Should we intervene?

This is the fundamental public policy question. It spawns a set of follow-on questions, like: Why should we intervene? How should we intervene? For how long would we intervene? How much will it cost the taxpayer to intervene?

There is in fact no other question governments and agencies get asked as much. Think about the recent stories about Cystic Fibrosis drugs, or scoliosis wards, or social housing initiatives, or sports capital grants. Right now the government is engaged in planning the update to the National Spatial Strategy, called Ireland 2040. It is asking the public when it should intervene over a long period of time, and why.

Naïvely, we might expect that when governments intervene to stop or to regulate or to provide some service, that there is some inefficiency. Of course taxpayer money is being used to fund the service, but generally uses of that money are dictated by the political system, which is pretty responsive to what people want. Public servants often get better value for goods and services than their private sector equivalents. There are many examples of publicly produced services that are cheaper and more efficient than their private-sector analogues. Compare for example healthcare in the United Kingdom, which is almost entirely nationalised, and healthcare in the United States, which is to a much larger extent privatised. One is five times the price of the other. Compare the NHS to Ireland. The UK spends $3,757 per person in 2010 US dollars. Ireland, with its mix of public and private, with much worse outcomes, spends $4,730 per person. It is not correct to boil every public policy problem down to: public = expensive, inefficient, and bad; private = cheap, efficient, and good.

There are a set of simple criteria for deciding whether a government should intervene in some process. Will the service be provided without it? Will the government getting involved push out private involvement? Will there be a moment in which the resources of the state are overwhelmed by the demands placed upon it by citizens wishing to avail of this new service? Can we stop it if it runs out of control?

Contrast the office of the Director of Public Prosecutions with Bus Eireann, our public policy disaster du jour. No one expects the Director of Public Prosecutions to make money. No one is out saying the Director of Public Prosecutions will cost the taxpayer 40.6 euros in 2017, that needs to be reduced, and it is in fact too much. We need to let some of these lawyers go. Similarly, the State Laboratory costs us 8.75 million per year, but you don’t hear the public outcry to reduce Bunsen burner waste. This is because these two agencies, like dozens of others, are part of what we might call the State-proper. They are not expected to face a market, they fulfil obvious state-level functions like the administration of justice, and so the public accepts their taxes being paid over to fund these functions.

Bus Eireann on the other hand, exists to do two things. First there exists the semi-state company which is tasked with returning a profit to the state for the use of the state’s resources, in this case, its roads. Second, Bus Eireann has contracted with the National transport authority to provide bus services where otherwise there would be none. These two missions conflict with one another. Bus Eireann has three sides to its business. First a commercial arm, where it directly competes with other service providers. Second, it has a school bus business, where what they do is pretty obvious. Third, Bus Eireann runs a series of public service routes for which it is compensated by the state using a public service obligation payment.

Figure 1. Source: Bus Eireann Annual Accounts

To give you a sense of the breakdown between these, in 2015, Bus Eireann made about 200,000 on its Public Service obligation routes, about broke even on its school business, and lost 5.3 million on its expressway services. In fact, from 2014 to 2015, the company went from making pre-tax revenue of €13.1 million to only €2 millon in 2015.

Competition from private long haul bus companies has forced the profit-making inter-city routes to fail, and the company to lose stacks of money. Its own Chief Executive has raid the prospect of outright closure.

Figure 2. Source: Bus Eireann Annual Accounts

The solution in the short run is to cut back costs—French for reducing wages and letting people go—and borrow to return the company to viability. But that isn’t happening. In a private company this would have already happened. But this isn’t a private company. It is an extension of the State, and the State does not like taking things away from people. The Minister for Doing Absolutely Nothing, Shane Ross, has pledged to do absolutely nothing. It boils down to a public policy disaster. Unions and management cannot reach agreement on a way forward. Contrast this with the HP announcement to remove 500 jobs two weeks ago. They were losing money, so they stopped doing the thing that was losing them money.

Looking at Bus Eireann’s annual accounts for the last 16 years, you can see a very strong pattern. In terms of the total journeys its customers take, Bus Eireann hasn’t changed that much. In 1999 the company took 84 million journeys, and in 2015, 78.9 million. At its peak in 2008, the company drove 95 million people.

What is interesting here is the increase in pay over the boom period. From 1999 to 2008, journeys went up just over 11%. Revenues went up over 168%. Pay went up 91%. Capital spending went up as well.

Figure 3. Source: Bus Eireann Annual Accounts

During the boom, the public service obligation payment increased substantially, from €15.7 million in 2000 to 41.8 million in 2008. Remember in the boom the total number of journeys only went up by 11% in this period, while the payments from the state for some of those journeys increased 162%.

Then the boom went the way of the Dodo, and Bus Eireann’s finances suffered. During the crisis, as the public service obligation payment was repeatedly cut, Bus Eireann was covered in running deficits to a certain extent. It was nearly €49 million in 2009, and by 2015 the state subvented Bus Eireann by €33.7 million. Its annual accounts rightly blame austerity for contributing to its dismal performance.

Figure 4. Source: Bus Eireann Annual Accounts.

It is not true to say Bus Eireann just sat there and did nothing while its finances deteriorated. Several cost-cutting programmes were introduced, and the company has been modernising its fleet, introducing energy-saving measures, safety features and more driver training. Management managed to reduce the pay bill fell by 10% from 2009 to 2015 while the number of journeys fell by nearly 7%. Revenue increased only 0.1% over this period. The company’s accumulated deficit ballooned over the period and was €5.9 million in the red by the end of 2015.

It is true to say that the company is caught between two large problems.

The first is its pay bill, which grew too quickly relative to revenues in the boom and which hasn’t come down fast enough to save the company’s bottom line. The second is the dual nature of its role. Were it simply a part of the state like the DPP or the State Laboratory, Bus Eireann could lose money all day and few people would mind, especially if it were fulfilling its public service mandate to bring citizens from places private bus companies wouldn’t take them. When competing with private companies with newer buses and cheaper staff, Bus Eireann gets hammered. As it should. Its services are just not up to par.

So here’s the public policy question. Should we intervene and let Bus Eireann fail, or save it? The Minister for Transport not pump money in to solve the problem. Nor should he. The unions will, at least as far as I can see, not accept the types of pay cuts necessary to restore the company’s fiscal health. The management, whose presumably large pay packages are not outlined in the annual accounts, don’t seem to be for turning.

The market would say yes, let it fail. Bus Eireann is losing money hand over fist. Its staff have gone through some pain since 2008 but it is not the imposition of austerity which harmed the company materially, but the imposition of competition. Few people exposed to market competition in their daily work will have sympathy for a group of workers whose pay rose 90% from 2000 to 2008, but only fell 10% from 2009 to 2015.

The state would say no, save it. The company brings our kids to school and serves route the private sector won’t. The imposition of austerity meant that Bus Eireann’s balance sheet got hammered, but give it time to work these problems out.

The taxpayer would say let Bus Eireann fail, but save the routes. Let other companies bid for them en bloc and have some geographical tendering process, so bus companies in (say) the Mid-West fulfil the public service obligation in that area. In the end the state will pay to plug the gap the market won’t. It may even pay more.

Having read 15 years of its annual accounts, I would let Bus Eireann go. It’s 2,487 workers will find work elsewhere in a growing economy, perhaps at higher wages and with better conditions. There is enough demand for these skills elsewhere in the economy. Its functions can be transferred to other companies. Bus Eireann is an expensive intervention the state no longer needs.

Further Reading

TCD's Sean Barrett has an excellent piece along these lines here.