Colm’s columns

Colm Rapple
Irish MAil on Sunday August 9, 2009

Can a gas find currently valued on the open market at no more than €1.5 billion, generate €1.7 billion in tax revenue for the State? According to junior minister Conor Lenihan, it can, and no doubt he is right. But this take on the Corrib Gas field off the Mayo coast is misleading in the extreme, all smoke and mirrors as Mr Lehihan’s mentor Bertie Ahern might have said.

The figures are not comparable. The value put on the field is what someone is willing to pay now for a stream of income that could extend over the next twenty years. Indeed on the basis of the tax revenue estimate the field is likely to generate profits in excess of €10 billion. It’s against that figure that the expected €1.7 billion tax revenue has to be considered.

Comparing the current value put on a company with a stream of tax revenue that won’t start flowing into the exchequer for perhaps ten years and won’t be fully collected for maybe twenty years is like comparing apples and oranges as the clever Mr Lenihan well knows.

Firm figures are hard to come by in the offshore hydrocarbon business. But it hard to get anything firmer than the price a company is willing to pay for a find or a stake in it. That’s what we now have for Corrib. This week the Canadian based Vermillion Energy Trust announced that it was paying up to $400 million (€280m) for the 18.5% stake in the Corrib field owned by Marathon Oil.

Vermillion is essentially buying a flow of income, having taken a view on the likely gas reserves and made some assumptions on the future trend in gas prices. In making such a valuation a discount rate is applied to future income and a 10% rate is not uncommon. That means that €100 which won’t accrue to the company until this time next year is valued at only €90 or €81 if it has to wait two years. Using a 10% discount rate, a €100 payable in ten years time is currently only worth €14.

That’s how companies put a current value on a future flow of income and that’s how Vermillion undoubtedly calculated the price it was willing to pay for the Corrib stake. On the basis of the €280 million it paid for an 18.5% stake, the Corrib field as a whole is worth €1.5 billion. But the actual profits that will be made will be multiples of that.

Putting a current value on a future flow of tax revenue is easy mathematically if we knew when that estimated €1.7 billion was going to flow into the exchequer. But we can guess. Shell and its partners won’t be paying any tax for many years. It can write off all of its exploration and developments costs and even the cost of eventually abandoning the find before declaring a taxable profit. So it could be ten years before they pay a cent in tax.

On the assumption that the tax would come in evenly over the following ten years, the current value of that estimated €1.7 billion tax revenue using a 10% discount rate is only €380 million.

That’s the figure that Conor Lenihan should have used this week if he really wanted to compare the potential tax revenue from Corrib with its current value as determined by the Marathon sale. And it’s a pittance. The Irish people, who actually own the gas, will get only 20% of the taxable profits made by the Shell consortium. Shell will be pocketing profits for many years before a cent in tax is paid.

The debate over where the gas refinery should be sited and where any onshore pipeline should be laid is really only a side show to this greater scandal. Instead of falling over themselves trying to made things easy for Shell, it’s time that the State agencies from the Minister down recognised just how good a deal Shell is getting and how much more it could be forced to contribute. It should at least be forced to be more environmentally and people friendly while a strong case can be made for a windfall profits tax. It’s an insult for Conor Lenihan to pretend that the Irish taxpayer isn’t being short-changed.

Colm Rapple
Irish Mail on Sunday, August 2, 2009

NAMA, the National Asset Management Agency, is set to become one of the largest lenders in the country with a loan book worth an estimated €90 billion. A large proportion of that debt will be owed by a relatively small number of developers and the new agency, with a staff of about 50, should be able to manage the loans.

But NAMA could also become the biggest property owner in the country. The management of that portfolio will have a major impact on our economic and social  progress for decades to come and NAMA’s focus is likely to be too narrow to ensure that all aspects of the public interest are taken into account. It’s primary role will be to maximise the financial return on those assets and that’s where its focus will lie.

It isn’t planning to become a major property management company in its own right. Instead it has plans to contract out that role. Already, we are told, a number of companies, including some large foreign PLCs have expressed an interest in doing the job.

And why wouldn’t they? It could be the business opportunity of a lifetime for such companies. But who will they be and how will they be picked? Will Irish companies be excluded? If not, will it be possible to ensure that developers who defaulted on their loans don’t resurrect themselves in a new guise?

But any property development company will be motivated simply by a desire to maximise profit.  In itself, there’s nothing wrong in that but if we learnt anything during the boom years, it is that the best interests of society and communities are seldom promoted by profit maximising property developers.

We now have a golden opportunity to have a large property portfolio managed by a central planning and property management agency, that could maximise not only the financial returns but also the social returns of future developments.

The bones of such an agency already exist in the Office of Public Works. It’s current tasks include property maintenance, property management, architectural and engineering services, heritage services, project management and procurement services. Between it and the housing sections of the Department of the Environment and the larger local authorities there must be enough expertise to provide NAMA with all of the property management and development services that it will need.

Of course, NAMA would still have to call the shots. But using a State agency to manage this potentially massive property folio in the interests of the Irish people is obviously a far better option that passing it over to private property developers, whether Irish or foreign. There is a strong case for such an agency actually buying some of the land that will be coming onto the market for future housing and infrastructural use.

Such a land bank could form part of the National Pension Reserve Fund and be financed as such. It would form a major bulwark against a repeat of the house price bubble.

Initially, of course, NAMA won’t be acquiring properties. It will be buying what are effectively IOUs. There is currently an estimated €90 billion owed to the banks by property developers on the security of land and property that is now worth considerably less than that. The banks hold the IOUs but they are no longer worth their face value. They’ll be bought by NAMA at a discount that will be decided on a loan by loan basis.

We don’t know how much the discount will be but NAMA might get the €90 billion worth of IOUs for, say, €65 billion. It will continue to pursue the developers for the full €90 billion and, where loan repayments are in default, it will have the power to acquire the assets, land and property, that was initially put up as security for the loans.

Undoubtedly that power will have to be exercised on a relatively large proportion of the outstanding loans and NAMA will end up with a substantial portfolio of land, and developments both fully and partially completed. It’s full potential will only be realised if the full portfolio is viewed, not as discrete elements, but rather in its totality within the context of a long-term, national property development strategy.

That will require more than what is currently proposed for NAMA.