Wednesday 7 December 2016

The Interview: Economist and Government adviser Peter Bacon

As a consummate insider, he has an outsider's perspective and finds himself advocating measures he would formerly have been uncomfortable to support. By Emmet Oliver

Published 14/10/2010 | 05:00

Those who advise governments lead a strange double life and Peter Bacon, arguably the most influential Irish government advisor/consultant of the modern era is no exception.

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Bacon is often described as the consummate insider, someone who is able to whisper in the ear of senior ministers when he wants to and able to lunch with senior civil servants when he has the time.

But for all of that, his personal circumstances underscore that far from being an insider, he stands somewhat apart from the political and media bubble that most politicians and commentators inhabit.

For a start there is his choice of home. The small Wexford village of Killinick is at least two hours from the centre of Dublin and while picturesque, anyone who desperately craved political patronage wouldn't settle that far away from the capital.

Also Bacon, despite his success in winning lucrative consultancies, has an outsider's perspective and refuses to let the fashionable opinions of the chattering classes cloud his mind. He is an endless conveyor belt of ideas though.

Greeting me at the driveway to his house, Bacon looks relaxed and is in a breezy mood, just right for generating ideas that might take other people a few years to produce.

Bacon is clear that it is a time for radical thinking and he finds himself advocating measures that a few years ago he would have been uncomfortable supporting.

I ask him first how he rates the government's performance -- and he awards this administration a set of mixed grades. "Broadly I think the measures the government has taken are necessary, but equally they are not, by themselves, sufficient,'' he says.

"Where the policy has been deficient is in giving households a basis for reducing their savings rate, which is very much precautionary saving. There are three basic reasons for the saving, the fragile employment situation, the collapse in house values and the general indebtedness in the economy,'' he comments.

"We need initiatives that are going to cause the savings ratio to fall and get people spending again and in that context I think we do need to think outside the box,'' he explains.

When others think outside the box, they tend to be ignored. But when you are Peter Bacon, well, your outside the box thinking gets listened to.

Debt

"Firstly I think we should come up with ways to bring forward the value of pension assets, why not make pension assets available now, the problem is now, not later,'' he suggests. "The funds from pensions could be released now with the objective of allowing households to resolve their indebtedness,'' he adds.

That's one radical suggestion, but Bacon isn't finished there. "The other area we will have to look at is young people, who were encouraged into the property market by erroneous policy incentives that emphasised the likelihood of a soft landing, they have now been destroyed, financially,'' he says passionately.

"But one way to deal with that would be for the state to realise the value of its own assets and use the proceeds from these sales to tackle the whole problem of mortgage debt,'' he suggests.

The idea of selling off the semi-states and using the money to free up young debt-laden mortgage borrowers, is often what other people describe as a "people's NAMA''.

For others it is moral hazard and Bacon agrees that any such scheme would have to be carefully designed to prevent money being given to those who simply can't be bothered paying the mortgage.

"It would be a way to relieve the negative equity portion of the mortgage present in younger households,'' he explains.

"The current circumstances are so difficult, you do have to be radical,'' he adds. He suggests such things because standard stimulus spending is not available to Ireland. "We have hung ourselves,'' is how he sums up the position.

The ideas factory that is Peter Bacon is not finished there though. He also wants to see a public sector waste czar who eliminates waste across the public sector and removes regulatory and bureaucratic bottlenecks from the economy. "Whatever stops productive sectors being productive,'' he says. While he admits a war on public sector waste is standard catch cry, he really means it and he suggests any such person could usefully start their job by reading the annual reports of the Comptroller and Auditor General.

NAMA

Without pausing for breath, Bacon tears into questions proferred about NAMA, which was essentially his brainchild. He says it can make a profit, but at the same time the obsession with that subject is to miss the bigger picture, he explains.

"I think the level of emphasis on that aspect has been to the disadvantage of NAMA. NAMA was a public policy intervention, it was never meant to be a standard commercial semi-state company,'' he remarks.

"I do think however that NAMA should quicken the pace of asset sales, selling the bottom level assets and the top level assets and work on the middle piece,'' he says.

"I think it would help the market if assets were sold quicker. I think the pace of sales to date has only been forestalling recovery, we still don't have price discovery,'' he says.

He rates the top management at the agency, but would like to see more property deal makers on board and definitely more joint ventures being set up by NAMA along with private equity. "Irish development companies never managed to grow using equity and NAMA will now have to deal with the consequences of that."

"I think we should remember the name of the agency, the National Asset Management Agency, the management word is important, these things have to be managed and that means a certain set of skills", he says. Overall though he is glad NAMA is supervising these assets, rather than the leaders of the banks, of whom he is quite caustic.

"The senior managements at the banks are like shell-shocked war veterans, they will never be able to fight another war,'' he remarks.

"There hasn't been a sufficient enough clear out of the banks at the top levels,'' he adds.

He says banks lent for property projects and secured those loans on yet more property, he says the shock for the bank executives was how little protection this model gave them when hard times arrived.

The business models of the developers is also something he criticises.

"There was a lack of an equity culture in that industry, these companies were not used to working with the capital markets and when the adjustment came they were unable to bolster their balance sheets in the normal way, via actions like rights issues etc,'' he explains. His verdict on the future of the industry is blunt. "I don't think many of them will survive in the form they came into this crisis,'' he says. "The ones that will survive will be the ones who can deal and work with outside investors,'' he says.

As for the banks, Bacon forecast early in 2009 that all the main institutions would need massive injections of fresh capital and this forecast left some senior government figures speechless at the time. Even now Bacon is not entirely convinced the capital calls are over and inserts an alarming qualifier in relation to AIB.

"All I will say on that, is the current capital requirement I don't necessarily see as definitive''.

Hotels

On hotels Bacon says even levelling some properties may need to be considered, but that kind of action could only be considered once it didn't damage the tourism industry, which relies on a diversity of property, from budget accommodation to five star hotels.

"The excess stock will have to come out. I think a restructuring fund, it could be a quoted vehicle that attracts in equity, should be considered and that could eliminate the excess stock,'' he suggests.

He says the Budget is quite simply the last chance the Government is going to get to demonstrate its credibility to the international markets. Otherwise something external could be needed, he sighs.

Irish Independent

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