A welcome roadmap for a change in semi-states’ delivery

FOR many of us long-time advocates of substantial reforms in the public services, the report of the review group on state assets and liabilities, also known as the McCarthy 2 Report, offers some promising reading.

Instead of calling for a fire-sale of state assets in line with the media and public anticipation, the report provides a longer-term perspective on the assets’ valuation, placing their total realisable value at about €5 billion. The optimistic level of this figure, especially given the levels of debt and pension liabilities already carried by many semi-state companies, strongly suggests market valuations consistent with longer-term value, rather than a quick disposal.

From the starting point of the report, it is clear that, in the view of the group, state asset sales should not be used for the purpose of raising quick cash. No plugging the holes left in our balance sheet by fiscal imprudence of the boom years politics – aka, the Social Partnership or the banks. Instead, the disposal of assets should be structural, drawn out over time and strategic in nature.

This is made clear by the group treatment of the core infrastructure assets, where a natural monopoly can emerge, such as the national grid. Likewise, land-linked assets are viewed by the group as the source of lease yields, not as the candidates for the ownership disposal.

Reforms of core, protected sectors are rightly seen by the group as both the precondition to disposal, but also as a long-term objective for the Government.

For example, in the areas of health and education — sectors outside the direct analysis of the group — reforms should be geared toward achieving the following core objectives.

First, the reformed services should provide much better value for money than the current system does. Second, the existent service providers should be put on a fully self-accounting operational platform, with the state providing funding for the purchases of services, ensuring the quality and standards of these services, without engaging in provision of actual services. This principle, of separating provider from payer, can result in both gained efficiencies in services provision and creation of incentives for development of internationally traded services in both areas. At the same time, it should remain the remit of the state to ensure that access to services is provided on the basis of need, not the ability to pay.

One positive step in this direction, actually covered by the group report, is the proposal to privatise VHI. The Irish health insurance sector currently represents a dysfunctional industry dominated by the state-owned market player. The classic outcome of such an environment is known as regulatory capture, the situation whereby the regulatory authorities become dominated by the interests of the largest company. Hence, pricing of insurance contracts in Ireland has nothing to do with the market for the service. Increases in rates, triggered by the VHI this year, came in the context of shrinking market demand and the lack of significant new capital investment programmes in the sector. In effect, underwriting of higher exchequer dividends from VHI by using rate increases amounts to a hidden tax on those of us who can still afford the service. And the service itself, as offered by the Irish health insurers, has little to do with buying a risk insurance contract and more to do with buying a state-sanctioned permit to jump the queue.

Exactly the same argument holds for the Dublin Airport Authority’s (DAA) preferred modus operandi. Through constantly hiking user charges on diminishing numbers of passengers, the DAA has gold-plated one terminal, created a maze of new ‘temporary’ facilities and accumulated huge debts — financing which requires even higher charges on captive passengers.

This reality of persistently rising costs of public services, which is nearly completely divorced from service quality or quantity, must be drastically reformed.

The opponents of privatisation who point to the positive returns to the exchequer from semi-state companies’ operations are missing exactly this point. In order to generate profits remitted to the state, our semi-states often engage in uncompetitive pricing of their services, market manipulation and regulatory lobbying.

The end bill for this falls onto our — taxpayers’ and consumers’ — shoulders.

But the economic damages do not stop there. Instead, uncompetitive publicly-controlled and state-supplied services — from transport, to energy supply, to water and airports and ports facilities, to health insurance and healthcare and education — all impose often severe economic costs onto our productive economy. No competitive water supplier can afford losing 30%-40% of water through leakages. No competitive transport provider can afford treating commuters to an erratic, unpredictable schedule. A state and local monopoly can, since it is not them, but consumers, employers and employees who pay for these failures of our marketplace.

The McCarthy 2 report, just as its predecessor, the McCarthy 1 (An Bord Snip Nua) report on public sector numbers and remuneration, is a welcome roadmap for starting the process of changing how core public services are being delivered in Ireland.

- Dr Constantin Gurdgiev is the Adjunct Lecturer in Finance with Trinity College, Dublin.