1. Public Policy Towards the Sale of State Assets in Troubled Times Paul K Gorecki ESRI,TCD PS6: Economic & Legal Aspects of Competition & Regulation 25 November 2011

2. Structure of Presentation Why sell State assets? How should the proceeds be used? What are State assets? What are their characteristics? What has been public policy towards State assets?

3. Structure of Presentation (cont’d) Options for sale of State assets? Revenue Maximisation Minority Shares An Economic Approach: Market Failure Conclusion: Which Rule?

4. Why Sell State Assets? Restore sound budgetary stability EU/IMF Programme for Financial Support (Dec. 2010) “setting appropriate targets for the possible privatisation of state-owned assets” “drawing on … report of the Review Group on State Assets and Liabilities” (the McCarthy Report) Programme for Government (March, 2011) Target: €2 billion Non-strategic assets only for sale Drawing on McCarthy Report recommendations Market conditions must be right Adequate reg. for consumer protection in place

5. Why Sell State Assets? What should the proceeds be used for? Depends on rationale for asset sales Debt reduction Jobs programme Structural reform

6. What are State Assets? Tangible State Assets - commercial semi-states (e.g. ports, airports, CIE, ESB, Coillte, Bord na Mona, BG, Aer Lingus, Eirgrid, TV stations, etc) Intangible (e.g. radio spectrum, EU ETS permits, mineral rights, trademarks (eg Kerrygold) etc). Major Characteristics Non-traded Infrastructure Market power Regulated

7. Public Policy Towards State Assets Privatisation programme started in 1991 Increase efficiency, better access to capital Shareholder democracy – attract small shareholders EU – State Aid controls; and liberalisation utility sector State assets already sold: banks, steel, shipping, sugar refining, Eircom, Aer Lingus.

8. Public Policy Towards State Assets Proceeds privatisation: 1991-2006 GROSS proceeds €8.4 bn (Eircom €6.4 or 76%) Direct costs €0.1 bn Indirect costs €0.9 bn ESOPs €1.1 bn NET proceeds €6.3 bn Decline in Commercial semi-State sector: 1980, 91,000 persons or 8% total employment; 2008, 41,000 persons or 2% total employment

9. Option #1: Revenue Maximisation Hire advisors to value State assets Select assets worth €2bn (eg rank high to low) Pros: straightforward; retain largest number of firms in State-ownership Cons: (a) not distinguish between strategic & non strategic assets; (b) sell monopolies; (c) assumes ownership irrelevant, but it is not – monopoly power, externalities etc

10. Option #2: Minority Share Hire advisors to value State assets Select minority shares worth €2bn (eg rank high to low) Pros: (a) straightforward; (b) no need to distinguish strategic/non-strategic assets; (c) lower risk strategy for price discovery Cons: (a) Dysfunction corporate governance structure (?) – State, ESOP & private shareholders; (b) assumes current State ownership structure optimal

11. Option #3: An Economic Approach: Market Failure Revolves around the question: Why public as compared private ownership? Q1. Rationale for State ownership? Q2 Is the rationale still relevant? Q3 Are there better more cost effective policy instruments that could be used to attain the objectives? Q4 What objectives are best met through public ownership?

12. Option #3: An Economic Approach: Market Failure Q1. Rationale for State ownership? Market power – high prices, slows innovation Where – airports, ESB, BG, Externalities – network industries, congestion Where – urban buses, telecommunications, transmission system Public goods – e. g. security of supply in energy Where – Bord na Mona, electricity, gas, electricity and gas interconnection

13. Option #3: An Economic Approach: Market Failure Q2 Is the rationale still relevant? Many State-owned firms created 1930s onwards Are original aims still relevant? Technology changes Better alternative instruments Eg Bord na Mona Created in 1946 Peat mining lessens reliance on imported fuels = greater security of supply BUT Peat high CO 2 ; €78 million PSO in 2011 Interconnection & Corrib

14. Option #3: An Economic Approach: Market Failure Q3. Are there better policy instruments that could be used to meet the objectives? Rationale for gov’t intervention not necessarily State ownership Instrument choice Tendering (eg household waste collection; city bus routes) Regulation (eg energy) Competition policy(eg ports, inter city bus)

15. Option #3: An Economic Approach: Market Failure Q4 What objectives are best met through public ownership? Natural monopoly public rather than private sector Critical assets to functioning of economy - electricity and gas transmission networks Security of supply – ownership of electricity interconnectors to Great Britain BUT: Regulation may be an adequate alternative if: (a) step-in rights (eg Quinn Insurance); (b) appropriate structure (c) appropriate penalties

16. Which Option? Which option - option #3 Identifies strategic assets Avoids dysfunctional ownership structures Best incentives for efficiency Provides a framework of analysis Consistent with the Review Group on State Assets & Liabilities Consistent with both the letter and spirit of the EU-IMF Bailout terms and conditions Provides basis for better gov’t intervention

17. Which Option? BUT: GOV’T POLICY IS TO SELL MINORITY SHARE IN A VERTICALLY INTEGRATED MONOPOLY What did McCarthy recommend wrt ESB? R. 21 Electricity grid ownership shifted to Eirgrid R. 23 Dispose of further generation units R. 24 Energy supply, international division etc sold as a unit R. 25 If ESB retained in public ownership then all international operations sold Market failure or public choice – what do you think?

18. Further Reading P. Gorecki, S. Lyons & R. Tol, “Public Policy Towards the Sale of State Assets in Troubled Times: Lessons from the Irish Experience” Utilities Policy, Vol. 19, Issue 3, September 2011, pp. 193-201. P. Gorecki & R. Tol, “Selling State Assets: Three Options.” Research Bulletin, QEC, Autumn 2011, ESRI.

19. Further Reading D. Palcic & E. Reeves. “An Economic Analysis of Privatisation in Ireland 1991-2003.” Journal of the Statistical and Social Inquiry Society of Ireland, Vol. XXXIV, 2004/05, pp. 1-27. http://www.tara.tcd.ie/handle/2262/8758 Report of the Review Group on State Assets & Liabilities, April 2011 http://www.finance.gov.ie/documents/publicatio ns/reports/2011/revgrpstatassets.pdf http://www.finance.gov.ie/documents/publicatio ns/reports/2011/revgrpstatassets.pdf (paul.gorecki@esri.ie)