An Individualistic Island
September 29, 2006
An Individualistic Island. Check it out:(Business & Finance Via Thomson Dialog NewsEdge) An Individualistic Island
Tony O'Reilly
In the concluding part of the interview, Sir Anthony O'Reilly tells Constantin Gurdgiev about his views on the future of Ireland, the influence of the EU, our regulatory climate and competitiveness.
CONSTANTIN GURDGIEV: You've mentioned ComReg. Some would say that, so far, ComReg has been mostly a conduit for EU regulation implementation in Ireland rather than an original player in the marketplace. What is your feeling about this spread of Brussels's remit over local regulation?
TONY O'REILLY: There are very few regulators who would go 100% against what Brussels wants. There is a degree of flexibility in the overall remit from Brussels that can be interpreted at the regional level by individual regulators, but I think all of them are moving in the same direction, and I think Comreg latterly has done a good job for the industry and the consumer against this criterion.
Fundamentally, the word that dominated Irish political thinking for many years has been sovereignty - the abstract idea that ruled our State for some 70 years. But what does it mean?
In relation to Brussels we substantially reduced our sovereignty to act unilaterally. That has been the price that we've paid, so that now 70% of all laws and regulations are not being set by the Dail, they are made by Europe. When we joined Europe, I don't think we fully understood what this menu really contained, nor do we fully understand it today.
But because our joining of the EU was lubricated by substantial transfers of assets and money, we ate prepared to accept it almost categorically.
There is certainly a case for questioning this - and I am sure in time there will be a party in Ireland that will do so. There is a view that the European Union was launched on the basis of a number of ideas, among them that it will be able to control economic activity and that French farmers, for example, would never be exposed to world competition.
CCS: There is a third dimension of trade - trade in services - that also crashed at the walls of Europe. The initial rejection of the Services Directive and subsequent watering down of its provisions - this was also driven by France.
TOR: Well, the French are very clever, very centralist.
They will always look after their own interest.
The CAP was set up basically to favour French farmers interests and it will continue to be shaped along these lines. All international trade movements, the World Trade Organisation (WTO) and the rest of the market reforms will collide with the rock of the agricultural subsidies in Europe. Globalisation will affect everything that is industrial, but it will not change agriculture substantially.
I always believed that Europe will be run in the German image, but it will be Franco-centric in its policies - de Gaulle's famous "Europe Des Patrie". This is fair - we know who we are playing against and what the rules of the game are, and our civil servants in Dublin and Brussels are very astute, but Brussels is not a collection of jolly people sitting around the table and thinking - "how can we integrate with the world economically?"
It is a collection of jolly people sitting around the table and thinking - "how can we protect France or how can we improve Germany?"
Yet, I still think that despite these problems, there are many areas where the main thrust of Brussels is positive. And we are the beneficiaries of it in Ireland.
Flight path for Aer Lingus
CG: You spoke earlier about capital mobility and the threats this presents if we were to fail to assure fair return on imported capital. Are you optimistic about the possibility for the successful sale of Aer Lingus, given the conditions of partial privatisation - the share retained by the unions and the State?
TOR: The Esot played a pivotal - and under the leadership of Con Scanlon - a very constructive part in the Eircom story, and the Esot will pay a very important part in the attractiveness of Aer Lingus going to market.
I am conscious that there are enormously important intrusions by some governments in the process of private ownership of companies.
Take South Africa, where the government now demands that 25% of all companies must be owned by black investors or employees. While socially laudable, this does have an effect on foreign investment there.
In the case of Aer Lingus, people will look at the prospectus and they will ask themselves what rate of return on capital can they get over the next 10 years by investing in an Irish airline and what kind of risks do these returns contain.
Ryanair probably will give them a sense of encouragement because it was able to do something that no one else could.
I think Ryanair is a poster-child for Irish private capitalism and they have done a remarkable job and I think Michael O'Leary is a remarkable leader. So I feel that people will look at Aer Lingus from a pure return on capital point of view, risk adjusted for the share ownership structure and for the growth prospects of the airline.
The unions are not the key to everything. When you look at foreign investment in Ireland, multinational companies sidelined the issue of the unions and built on this.
In the case of Eircom, the injection of money into Esot did help us to reduce the size of the workforce from around 10,700 to some 7,000 employees.
We paid a big price for this, but I believe that this is yet another form of risk that one has to deal with.
International capital lessons
CG: Going back to the Eircom story - after the IPO, you stayed on as chairman, even though you were neither a majority shareholder nor were you earning an exceptional salary from this. If investing in State-owned enterprises is all about return on the capital, why did you choose to make such a decision?
TOR: I felt a strong sense of responsibility to the new board of directors and the incoming shareholders. I had made money out of Eircom through my investment in the Valentia consortium and there was, at the time, talk about venture capitalists coming in, making money and getting out, with the accusation that they somehow left an underfunded and a weakened company behind.
This was not so - just look at the subsequent stock performance relative to the broader telecom markets. I think it was very important that there was an orderly return of Eircom to the market and it was equally important that as chairman I should act as an entirely impartial party.
At Valentia, the challenge was allocating resources, and all of the partners - Providence Capital, George Soros and Goldman Sachs - brought precise discipline to the whole process of capital allocation and cost management. And I think we proved our point - we satisfied the demands of the shareholders, built a leaner and more efficient company and refloated it, and the people who bought it from us recently sold on to Babcock & Brown and made 62% in 18 months.
And as I said two weeks ago, only airlines - Ryanair and I might add Aer Lingus - have reduced their prices over the last seven years.
Everything else - gas, electricity, road tolls, food, etc - has gone up in price during that period.
So it was not the case of venture capitalists deciding to take everything out of the company and squeeze the assets.
It has been a really successful process for both consumers and the investors. But most importantly, it's been a progressive process for the watching international financial community who now have that little bit more confidence in investing in Irish assets than they had some years ago.
Competitive advantage
CG; In your view, then, Eircom is part of the story of the important drivers of Irish growth - privatisations, development of the markets, inflow of capital and improvements in the way global financial markets view Ireland. Taxation is yet another factor. After years of success, with other countries - most significantly those of eastern Europe - moving fast into our space, do we still hold a competitive edge?
TOR: I think our competitive advantage is seriously threatened today and I feel that Ireland must be made aware that the current prosperity can obscure for us the fact that everyone in the new Europe has woken up to the anatomy of the Irish miracle.
These new countries set out to replicate our success and they know full well that it was largely founded on the basis of low taxes. I am trying to articulate the need for reproducing the low-tax regime found in the Republic of Ireland and bringing it to Northern Ireland. I recently met Gordon Brown to advance this argument and said that the introduction of a standard rate of tax across the island at 12.5% would make investment on this island location-indifferent.
In fact every party in Northern Ireland agrees on this point - a low-tax regime in Northern Ireland can bring about a huge spurt of economic activity. So the answer is that it is going to get tougher and tougher for Ireland because new European countries are going to strive for lower tax rates than us.
Again, if you can make a product, say Dell computers, and you are indifferent in your business to things like the language spoken by the workers, then look at Estonia - it gives you productive young workers at no tax at all. There will be pressure on the companies operating in Ireland today to go east. But an additional problem is that, with the rising cost of doing business here and shortages of labour, we are actually losing our competitiveness vis-a-vis the old European states.
Models for growth?
CG: There is a penchant in Ireland to compare ourselves to the two main models -the Nordic and the US. Yet another model that is almost never mentioned in Ireland is that of Hong Kong. Like Ireland, it is a small, open economy adjoining a giant one. From your point of view, would you rather see Ireland moving closer to Hong Kong or to Stockholm?
TOR: I think if you visit Hong Kong, you must be excited by how energetic the place really is. You cannot but notice also how just beyond the perimeter, there is that great country called China. There is a pulsating appetite from the mainland for everything produced in Hong Kong.
On the other hand, there are many social problems, such as uncontrolled immigration and the fact that it is a somewhat artificial world, along the lines of Malaysia and Singapore.
I don't think that these are viable models for us - they lack the same sense of individualism that we have, they are more centralised, and the state, ideologically, not welfare-wise, plays a far more central role there.
Ireland is a very individualistic country, we take a more competitive approach to running our business and we are more personal in the way we run our own lives. Chinese and Asian cultures in general are more docile, so a "strong man" approach to management can work there on a larger scale than it can in Ireland.
I do like the Swedish model in terms of the welfare it provides, but I dislike it in terms of taxation. I think it is very interesting to see that the big Swedish companies now primarily operate outside Sweden, and the country's growth must inevitably have been impacted over recent years.
What is important is that Ireland should not take its new prosperity for granted, for it might become a very shortterm thing unless we find new innovative ways to support it.
The only way we really can galvanise the economy for the next 25 years is to attract more and more international capital - both human and financial - into Ireland. That is why I think the issues of immigration and capital should be central to how we think about the future of this country.
Immigration
CG: On immigration, just few weeks ago Labour Party leader Pat Rabbitte repeated his comments about the danger of an "open doors" immigration policy toward eastern European workers. Do you share his concerns?
TOR: Ask yourself: what made America grow? Immigration is the answer. The skills of the world came to America, seized new opportunities and even today the debate about Mexican workers recognises this. It is unavoidable that we are going to have immigration as long as we have new physical and financial capital coming into the country. This is the main benefit of being a member of the common market.
So what Pat Rabbitte is really saying is that the unions are hugely challenged by this, by events like the Irish Ferries dispute. We can slam shut the doors on immigration the way the French did with their Polish plumber campaign.
There are certain countries in Europe that do hold a different view of immigration than we do. But your question is whether we can sustain our open door policy.
My view is that yes, we should be able to sustain our policy on immigration. But this does not apply to everyone. For example, where do secularism and religion come into it? It is an entirely new debate, which Ireland, inevitably, will have to face.
CG: Yet the Irish Ferries dispute taught us also about the lack of proper policy debate in Ireland. In the majority of western democracies, the debate is quite often being driven by business leaders, openly speaking about their views on Government policies, as well as by intellectuals.
In Ireland, it is virtually unheard of that a businessperson would stimulate a debate about policies. We seem to be more comfortable with sponsoring festivals and golf events than with sponsoring research into social policies and promoting alternative views and ideas. Do you feel that, as we become more comfortable with our newly acquired wealth, we will see the emergence of more policy-conscious and more proactive business leaders?
Think tanks
TOR: When you asked the question about why I stayed at Eircom, I answered it by saying that I wanted to be a champion of the capacity of Ireland to build real public ownership of companies through the marketplace. This was a statement of my belief in that debate and certainly the wider audience, the City of London or US capital markets for example, will have no doubt now that it is possible to get a fair deal in Ireland.
Of course in the US, for example, you have the Brookings Institution, the American Enterprise Institute, the Hoover Institute and many other think tanks that span the whole political spectrum. These are very important catalysts for the way the American political system works. We don't have these here. We should have them. I think the ESRI is a fine starting point.
We need centres for catalysing the debate - not just the employers or Ibec's views or the unions' views, but think tanks and our business schools expressing trenchant views of our society and structures. So far we have a rather simplistic adversarial relationship between, say, the trade unions and the employers.
Yet, when you ask Irish people, "What do you class yourself as?", the vast majority of the people believe that they are "middle class." I often wonder who represents them at the partnership table?
Copyright 2006 Belenos Publications Ltd Source: Financial Times Information Limited - Europe Intelligence Wire.
Related Tags: individualistic island, northern ireland, think tanks, return capital, ireland, Ireland
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