I have a point on this which is relevant to the amendment I have on section 3. This section says that, in addition to the shares held by him in Aerlínte by virtue of section 2 of the Act of 1966, the Minister for Finance may subscribe for further shares of any class of Aerlínte to an amount not exceeding £10 million. I was in doubt, faced with this, as to whether the Minister had, in fact, the right to subscribe for preference shares in Aerlínte under this and I put down an amendment to section 3 designed, in fact, to substitute for section 3, to ensure that the Minister would have this power and to require him to use it in relation to this additional £5 million which he is providing for under section 3. If, of course, section 2 does entitle him to subscribe for preference shares, then I would have or should have adopted, perhaps, a different method of amending the Bill. Therefore, before going any further, I should like to know where we stand on section 2, what is the position about the issue of preference shares under the existing legislation about Aerlínte and under its Articles of Association and the Companies Act?
Committee on Finance. - Air Companies (Amendment) Bill, 1969: Committee Stage.
I thought the section was reasonably clear —"of any class". It leaves it open. It is flexible.
Could the Minister be more precise? Does that mean that he can subscribe for preference shares?
Any device that the Minister on behalf of the Exchequer and on behalf of the State regards as the proper device from the investment point of view can be adopted under section 2 as it reads.
I see. Does the Minister not feel that it would be much more appropriate that, if he has to provide capital to Aerlínte, it should be share capital rather than this extraordinary invention of his which he referred to the last day as a non-repayable loan, I think?
It is not an extraordinary invention; it is very practical.
There are many contradictions in terms which might be regarded as practical but, on the whole, they are regarded as impractical. It is a contradiction in terms.
No. It is the Exchequer's interests that I am concerned with—the State.
I appreciate this. My point is that if the Minister should advance capital to the company he should advance it either by way of shares in the company, which are, of course, not repayable——
Why should the State limit itself?
I have not quite finished my sentence—by way of shares in the company or by way of loan to the company or by way of grant to the company. For all other State companies these methods have been regarded as providing adequate flexibility. I am not clear as to why we have to append this new contradiction in terms, "non-repayable loan". When I questioned the Minister on Second Stage the answers he gave conveyed to me that what he wanted to do was to provide money to the company on terms which are akin to those of preference shares. The only way in which, so far as I can see it—the Minister can enlighten me if I am wrong—the proposals in section 3 would differ from preference shares is that the interest rate on preference shares is fixed at the time the shares are issued and that preferential interest rate is payable—it can of course be passed over if the resources are not there for the purpose—but it is payable, if payable at all, if the money is available at all, at the prearranged rate.
Section 3 seems to envisage that the interest rate could be varied by the Minister from time to time. This I regard as clearly objectionable. This is neither one thing nor the other. To lend money on the basis that you get interest at a rate that you fix from time to time gives the Minister power to change the whole financial position of the company arbitrarily. It is wrong that any State company should be put in that position. It is wrong that the Exchequer should be put in that relationship to a State company. The relations between the Exchequer and the State company should be clearly laid down and defined by the Oireachtas. The Oireachtas should be clear that when money is being issued it is being issued either as ordinary share capital, risk capital, taking its chance whether it gets its share or not, or as preference shares knowing that this entitles it to a certain rate of interest if the money is available and to that full rate or, in the case of a grant, to a grant, or fixed interest-bearing stock.
I do not see why one should introduce this kind of insecurity—you could hardly call it security —"insecurity" would be a better word for it—insecurity involved for the company, in which the Minister arbitrarily decides in any year what rate of interest he wants. That is not fair to the company and it is not fair to the Exchequer. It is not necessary. What the Minister wants is to ensure that he will have a better chance of getting some return here than on his ordinary shares. He wants to be in a position, as I understood it on Second Stage, that in regard to this £5 million it will be in the ordinary way remunerated at the ordinary rate of interest. The way to do that is to fix the rate of interest now which is thought to be appropriate and he will receive that rate of interest thereafter unless the affairs of the company are such that they will have to pass over the preference dividends or pay a lesser amount in a given year. If the Minister wants to assure his position further he can issue cumulative preference shares so that, if there are arrears of preference dividends, they could be caught up with later. This would achieve his objective without introducing a new mechanism which is awkward and which is, I think, objectionable, objectionable in its uncertainty, objectionable because of the fact that it introduces an unnecessary complication into the whole system.
For that reason, on this section, I should like to discuss this matter further because it may well be that the right answer is simply to give the Minister power in this section to subscribe for further shares at a sum not exceeding £15 million. If, within that power given by the Oireachtas, the Minister decides that some shares shall be preference shares at a certain rate of interest, he is entitled to do so and section 3 would then become superfluous at that point.
I doubt if I would have risen to speak at all this morning, despite the Minister's remarks about me the last day when I had left the House. If I had known that he was going to say something about me I would have remained. I am sorry for the discourtesy. I am not going to follow Deputy FitzGerald with his combinations of various forms of top logic and mathematical interlocutions of cumulative preference shares and so on. I said a very simple thing the last day and I will read it out. I took from the Minister's brief the following sentence:
The proposed further State investment in the equity of the company will not be provided as subsidy or grant.
I then went on to say that it would be just as well if that sentence had been left out. There is no difference between putting £10 million capital into this company and giving it a grant. There is no effective difference. Then the Minister proceeded to read the Riot Act to me and said that I was Victorian in my outlook and all the rest of it. I would suggest that it is the Minister who is being Victorian in his outlook. The fact is that, if the Minister had said "We will give a grant or a non-repayable loan," this word that does not appeal to Deputy FitzGerald—I am not precious about words in this sense; if it passes the draftsman, it will do me—I would not have minded. I would not have minded if the Minister had said that he would give the whole £15 million to the company in the one way. What I objected to, really, was the pretence in the Minister's own brief—I am quoting it to him this morning and I think I have him on top of a nail— the pretence in the Minister's own brief that there was a difference between taking up ten million £1 ordinary shares—if I might become logical for a moment—in this company and giving it a grant of £10 million. Personally, I think there is no difference.
I know this company reasonably well. Although I did not work in it, like Deputy FitzGerald, I did work on it for a number of years because it was part of my duty in the Department of Finance to work on it. So, I know the background of this company reasonably well—perhaps not quite the kind of detail that Deputy FitzGerald knows about it — but I do know the principle on which it was set up, and so on. The Minister will appreciate from what I said that I was quite in favour of this company getting £15 million. Perhaps ten or 15 years ago I would have said, "This is an awful lot of money" but in a year where we have a £500 million Budget, £15 million is a modest enough sum. It is the £71 million that concerned me, the Minister will remember. I do think my remark was justified. I do think that it does not make any difference. Deputy FitzGerald's amendment introduces a further complication for this company which has no reality, if he is talking about preference shares. There is no hope whatever in the foreseeable future of the State ever receiving one penny from any kind of loan it will give to this company, regardless of what the Minister may say.
I dispute that.
Therefore, the simpler the approach we use towards these matters the better. I would not have minded if the purpose had been to give a straightforward £15 million to this company but it was this phrase in the Minister's speech this morning that forced me into making the remarks I have made. This does not make me Victorian, rather it makes the Minister Victorian because he is putting forward the view that shares in the company are worth something. The Minister is pretending that the shares are what shares normally are, marketable security, but of course they are not a marketable security.
As I have said, I have no objection to the company getting £15 million but if we are to start putting in preference shares as well, all we are doing is adding another line of print to the balance sheet at the end of the year. I know, of course, that this company borrow money from abroad and that they have been successful in obtaining considerable moneys.
This discussion is more relevant to Deputy FitzGerald's amendment on the next section and we are possibly only anticipating the debate we shall have on the Deputy's amendment. Fundamentally, what is involved here is that the State wishes to be secured more strongly in regard to one-third of the capital advanced and we believe that the most flexible way in which this can be done is by the device adopted under section 3 which leaves it absolutely open in regard to the Exchequer. There will be a repayment in regard to the loan capital to be advanced and there will be a repayment on revenue. This is the strong point.
My objection is that it does not do anything of the kind.
There will be guaranteed revenue interest repayment on the loan capital advanced. This is the whole purpose of the exercise.
In that case, the Minister has misconceived his own section.
Perhaps we are having a false debate. We are discussing the Deputy's amendment. Would it not be better if we had a debate on the Deputy's amendment rather than on the section?
May I ask if acceptance of this section does not preclude an amendment on Report Stage?
Amendments on Report Stage can only be put down on matters that arise on the Committee Stage of a Bill.
I would not like anything I did or did not do now to preclude me from taking action on Report Stage.
At this stage it has been agreed that section 2 stand part of the Bill.
May I take it that in passing on from that section I have not precluded myself from putting an amendment on Report Stage?
That can be dealt with on that Stage.
SECTION 3.
I move amendment No. 1:
Before section 3 to insert the following new section:—
The Minister for Finance may, on the recommendation of the Minister for Transport and Power, take up preference shares issued by Aerlínte to an amount not exceeding five million pounds.
(Acceptance of this amendment involves the deletion of section 3 of the Bill.)
I am concerned with the Minister's remarks on section 2 which suggest that the purpose of section 3 is to ensure that there will be a return on this amount of capital whereas, in fact, the introduction of section 3 has the opposite effect. Had he left the situation as it was in section 2 and just informed the House of his intention to issue part of the £15 million as preference shares with a fixed interest rate, he would be receiving that interest unless the company were in very bad shape but in introducing this new type of insecurity in section 3——
Security.
——he is creating a situation whereby £5 million is to be loaned with no guarantee as to the interest. The position of a State body should not be such that it can be varied at the whim of the Minister. I should have thought that Deputy O'Donovan would have supported me even though he may not be enthusiastic about preference shares, for some reason that I do not understand, but I had hoped that he would have agreed with me that State companies should be protected from Ministerial intervention that could affect the shape of their profit and loss account. They should be entitled to run their own affairs on the basis that they would know their liabilities in advance. I am not aware of any precedent for this procedure. I did mention on Second Stage the situation that has developed in Nítrigin Éireann but it is slightly different in character and is, perhaps, even more objectionable. I agree, of course, that State companies should know where they stand and that they should be subject to supervision by the Minister as regards their policy but within certain limits.
Deputy FitzGerald forgets that when I was interested in State companies, my interest was in trying to get some money out of them rather than, as the Deputy suggests, preventing Ministers from intruding in their affairs. I must say that the State companies of which I had experience showed no reluctance on their part towards the Exchequer. For instance, the Dairy Disposal Company when it began to make a great deal of money during the war years also paid a large amount to the Department of Finance.
Deputy O'Donovan touched on the various points involved here. It is quite simple, really. Let us cut out the jargon. It is a question of the State ensuring a security in regard to interest repayment for a proportion of capital invested. This method of doing it in regard to having a definite interest return——
Indefinite.
No, a definite return.
Indefinite.
No, definite.
That is not what the section says.
The Minister to continue.
This is the whole purpose of the exercise. It is designed to secure a definite interest. At the same time, it is within a flexible framework and will ensure, as regards one-third of the money advanced by the State, that the Exchequer is guaranteed a dividend. This is what is done. It is a safeguard so far as the State is concerned. Deputy Dr. FitzGerald said this might start an undesirable precedent. The boards of the air companies concerned, Aer Lingus and Aerlínte, are fully behind it and support it fully. It has been examined in consultation between my Department and the boards involved. They think it is a reasonable balance and a reasonable way to achieve the investment required. There would be a balance between the loan capital and equity investment which we would hope to achieve on, roughly, a fifty-fifty basis. We want to ensure that there is this balance within the capital structure of the companies and that within that structure there is a reasonable way, from the State's point of view, of achieving a return, and this is the device adopted.
I am surprised at Deputy Dr. FitzGerald being ultra-conservative or concerned about traditional methods of doing this particular operation. Surely sections 2 and 3 both ensure that there will be complete flexibility in regard to the various devices which can be adopted? I am much more in agreement with Deputy Dr. O'Donovan here.
Two Victorians.
We are thinking ahead whereas Deputy Dr. FitzGerald is thinking with a hidebound conception. Let us have a flexible arrangement in regard to raising capital so long as the broad objectives are achieved. We have to get a proper capital structure for the air companies to ensure that we have a capital structure to enable our air companies to raise the finance necessary for the massive investment which will be required in the 1970s and 1980s. That is the first purpose. The second purpose is that in the interim period—and it is an interim period in regard to the finance involved —we wish to ensure that the State gets a reasonable guarantee in regard to the return on moneys advanced. This does not preclude an equity return. It does not preclude a return on equity investment either. I would disagree with Deputy Dr. O'Donovan here. I could see a dividend resulting from the equity investment in the future. This is our hope. We would at least guarantee that a percentage or a proportion of one-third of the investment would give a definite dividend by reason of this device under section 3, or whatever other device may be adopted. Leave it open to us to do so.
This is a commercial growth enterprise and Deputy Dr. O'Donovan is being Victorian in his conception here in that he does not envisage any State return arising from our substantial investment. Our investment in the air companies will be much more substantial in the future. These companies have proved to be a dynamic growth industry financed by the State and well remunerated. It should be the sort of industry to be encouraged by socialists as people who believe in State involvement, I want to see this industry doubling and trebling itself in the years ahead. It has shown itself to be highly remunerative in the narrow sense and totally remunerative in the broader sense of revenue intake in respect of services rendered to the tourist industry itself. This industry has proved remunerative in the broad sense of an analysis of its benefit to the nation as a whole as well as in the narrow commercial sense. So far as the State is concerned in regard to this and any further investment that may be involved, this group of air companies have shown themselves remunerative. They will be more remunerative in the future. They are dynamic growth State enterprises of which we can be proud. We should not quibble about details in regard to investment. It is really a question a rose by any other name in regard to what sort of device we adopt. Let us leave it flexible so that we can adopt any sort of device so long as the State interest is retained.
I agree with the amendments. It would be better to describe them as preference shares rather than leave the matter loosely as it is. I also think that, under certain conditions, the preference shares should be repayable. Section 3 states that the money shall not be repayable. That is bad practice. Under certain circumstances, if Aerlínte or the other air company became liquid and the Government needed capital moneys, it would be quite right to call upon Aer Lingus to pay back any moneys they could afford to pay back. It is only right that the actual interest on dividends on the preference shares should be stated in the Bill. It should be specified, and eight per cent would be a fair return in the commercial sense. I should like to ask the Minister what the conditions would be in respect of the financing of Aer Lingus if we joined the EEC. Would the present practice of not getting interest or dividends from Aer Lingus or Aerlínte be allowed to continue? I do not think we could subsidise the air companies as we have been doing up to now.
There is no problem there in any EEC context. There will be no problem with regard to Aer Lingus particularly. We can say that with very definite certitude because if every airline in the world was as good and in as satisfactory condition as Aer Lingus they would be very happy.
That is over-simplification. Although the Rome Treaty excludes air and sea transport from its transport chapter or title, with the Irish, British, Danish and Norwegian membership it is the intention and expectation that they would be included. The provision in regard to State companies would then apply here. That could be a problem in the future. It is not a pressing, urgent one now because, as the Minister says, other air companies are in even worse condition. I would not rule it out completely. In regard to railways, already the EEC transport policy is beginning to be brought to the point of applying.
We are not on that today.
It has potential implications for us also. I would not just dismiss it completely. There is a good point behind what Deputy Collins has said here.
It is amusing how Queen Victoria comes into the debate on air companies. The use of the word "Victorian" is amusing me. I would associate her with many characteristics but not with such matters as preference shares and non-repayable loans.
She could be associated with railways rather than with airlines.
I agree with some of what the Minister has been saying in reply to Deputy Dr. O'Donovan. The fact is that this particular company has been earning a return on its share capital of ten to 15 per cent. Admittedly, in later years this capital structure has become very unbalanced. A high proportion of it is loaned capital and you are not getting a very fair picture of its earning power if you relate its profits only to the share capital which is too small a proportion of the total, but even if one allows for that and throws in the loan capital it is still earning a significant return on the capital invested in it. It seems to me that to say that there is no prospect of ever getting a return from the money now to be invested is to be unduly pessimistic. On this I agree with the Minister rather than with Deputy Dr. O'Donovan.
To come back to the main point, this amendment, I am struck by the way the Minister ties himself up in knots—he may be unconscious of this and that would even make it more striking—by talking on one hand of the immense value of this procedure as being completely flexible and on the other hand that you would ensure a definite return. It cannot do both at once, and the one thing it does not do is ensure a definite return. The purpose of section 3 is not to ensure a definite return. The purpose of my amendment is to ensure a definite return of X per cent, whatever is fixed on the preference shares at the time they are issued. The Minister has avoided that device and has proposed a system under section 3 which provides an indefinite return, a return which is not fixed and may be varied by the Minister from time to time as he thinks fit. It is absurd to claim on the one hand that this device is flexible, which is perfectly true, and at the same time that it involves a definite return. It is, in fact, a device that is too flexible. The Minister said that the boards of Aerlínte and Aer Lingus—I am not quite clear how the board of Aer Lingus is concerned——
They are interlocking, as the Deputy knows.
But they are not the same boards. They have a different composition and I do not see what the board of Aer Lingus have to do with it. The board of Aerlínte is the relevant one and from what the Minister said I gather it is wholeheartedly behind this proposal. This does not surprise me. The board of Aerlínte could well be taking a short-term view and not having regard to its longer term interests or, indeed, to the public interest. State boards often do take a narrow view. From the short-term viewpoint of the Aerlínte board they could benefit from this because instead of being burdened by, say, 6 per cent per annum to be paid every year they would have money available to them on which interest would be payable as the Minister determines.
It would be much easier and would be much less noticeable if in any year they went to the Minister and said: "You asked us for 6 per cent last year but this year things are not so good. Would you cut it back to 3 per cent?" This is done by ministerial order quietly and there would be no need, I think, even to lay the order before the House. I am open to correction on that. That would be much less noticeable than having to pass the preference dividend. I can quite see the Aerlínte board taking a short-term view and preferring to put themselves at the mercy of the Minister in this matter rather than have a definite obligation to take interest on the money.
I think that would be wrong but it would not surprise me if they took that view. I think in the longer term their interest lies in having a relationship, an arm's length relationship with the Minister and his Department, a relationship in which it is quite clear to everybody what the financial relationship is between them and in which the Minister does not have power to influence the company's accounts by arbitrary action with regard to the interest he requires to be paid. While I am disappointed that the board of Aerlínte have taken this line I am not completely surprised because there is is this danger of boards of State companies, particularly when under financial pressure, taking an unduly short-term view of their own interests.
There is certainly the danger that they do not have regard to the public interest which lies with preserving the autonomy of State enterprises subject to overall ministerial Parliamentary control of their policy, but not intervention in day to day affairs. There is nothing more day to day than annual accounts, if one can speak of something annual as being day to day, because they are part of the ordinary running affairs of the company, their annual accounts and what money they make year after year. This is not something in which the Minister should be able to interfere every year at his discretion but it should be a matter for the autonomy of the company. The more I think about this the more concerned I am.
When I made the point originally I did so because it struck me as odd that the Minister had proceeded in this way. The full impact of it did not strike me and it was only during this debate I began to realise how very serious this precedent is and how it could easily become a device for very much greater ministerial and Departmental control over the State companies. I know from my experience of State companies, and Deputy Dr. O'Donovan knows it from the other side—and, perhaps, sees it differently—how much intervention there is already and how much of a pure theory it is that the Minister is the person concerned with these State companies. The practice at day to day level is that the civil servants and the management of the company are in constant contact with constant warfare between them; perhaps, that is too strong a term but constant conflict over various issues, give and take, horse-trading and bargaining. If this gets a bit out of hand and one side or the other becomes irate and is not winning out sufficiently the Minister is called in, in a sense, to arbitrate.
That is the practical position and the theory that it is the Minister who is dealing with them and that the civil servants are acting merely as his agents is, as the Minister knows, a lot of nonsense.
Most of the time the Minister does not know what the civil servants are doing and only finds out when something goes wrong and they come to him. I know that from my day to day dealings personally with officials of the Department during my period in the air companies. That relationship is already a disturbing one. The degree of bureaucratic intervention and control is disturbing. The State companies must accept this to a considerable degree because they are already excessively dependent for various favours and discretionary matters upon the Civil Service and the Department. There must be give and take. Very often they must agree to things which the civil servants have no power to require them to do but they must agree because otherwise they would lose the goodwill of the Civil Service in relation to some other matter where the civil servants could advise the Minister against them. Fear of that means that the State companies must toe the line.
On the whole, this difficult relationship is one in which a balance is maintained because ultimately the State company has autonomy and could assert itself and, therefore, the civil servants are limited in the extent of their intervention. At the same time, they have considerable power. That power is always exercised for what they see as the public interest or public good. It would be unfortunate if they did not have some power because, as I said, these bodies very often take an unduly narrow view of the public interest. There must be a balance of interest in this way. But what I fear is that in this instance if this power is given the balance between the two would be pushed far too much to one side and that, although the board of Aerlínte may not appreciate this now, they are putting their head in a noose with this and putting themselves into a position where for the first time, by a stroke of a pen, the civil servants advising the Minister can affect the shape of their profit and loss account.
This will give an additional bargaining power to the Civil Service which I think will unbalance the relationship which is already a very delicate one between the two and which already, I think—this is a personal view which is obviously open to disagreement—is if anything too much on the Civil Service side—not too much too much, but a little too much. If we now give this discretionary power to the Minister I think the whole position of State bodies would ultimately be in danger. I speak from some experience, although from a particular viewpoint on that. I can see that Deputy Dr. O'Donovan, who has had just as much experience as I have of the Department but from a different angle, may view it differently and may advise the Minister differently on this subject. I am concerned but I feel that this is a precedent of some importance, one which might have passed through without much notice but for the fact that it struck me as an oddity in the first instance and it is only from hearing the debate here that I have come to appreciate the seriousness of what is here proposed. I, therefore, urge the Minister that both with a view to getting a simpler and more clear cut position and securing a definite return, if that is what he wants, he should revert to the preference share arrangement——
On revenue. We have a really definite return guaranteed by what we propose in regard to the £5 million advance.
There is no definite guarantee. I wish the Minister would explain this statement. What is said here is that sums paid to Aerlínte under this section shall be on such terms as to interest and such matters as may from time to time be determined by the Minister. I cannot imagine anything less definite.
The Deputy cannot ride two horses at the one time.
The Minister is riding two horses. I am just galloping away on one of them—I hope.
I agree with that.
Is the amendment withdrawn?
Has the Minister nothing more to say?
Not beyond what I have already said. I regard this as having the merit of flexibility on the one hand and of enabling the Exchequer to ensure remuneration in regard to a proportion of its investment. This is surely the proper balance to maintain vis-á-vis a State company vis-á-vis any form of investment envisaged. Furthermore, this has been done after complete consultation with the boards concerned and this is the proper way to go about it so as to ensure that our air companies have a capital structure in the 1970s that will enable them to raise the massive investment that will be required by them in the aviation world into which we are going.
Would the Minister say in connection with this section what is the position about these guarantees at the moment?
Is the Deputy just asking for information?
How much is guaranteed by the Government at the moment?
The 1966 Air Companies Act limited the guarantee on borrowing to £5 million for Aer Lingus and £6 million for Aerlínte. The 1967 Air Companies Act increased the Aerlínte limit to £18 million. This increase is related to the purchase of the two jumbo jets. The companies themselves advised me, and we have gone into it and investigated it, that a combined limit for the two companies instead of individual limits gives greater flexibility for financial transactions and we are interlocking the two companies so that the overall increase from £23 million to £50 million results in a much bigger re-equipment programme for the two companies. The whole purpose of this section is to ensure closer interlocking between the two companies and to raise the financial limits that were circumscribed heretofore.
It is entirely sensible to bring the two under one provision but what I want to know is what, in fact, is the amount guaranteed at present?
The borrowing limit is up to £50 million. The guarantee to the Irish Life Insurance Company, I am told, is £1 million; the bulk borrowing for the air companies capital programme, is £28 million——
What is guaranteed at the moment?
For Aerlínte the guarantee at the moment is about £9 million.
The two together?
Yes.
Could the Minister explain section 7?
Under the 1966 Act, section 4, the Minister for Finance is authorised to make repayable advances up to £1 million to Aer Lingus or Aerlínte. The repayable advance involved meeting repayment of principal as well as interest. The section of the Bill we are discussing deals with the capital requirements of the air companies until 1972-73. There are provided for in section 2 shares and section 3 non-repayable advances. In other words, we are removing the limit again, coming back to what Deputy FitzGerald advocated some time ago, removing the limit that was there under the previous Acts.
Does this go because what is in it is covered by sections 2 and 3?
Yes, that is correct.
Next Stage?
Could we have it now?
If the Chair would allow me to put some verbal amendments I would agree. They are very simple ones. This will facilite the Minister. The amendments concern sections 2 and 3.
If the House agrees.