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The revolution will be privatised

02 Dec

Eamon Gilmore and Enda Kenny incorporated a privatisation programme as part of a programme for Government

The Programme for Government begins with “On 25th February a democratic revolution took place in Ireland”. One part of this “revolution” is a privatisation programme, which has the potential to be one of the most divisive issues to emerge from the current economic crisis. So is it wise to offload state assets at a time of mass unemployment and economic uncertainty?

The programme for Government states the Government will aim for €2 billion in privatisation of state assets based on the McCarthy report issued in April 2011.

The McCarthy report recommends, among much else, the part-privatisation of ESB, RTÉ and CIÉ, while Dublin Bus can be fully privatised along with the Dublin Airport Authority. The total from all recommendations would yield savings of €5 billion according to the report, although figures are market-price dependent, so hard to quantify.

The part-sale of ESB – the biggest public company – is the start of a privatisation programme, which has been pushed by the deal with the Troika, but is not necessary according to the legally-binding Memorandum of Understanding, which states Ireland need only undertake “an independent assessment of the electricity and gas sectors with a view to enhancing their efficiency”.

Therefore, any decisions taken on privatisation are the policy of the Government, although there have been a few wink, wink, nod, nods thrown in by the IMF in their Quarterly Reports.

Not that Fine Gael has a problem with this. As per their election manifesto, the Government has  launched the economic stimulus plan, New-Era, to “sell those assets that can operate in competitive markets and that are no longer of strategic interest to the state”.

Labour, meanwhile, is reneging on yet more election promises. They stated in their election manifesto “Labour is opposed to the short-termist privatisation of key state assets, such as Coillte or the energy networks”.

The biggest issue around privatisation is that once complete, it is almost impossible to return of state ownership, so should it be done at all?

Proponents for privatisation argue it means greater efficiency, greater competition so more competitive prices for consumers, better value for the product and more innovation in the sector. “A genuinely competitive private sector will outperform a public sector monopoly any day of the week, and will drive down consumer costs far more quickly”, says economist John McGuirk.

Advocates for privatisation argue the Government’s role in state services should be as minimal as possible. “I’d propose a simple test to decide – 2 questions: Is this something the state alone can do? Is this an essential service that must be provided, even at a loss? If the answer to those questions is “yes”, then we should keep

The privatisation of Dublin Bus is seen as a long-term objective by the McCarthy Report

the asset. For example, though I wholeheartedly believe in privatisation, selling Bus Éireann would inevitably lead to a private operator cutting loss-making routes, even though those routes have a significant social dividend, for example in small rural communities. On the other hand, the ESB can go. The private sector can ably provide electricity, and the sale would raise significant revenue while not impairing any service”, says McGuirk.

The problem is when a state asset is privatised, the raison d’etre for the company moves from offering a service to making a profit. If the incentive of profit isn’t there, the company will not offer the service.

Take the privatisation of Eircom for example. Over a decade after privatisation, Ireland has 53.7% of households with broadband, which is lower than the EU 27 average. In Scandinavian countries, where broadband is publicly distributed, the figure is closer to 99%. Greater broadband access is imperative in a modern economy to attract business, let alone encourage business at home.

The nation ranking at the top of the list for broadband speed – South Korea – has embraced fibre optic broadband since 2003. Eircom has only begun the transition to fibre optic broadband in Ireland this year.

Since privatisation, Eircom has run up debts of €3.75 billion, asked staff to take a 10% paycut in 2011 and cut 2000 jobs since 2009. All this while the companies in control of Eircom has profited massively from asset stripping – selling the best performing assets for big profits. Eircom’s mobile subsidary, Eircell, was sold to Vodafone for €4.5 billion.

And let’s not forget the 575,000 people who lost out by investing in shares in Eircom. “The privatisation of Eircom in 1999 must rank as the single biggest economic mistake made by the Irish government – until the disastrous blanket bank guarantee in September, 2008”, said the Irish Congress of Trade Unions.

Deutsche Telekom has increased its stake in Hellenic Telecommunications Organisation

Advocates of privatisation still defend the overall effects. “We now have more consumer choice and competition in the telecoms and internet provider market than dreamt possible at the time. Imagine if we could do the same for the electricity market, for example. Eircom’s privatisation was criticised for what happened to that company – but the aim of privatisation is not to strengthen the company you sell but to strengthen the market and increase consumer choice”, says McGuirk.

Unlike Ireland, Greece has been forced into a €50 billion privatisation programme by the Troika deal. The plan has seen German companies frothing at the mouth to buy up state assets for low prices and turn them into profitable businesses. Deutsche Telekom has increased its stake in Hellenic Telecommunications Organisation from 30% to 40%, although this deal has been in the organised since 2008. Deutsche Telekom paid €4 billion for the first 30% in 2008, but only €400 million for the next 10% in 2011. Meanwhile, the owners of Frankfurt airport, Fraport AG, want the Greek government’s 55% stake in Athens International airport.

The sight of a plane-full of German businessmen and women, economists and Government officials flying to Greece in October 2011 with the promises of investing in Greece gave eerie similarities to post-Golf war 2003 Iraq, when American companies such as Halliburton and KBR arrived to rebuild Iraq. “Of course people want to make profits, but this is about benefiting Greece”, said Martin Knapp, head of the German-Greek Chamber of Commerce.

Privatisation will almost certainly result in job losses. That means yet more unemployment and hardship for many all in the name of efficiency. Meanwhile, any capital gained from the sale will more than likely be thrown into our ever expanding black hole of national debt.

In its Programme for Government, the Government promised to be “guided by the needs of the many, rather than the greed of the few”. Privaitisation isn’t guided by this overarching principle.

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Posted by on December 2, 2011 in Government policy

 

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