State sector faces increased competition

The biggest challenge facing State companies this year is to adjust and adapt to the continued rise of competition, driven mainly by liberalisation of their markets.

Commercial State companies are still major players in the economy, with a combined annual turnover in excess of £4.4 billion and contributing 4.5 per cent to Gross Domestic Product (GDP). Around 58,000 people are employed in these companies.

Despite the criticism and the familiar catch-cry that they should be privatised, many State companies are fighting hard to come to grips with the advent of competition, much of it fuelled by the European Union. They are trying to adapt to new work practices, cut costs and take on a full commercial mantle.

Virtually all companies are facing competition, from the transport sector to the energy sector. Aer Lingus, for example, has been given a mandate to compile a report for Government on a possible strategic partner.

It is currently negotiating the sale of its aircraft maintenance division, TEAM, to Danish-owned FLS Aerospace. The company has been a considerable drain on Aer Lingus's resources, but the airline still has its own problems.

It reported pre-tax profits of £41 million for 1996. This was a good performance compared to 1995, but core air transport operations remained under pressure, with a fall in operating profits despite higher sales. Aer Lingus needs to cut costs and it also will need cash for new planes.

An alliance with British Airways is being touted, but the State airline will not produce a report to Government on the issue for several months. It was due to submit one at the end of 1997, but the TEAM sale is occupying its time at present.

Although in reality Aer Lingus will make no profit from the sale of TEAM - proceeds will be offset by the settlement with employees to buy out the letters of guarantee - TEAM needs reinvestment, money which Aer Lingus cannot afford. So in the longer term, selling TEAM will produce savings.

The CIE group of companies are still a major problem for the Government. Talks on cost-savings seem stalled at best, or non-existent at worst. Substantial savings are needed in all its subsidiaries - Iarnrod Eireann, Dublin Bus and Bus Eireann. The company is seeking savings of £8 million for Dublin Bus, £30 million for Iarnrod Eireann and £6 million for Bus Eireann as part of a viability plan. The plan includes some redundancies and redeployment.

CIE lost £56 million in 1996. It currently gets more than £100 million a year from the Government towards its costs.

CIE now wants to Government to pay it £85 million per year - £55 million for rail track upkeep and £30 million for other rail services. CIE denies this is a subvention by another name, but argues that this is the cost of providing uneconomical services.

In return CIE will introduce performance contracts, whereby it will be fined for not delivering services, and wants to raise bus and rail fares. Bus fares, for example, have not been increased since 1991 and the company argues that it has had to pay wage increases which have added over 20 per cent to its payroll.

This year should see the introduction of the performance contracts and higher fares - once the issues are agreed with the unions. Despite the difficulties between management and unions, CIE is viewed - especially by the privatised British transport operators - as an attractive proposition, should it ever come on the market.

A company which is set to bring itself nearer the privatisation path is Aer Rianta, the State airports operator. The company has engaged a firm of consultants to examine whether its international operations should be floated off or whether some kind of strategic alliance partner should be found. On the face of it, Aer Rianta is performing well. The company's balance sheet is healthy, with pretax profits for 1996, (the latest figures available) running at £42.4 million. However, one-third of group sales is accounted for by duty-free sales.

Aer Rianta is under pressure because of the threat by the EU to abolish duty-free and has been looking elsewhere for revenue. It recently bought into a 50 per cent stake in Dusseldorf Airport with a German construction group. Aer Rianta, which already owns 20 per cent of Birmingham International Airport, paid £35 million for its Dusseldorf stake. The company is expected to examine similar overseas ventures this year and perhaps sell a stake in its overseas operations.

Telecom Eireann already has a strategic alliance - with Swedish/ Dutch consortium KPN/Telia which has bought a 20 per cent stake in the company. The two have an option to buy a further 15 per cent for £200 million within the next two years. It is questionable whether they will exercise the option this year, but may do so in 1999.

It is understood that the partners have deployed significant resources at senior executive level within Telecom since they formally bought in 12 months ago. Two of the alliance partners' executives are heading up two of the five new business units.

Telecom is set to engage in further price wars - on both the domestic and corporate front - with private operators such as Esat Telecom, WorldCom and Swiftcall this year.

This year will also see the awarding of the third mobile phone licence, which, although the new operator will not be up and running, should result in price cuts between the two existing operators. They will be anxious to ensure that the new operator finds it difficult to win market share.

This year will also see the start-up of a joint venture company involving British Telecom and the ESB, which will use its existing infrastructure to compete in the telecoms market.

The ESB will also be looking for investments abroad - it intends to spend up to £150 million on new projects - to generate more cash flow. Like other sectors, liberalisation is coming in the electricity market and in 2000, large users of the ESB's electricity will be free to procure it elsewhere. Other companies will also be free to enter the market. It is estimated by ESB chief executive Mr Ken O'Hara that up to 32 per cent of Irish companies will be free to seek electricity from alternative sources. For Bord na Mona 1998 will be marked by the award of a tender to build the Europeat power station, somewhere in the midlands, to generate electricity for the ESB. Bord na Mona, which could not tender for the construction of the £100 million project, will supply the peat.

Bord na Mona hopes to become a shareholder in the project. A shortlist of five candidates to build the station is currently being considered.

Bord na Mona will also continue concentrating on maintaining its place as a supplier of fuel and on building up its other divisions, including its horticulture division which needs a major revamp.

The semi-state's balance sheet has been cleaned up with the injection of £100 million since 1995 by various governments. It will now have plc status, but the price it gets for supplying peat to the ESB has to be reduced from £19 to £14.40 per tonne. This means the company will have to continue to try to find other sources of revenue as well as constantly monitor and cut costs where necessary.

For another fuel company, Bord Gais, recording pre-tax profits of £82 million for 1996 was a great achievement. However, it also knows that it must prepare for competition and change work practices. It aims to reduce staff from over 700 to 600 by 2000.

Since 1995, Bord Gais has allowed its nine largest customers to source gas from outside Ireland. Although none of them has done so to date, this could change.

The company faces dwindling supplies as the Kinsale gas reserves run out and has already begun to buy supplies in the UK through its interconnector. However, sourcing supplies internationally will increase Bord Gais's costs.

In an interview in the Sunday Tribune last year, the company's chief executive, Mr Philip Cronin, pointed out that if it had bought all its gas in the UK last year, rather than in Ireland, its profits would have been £36 million, instead of £82 million. This year will be a year of major changes, partly brought on by the fact that liberalisation in their markets is a year nearer for many commercial State companies.

The prospect of part or total privatisation will also move a step closer. The Minister for Public Enterprise, Ms O'Rourke, is said to have no real ideological problem about privatisation. Nor has the Government.