We need to avoid ‘death by a thousand cuts’

AS the scramble to contain government spending continues the announcement this week that the pay of senior managers in the semi-state commercial sector is to be cut by about €100,000 for incumbents will no doubt be broadly welcomed.

So far, the general populace have had to take hits to their pay and pensions while the most vulnerable become more marginalised as the battle for scarce funds leave those on the margins of society even more exposed.

In that sense the quest for a balancing of the scales is wholly understandable, but we have to be careful not to fall into the trap of “death by a thousand cuts”.

Slashing the wages of semi-state bosses in the ESB and Bord Gáis could become counter-productive.

In fact evidence is emerging that this policy is starting to hurt the sector. It is known that John Mullins, who has made a significant impact since taking over as boss of Bord Gáis, is most unlikely to go forward for another term.

His successor will be paid €191,000 a year against his basic of €265,000.

It is understood Mullins never even applied for the ESB job to succeed Padraig McManus. It is expected that when his contract is up he is heading back to the private sector. Under Mullins the company grew dramatically, improved profitability and paid dividends to the state while other semi-states lost millions

Both the ESB and Bord Gáis are two key targets for privatisation as the state continues to fight to reduce the government deficit.

The question the government must ask itself is what message it is sending to the markets by paying key commercial semi state bosses salaries well below the market norm elsewhere.

McManus took something like €750,000 home last year, but he is highly regarded as a player in the international utilities sector.

If the state gets round to selling off the business then the monies he took out as boss will be modest in terms of the return the state will get from selling off the business to a third party.

Then of course those who preceded McManus, and who were on much lesser salaries, also succeeded in lifting the ESB profile.

However, the argument can be made that in an environment where tougher and more strategic decisions need to be taken the country needs people of the highest calibre to take the right corporate decisions.

And while the firms are state-owned, international funds are massive investors in the companies and have backed the businesses to the tune of several billion down the years. Bond holders like to know that senior management are to up to the job.

Next year the ESB has to refinance about €1 billion of its debt.

Market instability could raise the risks to the ESB’s refinancing needs if the market nervousness persist about the Irish economy, a recent report from credit ratings agency Fitch has predicted.

ESB has to refinance €975m next year and if current markets conditions persist this will create a “marginal” risk to the ESB’s chances of getting cheap funding, said the agency.

The biggest risk to the ESB is that if the Irish Government gets downgraded to sub-investment grade or “junk” as this would also cause a follow-on downgrade to ESB.

Current markets present a bigger challenge to refinancing entities with a domestic-Irish focus, Fitch said.

It pointed out ESB gets 75% of its earnings from the Republic of Ireland and the rest from Northern Ireland.

Overall while austerity is needed as we struggle to put the economy back together, but we have to bear in mind the last thing we need to be doing at this stage is sending messages to credit rating agencies that we plan to staff our key utilities with executives who are not really up to the job.

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