Selling State assets
Should the Government sell off semi-State companies to get much needed funds? Fearghal O’Connor hears arguments for and against.
With Ireland suffering a fiscal crisis of epic proportions, it is not surprising that attention has focused on the country’s 28 commercial semi-State companies and the money they could realise if sold.
To some this would be an act of desperation equivalent to a trip to the pawnbroker. Others believe that the State has no business being involved in many of these areas of industry in the first place.
The Government has established the Review Group on State Assets, led by UCD economist Colm McCarthy, to advise it on the future of commercial semi-States. But many have already made up their own minds on the matter.
“It makes no sense that the State owns different energy companies that compete with one another,” says Simon Coveney, who was one of the key people behind FIne Gael’s New Era plan, which advocated a radical overhaul of policy on semi-State assets long before the Government asked Colm McCarthy to examine the possibility of their sale.
Coveney points to Bord Gáis as a particularly valuable company with a large growing customer base that could provide any big international energy player with a strategic foothold in the Irish market. And he believes that, given Ireland now has a soundly operating regulated gas and energy market, that there are no strategic issues with energy assets moving from State to private hands.
“There is an opportunity for the State to cash in on a very big asset that isn’t strategically needed in State ownership in the future,” he says.
When Bord Gáis purchased SWS, the second biggest wind-energy company in the country at the time, Coveney points out that it was competing against the ESB and that two State companies were outbidding each other. “It was a farce,” he says.
Nevertheless, he is adamant that Fine Gael has learned the harsh lessons of the Eircom debacle and would not sell off the actual gas pipeline network and infrastructure. Likewise, he would maintain State ownership of the electricity power grid or network but would sell elements of the ESB such as its power-generation capabilities and perhaps its successful international arm, ESB International.
“The State does not need to be involved in power generation,” he says. “Elements of the ESB that we don’t see any reason to keep in state ownership, we would look at selling to finance the aggressive roll-out of the grid that is required. There is a lot of value in power-generation plants and the ESB has already sold some of them so they have set the precedent themselves.”
But if Fine Gael is wedded to this strategy, it could lead to some very interesting and difficult negotiations, depending on the results of the next general election. Labour is regularly touted as Fine Gael’s most likely partner in Government but its finance spokesperson Joan Burton has a very different take on the idea to Coveney.
“It seems to me an extraordinary proposition at a time when Ireland is doing so badly in terms of bond spreads that we would seriously want to sell into a depressed market State assets which themselves have a fund-raising capacity in terms of their own needs,” she says.
”I would have serious doubts about the State being able to replicate this in terms of the privatised entities that would emerge.”
She points out that semi-State companies such as ESB and Bord Gáis have independent funding capacities through the bond markets.
“Given the difficulties that we are in at the moment with our bond spreads, it seems to me to be unwise to remove this strategic capacity,” she says.
And Burton is not the only critic of the notion that selling State assets is an answer to some of Ireland’s problems. Friends First chief economist Jim Power says that five years ago, he would have thought it a good idea but he now has serious reservations about selling off important State assets. Firstly, he says, there are no guarantees that the private sector would run the current semi-State companies any more efficiently than the public sector.
“We have seen massive private-sector failure in the last five years, particularly in the financial-services industry so private sector control is not necessarily the panacea,” he says.
“When you go through company by company, Bord Gáis, the ESB, there are probably parts of those businesses that could be, in theory, privatised. But at the end of the day, they are assets of the Irish taxpayer.
“They are assets that are a vital part of our infrastructure and if you hand them over to private interests who are not interested in the greater good of the country, well then you could have a recipe for disaster.”
And if there is any sale of any State asset, he believes that it must be ensured that the new owners act in the best interests of the Irish economy and this is not something that can be guaranteed.
“I wouldn’t be averse at this stage to the State running those companies on a commercial basis, reducing the strangle hold that trade unions have had over those companies over the years and make sure that those companies start to operate in the best interests of the economy rather than in the best interest of vested interest groups. I am convinced that this can be best achieved through retaining State control,” he says.
But he expresses little optimism that the current Government could achieve such a scenario. He is also fearful that if the Government does go ahead with some disposals and receives a financial windfall, that it would just further postpone what he calls “the need to radically and fundamentally restructure the Irish public finances.”
“We need to address spending in a very meaningful way. We need to restructure the tax base in the country and the sooner that happens, the better. Obviously, if they were to get a financial windfall from privatisation, it would inevitably delay the necessary adjustment in the public finances. In a sense, that sort of financial windfall could end up reinforcing all of our current problems in the system,” he says.
He estimates that it is possible that a programme of disposals could raise €10bn. But he points out that this is equal to about half this year’s borrowing requirement and the proceeds of such a crash sale would disappear very quickly.
But Simon Coveney rejects the notion that the plan to sell off State assets, or the Fine Gael version of it at least, is a crash sale.
“The big difference between what Fine Gael is saying and what Fianna Fail is now considering is that we are talking about raising money to be spent in specific areas, ring fenced and kept in those areas,” says Coveney.
“What is needed is an investment programme - we have said €18bn over four years in the energy, water and telecommunications sectors alone - with the money raised by selling suitable assets.”
He believes the Dublin Airport Authority could be a very good example of an asset that could partially privatised in the future.
“Terminal 2 is hugely impressive but very expensive and there is a question of how we pay for it,” he says. “Do we look at a partial sale of a percentage of DAA? Do we look at selling elements of the DAA that are still out there such as the Aer Rianta International shops all over the world? I think you can safely say that there are no sacred cows under Fine Gael policy. We will look at what makes sense for the country strategically.”
But, of course, there is one massive issue that is likely to take the shine off many Irish semi States that are put in the shop window. Many have serious pension deficits. When Aer Lingus was part privatised, the Government was forced to set up a €102m supplementary pension fund to cover future problems in its pension fund. But it remains in a very unhealthy situation.
Based on its current share price, Aer Lingus is worth about €500m and it is just over 25% owned by the State. But pension experts estimate that it would require about €200m to shore up the Aer Lingus share of the deficit in the pension fund it shares with Dublin Airport Authority.
So if the State was to sell its share of the airline in the morning, it would not realise nearly enough cash to meet the minimum funding standard, never mind the further €100m estimated hole for the DAA portion.
And the jewel in the crown of the semi State sector, ESB, has a pension fund that appears to be in an even worse state. There have been suggestions that ESB is worth up to €4bn. But at the end of 2008, the last time there was an estimate, it was reported that the ESB pension fund had a deficit just less than €2bn.
And this is just a few short years after a deal between the company and its unions that was supposed to fix the then €511m shortfall in the fund. ESB paid €25m into the fund, increased its company contribution to 4.5% and employee contributions to 2% (although staff received an equivalent 2% payment in return). Yet the deficit has since spiralled further beyond reach, storing up huge industrial-relations problems for the future.
“What investor in their right mind would touch companies with funding proposals and all sorts hanging over them?” says one source with a detailed knowledge of semi-state pension funds. “I couldn’t see any possible consideration of any sale until such time as all of those issues have been sorted out. As part of any sale, pension schemes would at least have to be brought up to minimum funding standards. In all likelihood, that would involve a big cash injection. Staff would have to up their contributions.
Whoever buys the company will have to increase contributions from their side. Benefits will have to be reduced. Where big deficits exist, you are likely to have a pension fuelled industrial relations nightmare over and above any other issues that might arise from selling off heavily unionised State utilities says the source.”
Of course, heavily unionised State utilities have been sold off before with generous terms for staff easing the path. But the Eircom example, in particular, is often cited as one good reason not go back down that path.
“The people pushing this have not sat down and pondered the Eircom lesson,” says Joan Burton.
“With Eircom, we lost out on a continuing flow of strategic investment into the whole broadband and telecoms area. So from having been very high up in the rankings in relation to telecom, we completely lost out on new-generation investment subsequently.”
Jim Power believes the Aer Lingus example is also instructive and has left the company stuck in a strange kind limbo with an ownership structure that includes the Government, the unions and Ryanair.
“It is neither fish nor flesh at this stage. If it had been fully privatised, it probably would have been a more successful outcome,” he says.
But Simon Coveney agrees that the privatisation of Eircom was a disaster but believes this analysis is too simplistic in the case of Aer Lingus.
“You get these platitudes from people that the privatisation of Aer Lingus and Eircom were disasters,” he says. “The privatisation of Aer Lingus was not a disaster. The company is functioning and functioning well even though they face huge challenges, but so does every airline in Europe. That’s not to say that everything is perfect in Aer Lingus, far from it, and if we were to do it all again, we might do it differently but the decision to privatise was not the wrong one. ”
Fixing the banks and trying to return them to the private sector is likely to be a bigger priority for now. But what Colm McCarthy and his group have to say on this matter will make very interesting reading. One way or another, this Government or the next will face some very tough choices.
Review group
Who’s in it and what will they cover?
• The Review Group on State Assets is to advise the Government on the future of commercial semi-States and is expected to report by the end of the year.
• It will also examine other State agencies that hold substantial assets. This is likely to include broadcasting and telecommunications spectrums, exploration licenses and carbon emission permits.
• It is chaired by UCD economist Colm McCarthy and also includes Donal McNally, second secretary general in the Department of Finance, and Alan Matthews, Professor of European Agricultural Policy at Trinity College Dublin.
