Privatisation Pendulum Swings Back.

In my last blog in November, we saw that privatisation is being reversed in the UK, the original home of the Thatcher ideology of “rolling back the state.”

However, privatisation is still in vogue here. Much of local authorities’ work has been privatised. They used to fund the health service, run water, sewage, parks and importantly, social housing. Now they seem to do little, except outsource. 

On Monday mornings I am awoken by loud bin lorries, supposedly “competing” to give me an enhanced waste service. Not alone are we disturbed several times every Monday, but the service is much more costly (it was also paid from taxes before privatisation); the service is duplicated; and the cost is virtually the same as companies seem to charge what the competition is charging. “Competitors” compete by minimising worker’s pay and their companies are based offshore perhaps not paying full tax.  

Originally, Irish enterprise was state-led but it still is.

There was a dearth of private capital in the 1920s and the new state set up many state enterprises, which remained quite dominant until the 1980s, when the private sector finally matured, boosted by influxes of Foreign Direct Investment. Privatisation, the Thatcher trend to shrink the state and tackle inefficient, albeit many sunset, industries in the UK, also spread here.

The key reasons given by Thatcher for privatisation were to shrink the state and break the trade unions – neither were issues here. Other arguments were for greater efficiency, wider share ownership and to generate cash for the exchequer.

Efficiency

Whilst the level of privatisation was great in the UK and in some other states e.g. France and some former communist countries, there was no need for privatisation here because Irish state companies had become efficient other than a few in sunset industries which had been closed when they could not be made viable.

Nevertheless, governments which had been successful champions of public enterprise fell for the UK Thatcher ideology of privatisation. But no Irish state company was sold until it was first operating profitably and efficiently. Thus one of the key reasons given for privatisation - to make companies more efficient - had already been achieved – under public ownership. Despite that, there were still privatisations of 11 profitable commercial state enterprises in Ireland, (the last being Aer Lingus in 2015).

Capital for government

Further, with a booming Irish economy between 1994 and 2008, the Exchequer did not need cash because for the first time, it had surpluses. Government used the money to cut direct taxes, incentivise property investment and so boosted the Crash. Thus privatisation was part of the broader ideology that contributed to the collapse here.

Wider share ownership – spreading capitalism

Another objective of privatisation was to have wider share ownership but many people who bought shares in Eircom in 1999 got badly burnt - that quenched that ambition.  

The mixed economy - public stars and private wasters

The ten or so commercial companies still left in state ownership are star performers, compared to the previous top private Irish companies. The private companies virtually all collapsed after the Crash – e.g. all banks and big builder/developers. Their collapses did not just wipe out their investors, contractors, etc., but almost bankrupt the state. It was waste/destruction on a scale never seen.

On the other hand the ESB has paid over a staggering billion euro in dividends to the taxpayer in the past decade. This is an incredible return on zero investment by the state which only gave guarantees on the loans. The state will share in the €136 million that state company Coillte will make on selling four wind farms and more.

Ireland has a “mixed economy” or public and private enterprise and gives large subsidies to private firms. It is not a privatised economy in spite of privatisation, PPPs and outsourcing. It is time then that privatisation was taken off the agenda.

Yet massive strategic privatisation is planned, in spite of evidence.

Despite all of this, the government has already started the privatisation of the AIB which it wants to sell quickly. There is no debate in looking at other possibilities or considerations, such as:

1.  that credit is too important to be left solely in the hands of a small discredited, private elite;
2. that by holding on to AIB, we could get back the money lost on banking,
3.  that it could prevent future AIB incompetence and malfeasances by maintaining some state control of this important credit utility.
4.  that it could prevent distant, unresponsive foreign control of banking (e.g. Delaware or Luxembourg?)

The state should not privatise all of AIB, but should hold on a large chunk of its shares – at least 33%.

Wholesale privatisations but little serious debate

There is a need for deeper debate on what has already been outsourced and privatised beyond the superficial analysis of Carillion’s PPPs’ screw-up. There is also the recent scandal of the 40 schools screw-ups and the outsourcing of billions in bank loans to vulture funds by NAMA and the banks.

Difficult to undo privatisation

The advantage of privatisation is that governments get capital. A government can then use the money to “buy” votes by cutting taxes etc. Governments, of course, should not use capital for day-to-day spending but should invest it in other public assets. But they do and thus gain electoral advantage whilst shrinking the state. Meanwhile to reverse privatisation or re-nationalise is very costly.

Not a privatised but a subsidised economy

Irish governments have gone much too far in accepting the neo-liberal line that “private is good, and public is bad”. This is nonsense. The real dependence is probably of the private on the public. This was coldly demonstrated by the public, the state, picking up the other, the private, after the Crash of 2008, in UK, Europe, US and Ireland.

Much innovation is state-led, but monetised by tech or bio companies. Even profitable MNCs get great support from the state, including even cash subsidies.

Thousands of public servants and hundreds of millions in public subsidies work to support the Irish private sector, yearly as I demonstrated in my chapter in TASC’s Nuts and Bolts of Innovation book.

Conclusion

In spite of three decades of privatisation, European states are not fully privatised economies. Governments have privatised some assets, reducing public balance sheets, but they are still building up new assets. In the six years to 2016 non financial government assets grew by €23bn, equivalent to 57% of GNI* (Central Bank 3/18). Further state spending on the current side remains stable in Europe and is rising here.

In spite of this high level of privatisation in some states, and the public cost of the Great Recession, a recent IMF report shows that the national debt in most states is less than its assets. Ireland’s total state assets exceed its national debt.

The state still plays the key role in the economy, directly through its assets and legislation and indirectly too in substantial subsidies and supports. We still have a mixed economy of public and private, interdependent on each other.

It is time for a big rethink on this false ideology of privatisation and for the overdue recognition that Ireland, like most European states, has a mixed economy, where private and public work together. However, contrary to the dominant view that private is superior to public, the private sector may be more dependent on public support.

Posted in: Corporate governance

Tagged with: privatisation

Paul Sweeney     @paulsweeneyman

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.