Friday, April 22, 2011

Evening Echo Article 22/04/2011

Here is the text of an article I wrote after this week’s publication of the Review of State Assets and Liabilities that was carried by Friday’s Evening Echo.

The Review of State Assets and Liability published this week identifies around €5 billion of assets which could be sold. The report was undertaken by a group of three, but it is the group chairman, UCD Economics Lecturer, Colm McCarthy who is associated by name with the report. The other members of the group were Alan Mathews, an Economics Professor in Trinity College and Donal McNally who is the Second Secretary in the Department of Finance.

The report gives a useful insight into the activities and outcomes of 15 commercial state bodies, including the ESB, Bord Gáis, CIE, An Post, RTE and the airport and port authorities. Some commercial bodies were excluded from the report. These were the VHI, NAMA and the now nationalised banks as these are all subject to separate processes.

The report makes some strong recommendations about how these assets should be used, but emphasises that an immediate sale of these assets should not be contemplated. The recommendations of the report are to be considered by government and it is only once their actions are announced that we will know what the outcome of this process will be. The report, though, does give us the information they will be using on which these decisions will be based.

At the end of 2009 the 15 bodies covered by the report had just over 40,000 employees which was identical to the number of employees at the end of 2007. The average annual salary was €54,600, with pension contributions bringing this up to €63,200. As the country experienced economic collapse average salaries increased by 2.6% from 2007 to 2009, and once pension contributions are included the increase was actually around 4%.

In 2009, these companies earned an aggregate operating profit of nearly €400 million. Although the State is the beneficiary of these profits, subsidies to loss making elements, particularly rail travel and rural transport, meant that the State had a negative dividend of €340 million to keep these companies running. There has been no year since 2002 when the aggregate of these companies has produced a positive return for the State.

Since 2002, the ESB has paid over €700 million in dividends to the Exchequer with Bord Gáis contributing over €130 million. These two companies provide over 70% of the total dividends paid to the State from these enterprises, though it must be remembered that these dividends are generated from the prices charged in providing electricity and gas to households up and down the country. All the other companies covered the report are not significant contributors of dividends to the State.

The ESB and Bord Gáis also have the highest salary levels. In 2008, the average annual salary for the ESB’s 8,000 employees was €76,000. Once pension contributions by the company are accounted for the average annual salary rises to nearly €90,000. This is two and a half times the average industrial wage. The average annual salary for the 1,000 employees of Bord Gáis was €67,000 with pension contributions bringing this up to €77,000. Again, these salaries are funded from the revenue collected from households.

These companies have total debts of around €6.5 billion with the bulk of this in ESB, Bord Gáis and the Dublin Airport Authority. CIE does not have a significant level of debt as investment in the transport infrastructure it uses is directly funded by the State. This debt reduces the potential sale value of these enterprises.

Although many of the companies cover the entire country, there are three instances that relate to specific assets in the Cork region. These are Cork Airport, the Port of Cork and SWS Natural Resources, which was acquired by Bord Gáis in December 2010.

The report does not recommend that Cork Airport be sold. The report is, however, critical of the capital expenditure undertaken in the airport and describes the new terminal as “controversial”. The report states that there is “excess terminal capacity” in Cork Airport. This is undoubtedly true but it does mean that using Cork Airport is now a far more enjoyable experience than under its predecessor.

The report then states that it is the customers who are paying for this excess capacity through higher airport charges and suggests that, if the airport were a private enterprise rather than a public one, it would be shareholders rather than customers who would absorb the capital loss.

The report, however, stops short of recommending privatisation of the airport and merely suggests that the regulatory arrangements need to be reviewed. This may see the current situation changed where Cork Airport is actually controlled by the Dublin Airport Authority rather than acting as an independent entity. Cork Airport will remain in public ownership.

The report’s recommendations for the 11 seaports owned by the State are somewhat different. Here the report recommends that the ports be restructured around three “multi-port” companies built around Dublin, Cork and Shannon Foynes. It seems that Cork could become the largest part of an entity that would see it merge with Waterford, New Ross and, possibly, the CIE-controlled Rosslare port. Some of the smaller ports may actually be closed.

Once this amalgamation process has been completed, the report recommends that some or all of the ports should be privatised. Unlike the airport, it is not certain that the Port of Cork will remain in public ownership.

The port currently has 111 employees and in 2009 generated a profit of €1.5 million on sales of €21 million. In 2008 there was a profit of €6 million on sales of €26 million. The report does not indicate how much could be raised by the sale of the port but, if it was to happen, the likely return would be relatively small.

SWS Natural Resources is a wind-generating company based in Bandon that employs 50 people and was bought by Bord Gáis from IAWS for €500 million in December 2009. The report is unambiguous in its recommendation that this, as well as other parts of Bord Gáis excluding the actual network, should be privatised. One final recommendation that has a specific local bearing is the selling by Bord na gCon of its holding in greyhound tracks around the country.

In general the report is largely as expected. Given the current economic environment we are unlikely to see substantial sales of State assets in the medium term. Over a timeline longer than three years the outcome is less clear. Experience from other countries suggests that privatisation brings its own problems and our own experience with eircom should not be forgotten.

The sale of eircom raised over €6 billion for the Exchequer but the company and the infrastructure it should provide have been beset by problems ever since. In total, the sales recommended in this report have a net asset value of €5 billion. In the context of a banking crisis that is set to cost €60 billion and an ongoing budget deficit that will add €100 billion to the National Debt over six years, the figures in this report are quite small.

It is more likely that the sales that could be undertaken in the near term will raise about €2 billion.  This is a once-off gain and €2 billion is a lot of money but it would be far better if policies that generate an annual reduction of €2 billion in the deficit were introduced.  This is an issue that has not got sufficient attention in recent times.

The country faces more pressing concerns than deciding to sell off some of our assets at a time when values are depressed. Some of these companies are substantial profit earners and provide an annual dividend for the State. Maybe in the future we can look more calmly at what can be done with these assets. In the meantime the State should look to reduce the debt levels and labour costs of these companies. The middle of a crisis, with a delinquent banking system and an €18 billion annual budget deficit, is not the time to be rushing into unnecessary firesales.

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