Financial Transactions of Certain Companies and Other Bodies Bill, 1992: Second Stage.

Minister for Finance (Mr. B. Ahern)

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

This is a short and essentially technical Bill with the objective of confirming the legal powers of semi-State bodies to engage in swaps and certain other financial transactions in the treasury management area. The provisions contained in the Bill are summarised in the explanatory memorandum which has been circulated with the Bill for the convenience of Deputies.

Placing the matter in a wider context, Deputies will be aware of the considerable growth which has taken place over the last decade or so in the financial services area both in Ireland and abroad. We have benefited from that growth already and hope to continue benefiting from it through the development of the International Financial Services Centre in particular. The growth in the financial services industry worldwide reflects the arrival of new complex and sophisticated financial instruments. These have been developed in response to the requirements of borrowers and others as new ways to reduce debt service costs and to minimise the risks associated with fluctuating interest and exchange rates.

Internationally and here in Ireland the industry has been boosted by factors such as deregulation and the development of new technology. The gradual removal of exchange controls here, and their complete elimination before the end of this year, has also encouraged the development of a more global market. The growing complexity and sophistication of the whole financial services area, with its potential for achieving savings, was one of the underlying reasons for the Government's decision in 1990 to establish the National Treasury Management Agency with the specific purpose of exercising the borrowing and debt management functions of the Minister for Finance.

No less than the Exchequer itself, the commercial semi-State bodies have been affected by the opportunities presented by these developments. At the end of 1991 their total debt stood at some £5.2 billion. Some 46 per cent of this debt is accounted for by the ESB, Bord Telecom Éireann and Aer Lingus. Another 39 per cent of the total debt of commercial semi-State bodies is accounted for by the three State-owned financial institutions — the ACC Bank, the Industrial Credit Corporation and the Housing Finance Agency. This reflects the large scale of their financing of private sector operations. In summary, these six companies account for 85 per cent of the debt of the commercial semi-State bodies. About two-thirds of the remaining 15 per cent is accounted for by Bord na Móna, CIE and NET.

Fifty-seven per cent of the total debt of the commercial semi-State bodies is in Irish pounds, with 43 per cent in foreign currency. However, over two-thirds of the foreign currency debt is in EMS currencies and, because of this and the strength of the Irish pound within the EMS, these debts carry little exchange risk. The relatively large foreign currency exposure of the semi-State bodies reflects the fact that not all of the heavy capital investment needs of the early 1980s could be met at a competitive cost in the relatively small domestic capital market at a time when the Exchequer's own borrowing needs were also high.

With this high level of debt, it is essential that the commercial semi-State sector has available to it the full range of treasury management instruments which our domestic and international financial markets can offer. Indeed, for the larger companies in particular, the emphasis has shifted markedly over recent years from new borrowing to active debt management. With annual debt interest costs of the commercial semi-State sector amounting to about £450 million, this approach can only be strongly encouraged. It is a fair measure of the progress of our semi-State bodies in this area that some of the larger companies are successfully offering treasury management consultancy services to other companies both at home and abroad. In the light of all this, Deputies will appreciate just how important it is to confirm the powers of semi-State bodies to enter into the kind of transactions which are universally accepted and which underlie their treasury management operations.

The best known treasury management or hedging instrument is the "swap". In its simplest form, the swap allows a borrower to convert a floating-rate loan into a fixed-rate loan or vice-versa. The relative flexibility of the swap market enables borrowers to take advantage of changing market conditions so that, for example, a company wishing to fix their interest costs could borrow on a standard floating rate basis at any time and then use the swap market to fix the interest rate when fixed rates have fallen to a level acceptable to the company. Use of the swap market can also give borrowers access to funds at rates below those otherwise available. Outside of the State-owned banks, who deal in these transactions in the normal course of their banking business and who are therefore provided for separately in this Bill, the commercial semi-State bodies have entered into £1.3 billion of swaps in various ways. About three-quarters of this amount is accounted for by the ESB and Bord Telecom Éireann.

Hedging transactions such as swaps are undertaken principally in order to minimise certain risks. They can also reduce the cost of borrowing and provide a means of insuring against certain losses. These transactions make a positive contribution to the management of commercial semi-State bodies.

I will now deal with the doubts which exist about the legal powers of companies to engage in certain treasury transactions; doubts, which, I would emphasise, have arisen in respect of both private and public sectors. In January 1991 in the UK the House of Lords found that, in the absence of express statutory authority, the council of the London Borough of Hammersmith and Fulham did not have the legal power to enter into swap transactions. While the legal position of UK local authorities is not directly analagous to that of Irish semi-State bodies, it has prompted banks and their legal advisers to take a very close look at the legal powers of Irish companies.

As those legal powers were generally set down before the emergence of swaps and other similar financial instruments, it is not surprising that express authority covering them is rarely found in the memoranda of association or the governing legislation. While specific statutory provisions exist in the case of the National Treasury Management Agency and the building societies, it had previously been generally assumed that, in the case of companies and semi-State bodies, the necessary powers could be implied as incidental to the pursuit of the activities that were expressly authorised, especially where the transaction was part of a bona fide hedging strategy, as is the case with the treasury transactions concluded by the semi-State bodies. In this regard it is worth noting that, in arriving at their decision, the House of Lords overturned an earlier UK Court of Appeal decision that swaps entered into for debt management purposes were valid.

In any event, consideration of the UK House of Lord's decision led banks in this country to the view that the legal powers of Irish companies, both private sector and public sector, needed to be updated by providing specific authority to undertake swaps and other hedging transactions. This view was endorsed by the Attorney General in so far as the commercial semi-State bodies are concerned. In the case of companies in the private sector the necessary changes can be made by the relatively straightforward procedure of amending a company's memorandum of association. However, for the majority of commercial semi-State bodies — those whose borrowing powers are set out in legislation — a statutory provision is needed. The Bill now before the House makes that provision.

Before dealing with the specific provisions in the Bill I must mention that discussions have been held with the main commercial semi-State bodies to ensure that this legislation would meet their requirements and achieve its purpose of removing all legal doubts in his area. The Irish Bankers' Federation were also consulted and are satisfied that these provisions met their concerns.

As Deputies can see, the Bill is a short one. Its provisions are broadly based on section 34 of the Building Societies Act, 1989, which allows those bodies to engage in hedging transactions under the supervision of the Central Bank.

Section 1 is, of course, a standard provision relating the necessary definitions to be included in the legislation. Section 2 contains the main provisions of the Bill. This section confirms the legal power of bodies whose borrowings are subject to the consent of the Minister for Finance to engage in financial transactions for the purpose of reducing or eliminating the risk of loss arising from fluctuating interest rates, exchange rates, commodity prices or similar factors affecting their business or the business of another company in the same group; reducing borrowing costs or the costs of other transactions carried out in the course of their business and increasing the return on an investment.

This provision confines these bodies to transactions of an essentially hedging nature. Broadly the Bill covers commercial semi-State bodies and their subsidiaries but does not apply to local authorities.

The section also provides that, after this Bill is enacted, the powers confirmed by it can be exercised only in compliance with specifications issued by the Minister for Finance after consultation with the relevant Minister. The requirement for ministerial specification as to the type or types of contract that may be entered into is designed to ensure that only instruments which have a primarily hedging function will be allowed. The requirement for prior ministerial consent is designed to preclude bodies for whom such transactions would not be appropriate. The Minister for Finance is also given discretion to lay down such other conditions as he considers appropriate.

Section 2 further provides that, in the case of transactions covered by this Bill, third parties dealing with semi-State bodies in good faith are given protection by this section. This provision is analogous to section 12 of the Building Societies Act, 1989.

As institutions providing a banking service the ACC Bank plc and the Industrial Credit Corporation plc are provided for in section 2 separately from other semi-State bodies. Their power to enter into the transactions covered by the Bill for the purposes of their banking business is confirmed. Specifications are not required in the case of these bodies because they are providing a banking service under the supervision of the Minister for Finance. Sections 3 and 4 are standard sections.

In conclusion I would like to emphasise that specifications issued under section 2 (2) will emphasise the prohibition of speculation and require treasury transactions to be operated under board control and supervision. This is important because in the Hammersmith and Fulham case, which I mentioned earlier, the heavy losses arose because they engaged in swaps for purely speculative purposes and unrelated to their debt. Where appropriate, the consent of the Minister for Finance will be required for particular transactions as is already the case with swap transactions. I would stress that the instructions covered by this Bill are not borrowing instruments, though they may be indirectly linked to borrowing instruments. Any borrowing by semi-State bodies requires ministerial consent under existing legislation or, in the case of a small number of companies, under their memoranda and articles of association. I commend this Bill to the House.

Mr. Finucane

We welcome this purely technical Bill the provisions of which deal with the interests and concerns of banks. This is an understandable interest when one considers what the Ministers said in relation to commercial semi-State bodies which, at the end of 1991, had total borrowings of £5.2 billion, 57 per cent of which was in Irish currency and 43 per cent in foreign currency. Therefore, in relation to the scale of borrowings it is understandable that the banks would require some type of protection of their interests.

As the Minister said, this Bill emerged really out of the United Kingdom Hazell versus Hammersmith and Fulham case and the swaps engaged in by that local authority when their legislative provisions were found wanting. It was understandable that our banks would express similar concerns.

The Minister said that the provisions of this Bill will not relate to local authorities here. When replying he might clarify the position in relation to local authorities because they are involved in borrowings and, I predict, will become even more involved in borrowings in the future. Many legislative provisions and regulations are emanating from the EC and this House, which will place extra financial strains on local authorities. I might cite, for example, the Abbatoirs Act, the Building Regulations Act, the Health and Safety Act, all of which place additional strains on the purse strings of local authorities involved in borrowing. Perhaps the Minister would say whether local authorities should enter into debt in order to expand their activities.

The provisions of the Bill are clear-cut, particularly in regard to debt management. It is understandable that commercial semi-State bodies would have to resort to these types of swaps as an effective debt management exercise. My party will be supporting the Bill.

Mr. Quinn

The Minister correctly described this Bill as a comparatively technical one. Its introduction enables us to examine the growth of the swaps market in an Irish context, in particular the dependence on them of the three companies to which he referred and their usage in order to reduce the cost of servicing their substantial debts.

Having regard to the debate in this House concerning the future of the Agricultural Credit Corporation on 1 April last, bearing in mind that the provisions of section 3 refer specifically to the ACC — and by extension to the Industrial Credit Corporation — perhaps the Minister would indicate what type of strategic thinking has evolved in his Department in relation to this matter. Once again this House is being presented with an ad hoc Bill in response to a court case which arose outside the jurisdiction of this State in regard to activities that could never occur here because of the draconian mailed hand of the Department of the Environment around the throat of every county secretary or manager. The speculative manner in which certain Labour controlled local authorities in Britain endeavoured to get around the Thatcherite freeze on cash in the eighties is of some anecdotal interest but certainly of no political interest to us. Most important of all, I contend those types of ad hoc legal decisions should not drive fiscal and financial policy as they pertain to the future of banking here.

The Minister has placed on record the scale of the exposure of debt in the case of commercial semi-State companies. It would be interesting if we could ascertain the scale of debt of all local authorities. It would also be interesting to have from the Minister an indication of the level of current account deposit at the disposal of those local authorities on a daily basis; what kind of manipulation of that current account is open to them to maximise their return so that they can reap the greatest return from our fairly sophisticated financial marketplace. Clearly that power is not being given to local authorities. Nor is discretion being afforded local authorities to have that power exercised on their behalf by financial agencies other than banks with which they might wish to enter into contractual arrangements. For example, it would be interesting to know whether local authorities could seek the assistance of the National Treasury Management Agency in these matters or whether such assistance would be of advantage to them. These are questions to which the Minister might respond when applying or in the course of our Committee Stage discussions.

In the context of providing further legal certainty in an increasingly complex financial marketplace here, perhaps the Minister could inform us how he envisages that market developing after 1992, just six months away if one omits the summer and Christmas holiday periods. On a number of occasions he has referred to the position post-1993. The most recent of which was at a function held last night to celebrate the successful development of an Irish based bank with a French partner. What is the strategic thinking in the Department of Finance in relation to how the Irish banking system and the related financial market will be in the next few years? Concerning the provision in the Finance Act in regard to the special savings accounts introduced to minimise revenue loss as a result of DIRT, as a result of money being taken from the jurisdiction and deposited elsewhere, what countervailing measures does the Minister propose to take to reassure the Irish equities market and the life assurance market which is essential for employment, not only directly but also indirectly, if one takes into account the role those operations play on the Dublin property market and the role they play as a source of revenue to, for example, the local authority of which I am a member? If one ravages the heart of the financial sector of Dublin, which I think the Finance Act in part has the potential to do, one does not square little boxes in the Department of Finance and keep money counters relatively happy in relation to the tax revenues which are needed to balance the books at national level; rather one interferes in a very dramatic and dynamic way in a very complex set of relationships, the scale of which the Department of Finance did not fully take on board when they looked at this measure, at the Finance Act or the ACC Bill of 1 April. No pun is intended in relation to that date.

The next question I want to pose to the Minister by way of a chapter heading is: to what extent can we expect further legislation from him in respect of financial transactions or the role of the financial sector in our society post-1992? What threats does he now see for those sectors which, of their own admission, are going to be considerably disadvantaged as a result of the establishment of the special savings accounts and other measures designed to protect the banking deposit base with the abolition of exchange controls and all subsequent controls on 1 January 1993? Is anybody in the Department of Finance raising these questions and coming forward with proposals to deal with them?

The Minister in his speech stated that the measures in this Bill were put together following consultation with the main commercial semi-State bodies. Did additional consultation take place with other people involved in these types of transactions? Were their views sought also? I see that the Irish Bankers' Federation were also consulted. I should like the Minister, if he is in a position to so do, to indicate the range of consultations which took place and to say whether the various other finance houses who engage in this type of activity had an input to the Bill either directly or indirectly.

The reason I ask the question is that between 1979 when we joined the EMS and January 1993 when we enter the Single Market economic conditions, which will lead inevitably to a single currency by the end of the decade at the latest, there will have grown up in Ireland, primarily in Dublin but not exclusively, a very extensive and sophisticated, highly motivated and economically well paid small financial sector which not only has developed an expertise which has been recognised by many international banking groups but which has led in part to the establishment of the international financial services centre in the Custom House Docks area. We now have a proven expertise in the area of money management which up until 1979 we did not require because of our integration with the British sterling currency. A home grown industry by and large has grown up and developed during that 12 year period. Many of the people in that industry are of the view that without the establishment of clear strategic thinking which only the Government can bring into play there will be substantial losses of employment in that sector at the coalface and substantial consequent losses down along the line. I referred to these earlier, for example, the impact on the Dublin property market which in turn has an enormous impact on construction to say nothing of its impact on the tax base revenue of the local authority of which I am a member. The Minister might respond to that point in his reply.

In light of the Culliton report and the need to move from capital grants for industry to equity participation, has the Minister given any consideration to the development, in conjunction with the Irish money markets, of some system of unit trust funding which would. enable institutional investors, small or managed funds, individuals or any combination, to be able to provide the equity capital for incoming multinational corporations which will be attracted to locate in Ireland for reasons of the quality of the labour force or the taxation regime open to them? Based on what the Minister has said on numerous occasions and having regard to the massive capital scarcity for local authorities and the way in which the equity market has been disadvantaged by the special savings accounts provided for in the Finance Act, some creative counter-vailing measures should be contemplated by the Department of Finance if they are doing their job or if they know their job. I do not want to sound too philosophic about this but it brings us back to the main point about whether the Department of Finance have reverted to being the treasury, with all that implies, or if there is a vestige left of the department of economic development, a role it took on in real terms under the former Deparment Secretary, Mr. Ken Whitaker, a former member of the Upper House and a very thoughtful contributor to debates in that House? Have the Department lost that kind of economic development role they sought for themselves from within their intellectual resources on the one hand and with the active encouragement of successive Ministers for Finance and, in particular, the former Taoiseach, Seán Lemass, on the other?

I believe those are reasonable questions to pose on a Second Stage debate in the context of responding to a financial Bill which tragically, may very well be necessary but which has been brought in as a reaction to a negative decision in another jurisdiction, a decision which has cast some doubt over. the legitimacy of some transactions which have taken place in the Irish money market.

Is the Minister in a position to outline the role he sees for the National Treasury Management Agency in the context of providing direct services for either Telecom, the ESB, the Housing Finance Agency or other semi-State Bodies which have large borrowings? Is the Minister of the view that the ESB, directly or indirectly, are more capable of taking on this activity now legitimised, rather than giving it to an agency we spent a lot of money establishing and which have performed very well by everyone's standards? The targets set for that agency last year were met in excess and I understand they are on course to meet the targets set for them this year. There is a general optimism and high morale within the National Treasury Management Agency. Will the Minister indicate if he has given any indication, through the relevant Ministers in the Cabinet, that the activities of these bodies should be handled on a day-to-day basis by the National Treasury Management Agency?

In conclusion, I ask the Minister to have regard to the extraordinary vulnerability in terms of this sector, the most protected sector of our economy, which is not very well run. The dispute between the IBOA and management should give cause for much alarm about the future of the traditional banks who have about 80 per cent of the market. I am not suggesting that the Minister should rationalise these banks — I am not sure they would be great value — but an interventionist Minister, one who would see, as does the present Minister, that the State has a pro-active rôle in this area, one that is unique to the status and powers of the State, should intervene to wake those banks up to the reality of what they are facing in the context of continental Europe and to stop their games in the north-east corner of North America. Alternatively, he could consider how the rest of the banking sector in Ireland under the direct control of the Minister and his colleagues — ACC, ICC, the post office network dealing with deposit savings, the post office bank and the Trustee Savings Bank — can be brought into gear as a vibrant third major player in the Irish banking system.

I have posed those questions before and I am doing so now because my fear is that in the absence of any creative, imaginative, strategic thinking in the Department of Finance, if these people are in the treasury bunker and not on the floor of economic development they will miss this opportunity and, by default, the components under the control of the Minister for Finance will be disposed of at discount prices to no good advantage. The whole financial sector, with all the consequential dependencies related to it, would be exposed post-1992 to very severe competition, for which it is not well equipped to respond at present, and we would lose out significantly. I ask the Minister to respond to those points when replying.

Mr. Rabbitte

I note that the Bill, and the Minister's speech, have been introduced in terms of the advantages that will accrue to semi-State companies as a result of having the latest debt management instruments available to them. The purpose of the Bill as I read it is to protect the banks; it is as simple as that. The banks, obviously, feel that after the Hammersmith decision they may be at risk for that element of the debt that is managed in foreign currency. I cannot say whether that is the case or whether the effect of the decision in the Hammersmith case can be imported directly into the position here.

Deputy Quinn made some remarks about the origins of the Hammersmith case. Both he and Deputy Finucane referred to the lack of clarity about the position here as it affects local authorities. As I understand it — I would ask the Minister to address this point — I do not think this issue arises in the case of local authorities because I do not think they have this kind of debt or are in any way concerned with this type of debt management. Even on the capital side, most local authorities are probably covered by mortgages and direct Exchequer aid. Therefore, it does not arise as far as local authorities are concerned, although it is an entirely different matter as to whether it should arise.

I am surprised at the extent of indebtedness of the very small number of State or semi-State companies that exist — £5.2 billion, almost half of which is in foreign currency, is a large debt for a small number of companies. I am interested in the Minister's reference to the fact that the emphasis has shifted markedly in recent years in these companies from new borrowing to active debt management. He provides figures on that and goes on to say that some of the staff in these semi-State companies provide, on a consultancy basis, treasury management expertise. I find that interesting in the context of the discussion we had in the House at the time of the setting up of the National Treasury Management Agency. The only argument for that agency at the end of the day, no matter how it was dressed up, was that the public service was not paying the going rate for the exceptionally skilled, specialised, and important nature of the work being done by full time civil servants in the Department of Finance in managing the national debt. Other arguments were adduced in the Bill, but that was the main argument.

As I understand it, the people in the Department of Finance have a considerable international reputation in this area. It is acknowledged that, with a rather difficult portfolio, they did a very good job for the State. However, the fact is that they were being poached by the private sector and, while under the aegis of the Department, they could not command the salaries they would get in the marketplace. In the first year of the National Treasury Management Agency that has been borne out.

I am surprised that there seems to be, within the semi-State companies, people with similar expertise who are capable of lending this expertise in the form of consultancy services. I presume this does not mean that these people are breaching the pay guidelines within the State companies, which I presume, are roughly commensurate with those in the Department of Finance. Therefore, if the argument obtained for the Department of Finance officials to be released from the chattels of public service pay constraint, presumably the same argument applies for the people working in State companies who provide this service. I would like to hear the Minister's views on that point.

I would also like to hear his views on whether the expertise and skills in the National Treasury Management Agency could be put at the disposal of State companies. Is it true that until some years ago borrowing was carried out for some of these State companies by the Exchequer? The level of indebtedness we are now talking about is a relatively recent phenomenon — I did not have time to research this matter but that is my memory of it. Is there any reason, since we have set up this specialist agency, that the skills in that agency could not be made available to leading State companies such as Bord Telecom and the ESB in terms of managing their portfolio?

I am not arguing against the necessity for our leading State companies to have available to them whatever treasury instruments are available in the marketplace. I accept that some of these financial instruments have grown up since the legislation was put in place to found these bodies. If the Hammersmith case is to be our guideline, many private sector companies will also be out of date. It seems important that if debt management is an important element in financing the debt load of these companies, then the best and most efficient instruments ought to be available to the management of these companies. I have no complaint with that.

On the question of private sector companies, is it true that the banks are exposed in terms of their dealings with State comanies following on the English case? If it is true, presumably the same applies to private companies who would probably be involved on a more regular basis in terms of swaps and the use of other hedging transactions. Is there some kind of general instruction of exhortation going out to private companies that they should amend their memorandum and articles of association to comply with this? The main thrust of the Bill is to give the banks this protection. Presumably the Minister is arguing that if we do not give the banks this protection, this element of relief that is available to the State companies in managing their debt will not be available to them, so I presume that we have very little choice but to nod this through. Presumably the same questions arise in respect of the private sector.

As has been said, the Bill seems to be a technical measure. The continued growth of our State companies is obviously a very important dimension of our economic performance. Over the seventies and eighties it became clear that some of the State companies have been positively strangled by the extent of their indebtedness and we never managed to get the debt/equity ratio right. No Government ever seemed to want to address that problem with the result that it has got out of hand in some of the State companies in the recent past, so that they ended up being privatised or sold off or being prepared for privatisation, or struggling with a debt, like Bord na Móna, for example, that is almost beyond dealing with, and which has led to the kind of cutbacks and rationalisation that would otherwise not have been contempleted.

I accept that the continued growth of our public enterprises is a very important aspect of our industrial strategy. In that sense, if access to swaps and other hedging transactions is considered important in efficiently managing an element of that debt, then it is proper to facilitate that in every way we can, but I would like to hear the Minister on the points I have raised.

Minister for Finance (Mr. B. Ahern)

I thank Deputies Finucane, Quinn and Rabbitte for their contributions to the debate. Many of the points of detail mentioned by the Deputies will be dealt with on Committee Stage. While this Bill is largely technical, it is important for those concerned. The bodies involved have pressed hard over recent weeks to see this Bill through the House. I thank Opposition Deputies for facilitiating the Bill. These bodies would have preferred to have this through before the Finance Bill but that was not possible.

The transactions involved here are now part of the everyday treasury management operations of major companies everywhere. It is therefore essential that the legal doubts which followed from the Hammersmith and Fulham decision in the UK should be resolved in a definitive manner and that semi-state bodies should not find themselves operating at a disadvantage relative to other companies when it comes to availing of the opportunities offered by the financial services sector. With a total indebtedness of the order of £5 billion, the need to minimse debt service costs in the semi-state sector hardly needs to be emphasised. This Bill will facilitate such an approach while ensuring that semi-state bodies do not become involved in operations which do not arise from their own debt management or other business activities.

Many of the developments in financial instruments which occurred in the 1980s were designed to facilitate better mangement of liabilities and assets. While the European Monetary System helped greatly to reduce the volatility of exchange and interest rates, significant differences remain between the individual financial markets and member states. In addition, the EMS currencies are still exposed to exchange rate fluctuations with the major economies in the rest of the world such as the United States and Japan. Consequently it is likely that the trend established during the last decade will continue, with new hedging instruments being developed on a regular basis to meet the ever changing needs of the market place.

The objectives and policies for hedging must be clearly established at the outset. This legislation limits the hedging operations of the non-bank commercial semi-State bodies to the management of their own debt or assets or to hedging risks arising from their business. The objectives of hedging is not to make a profit but to reduce the cost of borrowing and the risks arising from volatile interest and exchange rates and commodity prices. The requirements that a State body must secure a specification issued by the Minister for Finance before they can avail of the powers confirmed by this Bill will further guard against transactions which are not of a strictly hedging nature and will be used to ensure that the powers confirmed by this Act are subject to board level supervision. Hedging instruments are designed specifically to reduce or eliminate exposure to price movements and interest and exchange rate changes and will achieve this when used properly.

The swap developed during the 1980s as a tool to enable companies to vary the terms of their loans and therefore to manage their liabilities more effectively. More recently, swaps have been used in a similar way to manage assets. Swaps originally developed where each party to the swap could access a particular market on comparatively better terms than the other party. This comparative advantage would then be shared between the parties, and any intermediaries arranging the transaction, to lower their funding costs. The parties entered the markets where they had the advantage and agreed to exchange or swap cash flows. This result gave the parties better terms in their preferred market than if they had entered it directly.

As Deputies will be aware the financial services industry about which Deputy Quinn spoke, is one where Ireland has made considerable advances in recent years. The concept of an international financial services centre was first proposed in 1986 to take advantage of the worldwide growth in financial services. The Custom House Docks was chosen as the location for the centre and its success is now very evident. The 200 or so companies approved by the Minister for Finance to operate in the centre have committed to the creation of close to 2,900 new jobs over the next 3 to 4 years. In excess of one third of these new jobs have already been created. Additional extra employment has arisen in associated activities outside the centre in the accounting, legal and general services area. Moreover, the IFSC provides a significant and growing source of corporation tax for the Exchequer, IR£47 million in 1991. These companies are primarily involved in: insurance; funds management; treasury management and banking. The centre has attracted leading international companies in each of the above fields from North America, Japan and Europe.

There is a strong emphasis on a high standard of financial regulation and supervision in the centre and this ranges from the initial certification of projects by the Minister to ongoing supervision by the Central Bank. The ongoing legislative programme is designed to enhance the type of product available to companies within the centre. Last year's Finance Act, for example, contained provisions which made certain life assurance and other investment products more easily available within the centre. We have been among the leaders in implementing recent EC directives concerning collective investment undertakings. Against this background it is important that there is no doubt about the legal powers of semi-State bodies operating in the financial markets and this Bill is designed to remove such doubts.

Deputy Finucane asked why the local authorities and health boards were excluded. There are two reasons. The Minister for Finance does not have the statutory function of consenting to the borrowings of these bodies and, secondly, the legislation is primarily designed to facilitate the commercial and management operations of commercial semi-State bodies whose resources, both in terms of personnel and expertise, allow them to engage in the type of transactions covered by the Bill. The local authorities and health boards are not engaged in the type of commercial operations which would make this Bill appropriate to them. It is not intended to allow any of the bodies covered by the legislation to engage in transactions which are inappropriate to the nature of their operations. It is a matter for administrative decision in a case by case basis. The expertise of the body in question and current market opportunities would be relevant factors in reaching such decisions if they were put before us.

Deputy Quinn raised the matter of the impact of the Finance Bill on the financial markets, particularly in relation to DIRT. My view is that the changes in DIRT protect the exchange rate which our financial services have for years been talking about. This will ensure that we retain savings in this country to meet the requirements of industry and credit. I quite understand the concerns of some sectors of the industry at what might happen now but it is the old story — you have to get the horse before the cart. If we were to take the risk that the money might be taken out, there would be no possibility of correcting the decision afterwards. We have stopped what would have been a flood of activity by the banks in advising people how to move their money outside the country. That would immediately affect the markets and the exchange rate and push up the interest rate. That happened in Germany. If it happened there, what would happen here? We have resolved that matter and it is satisfactory to see the banks advising people to keep their money here.

Another question to be asked is what other difficulties that might create for equity and for the insurance industry. We had already set up a strategic team to look at these matters before I made the announcement regarding DIRT. I am watching what the insurance industry are saying. That industry have had substantial comparative advantages for a number of years. In the order of balance, they had a very good position for a long time. We heard very little about it. I do not say that in any argumentative fashion.

We must take into account what is happening in the marketplace because of the Single Market and the final move towards removing exchange controls by the end of the year. Our companies are trying to sell in the continental markets, mainly in Germany. One of the world's biggest banks outside Japan was represented at a very prestigious gathering of bankers yesterday evening. Our President is doing an excellent job for the country in Paris. Also in Paris our financial services are making one of the first presentations of how we can sell our gilts in the huge French market which we have not broached so far. Even a small inroad would have a considerable effect. It is a fact that profits made on pension funds and commercial profits move out of the country, while our companies sell our paper and our gilts outside and that money comes back to the country. The liquidity in the market must favour our side. I belong to the school of thought who believe that the basics must be right for us. In recent years the relaxation of exchange controls has enabled many people to move outside but that will settle down in a few years. People in the industry believe it will settle down within two years. We will have to treat the question with caution.

Everything cannot move to the 10 per cent rate. We need a system where people who have ideas can be matched with people who have money for investment. I am not convinced we have such a system and I look forward to its development.

Mr. Quinn

The Minister should not have allowed the Minister for Industry and Commerce to abolish NADCORP.

Mr. B. Ahern

There are people who have money available for investment. They may not want to invest money in their own enterprises because they may feel they have been maximised. On the other side there are people with good ideas but no money. I am not sure we have ever resolved that issue. The BES concept in its original form was on the basis that this would work but unfortunately it did not. I do not think we should forget that concept.

Mr. Quinn

The concept did not fail. The terms were changed to make the risk element irrelevant.

Mr. B. Ahern

It is an area which must be watched on an ongoing basis. Deputy Quinn also asked about State bodies on whose behalf the NTMA could borrow. The National Treasury Management Agency have no statutory power to undertake transactions on their own accord. The agency is an agent of the State and undertakes transactions on behalf of the State. Even if it were possible for the agency to act as an agent or intermediary on behalf of State bodies, those bodies would still require legal power to engage in the transactions and to benefit from them. It would not be realistic for the NTMA to operate effectively on behalf of a wide range of bodies who already have highly sophisticated treasury operations tailored to their own needs. Some of the large semi-State bodies are successfully offering treasury management consultancy services to other bodies at home and abroad. Deputy Rabbitte asked why there was difficulty with the Agency's staffing if this is so. The position of the Agency is slightly different. We are trying to handle £25 billion and for the first time we are trying to create a two-way process in our market where you can buy and sell in the traditional way.

Deputy Rabbitte asked about the position of private sector companies. This is a matter between the companies concerned and their own banks. It is a relatively simple matter for any of these companies to change their own memorandum and articles of association if they so wish.

Deputy Quinn raised the question of the role of the National Treasury Management Agency and the borrowing of local authorities. The agency has been given power by the Government to borrow money on behalf of the Exchequer and to manage the national debt. They have no specific function in relation to the borrowing of local authorities. The debt of £70 million incurred by local authorities last year is relatively small.

Mr. Quinn

Was that for all local authorities?

Mr. B. Ahern

Yes. The scale of the borrowing operations is not appropriate to this Bill. Deputy Rabbitte asked whether the Bill was being introduced in order to give comfort to Irish banks. The Hammersmith decision arose because the UK local authorities took the view that they had no legal authority to engage in swaps and, consequently, no legal obligation to fulfil the swap contracts entered into. In Ireland no swap counterparties have taken such a view. It should be emphasised that no Irish local authority are engaged in swaps. The public sector bodies in his country who did engage in swaps were commercial semi-State bodies and took the view that the powers were sufficiently wide to cover swap contracts. The present legislation is designed to confirm the legal powers of the commercial semi-State bodies in this area and to protect them from the doubts which the Hammersmith decision has raised about swaps powers generally. I am not sure whether we are going on to Committee Stage.

Mr. Noonan

(Limerick East): We are.

Mr. Rabbitte

I would not see any reason for not doing so.

Mr. B. Ahern

Deputy Quinn asked about the strategic examination of the banking issue. There was a debate on that issue some time ago. I am still following that line of thought which I think would be 100 miles away from Deputy Quinn's thinking.

Question put and agreed to.

Mr. B. Ahern

I believe there is some confusion with the Whips as to the taking of Committee Stage.

Acting Chairman (Mr. Boylan)

The Order of the House is that we agree to take Committee Stage at a later date.

Mr. Quinn

My understanding is that the time allocated for Second Stage was until 7 p.m. and I know there is other business pending. In view of the fact that the Bill is quite small and there appears to be general agreement on it, am I in order in asking you, Sir, if we can, by consent of the House, agree to proceed immediately to Committee Stage?

Acting Chairman

My hands are tied on this matter. I have an Order in front of me outlining the Order of Business.

Mr. Quinn

The House can always change that order.

Acting Chairman

They can. I do not know whether the Leas-Chathaoirleach has the power to do so. I think the Whips office are not in full agreement, they are not prepared for this development.

Mr. Rabbitte

If the Minister is in agreement it is up to us.

Mr. B. Ahern

I appreciate the cooperation of the Opposition spokespersons for agreeing to take this Bill so quickly. Unfortunately I have no note from the Whip's office other than the one I received a while ago informing me the Whips were not in agreement. While it would suit me very well to take it I am afraid I have to stick by the Whips.

Mr. Rabbitte

We have departed from the Order of the House before when the House so agreed. It is extraordinary, at a time when we are pressed for legislative time in the House and if there is agreement by all parties that we should proceed with the Bill; that we cannot do so. Above all the authorities invoked in the House, with all due respect to the Whip's office, if we can dispose of the Bill, dispose of it and let the Whips decide. There is back-up legislation waiting to be taken. I propose we dispose of the Bill.

Acting Chairman

The Chair will not impede the progress of the House.

Sitting suspended at 5.27 p.m. and resumed at 5.35 p.m.

Dáil Éireann debate -
Tuesday, 26 May 1992