State sector has to work out how it can go private

Business Opinion: Events at Aer Lingus are doubtless being watched with interest by senior management at other commercial state companies, particularly the ESB and Bord Gáis.

Privatisation has been a dirty word since the Eircom debacle left something like half a million small shareholders out of pocket and the State's core telecommunications infrastructure in the hands of two US leveraged buyout funds.

The company may be back on the stock market and the State may have banked billions from the original sale - now safely ensconced in the National Pension Reserve Fund - but overall the sale of Telecom Éireann is judged to have been a failed experiment.

As a result serious talk of selling the ESB, Bord Gáis and Aer Rianta was quietly dropped. Unfortunately this did not remove the need for fairly chunky investment at these companies, in particular the ESB and Bord Gáis. Both utilities were gearing up for the liberalisation of their respective markets and in the case of the ESB needed to replace or upgrade many of its power stations.

With access to fresh equity via a flotation no longer an option both companies resorted to borrowing. Both have loaded their relatively pristine balance sheets over the last five years.

The ESB's long-term debt has risen from €735 million to €1.6 billion over the last five years while at Bord Gáis the increase has been even more dramatic, going from €197 million to €1billion.

Both would argue that these debt levels are sustainable and not out of line with norms for such capital intensive business. And given the enthusiasm of the US private placement market for the ESB's debt issue last year, their ability to service these debts is not really in doubt.

From the Government's point of view it was an attractive solution. Debt may be a less sensible way to finance these businesses than letting them raise fresh capital, but it allowed the whole issue of privatisation to be side-stepped.

No doubt the Government would be happy enough for Aer Lingus to also go down this route, given the opposition that is being voiced to even the mention of the possibility that part of the airline will be sold.

But it would appear that Aer Lingus does not have that luxury.

There seems to be a consensus that if it wants to spend €1 billion over the next three years on new planes, then it will have to raise fresh equity.

The first half of the strategy - renewing the European short haul fleet - could be financed through a mixture of internal resources and leases, but the other half - new planes for long haul routes - can't be funded in this way.

Something in the region of €200 million in fresh capital is needed to underpin this financing which in turn will secure the future of the airline, according to the company. It is a view that is supported by the review carried out for the Government by Goldman Sachs and if you accept that it is true, then the Government has three choices.

The first is to do nothing and let Aer Lingus struggle on. The second is to put €200 million of taxpayers' money into the airline and the third is to find a new investor.

The do-nothing option has its attractions politically, given that it would be several years before the consequences fully manifested themselves. But ultimately the issue will have to be faced up to at Aer Lingus, and eventually also at the ESB, Bord Gáis and Aer Rianta's successor, the Dublin Airport Authority.

A point will be reached when even they should stop borrowing and seek new capital.

Putting money directly into these companies would mean the State was essentially buying things like airlines and power stations with money that could be spent on roads, schools and hospitals.

This is not very appealing from a political point of view, but neither is the third option which is in effect privatisation, albeit for pragmatic rather than ideological reasons. It is however, the most sensible.

If you approach privatisation from this perspective the issue becomes one of selling enough of the business to raise the funds you need and still ensure that you are in a position to safeguard the strategic interests of the State.

The importance of Aer Lingus in this regard is debatable, particularly when the role of Ryanair is taken into account. But the problems are much more obvious in the case of the ESB and Bord Gáis.

It is clear from what happened at Eircom that if control of the company is surrendered, the State's strategic interests, whatever they may be, will only be furthered to the extent that they are in tune with the other owners' commercial interests.

But this problem has arisen with privatisation elsewhere and various solutions have been found.

Finding one that works in the Irish context would not be straightforward, but solving this riddle is the task for the the various actors in the commercial state sector.