It is very good of the committee to have invited us in. We are pleased to have been given an opportunity to outline the structure, functions and objectives of the agency and to present to the committee our annual report for 2008. We look forward to being able to answer any questions concerning the agency generally and to clarifying any specific issues the committee may raise.
I shall deal with the agency's function and mission first. Its function is to advance loan finance to local authorities and the voluntary housing sector to be used by them for any purposes authorised by the Housing Acts and to borrow or raise funds for these purposes. Our mission is to source and structure this loan finance in a cost-efficient manner and to the requirements of our customers. The agency does not formulate housing policy. That is the preserve of the Government.
The agency's role is to provide appropriate funding for the schemes and projects decided upon and established by the Government. We are required by the 1981 Act to meet the costs from our operations and this we do. The agency does not receive any Exchequer grant or subvention. Another important point is the agency does not lend directly to individuals or households. We are in effect a centralised borrower on behalf of local authorities. We block lend to the local authorities and then, in turn, lend at individual level, having added a margin to cover the administrative and risk costs in so doing. For our housing business, the Government guarantee on our borrowings enables us to raise funds at very fine rates. The total outstanding loan book of the agency at the end of July this year was €4.5 billion.
I shall now give a brief summary of the agency's establishment and structure. It was established in 1982 following the passage of the Housing Finance Agency Act 1981. That Act empowered the Minister for the Environment, as the role was known then, to form a company limited by shares. The agency has a share capital of €39,000, all of which is beneficially owned by the Minister for Finance. It is governed by a memorandum and articles of association, operates within the terms of the Companies Acts, is subject to normal company accounting rules and principles and is audited by a commercial firm of auditors.
The board of the agency is appointed by the Minister for the Environment, Heritage and Local Government with the consent of the Minister for Finance. The term of membership is generally no more than five years except for my own which runs for seven years from my date of appointment as chief executive officer to the conclusion of my current contract. Members will be aware that the chairman of the agency, Mr. Ted Coffey, died in office earlier this year. Mr. Coffey was appointed chairman in 2002 and reappointed in 2007. I am sure the committee will allow me to pay tribute here to his work on behalf of the agency, especially his skills in managing meetings efficiently and productively and his role in cementing the excellent working relationships we have with our customers, the local authorities.
The board consists of 12 members. The current board is representative of local authorities and the voluntary housing sector and includes among its membership a serving county manager and a head of finance. It also includes a senior official from the Department of Finance as well as the Department of the Environment, Heritage and Local Government. More details of our history, functions and reporting relationships are set out in our five-year rolling corporate plan, the latest edition of which is published on our website, www.hfa.ie.
I shall now deal with corporate governance. The directors are committed to maintaining the highest standards of corporate governance. The agency in its business follows corporate governance principles in relation to companies, otherwise known as the 2006 combined code, and complies with the code of practice for the governance of State bodies as published by the Department of Finance and revised in June this year. The board has established a performance review committee which evaluates its own performance and that of individual directors.
As regards the schemes funded, the agency was originally set up to operate a specific scheme of income related mortgage loans based on index-linked funding, primarily from pension and life funds. This scheme allowed 16,000 households, which would not otherwise have been able to do so, to acquire houses between 1982 and 1986. Some 500 of these loans are still outstanding. The agency's remit has been widened and deepened progressively since its foundation. In 1986 it was given responsibility for funding all house purchase loans, taking over this role from the local loans fund. Since 1992 it has funded the shared ownership scheme and the capital loan and subsidy scheme. The latter provides rental accommodation through voluntary housing bodies. In 2002 we were given powers to lend to local authorities for water, waste and environmental projects, about which I will deal later. In the Housing (Miscellaneous Provisions) Act 2009 the agency has been given the specific task of managing an affordable dwellings fund which will recycle capital repayments on affordable dwellings back into that market.
The agency categorises its business into two broad areas, namely, mortgage business, which accounted for about €1.6 billion at the end of August this year and 36% of our total, and non-mortgage business, which was about €2.9 billion at the end of August or 64% of the total. Of the mortgage related business 81% comprises variable rate annuity loans, 10% relates to older income related loans and shared ownership loans and 9% is fixed rate. In total these schemes lend to about 25,000 households. Non-mortgage business covers what are the wholesale aspects of housing by local authorities, such as support for the voluntary housing sector through the capital loan and subsidy scheme, land acquisition, bridging finance and projects ancillary to and supportive of housing.
Our business also includes a small but important amount of finance for projects in the water services, waste and environmental areas under the provision of the Housing (Miscellaneous Provisions) Act 2002. To conform to EU state aid rules, our borrowing in this area is not guaranteed by the State. The price of the debt we raise is thus somewhat higher than what we pay on our guaranteed borrowings. Nevertheless, by accessing block funds from the European Investment Bank and the Council of Europe Development Bank, individual projects deemed too small for direct borrowing have been able to benefit from the fine rates available from these large supranational organisations. The amount advanced so far is relatively small, about €50 million, although we see opportunities for expanding the programme in the future, subject to availability of finance and general Government borrowing constraints.
I am sure the committee will be interested to know how we set and manage our interest rates. The agency has adopted a policy that sets interest rates at the lowest level commensurate with its costs, thus effectively operating on a break-even basis. On mortgage related rates, interest rates are set to ensure the agency can meet costs from its operations. Regard is paid to the level of average rates generally in the market to prevent distortion. The current variable rate to the borrower, excluding mortgage protection insurance costs, is 2.25%. Historically that has been about 0.5% below the average comparable market rate and is currently about 0.9% below, offering a significant saving in the current economic climate.
Local authorities also offer a five-year fixed rate to new borrowers, which is currently 4.4% and below the market average of about 4.89%. It is equivalent to the mid-range of similar private sector products. The non-mortgage related variable interest rate is, for risk management purposes, closely tied to our ongoing cost of funds. We achieve this by setting the rate monthly in arrears once our costs are known for that month. The average rate for 2009 is likely to be about 2.3%, which, assuming no further change in rates, should equate to a saving for our customer over current average private sector finance rates of at least 1% or about €30 million per annum on our total non-mortgage book.
The agency funds its operations by borrowing on domestic and international capital markets. In funding housing related loans, all our borrowings are State guaranteed, as approved by the European Commission under state aid rules. Our borrowing limit was recently increased to €10 billion, which should be sufficient for the foreseeable future. Where possible, the agency matches funds to its borrowing and lending. As the vast bulk of our lending is at a variable rate, so too are our borrowings. The principal instrument we use to raise funds in this area is what is called a eurocommercial paper programme of €4.4 billion which attracts the highest short-term ratings from the rating agencies Moody's and Standard & Poor's. The programme is operated on a cost recovery basis at the dealing end for us by the National Treasury Management Agency under an agency agreement of 2003, pursuant to a provision in the Planning and Development (Amendment) Act 2002. While the agency sets the broad parameters within which the programme is operated on our behalf, it makes sense to run this large programme in tandem with the State's own similar debt programmes, thus achieving synergy in marketing Ireland paper as a unity. Other debt consists of fixed rate and index linked bonds totalling €287 million, a medium term bank loan of €250 million and domestic commercial paper, including an investment facility which is useful to local authorities when they have short-term surplus cash.
The agency's risk management policies are set out in its annual report and note 15, in particular. I draw the committee's attention to an important element of our financial risk since, in large part, it explains the reason the agency requires reserves to be built up. There is a long-standing mismatch in our index linked and older fixed rate books. This is a legacy of the old Irish pound regime of more than 20 years ago when it was not as easy to structure debt in as flexible a way as it is now. As a result, there is an overhang in index linked and fixed rate bonds over the matching loans to borrowers that will result in costs arising until 2018 when the last bond matures. The agency has had a policy for many years of building up reserves to cover these costs and the model we use was validated by an outside accountant in 2006. Our reserves at the end of July were just over €25 million. We have built these up while still delivering competitive rates to our customers.
The agency's staff comprises 14 persons which, with job sharing arrangements, equates to 12 whole-time equivalents. This number has remained unchanged since a review in 2002. Since then the number of loans dealt with has increased by 90% and the total loan book has increased from €2.4 billion to €4.5 billion. The agency's staff pay rates are linked to appropriate public service grades as approved by the Minister and we do not pay overtime, premium pay or bonuses. Salaries account for approximately 40% of total administration expenditure.
The annual administration budget for the agency accounts for approximately 0.04% of the total outstanding loan book as at 31 July. Most of our business is carried out through a dedicated custom-built members website which allows for loan advances and treasury dealing to be done on-line, involving the agency, the local authorities and the Department. The agency is a self-financing body, not in receipt of Exchequer funds. Due to its small core size, it outsources requirements such as IT maintenance and development, legal services and dealing on our eurocommercial paper programme. The agency is always aware of the necessity to keep its costs down; for those costs under our direct control we are aiming to achieve savings of approximately 10% in 2009 over 2008.
The agency made a loss of €2.02 million in 2008, compared to a loss of €6.5 million in the previous year. I emphasise that these losses were planned for and in line with our projections based on our long-term risk management scenario. For 2009 we expect, barring unforeseen circumstances, to make an overall profit of approximately €9 million, thus increasing reserves to approximately €30 million. These will be utilised to bear the portfolio mismatch and any other risk costs that might arise over the period to 2018. Activity in 2009 and beyond is likely to be much reduced over that seen in 2007 and 2008. In the latter years the agency made net advances of €707 million and €621 million, respectively. Average annual net advances since 2000 have been €379 million. This year and probably in subsequent years net advances are likely to be approximately €100 million to €150 million.
I hope this brief overview of the agency has given the Chairman and members of the committee a suitable background for the questions or comments they might have relating to the agency's activities.