Colm’s columns

Colm Rapple
Irish Mail on Sunday, JUly 22, 2007

Food is set to join oil and interest rates as a major contributor to our worryingly high  rate of inflation. The wholesale price of food jumped by a sharp 2.8% over the past three months. Last month alone, prices rose by 1.3%. If sustained over a year that’s equivalent to an annual rate of over 15%. Many of those recent increases have still to feed into retail prices, and there is no let-up in sight. That’s partly because of the likely impact of the bad weather on domestic crops but mainly because of a worldwide upward trend in food prices.

In an interview with the Financial Times last week, Peter Brabeck chairman of the international food giant Nestlé predicted a period of significant and long lasting food price inflation. He pointed to the sharply increased demand from China and India and to the use of crops for the production of biofuels.

According to Mr Brabeck, the price of corn has risen by 60% and wheat by 50% over the past year. There have also been sharp increases in the price of sugar, milk and cocoa.  We are not alone in suffering from food price inflation.

The latest British consumer price figures show food prices up by a sharp 4.8% over the past year with fish up 11.1%, vegetable prices up 9.5% and milk, cheese and eggs up 5.6%.

So we can’t simply blame our own farmers for being too greedy or conclude that we gained nothing from the abolition of the groceries order which prevented below cost selling.  There may be some truth in either or both of those hypotheses. Farmers will always try to justify higher prices but they account for less than half and sometimes as little as a quarter of the prices paid in the supermarkets.

Rescinding the groceries order may have had some beneficial impact on prices but the evidence is far from conclusive and is getting less conclusive given these latest inflation figures. But we have to look beyond domestic causes since we are clearly following rather than leading international trends.

Those trends are pointing to a continuation of our current high inflation rate with the annual inflation rate remaining around 5% and maybe going even higher if oil prices continue to rise, if there is more than one increase in interest rates, or if the dollar starts to recover from its current weakness.

Official figures released during the week show that the wholesale price of dairy products jumped by a sharp 6.4% in June and is now 9.4% higher than it was a year ago. Wholesale food prices in general rose by 1.3% during the month and are 3.4% higher than this time last year. Meat is up 2%, fish by 5.8%, fruit and vegetables by 5.2% while the cost of grains, starches and animal feeds is up 5.5%.

Retail food prices haven’t risen quite as sharply. The average consumer’s food basket is currently costing 2.6% more than a year ago. That’s broadly in line with the general inflation rate when the impact of rising interest rates is taken out of the equation but the prices of many basic food prices have risen far faster than that average.

Over the past year the price of bread has risen by 5.4%, flour by 6.1%, beef by 8.6%, fresh fish by 7%, potatoes by 6% and other vegetables by 7%.

Surprisingly given that sharp 8.6% increase in beef prices, the price of lamb is up only 2.4% having fallen back during June while the price of pork is up less than 1% over the year. On average the retail price of meat is up 3%, not too far ahead of the 2% increase in the wholesale price although it might indicate some widening of retailers’ margins.

That’s what the farmers would claim and some figures recently compiled by the Fine Gael “rip-off  Ireland” think-tank indicates that less than a quarter of what you pay for your beef in the supermarket actually gets back to the producer. The figures issued by the party’s agricultural spokesman Denis Naughten put the supermarket price of  1kg of round roast at €9.38. The farmer’s share of that according to IFA price reports is only €2.97. The other €6.41 must end up in the pockets of cattle dealers, hauliers, butchers and retailers.

There’s an even larger percentage mark-up on a cauliflower which last week was selling for about €1.55 in the shops but for which the farmer only gets about 50c. He seemingly gets €4 for a 10kg bag of rooster potatoes which sells for about €8.15 and 58c for a kg of carrots that sells for up to €1.79.

Mr Naughten says that there is no justification for such profit margins on basic food products but he hasn’t any master plan for bringing prices down. In the end it comes back to the consumer and most seem willing to grin and bear it. High food price inflation is obviously here to stay for some time to come.

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Concerns that job losses at Pfizer’s Irish pharmaceutical plants could be blamed on a loss of competitiveness were firmly scotched this week with the unveiling of a sharp 48% drop in the multi-national’s second quarter profits. It has nothing to do with Irish operating costs but simply because it’s facing increased competition from generic alternatives to some of its branded products. One of the Irish facilities makes ingredients for a cholesterol lowering drug, Lipitor, which, although under patent until 2010, is being hit by competition from generic alternatives. Sales dropped by 13% during the quarter.

Colm Rapple
Irish Mail on Sunday July15, 2007

The minimum pay of top civil servants, those at the head of government departments, is now over €200,000 a year following the latest national pay award which took effect last month. The pay of principal officers, the grade to which the remuneration of TDs and senators is linked, have breached the €100,000 barrier.

General service grade secretary generals are now on either €201,178 on €211,765 a year depending on whether they pay full PRSI or not while principal officers are on up to €114,581.

It was a small enough increase, only 2%, but when you are on €197,000 a year, it’s enough to give you almost an extra €4,000 a year. And, of course, it also increases your pension entitlements. Civil servants with full service retire on half pay and in retirement their pensions rise in line with the pay of their still working colleagues. So all those ex-secretary generals of government departments now enjoy pensions of over €100,000 a year.

The current value of a secretary general’s pension on retirement is about €2.3 million. That’s what it would cost at current annuity rates to buy an pension an inflation proofed of €100,000 a year and provide a tax free lump sum of €300,000 i.e. the one-and-a-half years salary that civil servants are entitled to on retirement.

The pension entitlements of a humble standard grade executive office retiring on a pension of €23,000 are worth over €500,000 on retirement.

It’s no wonder that the benchmarking body that is currently reviewing public sector pay has promised to take account of the fact that private sector workers tend not to enjoy such favourable and guaranteed pension entitlements.

Indeed, all too many private sector workers have no pension entitlements, a fact that the Pensions Board failed to highlight in its annual report issued during the week.

It lauded the fact that the proportion of workers with some pension entitlements other than social welfare has risen slightly to 55% and to almost 62% of those aged between 30 and 65. It is an improvement that’s possibly due more to our growing affluence that to any direct efforts on the part of the Pensions Board and what the Board fails to point out is that pension coverage in much of the private sector is still dismally low.

Its report zones in on the overall figures from the latest Central Statistics Office survey but fails to highlight the wide variation in pension coverage between sectors. Only 13% of those working in the hotel and restaurant sector are in occupational pensions schemes. Other sectors with very low participation are: construction, 39%; wholesale and retail, 36%; and farming, 23%.

Even in the financial and business services sector, only 59% of workers are in company pension schemes and, of course, pension benefits in the private sector tend to fall far short of the ideal represented by the public sector schemes and there is continuing pressure from many employers to reduce their pension obligations.

The Pension Board’s report shows some evidence of a continuation of this trend. Almost all of the new schemes set up during the year were of the defined contribution type where the eventual pension is not guaranteed. The employer’s only commitment is to contribute a set percentage of a worker’s pay into the scheme. The pension depends on the amount contributed and investment performance.

Pensions payable under defined benefit schemes are actually guaranteed by the employer but the number of such schemes continues to decline. The number of such schemes fell by 70 during 2006 to 1,232, the fall being most marked among smaller employers with less than 50 workers.

Despite the decline in the number of schemes the actual number of members rose by 40,000 during the year thanks mainly to higher employment levels among larger employers with more than 1,000 employees.

Private sector workers are increasingly conscious of the threat to their pension entitlements. A number of trades unions, most notably the Irish Bank Officials Association, have vigorous opposed change but some, while protecting the entitlements of existing workers, have short sightedly accepted a diminution in the pension entitlements of new entrants.

Pensions are bound to be an issue in the upcoming review of the current national agreement but it’s an issue on which the trade union Congress is inevitably split. Public sector unions are not concerned at the level of pension entitlements although they must be worried at a benchmarking exercise that will take the value of such benefits into account when comparing public and private sector pay.

With growing member awareness of the value of valuable of pension entitlements, the private sector unions could see advances in this area as an alternative to the extra pay increases that they seem reluctant to pursue in the face of grim warnings from central bankers, government, employers and economists who warn of the potential impact on our competitiveness.

The pensions industry and employers have already been laying down markers in advance of the government green (discussion) paper on pension policy due to be published in the autumn. But so far there is no sign of an agreed policy approach from the trade union movement.

 Are unions in favour of equalising tax relief across all union earners even if that means higher earners getting less to allow low earners to get more?

 Are they in favour of mandatory pensions even if employer contributions have to be matched by contributions from their members?

 Are they in favour of the depletion of the social insurance fund that will result from the Government’s promised cutting in PRSI rates?

Those are just some of the questions they will need agreed answers for if they are to have a real influence on government pensions policy. But time is running out and the unions don’t seem to be even asking the questions, let alone finding answers.

Colm Rapple,
Irish Mail on Sunday, July, 9, 2007

The Financial Ombudsman, Joe Meade, has published another tranche of horror stories, all true and likely to instill a sense of fear into users of financial services. Some of the tales relate to the miselling of investment products, others to breaches of banking codes of conduct and yet others to attempts by insurance companies to avoid legitimate claims against them.

The villains have been forced to make restitution so there are happy endings for those directly involved. But there are undoubtedly many more victims who never called on Joe Meade for assistance and there will be many more in the future.

He has referred some of the malpractices discovered to the Financial Regulator who has or is considering the issues involved and may or may not take some action. That’s the gist of what I was told by a spokesman for the Regulator. In common with many other such bodies the Financial Regulator is firmly of the view that it knows best and it will clearly consider all of the issues raised by the Ombudsman.

But its operations are not going to be open to public scrutiny. So we may never know what action, if any, is taken in response to the Ombudsman justifiable concerns. So we need to study the horror stories and remain fearful.

One tale concerns a single mother of two who was lucky enough to have €10,000 on deposit with her credit union. A sales rep for an unnamed insurance company encouraged her to transfer the money into an investment fund. It was a fixed interest bond fund which was never going to drop too sharply in value as an equity fund might. But entry charges were bound to cause an initial decline and bond values will always fall during a period of rising interest rates.

Over time such a fund should do a little better than simply putting money on deposit but it might not and even the slight volatility involved meant that losses could be incurred in the short term if money had to be withdrawn. The investment had fallen €1,100 in value when investment was cashed in after eleven months.

It was not a suitable investment for an unemployed single mother. The Ombudsman believes that she didn’t understand that the investment could fall in value and he asked the Regulator to review the sales practices of the company involved and the appropriateness of selling such investment funds to low income clients with limited capital.

The Regulator won’t comment. Up to now it has relied on the codes that service providers are supposed to comply with. In this case there is no suggestion that the sales rep breached any code. A “fact find” was compiled on the client and the view was take that this was a suitable investment. The company obviously backed that view since it had to reject the complaint before it went to the Ombudsman.

So what is the Regulator going to do? Will it lay down more specific rules on what products may be sold to who, or will it rely on more effective education of consumers. We may never know.

In that particular case there was some doubt as to the culpability of the sales rep and the company but in a number of other cases published by the Ombudsman there was no doubt at all.

One such case involved a bank and a related insurance company. A woman transferred €22,000 to the bank to secure a loan for her son. She was advised to speak to the insurance company rep and encouraged to put the money into a investment bond. It fell in value and she lost €4,700. The insurance company relied on the clear statement in its documentation that the investment could fall in value but it had not completed the “fact find” on the women’s finances that is required under the regulatory code.

The “fact find” is designed to provide a complete picture of the client’s finances, attitudes to risk, needs etc.

The Ombudsman awarded the woman 75% of her loss but made no referral to the Regulator. So what about the breach of the code? Has the adviser been reprimanded for not doing a “fact find” or is this practice common with this particular bank? How many other investors have suffered similar losses and not taken their cases to the Ombudsman? We may never know.

Another service provider clearly lied to the Ombudsman claiming that documentation backed its side of the story but on inspection it didn’t. The complainant was awarded €50,000 but the service provider remains unnamed. The Ombudsman has outlined a consistent and, to his mind, defensible view against widespread naming and shaming but this case must surely qualify as an exception.

So too would a case involving a breach of the voluntary code on transferring bank accounts where a complainant was awarded €1,000 for the tardiness of his bank in arranging a transfer of his account.

The Regulator’s forthcoming annual report may shed some light on these unanswered questions but there will doubtless be many left to be asked when the Regulator’s team next appears before an Oireachtas Committee.

They do read this column and got upset a year ago at the suggestion that their web site was deficient particularly in its lack of up-to-the-minute cost comparisons. But they have taken the criticisms on board and are to launch an improved site with constantly updated and interactive information but possibly initially only on bank products. It’s not before time and while welcomed it may only be a first and inadequate step towards the ideal.

Colm Rapple
Irish Mail on Sunday, July 1, 2007

Ghana has hopes of becoming the African tiger economy following the discovery of a substantial offshore oil field by Tullow Oil. It’s good news for the many Irish investors too. Tullow has been a popular punt over the years and the shares are up about 30% in value since word of the Ghanaian find began to leak out earlier this month.

Tullow and its oil exploration partners are going to do very well from the find but the Ghanaian people will also get a share of this new found wealth. It might not be as much as they deserve but it’s likely to be more than the Irish people would get from a similar find off the Irish coast.

There’s a message here for Éamon Ryan, our new Minister for Communications, the Marine and Natural Resources. It won’t have taken him by surprise but near the top of the in-tray left by his predecessor, Noel Dempsey, is a consultant’s report recommending changes to our offshore licensing terms. It was commissioned last year and was to have been published long before now in preparation for a fresh issue of licences for the Porcupine area off the west coast.

It’s hard to understand why Noel Dempsey didn’t make the decision and get Government approval before the election. It’s possible that there were strong conflicting views, the oil companies pressurising for a continuation of the current soft terms set against a growing recognition that the great oil and gas give-away has been going on for far too long.

Under our offshore licensing terms the State take from any find is confined to a tax of 25% on the profits from the sale of the oil or gas after deducting all the costs of exploration, development and even the estimated cost of eventually closing down the operation when the field has been depleted.

Although the oil and gas belongs to the State, i.e. the Irish people, it is simply given over to the private companies that found it. They are not even required to land it in Ireland if it doesn’t suit them and in the case of a small oil find it could make financial sense to simply pump the oil up to waiting super tankers for shipment to refineries in Britain or elsewhere.

The Ghanaians look for more. They are new to the offshore oil business and even relatively new to democratic rule. For most of the 50 years since it gained independence from Britain in 1957 it has been subject to various forms of despotic rule. The current democratic constitution dates back only to 1993. Some of its political problems were doubtless related to the fact that it is Africa’s second largest gold producer.

They’ve learnt how to tax the gold mines. There is a royalty of between 3 and 12% on the value of output, a profits tax of 35% and a tax of 25% on cash balances carried forward by the producing companies at the end of the year.

The State won’t be getting quiet that much from Tullow’s oil find but The State owned Ghanaian National Petroleum Corporation is entitled to a 10% ownership stake without having to fund any of the exploration or development work. On top of that Ghanaian law allows for a profit tax of up to 50% on income from oil and gas finds although the companies can negotiate a lower rate when applying for petroleum licences.

It’s not clear what rate Tullow and its partners will be paying but it is obvious that they were not deterred from exploring by the prospect of giving away an ownership stake in any find while also possibly paying tax at 50% on the profits.

So how much can Éamon Ryan extract from the oil companies? Although very supportive of the Rossport protestors on environmental grounds there is no record of him expressing strong opinions on the offshore licensing regime although his colleague and ex-leader, Trevor Sargent, is on record as blaming the Rossport dispute on “the giveaway deals for exploration licences”.

Certainly the Rossport debacle highlights the inadequacies in our offshore licensing regime but the issues involved are quite distinct. The Shell to Sea campaign is primarily concerned with safety and the environment but many supporters have come to recognise the need for new licensing terms that will ensure a fare return for the Irish people from the exploitation of our natural resources.

We are not going to get that from the Corrib gas find. The Shell licence is not going to be renegotiated but the fact that it will have to pay so little to the State in taxes simply underlines the fact that both national and local government should have been very demanding when it came to laying down conditions for the development of the find. They weren’t.

Shell and its partners could have been required to put their refinery offshore, to contribute more to the local infrastructure, to supply gas at a favourable price to local towns, factories or power plants. The possibilities are endless but instead of being demanding, the local and national mandarins seemed to have gone out of their way to favour the interests of Shell over those of the people who actually own the gas.

The job of sorting out the resultant mess now falls to Éamon Ryan as does the decision on future licensing terms. It’s not easy being in power but having stood shoulder to shoulder with the Shell to Sea protestors, the new Minister has a lot to live up to. He faces an interesting summer.