Biting the bullet on reforming the public sector

Runaway public spending created havoc with the nation’s finances, argues Bill Hobbs

With wages accounting for over 40% of day to day spending, Government can no longer afford to run an inefficient, overstaffed and unproductive public sector. Between 2000 and 2008 staffing levels in the wider public service grew by close to 70,000. There are now about 347,000 state employees and another 53,000 employed by semi-state companies.

About a decade ago, Big Government arrived as the economy boomed. Billions in low cost credit flushed through the banking system to fund a domestic construction boom. Private sector service and retail enterprise expanded and incomes rose. Swollen with tax revenues, governments’ coffers emitted the luring siren call of “spend me now!” An unfettered Government obliged and went on a spending spree. Once it exhausted billions on the “must haves”, billions more were expended on “nice to haves” in what became an unstoppable spending spree. The high tide mark of this credit based, illusory largesse was Bertie’s Bowl, which was to be a modern monument to mammon.

Public sector unions were quick to exercise their muscle and politicians opened the exchequer cheque book to fund salary increases for absolutely zero gain. Not only did employee numbers rocket, but Ministers competed with one another to set up one new agency after another, providing highly remunerative career paths for senior civil servants and thousands of board seats for their friends. It was Big Government on a Big Scale needing a Big Budget.

Senior state employees thought nothing of flying first class on international jollies, while private sector businessmen sat in the coach seats. If the first class ticket symbolised hubris and waste, hospital corridors full of trolleys symbolised something altogether different – leadership and management failure to change the way things were done. We had third class public service standards on first class budgets.

The problem was we were living and paying each other largely on bank credit. Worse still the public service was funded from taxes on imported credit. When taxes dried up, an enormous gap appeared between revenues and expenditure. The IMF programme may provide €50bn in funding to pay for the running of the public sector but it comes with harsh demands. Closing the gap between what we can afford to contribute in tax revenue and what Government spends on public services can only mean one thing. It only ever meant one thing - brutal surgery.

Tens of thousands of state employee jobs will have to be eliminated. The Croke Park appeasement will be replaced with a ruthless business endeavour to radically reduce numbers whilst maintaining the quality of essential services and “nice to haves” will simply have to go.

Ten years ago public servants were earning 13% more than their equivalent private sector colleagues. By 2008 the gap had risen to a stratospheric 25% which was 48% more than the average industrial wage. The disparity in wage rates between public and private sectors was one of the widest in the modern world. It still is. Last September public servants were being paid 55% more than private sector employees or just over €9 extra per hour. Yet no one argues the public sector is 55% more productive. Few can point to service improvements in the past ten years. The number of significant service breakthroughs can be counted on the fingers of one hand.

Any reform must tackle the embedded management emphasis on what’s been spent and not what’s being accomplished. Whatever funding is available must be focused on delivering what matters to the public. Key services will have to be executed flawlessly. Hard to measure long term outcomes, such as improvements in health and education will have to be matched by short term outputs that can be measured and rewarded. Key service performance measures will have to be benchmarked to real change and reform objectives and not some flowery nonsensical statements that mean anything you want them to mean.

The public service must learn to emphasise what’s being accomplished and not what’s been spent. Management and staff will have to learn how to deliver on the service value demanded by us, their customers. Routine services should be outsourced to the competitive private sector.

Political language uses words such as “change” and “reform” without any real meaning. In business they are hard words carrying real meaning. One political party is using harder business language. Fine Gael’s plan to cut public service employments levels by 10% or 30,000 jobs is but one of the many changes that will have to be imposed if the country is to have a public service it can afford. The challenge for any new political administration will be to ensure public sector employees deliver a first class service on a third class budget.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 21st February 2010.

Working banking system and credit insurance needed

Without a credit insurance scheme, small business will continue to fail, says Bill Hobbs

You would be forgiven for thinking Fogape was a coffee drink. It’s not. It’s the name of a highly regarded, Chilean state sponsored, small business loan guarantee scheme.

Years ago, with a small amount of seed capital, the Chilean government kick started a loan insurance guarantee scheme to provide viable small businesses with access to bank credit on affordable terms. In the aftermath of the global crisis, quick to realise the urgency of ensuring credit access to their small businesses, the Chilean’s beefed up their scheme.

Here, when pushed on a small business loan guarantee scheme, Minister Mary Coughlan made the usual soothing noises that her officials were “looking into it”. She even mentioned Fogape as a good model. Her successor Batt O’Keefe solemnly announced that his officials were “still looking into it”. They probably still are.

Lately Fogape has surfaced again, this time in Fine Gael’s manifesto, which mentions a self-financing, small business loan guarantee scheme.

Our banking system has become an economic black hole, continuing to suck in state capital and retail deposits never to be seen again. While the Central Bank’s fourth attempt to get to the absolute bottom of banks losses may disprove Alan Duke’s controversial estimate of an additional €15bn in state capitalisation, three years on and what’s left of the small business banking system?  “Barely functioning” aptly captures those that remain “open for business”.

If we want a working banking system, one that investors will be prepared to fund, we have no choice but to continue to plough capital into Bank of Ireland and AIB. Of course their existing bond holders will have to bear the pain. But astonishingly we have yet to publish and affect special resolution laws that would allow the state to enforce an equitable restructuring. Politician’s electioneering proclamations of “not another cent to the banks” are empty rhetoric without the power to deliver.

The Danes used their powerful laws to shut down one of their own bad banks. They forced bond holders to take a sizeable bath. But they didn’t stop at bond holders. People with deposits suffered too as amounts over the Danish deposit guarantee of €100,000 had a 41% haircut applied. In the absence of the temporary extraordinary state guarantee, Irish deposit holders are similarly exposed to losses.

Internationally, the primary function of deposit guarantee schemes is to instil confidence so that people do not rush to take their deposits out at the first sign of trouble. They also pressure banks to behave themselves by demanding a hefty fee for coverage should they misbehave themselves. Participating banks effectively insure one another’s deposits, with the state providing a back-stop support. When faced with systemic failure, governments are forced to step in to guarantee all deposits and senior bonds which apparently rank equal to deposits here.

Could Irish depositors face similar losses? The answer is yes, should one of our banks fail or be closed down this would become a probability and not just a theoretical possibility. All the more reason to get banking working again and supporting the credit creation system with meaningful guarantees for viable small businesses.

Why have we not seen a Fogape type scheme implemented? The answer within a system designed not to change. In the labyrinthine corridors of executive civil service power and influence, government cannot respond quickly enough if at all.

Ask anyone who has managed to persuade government officials to do something and they will tell you of the sheer frustration of trying to get things done. They will tell you of the senior civil servant goal keeper, whose job it seems is to stop everything getting past them and cover their colleague’s behinds’. They will tell you of senior public service managers who frustrate, procrastinate and drag their heels. They will tell of people whose main contribution is to explain why things cannot be done. They will tell of draconian interpretation of compliance with EU directives and pointless red tape that prevents small business from functioning as it should. They will tell you that any new government will face an immediate battle with powerful organised internal interests that will fight tooth and nail to protect the status quo.

Fogape was a “no-brainer”, an easy to do, effective response to the credit crisis. In the private sector it would have been up and running within six months. In the public sector it could take up to six years and longer. Similarly laws allowing the state to close bad banks should also have been in place well before now.

With a political campaign in full swing, and job creation targets vying with another, small business remains largely forgotten. One thing is for sure. Without a working banking system and supporting credit insurance scheme, small business will continue to fail.

A version of this article appeared in the Irish Examiner, Business Section on Monday 14th February 2010.

We need to set "financial" prisoners free.

Hundreds of thousands of ordinary people have become financial prisoners of banking parasites that are sucking the marrow from household wallets to keep their doors open.

Permanent TSB’s rate increase is a brutal reminder that the banking system and housing market remain broken. It’s a bank that bears enormous responsibility for fuelling the housing bubble during which it shovelled money out the front door just as fast as it could get it in the back door from the money markets. If the safe mortgage bank driving limit was 100kmph, its board and management drove at 500kmph. When the bank inevitably ran out of road, its loan to deposit ratio was a catastrophic 250%.

The damage wrought from such catastrophic negligence is now being visited on its mortgage customers who are manacled and shackled to the bank’s financial straits. Its variable rate mortgage rate will jump by 1% to a stratospheric 5.19%. With similar rates in Germany less than 2%, its customers will pay well over 3% extra just to keep PTSB bank open for business. Hot on its heels, Ulster Bank has announced its own increase of 0.50% for its similarly imprisoned customers.

Inner city commercial property hulks and rotting carcases of provincial housing estates bear testament to a time when as Michael Lewis put it in his Vanity Fair article “suddenly, among the richest people in Europe, the Irish decided to buy their country – from one another”. It was a time when many considered homes to be a store of wealth, ATM machines to be tapped to buy more property.

It was an illusion of wealth. Encouraged by government and vested interests, it was an enticing mirage many were inexorably drawn to. It worked because our banks could borrow cheap money from money markets. It worked because of chaotic property development. And it worked because there was enough fat to keep almost everyone happy. It’s now so broken no one will give our banks money any more – at least at a price they can afford. So banks are fighting each other for retail deposits. But money is flying out the door, seeking safe haven in other jurisdictions or lodged in branches of foreign banks to fund their lending everywhere else but here.

Banking’s mobilisation of household savings into affordable loans has stopped. With a home mortgage market frozen solid, no one can move their loan to another bank. Switching is not an option for the 350,000 in negative equity and only an option for those few who qualify should another bank have funds to lend. Captivity is not confined to those in negative equity, it extends to the majority of the 770,000 mortgage holders. Everyone is at the mercy of their broken bank. And all our mortgage banks are broken.

Have the property and credit bubble lessons been learned and applied? What has been the political response? One party’s proposal to create a mortgage warehouse for tracker mortgages – the ones banks cannot contractually squeeze- merely shifts a bank funding problem onto the state’s balance sheet. How will the mortgage warehouse be funded? The state’s cost of funds is 6%. It appears yet another burden to be borne by the taxpayer to rebuild the banking system.

What of price controls – capping mortgage rates and forcing banks to live on proper margins? Not one political policy document addresses the housing and related mortgage credit market. Not one addresses the growing mountain of unaffordable mortgage debt. No one has grasped the nettle and dusted off the decade’s old Kenny report that called for the regulation and control of affordable housing. No one has adequately addressed the legacy of banking’s boom time abusive marketing of mortgage credit and latter day abusive treatment of their captive customers who have no choice but to pay exorbitant rates.

The very use of the word “recovery” means achieving a previous state of being. Does economic recovery mean going back to where we once were? A time when uncontrolled housing market and credit markets combined to create one of the worst housing bubbles ever. Or are we to craft a different outcome? One that supplies decent, quality housing at affordable prices. One that has a regulated credit market free of abusive marketing practices. And controls the price of mortgage credit?

For decades politicians have mouthed platitudes about housing market regulation and control, all the while captive of powerful influential property interests. Is it time to regulate the housing and associated mortgage markets in the common good?

So far politicians’ policy documents have failed to address just how these markets will be restored to working order and how they will be managed in the common good.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 7th February 2010.