The Myth of Deregulation - Address to MSF AGM
16 Apr 2002
Address to MSF AGM 16th April 2002
This morning I participated in a debate on the new "Talk 106" Radio Station about the economy. My opponent was a very nice young man named Paul Maloney who heads up a neo-liberal Think Tank. His thesis was that failure to deregulate and privatise at a sufficiently fast pace was ruining the country.
When you think about it there has been, for nearly twenty years, a sustained campaign against public ownership. If State companies are not openly attacked, as they are on a regular basis in the Sunday papers, they are generally referred to in pejorative terms - usually as "troubled this" or "under-performing that". Contrary to public perceptions the reality is that the State companies have not been a burden on the taxpayer for a long time and have, in recent years, been contributing of the order of five hundred million pounds profit to the Exchequer.
The campaign for privatisation was developed in the United Kingdom under the Thatcher regime. It was championed aggressively by private sector interests in pursuit of rentier profits. And how handsomely they have succeeded! So-called private "entrepreneurs" have made hundreds of millions through acquisitions and granting of licences to act in competition with State companies. Significantly, these fortunes were made without the people involved adding any value whatsoever. As we all know there is now prima facia evidence at least that these profits were acquired corruptly.
In my opinion privatisation and deregulation of State utilities was mediated by two significant agencies. The first is the European Union which, in the middle Eighties, started the process of opening monopoly sectors of the economy to competition, and by extension to privatisation. Contrary to what is often asserted this was not done on the basis of a level playing field. The playing field was substantially tilted in favour of new entrants to the market and even as the market has matured the tilt has not been redressed. The stance of regulatory policy remains extremely hostile to incumbent operators. There is no overtly stated policy favouring privatisation. It is just that the conditions for competition make it inevitable.
The second contributory factor of this development was the attitude of the Irish Civil Service. In my opinion they believe passionately in privatisation. They facilitated the process by starving the State companies of investment over the years. In so far as they had an investment policy it was only to put money in when the enterprise was in trouble. It is a perversion of normal investment policy which logically should happen when an organisation is in a position to benefit from the investment. The most recent manifestation of this hostility was the case of the ESB's attempt to expand overseas in Poland. This proposal, as you know, was shot down at the last minute by government. To a large extent this policy of starving public enterprises of investment is a reflection of EU policy.
When I was dealing with Telecom Eireann in 1994 we spent a lot of time and money trying to look into the future and to construct a long-term policy for the company. Our conclusion was that, in the light of market changes, technology advances and globalisation, there were likely to be a small number of very significant players in the global market place. We formed the opinion that it would be desirable for Telecom to be part of an alliance which would allow it to participate in the global market. You are all familiar with the fact that a strategic alliance was eventually formed with Dutch and Swedish telecommunications companies - KPN and Telia. The intention was that the government would retain a majority shareholding with 35% being sold to the alliance partners and just under 15% to staff.
As you also know this is not the way things eventually worked out. The alliance partners withdrew due to over exposure in other parts of the world, the government sold its entire shareholding divesting itself of any strategic instrument to guide the investment decisions of the company, the most important business asset - mobile - was sold off and the rump of the company was put up for sale. It is now in the hands of a venture capital group led by Dr Tony O'Reilly. So we have no strategic position in the world market place, there is no popular ownership and the company has little strategic role for reasons which I will discuss later. The people who did well out of all of this were first of all the State as an institution in so far as it received three billion pounds, the workers (hopefully) in so far as they have secured a very substantial percentage of the equity of the order of 30%, the Venture Capital Group who got a bargain and the consultants who between them earned forty million pounds. It is difficult to see any advance for the public at large.
I would like to take a few minutes to examine the impact of the regulatory regime on the development of the telecommunications infrastructure in Ireland. The expectations of the policy makers in the mid-Nineties was that privatisation and deregulation of Telecom would lead quickly to a vibrant, dynamic competitive sector where companies would be vying with each other to invest in infrastructure to meet the telecommunications needs of business and consumers These naïve policy makers never questioned the message given by dynamic new entrepreneurs that if only market access was cheap and easy, all of Ireland would take a joint step towards a dynamic e-commerce society. The general "message" was that Telecom Eireann was part of the problem and that the sooner vigorous competition was introduced, the less dependent a captive market would be on the then Telecom Eireann "dinosaur". The directives issuing from the European Union were based on a blueprint based on the needs of big markets like France, Germany and The Netherlands and were accepted without debate by the policy makers here on the basis that the positive impact of these measures would be the same in Ireland.
That is not how it worked out. The Irish market was deregulated faster and more aggressively than any other EU markets. The regulator of the sector was given an independent role as required by EU law but was never given any objectives in terms of public policy by government. In effect, the government abdicated its public policy role; public policy for a key national utility has in effect passed to Brussels and the office of the telecommunications regulator.
The entrepreneurs who championed this great new world of competition quickly disappeared having sold out at an enormous profit to major global companies. The new competitors in the Irish market are almost exclusively owned by big multi-nationals, for example BT, who have no incentive or desire to commit investment funds to the Irish market. In any event they are cash strapped after making massive and unwise investments in 3G mobile technology.
So where to now? The expectations of deregulation have not been met. There is capital rationing in the sector and given the lack of investment incentives due to unwise deregulation policy, the government is now proposing to re-enter the telecommunications market. What irony!
The Minister for Public Enterprise has recently announced the availability of £1.2 billion to construct a fibre transmission system linking all key towns in the West and South of Ireland. This is in response to allegations of a digital divide between Dublin and the rest of Ireland - a well-judged allegation in my view - and the lack of broadband connectivity generally as an enabler of the information society. The County Councils have now applied for the money to do this work. So it is back to the Public Sector in a way but it is hard to see how this is a better arrangement than when eircom had the responsibility for infrastructural development.
To put it bluntly this is a massive indictment of public policy in the utility sector at a time of high requirements for expenditure in social areas like health and education. The government is seeking to step back in to solve a problem which could have been resolved if the right objectives were established in the telecommunications sector in the past five years. This is an argument which goes well beyond the rights and wrongs of deregulation and ownership. The key requirement is to be absolutely clear on the long-term goals for a key utility sector to ensure conditions for sustained investment thus guaranteeing a commercial return for operators and a sustained provision of services for all the community.
Telecommunications is the sector I know most about but EU competition policy has had implications right across the economy.
Aviation
The European Commission did not consider the results of September 11th as a crisis. They saw it rather as an opportunity to rationalise the European airline industry. This also suited Britain, Germany and France and so the EU absolutely refused to allow any State aid to the smaller airlines. It is now a matter of record that this led to the collapse of Sabena. From Ireland's point of view it did not matter that Aer Lingus is crucial for our North American tourism and high tech business link. The objective seems to be to force Aer Lingus to be sold to one of the larger European Airlines.
Postal Service
The Commission is steadily moving to a point where it will liberalise all cross border mail. The Post Office system operates on the basis of geographic cross subsidy. In other words it costs about half the price of a stamp to deliver a letter in Dublin and twice the price to deliver it in rural Ireland. This is because it takes longer to deliver to isolated locations. The concept of universal service means that the postal service is available to everybody at the same cost. Clearly this is less of a factor in densely populated countries. Also the average amount of postal revenue tied to cross border mail is about 7 per cent for most European countries. Unfortunately, for Ireland it is around 30 per cent so nearly one-third of An Post's revenues will be at risk. It is another example of EU policy impacting disproportionately on Ireland because of its "one shoe fits all" approach.
Energy
The idea of forcing competition in electricity provisions in a market of less than 4 million people is irrational. The last price rise of 8 per cent had nothing to do with the needs of the ESB. It was conceded to ensure that market conditions were attractive enough to justify private sector investment. Capacity on the ESB system is now perilously close to demand and the competition policy militates against ESB making advance investment in plant as they would have done traditionally.
The European Commission aims to have full competition in gas and electricity markets by 2005, with restrictions on companies entering the electricity market lifted by 2003 and lifted in the gas market by 2004. Finally, by 2005 consumers will be able to choose their energy supplier.
Open European energy markets are supposed to give a better product at lower prices. However, neither the European Commission nor the Irish Government appears to be learning any lessons from de-regulation on the other side of the Atlantic. There, de-regulation in California has led to the exact opposite of what was intended - an energy crisis and spiraling prices. California, the home of Silicon Valley and one of the six richest regions of the world, has an electricity industry more akin to an east European country, with blackouts imposed on a regular basis. This is a direct result of unplanned, over-hasty de-regulation. Before de-regulation the public utilities in California were starved of resources to build new power plants. When the market was opened up and over 100 new private suppliers moved in, they took advantage of the mismatch between supply and demand and prices to the consumer shot up.
To date, deregulation in Europe has been no more successful than in the U.S.
In Sweden, competition between players in the electricity sector is not functioning the way it should and the electricity market has grown increasingly confusing for customers. The 170 electricity suppliers have different systems for pricing and contracts, which makes reliable comparisons impossible. Those who have switched suppliers complain about complicated procedures. Even the Swedish Competition Authority says that competition between players does not work.
However, other states in the US have learned from California's mistake. In New Mexico, retail customer choice of power supplier has been postponed until 2007 allowing the state to pursue the construction of new power plants. These new plants, to be built by a public utility, will not be subject to market de-regulation policies until the energy supply in the state is secure.
We need to do the same in Ireland, namely, take a 'go slow' approach toward competition in the energy market. If there is one factor that will quickly strangle our economic growth it is an energy crisis and uncontrolled price increases. US energy experts have noted that the lesson from California is that an imbalance between supply and demand can quickly derail a competitive market. We need to delay deregulation here to give the ESB the time it needs to expand our generation supply.
RTE
The financial position of RTE is very serious. It is under pressure to reduce staff by 500, to sell its property in Donnybrook and to contract out more and more programme making. On the surface it does not sound unreasonable to make the station adopt a more commercial posture and to seek to raise a greater proportion of its revenue for advertising. The problem is though that public service broadcasting does not sit very well with a commercial remit. Advertisers want programmes that appeal to specific socio-economic audiences usually with an age profile between 15 and 34. The more RTE moves to accommodate its advertisers the less inclusive will be its public service broadcasting.
Consultants put in by the Government recommended a license fee increase of €21.50. The Government agreed only €14. It was an arbitrary decision and one that no management or staff can make work.
The irony is that while RTE is under threat great efforts are being made to insert political, social and health education into school curricula. One arm of public policy is not informed of hat the other arm is doing. It is all self-defeating I think.
The fault lines in the "one shoe fits all" policy of Europe is becoming evident in a number of areas. I have already described the unsuitability of that policy to telecommunications. Its policy on aviation seems to take no account of the exposure of Ireland to competitive pressures from the North American airline industry and to the strategic importance of links with that country. Its policy on deregulation of postal services takes no account of the fact that Ireland has four times the volume of external mail of any other European country and its policy on energy takes no account of the need to maintain generating capacity above consumer demand.
For ourselves I think that in the past we made the mistake of looking at the State sector from a purely producer viewpoint. It was mistake not to recognise the status of workers as consumers and to try to construct a policy framework around the interest of both workers and consumers. It must also be said that many of the State companies failed to act on their own initiative to minimise prices to consumers. When competition came it exposed the lack of entrepreneurial talent within the management of the State sector. In the eyes of the world it validated the argument of those who so consistently attacked the sector.
But now we know that nothing is black and white. State companies have a complex role in the economy which transcends pure pricing issues. Perhaps now is the time for a new paradigm for State enterprise; a time to examine which of the State companies are really strategic and to support their role in the economy with a proper active investment policy going forward.
Not one of the State companies was established for ideological reasons. When they were set up it was done to fulfil a perceived need in the economic life of the country at the time. Yet the arguments for dismantling them are ideological or for base profit motives. Anytime we tried to defend the concept of public enterprise in the past we were brushed aside as simply representing a vested interest. Now the climate may have changed to make some of the arguments for public enterprise more congenial to the public at large.
I have in mind the collapse of the Enron Corporation and the evidence of how it corrupted politics to achieve advantage in utility markets, particularly energy. I am thinking also about the effective re-nationalising of Railtrack and payment of compensation of £300m to the shareholders. I am thinking of the re-nationalisation of the Netherland's Railways and the failure of electricity de-regulation in California.
If there is another national agreement, although it seems unlikely, we must try to get some anchorage for the level of Government involvement in the economy. It is an issue which has simply drifted during the partnership agreements.
I do not think we can allow that situation to continue. It is why we have, at MSF's suggestion, established a Task Force to engage with Government on the issues of ownership, competition policy, regulation and public procurement. The first challenge will be to respond to the recently published consultation document 'Towards Better Regulation'. There is an opportunity to get more balance into the debate about regulation. We should not miss it.