Is this a New Era for the State-owned sector or a false dawn?
ECONOMICS:Government plans to place public enterprise at the heart of recovery efforts require greater coherence to work
THE RECENT establishment of the New Economy and Recovery Authority (New Era) signals the beginning of what could be the biggest ever restructuring of the commercial State-owned enterprise (SOE) sector. If plans are to progress along the lines detailed in Fine Gael’s original New Era documents (published in spring 2009 and revised in spring 2010), the envisaged changes will place public enterprise at the heart of efforts to lay the foundations for economic recovery.
The principal features of New Era are as follows:
* Five new SOEs, namely Smart Grid, Gaslink, Broadband 21, Irish Water, and Bio-energy Forestry Ireland, will be established for the principal purpose of addressing Ireland’s deficit of critical infrastructure. Despite massive increases in public capital expenditure over the past 15 years, the quantity and quality of Ireland’s capital stock (for example, water and broadband) remains low relative to international peers.
* The New Era plan centres on the establishment of structures for providing SOEs with the funding required for large-scale investment in infrastructure. It is envisaged that sources of funding will include the National Pension Reserve Fund (NPRF), revenues from privatisation, and a strategic investment bank (initially a fund).
* The New Era plan will alter the governance structure of SOEs. For now, New Era will take a “shareholder perspective” on the relevant SOEs, but may eventually be given holding-company status and thereby own shares in the SOEs.
There is much to welcome in the New Era plan, given the clear need for ongoing investment in vital infrastructure. In addition, the three features of the plan outlined above clearly seek to address important challenges that SOEs have faced for decades.
But the details revealed when New Era was launched in September leave a host of important questions unanswered. Key issues concern the precise details and expected timeline for the planned restructuring of the SOE sector, as well as how New Era will be funded, given the constraints imposed by economic circumstances and the conditions of the EU-IMF bailout.
The most binding constraint is the availability of funding for investment under New Era. The revenue accrued from the privatisation of non-strategic State assets had been earmarked as one source of funds. But room for manoeuvre is limited in this regard, as it is still not clear whether the troika will allow the Government to use privatisation proceeds for anything other than paying down the enormous national debt.
The other sources of funding include the NPRF, but so far it has only committed €250 million for New Era investment, which is being channelled into a Strategic Investment Fund (a forerunner to a Strategic Investment Bank), which will also seek to attract private funding. This will be a tall order at a time when public-private partnerships that involve private finance have largely been put on hold. Funding New Era therefore presents a major challenge.
There are also big issues to resolve in relation to the original New Era plans for the restructuring of the SOE sector. The new State-owned network companies to be created in the electricity, gas, water and telecoms sectors require significant changes to existing SOE structures (for example, Smart Grid involves the merger of Eirgrid and ESB Networks, while Broadband 21 requires the amalgamation of the telecoms assets of a number of different SOEs). The Government’s willingness to push ahead with such radical reform is already open to question after the recent decision to partially privatise the ESB as a fully integrated network utility without separating the transmission assets (as per the original Smart Grid plan) prior to any sale.
The precise detail of how New Era will alter the governance structures of SOEs is also unclear. If New Era moves to full holding-company status it is likely that it will own shares in the relevant SOEs. There is a lot of merit in such a structure, as it would address long-held concerns that the current governance structures are inefficient due to fragmentation, and would reduce the potential for political interference in the running of commercial SOEs. However, the original New Era document refers to a sunset clause whereby New Era will be dissolved after seven years. Does this mean SOEs will revert to traditional governance structures and report directly to relevant Ministers?
Overall, the implementation of the New Era plan requires a significant degree of resolve on the part of government, as there is likely to be strong opposition to some of the restructuring. In addition, the implementation of the plan will require higher degrees of coherence and consistency than witnessed in recent months. The Minister for Finance’s statement about the alleged superiority of private ownership to the Dáil in October, along with the decision to sell a stake in a vertically integrated ESB, are not consistent with the details laid out in the New Era plan.
Moreover, the troika indicated in October that there was no deadline for asset sales and that privatisation was more of a structural reform issue than a revenue-raising issue. In this context, the decision to sell shares in ESB without first conducting a detailed review of the energy sector (as required by the original memorandum of understanding with the troika) is difficult to understand. The time has come for the Government to provide precise details as to how New Era will be implemented and how privatisation fits within this plan. Muddling through is not an option.
Dr Dónal Palcic and Dr Eoin Reeves lecture in the department of economics at the University of Limerick and are members of the Privatisation and Public Private Partnerships Research Group based in UL