Semi-states must be shifted to new holding company to maximise returns

By Ivan Yates

Thursday, April 28, 2011

THE national preoccupation of living life through the rearview mirror meant that Peter Nyberg’s historic analysis of our economic crisis took precedence over Colm McCarthy’s privatisation prescriptions for state companies.

We already knew the causes and culprits of our credit and property bubbles. There’s no need to endlessly shift blame as Brian Lenihan sought to do by pointing the finger at the ECB. We should urgently address the plethora of vested interests that prohibit reform of our semi-state sector. McCarthy raised serious issues of inefficiency, poor returns to the taxpayer and confused policies that must be dealt with head on.

State companies have been exposed as being grossly over-manned, with executives excessively remunerated. Both head counts and wage packets appear unaffected by the severe economic downturn. Within 18 semi-state companies there appears to be significant feather bedding. Most disturbingly, significant share value is being lost to taxpayers through maintenance of enormous levels of employer pension contributions. Pension contributions by Dublin Port amount to almost 63% of pay levels. Comparative figures for the ESB are almost 25% and Coillte 40%. This is without parallel in the private sector.

ESB and Eirgrid management have agreed to average salaries in excess of €94k and €96k when pension costs are included. The Irish Aviation Authority has approved average pay of €120k when a 26% pension contribution is included. Pay levels from 2007 to date have risen across all semi-states to €55k compared to the industrial average wage of €33k and public service average salary of €51k. The ESB have decided to pay €591m over the next three years on top of regular pension contributions. These enterprises are being run mainly for the benefit of their staff and management. Bosses of 10 state companies shared €4.4m in 2009.

Government response has been tepid in the extreme. Fine Gael’s previous policy approach in their New Era document has been abandoned. It envisaged a dynamic pursuit of realising €7bn in asset disposals to fund new public utilities in water provision, renewable energy and broadband. FG promised 90,000 new jobs therein.

Now, Tánaiste Eamon Gilmore says the Government will be in "no rush" to act in this area. Fear of fire sale values has been used to effectively exercise an embargo on reform. The bailout boys have been warned off expecting proceeds from state asset sales. This stance underlies Labour’s ideological objection to change.

Given the nation’s perilous finances, surely finite funds should be targeted at services that cannot be provided by anyone else? Welfare provision, education and health services are essential facilities that are only available from government. Electricity generation, turf cutting, forestry production, bus transport, broadcasting and horse breeding are freely available in a competitive commercial market. Global privatisation since 1977 has shifted ownership of nationalised assets to the value of $2 trillion.

Retention of state share ownership is not justified on standard commercial grounds of ROCE (Return On Capital Employed). Dividends to taxpayers have been paltry in the extreme. Where there have been profits, such as Coillte of €143m, only €2.6m was returned to the Exchequer. The taxpayer has been the most passive of shareholders. McCarthy recommends a 30% shareout of profits in dividends. Parent departments and sponsoring ministers regarded state companies in their aegis as playthings. Cronyism abounded in appointees to boards, irrespective of sectoral knowledge or business skills. Former Minister Eamon Ryan used the ESB and BGE to implement his climate change policies.

Proper stringent independent regulation is the real job of government. State ownership led to a direct conflict of interest between shareholder considerations of profit versus the primary role of state as regulator. Rather than maximising profit, corporate governance emphasised requirements of transparency, obligations of fairness and addressing consumer needs. This blurs the lines that should separate public good and commercial activity.

Confusion extends to using state companies as vehicles on behalf of Ireland Inc. Taxpayers don’t need to fund oversees investments that may have a commercial logic. Semi-state debt costs are excessively onerous due to our sovereign bond ratings.

Politics compromises efficient enterprise. Take the Irish National Stud, where net assets stood at €11.7m at the end of 2009. The state injected €1m in 2000 and €1.1m in 2006 to fund bloodstock investment. McCarthy proposes to sell it. Some horse breeders have recoiled in horror. They claim it provides cost-effective stallions, adds to our equine reputation and will host Queen Elizabeth. Kildare TDs will be up in arms to voice concerns for government retention of a local industry. Ireland is a world leader in horse breeding, thanks to the exploits of Coolmore Stud, the breeding operations of the Aga Khan at Ballymany Stud and the Arabs’ Darley Stud. The National Stud is set to become a political football rather than a commercial entity. This report by the Review Group on State Assets and Liabilities provides an excellent opportunity to reinvent our approach to state enterprise.

Instead of ideological inaction, we should establish a state investment holding company. DCC is an equivalent private sector investment vehicle that successfully operates as a quoted plc. It has maximised shareholder value, currently €22.50 per share. A National Development Corporation could act as a government stock holder with a completely commercial approach. This holding company could sell partial shareholdings, based on maximising proceeds from tranches of equity. It could foster joint ventures with profit criteria. It could avoid past privatisation mistakes and optimise efficiency gains by cost cutting. It would tackle vested interests of staff.

McCarthy also recommends a singular state property management agency. This would consolidate a commercial approach whether the Government is a landlord or tenant. The Office of Public Works needs to be transformed so that we can realise and extract value from unutilised Government assets and apply a savvy approach to public accommodation and building needs. A similar recommendation by An Bord Snip Nua continues to gather dust. McCarthy further advocates future granting of licences or quotas should be conducted by transparent market auctions, rather than beauty contests. This would maximise cash receipts for the Exchequer.

Familiar facile verbiage about "selling the family silver" and a narrowing of this debate down to a €2bn limit of energy utility assets represent a wasted political opportunity. Dialogue may be reduced to a spat between us and our troika of creditors. Meanwhile, shareholder value in state enterprise is being milked by those within the companies. Eircom, like Manchester United, carry millstones of debt because of aggressive shareholder acquisition. It’s time to take semi-state companies away from politicians, civil servants and unionised control. The next step is to shift ownership to a market-orientated state holding company, whose mandate is neither regulatory nor the public good, just optimum operations and returns.

This appeared in the printed version of the Irish Examiner Thursday, April 28, 2011