Privatisation is Not the Solution

The Republic’s Minister for Finance, Brian Lenihan, recently announced the establishment of a Review Group on State Assets and Liabilities fronted by economist Colm McCarthy. It is claimed the Group will advise on “the proper stewardship of state assets and on opportunities for the better use of those assets.” However, Jim Stewart believes it to be just another attempt to strip assets from the people for the benefit of private interests.

The Privatisation Board

The composition of the latest Review Group, and its terms of reference, makes inevitable that the conclusions will be: privatisation of all major state Commercial State Bodies as a preferred solution; if not full privatisation, part-privatisation via public/private partnership; and as a final option drastic reduction of any State subsidies, as in the case of the CIÉ Group.

Cutting public transport has been a particular obsession of McCarthy, who opposed Dart electrification. It is one of a few examples of proposed cuts in the Report of the Special Group on Public Service Number and Expenditure (last year’s so-called “McCarthy Report”, which called for savage cuts across the public sector) not contained in evaluation papers published by the Department of Finance.

The same procedures used in producing last year’s McCarthy/Department of Finance report will likely be followed in this new report. Officials in the Department of Finance will draft chapters, proposals and conclusions which will be largely accepted by the Privatisation Board.

Who is Driving These Policies?

These recommendations are likely to be as already described. The reason for this is that prevailing International Monetary Fund (IMF) views are largely held within the Department of Finance. While privatization was not a policy recommended in a recent IMF report on Ireland, that report in several places acknowledges IMF staff agreement with “the authorities” (not defined but referred to elsewhere as “the officials of Ireland” and the IMF report also states that meetings were held with senior officials from the Department of Finance, etc.). The IMF together with the World Bank helped establish privatization as part of the Washington consensus, often with disastrous policies for developing countries. These discredited policies are now being reintroduced as conditions for IMF loans to countries with large budget deficits such as Greece.

Why Privatisation is Not a Solution

Privatisation largely involves an exchange of ownership. The State will obtain financial assets in exchange for real assets. These financial assets could be invested in other real assets, but this is unlikely, rather Government borrowing/debt will be reduced. This exchange will be costly. Firms such as Goldman Sachs, Merrill Lynch, PricewaterhouseCoopers, Arthur Cox, etc., (all featuring in advice to the Government in relation to the banking crisis) will again be paid large fees.

Apart from the cost, privatisation is no solution to Irish economic problems. The State’s net Balance Sheet remains the same, but the policies privatised companies may pursue will be very different. Some firms such as the ESB are natural monopolies. Regulation is key – an area where Irish agencies have a particularly poor track record. State control of monopolies can address deficiencies in regulation.

What about commercial policies? ICTU economist Paul Sweeney has argued coherently that commercial policies of formerly State-owned companies have been disastrous for Ireland’s economic success; the best known is Telecom Eireann. But policies pursued by other privatised firms have added to the economic crisis, for example the former ICC and ACC banks. The operations of the former Irish Sugar company (Greencore) are now focused largely outside Ireland, and as such are unlikely to contribute to the development of agribusiness within Ireland.
In the current crisis we have been badly let down by former and current employees of the Central Bank, the financial regulator, those who designed and encouraged our gross over-reliance on tax incentives, those in charge of our planning process, but in particular by institutions largely in the private sector, banks, building societies, professional firms such as auditors.

Corporate governance has not been an issue in Commercial State Bodies in contrast to private sector firm such as banks, the Quinn group, and DCC. The solution is not more economists with their misguided views on ‘efficient markets’, and ‘rational behaviour’. Banks in recent years have lost billions, competition policy as implemented by the EU Commission has lost billions more. Nor is the solution privatisation.

Arguments against privatisation are compelling. It is important that they are expressed.

This article first appeared on Tasc’s website.