Industrial Credit (Amendment) Bill, 1979: Second Stage.

Minister of State at the Department of Finance (Mr. Wyse)

I move: "That the Bill be now read a Second Time."

The purpose of this Bill is to raise the statutory limits on the power of the Minister for Finance to guarantee borrowings by the Industrial Credit Company and on the borrowing powers of the Company.

The Industrial Credit Company was set up in 1933 to provide industrial credit mainly on a long-term nature. The relevant legislation imposes a limit on the extent to which the Minister for Finance may incur a contingent liability by guaranteeing the company's borrowing. The present limit is £75 million. I have recently authorised the Industrial Credit Company Ltd. to negotiate foreign borrowings in EMS currencies so that it can continue to meet the high level of demand by industry for investment funds. A total package of £50 million is envisaged up to the end of 1980 and this money will be on-lent by the company in Irish pounds at keenest going rates for Irish currency. No exchange risk will arise for the ultimate borrower; the risk will be borne by the Exchequer in return for regular payments to it by the company. The official external reserves will, of course, benefit from the receipt of foreign funds.

The precise mechanics of this scheme have yet to be worked out but, as it will be necessary for me to guarantee the repayment of the principal sums being borrowed under this package, we need to revise, upwards, the limit in legislation on the power to guarantee borrowings by the Industrial Credit Company Ltd. As I mentioned above, this guarantee limit at present stands at £75 million and as that limit would in any event shortly be reached in the normal course of events, it is now necessary to increase that limit to accommodate not alone the moneys involved in the package referred to but to take account also of the vastly accelerated rate of business being generated by the company. I therefore propose to raise the limit enshrined in existing legislation from the present level of £75 million to £400 million and, as will be seen when I refer to the general borrowing of the company, this limit is in line with what I propose to fix as the limit on borrowing by the company for a further period.

Since the company's establishment there has always been a statutory limit placed on the extent to which it may borrow for the carrying on of its operations, and this limit has been extended from time to time as occasion required by amending legislation. The existing limit on borrowing is £200 million. Outstanding borrowings now total £127 million and are rising rapidly, as the company's business is expanding at a rate which was not envisaged last time the limit was increased. On the basis of firm arrangements already entered into by the company it is probable that the statutory limit will be reached by mid-1980. It is essential, therefore, that the present limit be raised to enable the company to continue its very useful work. The new limit proposed in section 1 of the Bill is £400 million. An increase of £200 million may be considered to be very large. ICC business is, however, steadily growing and is at present at a level of over £10 million per annum and it is likely that this growth will continue. Lendings of that amount would involve borrowings by the company of some £60 million. Hence an increase of the limit on borrowing to £400 million should be sufficient to allow the company to borrow its requirements for a further four to five years before Oireachtas approval has again to be sought. I do not think that Deputies will regard this period as too long.

Deputies will note that the Bill has the effect of making the limits for both overall borrowing by the company and ministerial guarantees the same at £400 million. While certain aspects of the company's borrowing requirements do not require guarantee—for example, borrowings from the Exchequer—the experience now is that the financing of the company's operations is more and more being subject to guarantee. Deposits of the public with the company, reflecting the public's confidence in the ICC, have increased substantially. The borrowing in EMS currencies referred to earlier will also call for guarantee as do the company's borrowing from such institutions as the World Bank, the European Investment Bank and the European Coal and Steel Community. Guarantees are also being sought by other institutional lenders—this seems to be common practice nowadays—and as the Exchequer element in ICC's financing represents a diminishing proportion, it is considered appropriate to have the two levels the same. Thus, the relationship which existed prior to the 1977 Act between the overall borrowing limit and the power to guarantee is being restored. However, despite the fact that it is intended that the guarantee limit will be the same as the overall borrowing limit, it will remain my policy only to give a guarantee where absolutely necessary.

In the year to December 1979, the company expects to have provided financial facilities totalling £74 million approximately for industry. In the previous 12 months the company disbursed £42 million. Most of the capital needed by the ICC is secured from non-Exchequer sources, and it is hoped that this position will continue. Capital required for the operations of the Shipping Finance Corporation is provided by the Exchequer as it is re-lent at a subsidised rate of interest.

Over the last ten to 12 years, the ICC has expanded its activities considerably. The company's main activity is the provision of longer-term loans but it also offers a wide and sophisticated range of other facilities to meet the complex demands of industry. These include share investment in industry, capital underwriting and issuing house services, hire purchase facilities for plant and machinery, equipment leasing and finance for distribution. In addition to the provision of capital it has also a subsidiary company, Mergers Limited, which specialises in the field of mergers and takeovers by undertaking share evaluations and by advising in negotiations for mergers between firms. It is also concerned with shipbuilding finance through its other subsidiary company, Shipping Finance Corporation.

In view of the need for higher industrial investment to promote economic growth and generate much needed jobs, there will be a continuing and increasing demand for the facilities provided by the company. I am most anxious, therefore, that the company should be in a position to contribute to industry the financial and organisational expertise which it has built up over the years in addition to financial assistance. The present legislation, when enacted, will enable the company to maintain an appropriate flow of funds to industry.

For almost 50 years now the ICC has been to the fore in the financing of Irish industry. Many of the successful industries established over that period started from modest beginnings with the assistance of finance provided or arranged by the company. Facilities are provided for the establishment of new industries as well as the expansion of existing firms and the company has a tradition of giving special attention to proposals in regard to small projects. The continuing increase in the demand for the company's facilities is proof that its importance has in no way diminished with the emergence of present-day financial institutions in the private sector. The present legislation will enable the company to continue its important role in the development of the economy and I confidently recommend the Bill for the approval of the House.

I should say at this stage that I would appreciate if the House would agree to deal with all Stages of the Bill.

Mr. E. Collins

I rise to welcome and support the Bill. I assure the Minister of State that there will be no delay in its passing through the Dáil this afternoon and I am prepared to give it all Stages today.

There are a number of aspects of the Bill which I would like to discuss.

First I want to mention the question of foreign borrowing by the company. The cost of finance is so high here that our financial, industrial and commercial institutions are being forced to go abroad to get finance for their operations. That is not healthy in the long term. I know there are limits to what we can borrow abroad and that, in the context of our balance of payments, the debt that would have to be repaid would not really count in the long run. Nevertheless it is a fact of life that the interest rates available abroad are much more favourable than at home.

This leads me to criticise the Government for their attitude to the situation within the European Monetary System. It is fair to say that when we were discussing entry into the EMS it was to put to us that our currency system and our structure of finance within industry would reflect the situation on the Continent rather than that in England. On that basis we looked forward to a low level of interest rates rather than a high one.

What has happened in effect is that we are still linked with the money situation of England rather than that in Europe. We suffer when the British bank rate goes up because there is still a definite connection. That is unfortunate because the state of development of Irish industry and commerce, including agriculture, is such as to require a structure of low interest rates rather than high if we are going to see the necessary development in our industry, commerce and agriculture.

The present level of interest rates here is a disincentive to investors; it is a disincentive to business people to invest in new projects or the expansion of existing factories and businesses. The Government are certainly to blame because they have allowed this high interest rate structure to continue. They have not made the necessary attempt to restructure what I will call our money industry in relation to Europe. We are still looking at the Old Lady of Threadneedle Street and whatever she does we must follow on her coat tail. That is wrong. If we are to be an independent nation we have to have our own structure which will relate more to the needs of Ireland than to the needs of Britain. The present interest rates here are anything up to 20 per cent. Rates are between 17 and 20 per cent unless it is a special loan. This is not the type of structure we need and the Government must bear the blame for not making an effort to move away from that structure.

We have another problem in relation to the expansion of industry and commerce here and that is the reappearance of a relatively high rate of inflation. It is now going up into two figures at 13, 14 and maybe 15 per cent per annum.

An Ceann Comhairle

This is getting away from the terms of the Bill.

Mr. E. Collins

I will not go deeply into it. I merely want to refer to the environment in which our industry and commerce and, indeed, the Industrial Credit Company itself, must work and I feel a brief reference to the inflation rate is relevant to the working of the ICC. When the last Government went out of office in 1977 the rate of inflation was about 7 per cent having come through a worldwide recession. That is the type of inflation rate that we possibly can afford. We most certainly cannot afford double that rate, 14 per cent. In that environment it will be difficult to get entrepreneurs or investment companies to invest in new industries and in the expansion and modernisation of old industries. The ICC must be well aware of this inhibiting environment.

The amount by which the Bill is increasing the borrowing limit from £200 million to £400 million, that is, by £200 million is exceptionally large. While I would not wish to see any Minister having to come into this House every six months to seek an increase in the limit it must be quite obvious that the £400 million now being sought will mean that there will not be a discussion on the ICC in this House for at least two years and that is a long time. I would prefer to see at least a yearly discussion on the workings of the ICC in this House.

I note, too, that the guarantee which the Minister can make is also being raised to £400 million. This is interesting because this was not done in the 1977 Bill and Deputy P. Barry, our spokesman on Finance, on Second Stage of the 1977 Bill queried the reasons for not linking the guarantee limits, so to speak, with the borrowing limits of the corporation. I am glad that they are now pari passu and there should be no problem about the Minister giving the guarantee, although I wonder why the Minister used the phrasing he did use. I quote him:

However, despite the fact that it is intended that the guarantee limit will be the same as the overall borrowing limit, it will remain my policy only to give a guarantee where absolutely necessary.

Why was it necessary to make that kind of statement? Is there some technical or legal reason or has pressure been brought on the company or the Government to give guarantees constantly in respect of borrowing by the ICC? It is a peculiar statement for a Minister to make in the House concerning borrowings of the ICC. I would like the Minister to come back to it in his reply.

I am glad that certain foreign borrowings by the company are guaranteed as to exchange rate risk. I would like the Minister to state the policy in respect of present and future foreign borrowings. On page 17 of the ICC Annual Report for 1978 is a note which states:

(13) There has been a partial drawdown in various currencies of loans equivalent to $40,000,000 from the International Bank for Reconstruction and Development repayable by half-yearly instalments from 15th November, 1973, converted at the rate of exchange prevailing on date of receipt. No foreign exchange profits or losses will arise on repayment under the terms of an agreement between the company and the Department of Finance.

That is understandable. It is proper that State bank institutions such as the ICC and the ACC should not be open to risk on the foreign exchange market. There is a proper need for the Government to ensure that the risks are guaranteed against in making the initial deal, or are secured by the Government in making the deal or in the course of the loan.

The corporation have sought finance from the European Investment Bank and that money is being lent to industry—successfully I may add—at the low rate of 9 per cent with ¼ per cent added for administration purposes. That is sound, and obviously demand for it has been such that there was a need to go back for more. During the year 1978 there was an initial fixed interest rate loan of £2.5 million from the European Investment Bank and this was lent to manufacturing industry at a fixed rate of 9 per cent. This was so successful, according to the report, that, quite properly, they went back to the EIB for an additional loan of £5 million and it is anticipated that this money will be used in the coming year. That is good and sound.

As I mentioned in an agricultural debate in the House about two weeks ago and dealing with the ACC, this raises the question of the future role of the ICC. Certainly they are dealing as a merchant bank more or less within the manufacturing, commercial and industrial sector, giving long-, medium-and short-term loans, hire purchase and leasing facilities and are involving themselves in share investments and underwriting capital issues. Those are proper functions for a merchant bank.

Have the ICC any plans to become a full bank? I merely raise the question for discussion. There may be an argument for them becoming a full bank and keeping themselves involved only in the industrial market—in other words, not involving themselves in personal loans. There may be a good argument in favour of the ICC becoming a full bank with current accounts. Obviously, they have a very large investment in the industrial and commercial sector and on occasion this investment may be in jeopardy because of the lack of working capital being made available to some of their clients. With many manufacturing industries, for one reason or another, such as a bad year, seasonal problems or down-turns in the economy, there is a tremendous working capital problem which sometimes is not solved. Perhaps if the ICC were in a position to run an overdraft for such firms that would be a proper extension of their responsibility to industry which could smooth over problems for some of their clients, especially short-term problems in relation to working capital.

There would be a resistance on the part of the banks. However, the ACC preferred to become a commercial bank in full because they would understand the needs of farming better and would be seen to be able to be outside a credit squeeze in so far as they could resolve their productive investment and loans. The same could apply to the ICC. If they were to become a bank they could be exempt from credit squeeze in relation to industry. Obviously, the ICC bank would not take over from the larger banks, but there is a limited role which the ICC could play profitably and properly in their banking system, certainly in relation to their own clients. I make the suggestion more as a discussion suggestion than as a policy statement and perhaps it would be more proper to some other time.

Two subsidiary companies are involved. One is Shipping Finance Corporation Limited who are involved in loans for the construction of ships. The other is Mergers Limited who are involved with advice in relation to mergers, takeovers, public issues and so forth. That is fine, but it does not come to the notice of the Dáil that these companies are successful or unsuccessful. We are not aware of the policy being pursued by the ICC in respect of loans for ship construction which is always a difficult area. We are entitled to more information than we are given at present in relation to the operation of Shipping Finance Corporation Limited. Obviously, the cost of a ship is very great and we would like to see our shipping industry expanding and improving, but under certain conditions which would be favourable to national rather than foreign or multinational industries.

However, a debate on that would be interesting. To say the least, the reference to the companies is passing and there has not been any policy statement from the Minister on behalf of the Irish Shipping Finance Corporation. The field of mergers is very specialised. I understand that the company concerned have been very successful, that they give good advice, but I should like more information to be put before the House as to the policy adopted by that company. Obviously, we would hope that the company would not favour the emergence of monopolies nor that they would be a party to encouraging a monopolistic or oligarhic situation. They have a duty to ensure that the firms they advise are firms that will profit from a merger or whatever is intended, but any such merger should not result in an increase in the monopoly situation.

Again, I am disappointed at the failure of the Minister to make a comprehensive statement in relation to mergers but there was no such comprehensive statement either in 1977 on the policy adopted by Mergers Limited or by the Shipping Finance Corporation. I am glad that the Industrial Credit Corporation have broadened their activities and have become involved in helping in the area of investment in the hotel industry. This is a novel idea, but it is an area that is as much deserving of finance as is any manufacturing industry having regard to employment content and so on. The fortunes of the hotel industry vary enormously. During the seventies that industry experienced very difficult times, primarily because of the Six County situation but also because of inflation and of difficulties in the international money market. Hopefully, the investment in hotels will play a full and proper place in the overall policy of the corporation.

In conclusion, I would merely say to the Minister that the present level of interest rates is forcing people to do business abroad. In the long term the policy that brings about such a situation is wrong. It is caused by our not having made the necessary effort to insulate our money market and by our failure to make the necessary policy decisions to ensure a low level of interest rates. This is a very serious matter and one which will cause the deferring of investment at home and that is a serious matter for a country such as ours which is at the developing stage.

Mr. Horgan

It is unfortunate that the Minister for Finance is not here but presumably he has other engagements. In broad terms we welcome the Bill, but it has certain implications which bear consideration and some of which are fundamental.

One of the key differences between this Bill and any of its predecessors relates not only to the alterations in the limits for borrowing and guarantees but to the fact that, in introducing the Bill, the Minister told us that recently he authorised the ICC to negotiate foreign borrowings in EMS currencies. Of course, a couple of years ago there was not any such system as the EMS. We are all aware of the problems that arise when one must borrow from foreign sources in the absence of a common monetary system. Because of circumstances which are totally outside our control, the value of our currency may fall while the value of the currencies in which funds are borrowed may rise so that we may find ourselves in the same position as the clown in a circus who kicks his hat further away each time he tries to pick it up. In other words, we may be moving further away from the point at which we can repay massive foreign borrowings instead of being able to keep the situation within control.

One of the chief advantages of the EMS is related precisely to foreign borrowings. We are part of the EMS and our currency has performed reasonably well within the EMS band. Therefore, we have the right to hope that the new borrowings that will be made on foot of this legislation will not be subject to the kind of see-saw situation that occurred in the past and which placed a major question mark in terms of foreign borrowing policy. In that respect, if in no other, the present administration are more fortunate than were the previous Government. But the fact must be faced also that the UK is not a member of the EMS and that, whereas it could be argued that our membership of the EMS has a positive effect on industrial progress and development in relation to currency and export matters, it remains the position that the UK is a very large trading partner of ours and that extreme fluctuations in the currency of that country can have a substantial effect on our trading performance and may at times offset any advantage we may derive from currency stability within the EMS.

It was instructive to note from the recent summit and from developments since then that there does not appear any likely prospect of the British £ going into the EMS for some time; but until that happens, whatever our level of borrowings and however stable may be the EMS currencies, we must keep an eye in that direction.

I note, too, that the Minister commented to the effect that the official external reserves will benefit from the receipts of foreign funds. I am something of an amateur in the field of external reserves and macro-finance but I find it in my heart to wish that there was a better way of improving our external reserve position than by borrowing foreign funds. The activities of the ICC are expanding. They need to increase their limits but, by and large, the Minister is providing for this in the appropriate way.

Deputy Collins suggested that the four or five years that may elapse before another ICC Bill comes before the House is too long and he said he would prefer a period of about one year. I do not know that it is absolutely necessary to bring the affairs of institutions like this to the floor of the House once every year, but there certainly is a problem which may need to be dealt with in another way in that the activities of non-trading State companies are not subject to the same kind of detailed scrutiny as the trading companies that were recently brought within the ambit of the all-party committee on semi-State bodies. If that were done I do not think there would be any objection to the four- or five-year gap that we will have before the next ICC amendment Bill comes before us. Even if this were not to be done, I think it is reasonable to allow an adequate period for the ICC to continue their activities without having to come to the House for further authorisations.

I do not think that anybody in this House for a moment believes that there is anything even remotely untoward in the way ICC have managed the funds at their disposal. Quite the opposite is the case. We would really only be insisting on a rapid and regular review of the activities of ICC if there was even the slightest shred of evidence that there was something fundamentally wrong with the policy of that institution. I have no such evidence. They seem to be doing their housekeeping extremely well and I do not think we should put any kind of question mark against them.

Perhaps in his reply the Minister would clear up one sentence in his speech. He said: "Despite the fact that it is intended that the guarantee limit will be the same as the overall borrowing limit, it will remain my policy only to give a guarantee where absolutely necessary." Strictly speaking, who decides when the guarantee is necessary and when it is not necessary? Perhaps the Minister would give us some idea about the proportion of funds that will require to be guaranteed in this way?

Overall this Bill gives us an opportunity briefly to have a look at the operations of the ICC and their place in the industrial and economic framework of the country. It certainly points out the fact that there is virtually no such thing as private industry in this country anymore in the 19th century Victorian sense where private industry is thought of as industry which is started on, is run on and is dependent solely on private capital. Few organisations—except perhaps the IDA and, at another level, Fóir Teoranta—are as deeply involved in the financing, capitalisation and ongoing expenditure of our so-called industry as the ICC. I find it ironic to put it no stronger that the spokesmen for private industry who were quick to demand further privileges for themselves are very slow to make any positive reference to the activities of State financing bodies such as the ICC without which many of them would have gone to the wall years ago. They are quick enough to look for grants and loans when they think they need them but most of them are like the nine lepers in the bible. They continue to praise the virtues of private industry as though it still existed in its pristine Victorian form.

Another point worth making is that the funds now being borrowed—to a certain extent provided or guaranteed by the State and to a certain extent provided by private depositors—are being economically recycled and they are being recycled largely into profits. We have to look at the way in which a State-run institution like the ICC, with State guarantees and to some extent with a contribution from the Exchequer, recycle public finance into private finance. In this they are aided by the structure of company taxation. I should like to quote from an article in The Irish Times of 4 December 1979 which showed that in a survey carried out by the Financial Executives Association the tax rate on companies dropped from 45 per cent at the beginning of 1974 to 21.7 per cent in the year ended 31 January 1979. The effect of tax rates on companies almost halved in five years. This and the investment policies of organisations like the ICC are a mechanism whereby to some extent either public finance or publicly guaranteed finance is recycled into private profits.

I could wish that that expertise, knowledge and management ability, not to mention the money, which is directed through the ICC into the private sector could be more profitably directed into a public investment industrial sector and that perhaps the ICC could form the foundation for a State bank of a specialised kind. The machinery and confidence are there. The managerial and other talents are in the ICC and in similar organisations but it would need a profound change of political philosophy on the part of the Government to put these abilities and assets into the public sphere rather than into the private sphere.

I do not propose to labour the point because even if investment is going into the private sector in this way at least it is investment. Some jobs will be produced but not enough by any means and not as many, I would argue, if the money had gone into public investment. However, a job is a job and I would be the last person to gainsay that. So far as it goes and subject to the general critique I have made of the activities and the concept of a company like this and its place in our economic and industrial structure, I welcome the Bill.

Mr. Mitchell

I should like to welcome the Bill in general terms. I am sure Deputy Collins has given our party's stand on this matter as would our spokesman on finance, Deputy Barry, if he were here. It is understandable that the Minister for Finance is not present in the House given the events of the day.

Minister of State at the Department of Finance (Mr. Wyse)

I should like to tell the Deputy that I was appointed a week ago to come to this House to deal with this Bill. Today's events have no bearing on the Minister's absence.

Mr. Mitchell

The Minister of State is more than competent to deal with the matter and I have no objection. I should understand quite well if the events of the day had prevented the Minister from coming here. I will not ask the Minister of State who he will vote for because I do not think he will tell me.

Dáil Éireann debate - Wednesday, 5 Dec 1979

Industrial Credit (Amendment) Bill, 1979: Second Stage.

Dáil Éireann debate -
Wednesday, 5 Dec 1979