Colm’s columns

Colm Rapple
Irish Mail on Sunday, December 28th, 2008

No-one has yet put a firm figure on the number of borrowers who are going to have their loans restructured, reduced or written off by the banks over the coming year. Neither do we have a figure for the amount that will be written off. But we can be sure that many borrowers won’t be paying back their loans in full and those with the largest liabilities are likely to benefit the most.

Who’s going to make the decisions? Which borrowers are going to be let walk away from their debts? Will the Government representatives on the banks’ boards have an input? Is there a possibility of political interference in the decision making? Will it all be done behind closed doors?

Similar issues have been faced in the past, particularly in the mid-1980s when thousands of farmers, with the help of a dedicated IFA team, negotiated significant reductions in their bank liabilities. Their problems were partly the result of a property bubble, much as today. Farmers had been encouraged to expand on the back of the massive gains arising from EEC entry in 1973. But farm incomes plummeted after 1979.

The individual rescue packages were all negotiated behind closed doors and the affected farmers were ordered to keep their deals secret. That suited both the IFA and the banks. The process was never reported in the media at the time although some indication of the scale of the problem and the extent of the loan write-offs became evident from the published accounts of the then State owned ACC (Agricultural Credit Company). It 1985 it got an injunction preventing the publication of an internal report on the extent of its bad debts but it subsequently admitted that it had some £52 million (€66m) in non-performing loans, a very large sum in those days.

On thing very clear from Dáil debates and reports from that time is that ACC and private banks all came under great political pressure to reduce or write-off farmer loans. TD’s were expected to make suitable representations on behalf of constituents. The deals were clearly influenced by political pressure and the extent to which individual borrowers had the backing of pressure groups such as the IFA.

This time political pressure is likely to be even more persuasive, given the extent of the State’s current involvement in the banks. Politicians certainly have more power over the banking system than they ever had. Deals will be done with land speculators and developers covering the extent of any write-down of loan liabilities, the forced sale of assets, loan extensions and, perhaps, interest rate reductions.

As currently structured the bank recapitalisation plan doesn’t provide any mechanism through which the public interest can be taken into account in such deals. Yet the public interest is unlikely to coincide with either that of the banks or the borrowers. Nor it is likely to coincide with the interests advocated by politicians making representations on behalf of individual borrowers.

The conflicts of interest are likely to be most acute when decisions have to be made over the sale of assets. A fire sale of some property assets could present local authorities with a golden opportunity for increasing the stock of social housing but would not be in the interests of either the banks or the developers. On the other hand an orderly disposal of properties may not be possible given the competing interests of individual lending institutions.

There are no easy answers but the operation of a free bargaining process between lenders and defaulting borrowers is unlikely to yield the best result. There’s much to be said for the imposition of some central control over the management of bad banking debts. The idea of transferring this so called toxic debt into a nationalised Anglo Irish Bank seems worth considering.

There is certainly a need for more transparency.  As yet we don’t even know the true extent of the bad debt problems. The banks’ published accounts are believed to underestimate their extent while the independent report, commissioned in recent months from Price Waterhouse Coopers, was never made public.  But some estimates suggest that the figure could run into billions.

Whatever the figure, the banks are going to take a major hit. Thanks to the injection of fresh capital, they should be able to survive. The cost will be borne by the bank’s shareholders – the owners who gained in the good times and now have to carry the can. Their losses are already reflected in the value that new investors are currently putting on their shares.

With no bank failure in prospect, taxpayers are unlikely to suffer any direct cost, but everyone is suffering from the recession which has at least been deepened by our own domestic banking crisis.

Little of the cost has so far been borne by the executives who oversaw the imprudent extension of credit which left the banks exposed to the bad debts that they now face. They can rightly claim that while many were forecasting some slow-down in the Irish property boom, no-one expected a conjunction of world financial crisis and domestic slow-down. Had the U.S. sub-prime crisis never occurred, the chances are that the Irish property bubble would have deflated rather than burst. But it’s the job of bank executives to take account of the unexpected in their risk assessments. So bank shareholders have every right to hold their managers accountable. There’ll be some interesting annual general meetings in 2009.

But of more concern to the rest of us, are the specifics of how the banks’ bank debt problems are resolved.

Colm Rapple
Irish Mail on Sunday, December 14, 2008

Oil giant Shell is keeping very tight lipped about the results of an exploratory well it drilled this year on the so-called Dooish prospect some 150 km north-west of Donegal. Earlier wells in this area yielded oil and gas finds which were described at the time as very encouraging. So encouraging, indeed, that Shell was willing to spent over €100 million on this latest well.

Mind you, the Irish taxpayer will be picking up the tab for a large chunk of that cost since Shell can write off the expense against its profits from the Corrib field.  Because of that tax concession we effectively pay a quarter of the exploration and development costs of getting oil or gas ashore. That, of itself, would justify the 25% tax we can hope to get on the profits from a find.

With larger finds the tax take can now go up to 40% but even that’s a pittance given that we own the oil and gas. We own the oil and gas, pay 25% of the exploration and development costs and yet, in the case of the Corrib find, for instance, will only get 25% of the profits.

But this latest drilling did cost Shell over €75 million so it was clearly optimistic about the prospects. But neither it, nor the Government, will reveal if that optimism was justified.

We are being denied information that would be very relevant in making a judgement about the appropriate of current Government policy on offshore exploration, in particular it’s approach to Shell’s development in Mayo and its decision to licence further key oil and gas prospects off the west coast on terms that are decidedly soft by international standards.

It suits both the Government and Shell to keep us in the dark. They have been playing down the possibility of other gas finds that could be routed through the Glengad landfall near Rossport in Mayo to the gas refinery being constructed at Bellinaboy.  But if there is more gas out there, that’s where it will end up.

And the prospects are good.

While Shell was drilling on the Dooish prospect this year, one of its partners in the Corrib project, StatoilHydro, was drilling on the Cashel prospect which is only about 50km north-west of Belmullet and a lot closer to the Corrib find that Dooish. It was the first drilling into a structure that was believed to be very promising although the industry speculation is that StatoilHydro was disappointed with its results.

But speculation is only that but we won’t really know until StatoilHydro makes a formal statement. Exactly why it is keeping quiet is anyone’s guess.

The Dooish prospect off Donegal is even more promising. An initial well in 2002 encountered a column of hydrocarbon condensate, oil and gas. Shell’s predecessor, Enterprise Oil, was reported to be very encouraged by the results and confirmed that view by returning to the well in 2003, drilling a fresh hole at an angle to the original one. It once again encountered hydrocarbon flows.

These wells are in particularly deep water, some 1700 metres, so it is not surprising that even a very promising find would be left for some years before being revisited. But Shell was obviously sufficiently encouraged by the results to return this year to drill again in an area west of the original find.

The well was spudded on May 19 and plugged on July 28, all without any fanfare, not even a one-line press release from either Shell or the Department.

If the news is in any way good, it calls into question Green Minister Éamon Ryan’s decision to go ahead with another licensing round covering an offshore area the size of the country.  We’ve known about his intentions for some time but it’s only in recent weeks that he formally requested applications for exclusive licences to a massive area off the west and north-west coast.

The companies will be able to cherry pick the choice areas and hold exclusive rights to them for sixteen years. To gain a licence they have to commit to an exploration programme but that may be satisfied by relatively cheap seismic studies and need not necessarily include a commitment to drill even a single well.

The licences will be subject to the slightly improved terms under which tax at up to 40% can be levied on very profitable fields. That’s a little better than a flat 25% but compares rather poorly with 50% in Britain, 78% in Norway and over 80% in some other areas.

Andrew Vinall, technical director at the British consultancy Hannon Westwood, recently described the new terms as in keeping with a regime that has always been “benign at least”. Even with the new terms, he added “if you do find oil and/or gas it is not going to be heavily taxed.”

We gave the Corrib gas away and now Éamon Ryan is intent on giving away the remaining choice areas of our offshore acreage at less than bargain basement prices. He risks giving away too much, too soon and too cheaply. Some of the areas on offer are very close to existing finds. If even one of those is declared commercial the terms for future licences could be greatly hardened.

Government studies suggest that there is oil and gas equivalent to 10 billion barrels of oil under the Irish Atlantic shelf. We’ve already given away our right to a significant proportion of it. Let’s not compound the error by issuing more licenses for next to nothing.

Colm Rapple
Irish Mail on Sunday, December 7, 2008

Pensions have always been way down the agenda at wage negotiations. Even in the broader context of national agreements, little more than lip service is paid to the need to improve, protect and extend pension coverage. Employers don’t want the extra cost and the trade union negotiators know that most of their members regard pensions as a low priority item.

So instead of moving forward, we’ve been slipping backwards.

Existing pension scheme members have been all too willing to accept the closing off of their own favourable defined benefits schemes for new recruits, to secure some short-term gain for themselves. And all too often the trade union establishment acquiesced when they should have been keenly aware of the broader implications.

But pensions were always a low priority. When PRSAs (Personal Retirement Savings Accounts) were introduced, the larger trade unions could have negotiated very favourable deals for their members. They didn’t. And many unions hive off responsibility for advising members on pension AVCs (additional voluntary contributions) to fee charging financial intermediaries who, as a Prime Time programme recently showed, may not always provide adequate advice.

Real pressure for improvements was never applied in the negotiation of national agreements. All parties generally agree that pensions are important, that all retired people should have an adequate income and that the coverage of pension schemes extended. The long-standing target is to have 70% of the population over 30 years of age in some form of occupational pension scheme.

But the issue is then conveniently sidelined. That’s easily done given the long-drawn out process of developing Government policy in this area. Reports have been coming thick and fast for decades. A final Green Paper was published by Martin Cullen who had responsibility for pensions as Minister for Social and Family Affairs. He promised to unveil policy initiatives by the time the Dáil rose for this year’s summer recess.

But he was succeeded by Mary Hanafin and to help put her stamp on the issue, she hosted a conference last April which she described as marking the end of the consultation period. “The Government is determined” she said, “to bring this process to a successful conclusion by the end of the year by publishing a framework for pensions policy that will deliver a pension income for all our people which will allow for the type of retirement we all aspire to.”

Surprisingly this promise wasn’t mentioned in the thick of the latest scare created by the leaking of a memo from Minister Hanafin to her Cabinet colleagues. The timing could have something to do with efforts to influence government decisions.

The problems highlighted in the leaked Government memo that created the scare, are not new. They existed and were recognised long before asset values hit bottom earlier this year. It’s time they were tackled and tackled in a way that enhanced rather than diminished pension entitlements.

The ideal should be to provide all private sector workers with the type of pension security enjoyed by civil servants. That is best done through defined benefit pension schemes where the pension is based on final salary and years of service. But such schemes create problems for employers. Worker contributions are usually fixed as a percentage of pay and employers face an indeterminate liability to make up the rest.

When investments are doing well they can cut their contributions and even take contribution holidays – many large companies were able to do that in the not too distant past. And market downturns need not be catastrophic for larger pension schemes with a good age mix of  members, if they are allowed to take a long term view. But they are not.

The Pensions Board requires pension schemes to have sufficient assets at any point in time to cover liabilities to members if the fund has to be wound up. It’s an understandable and prudent requirement. Companies do fail. But most don’t. The Board does allow some flexibility but more is obviously needed.

It might not stop employers closing off their defined benefit scheme to new members but it might slow the process down by giving them one less excuse for so doing.

But that’s only one of a multitude of pension issues that the Government has to tackle and the quicker the better. This week’s decision to give members of defined contribution schemes two years from pension date to buy their annuity is only tinkering at the edges of the many problems that exist.

Employers are fearful that they will be forced to make pension provision for all workers yet it’s very clear that the only way to extend pension coverage is by compulsion.

The easiest, cheapest and most effective solution would be to simply extend PRSI, the State social insurance scheme. It already provides pensions to most workers. The collection system is in place and operated by all employers and, the existing National Pension Fund offers ideal investment vehicles from the very risky to the very safe.

Of course, there is no money in that for the pensions industry and a few months ago any move to even partially nationalise pension provision would have been unheard of. But not now when even hardened right-wing commentators are calling for bank nationalisation.

The time may also be ripe for major changes to the iniquitous system of tax relief on pension contributions whereby the greatest benefit goes to the highest earners.  Ignoring charges, a standard rate taxpayers pays €80 for the same pension benefit that a high rate taxpayer gets for €59.

Pensions are going to be in the news for some time.