Privatisation pot must be preserved for the national pension fund. On the nail Ivan.

Intrinsic share values of state companies have been systematically
pillaged by management and employees.

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.