Privatisation pot must be preserved for the national pension fund

THE Cabinet is to sign off shortly on proposals for privatisation of commercial state companies. They are obliged to present to the troika next month plans to sell-off state assets. The bailout boys are set to play hardball. Greece and Portugal were obliged to multiply original targets of sales receipts. The IMF suggested last week that Ireland should raise €5bn instead of €2bn, as set out in the Programme for Government. Politics, pragmatism, ideology and street smart commercial competence combine to set the agenda for coming decades for essential sectors of the economy.

The first row relates to the proceeds of privatisation. Our creditors, like any loan shark or moneylender, demand that we offset all cash received against the €67bn of the bailout or repay sovereign debt. This makes no sense. €3.8bn of unguaranteed senior bonds may still be redeemed for Anglo Irish and Nationwide. It is incredible that we would sell vital productive assets simply to pay off bondholders who bet on these institutions that will never function — let alone lend again. This is the definition of “putting good money after bad”.

It is pointless flushing further scarce resources down the toilet of toxic defunct banks. Government is seeking wriggle room to redeploy privatisation proceeds into a new generation of state enterprises. Fine Gael created a hostage to fortune with a previous policy document Working for Our Future. They promised to invest €18bn to create 100,000 jobs. Policy wonks, in the isolation of opposition, dream up grandiose creations that bear little relationship with reality. A new state agency, in the form of an investment holding company, called New ERA (Economic Recovery Authority) is set to invest in water, telecommunications and renewable energy. No business plan, detailed market analysis, prospectus or commercial rationale has ever been advanced — just promises of job creation and economic stimulus.

The notion that politicians in a committee room can create sustainable businesses has to be derided as fanciful. Taxpayers’ funds are primarily obliged to meet society’s basic needs of income support through welfare, provision of health and education and other essential public services. Creating a public utility company Irish Water, to take over water investment and maintenance programmes from 34 local authorities, is grand.

It depoliticises collection of water rates, equating such revenue collection as that of the ESB and BGE. A new statutory corporation should be subject to private investment from the outset, through an IPO. Investment in renewable energy or broadband is extremely dubious, given levels of existing capacity and intense competition.

This stand-off, between EU/IMF/ECB and Government, can be resolved by an honourable compromise. The National Pension Reserve Fund (NPRF) was established almost a decade ago to provide a kitty of investment to meet future public pension provisions. Current actuarial estimates of public sector pension liabilities are around €100bn, to be met out of annual budgets. The fund reached almost €25bn before it was raided to shore up the banks. The bailout terms insisted that a further €17.5bn was committed. The cupboard is now bare and desperately needs to be replenished. The Cabinet should commit to a vigorous programme of privatisation on the precondition that all proceeds will be allocated to the NPRF. This means that they could not be frittered away on futile bond redemption or political play projects.

Candidates for share sales have already been established by the McCarthy Review Group report published last April. Their recommendations form a blueprint for legislative reform, new regulatory frameworks, policy context and selection choice of companies. Bord Gais and ESB represent the juiciest low hanging fruit. Options are to issue an IPO, as with Eircom, or prepare a minority stake (up to 50%) for a trade sale/equity investment to either an established international player or pension fund. The big policy choice is either to maximise the cash yield by keeping them intact or segregating out the transmission networks. This would mean retaining Eirgrid, while selling ESB Electric Ireland and separating BGE Networks from its retail arm.

The 25% state stake in Aer Lingus, when combined with employee shares of 14% and Ryanair’s 29%, represents an opportunity for an interested party to acquire overall ownership of the airline. The privatisation in September 2006 resulted in shareholder paralysis, due to the unexpected attempted acquisition by Ryanair. The EU commission stymied Michael O’Leary’s plans. Their offers at €3.50 and €2.40 were spurned. EasyJet or Willie Walsh’s International Airways Group (BA & Iberian) might acquire the entire plc at a euro per share, with a market capitalisation of €350m. As CEO Christophe Muller has had a complete commercial mandate for cost-cutting and route rationalisation, there seems to be no political purpose in government retaining shares.

McCarthy’s top line net valuations, based on the market in 2009, are probably subject to impairment, but are worthy of repetition: Dublin Airport Authority €977m; Coillte €1.2bn; Bord na Mona €224m; Dublin Port €238m. The National Lottery is definitely saleable, based on the UK experience with Camelot. The National Stud competes with private bloodstock interests and no longer fulfils a public policy role. Bus Eireann and Dublin Bus could be partially or fully sold, if regulatory conditions were transparent and fair. Over a period of three years more than €5bn should be raised to replenish the NPRF.

GREATEST impetus for privatisation is not cash realisation, but the mega rip-off of the taxpayer as shareholder. Intrinsic share values of state companies have been systematically pillaged by management and employees. Employment conditions have resulted in over-manning, excessive remuneration, dubious levels of absenteeism and inefficiency — all based on culture of buying industrial peace. Over recent years 25% employer pension contributions have decimated company valuations. Dublin Port, Coillte and ESB are paying respectively 63%, 40% and 25% of payroll costs to fund enviable defined benefit pensions for staff. These computations are based on salary levels that are a multiple of three and four times the national average wage. State enterprise equals compromised management, resulting in a politicised payroll.

Any enterprise is only as dynamic as its business plan and access to capital. Our state enterprises have been handicapped by penal costs of finance — directly related to our sovereign bond ratings. This means added costs and restricted capital availability. Potential for overseas export earnings is therefore stifled. As part of an international conglomerate these companies could dynamically grow like publicly quoted PLCs to the benefit of all their stakeholders. State ownership represents a shackle that stymies development opportunities.

The Eircom example, with a debt burden of almost €3bn, is used to oppose privatisation. It was sold and re-sold four times, also compromised by an ESOT at 14%. However, the consumer has benefited most from the resultant fierce competition and deregulation. The exchequer is no longer responsible for its capital requirements. Effective regulation provides the state with more armoury than state ownership. Pitfalls of troika demands, trade union blackmail, fire sale discounts and vested commercial interests can be successfully overcome if the Cabinet courageously and decisively takes command of the situation.