Diseased Arteries
A rash of recent books has revealed what lay behind the banking crash: appalling practices, regulatory ineptitude, cosy connections, political delusion and alarming complacency. However, it has not been just the financial arteries of our society which have suffered in this way. There are unhealthy signs of disease in many of the other arteries that are crucial if our society is to kick-start recovery. The arteries for energy, telecommunications, water, waste have become similarly infected. Even a casual reading of the Competitiveness Council’s Reports confirms this. The policy failures have taken different forms:
• In Water, dissipation of responsibility across 34 separate public authorities has resulted in poor planning and appalling waste Over 40% of expensively treated water simply leaks into the ground.
• In Waste, the inability to settle on a joined-up strategy or fair ground rules for competition have created total incoherence. It is illustrated by the recent spat between the Minister, the City Manager and the finding of abuse of market power against the City Council.
• In Communications, an ill-constructed privatisation policy sold out the core network, which has been starved of investment since. The company was pillaged by fast-buck investors who used highly leveraged buy-outs to get quick returns and lumber the company with debts. We are left with broadband speeds 20 times slower than best practice.
• In Electricity, a wholly-owned State operation has insufficient equity to fund investment in a modern cost-effective network, has failed to confront productivity gaps or wean us off fossil fuels. It lives in a protected environment where it can blissfully ignore the crisis that is engulfing the country.
Where regulators were in place, they did not protect the consumer or deliver a modern internationally competitive infrastructure. The regulators were easily captured and rarely challenged these weaknesses. Indeed, even the new Transport Regulator has been obliged by government to allow the existing monopoly remain undisturbed in its existing markets for several years. Have we learned nothing?
Huge Price in Competitiveness
The consequence of bad policy is that the key infrastructural networks fall far short of the standards we need, and the price of these services puts us top of the league across the EU.
In a revealing report published just before Christmas on sectoral exporting opportunities, the Competitiveness Council illustrated that the constraint on opportunities in Ireland typically revolves around weaknesses in these key arteries. From medical technologies to financial services, from software to renewables, these are the factors holding us back.
Fine Gael is determined to herald a ‘New Era’ in relation to the investment, management and regulation of these key infrastructures. We aim to transform them to become state-of-the-art networks, which will create a platform for economic recovery.
It is remarkable how the most ingenious financial engineering went into funding the construction of buildings that no one now wants, much of it propped up by tax incentives, while critical infrastructures owned by government were starved of finance. Now is the time to apply innovative financial thinking to attract private investment into this neglected area.
New Economic Recovery Authority (ERA)
This is what Fine Gael has proposed through the establishment of a new holding company called New Era. It will have under its wing: the State energy, forestry and peat companies; the publicly-owned broadband network and water supply network. It will involve the consolidation of almost 50 bodies down to just 4 operating companies. It will be in a position to dramatically ramp up investment in these infrastructures, far beyond existing plans that rely on constrained internal funds.
There are several critical elements to the success of this model.
• We must be willing to let go of old assets in order to create arteries vital to our future. New Era will require State equity which will initially come directly from the Exchequer. However, as the programme develops, further equity will be found by selling off assets that are no longer ‘mission-critical’ for the country. For example it is no longer essential that the State owns all of the capacity for producing gas or electricity, though the grids must remain publicly owned.
• All of the investments will be on strictly commercial terms. The companies involved will commit to servicing their loans without a State guarantee. This will bring a new element of commercial realism into the operation of companies and force new disciplines into their operation.
• Up to 80% of its money will be realised from private sources through a New Era Bond, open to subscription by ordinary members of the public, and also from pension funds who are only crying out for outlets that offer reliable, regulated returns in sectors proven internationally to have a strong record.
• It will operate under a new approach to regulation. In a small, open economy, it is not enough that regulators prevent artificial obstacles to entry for new competitors. A core priority must be to ensure that services are delivered at a price that is competitive when benchmarked against best practice in other countries. Cost plus price formulae put forward by operators will no longer be accepted. Instead targets will be set to achieve a competitive edge by a tough new regulator spanning all these sectors.
At a time when the private sector is under severe strain and confidence is at an all-time low, here is an opportunity where the public sector can take a lead. It provides the sort of economic stimulus which our threadbare government cannot offer. Not only is it a stimulus, but this is a key weapon in our battle to regain export competitiveness. The economic impact of this programme is not just in the 120,000 jobs that will come directly from the laying down of the investment but also it can create over 50,000 sustainable jobs for the long term. The economic activity will feed back into the public finances through better revenue and lower social welfare payments. Over the first four years alone, such an investment programme can shave €10 billion off Exchequer’s borrowing.
The central message is of New Era is that now is the time to start building a new future. Ireland has not lost the characteristics that made our economy strong in the past. That talent, adaptability and inventiveness can build a strong position in the new emerging economy, built on knowledge and sustainability, if political leadership is willing to create the opportunity. Our competitive edge has undoubtedly been damaged so we must start to repair it now. We can rebuild strong arteries which will fuel the muscle of economic recovery. We can reinvent ourselves in this rapidly changing environment.
