(Limerick East): I move:
That Dáil Éireann calls on the Government to make an early decision regarding the privatisation of Irish Life Assurance plc."
I wish to share my time with Deputy Ivan Yates, if the House is agreed.
Private Members' Business. - Irish Life Assurance Company Privatisation: Motion.
Is that satisfactory? Agreed.
(Limerick East): The Joint Committee on Commercial State-sponsored Bodies in their first report to this Dáil have recommended that the Government take an early decision on the submission to the Government made by the company, that is, Irish Life Assurance Company, in order to eliminate the present uncertainty. A submission by the company to the Government seeks the restructuring of the capital base of the company in a manner which would effectively lead to their privatisation.
The Government should make their decision immediately and I call on them to agree to restructure the capital of the company to enable the company to continue to grow and expand their business internationally and at the same time to realise some of the shareholding of the company for the benefit of the Irish Exchequer.
Irish Life Assurance plc were incorporated on 15 March 1939 to carry on the business of life assurance. The decision by the State to enter the life assurance business was not a ideological one. The Taoiseach of the day was no Hugh Gaitskell capturing the commanding heights of the economy for the State sector. The decision was pragmatic. The private companies which were rolled together to form Irish Life were broke. The State came in to rescue them and to protect the policyholders. The State being in, stayed in, and the company prospered but the original decision was based on the same pragmatic criteria which involved the State in the other areas of the economy; those of rescue and protection of the savings of citizens.
In 1939 the shares in the company were held as follows: British Life offices 72 per cent; Irish Life office 10 per cent; Minister for Finance 18 per cent. In 1947 the Minister for Finance purchased the shares of the British Life offices for £110,000. Since then there has been little change in the ownership of shares in the company. The shares are currently held as follows: Minister for Finance 90.3 per cent; others 9.7 per cent. The shares in Irish Life, of course, are not quoted on the Stock Exchange.
Although the Minister for Finance holds over 90 per cent of the shares, very little of the profit of the company accrues to the Exchequer. This has been the case since the company were incorporated in 1939, but was exacerbated in 1971 when, to enable the company to compete more effectively in the area of life policy with profits, the company were virtually mutualised.
The company's capital structure was reconstructed in 1971, whereby the shareholders' entitlement to profits was reduced from 20 per cent to 2 per cent. As a consequence, a sum of £1.6 million was paid to shareholders and the principal shareholder, the Minister for Finance, received the bulk of this.
As a result of this restructuring the company were run to all intents and purposes for the benefit of the policy holders rather than the shareholders. As the principal module of business at the time consisted of with-profit policies, the company were run for the benefit of these policyholders.
Under the company's articles the with-profit policyholders have a "perceived" right to 98 per cent of all the surplus it is chosen to declare for policyholders and shareholders. The shareholders and, as I say, the bulk of the shares are held by the Minister for Finance, get the remaining 2 per cent.
I am not criticising those who made this decision in 1971. When giving evidence before the Joint Committee on Commercial State-sponsored Bodies on 23 July 1986, Mr. David Kingston, Managing Director of Irish Life said:
In this particular situation there was an actuary from the UK, an expert in this area, employed by the Government. The position has shifted somewhat since 1971. At that time the company was keen to become mutual because the with-profit business, giving bonuses to policyholders, seemed to be the core of the business. The business has changed somewhat in the last 15 years and the bulk of our business now is unit linked business where the investment performance goes to the policyholder — what we call non-profit business. In other words the policyholder puts in his £100, we invest it on his behalf, we take a proportion of that for expenses, mortality risks and so on and he gets the rest. We make our profit out of hoping that we keep our expenses below what we are charging him and we hope that our death claims will be below what we are charging. This is not just true of Irish Life, it is true of the life assurance industry generally.
In a sense it has moved away from mutuality as a concept and more towards a business where policyholders have largely non-profit policies. Obviously capital backing will be needed so that if one gets into difficulties there will be something to support that and to provide the sort of solvency margins which are required by the supervisory authorities. In 1971 we would have said the ideal structure for Irish Life would have been mutual whereas in 1986 we might say the ideal structure would be one where shareholders were entitled to a much higher proportion of the profits than they are at present.
I do not criticise that decision. It was taken facing the circumstances of the company at the time and was probably a good decision at the time but circumstances have changed enormously in the type of business which the company transact in the intervening period and we must now face the changing circumstances and be as realistic as our predecessors were in 1971 and face the decision now again to restructure the company, to face the needs of the eighties and nineties. The quotation from Mr. Kingston can also summarise the need now for restructuring the capital of the company. This restructuring is necessary for two reasons and my case rests on these two reasons. First, the present structure is now inhibiting the growth of the company. Secondly, one of the largest and most successful multinational companies in Ireland is owned by the State, but the Exchequer does not benefit directly from the success of the company. Obviously, there are tax and PRSI payments accruing from the fact that the company employ 1,600 people, but there is no direct transfer of surpluses to the shareholder which, in effect, is the State.
I now propose to discuss these two factors because it is on them that the case for privatising Irish Life rests. Mr. J. P. Reihill, Chairman of Irish Life, as reported in the Minutes of Evidence of the sitting of the Joint Committee on Commercial State-Sponsored Bodies, pages 1 and 2, said:
We trade and compete as a commercial life insurance company and unlike other State controlled companies, do not fulfil any special role on behalf of Government. Our principal job is to provide the best possible returns to our policyholders — our shareholders are entitled to a tiny proportion of our surpluses. Shareholders have never been asked for money since the company was founded.
I say these things at this stage so that you will appreciate that Irish life is run as a commercial concern. Future planning and detailed running of the company in the competitive markets in which we operate in Ireland and the UK must be a matter for the board of the company and its management.
One of the things which will be immediately obvious to you is that, because of its very success, Irish Life has an extremely large share of the Irish market. While we expect the Irish Life assurance and savings market to continue to grow, it would be unwise for us to depend totally on that market for future growth. There are two reasons for this. First, it is unwise for any organisation, particularly a financial one, to have too many "eggs" in one basket. Secondly, the way in which financial business is transacted worldwide is changing and becoming more international. In this context, Irish Life has little option but to become more international itself.
Irish Life entered the UK market almost 20 years ago, and it was run literally very much as part of the Irish business in terms of products, etc. A major expansion in our activities there was initiated in 1978 and this area of our business now accounts for a significant proportion of our business. Necessarily, this has been achieved by the development of specific products to meet the local demands of that market and to comply with differing legislation, but it continues to be run as a branch operating with common senior management and firm control from the chief office. It is important to note that the increased level of employment which this has created in the UK is well matched by increased employment throughout chief office to manage and service this business.
As Irish Life looks further ahead, it will have to operate in a different fashion: the very close similarities between the UK and home markets will be absent. Prudence dictates we establish the overseas business as a separate legal entity. That way the financial progress can be monitored much more clearly and the interests and protection of policyholders and shareholders are maximised. The subsidiary could be created by setting up a new company or by the purchase of an existing company. Either way capital is necessarily required.
It is essential that Irish Life expands abroad; indeed this is extremely desirable from a national point of view. It is vital that some milti-nationals, particularly financial ones, should be Irish based. In order to make it easier for Irish Life to expand overseas, some form of capital reorganisation may be necessary to allow new infusions of capital. Such a reorganisation is desirable for other reasons such as the remuneration of shareholders.
You may gather that Irish Life does not want to rest on its past progress. We believe that the clear definition of Irish Life's responsibilities in reporting has worked extremely well and has been a major factor in its success.
One does not always have to agree with the statements or submissions of chairpersons of commercial State-sponsored bodies to committees of the Houses of the Oireachtas but that encapsulates the case for a restructuring of the capital base of the company so that the company can expand in its own interest, in the interests of the employees and in the national interest.
It is clear from that submission I have quoted and indeed from any examination of the company, that Irish Life dominate the Irish market; that Irish Life can grow very little more if their activities are confined to Ireland; that if the company are to continue to grow they must further expand in the UK and establish a strong presence in the United States. They must get ready to establish in Europe in advance of the completion of the internal market in 1992. To achieve these objectives the capital base of the company must be restructured. Expansion cannot continue if they depend entirely on the reinvestment of surplus funds. It is clear that the main shareholder, the Minister for Finance, is not in a position to provide the capital necessary for expansion. I do not think this House or the community at large would expect him to provide the kind of funds which would be necessary for the expansion of a multinational company the size of Irish Life.
It is clear that the further growth of the company is not only in the company's interest, and in the interest of their employees, it is also in the national interest.
Apart from the necessity to restructure the capital of the company, one further problem arises from the fact that the company are a State company.
When the company representatives gave evidence to the former joint committee in July 1986 they advised that about half the states in the USA had an objection to companies owned by other Governments and that this might inhibit the expansion of the company in the USA.
However, in the course of the subsequent hearing of oral evidence by the joint committee in October 1987, the company disclosed that they had established an office in the US, that a French company was using a procedure called a "voting trust" of which the majority of the trustees were US citizens, to hold an American company, and that this procedure might be a short term solution to the company's problem of expanding into the US.
It is not fully clear from the evidence what the present position is but it seems that the fact that Irish Life are a State company inhibits the growth of the company in the United States of America and will continue to do so. Elsewhere, in the evidence produced to the joint committee, it appears that similar difficulties could arise in Spain. We are all aware of the American distaste for doing business with companies owned by foreign powers. I do not know the basis of the problem in Spain but if Irish Life are to expand prior to 1992 and subsequently in continental Europe, I do not think they can compete with the great multinationals of France and Italy. The market gap is in Spain and, if there is to be an acquisition in continental Europe, Spain should be the target market and the company have admitted this already. The same inhibition applies because it is a State company and there is a problem in acquiring a subsidiary in Spain and for expanding into that country. There is nothing special about Spain but the evidence suggests that if Irish Life are to establish a substantial niche outside this country or the UK in a mainland continental European country, Spain seems to be the place to go. I understand, from the evidence to the joint committee, that the ASTMS which represent the majority of employees in Irish Life have certain fears about the privatisation of the company.
First, there is the fear that many of their members may become redundant as a result of privatisation. The ASTMS have many members in the United Kingdom and I am sure they are drawing on the experience of their members in privatised industry in the United Kingdom. I do not believe their fears are well founded but the company have an obligation to allay these fears and they should do so.
It is clear, from the evidence presented to the Oireachtas joint committee that the intention of the company is to expand and to seek to remove the spancels that tie them down and prevent growth. In that growth process, at home or abroad, extra staff will be required at head office to service the overseas market. Members of the ASTMS also felt that a privatised company could be taken over by a multinational of the insurance industry and that control of the company could pass out of Irish hands. This is a fear which should also be met. Paragraph 107 of the report of the joint committee states:
Apropos of this reservation the Joint Committee was advised by Irish Life that what was referred to as a "Golden Share" had been retained by the British government in the case of a number of entities which had been privatised (these included British Gas, Jaguar, Rolls Royce, British Airport Authority) which enabled the British government to maintain a veto over major changes, thus ensuring that no change can go through over a number of key issues.
Paragraph 108 of the report states:
Additionally, the French proposals in regard to UAP and AGS, two insurance companies currently being privatised in France, will ensure that foreign ownership will be limited to 20 per cent of the issued shareholding. Irish Life management believe that either of these approaches could effectively be used by the company in the event of privatisation.
I believe that some such mechanism should be put in place if Irish Life is privatised. Obviously, there is a company interest, there is certainly a national interest, but there is also the interest of the employees and their families. Fears, whether real or not soundly based, should be met squarely by the company and any proposition they are making to the Government should be accepted.
I now wish to turn to the second leg of my argument. The total assets of Irish Life Assurance plc at 31 December 1986 was £2.461 billion. The Minister for Finance, on behalf of the people of Ireland, holds 90.7 per cent but the benefit to the Irish Exchequer is minimal. It is difficult to explain to our citizens how we, as their trustees through the Minister for Finance, hold 90 per cent of a company worth £2.461 billion and do not get anything out of it.
Against the background of the financial problems facing this country it is reasonable to expect that some of the fruits of success of such a manifestly successful Irish company should accrue to the State. To achieve this would require a restructuring of the capital of the company. We must have one of the most ironic systems in the world because as this is a State company we do not get anything out of it. To achieve the restructuring of the capital of the company would mean that certain decisions would have to be made. According to paragraph 110 of the report of the joint committee the company believe that "the public issue of shares would be necessary if the Government wish to realise a significant proportion of all of their investment in Irish Life".
I believe that a public issue of the shares held by the Minister for Finance would yield up to £300 million to the Exchequer after allowing for an appropriate payment to with-profits policyholders whose rights must be protected. A flotation of shares on a once-off basis or over a period of years, would provide a very welcome cash inflow to the Exchequer. This, I believe, should be used to replace borrowing rather than to be squandered on some pump-priming exercise. I said at the outset that the decision in 1939 to incorporate Irish Life was a pragmatic one. The decision now facing the Government should be made on equally pragmatic grounds. I am asking all Members to make their decision in an equally pragmatic fashion. As I informed the House earlier, I am sharing my time with Deputy Yates.
I thank Deputy Noonan for facilitating me. It is a great pity the Government have allowed the uncertainty over Irish Life to drag on so long. Since a Dáil question was answered by the Taoiseach on 12 October last we have had a commitment by the Government that they would study the proposals submitted by the company. I was, as had been heralded in the media, expecting an announcement on this in the budget. The publication of the excellent report of the Joint Committee on State-Sponsored Bodies and the debate on the motion tonight means that there is no further need for procrastination on this matter; a decision is urgently required. A delay in making a decision will only succeed in dampening morale in Irish Life and in dampening important investor confidence both for policyholders and for potential equity investors and shareholders.
There is no doubt that the circumstances under which Irish Life came into being in 1945, with the amalgamation of different life assurance companies under the 1936 Act, bears no relation to current market conditions of the life assurance sector and international competitiveness in that component of the financial sector. It should be said that Irish Life are, effectively, the biggest financial organisation here. When one looks at their holdings in the two largest banks, AIB and Bank of Ireland, at their controlling share in important non-life insurance companies such as Church and General, at their building society involvement and their involvement in equities in the Irish Stock Exchange, one will see that we are dealing with a very important company. When the top executives and board of that company say, as they have been saying for 18 months, that they are inhibited, that they cannot develop in the way they want because of their capital structure and because of the company's articles of association, the House must take note not only in the interests of Irish Life but because of the different ways Irish Life are involved in our economy.
Those who have been watching Irish Life closely will admit that even people who are opposed to privatisation as a point of principle, such as the unions involved, have a different view in regard to the privatisation of this company. When the unions put that question to employees at the time Irish Life were lobbying they learned that the staff were strongly in favour of management's proposals. It is clear there is not any argument in regard to that in the company. In relation to the overall debate on privatisation, it has to be said — I have studied this whole area when investigating 19 different State companies — that if we wish to pick any example of an easy State company to privatise Irish Life is the simplest because it is a plc, because it has already a shareholding structure. There are many statutory companies and statutory corporations set up under Acts of the Oireachtas that would be difficult to privatise and float on the Stock Exchange. That is not the case with Irish Life.
It strikes me as extraordinary that as a small country with a national debt of £27 billion we have not given consideration to realising how we can meet that debt. There are many different ways this can be handled. It can be done by private placement, by flotation with a dual listing on the London and Dublin Stock Exchanges or by looking for a direct facility with some of the banks. I have no doubt that the best way to proceed is to get the merchant bank which the State owns, ICC, to prepare an evaluation of the market conditions, of the price that would be correct for a public flotation and to control and plan the delivery to the potential investors.
On a political point, it strikes me as extraordinary, judging by the amendment tabled by The Workers' Party, that one cannot talk about this whole area of privatisation without getting involved in emotional rhetoric. It is interesting to note that Fianna Fáil, when in Opposition, made specific commitments in the area of State companies and public enterprise. It is perceived that if one is in favour of privatisation here one is Thatcherite but I do not accept that. I agree wholeheartedly with what Deputy Noonan said, that this decision should be made in a pragmatic fashion given the liabilities and assets that the country has and the importance for Irish Life that they should develop.
It strikes me as extraordinary that the shareholders of Irish Life should be limited to a 2 per cent return on investment for the profits under the existing Articles of Association. The report of the joint committee was an excellent one although some of the final recommendations were less than trenchant. However, we must commend the committee for the professional way they carried out their work. I accept that the committee had to meet different political views. There is no doubt that the return to shareholders is entirely unsatisfactory. If we were to change that and increase it from 2 per cent to 20 per cent, as recognition of the way the shareholder, namely the taxpayer, has been poorly represented in the past, we would go down the way of a legal minefield. Any change in the articles of association to do that would leave the company open to several different types of litigation which could result in the company not achieving their initial goal. Changing the Articles of Association is not a realistic way forward.
Another way forward suggested by many people who are au fait with the insurance industry, particularly the non-life insurance industry, is mutualisation. For example, Canada Life has been mutualised quite successfully. Mutualisation is a bit of a scam in one respect. It operates on the basis of ultimate democracy. The building societies are fully mutualised and operate on that basis but if one looks at the way they have operated and at the way they elect their management to the boards, and if one looks at the real chances of the outside punter, Muriel Scorer and others, one will see that they are not democratic institutions and are, in fact, closed shops. I do not believe that mutualisation would bring the desired objectives. I also believe that in a time of increasing competitiveness in the financial services sector it would be extremely cumbersome and undesirable.
The critical questions for Irish Life are access to future funds, whether the existing revaluation system and reserves of capital are adequate to meet this and whether it is the best legal and actuarial way to finance future growth and expansion. I have no doubt that it is not and that there is an urgent need to get a new dynamic into Irish Life which should, of course, be outside shareholding. People will put forward reasonable objections regarding the ultimate fate of Irish Life, whether it will be brought by some multinational conglomerate which will swallow it up or whether it will be eroded over a period of time and go outside the control of this House. There are many different ways in which this House can retain control. However, the means by which this should be done should be recommended in a professional way by a merchant bank. It should not be done in a political way. We must not have a botched solution whereby we would have political hacks on the board, the Devlin Report stifling recruitment of new staff and an overall departmental structure of supervision. While all that is good for accountability, it strifles dynamism and growth. Irish Life could have exceeded their own growth record if they had been released from such constraints as Devlin. The Government's decision not to award a 33 per cent pay increase to the Judiciary, higher civil servants and Members of this House is politically justifiable but is it right commercially? Is it in the best interests of Irish Life? Ways have been found of getting around the system, such as the Zeus contract for the B & I. This is one example of constraint imposed by the public sector on the commercial area.
Surely we as elected representatives have an obligation to provide for economic development, welfare, education and health. Do we have an obligation to be in the insurance business? I do not believe so. At a time when there are great constraints on public money we have not the opportunity to meet our debt requirements and our social obligations while at the same time running an insurance company.
I am concerned about the level of management expenses in the industrial branch of Irish Life which run at 50 per cent. This compares with management expenses of 16 per cent or 19 per cent in a similar area in the UK. I know that some of the figure can be offset by group sales but it is still too high. This is an area in which the rigours of competition and privatisation would clear out the cobwebs.
Another great advantage to the Irish taxpayer accruing from privatisation is that we would get more money in profits tax and corporation tax from the revised Irish Life than we are now getting as a shareholder. There would be a strong profit motive in any person who invested in Irish Life looking for a rate of return. That would generate corporation profits alone which would make the present yield from our shareholding look totally disproportionate. There is an obvious case for saying we would get more than the £2 million which is the total we have received in the 30 years from 1936 to 1986. It is evident from a simple perusal of the accounts of Irish Life that they cannot fund any of their developments out of their shareholding. It is the case that 0.12 per cent of shareholders' funds are of policy funds.
Future growth must be overseas. A number of factors are coming into play which put the privatisation of Irish Life well beyond any emotional or political considerations. Technological developments which have no frontiers will mean that within a few years we will be able to see on our VDUs anything from our shopping list to our insurance requirements. Such developments, together with the Single European Market from 1992, will revolutionise the current competitive situation in the non-life insurance sector. Any Irish company who want to develop beyond a certain stage must go overseas. Companies such as Smurfits and Cement Roadstone have done so and I have no doubt that this is a very good thing. Some people have a backward and misguided attitude in these matters. Last Friday at the CII annual conference I had the pleasure of listening to Martin Naughton. owner and chairman of Glen Dimplex. They started as a very small company employing 50 people. Now they have Morphy Richards and Hamilton Beach in the USA. Although Ireland accounts for a small percentage of their sales, 30 per cent of their workforce is in Ireland. Irish companies have a lot to give to the Exchequer and to the economy in terms of employment by overseas development. We should be very supportive of such development.
It is also a fact that if an overseas giant in the insurance sector wants to hurt Irish Life on the Irish market, all they have to do is set up an overseas branch in Dublin, subsidise that office and erode the market share of Irish Life. That is being done at present. Irish Life's market share varies from a half to a quarter, depending on which portfolio or market segment one examines. Even though we are a small market of 3.5 million people there is no doubt that some of the giants will strike at Irish Life's market share. Unless we allow Irish Life to do the same unto them we will not be playing fair. Deputy Noonan has already said that in 31 American states there are legal prohibitions on a State-owned insurance company setting up. Some loopholes have been found but it is entirely unsatisfactory that a major life assurance corporation should be dependent on backdoor deals to get into important markets. There is no doubt that we could trade successfully in the ethnic market in the USA. Travelling on someone else's coat tails is not satisfactory.
The former Minister for Finance, Deputy John Bruton, set up a review committee in conjunction with Irish Life to report on this matter. That report is gathering dust in the office of the largest shareholder, the Minister for Finance. It is imperative that the Government should make a decision to ask ICC, as the State merchant bank, to set about the best and most professional way of floating Irish Life. We should put behind us the debacle of the Mid-Western United Life Assurance Company in November 1987 and look to the future. We must look unemotionally, pragmatically and fairly at the interests of the Irish taxpayers who would get a much better return through corporation tax alone, not to speak of realising the profits which have accrued over the years. There would be a much better return to the staff who would have one of the first options on shares, as in the case of privatisations abroad. This would strengthen their employment and boost confidence in Irish enterprise. To date we have had the wrong balance between the interests of taxpayers and the interests of policyholders of Irish Life. We should change that balance and follow the ambitious plans set out by David Kingston and his colleagues to make Irish Life an international flagship business for Ireland that will improve its trading, improve its profits and repatriate them back home so that everybody in this community can share in the benefits and successes of Irish Life.
I should like to thank Deputy Noonan and his party for providing an opportunity to discuss this matter in the House. The motion before the House this evening calls on the Government to make a very far-reaching decision. Irish Life is one of the largest and most successful companies not just in the public sector but in the State. It is our fifth largest financial institution with investments of the order of £2.5 billion at end 1986. It has very substantial holdings of land and buildings, Government securities, equities and other assets and, by the nature of its investments, its position is probably more sensitive than certain other larger institutions. Indeed in its 50th year of operation I congratulate the company on its notable success.
I regret any suggestion made by Deputy Yates that the Irish Life board is composed of political hacks. It must be said and agreed that the membership of the board is well respected no matter which side appointed them. Some facts about the company bear repeating. Irish Life, a public liability company, is the largest life assurance company in Ireland. The company markets life assurance business and industrial assurance business in Ireland and life business in the United Kingdom. The company commanded 43 per cent of the life assurance market measured by net revenue premiums in this country at year end 1986. Total funds amounted to £2.46 billion including overseas business of £142 million. Premium income for 1986 was £450 million net of reinsurance of which £58 million was in respect of overseas business. New business for 1986 amounted to £296 million gross of which £43 million represented overseas business. The company employs in excess of 1,600 people with almost 200 of these located in the UK. In 1986 the company opened an office in the USA to examine opportunities in that market.
On the other side of its balance sheet Irish Life has over £2 billion of liabilities to policyholders whose funds represent the main source of the considerable investment built up over the past 50 years. The company has over one million policyholders, whose life assurance, permanent health and pension cover are underwritten by the company. These policies extend far into the future, for perhaps over 40 years in some cases. The company's liabilities to individual policyholders, and the latters' dependence on being paid, increases as the policy approaches maturity. The amount shown in the balance sheet merely reflects the present value of these future liabilities.
Because of the long term nature of life assurance business and of the scale of the liabilities that can arise, it is vital that life assurance companies have adequate capital resources. If Deputies will bear with me I will illustrate this point with a rather simplistic example. When a life company issues a policy with life cover of £5,000 and a guaranteed benefit of the same amount on maturity after 20 years, it must be in a position to pay immediately on the death of the policyholder. If the premium payable is, say, £10 per month then the earlier the policyholder dies the more of the payment would have to come from the company's own resources, rather than from the accumulated investment of the premium.
Similar problems could arise at maturity of the policy from poor investment performance. Obviously, with a large pool of policyholders the incidence of claims is more predictable and the impact of individual claims on the funding of the company will be less. In the case of all life assurance companies, however, prudent management ensures a substantial capital reserve to cover these eventualities. Prudential regulation and supervision of life assurance also reinforces this arrangement.
This problem comes to the fore when a company proposes to establish a new business, for instance a subsidiary in a new market. Given the completion of the European Community internal market by 1992 this is a basic and important issue in all companies' corporate strategy, not just Irish Life's. In this case the company must have sufficient resources to cushion its liability to present and future policyholders and to establish the new entity on a similar prudential basis. These resources have to come from somewhere other than policyholders. The two obvious sources are shareholders and retained profits.
While I am on the subject of the completion of the European Community internal market I think it is vital that all financial institutions should be building this factor into their corporate programme. I note that this is the case with many of our Continental counterparts. We have seen well-published moves to build up European financial conglomerates. We cannot afford to be left behind or marginalised in such developments. A strong indigenous financial sector will be vital in the nineties. The value which export of services can provide to an economy is well recognised. It will be the Government's aim in bringing forward legislative proposals to the House this year on financial institutions to do what can reasonably be done to foster or, at least, to remove unwarranted inhibitions on developments in this direction.
In the case of Irish Life, as has rightly been pointed out already, the level of shareholders' funds is relatively low. An increase in those funds through the sale of additional shares would not be a practical proposition in view of the restrictions on the distribution of the surplus of the company. The company, therefore, has relied on retained profits, partially represented by the investment and valuation reserve, to build up its resources. One of the questions that must be addressed is whether this structure is adequate to ensure a future for the company and to meet the requirements implicit in its development plans. The company, in examining these matters, came to the conclusion that its interest might be better served by greater reliance on and access to share capital as a source of finance for its future. Constructive proposals as to how this might be brought about were put forward and are at present being examined by the Government.
The recently published report of the Oireachtas Joint Committee on State-sponsored Bodies gives considerable detail on the present structure and operations of Irish Life, its capitalisation, profit distribution and plans for the future. I would like to pay tribute to the substantial work of the committee and the fairness and accuracy of the report. It is of considerable assistance in the examination of the proposal for the restructuring of the company. As I am sure Deputies are familiar with the contents of the report I will try to avoid duplicating its contents and concentrate instead on certain other issues which are of relevance to the Government, both in their role as shareholder and in the much broader context of their responsibilities to the nation.
The Oireachtas Joint Committee report does, however, touch on several of the issues involved. It provides a balanced examination of the processes to be gone through in giving practical effect to any change in the company's status. I know Deputies will find the report a clear and useful exposition of what is a difficult subject. It will be clear from what the committee say that it is no simple matter to change Irish Life's basic charter and that assessments will be needed at several stages in the process on how best to proceed. The committee's report also make it clear just how successful the company has been, starting from humble origins in the forties when some of the principal former shareholders had so little faith that they were only too willing to be rid of their holdings. Too often we do not give ourselves credit for what we, as Irish people, can do even in skill intensive areas like life assurance. The Government do not share this lack of faith and have shown their commitment by the important and successful initiative in the Irish financial services sector. I am glad to say that Irish Life too has given its vote of confidence, in the most important way, that is, by investing in one of the projects already announced.
As shareholder, the State has an interest in ensuring that the company is properly capitalised and pays a dividend on its investment. Because of the arrangements dating from 1971 whereby the declared surplus of the company on with-profits policies is divided in the proportion 98:2 between with-profits policyholders and shareholders there is, as the joint committee pointed out, a restriction on the amount of dividend paid by the company. The shareholders were paid a capital sum for their agreement to this arrangement. They have continued to receive a dividend on their shares in the intervening years. This arrangement has also enabled the company to retain within its own resources much of the accumulated surplus from business other than with-profits business. To this extent, shareholders have been absolved from a need to inject further capital.
Because with-profits business is no longer the mainstay of the company's activities, the restriction on distribution of the surplus effectively puts a cap on the shareholders' dividend. Consequently, its ability to attract or remunerate new share capital is impeded. A capital reorganisation of the company would be required so as to increase the scope for shareholder participation. This reorganisation would clearly have to be carried out in a way which safeguards the interests of the policyholders, to whom specific commitments have been given about their participation in the profits on their investment. This is a far from simple undertaking in the light of the number of policyholders and the variety of policies. Quite apart from the contractual commitments implicit in the articles of association of the company and in individual policy documents, it must also be borne in mind that insurance legislation generally is designed to protect the interests of policyholders. This principle applies not just in the case of Irish legislation but in that of other countries where Irish Life operates. The State and other shareholders, therefore, cannot act without proper regard to the interests of policyholders. Any restructuring would have to be carried out in such a way as to protect policyholders' interests. Because of the extremely narrow base of the present share structure it would obviously be necessary to carry out a successful restructuring of the company before the question of disposing of the State's shareholding could be considered. The broader issues of the principle of the State reducing its holding and its merits in this case have also to be considered.
Many of the general arguments for and against State divestment do not apply in the case of Irish Life. The company has operated successfully and commercially without placing demands on the State for additional funds and with a minimum of input from official quarters. It has proved itself not just in the home market but with success in the much more competitive UK market as well. While Irish Life has built up a dominant position in the market it is far from enjoying a monopoly and faces increasing competition. There is no apparent reluctance on the part of private investors to become involved in the provision of life assurance services and it is difficult to claim specific social or strategic interests which would justify retention of the holding. In practice, therefore, the arguments to be considered are those specific to Irish Life. The origins of the State's ownership, of course, are also due to a set of specific circumstances arising from the insolvency of certain life assurers in the thirties which I have referred to already. We got into this because we had to, not necessarily because it was felt that State ownership of life assurance was best.
We must in deciding these questions look further than the Irish context. The small size of the Irish insurance market and likely competition from foreign insurers limits the potential for growth. Irish Life has expanded successfully into the UK and has maintained and increased its employment. For the reasons I described earlier, to continue this expansion and to consolidate employment prospects requires access to further capital funds. The funding of this expansion out of the reserves of the company is not satisfactory. Reserves can only be accumulated slowly from profits and adequate provision must first be made for prudential requirements.
The State's majority shareholding may present an impediment to expansion in some markets, including certain parts of the US market. This is more so in the rich and populous states which maintain a legislative ban on trading by State-owned entities. Short term solutions may be available to remove this impediment but this is not the best way to proceed in a long term market. The State-owned tag may also be a more general disadvantage in selling the company's products, particularly where competitors may try to represent State ownership as having a sinister implication.
Fears have been expressed for employment levels in the company should its status change. This is an important consideration. I would not like to see any negative effects. Irish Life, however, is an efficient team working in a very competitive sector. It has, as I said earlier, managed to maintain and increase employment in such an environment. Some would see the potential for access to wider capital funding as contributing to, not detracting from, the prospects of the staff.
Under the present structure the returns which the State can earn by way of dividends from the company are severely restricted. Since 1971 the dividends received by the State amount to £1.8 million, £2.8 million gross. The assets of the company grew from £111 million to £2,461 million in that time. A capital restructuring and sale of the shareholding could yield a significant capital gain which can be used to reduce the Exchequer borrowing requirement. However, it could be argued that a restructuring without disposal of the shares would yield an adequate return to the State and, at least in the short term, meet the interests and requirements of the company.
A common argument against a sale of part or all of the State's holding is that it would transfer to the private sector resources which have been built up and developed by the State. In practice, however, these resources were built up from the trading activities of the company. To the extent that they are transferred to the private sector their value would be recouped through obtaining the market price for the shares. I will return to the question of market price later.
It may also be felt that the State shareholding provides for the exercise in the public interest of important control over the company's operations and investments which are very significant in almost all areas of economic activity. In practice, the State has had no specific influence on the day-to-day management of Irish Life, or indeed of any other comparable investment institution. In any event the company and all other life offices are obliged under insurance law to manage their investments in the interests of policyholders. Any attempt to alter this position to serve the interests of the State would affect sales of insurance policies at home and abroad.
Similarly, concern has been expressed that a change in ownership could result in a switching abroad of all or part of its investments, with a consequent capital outflow. However, Irish Life and indeed all life insurers are required under supervision rules to maintain within the State not less than 80 per cent of the assets representing liabilities to Irish policyholders. The current operation of exchange control provisions also restricts the company's capacity to switch its asset holdings abroad. However, these are substantial issues. One would wish to see the company retain its essentially Irish nature. Very few domestic life insurance companies are now Irish-owned and the number has been getting smaller.
The main concern arising from a sale of the State shareholding would appear to be the prospect that the company could fall into unsuitable hands or would pass into foreign control. There are several options available which might assuage these dangers. Briefly, these involve the inclusion in the memorandum and articles of association of the company of provisions designed to prevent unacceptable transactions. The type of transaction could include the transfer of establishment, or of control over important assets.
The most significant of these is the "Golden share" arrangement which has been mentioned already. Under this the State could retain a special share effectively enabling it to veto any fundamental changes to the company's structure. Restrictions might also be placed on the size of individual or foreign holdings or both. These arrangements have to be considered carefully in the context of company law, both domestic and EC. Their practicality and suitability to the future needs of the company and the State need to be assessed. They have been used elsewhere in the privatisation of State companies with some success and it is claimed that they have no significant impact on the share price.
There are also, of course, various other mechanisms generically referred to as "poison pills" which have been used to protect certain quoted companies, particularly in the USA. In practice it has been found that some of these have rebounded at a later stage against the best interests of the company they were designed to protect. We would have to proceed very cautiously in this area to avoid storing up troubles for the future.
This term "poison pills" is a new one for me and may be for Deputies generally. I am told that "poison pills" basically operate through special clauses in the constitution of the company or in binding agreements or covenants on that company. These clauses are designed so that anyone gaining control of the company's share capital through a takeover would have to spend additional large sums of money before taking over its management and direction. The more usual forms are requirement that the contracts of existing directors, executors or perhaps even shareholders would have to be bought out at very inflated prices, a requirement to inject substantial additional share capital into the company within a short period of the takeover, or a restriction on the disposal or use of assets of the company. Greater ingenuity has been displayed in the devising of such packages and some takeover advisers specialised in their creation and dismantling. It has been found in some cases that such packages inserted originally as a protection against fraudulent takeovers subsequently turned out to the disadvantage of the company when they sought to engage in an agreed merger.
There has been considerable speculation about the possible value of the company on disposal. At this stage I would merely like to say that there is no scope for a definitive valuation. The value of shares would be determined by the net worth of the company, its present and future profitability and the mechanism of distribution of profits to shareholders, all of which would influence the amount investors are willing to pay.
Under the present structure of the company many of these items are not at all transparent. Accordingly, it would be necessary to re-organise the capital structure of the company before any serious attempt could be made to value the shares accurately. As I pointed out earlier this process will be complicated. It could take some time to carry out. In the meantime the ongoing trading of the company will result in substantial changes in its balance sheet and in its spread of business and profitability. While these items would hopefully be reflected clearly under the revised structure, there is no prospect of predicting what the final figures would be at that stage. The state of the equity market at that time could also have a very significant influence on the proceeds. I need only refer to the events of last October to illustrate this point.
I have carefully rehearsed the arguments for and against a change in the company's status. The range of issues involved shows the care and attention needed in reaching a decision, and the danger of a snap response. I know Deputies will appreciate that. I know they will also acknowledge that the Government have been frank on this matter. I have outlined the position quite plainly in response to several questions in the House. I indicated the discussions that were going on.
The company in their annual report last May adverted to these discussions. The Taoiseach in an address at an Irish Life function last October set out candidly what was happening. The Taoiseach indicated that particular proposals put by the company were being examined and that the Government would make their decisions on the basis of what is in the public interest. This is the parameter within which such an important decision must be made. The House has been kept well informed and that is what I am doing here tonight.
It is important also to realise that what we are talking about is a decision whether or not to begin a process. Even if a particular decision were made now, the process of restructuring, forming new entities, seeking necessary court and other approvals, preparing of prospectuses, establishing a track record etc. will take time to put into effect. I am not putting this forward as an excuse for procrastination but it is a point that might be well borne in mind. A decision has been called for to allay uncertainty over the company's future.
I was disappointed to find Deputy Yates in his address talking about the confidence of investors being damaged by lack of decision. This is not helpful when one is talking about financing institutions. With all the contributions Deputy Yates has made with regard to financial institutions, he above all Deputies should know that.
The Minister has four minutes left.
Yes, or no?
I want to assure the House and the public at large that irrespective of the decision, the company's financial health is unaffected. It is a strong profitable secure and efficient company — a credit to Irish financial expertise. Policyholders can rest with certainty on that assurance. Whether the company is state owned or not does not affect this position.
I acknowledge the interest of the House in this subject. I am accepting the motion that the Government should make an early decision on this issue. With this in view the Government are considering the best advice on where the balance of advantage lies, and on what practical steps are necessary to resolve the complex issues involved in settling the future of the company. Such advice would be ongoing as there are many basic issues to address to ensure a fair return for the State, the company and its policyholders.
The motion here tonight is too narrowly cast. I would have preferred it if the motion had been wider. The Progressive Democrats would have preferred a motion which called on the Government to issue and publish a White Paper examining the prospects for privatisation of all appropriate commercial semi-State companies and bodies for existing functions within the public service and municipal services which are capable of being carried out by the private sector. In the short term we would have preferred to proceed with a programme to prepare Irish Life Assurance for the sale of its shares to members of the public, including its employees. The motion should have been cast in a manner which indicated a positive commitment to embark on the process the Minister for Finance has so carefully described here this evening.
The answer should be in the simple terms posed by Deputy Yates, either yes or no. We believe the answer should be yes, that Irish Life should be privatised. Tonight's motion from the Fine Gael Party offers a very useful opportunity to consider not simply this company and its affairs but also the whole purpose of privatising and the philosophy that lies behind it. The wider amendment to which I have just referred would have been desirable to gather and ascertain the support of this House, not merely to hasten a decision in relation to Irish Life, but also to oblige the Government to assess critically the entirety of the public sector, including the public service, semi-State sector and local government sector with a view to privatising those aspects of the public sector which seem most appropriate. Listening to the Minister describing, in this case, the sequence of events that would be necessary to privatise Irish Life, it occurs to me that the various steps in terms of restructuring the company's capital basis and share structure, renegotiating perhaps with some of the affected parties an alteration of their interest and applying to the courts, will not happen in a matter of weeks once a decision is made this way or that on the issue. It follows from that that if privatisation of Irish Life is to be the flagship of privatisation and the project which is to be to the fore in considering the success or desirability of privatisation generally, we will be a long time awaiting any positive indication of whether it was a good or bad idea or of how easy it was to implement the whole privatisation process. That is why it is important not simply to await the sequence — which will be protracted — to which the Minister refers in making decisions about other analagous companies.
I do not propose a blanket policy of privatisation for its own sake but I am seeking critically to examine each aspect of the public sector so that it can be decided on a rational economic and social basis whether each function or institution we find there would not be better carried out by a non-State body or as a non-State service. There is a danger that the recent adjustment in the Stock Exchange to which the Minister for Finance referred would create a lack of confidence and a mood of pessimism which would make us shy away from taking any political risks on the whole privatisation matter. It is desirable that this House be not frightened off by the instability of the Stock Exchange last October from taking a long, hard look at the whole concept of privatisation. Without being narrowly ideological on the issue, I think there are certain principles which the House should be guided by in the matter.
First, the State should concentrate its efforts and resources in areas where it is likely to be most successful. It follows from that as a corollary that it should avoid diluting the time and resources of Government itself in fields where it has no prospect of success. In the case of Irish Life the State did not enter into the life assurance market, as the Minister has pointed out, as a matter of choice. It found itself confronted with a situation which demanded its intervention, but the argument still applies that the State should concentrate its efforts and the limited political resources which any Cabinet — even one as illustrious as this — has on issues it is best qualified to deal with. Resources and time of Departments of State, it seems, are taken up by semi-State bodies or commercial activities under their control and it detracts from the capacity of Government to deal with the other more pressing, urgent issues of the day if the time of Ministers is spent running radio stations, insurance companies, turf production companies and the like.
The second principle I would like to suggest is that the State should, wherever possible, leave to others to do that which can be properly carried out by them. Against that second principle the decision should be if at all possible to privatise Irish Life. Thirdly, the State should deploy its legislative and executive powers in efforts to free up and encour- age competitive market forces in the provision of services and the allocation of social resources. Again in the context of Irish Life I make the point that there are definite inhibiting consequences to the State's involvement in Irish Life, and the Minister, Deputy Yates, and Deputy Noonan have dealt with them.
Fourthly, the State as a net borrower, which it is likely to be for a considerable time in a developing economy, should marshal its assets with a view to minimising interest payments. If the State is receiving a negligible or zero return on hundreds of millions of pounds' worth of assets but has to pay 10 per cent interest on annual borrowings of the same amount, it makes sense to realise those unproductive assets and apply the proceeds in lieu of fresh borrowing and fresh interest liabilities. Last, and perhaps most important, the concept of privatisation of State functions should not be seen merely as a public placing of shares in State run industries. My and my party's view is that from house building, maintenance and sanitary services of local authorities to production of metal ores, energy, transport, printing, scientific and information services and publishing, the entire State sector has to be gone over with a fine comb to see whether those activities now carried out by the State might not be better or more efficiently done by others.
It is not possible to approach the whole issue of privatisation with one single modus operandi. The complexity even of this individual case before us, the Irish Life Assurance Company, shows that a simple, broad thrust towards privatisation must be sensitively measured in respect of each industry to which it is applied. For instance, the complexity of this issue was well examined by the committee of which Deputy Lawlor is chairman, and I wish to pay tribute to their work and the clarity of their analysis of the issues involved. It is the most clear minded report on the issues I have seen in recent times and the Deputy and other members of the committee are to be congratulated on it. However, if that is the degree of complexity which attends this privatisation, if we were ever to seek to establish a programme of divestment of other State assets and if this is to be the first, then the amount of preparation, preliminary thought and preliminary examination of the issues involved cannot just be allowed to be postponed indefinitely. This process of privatisation in relation to Irish Life is so monumentally complex that it behoves us, if we are in any way motivated to do privatisation on a wider basis, even if our ideological convictions vary from one party to another in this House, to get on with the job of examining other institutions with a similar aim in mind.
Some State bodies which I believe should be privatised have no balance sheet value at all and thus in their case a sale to the private sector would be entirely useless, but many of their activities are being carried out at a loss which is unjustifiable by any social standards. These activities may in some cases have to be handed over to others and in other cases discontinued completely. I will give one example. We are being asked in the near future to invest another £11 million of taxpayers' money in the B & I shipping company. In that context it is sad that the State ever ventured into running a fleet of ships and what is now being described as investment in a Bill presented before this Dáil is money being thrown away to shore up loss-making operations by an inefficient company in which the State would not have had an interest and what interest it had should have been the subject of divestment and privatisation a long time ago. It is also sad to reflect that a competing company — Sealink — could have been bought for a small fraction of its value compared with the amount of money we are investing in equivalent services under the B & I. That is an example of the State making a commercial blunder which could have been avoided. It is sad to see more money being poured in that direction now under the guise of share capital when it is merely paying off debts which the company's management, because of their mandate in particular circumstances, have been obliged to incur in the operation of a company in the interest of the State.
Other activities require just as much thought and consideration as this privatisation procedure in relation to Irish Life would require. In the health area there is plenty of opportunity for the basic thinking to go into privatisation. There is good reason to believe, for instance, that the health insurance area could be deregulated, competition could be encouraged and insurance companies, including the Voluntary Health Insurance Company, could acquire and run hospitals on a commercial basis in order to bring down costs and to increase the allocation of resources to health. Doubtless we will hear from the commission suggestions to that effect for funding of the health service. I suggest that when we are talking about privatisation we should be doing the basic thinking which is necessary to set in train a programme of privatisation which is capable of being realised within the political horizon as we see it. If we make the mistake of thinking that we will try out privatisation as a concept in the case of the Irish Life Assurance Company and when we see whether it is a success we will do the same with some other body, in my view, and I think most Deputies will accept this, it means we will not tackle anything else for a long time to come. It means there will be no programme of privatisation.
I do not think — to use the phrase Deputy Yates used — you have to be a Thatcherite or a monetarist to believe in privatisation. I do not believe anybody in this House, least of all the Government, is going to be guided by anything other than pragmatic concerns. That is why I felt it was unfortunate, in the context of the last general election, that for some political reason the Government party thought it necessary to assure the electorate that there would be no privatisation. The majority of electors believe in privatisation, if opinion polls at the time are to be believed. The Government's action did no good. I ask the Minister and his colleagues in Government to accept that we at any rate will not crow or jeer if they decide to depart from the stance which was adopted in the context of that general election. We will not mock them for that. It is desirable that they move in the direction of privatisation. We will encourage them to do so and will not score points at them if they change tack on that issue.
I ask the Minister for Finance, in particular, since he is a member of Government who sees on a daily basis the cost of our borrowings, to consider whether a White Paper on every aspect of the State's asset base is necessary, examining every operation of the State, whether through semi-State companies, wholly-owned companies or partly-owned companies as in the case of the Irish Life Assurance Company. Is it not time for the Government to go through each one of those companies with a view to seeing whether they can be disposed of by the State and their value put towards reducing borrowings? In relation to the ones which have no value, is it not time to go through each one of them to see whether the losses which they force the State to bear should not be curtailed by divesting the State of the obligation to run these services and to fund them, whether by capital or loan guarantees?
It strikes me that from map-making to meteorology, from building homes to maintaining local parks, from telecommunications to road transport, from air transport to sea transport, from running radio stations to running television stations, from printing and publishing State documents to providing furniture, heating, lighting, wiring and services even to the State apparatus itself, there is immense scope for saying, why should the State be involved and why should they not seek to get out of involvement in these areas, as in the case of Irish Life? I suggest that a considerable amount of the Minister's energy and that of his Department is absorbed by the fact that he has some ministerial responsibility for Irish Life, that he is in negotiation now, that this is a weighty issue and that Government time will be taken up on restructuring Irish Life. All those issues show how unwise it is for the State to be involved in areas where it can avoid involvement.
I do not believe it is Thatcherite or ideologically Right-wing to take the view that the State should concentrate on some of the matters which are most important such as redistributing from the haves to the have-nots in society, providing a climate for enterprise and applying its legislative efforts to matters such as reforming the tax system, rather than being tied down to providing an extra £11 million, and using up parliamentary time in the process for B & I. The whole problem with the State's involvement in industry and in the service sector, as in the case of Irish Life, is that it takes time and commitment. Supervising the State's assets and making sure that nothing goes wrong with them is a huge constraint on Government activity. It takes up Parliament's time. This Parliament should be doing other than managing insurance companies or turf development companies at a distance. This Parliament has more important work to do and is not, on its record, the best board of directors, of last resort, of industry. Surely, therefore, the time has come to look at privatisation not on a one-off basis, as the Government appear to be doing here, but as an opportunity to escape from some of the constraints and shackles which are debilitating the whole process of democracy and the exercise of the executive power of the State.
Privatisation is an opportunity. It is not something to be feared. It does not create unemployment. It creates a freedom of action for Government and for the Legislature. It is from that point of view that I feel it should be acceptable to the members of the Government party. I do not believe the average Fianna Fáil Deputy — if I may use that phrase — has in his heart a strong antipathy towards privatisation. I do not believe there is anything ideological about the Fianna Fáil Party which sets them irrevocably against a general policy of focusing the State's resources and the Government's time in areas where there is a return to political activity and avoiding areas where there is an opportunity to make disastrous mistakes.
If the unfortunate stance adopted by the Taoiseach in relation to privatisation at the time of the last election had been the diametric opposite, if he had said that he would go along on a pragmatic basis with any privatisation proposals and assess them all in a positive frame of mind, I believe he would have had wholehearted and enthusiastic support, even from the Fianna Fáil section of the electorate. His stance was a sad, political mistake designed to keep the Fianna Fáil Party's appeal to the electorate of a particular persuasion, what we call the Left segment of the electorate, as great as possible. That was not necessary and the consensus that has emerged in the Dáil post that election does not really justify it. I appeal to the Fianna Fáil Party in particular to rethink their stance on privatisation. It should not be something against which they have a knee-jerk, hostile reaction. In every individual case and every field of government it should be an option which will be positively considered and not just an option of last resort. In that context we cannot, as a Legislature, just permit one project, such as the Irish Life privatisation, to be tinkered around with to see if that is going to be the flagship which will decide the outcome of others. It seems to me that is too hesitant, too backward-looking and too frightened an attitude to adopt.
With the greatest respect to the Fine Gael Party, I believe the wording of this motion was a little pussyfooted. Sporting analogies are in vogue among some Members of this House and my party have been accused of throwing litter on the pitch, and I say that without rancour, but asking the Government to come to an early decision is the political equivalent of the sporting activity of kicking the ball around in your own penalty area.
Debate adjourned.