National Treasures - The Future For Irish State Assets?

22 December 2011

“Wage cuts and price deflation have restored Irish competitiveness. In contrast to Greece and Portugal, its fellow occupants of the eurozone’s intensive care unit, Ireland’s current account deficit is moving into a surplus. The rebound is explained partly by the multinational companies, chiefly US-owned, that use Ireland as a European base. But Irish policymakers have played their part, too.”
(Financial Times Editorial 2 September 2011)

One part of the Government’s recovery policy is the commercialisation of State assets. As required by the terms of its agreement with the European Central Bank, the European Commission and the International Monetary Fund (colloquially known as the “Troika”), the Irish Government has conducted a study designed to evaluate commercialisation opportunities in relation to State-owned assets and State-owned companies.  The  Report of the Review Group on State Assets and Liabilities was published in April this year. This report is popularly referred to as the ‘McCarthy Report’, after the Chairman of the group, Economist, Colm McCarthy.

As the report made clear, no immediate ‘fire sale’ of significant assets would take place. Indeed, the progress since publication of the report has been slow. The recommendations in it were made against a background of avoiding being driven excessively by short-term considerations that could potentially risk long-term damage to the Irish economy’s competitiveness, and focused on the safeguarding of critical infrastructure assets. In particular, the McCarthy Report recommended the retention of certain key strategic assets, such as the electricity transmission grid and the regulated gas transmission and interconnector assets.

The first steps towards implementing a programme of commercialisation of State assets have now been announced. 

In terms of a statement of principle, the Minister for Communications, Energy and Natural Resources announced on 14 September 2011, the decision to sell a stake in the Electricity Supply Board, the incumbent electricity provider, which owns the transmission grids, as well as Northern Irish and foreign assets. The manner in, and price at which a stake in an integrated electricity generation business can be sold remains to be seen.

There is an on-going review of suitable assets for divestment. More announcements over the coming months are expected which have the potential to cover a wide range of State-owned industries. Leaving aside the nationalised banks like AIB, the Government controls a host of enterprises operating infrastructural and commercial businesses.

These include owning and operating:

• roads, rail & buses
• ports & airports
• power generation & supply
• electricity & gas networks
• health insurance
• the National Lottery

Not all will be up for sale, but the capacity to generate new income by disposal, joint venture or innovation is self-evident.  International money is already investing in Ireland with Fairfax Holdings from Canada and Wilbur Ross taking a 34.9% stake in Bank of Ireland. The appetite is there for the right assets and Ireland has these and, moreover, is in a stabilising environment.

The Government announced on 29 September 2011 the formation of an agency, NewERA, to reform the corporate governance function of significant State-owned commercial companies from a shareholder perspective. The Government also announced on the same date that it is currently examining options for the possible disposal of further State assets. It has recently requested the Department of Public Expenditure & Reform (in consultation with relevant line departments and NewERA), to consider a number of possible candidates for disposal and advise the Government in relation to the appropriate valuations to be placed on the assets in question, and on the most appropriate method of disposal, likely timeframe and economic impact of any such disposal, in order to inform any further decisions that the Government may wish to make. Additionally, NewEra had to report back to the Cabinet by 30 November 2011 on the ESB stake sale and other asset commercialisation measures. Developments in relation to commercialisation of State assets may also occur on a more reactive basis from time to time. Indeed, reports published on 24 October 2011 of comments made by Leo Varadkar, Minster for Transport, suggest that the loss-making Cork and Shannon airports could be privatised after separation from management with Dublin Airport under the responsibility of Dublin Airport Authority.  We will be publishing updates on the process as it evolves, but a number of State assets are likely to come into play, and interested parties should be considering options and effecting public  information due diligence at this stage.

Attribute to Justin McKenna, Partner at Mason Hayes & Curran.

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