Wednesday 17 January 2018

Exports alone won't save us if we let our local economy fail

Continuing our series where business leaders suggest ways of kick-starting the economy, Neil O'Leary of Ion Equity says that the Croke Park deal may not be a total write-off

'Too often the State as referee awards a penalty -- and then considers whether it should take the kick itself. Why, for instance, are four semi-State companies competing in wind energy?'

THE Government hopes growing exports will eventually drag us out of the doldrums. However, given that growth in most of our target export markets is shaky -- at best -- this strategy is likely to fail.

The Government deserves credit for trying to address impediments to growth and job creation. But our local economy is in real crisis -- and it is not doing anything like enough.

There is no clear plan on what we should do next. Our situation is beginning to resemble Japan in the 1990s, when the malaise after their economic crash led to 10 years of stagnation.

We must look again at how we govern. Ministers need more firepower to make decisions and execute them. They should not rely on unaccountable special advisors and a civil service not designed to deal with a crisis of this scale.

Grandiose gatherings of businessmen and the great and the good are well-intentioned, but in reality they achieve little.

Instead, each minister should form an executive team, chosen on merit, of three or four people to tackle the big issues facing them. It is surely better to try such structures than persist with ineffective structures.

Stopping leakage is essential. It is unacceptable that frontline services are hit, carers' allowances are cut and key spending curtailed in the absence of a comprehensive programme to end government waste and inefficiency.

Everybody has their own story of government waste: look at our local government structures, which allow parallel administrations to be maintained at city and county level to govern a relatively small area of activity.

In the fuel distribution business, in which I have a significant commercial interest, all legitimate businesses are appalled at the lack of urgency in tackling illegal diesel washing.

The State is losing up to €250m a year in duty, thanks to the actions of 100 or so illegal petrol stations which operate with little fear of the law, and the already fragile home heating sector is illegally undercut.

Toxic waste from the illegal fuel process is being dumped in the countryside. We need serious criminal penalties to deter these operations.

Recently I spoke to a business owner whose management team came to him with a radical programme to deliver cost savings of €1m, saying they understood that cuts were needed. He shocked his team by saying that, in fact, they needed to deliver savings of €1.5m to survive -- but that they needed to deliver a better customer experience on top of this.

This is the reality facing private sector businesses. Where is this sense of reality evident in our public services? Job losses are unfortunately necessary but they will need to be accompanied by cohesive plans to redeploy people who are affected and find alternative employment for them.

Up-skilling is, of course, essential. In Ireland about 15 per cent of people experience lifelong adult education compared to over 70 per cent in some Scandinavian countries. That is a stark difference -- yet Ireland is cutting expenditure on education.

This is the biggest tactical blunder of them all.

The key to our society working lies in preparing our people to be useful in the areas where we can add value.

It must be better to spend, say, €100,000 on re-skilling an under-utilised public sector worker for three years instead of leaving him or her to sit at a desk at the same (or greater) cost -- but with little job satisfaction.

With better consensus on how to tackle the up-skilling challenge, the Croke Park Agreement can be a stepping stone to further change, rather than an obstacle to progress.

One area of activity deserving more focus is the whole services sector (not just financial services.) The CEO of one of Ireland's largest financial services businesses explained to me how middle-ranking employees in Ireland generally added more value than their counterparts in the UK, where services is a nation-sustaining activity.

We have a big advantage over other countries thanks to our position as English-speaking communicators and decision takers.

In Ireland concepts like "outsourcing" continue to be treated with suspicion in some quarters. But we should be seeking to be the world's leading outsource destination for added-value administration functions. If you were an emerging Chinese exporter with global reach, is there a better country to establish your global English-speaking HR function than Ireland? I would argue that there is not.

Refinancing is a thorny issue right now, but it must be resolved. We all know it is a struggle to get finance in Ireland. Activity usually requires capital. Either the existing banks genuinely get over their fear of lending or we need to re-establish entities like the old State-owned ICC Bank to invest in areas such as food and tourism.

Statistics about banks satisfying most lending applications do not reflect the true extent of the credit shortage facing businesses.

As regards State involvement in business, I feel it is better for the State to focus on key essential functions such as effective regulation than being an active participant. Too often the State as referee awards a penalty and then considers whether it should take the kick itself.

For instance, why are four semi-State companies competing in wind energy? On what basis does the rest of the market then compete? What return on investment is expected from semi-State companies? Can everybody expect even-handed regulation?

There are key infrastructural areas where State involvement can be justified and even increased -- but it should stay out of everything else and possibly raise some money from the sale of assets.

On the refereeing side, lots of money is being poured into financial regulation -- possibly too much, given that the horse has bolted. Yet nothing seems to improve in areas such as white collar crime.

The whole area of investigation and prosecution is patently inadequate. Change the whole thing if necessary. Look at the confidence arising from a revamp of the Commercial Court in recent years -- this shows that change is possible and can bring real benefits.

A word about tourism. The hospitality sector is an easy win. Visitors find Ireland attractive. But at the heart of it, a chunk of the hotel sector is a mess. Unviable hotels are being kept alive artificially, threatening other operators. How many receivers are running hotels? Will they keep up necessary capital expenditure? There is an opportunity to rationalise and set up hotel chains with centralised costs and booking functions, investment programmes and differing identities for different market segments.

In any discussion of Ireland's finances, the "elephant in the room" is the size of the national debt. Many presume there is a plan B and that we just have to let it emerge. I hope this is the case. Our current financing arrangements are, at least to some extent, unfair and in any event are not sustainable given the world economic outlook.

Some commentators talk about the country needing vision and others grasp for some new way of living.

Ireland's future success will depend on it being an open, mixed trading economy. This will need to be based on incentives to encourage endeavour that can survive in the global market. We will also need a safety net to ensure society works as a whole.

The future Ireland does not need to be too far removed from our current shape to succeed. But improvements in how we sustain ourselves and how we value each other can be made and can be better set out. We need to take action or matters will get worse.

But despite the challenges, we have a lot of cause for hope. Ireland is still a great place. Where else would you prefer to be?

Neil O'Leary is the co-founder of Ion Equity

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