As Senators will note from the explanatory memorandum circulated with it, the Borrowing Powers of Certain Bodies Bill, 1996, is essentially a technical one. It is designed primarily to remedy what appears to be a deficiency in existing laws governing the borrowing powers of State bodies whose borrowing is subject to the consent of the Minister for Finance. This apparent deficiency came to light fairly recently when the legal advisers to a State body queried that body's authority to engage in a finance lease and the legal validity of any State guarantee associated with it. As a result and until the legal situation is clarified, financial institutions are reluctant to contract any further finance leases with those State bodies which do not have express statutory power to transact such leases.
In general terms, a finance lease is a contract under which an asset is purchased by a party other than the lessee, usually a financial institution, which, by availing of capital allowances, etc., can reduce the cost of financing to the lessee. The lessee in such an arrangement assumes all the risks and rewards of ownership other than legal title to the asset. Because of their cost effectiveness, such leases are widely used as a means other than direct borrowing to acquire assets. A number of State bodies have in recent years funded some of their capital investment by way of finance leases. The total value of outstanding finance leases for commercial State bodies at the end of 1995 was £575 million; of this, £72 million carried a State guarantee.
On receipt of the inquiry concerning the doubt about the legality of the contracting by a particular State body of a finance lease, my Department consulted the Office of the Attorney General. Following detailed consideration of the issue, that Office advised that express statutory power is required for State bodies to enter into finance leases and that a similar power is required if the Minister wishes to guarantee the resultant obligations of State bodies.
Against that background, Senators will appreciate the need for the present Bill, if only to confirm the validity of those existing finance leases whose legality is in doubt. Up to the time the legality of the involvement of some of these bodies in finance leases was queried, everyone involved in such transactions, including financial institutions, had accepted that the legislative authority was there. My view is that it would be regrettable if I were now to pass over the opportunity the present Bill affords to put beyond doubt what precisely the borrowing powers of State bodies are.
There has been a rapid evolution of financing techniques. That has been accompanied by an ever-increasing complexity in the financial instruments which have been developed in response to the requirements of market participants to reduce the costs of borrowing and to minimise the risks caused by fluctuating interest and exchange rates. This process of refining existing instruments and inventing new ones is likely to continue and it behoves us to take account of it in this Bill. It is for this reason that I make provision for the Minister for Finance, after consultation with the Central Bank and the Revenue Commissioners, to be able to prescribe other capital financing mechanisms which the State bodies may avail of. Otherwise, we could be faced in the future with a situation of either having to deny a State body access to new financial instruments or else bringing in fresh primary legislation for every new kind of transaction or class of transactions that a State body may wish to avail of.
In this context I would like to assure Senators that what is being proposed in this Bill is not of major significance. In the first place, all it is doing is effecting through legislation that which a private sector company established under the Companies Acts could do through amending its memorandum and articles of association.
There are other assurances I would like to offer in relation to the Bill. The Bill does not in any way give any more powers to State bodies than are at present conferred by or under statute, it simply removes a doubt. The powers being clarified in this Bill can only be exercised in accordance with specifications laid down by the Minister for Finance, after consultation with the relevant Minister, where appropriate. The Bill lays down strict procedures for the calculation of a State body's financial exposure to a transaction for the purposes of the statutory limits on its borrowing and any related State guarantee. In preparing the Bill, my Department had detailed discussions with organisations likely to be affected by it, including the State bodies mainly concerned, the Irish Bankers' Federation and the Irish Finance Houses Association. All of them found the Bill acceptable. Finally, I would like to reassure Members of the House that the published figures for the debt of State bodies and any associated guarantees include the liabilities arising from finance leases.
This Bill also provides for an increase in the limit on the borrowings of ACC Bank. At present the limit is £1,400 million and the Bill proposes to raise it to £2,400 million. The agricultural sector was hard hit by the economic difficulties of the early 1980s and this had severe knock-on effects on the finances of ACC. In fact, the corporation sustained heavy losses in 1987 under the weight of accumulated bad debts and increases in arrears. The Agricultural Credit Act, 1988, was introduced to address these problems, in particular through broadening ACC's remit with a view reducing its dependence on a single economic sector.
The finances of ACC improved over the following years. The ACC Bank Act, 1992, removed all remaining restrictions on its lending. That Act also changed the name of the corporation to ACC Bank plc to signify the more diversified nature of the its activities. It also raised the authorised share capital from £35 million to £50 million and increased the limit on borrowing from £800 million to £1,000 million. Another important feature of the Act was that it made the bank subject to the prudential supervision of the Central Bank. This means that ACC Bank must obey the same rules and regulations as other credit institutions supervised by the Central Bank.
Over the past five years ACC Bank has grown rapidly, with deposits more than doubling to reach almost £1,000 million at the end of 1995. The bank's total borrowings, including deposits amounting to nearly £1,230 million, are quite close to the present borrowing ceiling of £1,400 million. This rapid growth in the bank's activities was due to its success in attracting new business, particularly in the home and commercial mortgage sector. Unlike more established mortgage providers, however, the bank does not have a portfolio of maturing mortgages to offset against new mortgage growth. Thus, because all mortgages undertaken by the bank are mostly new business, this business generates a higher rate of asset growth. If the existing ceiling of £1,400 million on borrowing is not raised, the bank's growth will effectively be halted. It is for this reason that I am now proposing to raise the ceiling, and the amount I have in mind is £1,000 million. At the average rate of growth which has been realised in recent years, this should cover the bank's requirements for the next four to five years. The financial performance and growth of ACC Bank over the past few years, in an increasingly competitive market, is due mainly to the effort and commitment of the board, the management and the staff of the bank. I would like to thank them all for their contribution to this success.
As I said in my introductory remarks, this Bill is essentially a technical one designed to fill a gap in existing law governing the borrowing powers of State companies. Section 1 specifies the definitions to be included in the legislation and is a standard provision. As the definition of "capital value" relates to section 7, I propose, if Senators agree, to deal with it when treating of that section.
Section 2 defines the bodies to which the Bill applies. Section 3 contains the main provisions of the Bill. Section 3 (1) confirms the powers of the bodies concerned to engage in the specified list of capital financing transactions and enables the Minister, after consulting the Central Bank and the Revenue Commissioners, to prescribe by order other capital financing transactions which these bodies may conduct. The latter provision is designed to take account of the continuing development of financial mechanisms and the possibility that State bodies may in future wish to avail of an instrument not yet developed. Section 3 (2) enables the Minister, again after consultation with the Central Bank and the Revenue Commissioners, by order, to amend or revoke any previous order made under this or the preceding subsection. Section 3 (3) relates exclusively to the class of transaction known as finance leases and is designed to give the Minister the authority to take account of any changes in definition which may be made to it as accountancy practice evolves. Section 3 (4) defines the terms "finance lease" and "body" for the purposes of the section.
Section 4 gives the bodies concerned the power to provide indemnities and to charge their assets in respect of any of the specified transactions. Section 5 provides that all existing provisions in respect of borrowings and guarantees, including requirements in relation to ministerial consent, will apply to all the transactions authorised by the Bill. It also enables the Minister, after consultation with a relevant Minister where necessary, to determine the terms and conditions under which a State body may engage in any of the specified transactions. Section 6 extends all existing guarantee powers, rights and obligations of Ministers and State bodies respectively to the transactions specified in the Bill.
Section 7 specifies the manner in which the borrowings of State bodies and any related State guarantees are to be calculated for the purposes of the statutory limits imposed by the Oireachtas. These limits set ceilings on the financial exposure of State bodies in the case of borrowings and of the State in the case of guarantees. To this end it is necessary to ensure that any financial exposure or potential liability arising from a transaction authorised by this Bill is recorded by the State body concerned as borrowing for the purposes of the statutory limits in question. The section relies on a specific definition of "capital value" in this regard, namely, the total value of the transaction less any inherent interest amounts and any amounts which do not constitute a legal liability on the body concerned.
Finance leases do not comprise separate principal and interest payments as in the case of a normal term-loan. However, in pricing a leasing contract, there is effectively an imputed or inherent interest element included in the repayments. For the purposes of determining the level of borrowing under the Bill, it is proposed that the amount borrowed will be calculated by reference to the nominal value of the repayments less the inherent interest amounts.
In the case of certain structured finance leases, a State body may secure the lease payments by making a deposit with a third party who takes over the payment obligations of the lessee. Generally, these structures do not allow the lessee assign to the third party its legal liability for the lease payments. Thus, if for any reason the third party were to default on its payment obligations, the liability to make the payments would fall back on the lessee. The Bill requires that any such potential liability or exposure be recognised for the purposes of both the borrowing limit and, where appropriate, the guarantee limit.
Section 8 confirms that State bodies may contract leases other than finance leases. The leases in question are operating leases and relate mainly to normal rentals such as office space and equipment. As such, the section provides that they are exempt from the requirements specified in the Bill in relation to finance leases and other capital financing instruments.
Section 9 provides for an increase in the borrowing limit of ACC Bank to £2,400 million from its present level of £1,400 million. Section 10 is a standard provision in Bills which alter the powers of State bodies, and sections 11 and 12 are standard to all legislation.
In conclusion, I warmly thank Senators for agreeing to process this Bill as a matter of urgency. I commend the Bill to them and am anxious to hear their comments.
