Eircom Esot holding a gun to taxpayers' heads

OPINION:It is staggering that this self-serving employee trust is seeking to extend tax-free status

THE NEWS that the Eircom employee share ownership trust (Esot) is once again looking for special treatment from the Revenue Commissioners is quite simply staggering.

In any sane country tax incentives are given in order to facilitate some sort of public policy objective. In the case of the tax-free status of payments from Esot, the public policy objective was ostensibly to encourage and facilitate employees taking meaningful stakes in companies they worked for and wielding their influence collectively. They were also a incentive to get public sector unions to go along with the privatisation of State companies, with Eircom being the first and best/worst example, depending on your point of view.

It follows that any extension or modification of the terms of the Eircom Esot – such as that being sought in connection with Singapore Technologies Telemedia’s bid for the company – should also pass some sort of public interest test. And the most obvious one has been whether the the Esot’s actions to date have been in the public interest as well as the interest of its members.

Being generous, the highest score you could give them in this regard is three out of 10.

The Esot can’t really be blamed for the disastrous original flotation of Eircom, which succumbed to dotcom bubble.

It does, however, take a large part of the responsibility for the decision to sell off the mobile business to Vodafone, and much more significantly the delisting and sale of the the fixed-line business to private equity. They could have blocked both.

It was pretty much after Valentia took over that Eircom gave up any pretence of being a phone company and became a test bed for more and more elaborate financial engineering.

The Valentia consortium, who the Esot supported and partnered with, hoovered billions out the business, leaving it saddled with huge borrowings.

And a key point in that regard is that the Esot was only able to participate in the mortgaging and remortgaging of the national telecommunications infrastructure because Charlie McCreevy, the then minister for finance, agreed to their first request for changes to the tax treatment of Esots.

The Esot was again a willing participant in the next reincarnation of Eircom, this time as a quoted company. But, as soon became clear, no body was serious that time either about trying to build anything, it was just a stepping stone to yet another pay day. That arrived in the form of what, even back then, seemed liked a crazy proposition from Babcock Brown. But, once again money talked for the Esot and it happily went along with yet another debilitating smash and grab raid on what was left of the Eircom balance sheet.

Now, once again we find the Esot in pivotal position as the fifth change of ownership is being mooted. The destruction in value has been so total during the nine years in which the Esot has been riding shotgun that STT are paying little more than the value of the cash the holding company has in the bank. The real consideration is its shouldering of Eircom’s debts of €3 billion.

It is staggering then to hear that the Esot has said that it can only go along with the takeover if it gets further concessions from the Revenue Commissioners, presumably relating to the continuation of tax-free payments.

If this is the case, the Esot is in effect holding a gun to the taxpayer’s head. The Government would dearly love to have Eircom sorted out. A modern efficient telecommunications infrastructure is prerequisite for any economic recovery and that requires investment, preferably by Eircom. On the face of it, a takeover by STT, which is owned by Singapore’s sovereign wealth fund, looks like the best chance the Government has of finding a long-term owner who is prepared to invest.

But, once again the interests of the Esot are being put far ahead of those of the taxpayer. And lest there be any doubt that the Esot has not changed its spots, you should note one of the few things that does seem to have been agreed before anything else. It is that, within three years of the STT investment, the Esot will be able to demand a public offering of the company, triggering another pay day. National interest? Not our problem.

The only consistent thread in the Esot’s behaviour over the last nine years is that it has consistently sought to maximise the return to its members and that is fair enough. What is not acceptable, and bordering on the offensive, is this pretence that somehow the Esot is force for good and deserving of further tax breaks. Most of its members are no longer even employees of the company, stripping away whatever veneer of employee empowerment remains. The Esot is in effect a large, very opaque private investment fund. It is entitled to no more favourable terms from the Revenue Commissioners than any other shareholder in Eircom.

The members of the Esot have shared – on a tax free basis – some €780 million of the cash pillaged from Eircom over the years. Enough is enough.