McManus puts all his energy into ESB reform

Regardless of what happens on privatisation, ESB chief executive Padraig McManus wants to get the company into a fit and lean condition, writes Emmet Oliver

It is a measure of the way the ESB has transformed itself over recent years that in future the company will grow through cost savings at home and expansion abroad.

The days of the ESB acting as a sort of job creation agency are definitely over and the company now looks abroad to locations as diverse as Spain, the US, Malaysia, Vietnam, Bahrain and Georgia for new revenue streams. While the company develops projects in these countries, closures are the order of the day for inefficient and obsolete plants at home.

It is probably no surprise then that the man leading the company spent 15 years working on the firm's overseas businesses and later became managing director of ESB International.

Most observers believe Padraig McManus acquired a broader perspective than some of his stay-at-home ESB colleagues by getting involved in the international businesses. Managing large projects and delivering them on time are skills prized in the electricity game and Mr McManus has a well-earned reputation in that domain.

However as chief executive of ESB, one could be forgiven for thinking his role would be more about the "orderly management of decline".

Where ESB once controlled 100 per cent of the Irish electricity market, it will, in a few short years, only control 60 per cent.

While this may appear entirely negative, Mr McManus sees it differently. In fact he sees the current period in the company's history as one of consolidation, possibly before privatisation.

"There is a view that ESB will be privatised at some stage. It's a question of when. I said last year there should be a period of time before it would happen. I think the issue for ESB is we have a number of things to do, to sort out our infrastructural problems, and build the new power stations," he says.

But it doesn't stop there. "And as well as that, we need to get our cost base right and get the PACT [Programme for Achievement of Competitiveness and Transformation] fully implemented. And what I have been saying to staff internally is look, let us concentrate on getting the company into a fit and lean condition and then whatever happens to the ownership issue we can take it whatever way it comes."

While yesterday Mr McManus and his board announced a 26 per cent rise in pre-tax profits to €196.4 million, Mr McManus knows the more successful the ESB becomes, the more certain people will speculate about its future ownership status.

"I have always felt that the ownership agenda is always lurking in the background in relation to ESB. While these are political decisions, there will obviously be interaction and I expect it to come back on the agenda again."

Where does Mr McManus sit? Is he personally in favour of privatisation?

"I'm not so sure 'in favour' is the phrase. I think it's inevitable. So in that sense it's not a question of whether I support it or don't support it. I think it's inevitable there will be an ownership change at some time, the question is getting the timing right. What I am really pushing at now is to try to get the company in the condition we would like to have it in. I think that certainly after one year we have done a lot to try and do that."

A lot of this good work has gone unreported with newspapers tending to concentrate on the fiasco of the Rhode closure and the ongoing row about ESB staff transferring to the new independent national grid, known as Eirgrid. It is now a separate company from ESB, although it still operates out of the ESB headquarters near Merrion Square.

Mr McManus expresses deep frustration with the delays in getting staff to transfer.

"We would like it to be sorted quickly. We all agreed to the model of separating EirGrid out as a separate entity. The delay is frustrating to an extent. In terms of its effect on the market, we have already separated out the national grid anyway. So they are a separate entity within ESB," he says.

The situation is complex because the EirGrid chief executive designate, Mr Kieran O'Brien, is also negotiating a contract with the Government at present.

"The whole management of EirGrid has to be put in place, you know. Until such time as that is done, it's hard to see how we can conclude the issues with the staff. We would hope that would be resolved fairly quickly, and then we could press on and talk to the staff about what their options are."

While EirGrid rumbles on, at least the extraordinary situation at Rhode power station has been resolved, although Mr McManus agrees that in retrospect it might have been handled differently.

"You would certainly like to do everything you could to leave the locality with some kind of reasonable relationship with the community. And I suppose that was the way we set out to do it. But we would have to accept at this stage that it took far too long. There were lessons learned on all sides in relation to that.

" Closure is going to be an issue for us over the coming years. We are going to have to deal with it and get better at it as we go along."

While difficult days may lie ahead with workers and possibly with the Government, Mr McManus says there is likely to be little friction with the public, at least in terms of price rises, with any increases simply matching inflation. Would he be happy with that?

"Happiness is not an issue. It's up to the regulator, Mr Reeves. We submit our cost base to him. And he has full and open access to all our costs. We have only started the process for this year," he says.

While increased profits are good news for the ESB, they are also good for the Government with €39 million of a dividend heading to the Minister for Finance, Mr McCreevy. Some in the ESB would like to keep the money and plough it back into the business.

"It's only now that the Minister for Finance has come after us looking for it. I suppose we had always accepted that as a commercial company we should be paying dividends. Certainly if we were in the private sector and if we were privatised we would certainly have to pay something of that order. So the agreement is that it is 25 per cent this year, rising to 33 per cent over a three-year period, I think that is a reasonable arrangement."

While the dividend is sizeable, it is dwarfed by the potential outlay facing the ESB at Moneypoint, the Co Clare coal-fired station, blamed by environmentalists for pushing up Ireland's C0₂ emissions. What is the solution and shouldn't the ESB just convert it to gas?

"We will never convert the existing station to gas per se. What that would mean would be building an entirely new station. It's physically possible to convert the station to gas, but it would be so inefficient and cost so much money, that we would never do it. So what conversion to gas means is building an entirely new station and abandoning what you have. Could cost about €700 million, I would say."

He says time is not on the company's side. "Whatever you are doing, you have to have it in place by 2008. So that means next year is decision time for us. The options for us are: close it down; build a new gas station; or put in a flue gas sulphurisation process.

"We haven't got that finally costed yet, but you are looking at an investment of €200-€250 million. Then we could run the station further. Taking about two years to build, this sulphurisation process would be like a chemical plant," he explains.

"One way or the other you are still left with CO2. That is a different issue. It's an issue for the whole country, not just ESB, as to exactly what we are going to do. That is exactly where you hit the Kyoto requirements," he adds. He says if carbon trading arrangements work, the carbon problem could be managed.

On the subject of power shortages, Mr McManus remains concerned. "We have made commitment to get down to the 60 per cent of the market by 2005. And the only way we could do that was to stop building stations. We are not going to be allowed to build a new plant.

"With this competition the regulator is running, we should have another new plant on the system. But the growth is still going and we'll just have to keep a watch on that. It's an issue between ourselves and the regulator to ensure there is enough supply there.

"It wouldn't be right for me to say I have no worries that once this third entrant is in place, that everything will be okay, we will have to look at that and deal with that as it happens, because growth is still continuing, it might only be 3 per cent but it's still growth nevertheless," he says.

Finally, he explains how ESB is going to fund itself in the years ahead.

"We are borrowing. We started out in 2001 with € 700 million in borrowings. Our target is to keep the borrowings below €3 billion. We are looking at going to the bond market. Our borrowings are going to increase from €700 million to about € 3 billion over a period. I suppose we are going to the bond market maybe for €1 billion.

"Maybe in two tranches. We haven't decided those things. We are only looking. Certainly we would be looking at moving away from our traditional banking sources. At the moment we are looking at getting a credit rating. Before we go to the bond market, we'll have to get one," he says.