Wednesday 25 April 2018

Bord Gais flop leaves privatisation strategy in tatters

There are serious question marks over how the Government will finance its jobs and investment strategy, says Dan White

Minister Brendan Howlin at the Labour parliamentary party away day in Johnstown House Hotel, Enfield, Co Meath
Minister Brendan Howlin at the Labour parliamentary party away day in Johnstown House Hotel, Enfield, Co Meath
Dan White

Dan White

LAST week's failure to find a buyer willing to pay the Government's asking price for Bord Gais Energy leaves its privatisation programme in tatters.

Without the €1.4bn expected from the Bord Gais sale, how will Enda Kenny now finance his jobs and investment strategy?

While the sale of Irish Life to Great-West Lifeco of Canada for €1.3bn, the €405m deal to sell the National Lottery licence to the Camelot/An Post consortium and the likely sale of the €1.9bn of Bank of Ireland preference shares mean that 2013 is shaping up to be the second-best year ever for the sale of State assets, the failure to find a buyer willing to pay the €1.4bn asking price for Bord Gais Energy casts a long shadow over the Government's privatisation programme.

Why should this matter? After all, the Government is on track to raise more than €3.5bn from the sale of State assets this year, a performance only bettered in 1999 when the Government raked in €6.4bn from the sale of Eircom. Is not the money raised from the sale of one set of State assets as good as the money that comes in from the sale of another set?

That's not quite how things work in post-Troika Ireland. Any money raised from the Irish Life and Bank of Ireland sales, about €3.2bn, will go toward offsetting the €64bn cost of bailing out the banks. This will effectively be used to repay money that this country has borrowed from the Troika, which lent us the money to plug the holes in the Irish banks' balance sheets after the international bond markets refused to do so in 2010.

However, things were supposed to be different with the sale of other State-owned assets. In February 2012, the Government reached an agreement with the Troika to sell €3bn of State assets with two-thirds of the proceeds being used to pay down debt and one-third (ie: €1bn) being used to finance the Government's NewERA investment vehicle. NewERA was supposed to spearhead a €6.4bn public investment and jobs programme in such sectors as broadband, the electricity grid, the gas pipeline system, Irish Water and the merged Coillte/Bord na Mona.

Among the assets put up for sale were Bord Gais Energy (basically the Bord Gais retail business), the National Lottery, the harvesting rights to Coillte's forests, the State's remaining 25 per cent stake in Aer Lingus and some "non-strategic" ESB generating capacity.

Specifically excluded from the sale were the electricity grid, the gas pipeline system, the ESB retail business or any of Coillte's 445,000-hectare estate. Announcing the proposed disposals, Public Expenditure and Reform Minister Brendan Howlin promised that there would be no "fire sale" of State assets, surely an unfortunate turn of phrase given that Coillte's forests were among the assets up for sale.

Twenty-one months later and the sale of the National Lottery aside, there has been little progress on the proposed disposals. In October, the ESB announced that it was putting its two Irish peat-powered generating plants as well as its 50 per cent stake in two UK generating plants up for sale. This sale of ESB generating capacity is projected to yield a €400m special dividend for the State some time next year.

There were no buyers for Bord Gais Energy at the Government's reputed €1.4bn asking price. While US investment fund Blackstone, Centrica (the former British Gas) and Northern Ireland energy company Viridian were all interested, "none of the final bids received for its [Bord Gais] energy business were acceptable", according to last week's announcement from Energy Minister Pat Rabbitte.

There has been even less progress on the sale of most of the other State assets earmarked for disposal. The Coillte harvesting rights remain unsold while the State's Aer Lingus stake will remain in limbo until Ryanair's appeal against the UK Competition Commission's decision to force it [Ryanair] to sell its 29.9 per cent Aer Lingus shareholding is decided.

Even if the ESB transaction lives up to expectations, the total proceeds from the sale process will be just over €800m, of which the State's share will be about €260m. This leaves a €760m financial black hole in the Government's investment and jobs strategy. Unless it can be plugged, the ambitious plans for public investment in the so-called "new economy" will either have to be drastically scaled back or scrapped altogether.

Last week's debacle has inevitably prompted renewed debate on the entire issue of the disposal of State assets. Despite having raised almost €8.8bn (including the proceeds from the National Lottery sale) for the Exchequer since 1991, privatisations remain controversial.

Donal Palcic, of the University of Limerick's privatisation and public private partnership group, believes that the Government was right not to sell off the electricity grid and gas pipeline network.

"Where you don't have competition in network industries it is better to have public rather than private ownership," he says.

Dr Palcic points out that Ireland is not unique. Troika-dictated privatisations in other eurozone periphery countries have also come up short: "Portugal and Greece have had to take very low prices [for privatised State assets]."

Empirical economic research tends to lend some support to Dr Palcic's opposition to the sale of monopoly-type State assets such as grids and pipelines.

In a paper published by the industrial policy body Forfas, Cranfield University professor David Parker, the official historian of the UK privatisation programme, stated that: "The lessons for Ireland from the UK experience are that as part of a wider programme of opening up the economy to market forces, privatisation can lead to efficiency gains, from which consumers and taxpayers benefit. However, these efficiency gains are not guaranteed. In particular, where competition remains restricted there needs to be an appropriate institutional response in terms of effective State regulation."

That's the theory. However, the reality is that, even without the NewERA funding gap, the Government is almost certainly going to have to find a large chunk of cash over the next few years. Next year the Irish banks will have to pass ECB's stress tests.

Then there are the tough new capital adequacy requirements under Basel III which all banks, including the Irish banks, will have to meet by 2019.

What are the chances of all of the Irish banks clearing these hurdles unaided? While Bank of Ireland has at least a fighting chance of being able to raise whatever additional capital it needs from private investors, can the same be said of the other Irish banks?

If one or more of the Irish banks does experience difficulties in either passing the stress tests or meeting the Basel III criteria, then the taxpayer will almost certainly end up footing the bill.

The cash to do this would ultimately have to come from the sale of State assets. If, or more likely when, this happens the Government will be forced to sell virtually any State asset for which there is a buyer. Even previously sacred cows would have a "for sale" sign plastered on them. In a few years' time last week's failure to sell Bord Gais Energy may well appear to have been no more than a minor bump on the road leading to the disposal of all those assets that weren't nailed down.

Sunday Independent

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