Notes on the Front

Remember the recent Deloitte report on the electricity market, accompanying the publication of the Green Paper on Energy? The overriding headline emerging from the report’s publication was ‘according to Deloitte, the ESB payroll is 20-30% higher than the European average.’ Great copy and how everyone jumped on it, making it appear that overpaid ESB employees were fleecing consumers. Except that Deloitte didn’t make this contention. What it said was far more revealing of how international consultancy can work and how it can be spun.

On the issue of labour costs, Deloitte didn’t cite any international or European sources. It didn’t refer to any other consultancy reports. It didn’t conduct its own study.  Here’s what it said rather than what was reported:

We estimate labour costs generally to be 20% to 30% above European comparators . . .

. . is due to a variety of factors, which could include higher than average Irish labour costs . . .

This may be due, inter alia, to scale economies . . and higher insurance and labour costs . .

Overall, we believe that payroll costs are approximately 20% to 30% higher . .

. . . we believe these staff costs are very high . .

‘Believe’, ‘estimate’, ‘could be’, ‘may be’, ‘approximately’? We should expect a bit more from a prestigious international consultancy firm on a lucrative Government contract. If they couldn’t find an authoritative up-to-date survey, they certainly have the resources to ring around Europe for the information. They even had the services of a sub-contractor, Mott McDonald, but still they failed to properly survey labour costs, which they highlighted so prominently. They left the issue at the level of belief and estimation.

Fortunately, we don’t have to ‘believe’ Deloitte. Eurostat – the EU’s statistical agency – provides comparative labour cost figures for the utilities sector. Eurostat shows that labour costs in Irish utilities ranked 9th in the EU-15; in other words – in the bottom half of the league table. Even more intriguing is that public sector Irish workers cost less than private sector British workers in the utilities sector.

Unfortunately, Eurostat doesn’t provide a separate breakdown for the electricity sector but since, for Ireland, utilities are in the public sector, the same ‘overpaid’ allegation would still pertain. Another problem is that this information dates from 2000. That’s a problem with comparative tables – it takes time for international agencies to collect and collate data from a number of national sources. Yet, using this as a baseline – and not a definitive picture of current comparative labour costs – Deloitte could have attempted to collect up-to-date data, if not in a comprehensive way, then certainly in a representative way from a smaller sampling. Or could have worked from this Eurostat baseline and assessed developments in the ESB payroll.

Why didn’t they? Maybe because the situation hasn’t altered that much since 2000, and such an assessment would have clouded the picture of an ‘over-waged’, ‘over-manned’ workforce. Maybe they felt politically constrained. Whatever the reasons, here is the information – taken from ESB Annual Reports.

• Since 2001 the ESB wage bill has increased by 2% annually in real terms. That’s less than the rise in the average industrial wage.
• In the last reported year – 2005 – the wage bill actually fell by nearly 6% in real terms.
• Net payroll costs (the capitalised cost of all payroll expenses – wages, PRSI, pensions, etc. – which are charged to the profit/loss account) have actually fallen every year since 2001.

Of course, these figures must be put in commercial perspective. The wage bill, as a proportion of the company’s revenue, has fallen by over 7.5%.

So in 2000 labour costs start off in the bottom half of the EU table and, given the information provided in the ESB annual accounts, there’s a reasonable chance they still are. Of course, Deloitte with all its resources could have verified this. Instead, they chose to estimate and guess and speculate.

To put it in stark terms, net payroll costs, including PRSI, pensions, etc., make up 16% of ESB’s total costs. It is ludicrous to attribute above-average energy prices to an input that is relatively small (by comparison, fuel makes up 50% of power generating costs).

In the last five years prices have increased by nearly 90%. If wages had been frozen at the 2001 level how much of that increase would have been knocked off? 5%. So what about the other 85%? Apart from fuel costs, Deloitte is silent.

In further posts I will focus on the real rise in energy costs over the last five years – issues which Deloitte deliberately refrained from commenting on, possibly because it would have reflected badly on the party that commissioned the report – the Government. But here’s a little taster:

In 2000, Ireland had one of the lowest energy costs in the EU. After six years of Government policy to ‘liberalise’ the market and introduce competition, costs have increased by 90% and Ireland has one of the highest EU prices. Why?

Deloitte’s not talking.