IRISH CASE STUDY:
Chapter 18: Industrial Policy and Competition Policy

Privatisation in Ireland: The Case of Eircom
by Edward Shinnick, Department of Economics, University College Cork.

This case focuses on the privatisation of nationalised industries in Ireland by looking at the case of Eircom. Utilities in Ireland, such as Telecommunications, have traditionally being nationalised, but recently this situation in undergoing a fundamental change. This case provides a link to Chapter 18 by looking at the issues in privatisation and regulatory reform.

With the privatisation of many industries occurring in the UK and elsewhere, the nationalised industries in Ireland such as telecommunications, electricity, gas and transport have or are in the process of privatisation. The key driving force behind this move is the European Union, which is putting pressure on the government to de-regulate key industries in an attempt to foster competition throughout the community. If a widespread sale of state assets in Ireland were to occur, a potential £3 billion could be raised.

World-wide telecom markets are undergoing rapid change, as indicated by the MCI and WorldCom alliance, the Bell Atlantic and GTE merger and the link between British Telecom and the US international carrier AT & T. These arrangements enable these companies to operate a global telecommunications network, providing services to multinational customers. The objective here is to give these companies a competitive advantage over their rivals who would not be in a position to offer such an extensive network.

It has been argued that given the pace of technological change and the pace of globalisation already underway in world markets, where most of Europe's previously nationalised telecommunication companies are now either fully or partially privatised, privatisation of Eircom was essential if it was not to fall further behind its competitors.

If Eircom is to succeed in an international market, a market where rapid change is the order of the day, privatisation by itself may not be enough. What is also necessary is for Eircom to link up with some bigger global player. Size matters in global markets and on a global scale Eircom is minuscule.

In addition Eircom has other problems, many of which are caused by years of operating as a cosy monopoly which is now faced with transforming itself into a streamlined public utility that can compete in an international market place. These problems include a substantial debt burden, excess staff, products that are still overpriced despite recent price reductions, problems with its cellular network and vigorous domestic competition from Esat. The net result for Eircom is a disappointing share price which is now substantially less than its floatation price.

On a positive note, a number of developments have taken place in the Irish telecommunications sector that may create opportunities for Eircom. These include a government initiative to promote development of the Internet and electronic commerce and a rapid growth in the cellular market with potential for further growth.

In addition Eircom has worked out a restructuring agreement with its unions providing for a 20 per cent reduction in its workforce. Part of this agreement involves an Employee Share Ownership Plan through which employees will be able to purchase up to 14.9 per cent of the company's equity. The Minister has indicated that such share deals may be used as a framework for further State company privatisation agreements.

Eircom ranks as one of the largest Irish publicly quoted companies with a significant number of overseas shareholders comparable with the current position of many other large Irish publicly quoted companies. The combination of continued economic growth in the Irish Republic combined with improved productivity should result in increased revenues for Eircom over the short to medium term. However, Eircom also faces a much tougher competitive environment and without assess to large international markets the prospects for its share price will remain weak. In all probability the best solution to Eircom's present troubles is for it to be acquired by a leading European telecommunications company who is interested in gaining assess to the Irish market and Eircom's highly profitable mobile phone division.

QUESTIONS FOR DISCUSSION

1. Provide an economic justification for the government's decision to privatise Eircom and explain whether this justification is in conflict with any social justifications to retain the status quo.

2. Justify why Eircom (as a private rather than a former public company) should not follow the lead of French Telecom, which announced it would dismantle thousands of telephone kiosks across rural France because they were unprofitable. In your answer you should address such issues as fair competition, cherry-picking, and rural development.

3. Suggest, giving an economic justification, what other state companies should also be privatised.