Colm’s columns

Colm Rapple
Irish Mail on Sunday, January 31, 2010

British supermarkets are set to comply with Government guidelines that will allow consumers to identify Israeli products originating from illegal settlements in the Occupied Palestinian Territories. In launching the guidelines the Secretary of State Hilary Benn pointed out that there is currently no way of knowing whether products labelled “West Bank” were made by Palestinians or by illegal settlers.

A similar move is expected this side of the Irish Sea. Taking time out from his Northern endeavours, foreign minister Micheál Martin, said that he supported improved labelling of Israeli products. According to some reports he has asked officials in a range of Government departments to draw up guidelines similar to the British ones.

The easiest option would be to copy the British guidelines, given that Mr Martin is possibly anxious to move as quickly as possible. Last month, having been refused permission by Israel to visit Gaza, the Minister urged the EU to push for a lifting of the Israeli blockade so that delegation of European foreign ministers could visit the Palestinian area.

The labelling issue is important for those urging a boycott of Israeli products mainly in protest at the attacks on the Gaza Strip. But a report published by the OECD this week highlights massive inequality and discrimination within the Israeli State itself. Arab citizens and migrant workers are the prime sufferers.

Israel has been anxious to gain the acceptance of the OECD for some time. A decision on its membership is to be made in a few months time, and reports on its economy, employment and social policies have been prepared as part of the decision making process.

Some of those reports were published during the week. They reveal an economy that is already climbing out of recession after a relatively short and shallow downturn. But they also reveal a country riddled with poor social services, with very unequal access to education and jobs and totally inadequate labour protection laws.

Arabs comprise about 20% of the population. These are Israeli citizens unlike the Palestinians of Gaza or the West Bank. They should not be second-class citizens but they are. There is no doubt about that.

About half of them have disposable incomes less than 50% of the average Israeli income. That’s the definition of poverty used by the OECD in this instance.  There is a similar high poverty level among the ultra-orthodox Jews, the Haredim whose men folk, by tradition, value study above work. They comprise about 8% of the population. Their poverty is seen as arising from their cultural predilections rather than any positive discrimination.

Less than one-in-eight of the remaining population are defined as poor.

So while about 20% of the total population live in poverty, the bulk of those are Arabs and, to some extent, Haredim. There is little sign of social policies aimed at redressing this inequality. The earnings of Jewish workers are more than 40% higher on average than those of Arab workers.

There are clear signs of discrimination in access to education. Public spending on children is far lower in Arab than in Jewish localities. Inadequate transport facilities particularly limit the employment opportunities of poor Arabs. They are twice as likely as Jews to be in low-level manual employment in competition with a large pool of about 200,000 migrant workers.

These migrants, many of whom have come from far afield to replace workers who used to commute from Gaza, are particularly poorly treated according to the OECD report. Apart from the closing of the border, employers have to pay levies and fees including an 11% wages tax when employing Palestinians rather than Israelis. But Israeli Arabs are also discriminated against as a result of poor labour protection laws that are inadequately enforced.

Farmers, according to the report, prefer Thai workers “whose unpaid and undeclared hours reduce their effective real wages below the minimum wage”.

Abuse of care workers is rife, the report adds, especially in terms of unpaid hours for live-in carers. Workplace supervision is poor and abusive employers face little or no sanctions.

The full extent of the discrimination against the Arab population is highlighted in some of the OECD’s recommendations. It urges greater investment in public infrastructure and childcare in Arab areas. It wants action on the barriers that many Arabs face in getting jobs, and equal education opportunities and the setting and enforcement of minimum educational standards for all children.

It highlights the need for urgent action to tackle the abject poverty of many Bedouin Arabs whose settlements, in the Neveg desert area, are not connected with the electricity, sewerage, transport and education systems.

The list goes on. It’s a sorry tale of discrimination and, resultant, inequality. The only good news is that the Israeli economy is expected to grow by 2.2% this year and 3.3% next year having emerged from the recession in the second half of 2009. But as the OECD points out in no uncertain terms, the benefits of growth are shared unequally.

The Israeli economy seldom comes under the spotlight but the image that emerges of its economic and social policies from these reports does nothing to boost its international standing.

Colm Rapple
Irish Mail on Sunday, 9th September 2007

Investing borrowed money is a risky business. It increases the potential return but greatly increases the risk of loss. It’s not for the faint hearted nor for those who can’t afford to lose all or a significant proportion of their investment. For that reason its worrying that a high-risk property investment is going to be promoted at road shows around the country.

Brendan Investments which is being promoted by Eddie Hobbs may prove a good investment but the risks involved shouldn’t be underestimated and may not be appreciated by many of those who will be presented with the informative brochure and urged to read it and the 98 page finely printed prospectus before committing themselves.

The geared nature of the investment is not mentioned as one of the risk factors. Yet it’s a major one.

Investors will be buying shares in a company, the share capital of which will be used to buy properties and finance developments in Europe. Each €1 of share capital may be augmented with €3 of borrowing. And, in addition investors are being offered the facility of borrowing half of their investment.

So an investor with €5,000 can borrow a further €5,000 and invest €10,000 in the scheme. On the strength of that, the company may borrow a further €30,000 and use the total of €40,000 in buying an investment property.

So the investor now has a €40,000 interest in a property or properties on the strength of an initial investment of €5,000. If values go up he can do very well but it only takes a 12.5% drop in the property value for all of his initial investment to be wiped out.

Another worrying aspect of the scheme is that its web site includes a copy of an Evening Herald article which quotes Eddie Hobbs as saying that he could quadruple investments for members of the public. That’s the type of speculative forecast that wouldn’t be allowed in the prospectus. The use of it on the website promoting the scheme is questionable.

Colm Rapple
Irish Mail on Sunday June, 10, 2007

It’s almost twelve years since Esat Digifone was awarded its mobile phone licence and its seven years since its sale to BT netted Denis O’Brien some €300 million. Having used that seed capital skilfully over the years Mr O’Brien is now ranked as Ireland’s fourth richest individual with assets of €2.3 billion.

It’s no wonder that he’s getting a bit weary at the continuing enquiries of the Moriarty tribunal which is now in it’s tenth year. Having dealt with payments to the late Charles Haughey, it is currently examining the financial affairs of Michael Lowry who was Minister for Communications when the Esat licence was issued.

It may be years before the Tribunal decides if there was anything improper about the issue of that second mobile phone licence. But improper or not, it was certainly a scandal that the Irish taxpayer gained so little while individual investors and foreign based companies did so well.

The State charged Esat Digifone only €19 million for the licence when it was issued in November 1995. Four years later, in January 2000, Esat was sold to BT for €2,400 million and it was accepted that the bulk of that price related to the company’s mobile phone operation.

Until proven otherwise we must accept that there was no impropriety involved in the issue of the licence. But there was certainly incompetence. Unfortunately there is no tribunal enquiring into that.

The licence could have been auctioned to the highest bidder. But it wasn’t. Instead selection criteria were laid down, applications sought and the winner picked by way of a so-called beauty contest. The licence fee was set at a maximum of €19 million.

The decision to go that route was taken by the then minister Michael Lowry and the Government of the day but they relied on the advice of civil servants and consultants who must all share the blame. There has been some attempt to shift responsibility to the EU Commission which raised questions about an earlier decision to put the licence up for auction. But there is little doubt that any issues raised by the Commission could have been overcome.

Whatever the Tribunal finds we already know of two scandals.

The first was the issuing of a licence for a fraction of its true worth to the significant detriment of Irish taxpayers. It’s clear that the mobile phone licence was worth at least €2,000 million to BT in 2000 and some of that value related to the customer base built up by Esat over the previous four years. But that hadn’t been a particularly difficult task for a lean new entrant taking on a old hide-bound concern like Eircom.

The licence issued in 1995 for €19 million was clearly worth at least €1,000 million to the successful bidder. There is no way of knowing if anyone would have had the foresight to bid that much at the time but they certainly would have bid much more than €19 million. It has been suggested that Esat would have been disadvantaged in an auction by its lack of resources but there were other applicants with deeper pockets.

The second scandal can also be attributed to incompetence. Those who decided to issue the licence on the cheap may have believed that the benefit would be passed on to customers in cheaper call charges and that that would encourage competition and speed the roll out of the new network. But they should, at least, have recognised that it mightn’t work like that. So as a fail-safe they should have recommended some mechanism for clawing back any windfall profits made by the Esat or its promoters. They didn’t.

The simplest way would have been to build some conditions into the licence terms. It could have been a tax levied on turnover as Sweden did with its 3G mobile licences or a straightforward right to claw back a proportion of any capital gain made on the transfer of the licence if it was sold on or if the ownership of Esat changed significantly.

But the Department of Finance didn’t even bother taking a fresh look at its Capital Gains Tax legislation with the result that Denis O’Brien sought to avoid an estimated €50 million tax on the capital gains he made from the sale of Esat by moving to Portugal. He may have been successful. He failed in an attempt to censor media comment on his tax affairs and it is known that he appealed a tax assessment but the determination of the Appeals Commissioners has never been made public.

The facts that he could try and actually did try to avoid tax on the windfall gain he made at the expense of the Irish taxpayer is a double scandal worthy of as much attention as the suspicions of impropriety surrounding the issue of the licence. Incompetence and greed can be every bit as contemptible as impropriety.

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Having tried to ignore the obvious for months, the trade union mandarins have at last admitted that they got it very wrong when they recommended the current pay deal to their rank and file members. But they are a little late in demanding government action to curb inflation when it was clear from the very beginning that the agreed increases averaging 4.6% a year were never going to be enough to keep pace with inflation.

Even before the pay deal was agreed this time last year the trend was evident and as outlined in this column a few weeks ago official statistics have now confirmed that most workers suffered a real decline in take-home pay in 2006. That trend is continuing with no reason to believe that the headline inflation rate will fall below 5% over the coming months.

The attractions of being in government are diminishing by the day.

Colm Rapple
Irish Mail on Sunday June, 3, 2007

This time last year, in the face of increased competition Bank of Ireland was forced to introduce a free banking option for its personal customers. To qualify you have to either keep a minimum balance of €500 in your account or else make at least 3 online or phone payments from your account during each billing quarter. The promotion has cost the bank money but it didn’t prevent it from increasing pre-tax profits by a massive 28% to just short of €2 billion during the year to the end of March..

Some of that profit came from the sale and lease-back of 36 of its Irish retail branches but even after stripping that out and also ignoring some other small once-off gains, the underlying profit for the year at €1.7 billion was up a sharp 22% on the previous year.

It could well afford to give its personal customers a little break. And it may be only a temporary break. It has maintained its basic charging structure for those who don’t meet the requirements of what it described in this week’s preliminary results statement as a “free banking offer”. That sounds as if it might be withdrawn at some stage.

But for the present the reduction in personal accounts fees has been more than offset by a substantial growth in both credit card income and personal banking fees, the Bank revealed in its preliminary profit statement this week. It seems that customers can’t win but all too often they have only themselves to blame.

It would be great if the Financial Regulator produced a fully interactive website where consumers of financial services could quickly and easily find out which financial institutition offers the best option for their particular needs. As pointed out in this column in the past the Communications Regulators Callcost.ie site provides a model that the Financial Regulator could follow.

Without such a site, consumers need to do a bit of legwork to find the best option and the banks don’t make it easy for them. They have become adept at offering products that are difficult to compare on a like-with-like basis with those offered by competitors. They should be forced to offer at least one basic option in each product area that could be easily compared. But that would be too much like real competition.

It’s not a new idea. That type of standardisation was applied to Personal Retirement Savings Accounts (PRSAs) when they were introduced a few years ago. It could easily be extended to other financial products.

In the absence of the ideal, it is up to consumers to look after themselves. Unfortunately they are not inclined to. There is no other way to otherwise explain why so many credit card customers stay with a bank which charges 16.2% on its standard credit card while three providers, Halifax, Permanent TSB and National Irish all offer cards with rates below 10%.

Or to take another example. Why haven’t all the banks moved to meet the new current account product from the new entrant Halifax which offers fee-free banking, an overdraft rate of 9.5% compared to Bank of Ireland’s 15.4% or AIB’s 14.5%, and an interest payment of 10% on credit balances up to €2,000 provided at least €1,500 a month in lodged to the account. For many people that last condition would be satisfied by the monthly pay cheque.

It seems that the older established banks don’t see the need to compete too seriously on cost. They can rely on customer inertia. It’s easy to say that consumers should shop around. Unfortunately too few of them will take that advice and until more of them actually do, the banks and other financial institutions will continue to coin it at the expense of their customers.

Almost €700 million of the Bank of Ireland’s group profit was made on the Irish retail banking operations, an increase of 27% on the previous year. The competitive pressures mentioned above kept the growth in fee income to a relatively modest 6% but the net income from loans jumped 17% while costs only rose by 6%.

Overall lending increased by 25% with business lending up a sharper 33% and mortgage lending up 22%.

Bank of Ireland, in line with other financial institutions, continues to gain massively from the 10% rate of Corporation Tax introduced to maintain the attractiveness of Ireland for foreign direct investment. The EU couldn’t prevent us from introduced a low rate of company tax but it ruled that it had to apply to all companies. So, although the financial companies were well able to afford a higher rate of tax and wouldn’t have moved out of Ireland in any case, they had to be included in the concession.

Initially the Government imposed a levy on the banks to claw back some of this lost tax but that was abolished a few years ago. The issue was raised again during the election campaign although not given very much attention.

In its manifesto the Greens promised to reintroduce the levy for a period of 5 years with an overall cap of €200 million. With a market share of about 20% the Bank of Ireland’s share of that would amount to about €40 million. It wouldn’t put too much of a dent in its profits. But it’s doubtful if the introduction of such a levy would be one of the Greens’ core demands in government formation talks.

During the year under review the Bank of Ireland incurred an Irish company tax bill of €226 million on Irish profits of €1.6 billion. Retail banking accounts for only about half the profits declared in Ireland.

Colm Rapple
Irish Mail on Sunday May 13, 2007

Back in December 1993 the then Minister for Finance, Bertie Ahern was doing more than getting a “dig-out” from his friends and concluding his marriage separation. He was also finalising his third and, what was to be his last budget . A year later, following the collapse of the Fianna Fáil/Labour coalition, he replaced Albert Reynolds as leader of his party but in opposition.

The Taoiseach’s promised response to the probing questions of recent weeks will undoubtedly provide an insight into his efforts to balance his personal finances at a time of marital and political change. But the content of the January 1994 budget can help explain Mr Ahern’s appeal to the business community.

It contained a package of tax reliefs aimed particularly at small and medium sized businesses. Some of them had been suggested by a Task Force on Small Business but no doubt others had been lobbied for by individual businesses and business organisations. It’s impossible to say that any measure was aimed at helping any particular business or individual. Indeed they were all broadly based and undoubtedly reduced the tax and administrative burdens of very many businesses.

But it’s clear that many businessmen, entrepreneurs and developers had plenty of reason to be thankful for the policies pursued by Mr Ahern at that time.

So what was in that 1994 budget?

There were the usual improvements in tax allowances and bands although some of the benefits were to be clawed back by restricting mortgage interest and medical insurance relief to the standard rate. Those latter measures were phased in over a few years. The bulk of social welfare recipients only got a 3% increase and it wasn’t paid out until late July. Consumer prices rose 2.4% that year.

The bulk of the budget statement was given over to what were described as enterprise and employment initiatives. There were a lot of them.

Of particular interest to property developers was an extension of the urban renewal scheme, the introduction of a new “living above the shop” scheme and a marked improvement in the tax incentives available for hotel construction.

The urban renewal scheme had been around since 1985 and was due to end in July 1994. It was extended and although there was a reduction in the area covered, there were extra reliefs for owner occupied developments.

Two years later a study commissioned by the Department of the Environment concluded that while the scheme had been successful in attracting private investment to the designated areas, it hadn’t increased the overall level of economic activity nationally.

It also faulted the scheme, as have subsequent reports, for not adequately promoting good architecture and urban design and for the fact that, particularly in Dublin, the locals benefitted little from the regeneration of their areas.

The net cost in tax foregone was between €47 and €58 million a year. What’s what the scheme was worth in saved tax to the high earning individuals who made use of it.

A more recent Indecon report concluded that the hotel tax concession was widely used by high income earners to reduce their tax liability while fewer than one-in-three hotel operators believed that it had helped increase the flow of tourists from abroad. The net cost in tax foregone is estimated at €125 million.

But there was more to Mr Ahern’s final budget than property based tax incentives. He also introduced a number of significant capital tax concessions. He started the process of reducing the inheritance and gift tax on business assets. For tax purposes the actual value of the asset was reduced by up to 50%. Farmers also got a benefit with the value of their assets reduced by up to 80% when calculating Capital Acquisitions Tax.

Another relief that would have been of particular interest to property developers was a reduction from the then 40% to 27% in the Capital Gains Tax payable on gains from the sale of unquoted shares up to a maximum value of €32 million.

There were also some smaller tax changes of particular benefit to business. The rate of employer PRSI was reduced by about a quarter in respect of lower paid employees while the restriction on the children of business owners claiming the PAYE tax allowance was removed.

It was such a pro-business budget that there must have been many in the country, and not only his immediate associates, who regretted Mr Ahern’s move to the opposition benches in December 1994 and who would have wished to support his return to power without expecting any specific favours.

At that time there was a perception of greater differences between the alternative governments than currently seems justified. So we shouldn’t be surprised that Mr Ahern had his benefactors.

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THE RELEASE of our latest inflation figures must have send a chill up the spines of the European central bankers who were visiting Dublin on Thursday for one of their regular meetings. An inflation rate of 5% is almost off the scale for these guardians of the euro. Thankfully the eurozone inflation rate is still stuck just below 2%. If it were much higher we wouldn’t have got away without a further interest rate hike this week.

Mind you on a strictly comparable basis our own inflation rate is only about 3% since the eurozone calculations exclude the impact of mortgage interest. But it’s still true that consumer prices here have risen by 5.1% over the past year and almost half of that rise occurred in the past three months. The effective rate has been higher for those with big mortgages.

With another interest rate hike expected next month it’s not going to get any better in the near future.