The Culture of Privatisation - ESBOA Conference

11 May 2002

ESBOA Annual Conference Corrib Great Southern Hotel - Galway Saturday 11 May, 2002
Address by David Begg, General Secretary, Irish Congress of Trade Unions

 

This conference is taking place in the middle of a general election campaign in the course of which a number of references have been made to the Electricity Supply Board and its future. It is not the business of Congress to intervene in the campaign but it is necessary to make our views known in this matter.

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 tax pay 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.

Liberalisation and the method and degree of re-regulation is not, in my opinion, an economic question in the first instance. It is primarily a political question.

What it involves in essence is the transfer to the increasingly globalised market and private interests of responsibilities which were previously exercised (with varying degrees of political accountability) by national Governments.

The liberal agenda's implicit basis is that competition is a sufficient condition of securing the public interest and that, where competition is not possible, the State can best protect the public interest through market-type mechanisms, such as contracts. Failing that, regulatory institutions should be shielded from political pressures so that their decisions are based on sound market economics. Throughout, the market is seen as the default mechanism of preference, and the role of the State is subordinated to it.

This has profound implications not only for the nature of the regulatory reform agenda but also for the democratic accountability of the institutions and processes which are shaping it.

In the case of our own country 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.

Foremost amongst these private suppliers was the Enron corporation. The United States Senate has this week begun hearings into the collapse of Enron which was the seventh largest corporation in the world.

Three devastating memos were revealed which showed exactly how Enron ripped off the State of California to the tune of 20 billion dollars. They did it by manipulating the electricity market, creating artificial shortages and raising prices on this basis. They had a practice called "Ricochet" by which they moved power out of the State, then back in, allowing it to evade price caps on the State spot market. They also held power off the market by closing down generating stations, which in turn raised prices. They even exported power to other States to get higher prices when blackouts were happening in California itself.

When a politician prefaces remarks with the words "we must face reality" there is usually some bad news on the way, but when Governor Gray Davis said that in his 2001 State of the State address at the beginning of that year, he was not about to tell the people of California anything they did not know. Referring to his State's experiment with privatisation, regulatory reform and partial deregulation of electricity supply, Governor Davis said:

"We must face reality: California's deregulation scheme is a colossal and dangerous failure. It has not lowered consumer prices. And it has not increased supply. In fact, it has resulted in skyrocketing prices, price gouging and an unreliable supply of electricity. In short, an energy nightmare... We have lost control over our own power. We have surrendered the decisions about where electricity is sold - and for how much - to private companies with only one objective: maximising unheard-of profits".

Enron was able to achieve its objective through political corruption. Whenever it needed to it bought off politicians to legislate a safe path for entry into markets. A typical case is Senator Phil Gramm. He sponsored legislation to allow the Commodities Futures Trading Commission to exempt energy swaps traded over the counter from regulatory oversight altogether. The Chairman of the Commission promptly introduced a rule to implement this and then joined the Enron Board. Her name is Wendy Gramm, wife of Senator Phil Gramm.

You might of course take the view that such things could not happen in this little country of ours. From my perspective what Enron was doing with electricity looks remarkably like what Larry Goodman was doing with beef. What Phil and Wendy Gramm were doing with the laws governing regulation of electricity sales looks a bit like what Michael Lowry was alleged to have been doing with telecommunications.

I am personally very unhappy about the way the future of the ESB is being bandied about in the election campaign. I do not see any merit in changing its ownership status and opening this market to competition could have unintended consequences. From my recollection, the business of matching supply and demand in the ESB has always been a difficult one in long-term planning. To its credit the ESB has always managed to meet the needs of the country even during periods of rapid economic growth. Having regard to the long lead-in times and heavy capital investment I would not be confident that the private sector would do the job as well. If we got it wrong we could be in serious trouble.

The bottom line is that I think it is plain daft to be going down this road for reasons of liberal market ideology.

I am reinforced in that view by my experience of what has happened in the Irish telecommunications market. The original idea was to sell an equity stake in Telecom Eireann to a strategic partner to allow Telecom Eireann to become an international player. The Government was supposed to hold a significant minority shareholding to give it an influence on strategic investment decisions. The market was opened up to competition earlier than was required by EU law in 1998. The regulator was given an independent role to promote competition but was never given any objectives in terms of public policy by Government. The assumption of the policy makers, egged on by the certain dynamic new entrepreneurs and the business press, was that the privatisation and de-regulation of Telecom would lead quickly to a vibrant, dynamic competitive sector where companies would be vying each other to invest in infrastructure.

It has not worked out quite as intended:

  • The strategic alliance collapsed after three years thus denying Eircom an international engagement;
  • The Government sold its entire shareholding thus divesting itself of any strategic influence in telecommunications infrastructural development;
  • The indigenous "dynamic entrepreneurs" sold their companies to multinationals, who, because they invested unwisely in other areas like 3G licenses, have neither cash nor inclination to invest in infrastructure that might have a long-term payback only;
  • Eircom, being privately owned, feels no obligation to the country either and anyway has to pay back the venture capitalists who own it, so it will not make long-term investments;
  • We have, as a result, a serious infrastructural deficit, particularly in broadband - west of the Shannon. The State is trying to plug the gap by financing local authorities to put in local broadband loops;
  • Eircom's main competitor, ESAT, bought over Ocean from ESB/BT for €304 million two years ago. The "Irish Times" reported yesterday that it is thinking of withdrawing from Ireland because of losses of €74.6m in the last three months of 2001.

The net position therefore is that Eircom could once again become a monopoly - this time a private one. Along the way a lot of ordinary people lost money as small shareholders who had no choice but to sell at a loss to Tony O'Reilly and his Valentia Group.

The Government has just issued a discussion document on regulatory policy and has invited submissions on it. The intention is to legislate for a new policy on regulation right across the economy. Congress is preparing a submission. If you want an input into that submission you are most welcome.

Since I am here I should perhaps also say a few words about what may happen at the end of this year with respect to a successor to the PPF or otherwise.

As you may be aware the Employers' organisation IBEC and Congress have been exchanging fraternal messages over the last few weeks about the whole future of social partnership.

The employers have alleged that unions have not abided by the terms of the agreement and instead have pressed unreasonable pay claims. I think this position is disingenuous for a number of reasons:

  • The income tax exchequer returns for 2001 revealed a shortfall of €1.2 billion against expectations. If pay settlements were running substantially ahead of those provided for in PPF it would show up as a positive movement in income tax receipts. The trend continued into the first three months of this year when income tax receipts were 2.8% down on the same period last year;
  • The disputes resolution machinery - Labour Court and LRC is working effectively;
  • The NIB is the body created by the PPF amendment to ensure compliance with the terms of the agreement. In the past year four major issues have been referred to NIB - The Euro Conversion, Aer Lingus, the Carers' Dispute and the 1% lump sum interpretation - and all have been satisfactory resolved;
  • Recently published CSO statistics indicate the lowest level of strike activity since 1917.

It is a fact that the PPF was a good agreement and that pay increases in Ireland are running ahead of the general trend in Europe. But if you consider that we are in eleventh place in the EU wages league it becomes clear that this recent improvement is only making up lost ground. If you also consider that over the 15 years of partnership the share of national wealth going to profits had gone up from 31% to 50% then employers have little to complain about.

By any standards the conditions for competitiveness in Ireland are very favourable. Business has had the advantage of:

  • A 25% devaluation of the Euro which allows us to sell goods into Britain and the US at a great advantage;
  • Very low interest rates;
  • Capital Gains Tax which was reduced from 40% to 20%;
  • The lowest corporation tax regime in Europe;
  • The lowest social insurance costs in Europe.

It is a good and necessary thing to have a competitive economy - even though I think some of the taxes on business are too low - but we have to ask what is it for? A country is more than an economy. There is no merit, in my opinion; in creating economic conditions that simply make the rich better off. We must surely strive to distribute the fruits of prosperity so that they benefit everyone.

I do not have to explain to you that the commercial world operates a set of double standards. On the one hand employers will demand the most austere conditions for workers. The IBEC statements assert that future wage settlements must be in low single percentage figures. Employers have also opposed every single piece of EU legislation designed to help atypical workers - the most recent being the Draft Directive on Temporary Agency Workers.

On the other hand captains of industry, who constantly bleat about their entrepreneurship and risk taking, pay themselves enormous bonuses, even when they fail. Take AIB for example. It has the distinction of recording the most significant corporate failure in the financial world since the collapse of Barings Bank. As we now know the systemic failure of its AllFirst subsidiary was going on for some years. Yet last year Mr Frank Bramble, Executive Chairperson, received a $435,000 bonus on top of his $725,000 salary. Ms Susan Keating, President and Chief Executive, received $336,000 on top of $600,000. Ms Keating has retained her position after the Rusnak debacle. Poor Mr Bramble had to retire early but to ease is paid $2.3m was paid into his pension fund.

I am sure that neither you nor any of the unions affiliated to Congress will be fazed by the prospect of having to deal directly with employers - you are doing it every day of the week. What disappoints me though is the complete absence of any vision from the IBEC statements. There is no concern for the common good, no willingness to look at the major issues facing the country and no desire to try to resolve them. If social partnership was to deal with pay determination only there would be no particular value in it. The IBEC statements added nothing in my view to the quality of public discourse.

But if they want out of partnership that is their choice. I suspect, however, that they may not find things as congenial as they expect. In racing parlance they may think the going will be "soft to yielding". It could turn out to be "good to firm" or even "firm in places".