Incoherent privatisation policy a cause for concern


OPINION:Can the Government be trusted to make decisions that are in the long-term interests of the State, ask DONAL PALCICand EOIN REEVES

THE LATEST visit by the EU-ECB-IMF troika has brought the question of privatisation to the fore once again. Unfortunately, the information that emerged two weeks ago raises more questions about future privatisation decisions than answers.

Not only is there a lack of clarity about the companies to be sold and the timing of any sales, but it has also emerged that there are significant differences between the Government and the troika on the role privatisation should play in contributing to any economic recovery. These differences do not bode well in terms of making the best decisions about the future ownership of critical infrastructure industries.

At this stage, two key points of difference between the Government and the troika can be discerned. First, the drip-feed of information provided during the latest visit indicates that the troika views privatisation as a structural reform issue that should be implemented to improve the overall competitiveness of the economy. The Government, meanwhile, appears to be focused on privatisation as a means of raising exchequer revenues.

The second point of difference concerns how the proceeds from privatisation should be used. Whereas the Government wants to direct revenues towards job creation, the troika views proceeds as a means of paying down the national debt.

The troika’s view of privatisation as a tool for reducing costs and improving competitiveness is an orthodox proposition that is traditionally associated with multilateral organisations such as the International Monetary Fund but it is one that can be readily challenged.

The Irish and international experience with privatisation demonstrates clearly that changing ownership does not necessarily lead to improved efficiency and lower costs in many sectors, particularly in the case of utilities. Making markets more competitive and ensuring effective regulation is in place are the key determinants of improved efficiency in such sectors.

To be fair, this was implicitly recognised by the troika in the original memorandum of understanding, which required the Government to undertake a full independent assessment of the energy sector. This review was to be followed by a discussion of the findings with the European Commission and a consideration of the question of privatisation in light of these findings.

Unfortunately, our Government skipped these sensible steps and prematurely announced last September that it planned to partially privatise the ESB as a fully integrated utility. In addition to being completely inconsistent with the steps outlined in the original memorandum of understanding, this decision was inconsistent with the recommendation by the Review Group on State Assets and Liabilities to separate and retain the ESB’s network in public ownership.

It was also inconsistent with Fine Gael’s original NewERA plan, which involved merging ESB Networks with EirGrid to form a new company called Smart Grid. When viewed in this context, one must wonder about the coherence of Government policy on public enterprise and privatisation in particular.

We have been led to believe that the overarching framework for the future of the public enterprise sector is the Government’s NewERA plan. This is based on raising finance for investment in newly structured public enterprises in sectors such as smart energy, bio-mass and the recently announced water utility. Part of the required finance is to come from the sale of non-strategic assets.

But The Irish Times recently reported that an interdepartmental group has nominated Dublin Port, parts of Coillte and Bord Gáis, and the Government’s remaining stake in Aer Lingus as candidates for privatisation. Are the ESB, Bord Gáis and our ports considered non-strategic? The Republic went down this road before with the sale of Eircom and the State continues to bear the costs of that ill-advised divestiture.

One of the key lessons from the Eircom debacle is that long-term issues around investment and the competitiveness of important infrastructure such as ports and energy should be the principal issues for a government considering privatisation.

Unfortunately, the current debate about privatisation has been dominated by the issues of the proceeds that can be generated from the sale of assets and how they will be used.

The troika has made it clear on a number of occasions that privatisation proceeds must be used for debt reduction. In other words, we will sell shares and relinquish control of important infrastructure to pay the holders of bank bonds and promissory notes.

The Government, in contrast, is seeking approval to utilise revenues to help create jobs. Its stated objective is of course praiseworthy but, given the troika’s stance, it is fanciful to believe that any serious resources will translate into meaningful job creation over the next three to five years.

What is particularly striking about the information that emerged in recent weeks is that various Government sources (including Ministers) appear to have exaggerated the pressure (if any) from the troika to privatise State-owned enterprises. It should be remembered that the original memorandum of understanding did not require any sales.

Two weeks ago the troika told the Independent group of TDs that there was no pressure to privatise or meet any targets for revenues from privatisation. Instead, it has recommended that some public enterprises be restructured for the purpose of improving efficiency and wider competitiveness.

One can only conclude, therefore, that privatisation is one of the few elements of Government policy that has been decided upon autonomously. But can this Government be trusted to make decisions that are in the long-term interests of the State? The lack of coherence displayed to date gives little cause for confidence.

Dr Donal Palcic and Dr Eoin Reeves lecture at the department of economics at the University of Limerick. They are authors of Privatisation in Ireland – Lessons from a European Economy(Palgrave Macmillan, 2011)