Telecom Eireann flotation will make the rich richer

Back in 1984, Mrs Margaret Thatcher decreed that British Telecom should be privatised

Back in 1984, Mrs Margaret Thatcher decreed that British Telecom should be privatised. It was the eighth state-owned company to be sold off, but, according to a leading representative of the major merchant bank advising the government on the sale, some aspects were dealt with in an informal manner. He admitted to one journalist: "We came up with the share price on the back of an envelope in the pub."

AIB executives are likely to take a more sober approach when they set Telecom Eireann's share price, but one central truth remains: at the start of July, Telecom Eireann will be owned by the 3.5 million residents of the State, at the end of the month it will be owned by, at most, the smartest and wealthiest 20 per cent. They will have bought it at a bargain price, with virtually no risk.

While a case can be made for the state retaining control of water or electricity supply, hardly anyone these days disputes the case for the privatisation of telephone companies. The globalisation of the telecommunications industry, the fierce competition, the massive investment required for new technologies and the risk attached to these, are already leaving state-owned telecoms dead in the water.

But there is a limited number of ways to privatise a state asset, and socially, none of these are especially pretty.


Mrs Thatcher's method was fairly straightforward. From 1979 onwards, she privatised more than a dozen major state-owned industries, buying the support of management and employees in each sector with generous share options, and spending vast amounts on advertising each flotation to the public.

She had an open, political agenda; generate enough extra cash to pay for tax cuts, undermine public sector trade unions, reward the financial services industry and create a shareholding middle-class that would be more likely to vote Conservative.

For a while, it all worked out beautifully. With each share priced low as an incentive to participation, institutional investors made fortunes from privatisation. Individual members of the public saw their shares in British Telecom, for example, double within a month. With so many members thankful for their free shares, the trades unions were riven by internal disputes. Many managers of state-owned companies became millionaires when their free shares or options soared in value from the artificially low flotation price.

More than a decade later and operating in a different political environment, the Republic's Minister for Public Enterprise, Ms O'Rourke, has drawn a few lines in the sand. Three times executives at Telecom Eireann have asked her for privatisation share options, and three times she has refused. The registration documents were sent to everyone on the electoral register, rather than just every Telecom Eireann customer. Institutional investors will receive a smaller proportion of the shares than they have in some other countries.

But partially by virtue of the very process of privatisation, Ms O'Rourke and her Government fall far short of being champions of the ordinary people. For example, the professional fees for the privatisation, to AIB and others, will be £40 million.

Currently, KPN/Telia owns the 20 per cent of the company it bought for £183 million in 1996, and will exercise an option for a further 15 per cent on flotation. The employees, through an exceptionally generous deal negotiated with management by their unions, own 14.9 per cent.

The Government is likely to sell between 30 and 35 per cent of the company. Of this, around half of the shares will be reserved for the major financial institutions, the rest for the public.

Around 1.2 million people, out of a population of 3.5 million, have expressed interest in buying stock in the company. Those running the flotation would be amazed if more than 500,000 actually bought shares - those who can lay their hands on £1,000 or £2,000 and are well enough educated to grasp a good opportunity when they see one.

While these people are not likely to double their money in a month, they are almost sure to make significant gains in a short time.

"Almost without exception it is a risk-free investment," says the Irish-born privatisation specialist Mr Brendan Martin, author of In the Public Interest? and Redesigning Public Services, a Partnership Approach. "Especially, first-time flotation on the part of governments which wish to go on to have other flotations of state-owned assets, the advice they get from merchant bankers is invariably to err on the side of a low price, so that they can present over-subscription to the share offer and a rapidly-rising share-price, post-flotation, as manifestations of success," he adds.

He says that in Britain, while the privatisations did increase the number of people holding stock in major companies, most individual investors sold again soon in order to cash in quickly on the certainty of an immediate profit.

Business specialists argue that while privatisation does represent a financial gain, mainly to the middle-class, it benefits everyone through a better, and more flexible, standard of service.

"Where companies have been floated, there is usually a change in culture, and a change in systems, in a way that is genuinely good for the company and its customers," says Prof Ray Kinsella of the UCD Business School.

But some, such as the London-based Institute for Fiscal Studies, disagree. It recently published a report suggesting that choice in utilities brought "benefits to the rich at the expense of the poor", and that pensioners have lost out in telecoms because they make fewer phone calls than others.

The report called for stricter regulation of privatised utility companies.

In a speech to the OECD, the former secretary general of the International Labor Organization, Mr Lane Kirkland, stressed that regulation of business was essential.

In the US, he said, the period leading up to the Great Depression of the 1930s was "a time when markets ruled, and whatever business wanted, it got.

"There was no impediment to its electrifying the countryside, or paving the highways, or reforesting the stripped and despoiled forests of our country, or providing comfort to the poor and afflicted for that matter," he continued. "But in fact it would not do these things and had no intention of doing them. It took the New Deal to do them . . . which set the stage for the greatest and most balanced period of growth and prosperity in the economic history of any nation."

In the Republic, the telecommunications regulator, Ms Etain Doyle, has appointed Telecom Eireann as the "universal service provider", and it will be her task to ensure that whoever winds up controlling the company, it offers the same service, at the same price, to every household in the State.