Cassandra Voices

Author: Cillian Doyle

  • Putting the ‘Public’ Back into Enterprise

    Part I of this series examined Mario Draghi’s recent proposals for reforming the E.U.’s economic model. It explained how one key tool was missing from his new industrial policy toolkit. That missing tool was public enterprise. Here in part II, we take a closer look at commercial State-Owned Enterprises (SOEs). Particularly regarding their role at times of market failure, and how they can be used to channel investment into promising new sectors, with positive spillovers.

    The role of SOEs as drivers of Irish industrial policy may seem like a thing of the past, or at least very much peripheral to Ireland’s tax-driven industrial strategy. However, a new debate is starting to take root. Although long overdue, it should be welcomed, particularly when we consider different options for how the €14 billion Apple tax receipts should be invested.

    Note the government’s proposal to use some of the funds for their shared equity scheme is exactly the opposite of what’s needed.

    A New Debate or a New Departure?

    As part of their pre-election campaigning the various Irish parties of the broad left offered different public enterprise solutions for various challenges.

    For instance, both People Before Profit and Labour called for the establishment of a new construction related SOE. There are differences in how each proposed it would operate in practice. Part III takes a closer look at these. It will also briefly touch on the Spanish government’s recent announcement that it’s to establish a new housing SOE, and ICTU’s call for the creation of ‘a new housing semi-state- Housing Ireland.’

    Sinn Féin in their election manifesto called for existing SOEs like the ESB to drastically increase the number of craft apprenticeship places they offer (electricians, plumbers, etc), to help address shortages of key skills and improve workforce planning. They’ve also called for €2.5 billion of the Apple money to be used by the state to take equity stakes in joint energy ventures undertaken by the ESB and private providers.

    The Social Democrats, for their part, called for an increase to Bord na Móna’s capacity to deliver large renewable energy projects (onshore and offshore wind). They also had Dr Rory Hearne elected as one of their new TDs, so it’s possible his previous research on a new national home-building agency could influence party policy in this respect.

    So, it’s clear that we’re noticing something of a shift away from a narrow (and reductive?) focus on tax and spend; toward a more ambitious and positive conception of the role of the state in helping to shape markets, and drive socio-economic outcomes.

    President Michael D. Higgins in a speech last year celebrating the 20th of anniversary of TASC highlighted the ‘dearth of progressive or heterodox policy debates’ over the last few decades. Something he rightly attributed to the ‘dominance of neoliberalism’ and its ‘economic orthodoxies’.

    Mainstream (neoclassical) economic theory says remarkably little about SOEs. This is despite their scale, scope, and importance in the history of economic development and industrialisation. In an Irish context, they have traditionally entered public consciousness at times of some proposed privatisation, or in reflection on the failures of past privatisations.

    It’s time our thinking evolved. Michéal Martin said the Irish left ‘doesn’t get our enterprise economy’. The problem is that there are many people who feel they aren’t ‘getting’ much out of it. Perhaps it’s time we put the ‘public’ back into enterprise.

    The Business of the State

    So, what’s the purpose of the state directly entering commercial activities via SOEs? The most common rationale is correcting market failure, and the OECD/EU provide several theoretical reasons:

    • The private sector’s not providing sufficient goods/services, which are deemed necessary.
    • The need to provide public goods (housing, health, education) which a free-market system won’t provide adequately.
    • The decision to become involved in an activity where the private sector overproduces certain undesirable good with negative externalities (e.g. pollution, carbon emissions)

    Other supportive arguments include the countercyclical function they can serve in terms of investment expenditures/employment during a downturn. Their ability to promote industrialisation by launching new industries that may have significant start-up costs and the requirement for long-term investments. Their use as vehicles for innovation, knowledge dissemination, and technological spillovers. Lastly, for national security reasons and to contend with monopolistic sectors.

    There’s no one size fits all model when it comes to SOEs. In practice there’s significant variation observed. There are commercial and non-commercial SOEs. They can be owned at the national level (e.g. Government Ministry), the sub-national level (municipal/local authority) or through some other entity (e.g. a sovereign wealth/development fund or a Central Bank).

    There’s different levels of ownership and control observed, ranging from full state ownership to a more limited shareholding. Some have shares privately held, with others having some equity traded publicly. The degree of control also varies from those directly answerable to a Minister/Department, to those subject in more indirect control. Part III returns to the variation in organisational structure in an Irish context.

    Despite the large-scale privatisations that have occurred with the ascendancy of neoliberalism, the relative importance of state ownership has increased in recent decades (OECD 2023). Data-driven research over the last quarter of a century has been somewhat limited, but we are currently seeing something of a resurgence.

    This is partly being driven by the ‘renewed interest’ in SOEs amongst policymakers (World Bank 2023). But also, by a multilateral institutional realisation that the footprint of the state in commercial activities is far larger than previously thought (figure 1).

    As the OECD (2023) notes, the number of SOEs in the list of top 500 global companies has tripled, and at the end of 2022 ‘the public sector held almost 11% of global market capitalisation of listed companies, amounting to $10.6 trillion, with public sector ownership in some markets amounting to over 30% of listed equity’.

    SOEs in the 21st Century

    SOEs are major actors in most economies holding assets of $45 trillion, equivalent to 50% of world GDP (IMF 2020). They’re also active across a wide range of sectors (figure 2). China’s sharp rise (see part 1) has supported the ongoing re-evaluation of the state’s role in the economy. But in the West the Financial Crisis (2008), Covid-19 and the energy crisis, which all saw partial/full nationalisations, government backed recapitalisations and a host of other state subsidies, has also fed into the ongoing re-evaluation.

    In 2009 the Harvard International Review argued that there was ‘no reason to believe’ that the SOEs of the 21st century would be like their counterparts from the 1980s/1990s. Criticisms of that period centred on the favouritism shown by the state, governance issues, inefficiencies, and so on.

    This assessment proved to be prophetic as extensive OECD research (2021) found that the ‘noteworthy trend’ has been that ‘states are operating increasingly like professional investors.’ That is, most had a commitment to ‘competitive neutrality’ meaning favouritism was not shown toward SOEs, and competition law and public procurement law were used to create a level playing field.

    They also noted for corporate governance it was now ‘common practice’ to have auditing and accounting standards (International Financial Reporting Standards) equivalent to stock market listed companies.

    MacCarthaigh (2008) in a review of Irish SOEs found that performance indicators were used extensively, with their use having increased significantly from previous years. Financial results and profitability were the focus, but other societal performance metrics like environmental and corporate social responsibility were also observed.

    Notwithstanding the recent work by multilateral institutions, academic research on SOEs over the last quarter of a century has been somewhat limited. The results of extant studies are also relatively mixed and lacking consensus. Table 1 provides an overview of some studies that have been carried out.

    SOEs have been studied across a range of issues, including: profitability performance vs private firms; level of innovation vs private firms; general performance following privatisation; effects on economic growth etc.

    There are some studies which found private firms tend to perform better in terms of profitability, with others finding no such evidence following privatisation, or that this brings higher costs in the provision of formerly public goods. Some found SOEs to be more innovative than their private sector counterparts.

    One study, examining their effect on economic growth, found that it was neither negative nor positive per se. Rather, their effect was conditioned by the institutional environment they operated within, meaning in the presence of good quality institutions their effect was positive, and in the presence of poor-quality institutions their effect was negative.

    This reminds me of something a former professor of mine once said. The answer to any question in economics is always – ‘it depends’! SOEs are not some kind of magic bullet. How they perform will depend on a range of factors. These factors can also apply to private firms.

    Factors like whether its organisational structure is sound. The presence of sound management and a board with a strategic vision, which are in alignment with its shareholder goals;[1] a good understanding of the market conditions they are operating within etc.

    Where they have differed in the past is that private firms could be quicker to exit a market when it was no longer competitively viable.[2] The case of Irish Steel – nationalised to save jobs – is a good case in point. It continued well past its sell by date, despite no longer being economically viable.

    But SOEs like private firms can adapt to a changed environment. For example, Bord na Móna went from being a major peat harvester to making good progress in renewable energy.[3]

    Lastly, it must be noted that SOEs may not be solely driven by maximising profit, measured via financial metrics (gross/net profit margin; return on equity (ROE); return on assets (ROA), etc).

    As commercial enterprises they will still need to make a profit, but they often have a so-called double bottom line, meaning they also look to maximise a second objective, such as capital investment, social impact, environmental performance, etc.

    So, comparing their profitability to private firms which are explicitly profit maximising is not necessarily a fair comparison. Next, we’ll take a brief look at specific Irish SOEs in historical perspective.

    Table 1
    Authors & year Research area/concern Findings Comment/limitations/ implications
    Shirley & Walsh

    (2000)

    		 Reviewed 52 studies (1980s to 1990s) which examined the difference in performance between SOEs and private corporations. They reported that there were only five studies indicating that SOEs outperformed private corporations Only monitored firms in monopolistic utility sectors
    Omran

    (2004)

    		 Examined the performance of 54 newly privatized Egyptian firms against a matching number of SOEs (1994-98) His analyses showed that privatized firms did not exhibit significant improvements in their performance relative to SOEs. These findings questioned the benefits of Egyptian privatization Cautioned that ‘changing ownership’ has no instant magical effect on performance, and greater consideration should be given to market structure or the power of competition
    Anderson (2007) Examined the impact of privatisation in Latin America (Ecuador), in relation to natural monopolies and public goods The privatisation of SOEs in involved in the provision of public goods can head to lower output and higher costs in the long run Noted that for Ecuador to develop the public sector still needed to play a significant role in developing human capital and physical infrastructure
    Mazucatto (2013) Examines the role of the state/public funding in the US economy’s success. Tackles the myth of neoclassical economics which juxtaposes a supposedly bureaucratic state versus a dynamic, innovative private sector The role of government as both a risk-taking funder of innovation and a market creator is widely understood. Public/state-funded investments in innovation and technology has been the driver of success, rather than free market doctrine Correctly recognises that governments form an essential role in the innovation chain. Points out that state has not only fixed market failures, but has also actively shaped and created markets. Sometimes successfully sometimes not.
    Benassi & Landoni

    (2018)

    		 Deals with the role of SOEs in innovation processes through two case studies (STMicroelectronics in the semiconductor and Thales Alenia Space in the space industry Illustrates how SOEs can contribute to innovation by exploring new opportunities and recombining different sources of knowledge. Highlights the conditions under which success can be realised. Highlights how these SOEs succeeded through a continuous wave of agreements, mergers and acquisitions. This has bearing for some of the proposals Mario Draghi has made (see part 1)
    Asian Development Bank (2019) Using a large sample of firms with cross sectional data, compares SOEs to private firms across various financial performance measures Found that SOEs ‘be less profitable than privately owned enterprises’. Argues SOEs should shift to profit maximising behaviour, although this runs counter to the double bottom line they often have
    Lee et al

    (2021)

    		 Examined the innovation performance of SOEs vs private corporations in Asian middle-income countries (2012-15) The authors note ‘somewhat surprisingly’ they found that SOEs in the study population tended to innovate more than private firms Noted the scarce data availability for empirical comparisons, meaning survey data was used instead
    Szarzec et al (2021) Examined the effect of SOEs on economic growth in 30 European countries (2010-16) Impact of SOEs on economic growth is not good or bad per se, but conditioned on the level of institutional quality. SOEs are positive on economic growth in a good quality institutional environment, and negative for poor quality institutional environments
    Castelnovo (2022) Analyses the innovation performance of more than 2000 SOEs vs private firms, using patent applications as a proxy for innovation value Results suggest that cross-industry heterogeneity exists. Overall, SOEs innovative performance is comparable or even superior to that of private firms Paper restricts attention to developed countries (EU Member States). Therefore, its findings cannot be generalized to developing countries

     

    Poolbeg Generating Station Ringsend, Dublin.

    Irish SOEs in Historical and Contemporary Perspective

    In the wake of the financial crisis (2008-10) a report for the Department of Enterprise noted that there was renewed global interest in SOEs in ‘promoting economic development’, and their ‘significant contribution to the economic and social development of Ireland since independence’ (FORFÁS 2011).

    At the time there were calls by ICTU to establish a strategic investment bank ‘to address the collapse in domestic demand’, to help support infrastructure investment and address the loss of jobs.[4] Such calls went unheeded. Instead, we got the below value sale of An Bord Gais and the attempted privatisation of our water services.

    Let’s briefly consider some of our current and former SOEs in historical perspective (see below), before considering some of the impacts of privatisation.

    • the ESB,
    • the Irish Shipping Company,
    • the National Building Agency,
    • Telecom Éireann,
    • ICC Bank,
    • Aer Lingus

    ESB

    At the time of independence/partition agriculture was Ireland’s main industrial sector. Yet most farms had no electricity or light, severely hampering profitability, productivity, and incomes (Schoen 2002). The ESB in helping to electrify the state had an immediate impact on economic, social, and industrial development, and average sector level income.

    Today it remains a large employer (supporting 0.5% of total employment). It’s a major capital investor (€6.7bn in the period 2018-23) and continues to provide strong returns to the state in the form of taxes, payroll, purchases, and dividends (€2.7bn in 2023). 

    The Irish Shipping Company

    The outbreak of WW2 threatened supply chains as many private shipping operators were unable to service Ireland. According to the old Department of Industry and Commerce, in 1939 only 5% of the total tonnage required for the Irish import and export trade was provided by Irish-owned vessels. During World War II, the U.S. initially refused to enter the warzone around Irish waters, meaning they couldn’t transport directly to Ireland.

    Other ships moved to the British register leaving a crisis in the availability of ships for transporting imported/exported goods. The establishment of the Irish Shipping Company was vital for the continued importation of energy supplies, as well as supporting exporting businesses in maintaining their trade routes, incomes, and employment. It was also considered essential to the preservation of Irish neutrality.

    National Building Agency

    The shift toward trade liberalisation and our FDI-led model in the 1960s was at first impeded by a lack of housing, as neither the private sector nor local authorities could meet demand. The National Building Agency was established for ‘facilitating industrial expansion through the provision of houses and ancillary services.’

    It soon undertook multiple large-scale developments and won plaudits from across the aisle. Even Fine Gael’s arch-conservative T.D. Oliver J Flanagan stated: ‘In my own constituency the NBA have provided what I consider to be the best type of houses that I have ever seen erected, in record time and to a plan and a design second to none.’[5]

    It was noted during one debate of the period how it had worked closely with the IDA, and after a decade in existence it had constructed multiple large scale developments, having ‘brought new techniques to Irish workers’, and ‘coordinated very well with the trade union movement’. The NBA was also an early pioneer in modular built structures and underfloor heating.

    Telecom Eireann

    The onset of the Celtic Tiger has multiple explanatory factors, but one often neglected was the quality of our telecommunications network infrastructure (Harris 2005). Thanks to the heavy capital investment of Telecom Eireann, by the early 1990s the network was amongst the most digitalised and modern in the world, and essential to attracting emerging ICT and financial services industries.

    At its height it provided employment to 18,000 workers, and by the mid-1990s the telecommunications infrastructure had become 100% digitised. It was privatised in 1999 as Eircom (now EIR).

    ICC Bank

    The Industrial Credit Corporation (ICC Bank), first established as a strategic industry lender, later became key to the SME sector. It made strategic equity investments in venture capital in the software sector, which was one of the successful indigenous export industries to emerge from the Celtic Tiger period (Kirby 2011).

    It expanded steadily, enjoying consistent profitability, and made equity investments totalling £36.9 million. At the time of privatisation (2001) it had grown its balance sheet to €3 billion.

    Aer Lingus

    Aer Lingus when it was an SOE was very entrepreneurial in its diversification activities, designed to mitigate the cyclical nature of the aviation industry (Sweeney 2004). It diversified into activities like financial, computer and engineering related services.

    It established successful subsidiaries like Airmotive, TEAM, Aviation Traders Engineering, Aer Turas, Pegasus and Futura, to name but a few. Aer Lingus, and its then employee Tony Ryan, can also lay claim to leasing one of the world’s first aircraft, which helped to create a global industry (aircraft leasing) in which Ireland now holds a 65% market share (PWC).

    Today Ireland’s remaining SOEs continue to contribute to the Exchequer, not merely in terms of employment and taxes paid, but also in terms of the dividends they have returned to the state. For example, in the period 2013 -2020 they contributed almost €2.5bn (Table 2). To put this in perspective, that is somewhere around where the final cost of the new National Children’s hospital will land.

    We can see from the foregoing the significant contribution that public enterprise has played throughout the state’s short history. And whilst there will always be those who assert that ‘the state has no business in business’, the above examples should demonstrate how erroneous that thinking is.

    It should, however, be said that when it comes to economic planning on the part of the state, it has often been found wanting (Casey 2022). The relationship between SOEs and the Irish government has often lacked ‘clearly articulated policy or objectives’ meaning public debate has rarely evolved beyond ‘the issue of privatisation’ (MacCarthaigh 2008).

    Table2 : Dividend payments to the exchequer from SOEs (2013-2020)

    Irish Privatisation in Perspective

    The importance of SOEs in Ireland has declined in relative and absolute terms since the early 1990s, through a combination of privatisation and the growth in the economy. In the 1980s SOEs employed ninety-one thousand people, accounting for 8% of total employment, falling to less than half that number and 2% of total employment by 2008.

    The wave of privatisations, with the ascendency of neoliberalism, saw major state divestment in sectors like construction, transport, telecommunications, other utilities, and finance (Parker 2021). In Ireland, arguably the biggest privatisation since the foundation of the state wasn’t from the sale of a single SOE, but rather the sale of more than half of all the public housing stock (Sweeney 2004).

    Ireland’s experience with privatisation largely mirrors the mixed results and disappointments seen elsewhere, as Table 3 sets out.[6] Despite promises of greater efficiency, cheaper and superior quality services/infrastructure, etc; often the reality failed to match the hype.

    In certain instances, privatisation had very costly consequences for households, businesses, the state, and its competitiveness.[7] As we can see below (table 3), four of the six SOEs (TE, ICC, IS and BG) were all profitable at the time of their sale, one of which had reached record profitability, and were returning dividends to the state.

    Of the two which were loss making; the Irish Shipping Company had been ‘a viable and successful state enterprise’ (Barrett 2004) before it made significant losses from speculative charter agreements, entered into by management without the approval of its shareholders (Minister for Finance/Transport).

    In the case of Irish Steel, major changes in global steel markets beginning in the 1980s, meant it became a significant loss maker and was no longer commercially viable. It was sold for £1 in 1996 and the new private entity would shut its doors in 2001.

    The impact of the privatisations of late 1990s/early 2000s were particularly acute. The sale of Telecom Eireann led to two leverage buyouts (think private equity) with much asset stripping and loading the company up with debt. There was then significant underinvestment meaning Ireland lagged behind EU peers in broadband connection for a long time.

    This privatisation was described as the ‘the biggest own goal’ for the state, next to the blanket bank guarantee. Although some of the proceeds of the sale were used to capitalise Ireland’s first sovereign wealth fund (the National Pension Reserve Fund), this of course would later be raided to bail out the banks.

    ICC bank was sold in 2001 despite being quite profitable and returning increasing dividends to the state. The proceeds of these sales were used ‘to cut direct taxes, incentivise property investment and so boosted the Crash’ (Sweeney 2018). In other words, successful public enterprise was sold off, partly used to lower taxes, and fuel the crash, and partly put aside in a new sovereign wealth fund, which would then be used to pay for the cleaning up of the mess.

    Bord Gáis, which was described as ‘extremely efficient in operational terms’, was sold under pressure from the Troika, and for less than its worth. Between 1976 and 2009 it had returned €689 million in dividends to the state. At the time it was still in public ownership, Ireland had one of the lowest energy costs in the EU, a situation which has now been drastically reversed.

    Table 3
    SOE, lifespan & industry Rationale for existence Max employees Performance prior to privatisation Aftermath of privatisation
    Telecom Éireann

    (1983-99)

    Communication

    		 To roll out digital telephone switching technology along with extensive fibre optic. 18,000 ·        Went from loss making (-£83 million) in 1983-84, to earning profits of £94 million by 1990-91.

    ·        In 1998 it made pre-tax profits of IR£223m, up 9%, on turnover of IR£1.35 billion.

    ·        By the early 1990s, the Irish network was amongst the most modern and most digitalised in the world and by the mid-1990s had become 100% digitally switched.

    ·        In 1999 it had debts of €340 million which rose to €4.27 billion by 2007 after privatisation.[8]

     

    		 Underwent two leveraged buyouts (LBOs), asset stripping, loading company up with debt, significant underinvestment, Ireland lagged behind EU peers in broadband connection for a long time.

     

    A report by ICTU noted that next to the blanket bank guarantee, the privatisation of Telecom Eireann ranked as “the biggest own goal” for the state.
    Industrial Credit Corporation – ICC Bank

    (1933-01)

    Finance

    		 Setup as strategic lender for industrial expansion.

    Later acted as key lender to SMEs, indigenous businesses, and venture capital.

    		 358 ·        Expanded steadily, enjoyed consistent profitability, and made equity investments totalling £36.9 million.

    ·        Grew its balance sheet through its own efforts to almost £3 billion at the time of privatisation.

    ·        Paid regular and increasing dividends to the Exchequer over the previous two decades.

    ·        In the five years before privatisation, dividend payments amounted to £14 million, while corporation tax payments in the same period came to £10 million.

    ·        The bank made a profit of €47 million the year before it was sold.

    		 Return on assets (ROA) declined after privatisation, asset size increased (Reeves).

     

    Post-crash, loss of ICC cited in support for establishing State Investment Bank (NESC 2013), (ICTU 2011).

     

    Credit demand muted after GFC, accessing finance today for SMEs remains a challenge with 66% having difficulties.[9]
    Irish Shipping Company

    (1941-1984)

    Transport

    		 Setup to protect imports and exports during WW2, to promote greater self-sufficiency and protect neutrality. 300 ·        Liquidated following significant losses from speculative charter agreements entered into without the approval of its shareholders (Minister for Finance/Transport).

    ·        Liquidation cost £101 million, which was £13 million more than allowing the company to keep trading.[10] Its ships were sold off.

    ·        Prior to this mistake with the charter agreements it was “a viable and successful state enterprise” (Barrett 2004).

    ·        It was described as having “offered good careers to many” and brought “benefits to our commercial reputation as a nation”.[11]

    		 Claims cost of liquidation would be £50 million whereas C&AG reports for 1984, 1985 and 1986 estimated in excess of £100 million.
    Irish Steel

    (1947-96)

    Basic Materials

    		 Initially nationalised to “save jobs” 1,200 ·        Loss of competitiveness from other EU markets and declining steel prices.

    ·        Although modest profitability in the 1950s/1960s, problems emerged in the 1970s and despite significant state investment in 1980s, and workforce changes (90s) it made a loss of £20.7 million (1993-94) and a loss of £5.8 million (1994-95).

    ·        Serious environmental damage caused from dumping of toxic materials.

    		 Often cited as a “white elephant” project.

    Was not viable as a commercial enterprise. Firoz (2003) argues that the significant drop in steel prices in the 1990s was a major problem for producers without trade protections, strong state subsidies, and increased competition from the developing world (China).
    Irish Sugar Greencore

    (1933-91)

    Agribusiness

    		Commercial and wider social reasons like promoting regional development and employment in the West 1,757 (1991) ·        Experienced rapid growth and improvement in the pre-privatization period.

    ·        Heavy investment in the 1980s and diversified into other agribusiness streams.

    ·        Turnover in the year ending September 1990 was £271 million, which was also a record year for net profits £18.4 million.

    		 In the decade post privatisation, its performance was not strongly associated with improved financial performance and productivity.[12]
    Bord Gais Energy

    (1976-13)

    Energy

    		 Established (Gas Act 1976) as owner of the national gas transmission & distribution systems, mandated with development and maintenance of the natural gas network. 1000 est. (2013) ·        Under pressure from the Troika the lucrative energy supplier valued at €1.5 billion was sold for only €1.1 billion, because no reserve auction price had been set.[13]

    ·        BGE had yielded rising profits with an EBITDA of €91 million in 2013.

    ·        It paid dividends of €689 million between 1976 and 2009,[14] the paid €30 million (2010), €33 million (2011) and €28.3 (2012).

    ·        It lost its profitable wind farms, plants and the right to supply gas to nearly a million customers in Ireland.

    ·        The SOE was a heavy infrastructural investor and was described as “extremely efficient in operational terms”.[15]

    		 Sold for less than valuation amidst much parliamentary/public criticism.

     

    Advisers’ fees for the privatisation amounted to €27 million.

     

    Irish electricity prices were 26% above EU average (Eurostat 2022), with Bord Gais like other suppliers having raised prices multiple times in 2022.


    Conclusion

    The late great Tony Benn once said there will always be those who don’t want public enterprise to survive, even where it succeeds. For instance, David Luhnow of the Wall Street Journal, recently issued sharp criticism of Mexican President Claudia Sheinbaum for saying she wanted her country to place a greater focus on its SOEs. He said it was like the economic evidence of the last half century had been forgotten.

    But what evidence does he think she has forgotten? Joseph Stiglitz recently pointed out that after forty years the numbers in: ‘growth has slowed, and the fruits of that growth went overwhelmingly to a very few at the top. As wages stagnate and the stock market soared, income and wealth flowed up rather than trickling down’.

    It’s not enough for the broad left to say that neoliberalism and privatisation has failed. We need to have a coherent program to start reversing it. One element of such a strategy could be public enterprise. The point here is not that the Irish state should return to direct involvement in previous areas it operated in like agribusiness or steel production, or even that SOEs are always the best option for addressing socio-economic problems or promoting industrial development.

    Rather it’s to recognise that in certain circumstances SOEs are the only actors capable of doing this when the private sector fails. It’s also to acknowledge that they can also be entrepreneurial actors, making the necessary long-term investments in transformational infrastructure, technologies and industries, when the private sector is unwilling or unable.

    [1] For mismanagement and misalignment can lead to ruin, as in the case of the Irish Shipping Company, which prior to its engagement of speculative charter agreements had long been a profitable and successful company.

    [2] Irish Steel is clearly an example of this where political pressure kept the entity alive well past its sell by date.

    [3] It recently announced the biggest change of land use in modern Irish history, 125,000 acres of bog land will soon be repurposed for wind, biomass and solar energy.

    [4] https://www.ictu.ie/news/jobs-plan-fails-deal-demand-deficit

    [5] https://www.oireachtas.ie/en/debates/debate/dail/1969-10-29/41/

    [6] Other SOEs privatised but not dealt with in Table 3 include Irish Life, TSB, the Agricultural Credit Corporation, Irish National Petroleum, British and Irish Line, BOI/AIB and Aer Lingus.

    [7] Poor access to broadband, housing crisis harming competitiveness, loss of dividends to the exchequer, proceeds of sale of privatisations of 2000s was used to reduce direct taxes rather than reinvestment, this helped to fuel property speculation, at time country was running surpluses, exacerbated the crash, etc.

    [8] https://www.ucd.ie/geary/static/policy/econconf/Reeves_Palcic01022013.pdf

    [9] https://p2pfinancenews.co.uk/2022/02/17/two-thirds-of-irish-smes-struggle-to-access-credit/

    [10] Recalling Irish Shipping liquidation – The Irish Times

    [11] https://www.oireachtas.ie/en/debates/debate/dail/1984-11-14/28/?highlight%5B0%5D=financed&highlight%5B1%5D=finance&highlight%5B2%5D=bill&highlight%5B3%5D=1932

    [12] https://www.tandfonline.com/doi/abs/10.1080/00036846.2015.1061643

    [13] https://www.tni.org/files/publication-downloads/tni_privatising_industry_in_europe.pdf

    [14] https://www.oireachtas.ie/en/debates/debate/seanad/2009-02-03/7/

    [15] http://www.irisheconomy.ie/index.php/2009/11/04/the-benefits-of-increased-investment-and-efficiency-in-public-infrastructure-and-utilities/

  • The Missing Link in Draghi’s E.U. Plan

    This article is the first in a forthcoming three-part series by Cillian Doyle on the role of the state in a mixed economy.

    Last month there were two seemingly unrelated events which in an Irish context can be connected. On September 9th Mario Draghi’s published his 400-page report on improving E.U. competitiveness. The report provides a series of recommendations for how the E.U., in the face of changing geopolitical realities, can acquire new industrial policy tools to deal with its ‘existential challenge’.

    A day later the Irish government was given the awkward news it had lost the Apple tax case. Despite its legal advisor Paul Gallagher describing the Commission’s case as ‘fundamentally flawed, confused and inconsistent’, that’s not how the ECJ saw it. Its punishment – €14 billion in additional tax revenue. As a result, it now has a financial war chest available for investment, but a dearth of policy ideas.

    This series deals with each in turn.

    Europe at the Crossroads

    Draghi’s report was intended to provide some harsh truths to E.U. leaders, by making them confront the reasons for Europe’s decline. Placing this within the wider geopolitical context, his report stresses that the E.U. continues to fall further behind the U.S. and China, whose successful innovation is being driven by ‘subsidies, industrial policies, state ownership and other practices’.

    Writing in the Financial Times Adam Tooze argued that the report’s real target was ‘not China but the U.S.’. Perhaps Draghi and other E.U. policymakers felt catching China was a step too far but that matching the U.S. was a more realistic prospect. When we look at the share of global growth over the last ten years (2013-23) accruing to China, versus that of the U.S. and the E.U., we can see why (Figure 1).

    Figure 1

    % Share of 10 year global growth: China vs U.S. vs E.U. (2013-23)

    Source: World Economics Database

    Speaking shortly after the publication, Draghi seemed to underscore Tooze’s point, stressing that the E.U. was not only looking to defend itself from China, as much of the media commentary suggested, but also from the U.S..

    This recalled the discussion around the need for ‘strategic autonomy’ that was flirted with during the Trump administration, when it was argued Europe was best placed serving as a third pillar and bridge between the U.S. and China. Something hastily forgotten with the election of the Biden administration and the Russian invasion of Ukraine.

    Since then, the von der Leyen Commission has stood firmly behind the U.S., so much so that even Foreign Policy magazine stated she ‘Might be too pro-American for Europe’. The world is increasingly bifurcating into two blocs; ‘Team Unipolar’ led by the U.S. along with the E.U. and other G7 members, and ‘Team Multipolar’ led by the BRICS group, the relatively new intergovernmental organisation, which is growing in confidence and size (see figure 3).

    Figure 2

    % Share of 10-year global growth: the West vs BRICS (2013-23)

    Source: World Economics Database

    This hasn’t gone unnoticed by the E.U. institutions. The E.U. engages with BRICS, although it stresses on an ‘individual basis’. Last year the E.U. Parliament’s Committee on International Trade as part of their engagement with the Commission ‘underlined the need to keep an eye on the group’s expansion, especially considering the effect of a potential BRICS+ currency and the consequences for E.U. trade policy.’

    Figure 3

    BRICS expansion 2023-2024

    BRICS encourages members to transact in domestic currencies for bilateral trade, as opposed to transacting in dollars and to a lesser extent the euro. They’re also trying to develop an alternative payment system to Belgian-based Swift. The dollar and Swift are key to the U.S. sanctions regime, and hence seen as posing risks.

    The Washington Post pointed out that the U.S.’ is currently subjecting around one third of countries in the world to some form of economic or financial sanction. Many of these are developing countries now looking towards BRICS as an alternative to the U.S. Rules Based Order, and Western dominated multilateral institutions (IMF/World Bank).

    Earlier this month U.S. Secretary of State Anthony Blinken stated that through its ‘human rights’ based foreign policy, the U.S. succeeded in rallying ‘the international community’ behind its Russian sanctions policy. However, as the Quincy Institute pointed out, ‘the large majority of countries around the world that have refused to join in sanctions and have called for an early peace — a call that has been repeatedly snubbed by Washington’.

    It was primarily the other members of Team Unipolar which rowed in behind the leader, with the von der Leyen Commission being particularly enthusiastic. As research by Thomas Fazi has shown, she used this exercise to assume more competencies for the Commission at the expense of E.U. Member States.

    Some portray this growing global divergence as one between democracies and autocracies. As Joseph Borrell recently acknowledged, however, this framing is used for political reasons. As he said himself, the West is allied with plenty of autocracies on the basis that they’re aligned with Western foreign policy.

    Super Mario World

    Where the E.U.’s future lies in all of this remains to be seen. But in the meantime, it must confront its challenges which are real, severe, and somewhat self-inflicted. Draghi’s report sets out in stark terms its relative decline in output and productivity growth. The latter singled out as a primary cause of its sagging growth. His report couldn’t have been published at a more appropriate time with the likes of Germany, Austria and Sweden falling into recession.

    Figure 4: GDP growth rates Q2 2024

    % Change over previous quarter (seasonally adjusted)[1]

    His report attempts to shift the E.U. away from what’s often seemed like a single-minded focus on competition policy, toward a new focus on industrial policy (hereafter IP). Whether such sweeping changes are possible in the absence of significant E.U. treaty change has been debated by legal scholars (see here for one critique).

    I’m more concerned with its proposed economic reforms, and in particular one which was curiously absent. It’s true these present something of a departure from established E.U. policy thinking and the conventional (neoclassical) economic philosophy which has generally underlain it.

    It’s also worth noting that up until quite recently, IP was described as ‘the economic practice that dares not speak its name’. Or as one leading member of the profession once said, ‘the best industrial policy is none at all.’

    Yet with the success of China’s IP and the U.S.’ recent adoption through the CHIPS Act and the hilariously misnamed Inflation Reduction Act, the E.U. had to act in kind. For students of history, those with an interest in development economics, or a general disdain for market fundamentalism, this move may have seemed long overdue.

    Every major power that developed did so through successful IP. The rapid recovery of Western Europe after WW2 was built on the back of it. The East Asian Tiger economies managed rapid industrialisation and technological advancement through a developmentalist approach, which often shirked the dictates of the Washington Consensus.

    But if you were thinking Draghi’s proposed ‘new Industrial Deal’ portends the return of state capitalism in a ‘post neoliberal’ world – not so fast. It was as interesting for what it didn’t say, as much as for what it did. The five most common tools of IP are (1) state-owned enterprises (SOEs), (2) trade policy, (3) public R&D, (4) long-term financing and (5) targeted supports for business.

    Table 1: Key recommendations of Draghi Report

    Industrial Policy

    Instrument

    		 Draghi Report? Recommendation(s) Comment
    State-owned

    enterprises

    		 No N/A N/A
    Trade policy Yes

     

    		 A new “Foreign Economic policy”.

    Coordinate purchases based on the European Union’s large internal market.

    Greater focus on need for E.U. Strategic Autonomy

    		 Use of preferential trade agreements to help facilitate direct investments in resource rich countries. More E.U. common procurement.
    Public R&D Yes

     

    		 Creating a European Advanced Research Projects Agency (ARPA), suggests increasing R&D spending, investing in research infrastructure, and fostering a more innovation-friendly regulatory ecosystem Says there’s a need to tackle fragmented public R&D spending. Increase public R&D spending. Streamline multi-country trial management to make the E.U. a more attractive location for clinical R&D
    Long-term

    Financing, investment

    		  

    Yes

     

    		 Common E.U. borrowing framework,

    Need for additional investment (€800m p/a)

    E.U. Capital Markets Union,

    Banking Union

    		 Common borrowing could be a powerful tool but likely to draw resistance from certain E.U. states (i.e Germany). Desire to shift E.U. away from bank-based finance to market based finance (shadow banking).
    Targeted business

    support

    		  

    Yes

    		 Replacing state aid with European aid, simpler and more flexible regulation for SMEs, reduced administrative burdens GDPR legislation to be re-examined in the context of companies working on AI. Increasing computational capacity dedicated to the training and fine-tuning of AI models for innovative E.U. SMEs

     

    As we can see above, there’s a glaring omission from ‘Super Mario’s’ toolkit. Any serious discussion of the role of SOEs was absent. But we’ll return to this in part 2 and 3. First let’s deal with some of the report’s big takeaways.

    The headline figure which stands out was the call for increased investment of around €800 million per annum to ensure the E.U. meets its key competitiveness, climate and defence targets. This equates to the E.U. investing around 5% of its income on an annual basis. There’s something of an historical irony here.

    You might recall a certain former Greek Finance Minister proposing this very measure. Yanis Varoufakis once proposed allowing the European Investment Bank (EIB) to issue bonds which would have been purchased by the ECB to fund a Green New Deal. Despite presenting his proposal to E.U. Finance Ministers and Central Bankers, he was given short shrift.

    Whether such a measure is now possible seems unlikely. As Varoukafis points out, the disillusionment with the much smaller sized issuance of bonds by the Commission – as part of its NextGenerationEU – means there’s unlikely to be much appetite from investors or member-states at the more ambitious scale outlined by Draghi.

    Investors doubt the Commission’s ability to sufficiently expand its fiscal powers, and member states – particularly groups like the German ordoliberals – are cautious that such borrowing would be a Trojan Horse for the Commission to massively expand its tax competencies.

    In terms of trade policy, it argues for a new ‘foreign economic policy’ explicitly described as ‘statecraft’. This would marry decarbonisation with support of direct investments in resource rich countries. Preferential trade agreements could serve as bargaining chips to encourage such resource rich countries to open up to E.U. investment.

    It doesn’t hide the sense of urgency behind this, stating bluntly the E.U. has ‘lost its most important supplier of energy, Russia.’ It’s less the case that the E.U. has completely lost access, and more that due to sanctions it’s now purchasing Russian energy at a higher price via secondary countries (Turkey, Azerbaijan, etc), albeit at reduced levels.

    This coupled with rising tariffs on China (e.g. from 10% to 45% on EVs over the next five years) means the German economy – the E.U.’s workhorse – has, on the one hand, been starved of cheap energy inputs. On the other, its main trading partner (China) is demonstrating less demand for its high-quality outputs (cars, chemical products, etc).

    Germany is thus undergoing deindustrialisation. The U.S., thanks to its new IP turn and the manufacturing subsidies it’s now providing, has been one of the main beneficiaries. Deloitte found that two thirds of German companies had moved some of their operations overseas. That’s good news for the U.S., but bad news for Germany.

    Member states are also incurring high costs from the construction of LNG infrastructure (terminals, storage, and regasification units). Over 50% of LNG imports are from the U.S.. Again, good news for the U.S., but bad news for member states bearing the higher costs associated with LNG, placing it at a competitive disadvantage.

    One thing that seems to have been lost on the E.U. Commission is that they’ve replaced the energy risk associated with one overly dominant supplier (Russia), with that of another (the U.S.), whilst locking in higher prices for supply. If some future U.S. administration were to tax LNG exports to the E.U., then it could find itself at an even further competitive disadvantage.

    The report sets out various recommendations to boost public R&D and thereby help E.U. companies to innovate, particularly those in the tech sector. As we can see from table 2 of the top 10 public research institutions according to Nature Index Research Leaders 2024, seven of these were Chinese institutions, with just two from the E.U. and one from the U.S..

    In terms of the top 10 technology companies and banking institutions the situation for the E.U. is worse again. It’s not represented in the top 10 in either category. Draghi thus wants to allow for greater ease of mergers between E.U. tech companies which it’s hoped would see them rival their U.S./Chinese counterparts.

    Table 2:

    Top 10 Research Institutions, Tech companies and Banks

    R&D (2024)[2] Technology (2023)[3] Banking (2024)[4]
    Rank Institution/Country Company Financial institution
    1 Chinese Academy of Sciences (China) Apple

    (U.S.)

    		 JP Morgan Chase

    (U.S.)
    2 Harvard University

    (U.S.)

    		 Alphabet

    (U.S.)

    		 Bank of America

    (U.S.)
    3 Max Planck Society

    (E.U.)

    		 Samsung

    (South Korea)

    		 Industrial and Commercial Bank of China

    (China)
    4 University of Chinese Academy of Sciences

    (China)

    		 Foxconn

    (Taiwan)

    		 Agricultural Bank of China

    (China)
    5 University of Science and Technology China

    (China)

    		 Microsoft

    (U.S.)

    		 Wells Fargo

    (U.S.)
    6 Peking University

    (China)

    		 Meta

    (U.S.)

    		 China Construction Bank Corp

    (China)
    7 French National Centre for Scientific Research

    (E.U.)

    		 Dell Technologies

    (U.S.)

    		 Bank of China

    (China)
    8 Nanjing University

    (China)

    		 Huawei

    (China)

    		 Royal Bank of Canada

    (Canada)
    9 Zhejiang University

    (China)

    		 Sony

    (Japan)

    		 Commonwealth Bank of Australia

    (Aus)
    10 Tsinghua University

    (China)

    		 Tencent

    (China)

    		 HSBC Holdings

    (U.K.)

     

    Financialisaton: Problem or Solution?

    Draghi sees a ‘lack of finance’ as being at the heart of the problem, unsurprising given his former roles in investment banking (Goldman Sachs) and central banking (Italy/ECB). He thus stresses the need to complete the E.U. Capital Markets Union (CMU) as a remedy for this.

    The CMU is intended to bring about an E.U.-wide union for market-based forms of financing (think asset managers, hedge funds, private equity, pension funds, etc), to provide an alternative to what has been traditionally, predominantly bank-based finance in Europe. This could allow for more equity-based financing as E.U. companies choose this over initial public offering (IPO) their stock.

    But it will also mean a single European market for the alphabet soup of obscure acronyms which denote the various complex, opaque, and risky financial instruments that got us into trouble during the Financial Crisis of 2007-2008. Essentially, more shadow banking. Is this really what the E.U. needs? It’s certainly taken as axiomatic that it is.

    The assumption is that the CMU would help to drive capital to SMEs and the real economy, which they see as overly dependent on bank finance. However, in the run up to 2008 U.S. capital markets had become highly developed, and it’s not clear at all that this led to increased lending to their SMEs or the real economy.

    What’s clear is that it led to huge levels of debt, the risk of which was masked in the system through opaque and poorly understood financial engineering techniques. And when it went sour it led to massive contagion effects, which brought down many financial institutions leading to costly public bailouts.

    One of the main problems the E.U. faces, although not alluded in the report, is that it’s allowed itself to be turned into (to a varied extent among member states) a high-cost, financialised economy with declining public provision, largely privatised primary health care services, high-cost housing, and childcare, and poor and deteriorating public infrastructure.

    Financialisaton has rightly been criticised on the basis that it can lead to increased financial fragility and the risk of financial crises. But it’s also identified as shifting the ‘orientation of the non-financial sector towards financial activities ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity’ (Tori and Onaran 2017).

    Figure 5: Growth of Financialisaton in Europe

    Total Financial Assets (TFA) as a % of GDP (2000-23)

    Source: ECB Data Portal

    The Fingerprints of Institutional Investors

    Another issue with financialisaton is that it provides financial elites with more power.

    It’s interesting to note who Draghi consulted as part of the research that fed into his report. The economist Isabella Weber pointed out the list of stakeholders consulted lists four pages of “trade and business associations”, “professional consultancies” and “companies and groups”, but just a single trade union.

    There was a total of 82 companies/corporate groups which fed into it. These ranged from large PLCs, to established private companies, to even newer start-ups. But they also included some current or former commercial SOEs (25), which makes the lack of consideration of public enterprise even more noteworthy.

    These companies/groups covered a broad range of industry sectors including: finance, extractive, transport, pharma, tech and so on. Table 3 examines 72 of these, for which some or all data could be compiled, and looks at that their level of institutional ownership, notable institutional owners, and state-owned shareholdings.

    The reason for doing this is simple. Over the last few decades, the ownership landscape of companies has changed radically. Whereas in the past large companies were owned by individuals, pension funds, insurers and indeed states, today they’re overwhelmingly owned by asset managers. These are financial intermediaries investing on behalf of wealthy individuals, pensions funds or other financial institutions.

    Today they’ve extraordinary levels of assets under management (AUM). By one estimate they own €1.8 trillion worth of real estate in Europe. Brett Christophers’ book Our Lives in their Portfolios highlights how asset managers have also become major owners of public infrastructure throughout Europe. He describes our current juncture as being one of ‘asset manager society’.

    Many Europeans have some sense of this, but may be unaware of the extent to which they’ve come to own such large shareholdings in companies across most sectors. This explains their description as ‘universal owners’: their portfolios are so large and diversified that they represent a chunk of the entire economy.

    Of the companies that fed into the report a significant level of institutional ownership is observed, with the highest being NXP Semiconductors (95.37%). Excluding those which had no institutional ownership (5 cases), the average level of institutional ownership was 40%. As we can see Blackrock, Vanguard, and State Street feature heavily.

    Table 3- Ownership structure: Institutional owners vs state owners
    Corporate body group % shares held institutional investors Notable institutional

    Shareholders (Big Three italicised)

    		Former SOE? % shares held state investors[5] Notable state

    shareholders
    Airbus 32.80% Amundi, State Street Yes? 25.7% France, Germany, Spain
    Air France KLM 6.08% Vanguard Yes 41.7% France, Netherlands, China
    Alstom 71.20% Vanguard Yes 25.04% Canada, France
    Amazon 50.81% Vanguard, Blackrock, Fidelity, State Street No 0% N/A
    Amundi 6.08% Vanguard, Blackrock, Fidelity No 0.47% Norway
    Ariston Group 34.76% Schroder Investment Management, Vanguard, Blackrock No 9.94% Norway
    ASML 21.10% Capital Research and Management Company, Blackrock, Amundi No 0% N/A
    BASF 43% Amundi, State Street 0% N/A
    Bayer 44% Blackrock, Vanguard, Oakmark No 6.67% Norway, Singapore
    BMW Group 17.61% AQTON SE, Vanguard, Amundi No 1% Norway, Australia
    BNP Paribas 82.60% Blackrock, Amundi, Vanguard, Oakmark, iShares (Blackrock) Yes 7% Belgium, Luxembourg
    Bolt 26.00% Fidelity, Sequoia Capital No 0% N/A
    Clarios 30% est. Brookfield Asset Management No 25% est. Canada
    Deutsche Telekom 69.40% Vanguard, Goldman Sachs Yes 27.80% Germany
    DHL Group 0.04% Altrius Capital Management, Amundi, State Street Yes 17% Germany
    Dompé Farmaceutici 0% N/A No 0% N/A
    EDF 0% N/A Current 100% France
    Enel 58.60% Vanguard, Goldman Sachs Yes 23.6% Italy
    ENGIE 21.18% Blackrock, Vanguard, Capital Research and Management Yes 23.64% France
    ENI 51.35% Morgan Stanley, Blackrock, Natixis, Goldman Sachs Yes 30.50% Italy
    Equinor ASA 6.60% Vanguard, Blackrock, State Street, DNB Asset Management Current 71% Norway
    Ericsson 9.30% Hotchkis & Wiley Capital, Morgan Stanley, Vanguard No 0% N/A
    Euroclear 21.47% Fidelity, Citibank No 32.50% Belgium, France, NZ, China
    Euronext 61.02% CDP Equity SpA (Private Equity), Amundi, Capital A Management BV, Vanguard No 8.03% France
    ExxonMobil 57.82% Vanguard, Blackrock, State Street No 0% N/A
    E.on 60% Blackrock Yes 4.90% Canada
    Ferrovie 0% N/A Current 100% Italy
    FINCANTIERI 4.20% Vanguard, Blackrock Current 71.44% Italy
    Flix 35.00% EQT Future. Kühne Holding, Vanguard, Fidelity No 0% N/A
    Glencore 41% Blackrock, Vanguard, EUROPACIFIC GROWTH FUND No 8.60% Qatar
    Google 61.98% Vanguard, Blackrock, State Street, Morgan Stanley No 1.83% Norway
    Iberdrola 77.80% Blackrock, Vanguard, Fidelity No 12.15% Qatar, Norway
    Infineon Technologies 24.70% iShares (Blackrock), Blackrock, Amundi No 0% N/A
    Investor AB 25.42% Vanguard, Blackrock, Fidelity No 2.65% Norway
    Leonardo 50.30% Vanguard, Dimensional Fund Advisors LP, Capital World Growth and Income Fund Yes 30.20% Italy
    Lufthansa Group 54% Vanguard, iShares (Blackrock), Goldman Sachs Yes 0% N/A
    LyondellBasell Industries 73.18% Blackrock, Vanguard, State Street, Dodge & Cox No 0% N/A
    L’Oréal 37.33% Amundi, State Street No 0% N/A
    Maersk 25.19% Vanguard, iShares (Blackrock) No
    McPhy Energy 17.14% Global X Hydrogen ETF No 19.14% France
    Mercedes Benz 45.95% Amundi, State Street No 15.50% China, Kuwait
    Meta 79.06% Vanguard, Blackrock, State Street, Fidelity No 0% N/A
    Meyer Burger Technology 19.52% Vanguard, Scupltor, Credit Suisse No 2.99% Norway
    Neste 31.69% Vanguard, iShares (Blackrock), Fidelity Yes 44.77% Finland
    Nokia 6.17% DANSKE INVEST FINNISH EQUITY FUND, Blackrock, Goldman Sachs No 5.7% Finland
    NovoNordisk 71.80% Jennison Associates, Morgan Stanley, Bank of America, Vanguard, Fidelity No 0% N/A
    NXP Semiconductors 95.37% Fidelity, JP Morgan, Vanguard, State Street No 0% N/A
    Orange 16.52% Vanguard, Blackrock, Thornburg, UBS Yes 22.9% France
    Ørsted 10.71% Blackrock, Amundi, Vanguard, iShares (Blackrock) Current 50.1% Denmark
    OVHcloud 12.62% KKR, Towerbrook Capital Partners No 0% N/A
    Renault 29.04% Vanguard, Blackrock, Paradigm Asset Management Company Yes 15% France
    Repsol 33.61% Blackrock, Vanguard, iShares (Blackrock), Fidelity Yes 3.20% Norway
    Rolls Royce 32.16% Vanguard, Blackrock, Causeway Capital Management Yes 0% N/A
    RWE 88% Blackrock, Fidelity, Vanguard No 9% Qatar
    Ryanair 48.38% Capital International Investors, Fidelity, Vanguard No
    Safran 41.90% Europacific Growth Fund, Aristotle Capital, Vanguard, Fidelity No 11% France
    Sanofi 77.80% Dodge & Cox Stock Fund, Morgan Stanley, Blackrock, Fischer Asset Management No 0% N/A
    SAP 6.30% Blackrock, Dietmar Hopp Stiftung GmbH, Vanguard No 0% N/A
    Shell 11.73% Fidelity, Vanguard, Morgan Stanley, Blackrock No 3.03% Norway
    Siemens 67% Blackrock, Vanguard, EUROPACIFIC GROWTH FUND No 2.98% Qatar
    Sobi 77.25% Investor Aktiebolag, Morgan Stanley, State Street No 1.24% Norway
    Spotify 62.07% Baillie Gifford & Co, Blackrock, Morgan Stanley, Vanguard No 0% N/A
    Stellantis 47.88% Blackrock, Vanguard, Amundi, JP Morgan No 7.29% France, Norway
    STMicroelectronics 14.85% Blackrock, Goldman Sachs, Grantham Yes 27.51% Italy, France
    Telefónica 1.26% Blackrock, Morgan Stanley Yes 9.9% Spain, Saudi Arabia
    TenneT 0% N/A Current 100% Netherlands
    Thyssenkrupp Steel E.U. 85% Amundi, Merill Lynch, Vanguard, iShares (Blackrock) No 3% Norway
    TotalEnergies 6.94% Fischer Asset Management, Morgan Stanley partial
    Uber 83.54% Blackrock, Vanguard, Fidelity, State Street No 0% N/A
    Vodafone 17.27% Vanguard, Blackrock, Legal & General Investment Management, UBS No 18.01% UAE, Norway
    Volvo 54% Vanguard, Oakmark iShares (Blackrock) No 0% N/A
    ZF 0% N/A No 0% N/A

     

    According to Braun (2020), ‘Asset Manager Capitalism’ is dominated by the ‘Big Three’; Blackrock ($10tn AUM), Vanguard ($9.3tn AUM) and State Street ($4.3tn AUM). The Harvard Business Review points out ‘One of either Blackrock, Vanguard, or State Street is the largest shareholder in 88% of S&P 500 companies’. They’re also some of the largest shareholders in each other. Institutional investors (passive/active funds) now own 80% of all stock in the S&P 500.

    In a study of the Britain’s FTSE350, the 350 largest companies in Britain, the authors found a 20% of its total value was controlled by just ten investors, 10% of which was controlled by Blackrock and Vanguard. The largest foreign owner of the Milan Stock Exchange is Blackrock. According to the OECD in Ireland, Sweden and Poland just three institutional owners control around 20% respectively.

    Naturally, concerns have been expressed that such concentrations of economic and financial power leads to a concentration of political power. With the sector today managing an estimated $100 trillion or so in assets (about two-fifths of the world’s wealth) – how could it not?

    The Big Three have been described as the “most powerful cartel in history“, with journalists from Bloomberg describing Blackrock as the ‘fourth branch’ of the government. Some have even described asset manager capitalism as an entirely new corporate governance regime. However, the source of this power and the way its wielded is still a matter of contention amongst legal scholars, economists and political economists.

    There’s no question that the Big Three want to influence politics at the highest levels. Blackrock has been pouring record amounts into U.S. political campaigns. The same applies in the E.U., where by one estimate they spend an annual €30m lobbying E.U. institutions to ensure their voices are heard.

    What the Asset Managers Want, they Get

    What do they want when it comes to a new IP approach? In a word, they want assurance of ‘investability’. But not just any kind of investability. To quote Mark Blyth, the want the state to operate as a kind of ‘insurer of first resort’ whereby it uses the public ‘balance sheet to insure private investors against losses’.

    Accordingly, this is done by ‘tinkering with risk/returns on private investments in sovereign bonds, currency, social infrastructure (schools, roads, hospitals and houses, care homes and prisons, water plants and natural parks) and most recently, green industries’ (Gabor 2023). This is what political economist Daniela Gabor terms the ‘derisking state’.

    A practical example is public private partnerships (PPP). Here private investors commit to finance public infrastructure projects (hospitals, schools, accommodation, etc) and manage them for a long-time horizon, in return for the state bearing certain risks stipulated in the PPP contract. Risks like an increase in the minimum wage, higher taxes, some new regulation, emissions reductions, etc – anything which might negatively impact cashflow.

    You see with higher institutional ownership of companies comes higher dividend pay outs. In a study by Buller and Braun (2021) of the largest companies listed on the British stock exchange, they found shareholder pay-outs as a proportion of profits rose substantially ‘reaching nearly 80% of pre-tax profits at the end of 2020’, but productive investment fell.

    Asset managers have also engaged in, and rightly been criticised for, extensive efforts at ‘greenwashing’—misrepresenting investment products as more environmentally sustainable than they really are, while refraining from enforcing ESG principles at their portfolio companies. So, I’m not sure how helpful they will be with Draghi’s decarbonisation efforts.

    As should be clear from the above, the investability relationship forged between the state and capital is one where capital dominates. It’s certainly not the kind of arrangement witnessed during the ‘golden age’ of capitalism, or what was seen in the East Asian Tiger economies, when capital was disciplined and directed toward the industries thought most productive.

    As Gabor points out; derisking and capital discipline are fundamentally at odds ‘because the former relies on private profitability to enlist private capital while the latter forces capital into pursuing the strategic objectives of the state even where these may be at odds with changing market conditions or profit calculations.’

    The latter occurred during periods when states were willing and able to do so through means such as nationalising banks to regulate their financial markets, and having their Central Banks impose credit quotas to drive bank lending to what were deemed strategic sectors, often in the presence of capital controls.

    The only real prospect of E.U. member states nationalising banks today would be to bail them out in a crisis, I’m not sure whether credit quotas have ever been employed by the ECB’s constituent Central Banks, and capital controls violate one of the E.U.s four freedoms (free movement of capital).

    There is, however, another way to take a more direct approach: through the capitalisation of new SOEs. Although Draghi is famed for his ‘whatever it takes’ approach from saving the euro, he clearly doesn’t apply this to IP, as demonstrated by the absence of any serious discussion on this.

    Despite the large wave of privatisations that occurred in the 1970s and 1980s, and indeed the more recent reduction in the number of SOEs in places like China, the relative importance of state ownership has actually been increasing. As the OECD points out, ‘the share of SOEs in the list of the top 500 global companies tripled’.

    Part 2 takes a closer look at this missing tool from Draghi’s proposed new toolbox, with part 3 considering what possible options Ireland could have with the €14 billion additional tax revenues it now enjoys, some of which could be used for such investment.

    [1] https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-06092024-ap#:~:text=In%20the%20second%20quarter%20of,by%200.3%25%20in%20both%20zones.

    [2] Nature Index 2024 Research Leaders

    [3] Tech companies ranked by total revenues for their respective fiscal years ended on or before March 31, 2023

    [4] 10 biggest banks as measured by market capitalisation.

    [5] These shareholdings are variously held by government Ministries, Central Banks, state pension funds, Sovereign/Public Investment Banks, Sovereign Wealth Funds, Sovereign Development Funds and SOEs.

  • The Politics of the Last Announcement

    In December the Irish Fiscal Advisory Council (IFAC) published a comparatively critical review of the government’s Budget 2024. Criticisms of ‘bad budgeting’ arose from the ‘lack of transparency,’ and the use of ‘fiscal gimmickry.’ IFAC defined the latter as ‘creative accounting techniques’ used to make the numbers ‘look more favourable than they are.’

    The Irish Times described this as ‘an extraordinary broadside against the Government’, with RTE referring to IFAC’s assessment as ‘controversial.’ However, as IFAC made clear in February, they were standing firm behind their ‘perfectly valid’ analysis which they stated was backed by ‘substantial evidence and reasoning in support of this conclusion.’

    This episode had me wondering whether similar kinds of “fiscal gimmickry” are at work outside of budget time, specifically when Ministers are out making what are nominally ‘new’ funding announcements. You will of course be familiar with this type of thing.

    It goes something like this: a Minister appears on RTE, or broadcasts via their social media platforms, that they are ‘delighted’ to be announcing x million for some initiative. Now the ordinary person probably never stops to consider whether this is new expenditure for a new program, additional expenditure for an existing program, or simply existing expenditure for an existing program.

    But to be fair to the average voter, there are a few Ministers that probably never to stop to ask this question themselves. What matters to them is that they are out and seen to be doing things – energy in lieu of action. If taking a bit of creative licence results in positive media coverage, then some see that as all well and good.

    I must confess that for some time I’ve been puzzled by how some Ministers seemed to be making ‘new’ multi-million announcements every other week, whilst for others such announcements were few and far between. So, I thought I would investigate the matter. As we’ll see, this is where a kind of “fiscal gimmickry” meets the ‘the politics of the last announcement.’

    In Table 1 we can see the number of funding related announcements made by all our current government ministers (excluding the Taoiseach) in 2023. We have a total of fourteen Ministers spread across seventeen Departments. The median amount (think middle value) of funding announcements made last year was 11.5, so just under one funding announcement per month.

    As we can see, half of our Ministers made less than this, and some significantly less. For instance, Messrs McGrath (6) and Donohue (5), perhaps the two Ministers most associated with the word ‘prudent’, were certainly amongst the most judicious. The same goes for Minister McEntee (4), although she was off on maternity leave for a period.

    Just three Ministers; Harris (32), Martin (30) and Humphreys (21) were significantly higher. But to be fair to Heather Humphreys she is Minister of two departments (Social Protection/Rural and Community Development), so it’s really just Harris and Martin that were so far ahead of the pack.

    What’s the explanation?

    Could it be that they occupy larger spending Departments and hence their respective Ministers need to make more funding related announcements? Considering neither of these Departments is in the top five in terms of expenditure, however, and indeed Martin’s is forth from bottom, that doesn’t seem to account for it.

    The second largest spender is the Department of Health, but Minister Donnelly made one of the fewest amounts of funding announcements (6). In fact, the size of a Department’s expenditure seems to have almost zero relationship with the number of funding announcements that its Minister makes.

    As we can see from Figure 1 there’s no statistically significant relationship between the size of a department’s expenditure and the number of funding announcements its respective Minister makes.

    Minister Department(s) No. funding related announcements (2023) Department(s) Gross Expenditure €000/rank (2023) Comment
    Simon Harris Further and Higher Education, Research and Innovation 32 €4,092,446

    (6th place)
    Catherine Martin Tourism, Culture, Arts, Gaeltacht, Sport and Media 30 €1,165,509

    (13th place)
    Heather Humphreys Social Protection/Rural and Community Development 21 SP – €23,901,145 (1st place)

    RCD – €428,981 (17th place)

    		 Minister for two Departments
    Norma Foley Education 13 €10,025,107

    (3rd place)
    Charlie McConalogue Agriculture, Food and the Marine 12 €2,164,509

    (9th place)
    Roderic O’Gorman Children, Equality, Disability, Integration and Youth 12 €5,931,759

    (5th place)
    Darragh O’Brien Housing, Local Government and Heritage 12 €6,414,089

    (4th place)
    Michael Martin Defence/Foreign Affairs 11 Defence – €1,209,737 (12th place)

    FA – €1,057,144 (15th place)

    		 Minister for two Departments
    Eamon Ryan Transport/Environment, Climate and Communications 10 Transport – €3,516,269 (7th place) Environment – €1,066,060 (14th place) Minister for two Departments
    Simon Coveney Enterprise, Trade and Employment 7 €1,621,413

    (11th place)
    Michael McGrath Finance 6 €600,240

    (16th place)
    Stephen Donnelly Health 6 €21,358,420

    (2nd place)
    Paschal Donohoe Public Expenditure 5 €1,670,513

    (10th place)
    Helen

    McEntee

    		 Justice 4 €3,428,623

    (8th place)

    		 Maternity leave for a period

     

    We’ll zoom in on new Taoiseach Simon Harris for three reasons. First, he’s the most prolific in terms of making funding announcements – averaging almost three a month; secondly, he’s the new Taoiseach so it could provide a window into what his tenure might look like; and thirdly he’s the only Minister I am aware of that has ever been accused of making re-announcements dressed up as new spending measures.

    In January Simon Harris appeared in DCU for a carefully choreographed photo opportunity. This was off the back of a big announcement he made about seeking Cabinet approval for a ‘new’ student housing policy. Note: this policy is almost indistinguishable from its predecessor.

    Off the back of this he appeared in DCU with the big funding announcement that he was there to ‘unveil plans for 500 student accommodation beds,’ something he again alluded to during Fine Gael’s Ard Fheis over the weekend. The glaring problem with this was, of course, that he’d already announced it last year, with an almost identically choreographed photo opportunity.

    The Students Union of DCU had clearly got wind of the Minister trying to pull a stunt and were there to confront him. Soon after the Union of Students Ireland chipped in accusing the Minister of recycling old announcements which amounted to ‘engaging in smoke and mirrors’ in the hopes that ‘no one will look beyond the headlines.’

    So, is this characterisation of Harris fair? Let’s take a look at some of his other creative accounting announcements. In June 2023 he announced: ‘Today I am launching a €9 million fund for higher education institutions to improve access to higher education for students with an intellectual disability.’

    It was in 2022, however, when he first launched what was then a €12 million fund. It was to work as follows; €3 million would be disbursed in 2022, with the remainder disbursed over 2023-25. So, essentially it is €3 million a year over four years. Yet with Harris’ approach €12m can be announced one year, €9 million the next, €6m the year after and then €3 million in the final year!

    If you weren’t following closely, you would be forgiven for thinking this has been a total of €30 million (12 + 9 + 6 + 3) rather than the €12 million that was originally set aside. Now the Minister could surely counter that what he said was technically correct, and he would have a point.

    Such announcements, however, as the USI pointed out, are made on the assumption that most people don’t look beyond the headlines. Or read the Department’s press release which will usually contain explanatory notes.

    In October in the wake of Budget 2023, where the Minister was severely criticised for having produced no new funding for student accommodation, he suddenly appeared to announce that he was ‘Delighted to announce a new €434 million student accommodation partnership, which will help build over 2,000 beds on college campuses across the country.’

    This one seemed to catch everyone off guard, including the universities, his Cabinet colleagues and the opposition. One of the glaring problems with this announcement was there was nothing new in it. Not only can the universities already borrow from the EIB, they already have significant borrowings. Their issue isn’t being able to access borrowing, it’s their ability to repay the money sustainably. Several universities are already grappling with financial deficits this year. Indeed, the entire sector has to deal with a core funding deficit of over €200 million, which is a hangover from the Austerity period – a shortfall he was supposed to address but has now left to his successor to sort out.

    If his past Ministerial performance proves a good indicator of Simon Harris’ future performance as Taoiseach, then we can expect big announcements, and then big announcements with even bigger bells on. But scratch beneath the surface and you’ll probably find some fiscal gimmickry afoot. I just hope that when these big announcements come, they will be met with equivalent levels of scrutiny by our media and state broadcaster.