March 26th Evening: The Recession Diaries

Leaving aside the sting in the tail which I will get to below (and it’s a big tail, the sting will really hurt), what would you say about a proposal that combines the strengths of existing public enterprises, along with creating new public enterprises, in order to substantially increase investment in modernising our infrastructure, create 100,000 jobs, and all with the added benefit of keeping it off the Exchequer’s balance sheet (and, so, reducing our fiscal deficit)? You’d say, hey, that sounds pretty progressive. And when you asked, ‘Who came up with that?’ would you be surprised that it was Fine Gael? You probably would. But, then, these are times when Irish politics can get funky.

Fine Gael has launched its ‘Rebuilding Ireland’policy today. It calls for the establishment of a new state industrial holding company, the New Economy and Recovery Authority (NewERA). This will be made up of existing public enterprises: ESB, Eirgrid, An Post, Bord Gais, Bord na Mona, Coillte and the Metropolitan Area Networks (MANS). In addition, Fine Gael proposes to establish ‘new’ public enterprises:

• Smartgrid(actually ESB Networks split off from the ESB Group) that will invest €3.3 billion developing a 21st century smart electricity grid, with emphasis on conservation, renewables, micro-generation and even electric cars.

• Broadband 21to invest €2.5 billion in open-access, high-connectivity fibre-optic and wireless network to support next generation broadband services to every home and business.

• BioEnergy Ireland(merging Bord na Mona, Coillte and the National Council for Forest Research and Development) to invest €800 million in the commercialisation of next generation bio-energy technologies.

• Renewable Energy Ireland which will invest in early stage green energy companies and applied renewable energy research.

• Irish Waterto take overall responsibility for providing safe clean drinking water and treating waste water through an expanded water infrastructure investment programme.

• Greener Home Bank(actually EBS turned into a state-sponsored mutual building society) to unlock credit for households to upgrade their homes to new energy and waste water standards.

This ambitious programme will be financed by equity investment from the Pension Fund, a loan from the European Investment Bank, and bond issues to domestic and international investors.

Fine Gael provides tables showing the impact of this investment on the economy (they even use multiplier outputs – bloody hell, are they in danger of becoming Keynesian!). The investment will, by 2013:

• Add 5 percent to the GDP, of which half will go to wages
• Generate 99,000 jobs, of which 45 percent will be direct employment and the remainder spin-offs
• Reduce Government borrowing by over €4 billion through extra tax revenue, reduced social welfare costs and transferring investment items from the Exchequer balance sheet

Well, yes. That’s what investment in job creation can do.

So what can we make of their proposals so far? Well, it’s lifted wholesale from ICTU’s own proposed State Holding Company which would combine all the assets of public enterprises into one body, with finance coming from almost the same places (Pension fund, private investors, equity and bonds).

I wouldn’t get too undone by this rip-off – after all, if we don’t steal one another’s ideas, how are we ever going to come up with original ideas? Though, it might have been politic (and the teensiest bit candid) if Fine Gael had actually referenced ICTU’s same proposals they made four years ago.

Ah, but here’s the sting. The problem starts with the financing. Fine Gael proposes to tap the Pension Fund for €9 billion, or 50 percent of the total investment. There’s little chance of that happening. The Pension Fund is worth €15 billion. By the end of the year – with equities still taking a bath – it’s likely to end up with less. A significant amount could be siphoned off for bank capitalisation. At the end, there would probably be little of the Pension Fund left to invest in NewERA (though, in principle, Fine Gael is right – to invest in infrastructural modernisation here rather than equities and property abroad).

But that’s only a niggle. The real sting is how Fine Gael proposes to pay back the Pension Fund and other investors. The returns from NewERA investment would only go so far. So the investment will mainly be paid off by a massive privatisation programme. The Pension Fund

‘ . . . will be replenished . . . through the sale by NewERA of existing and new state assets no longer considered strategic to the goals of the NewERA initiative (starting with Bord Gais and ESB International). In this regard, Fine Gael will not repeat the mistake of Eircom by selling critical infrastructures that are strategic to national economic development.’

Well, I don’t know how our gas network could be called anything but ‘critical’ or ‘strategic’. Indeed, when one considers Fine Gael’s last election manifesto – the commitment to provide natural gas to the West and Northwest – one might consider it, at least, pretty important.

If Fine Gael proposes to fund an investment programme into our infrastructure by privatising those companies investing in our infrastructure, it means they haven’t learned from past mistakes. Not only was there the asset-sweating of our telecommunications infrastructure through repeated Eircom owners. Take the example of B&I Shipping. Prior to the privatisation, the company had been turned to profit, largely due to the sacrifices of the workforce who agreed a five-year rescue plan involving hundreds of redundancies, a three-year pay freeze and a pay cut of 5%. Irish Ferries took it over – at a controversial knock-down price and the rest (what’s left of it) is history.

Then there’s Greencore and its transformation from a food manufacturer into a property dealer. And Irish Life and that dance with Anglo-Irish. And now we don’t have a bank to provide capital to small and medium enterprises because the bank we did have – the Industrial Credit Corporation – is history.

Fine Gael’s targeting of ESB is particularly curious – it’s like a vendetta (even though Simon Coveney, the main author of the policy, has accepted that ESB prices are the result of Government policy and not the company itself). It wants to privatise ESB International – a successful public enterprise and world brand that builds, own and operates power stations abroad, earning the company not only a valuable revenue stream (which, in a normal electricity market could be used to lower prices here), but an invaluable knowledge stream as well. The latter is particularly important as the company is an integral part of the ESB’s strategic plan to convert to renewable technologies. Why hobble that goal?

And what’s the point of hiving off ESB Networks, creating duplicate administration and losing competitiveness through loss of scale, to do what it is doing already? Is not our electricity retail network a critical or strategic part of our infrastructure? Or is the exercise wholly instrumental – making it easier to privatise?

This is not a fundamentalist argument against any and all privatisations. But to base a massive investment programme on widescale privatisation (when our history of privatisation is rather poor) seems to be putting at risk the very thing you’re trying to create.

Fine Gael claims that under public enterprise stewardship we can

‘ . . reposition Ireland as the most competitive and sustainable economy in Europe within the next decade . . . and help to drag Ireland’s economy out of recession.’

I agree. Wholeheartedly. But if public enterprise can do that, then why would you liquidate it? If private enterprise can do a better job why can’t they do it now? Fine Gael claims we need public enterprise in one sentence and then in the next says we don’t.

But don’t underestimate the appeal of Fine Gael’s proposal. This could be a winner – a breakthrough policy that can gain considerable support. It ticks a lot of boxes and, most of all, provides hope for economic growth. It is strong at the point where they copied ICTU but don’t think the questionable financing and privatisation will put a whole lot of people off. There are few who will care about the details of the Pension Fund. And I doubt many people will care about long-term privatisation plans if the programme can create anything near 100,000 jobs in the short-term (I suspect some people would turn their grandmothers into Soylent Green if it could create a few jobs).

What a week. First, we had Sinn Fein’s comprehensive list of job creation proposals and strategies. And now we have Fine Gael’s infrastructural investment stimulus. Labour will have a lot of ground to make up this weekend when, in all likelihood, it will unveil its job creation proposals.

Comments

[James]

Simon Coveney has also seemingly called for Eircom to be renationalised:

http://www.irishtimes.com/newspaper/ireland/2009/0326/1224243450383.html

Keynesians? Why they'll be Bolsheviks soon at this rate...

[Michael Taft]

James, that will always be the dream.

[Longman Oz]

I too was puzzled by this document. However, if you notice, it is also a return to their roots (enabling legislation for the ESB and rural electrification came in on their watch, if I am not mistaken). Equally, it will be attractive to Labour (and maybe even steal a march on anything that they had lined up for today).

I would critique their proposal further:

* I think that smart metering sounds like an interesting way foward, but there are several major short-term unknowns here (e.g. ease of use, upfront cost to consumer of installing any microgeneration, likely rate of take-up, cost of maintaining it, actual economic benefit, etc.).

* I wonder how compatible local planning laws are with some of these proposals and are reforms needed here to be able to advance these investments in a timely manner?

* Has ESB Networks been consulted with in terms of now installing small- to medium biomass-fired plants around the country. Grid access has already been a huge obstacle for wind farm development.

* I was interested that their broadband proposal would only make us amongst the best. Given how quickly technology advances, surely we have to set our sights on becoming the best, knowing that it will be passed out again soon enough.

* I was very confused by their EBS proposals. They talk about a €15,000 efficiencies mortgage (i.e. secured on your home, no less!) being repaid over 30 years and being balanced by "around" €500 of savings p.a. However, what about interest cost?

* They trumpet the renewable section a lot, yet €100m on wave & tidal technology research (where we are several years behind Portugal and Scotland already in terms of providing serious State aid) is small beer in a €18 billion-odd package.

* On the other hand, they gloss over the billions to be pumped into the EBS to restimulate home buying. Apart from not understanding how this is a job-creating stimulus, people without job security are simply not paying for expensive long-term assets right now (interest rates be damned). Moreover, are FG really suggesting that we use investments in residential property to recover from what has been a property-driven period of boom & bust?

* While open to the possibility of it, I agree with you that the discussion on privitisation is very weakly developed in that document.

[Michael Taft]

Longman Oz, you highlight valid criticisms of the FG document. In particular, the EBS propopsals. According to the Bank of Ireland calculator, the cost would come to over €700 per year - and of course always the danger that down the line interest rates will rise. Why not kick-start an insulation drive by linking repayments with income (through the income tax system) with the remainder to be paid off when the house is sold or disposed of through inheritance?

There are difficulty in many of these issues - of which planning could well be the least. As I stated, the funding of the programme is questionable by relying on a diminishing fund. However, there is no doubting the narrative sweep of the proposals - as you say, a returning to 'roots' so to speak. They eve have some trade unionists saying complimentary things about Fine Gael - and I never though that I would ever hear that.