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Column: Who are the winners when we sell State assets? Not the public…

With the deadline for a privatisation plan at hand, Fergal Browne warns of the pitfalls of selling public companies to private investors.

Fergal Browne

THE END OF 2011 was the target for the Government to meet with the EU, the ECB and the IMF and discuss its plan for the sale of State assets, according to draft Budget documents leaked earlier this year.

With that deadline at hand, Fergal Browne writes about the reasons for privatisation – and its possible effects.

PRIVATISATION 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 that the Coalition will aim to make €2billion from the 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 could be fully privatised along with the Dublin Airport Authority. The total from all its recommendations would yield of €5billion, the report says – although figures are market-price dependent, so hard to quantify.

The part-sale of ESB – the biggest public company – is the beginning of the programme. This has been pushed by the deal with the troika, but is not necessary according to the legally-binding Memorandum of Understanding. 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”.

‘Once complete, there’s no going back’

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 to a system of State ownership. So should it be done at all?

Proponents of privatisation argue that 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 political consultant John McGuirk.

They argue the Government’s role in state services should be as minimal as possible. “I’d propose a simple test to decide,” he says. “Two 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 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.”

‘Since privatisation, Eircom has run up debts of €3.75billion’

The problem is that 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 per cent 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 per cent. 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 €3.75billion, asked staff to take a 10 per cent paycut this year and cut 2000 jobs since 2009. The companies who have controlled Eircom have 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.

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“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”, the Irish Congress of Trade Unions has said.

‘The plan has seen German companies frothing at the mouth’

Advocates of privatisation still defend the overall result. “We now have more consumer choice and competition in the telecoms and internet provider market than dreamt possible at the time,” McGuirk says. “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.”

Unlike Ireland, Greece has been forced into a €50billion privatisation programme by the bailuot deal. The plan has seen German companies frothing at the mouth to buy up state assets for low prices and make profits. Deutsche Telekom has increased its stake in Hellenic Telecommunications Organisation from 30 per cent to 40 per cent, although that deal had been organised since 2008. Deutsche Telekom paid €4 billion for the first 30 per cent in 2008, but only €400 million for the next 10 per cent in 2011. Meanwhile, the owners of Frankfurt airport, Fraport AG, want the Greek government’s 55 per cent 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-Gulf war 2003 Iraq, when American companies such as Halliburton and KBR arrived to rebuild the country. “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”. Privatisation is not guided by this overarching principle.

Fergal Browne is a graduate of journalism in DIT. He writes at everythingiskaputt.wordpress.com.

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Fergal Browne

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