Hunt said...

There is no shortage of 'supply-side' measures that could be taken in the sheltered sectors that would reduce excessive and unjustified non-labour costs and increase real disposable incomes - but too many of the rent-seekers beloved of the 'progressive-left' might be discombobulated so it's far easier to go after 'other people's money' and impose a bit of financial repression.

Paul Hunt said...

For someone who is absolutely and totally opposed to this programme of privatisation that has been advanced by the Government, I am intrigued that there is so little outrage here where I would expect people to be even more vociferously opposed than I am.

I suppose the reason is that I am opposed because this programme does not focus on economic efficiency. Any programme of privatisation that does not have economic efficiency as its primary objective is almost certain to end up in a costly mess. Whereas most people here have to vent some perfunctory faux outrage in principle and on ideological grounds, but they are secretly delighted that it protects the existing gloriously inefficient and consumer and economy-damaging status quo - and the rent-seeking activities of its favoured 'insiders'.

Sinead Pentony said...

Thank you for your comments. The evidence does not support the premise that privatisation will lead to greater economic efficiency. The role of regulation is critical in creating the conditions for greater economic efficiency. This is an argument you are familiar with, having read your comments on the blog post on TASC's report on state assets, which has looked at the evidence in detail. Key sectors of the economy should be constantly striving to be more competitive and efficenct and this can be achieved through improved regulation and better management.

While the language in the latest EU/IMF MoU talks about increasing efficiency and competitiveness in the economy the only reason the disposal of state assets is being considered at all, is to pay down debts and (more recently) to fund job creation.

It would be better to improve the regulation, managment and corporate governance of key sectors across the economy as a means of creating greater efficiency and competitiveness.

At the same time, the focus needs to be on maximising the capacity of state assets to be used as vehicles for investment by co-ordinating their (investment) plans and by using state assets as levers for attracting additional resources for the purpose of investment.

Paul Hunt said...

@Sinead Pentony,

Thank you for your response. I thought for a while I was having a dialogue with myself. It somethimes seem to happen here when views are advanced that are not comptible with the prevailing 'belief-system'.

I presume I can take it we agree that this cack-handed, half-arsed proposed programme of privatisation should be opposed forcefully because it does nothing to enhance economic efficiency and, indeed, embeds existing and consumer and economy-damaging inefficiency and dysfunction.

It is not possible to disentangle the Government's proposed energy sector privatisations from the programme of electricity and gas market ‘liberalisation’ being pursued by the EU. The latter is fundamentally flawed in two ways. Both relate to the legislated, mandated roll-out of full retail competition. The benefits of liberalisation are primarily generated at the wholesale level, but the insistence on full retail competition without establishing efficient wholesale markets has resulted in increased consolidation and vertical integration in the industries. And this has increased the market power of the principal participants to the deteriment of consumers.

Retail competition has also atomised, disenfranchised and individualised final consumers and deprived them of the means of exercising effective collective action to advance and protect their interests. And it has destroyed the ability to convert their long-term commitments to consume and pay for electricity and gas as the basis for the long-term contracts these industries, characterised by investment in long-lived, specific assets, require.

In the gas sector, the EU has added another fundamental flaw by insisting on Entry-Exit pricing of gas transmission services which separates contractual arrangements from the underlying physical and economic reality of the transmission systems.

A naive person might assume that national governments, ostensibly seeking to govern in the public interest, would seek to ameliorate the detrrimental inpacts of these flaws in their own jurisdictions. And, indeed, some do. But in Ireland, successive governments - and this one is no different - have succeeded in exploiting and bending the primary EU legislation to establish a policy and regulatory regime that embeds in efficiency and dysfunction and gouges businesses and consumers.

Paul Hunt said...

I note you focus on improving regulation, management and corporate governance in key sectors - and P-E has advanced some valid proposals in a number of areas in various publications, but what is required in the electricity and gas sectors is comprehensive restructuring, refinancing and the restoration of effective regulation in the public interest.

However, the government-machine and the managements, unions and staff of the ESB and BGE are resolutely opposed to these efficiency-enhancing changes. And that's why we have this cack-handed, half-arsed privatisation proposal. Their narrow sectional interests have been 'squared'.

It is probably long past time for the 'progressive-left' to recognise that many of the 'aristocrats of labour' - those in secure, well-rewarded, pensionable jobs the public and semi-state sectors - have now become more capitalist than the capitalists themselves. I say good luck to them, though it's a shame that many of them seem to evince less concern for others than the capitalists they have joined and seek to emulate. And I believe their ability to exercise their rights as workers should be protected. I totally oppose this public and media frenzy that they should be subject to direct policy action. The public sense that they should not be largely protected from the harsh economic reality most people are confronting is understandable, but they should be exposed to this economic reality indirectly via organisational reform and restructuring - and all the time protecting their rights as workers.

The sad reality is that by protecting their narrow interests by preventing badly required restructuring the interests of all those on low and fixed incomes are being damaged.

And the primary purpose of the electricity and gas industries is to deliver supplies efficiently, safely and reliably. It makes absolutely no sense to impose further responsibilities or duties on these industries.

However, I suspect that coming to terms with all of this is probably a bridge too far for the 'progressive-left'.