State must retain some control over key strategic industries

 

ECONOMICS:If the sale of strategic State holdings is to be seriously considered then we should heed the Eircom privatisation

Recent events in Greece and Portugal have put privatisation high on the policy agenda in Europe, with both countries under intense pressure to sell state assets in order to reduce their indebtedness.

Similar fiscal pressures apply in Ireland and the recent report by the Review Group on State Assets and Liabilities has set a blueprint for a proposed programme of asset sales.

With regard to the issue of privatisation, the basic principle adopted by the review group appears to be that if enterprises operate in markets that are competitive the option of privatisation should be considered. From an economic perspective this is sensible.

However, the report also recognises that many State-owned enterprises “control and operate important infrastructure . . . where the relinquishment of state ownership raises issues for microeconomic policy”. In other words, there is little or no case for privatising most such enterprises unless significant restructuring and regulatory reform is implemented beforehand.

The entities put forward for consideration as candidates for privatisation by the review group include airports, ports, electricity and gas (apart from the network elements), forestry and bus transport. By and large, these state enterprises face limited competition and can be considered of strategic importance. Therefore, the success of privatisation hinges on the effectiveness of the regulatory framework in place prior to any sale and the extent to which the State retains control.

The possibility of privatising but retaining a degree of State control does not receive sufficient attention by the review group. A mixed ownership model exists whereby the State retains a majority or minority stake after privatisation. Such an approach offers the possibility of reaping the benefits of private ownership while retaining State control over what might be regarded as strategic assets.

The lessons learned from the Eircom privatisation are salutary. The full privatisation of a strategically important industry in the context of a weak regulatory framework resulted in failure, mainly manifested in considerable underinvestment (particularly in broadband) by the newly privatised monopoly.

This, coupled with the stifling of competition by the incumbent in the fixed-line market, led to a situation where Ireland was perennially ranked close to the bottom of most EU broadband performance indicators.

Just one page of the 179-page report on State assets is devoted to examining the lessons arising from Ireland’s largest privatisation to date. The review group suggests the problems that emerged with Eircom were not a result of privatisation and point to regulatory failure. In our view, this misses the point completely. The key lesson from the Eircom privatisation is that governments should never opt to fully privatise important public enterprises. This is particularly the case in sectors where there is limited competition and the potential exists for the newly privatised public enterprise to abuse its dominant position.

Policies of partial, instead of full, privatisation of State enterprises in key strategic sectors are common across Europe.

Contrary to comments to the media in relation to the potential sale of our airports by Colm McCarthy following the publication of the report on State assets, the majority of airports in Europe are not in private hands.

A report on the ownership of Europe’s airports published by ACI Europe last year shows that more than 75 per cent of airports in Europe are publicly owned, the main exception being the UK. Where airport privatisation has taken place in Europe, it has generally involved the sale of partial rather than full ownership stakes.

Recent research by Italian economists Bortolotti and Faccio highlights that governments maintain control of two-thirds of privatised firms in the EU by a variety of means including partial sell-offs, golden shares and certain regulatory and contractual requirements. There is a simple reason for this: strategically important infrastructure is seen as too important to be fully entrusted to the private sector.

The Eircom case provides a stark example of this. The Irish government’s decision to relinquish full control over the national telecommunications service rendered it powerless to prevent the break-up of the firm in 2001 and the private equity takeovers of the fixed-line business that followed.

The short-term profit-maximising financial goals pursued by these companies came at the expense of the long-run development of the company and the market failure that subsequently emerged in the provision of broadband can thus be directly linked to the government’s decision to fully exit the telecommunications market.

Given that many of the State enterprises recommended for sale by the review group can be considered to be of strategic importance, it is imperative that the real lessons from the Eircom privatisation are heeded. The Government must retain some degree of control over key strategic industries that affect economic competitiveness.

This does not rule out some privatisation. The sale of partial stakes can produce tangible benefits. Partial privatisation avoids giving up full control of State enterprises. This reduces the risk of jeopardising State competitiveness and prospects for growth. Such a risk is unconscionable when one considers the long-term growth required to set our national debt on a more sustainable footing.

Enough economic control has been ceded to Europe and the IMF. Giving up full control of some of the most important economic tools of growth makes little economic sense.


Dr Dónal Palcic and Dr Eoin Reeves lecture in the Department of Economics at University of Limerick and are authors of Privatisation in Ireland: Lessons from a European Economy(Palgrave Macmillan, 2011).