Colm’s columns

Colm Rapple
Irish Mail on Sunday, 24th February 2008

Allied Irish Banks had its Northern Rock moment back in 1985 after its subsidiary ICI ran up massive liabilities in the London insurance market. It has come a long way since then.

At that time it was bailed out by the Government under then Taoiseach Garret Fitzgerald. He simply nationalised the ailing insurance company making the State liable for its sizeable deficit. A bank levy was imposed to reimburse the Exchequer but it was undoubtedly passed on to customers and it was they who actually picked up the tab.

AIB didn’t even have to cut its dividend and has gone from strength to strength since, even managing to survive relatively unscathed when rogue trader John Rusnak racked up losses of $700 million at its US subsidiary, the Baltimore based Allfirst Bank.

So it’s not surprising that, despite the gloom and doom that has settled on the financial sector in the wake of the US subprime crisis, AIB managed to continue its advance last year and remain optimistic for the future.

This week it reported pre-tax profits of €2.4 billion, not counting profits from the ongoing sale and lease-back of its properties. That’s up 8% on the 2006 figure. Profits from the Irish retail operations were up 13% to €1,094 million. That’s not including some €64 million made from the sale and lease back of some 22 bank branches.

Business lending was up 25%, personal lending by 11% and mortgages by 14%. The Bank now claims 1.5m personal customers, up 67,000 on the previous year, and 220,000 business customers, up 16,000.

Wealth management services, which mainly involve the sale of investment and insurance products, performed particularly well last year. This is an area that AIB has targeted as having particular growth potential. It expects profits to jump from €60 million in 2006 to €150 million in 2010.

The Bank’s credit card business is also reported to have performed strongly. Cardholders were spending more and clearing less of their debt each month – good for the Bank and its shareholders but not so good for the customers.

Pre-tax profits from retail and commercial banking in Britain and Northern Ireland were up 20% on 2006 to €452 million while the Polish divisions contributed a 26% increase at €269 million.

So 2007 was a good year for the Bank. It has achieved better year-on-year growth in the past but profits have never been as high. Ironically shareholders have never before experienced a faster or steeper drop in the value of their shares.

This time last year the shares were trading at a high of €24. This week they were down below €14 and the results, while a little better than expected, did nothing to attract buyers into the market. Potential investors weren’t even impressed by the promised 10% increase in the dividend pay-out.

Launching the preliminary results for 2007 during the week, chief executive Eugene Sheehy was at pains to stress that this was the 15th consecutive year of double digit dividend growth and that the Bank was in a strong position to be able to continue with a progressive dividend policy for years to come.

For investors the message was clear. At current levels the shares are cheap. It’s a message that you would expect from a bank’s chief executive, but the figures do give credence to his claims.

The dividend pay-out for 2007 is covered two-and-a-half times by earnings. Even allowing for an expected slow-down in earnings growth, there will still be plenty of scope to increase the dividend pay-out in the years ahead.

The shares are currently trading on a yield of over 5.5%. In other words anyone investing at the current price can expect to get an income of 5.5% on the investment and the chance of a capital gain. The FT, in its commentary on the results, concluded that “unless conditions deteriorate markedly, AIB should surprise on the upside.”

So why are investors in such short supply?

It seems to be down to the uncertainty about the economic future, a general lack of confidence in the financial services sector, and a firm belief that the eventual upturn is still some way off. One analyst, quoted during the week, predicted that investors will remain cautious until next year at the earliest and maybe into 2010 and that only the brave will be investing in the meanwhile.

He could be right although AIB’s Eugene Sheehy, while predicting only low single digit growth in earnings per share this year, was gushingly optimistic about the longer term future and played down the current risks.

AIB had very little exposure, he stressed, to the bad debts expected from US subprime lending. The American M&T Banking Corporation, in which AIB has a stake, wrote off practically all of its subprime exposure during 2007 and still managed to contribute €120 million to Group profits. The contribution would have been even greater were it not for the impact of a worsening dollar/euro exchange rate.

In Ireland the overall bad debt provision was increased only marginally and the bank is not particularly fazed by the prospect of a continuing fall in property values. Residential property developers are seen to be the most at risk with the bank keeping a close eye on 8% of its loan book in this area totalling about €750 m. But it believes that there are adequate assets to back these loans even allowing for a further 5% reduction in house prices after what it says was a 15% decline last year.

So its good news for shareholders but there was a warning for customers. Profits come first, they were effectively told. In order to bolster profits margins, the expected cuts in European Bank rates over coming months may not be passed on in full to borrowers while savers are bound to take the full hit.

Colm Rapple
Irish Mail on Sunday, 17th February 2008

A carbon tax as proposed by the Green Party would push up the price of motor fuel and heating oil by about 8 cent a litre, add 52 cent to the price of a bale of briquettes and about €2.40 to the price of a 40kg bag of coal.

The tax could raise over €500 million a year for the State coffers but some experts believe that it might have little or no impact on the level of carbon emissions.

That has all been established already in a raft of reports prepared by the Department of Finance and in 117 detailed submissions to the proposals made in 2002 by the then Finance Minister, Charlie McCreevy. In the end he decided that it wasn’t worth the effort.

But the Green Party has got it back on the agenda and the current Finance Minister, Brian Cowen, has asked the new Commission on Taxation to treat it as a priority. It’s not clear, however, what that means. The Commission has until September of next year to publish its findings and there is nothing in its terms of reference requiring it to present an interim report.

When it was last proposed most Government Departments, including those now headed by Green ministers, agreed that any tax should be phased in over at least four years. But the Greens are urging its speedy introduction and while, in terms of reducing carbon emissions, the tax may be little more than a symbolic gesture pandering to the Green’s constituency, it could be expensive to administer, inequitable in its effects and harsh in its impact on some individuals and businesses.

An initial consultation paper prepared by the Department of Finance suggested a tax rate somewhere between €7.50 and €25 per tonne of CO2 emissions. A rate of €20 per tonne emerged as the most likely. It was the rate mentioned in most submissions including one from the Green Party.

Overall consumer prices would rise by 0.6% but the impact on low income families would be far greater than the average. A greater proportion of their incomes goes on fuel and it’s more likely to be solid fuel, coal and turf, that would be hardest hit by the tax because it is dirtier in terms of CO2 emissions.

It is estimated that the impact on the lowest 10% of income earners would be three times greater than on the average income earner.

Some or all of that impact could be offset by channelling the revenue raised into higher social welfare benefits of one type or another and to providing grants for converting to oil or gas central heating that would be more efficient than solid fuel. But it would be all a bit hit and miss.

It is estimated that there are about 300,000 households relying solely on old fashioned solid fuel for their heating. A large proportion of those don’t have access to natural gas. Many buy their fuel in small quantities and would find it hard to finance a fill of oil.

But that is only one of the problems that the Commission on Taxation will have to address. Another major issue is whether some businesses and sectors should be able to negotiate their own separate emission reducing deals and thereby gain exemption from the tax.

About a hundred of the larger energy users in the country, including the ESB, will almost certainly be exempt from a carbon tax. They were given quotas under the EU emission trading scheme. They can buy additional quota on the market or sell any surplus they might have. Since they got the quotas free of charge they have done very well but it wouldn’t make much economic or environmental sense to hit them with a carbon tax.

But other businesses would like to do special deals and the Department of Communications, Marine and Natural Resources, was very much in favour of such negotiated agreement when the carbon tax was last mooted. Now it is headed by Éamon Ryan of the Green Party which favours a broadly based tax.

But according to some reports the Danes found that specific tax relief/grant deals with business groups could produce emission reductions nine times greater than a carbon tax. A pilot scheme operated by Sustainable Energy Ireland was also deemed more effective in reducing emissions than a carbon tax.

But the narrower the base for a carbon tax, the less acceptable and the less effective it becomes. The Department of Finance estimated that a tax of €20 per tonne could reduce carbon emissions by about 2 million tonnes a year. That assumes that many people will reduce their energy consumption or switch to a cleaner or more efficient fuel. But price increases don’t seem to have had much of an impact in the recent past.

In any case a 2 million tonne reduction is small enough given that current emissions are about 68 million tonnes and the aim is to get that down to 55 million tonnes by 2020.

Charlie McCreevy may well have been right when he concluded that:

The environmental gains from a carbon tax would not justify the difficulties created particularly for households;

That it wasn’t really needed since most of the products involved are already subject to excise taxes that could be raised to create the same effect; and that

The range of compensation, revenue recycling and abatement measures needed to achieve some degree of equity could not completely offset the adverse economic and social results.

Colm Rapple
Irish Mail on Sunday, 10th February 2008

The Government has poured almost €100 million of taxpayers money into the film and TV production industry over recent years by way of tax relief and grants. But we got little or no return from that money according to a report commissioned by Finance Minister Brian Cowen. There is no doubt that there were benefits. High earners gained massively from the tax relief and jobs were created. But the benefits, even using a very broad definition of benefit, scarcely outweighed the costs.

That was something that the Minister didn’t mention when he announced an extension of the incentives until 2012 and raise the eligible investment per project from €35m to €50m.

Neither did he mention the fact that the Indecon consultants, who drew up the report, concluded that a continuation of the incentives could only be justified as a means of giving the industry a breathing space in which to address its longer term sustainability.

Other similar incentives, mainly linked to property investments, have been phased out. Some of them may have provided real economic benefits when first introduced in the pre-Celtic tiger days by promoting investment that would otherwise not have taken place. But they had outlived their usefulness.

Could the same be said for the film reliefs? Indecon was given a wide brief.

Many countries provide incentives to attract film makers but our tax breaks seem to have been particularly badly structured while little has been done to enhance the many other potential attractions of Ireland as a location for film makers.

Indecon recommended that the Irish Film Board, in conjunction with the industry, develop a long term strategy to address the sustainability of the industry. Its competitiveness is based principally on tax incentives that can easily be replicated by other countries. No industry is sustainable on that basis, it concluded.

The consultants issued that self-same warning in an earlier report published in 1998. It stressed the need for the industry to develop a competitive advantage based on factors other than government hand-outs. It even used the word “urgent”. But then, as now, the Government simply extended the incentives using tax payers money to attract film makers.

We were encouraged to believe that the strategy was a success. The film makers have come, films have been made, but until now no-one has been counting the cost. That’s what Indecon did for the 3 years, 2004, 2005 and 2006.

Over those 3 years, it estimated, investors had managed to trim €75 million off their tax bills as a result of the scheme. That’s a real cost in tax revenue foregone by the Exchequer. A further €16 million was handed out by the Irish Film Board. That’s a net figure that takes account of the money that it recouped from some projects. Add in a little for administration and the total cost to the taxpayer came to €91 million.

The benefits are harder to calculate. There were extra people employed as a result of the incentives and they paid taxes. There were fewer people drawing social welfare and the Exchequer also benefited from extra VAT and Corporation Tax. The spending spreads out through the economy with a multiplier effect but the calculations are, at best, guesstimates. For instance, given the near full employment of recent years, many of those employed in the industry would possibly have found jobs elsewhere in the economy.

But on the basis of reasonable assumptions, the report concludes that, taking account of the benefits that would have occurred even without the incentives, the gain over the three years in the form of direct tax benefits and multiplier effects was about €75 million.

That’s a good bit down on the estimated €91 million cost. But there are less tangible benefits to include in the mix. The film industry provides cultural benefits, helps in the development and retention of creative talent and may help to promote tourism. Indecon valued those benefits at €21 million bringing the total benefit to just above the total cost.

Taking all the potential benefits, tangible and intangible into account, the €91 million of taxpayer’s money spent on the film industry yielded no real return. So was it worth while, or would money have been better spent on something else? Maybe we should have been promoting multi-media developments, internet projects, or simply investing more in general education, health or roads.

Or maybe, the money could have promoted a better return from the film industry had it been spent in a different way , for instance by way of direct grants for production or the development of skills and infrastructure. The report certainly indicated such alternatives could yield better returns. So did the 1998 report. But we are still waiting and Mr Cowen seems to have put the matter on hold for another four years while the taxpayer picks up the tab.

The Minister also ignored a conclusion that the level of tax relief given for TV productions is “probably not justified” since they are more attractive than those in other countries and many RTE commissioned programmes would get produced without any tax incentive. While Indecon didn’t suggest an immediate abolition of the reliefs, it did recommend that there shouldn’t be any extra benefits for TV productions.

But the increased tax threshold proposed by Mr Cowen will benefit both film and TV productions while there has yet to be any suggestion that a new strategy is even being considered. Mr Cowen doesn’t seem to have been listening.