Colm’s columns

Colm Rapple
Irish Mail on Sunday, July 26, 2009

The State coffers may be depleted but this isn’t the time to be selling off the “family silver”.  Such sales are mooted in the McCarthy report but they are not seen as an alternative to the spending cuts that have grabbed most of the headlines. Unfortunately some politicians may view it differently and promote asset sales as an easy option which, in the short-term, would help to lessen the need to take on powerful pressure groups.

But it would be an exercise in short-termism.

Two large State companies are mentioned in the McCarthy report as possible privatisation candidates, Bord na Mona and Coillte. To describe either as “family silver” is misleading since both are valuable wealth and welfare producing assets that, in the current climate, would only fetch bargain basement prices.

They are not just simply non-producing ornaments.

Bord na Mona made a profit of €23.8 million last year – up €1.3 million on the previous year. It paid over €12 million in dividends to the State. It owns a land bank about the size of County Louth and it provides almost 2,000 good jobs, mostly in areas of the country where there is little alternative employment.

The current chief executive’s predecessor pushed hard for its privatisation. Goldman sacs had identified potential investors and no doubt there are still predators ready to pick up a bargain.

But we don’t want a repeat of Eircom. It may well have been sold near the top of the market but we lost out as the development of the telecommunications network was dictated by short-term profits rather than the national or regional interests.

Coillte is the largest single landowner in the State. Profits last year were down sharply to €9.2 million, mainly as a result of the slowdown in the construction sector. But that figure greatly understates the best benefits accruing from the company. Many of them are intangible but it is possible to put a firm figure on one of them, the carbon that its forests take out of the atmosphere each year.

It’s estimated that our forests are currently taking in about 6.2 million tonnes of CO2 each year. Half of that is released again as a result of timber harvesting and deforestation. The other 3.6 million tonnes is sequestered in our “forestry sink” most of which is owned by Coillte.

Only about 2 million tonnes of that is actually included in the Kyoto protocol calculations and that in currently saving us having to buy about €29 million worth of carbon credits. That’s assuming a price of €14.50 a tonne at which credits are currently selling. But they were fetching almost twice that a year ago and the price is bound to rise again as the world economy recovers.
So our forests are worth a lot more in real money terms than Coillte’s profits indicate. Could we trust private owners to manage this valuable carbon sink in our best interests? The answer is clearly, no. Private owners would, quite rightly, be interested only in the bottom line of the profit and loss account.

Coillte provides many other less tangible environmental benefits the management of which are obviously best kept in public rather than private control. It owns about a million acres of land, equivalent to two reasonably sized counties or almost 7% of the country’s landmass.

The bulk of that is commercial forestry and managed as such.  But Coillte has a broader remit. It puts it like this “Our purpose is to enrich lives locally, nationally and globally through the innovative and sustainable management of our natural resources”.

That could amount to just so much waffle in the mission statement of a private company.  There is a better chance of imposing the reality of that statement on a public company.

Land and forestry is best managed for the long term, something that’s better suited to a public rather than a profit maximising private company.

Far from selling, the Government should be thinking of buying at this time. Landowners pushed the cost of past infrastructural projects sky high with their exorbitant demands. So why not store up some savings for the future by identifying and buying, or retaining in NAMA, the land that’s going to be needed for future projects.

Colm Rapple
Irish Mail on Sunday, May 31, 2009

The private health insurance business is in a state of flux. Mary Harney is still awaiting EU approval for her tax and levy plan with which she hopes to salvage community rating while VHI, having lost €63 million last year, is looking for an injection of €100 million from a cashed strapped exchequer.

Worse still, all of this is happening in the absence of any long-term strategy. The Department of Health is still working on it. But the plan isn’t expected to be finalised for two or three years.

In the meanwhile premiums continue to soar, with no end in sight for hard pressed consumers. Despite a 23% premium hike VHI expects to generate only a modest surplus this year and even that is very much dependant on the performance of its investment portfolio.  It doesn’t expect premium income to cover the cost of claims.

Quinn Healthcare increased its premiums by 16% this year to help cover the cost of the Minister’s tax and levy plan. Hibernian Health imposed a much more modest 6% but that possibly reflects a desire to build up market share. General inflation may be low but according to VHI figures, medical costs will rise by about 15% this year.

No-one is particularly happy.

It’s all a sorry mess and much of it can be attributed to our health minister’s ideologically fuelled attempts to introduce free market norms into the business that is far better suited to being run as a State monopoly. There may not be many such businesses but there are a few and health insurance is a good example.

Privatisation, and the promotion of competition, is not always the best solution and certainly not for health insurance, particularly when the stated aim is to retain what is know as community rating.

Even the expert group of very free marketeers set up by the Minister to report on how to make the business profitable for investors recognised that the concept of community rating “is inherently at odds with an open and free market”.

Community rating requires insurers to charge the same premium to all clients irrespective of age, gender or medical history. That’s patently anti competitive but it is generally seen as fair and it is the accepted public policy of all political parties. Without community rating older higher-risk individuals would be charged far higher premiums than their younger and lower-risk children.

But the spread of gains and loses would be a bit more complicated than that.

Many older people would be forced out of the health insurance market altogether and have to fall back on the public health system. The extra costs would have to be met from higher taxes which would likely bear heaviest on the young.

No-one would really gain.

The debate has been going on for the best part of a decade and a resolution seems to be as far away as ever. It is generally recognised that community rating can’t work without some way of subsidising a company, like VHI, that has a far higher proportion of high-risk customers. We’ve seen what can happen. New entrants such as BUPA did very well by targeting younger customers. It could keep its premiums lower than VHI and still make a handsome profit.

Low risk customers gained a little but not half as much as high risk customers lost.

That’s where risk equalisation comes in. The object is to take money from companies with lower risk customers and give it to those with higher risk ones thus ensuring that companies won’t benefit from targeting profitable niche markets. That sounds sensible enough.

The EU Courts thought so but the system proposed by the Department of Health was finally shot down last July by our own Supreme Court. So the stop-gap solution of levies and tax reliefs was devised. It was to be introduced on January 1 last but it has still to get EU approval. If approval is granted the system will be back-dated to January 1.

Insurers will be charged a levy of €160 per adult and €53 per child but will be granted extra tax credits for customers over 50 years of age. It’s a very blunt system of risk-equalisation and, while it will result in the transfer of funds from the smaller insurers to VHI, it is not going to halt the upward march of premiums.

Misplaced government policies has resulted in EU pressure for VHI to convert into a profit making entity. The conversion is overdue but it needs at least €100 million in fresh capital to meet solvency requirements. There are no current plans to privatise VHI so the Government is being asked to put up the money. The National Pension Fund might view it as a worthwhile investment. But whoever puts up the money will be looking for a return. VHI will, in future, be expected to produce a profit and that can only come at the expense of its customers.

Competition among three profit maximising companies in a relatively small market with one predominant player isn’t going to bring premiums down. The ideal would be to have health professionals competing with one another for business. Instead we’ve got limited competition between health insurers for customers.

It’s time to look at the alternative, a State supported universal health insurance scheme. There are plenty of models to choose from but it’s time for Mary Harney to make up her mind or pass the job to someone else.

Colm Rapple
Irish Mail on Sunday, January 28, 2007

The decision of ConocoPhillips to sell Ireland’s only oil refinery for an asking price of €380 million highlights yet another example of governmental incompetence. The oil giant will be laughing all the way to the bank while the Irish taxpayer bears the cost.

It’s only five years since the refinery, together with the massive Whitty oil terminal in Bantry Bay, was sold by the Government for a mere €77 million. The dollar price of $100 million was worth a little more in euro terms then but that matters little since only a fraction of the agreed purchase price, perhaps as little as €30 million, ever found its way into the Exchequer.

Taxpayers didn’t get the benefit of even that small sum since the State had to assume responsibility for maintaining our strategic oil reserves. These stocks could previously be held at no cost in Bantry and Whitty but since we no longer own either facilities the Irish National Petroleum Corporation (INPC) is currently paying over €17 million a year in storage fees to private oil companies including ConocoPhillips.

Indeed it is likely that the bulk of our oil reserves is held in Bantry. While it is selling the refinery, ConocoPhillips is holding onto the terminal which has a capacity of 8.5 million barrels. With its deep water access and the Irish State as a guaranteed customer for storage facilities, it is clearly a very valuable asset.

So why did we sell both the terminal and the refinery so cheaply. We haven’t just lost money on the deal, we’ve also lost control over assets that are of prime importance to our national security. The importance of having at least one oil refinery in Ireland has been long recognised. It prompted the Government decision to originally buy Whitegate in 1982 when the then owners, a group of oil majors, threatened to close it down.

The State owned INPC took over the operation and in 1986 acquired the Whitty Island oil terminal when another oil major, Chevron, surrendered the lease. The terminal had been out of operation since the tragic explosion and fire that cost 51 lives and damaged the jetty in 1979.

INPC did a good job with both facilities. In 1997 it upgraded the refinery at a reported cost of €86 million while in 1998 the Bantry terminal was reopened. A requirement that oil companies buy at least some of their supplies from the State owned refinery provided an effective subsidy in some years but by the time it was sold in 2001 that requirement was no longer an issue and INPC was making a profit.

The Government decision to sell can be explained mainly by the ideological based belief that the less the Government owns and runs, the better. Even firm believers in that adage must accept that there are assets that are best kept in State control. The State’s only oil refinery and large scale oil storage facilities may well be examples.

But even if that isn’t accepted, it must make sense to get the best possible price for any assets sold. The sale of Whitegate and Whitty didn’t make sense. The Minister responsible Mary O’Rourke admitted in the Dáil at the time that the net proceeds from the sale were going to be substantially less than the $100 million “headline consideration” that was used in selling the deal to the public.

There was also a claim that the deal would help to bring down the price of fuel although internal Departmental documents later released revealed that there was no expectation of any significant impact on consumer prices.

Any potential opposition from management and staff were bought off with benefits and guarantees that helped to offset the move from State to private sector employment. Lump sum payments were made. Over €10 million of the purchase price was used to buy shares in Phillips Petroleum for the staff and jobs were guaranteed for 15 years.

As part of the deal the State had to give the new owners an €80 million guarantee to pick up the tab for any claims made in respect of environmental or other damage caused prior to the take over. And since they were only selling the assets of INPC, the State retained responsibility for the company’s debts which amounted to almost €90 million.

In reality the taxpayer got little or no benefit from the sale. In retrospect the guarantee that the refinery would stay open for 15 years was worthless. The State could itself have continued to run the refinery at a profit for that period but instead it gave away a very valuable asset for next to nothing.

Industry sources are quoting a current value for Whitegate alone of $500 million (€380m) and it’s easy to believe that the refinery is worth that. ConocoPhillips has continued to develop it with a reported investment of about €30 million. But it has also got some Government assistance. Last year a biodiesel project using soybean oil was grant aided. Rather strangely the Department of Energy didn’t require it to use rapeseed oil which could be produce in Ireland although it is said that the refining process would be the same.

Adding insult to injury the State owned Bord Gáis had to do a deal with ConocoPhillips to use part of the Whitegate site for a proposed generation station while the new Government development plan includes proposals for building additional strategic oil storage capacity. That 2001 decision to effectively give away the Whitegate refinery and the Bantry oil terminal continues to cost us money.

It might even make sense at this stage to buy them back.