National Treasury Management Agency and Department of Finance

I draw the witnesses' attention to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to this committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. The opening statements the witnesses have submitted to the committee will be published on the committee website after this meeting. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. I remind everybody to turn off mobile telephones or put them on safe or flight mode because they interfere with the meeting and the broadcasting equipment.

I welcome the National Treasury Management Agency, represented today by Mr. Conor O'Kelly, CEO, and the Department of Finance, which is represented by Mr. Eoin Dorgan and Mr. John Palmer. The witnesses are all very welcome. Their opening statements and submissions have been received and have been circulated. I will ask both organisations to make an initial summary and there will then be a range of questions from the members of the committee.

Mr. Conor O'Kelly

I thank the Chairman for the opportunity to attend here today and I hope I can be of some assistance. Rather than reading from my statement, it may be worthwhile to give an overview of the National Treasury Management Agency, NTMA, and explain how we are seeing the world through our lens, if one likes, as a debt manager. I will then talk in more detail about the Ireland Strategic Investment Fund which is more specifically relevant to the work of this committee. A couple of other areas of the NTMA also touch on the housing sector and I will also comment on them. I will then take any questions that members might have.

We all know that economic conditions are very favourable regarding economic growth and all of the numbers around Ireland's improving credit profile. That has been reflected in the upgrades from the rating agencies.

Even long before this, investors in the bond market had re-rated Ireland significantly in recent years. Some years ago we were a peripheral European country in terms of where we traded in the market, our yield and our credit spread over Germany and other countries. We have now moved into a more semi-core and we are now more compared to Belgium and France rather than Spain, Italy, Greece and peripheral countries. This reflects the improving economic conditions.

The credit of the country has improved significantly due to this economic performance. Another factor is that the interest rate environment has been favourable because of the policies being pursued by the European Central Bank. Quantitative easing, etc., has meant that interest rates are extremely low. The combination of low interest rates and Ireland's improving credit rating have meant that the National Treasury Management Agency, on the State's behalf, has been able to access finance markets at attractive and historically low rates in the past 12 to 18 months. That is great and it helps our interest bill, which has come down from approximately €7.5 billion to a little below €7 billion. Our belief is that in the coming years it could trend towards €6 billion. That is our hope provided the current interest rate environment remains benign. It is worth pointing out that in 2012 the forecast for our annual interest bill was €10 billion. Quantitative easing and the interest rate environment have significantly helped Ireland. We have been a major beneficiary, although we are still quite an indebted country.

I am keen to touch on that point. Although interest rates are low and we can access markets at attractive rates, we have a high level of absolute debt. We talk of how our debt to GDP ratio has come down to 94% from 120%. The economic growth figures push the ratio lower again. However, the absolute level of debt, at over €200 billion, is four times what it was in 2007. Our interest bill, which, as I have said, is close to €7 billion, was €2 billion in 2007. This debt is really the legacy of the crisis and we still carry it with us. When we talk about interest rates being attractive and suggest the State should borrow more money, it is worth reflecting that we already have substantial borrowings.

Regarding how the NTMA looks at the market and what it thinks about every day, the sovereign borrower is no different from any other borrower. The money we borrow has to be repaid or refinanced when it becomes due. We think about three categories. The first is revenue and what are our sources of revenue. What could happen to disturb or change those sources of revenue? Are we extrapolating unsustainable revenue in any case? In Ireland's case, as a small open economy, we are vulnerable to external factors. We have had a good deal of tailwind with low interest rates, low currency costs, good growth in overseas markets and low oil prices. However, these factors can change or reverse and we have to be cognisant of that.

The second category we think about is repayment. What are our repayment dates? How do they coincide with our revenue profile? Do we have enough flexibility? Do we have enough cash? Are we managing our short-term finances in a way that will allow us to do all of these things? I will outline our repayment schedule. For the coming 18 months, our repayment schedule is rather light, but in 2018, 2019 and 2020 a total of €45 billion in borrowing will become due over that three-year period, the majority of it in 2019 and 2020. This is what the people in the National Treasury Management Agency are already trying to think about and work towards. We have to think about these factors when we are in the borrowing markets.

The last factor is our absolute debt position. How much debt do we have? Who are we borrowing from? That is an important consideration. In Ireland's case, we borrow from international markets. Fully 90% of our traded debt is owned by international institutional investors. We do not have a big domestic savings market with regard to our debt. For example, a country like Japan has far higher debt levels than Ireland. It can sustain those levels because all of its borrowing can be financed by domestic savings. The markets look on those credits a little differently from those of Ireland given that we are dependent on foreign borrowers to that degree.

They are the considerations for us and we would be reluctant to add to that debt. The Department of Finance will talk about the other restrictions on the expenditure benchmark even if we could borrow.

We are considering what the Minister has asked us to focus on or prioritise in terms of housing and to find other parts of the NTMA we can free up to make some impact. In that regard the Ireland Strategic Investment Fund, ISIF, is the focus of the organisation. That is a fund of €7.9 billion and €2.4 billion of that has been invested throughout the country. This afternoon we will release the economic impact report from the strategic investment fund, which has a breakdown of the regional investments. Half of that is outside Dublin, half in the Dublin area, and across different sectors of the economy. We have approximately 50 investments in the pipeline with a value of close to €1 billion with some very interesting projects making a significant impact. Approximately 18,000 jobs have been created by the commitments made to those businesses to date.

In respect of residential housing, several investments have already been made in some platforms that have been discussed in parliamentary questions, etc. There is a company called Activate which has a €500 million fund. The strategic investment fund has invested €325 million with a co-investor who has put in the rest of the money. That €500 million fund is a non-bank platform that provides all-in finance to developers to build houses and could provide between 70% and 90% of the finance. The banks are now in the business of lending more like 50% or 60%. That fund has been created to fill that financing gap for developers. It has been up and running for only five or six months and my up-to-date information is that €50 million or €60 million has been drawn down to build approximately 800 houses. We have also invested in an equity vehicle called Ardstone that can buy land in the later stages of the planning cycle and partner with developers to build the houses. That has been active and has made its first transaction with approximately 400 houses on the pad.

We have invested in student accommodation with Dublin City University. That is an interesting sector because it is starting to move and releases houses that students are renting now, which frees up the market. It is an important sector. The ISIF has invested €54 million in a fund to build 2,000 units of student accommodation. That money released an additional €71 million from the European Investment Bank, EIB, into DCU’s overall campus development. It has had a significant impact on that university.

The final, smaller one is an urban regeneration fund. There has been a regeneration investment with Kilkenny County Council. We want to set up a fund in conjunction with a domestic pension fund to bring that out to other councils throughout the country for big towns and cities. That is the current ISIF activity.

Our debt management team also provides funds to the Housing Finance Agency, HFA. Since 2010, we have borrowed money on its behalf. Prior to that, it borrowed in its own right. We borrow that money on the market at government rates and we do not charge any margin to the HFA so it is accessing at the best rates possible. It lends the money on to approved housing bodies.

The National Development Finance Agency, NDFA, is involved in public private partnerships, PPPs. That is a long-term channel that we should keep open. It does take quite a long time to come to fruition. It is working on a PPP which is set to build 1,500 social houses.

The first bundle of 500 has been approved and is going through that process. It will be 2019 or 2020 before the public procurement process is completed and the houses can be ready for people to move into. It is a long-term channel that we want to keep open.

The Minister asked us to prioritise the sector and to look across the business in terms of whether we can come up with something else. We are considering a couple of platforms. One is an infrastructure fund to try to bridge the gap in places where infrastructure is clearly badly needed in order to release developments. The Dublin housing supply task force has said that close to 50,000 units could be built if infrastructure such as bridges, roads, water, sewerage, etc., is provided. We are considering establishing a fund that could lend money to local authorities directly or to private developers which would come to us. That would be different to what is available in the market because we could facilitate a ten or 20-year time horizon, or perhaps even longer. We would be prepared to take collateral against levies from local authorities - as houses are built - in a way that other financial institutions would not be prepared to do. The flexibility and tenure of the investment might allow us to do things a bit differently to the rest of the marketplace. We can add some value there and are working quite hard on that process. We are talking to local authorities and developers.

The second possibility is to consider a social housing vehicle whereby we could purchase social houses on behalf of approved housing bodies that are struggling to borrow money, that do not want to borrow or that cannot access funds. If they have identified houses they want to buy, we could set up a vehicle to buy houses on their behalf using funds from the Ireland Strategic Investment Fund or private capital. In terms of rental income, we would enter into a lease with approved housing bodies for 20 years. That would be an income producing vehicle and asset, and would, of course, crucially be off-balance sheet.

I apologise for speaking for so long. My final message is that we are trying to consider off-balance sheet private capital vehicles. The commercial property sector has come back to market a lot more quickly than the residential sector. A lot of institutional and private capital has come into the sector. In five or ten years' time, we will have a residential housing market that will have a lot more long-term institutional permanent vehicles to fund it and take risks. We do not want the banks to take risks because ultimately the taxpayer, as we know, bears the brunt of that. We want shareholders who are dedicated to the business to take the risk and to be able to go through the cycles with a bit more ease.

I thank Mr. O'Kelly. I know there will be a number of questions, in particular regarding the off-balance-sheet aspect of funding. Before we take questions, I invite Mr. Dorgan to speak.

Mr. Eoin Dorgan

I will speak very briefly. I thank the committee for inviting the Department to accompany the NTMA to this discussion on possible new housing finance models. I am joined by my colleague, Mr. John Palmer, from the budgetary policy section.

I reiterate what Mr. O'Kelly said on the views of the NTMA on the State's debt levels. It is important that the State exercise caution in regard to additional borrowings. We already have a very high debt level and are vulnerable to internal and external economic shocks, as Mr. O'Kelly said. The substantial reduction in our debt costs has been very much attributable meeting our targets and overachieving in our budgetary targets. Other factors include the ECB's monetary policy and the strong growth model within the economy.

I draw attention to the programme for a partnership Government, which commits the Government to meeting in full domestic and EU fiscal rules. This commitment has been a reassurance to financial markets, as evidenced by the recent Moody's upgrading which cited the Government's adherence to those rules. As a Department, we see that the reality is that any breach of the fiscal rules will have a negative impact on the State's borrowing costs, which will impinge on our ability to provide public services.

The programme for a partnership Government includes a number of commitments that involve the Ireland Strategic Investment Fund. The first is working with Irish banks, the European Investment Bank, industry bodies and the Central Bank to develop a new help to build funding scheme for the development of affordable housing in the private sector. The second is encouraging the delivery of housing-related enabling infrastructure in large-scale priority development areas, to which Mr. O'Kelly has already referred.

From the Department's point of view, in order for the ISIF to accomplish its core objectives and the additional objectives which the Government may set for it, it has to operate in line with its statutory mandate of generating commercial return and also having an economic impact in terms of its investments. That return ensures that the principal and the return can be reinvested in the future so it is a constantly cycling fund. Therefore, any housing sector investments in which the ISIF engages have to be structured in a manner that generates a commercial return so as to meet the legal framework. That keeps it off-balance sheet, which is absolutely vital given the fiscal rules and also the State's budgetary and debt position. The Department is committed to working with other bodies to examine all potential financial models and looks forward to assisting the committee in its work.

I thank Mr. Dorgan. Before I open the meeting to questions, perhaps Mr. O'Kelly would clarify two or three technical points specifically regarding issues he mentioned. He mentioned the possibility of funding student accommodation in, say, DCU. What progress has been made on that issue and is that deemed to be an off-balance sheet investment? Second, he referred to an infrastructure deficit across the four local authorities in the greater Dublin area that would have the potential to assist the development of up to 50,000 housing units and that the possible return on that investment could be from the development levies and so forth. Again, is that deemed an off-balance sheet type transaction? Finally, for the benefit of the committee, he mentioned Activate Capital which, while it is a new vehicle, commenced in January. There are ambitious plans for it. Does Mr. O'Kelly have any pathway, year on year, as to what the projected outturns might be? Perhaps he would deal with those three technical points and then I will hand over to the members.

Mr. Conor O'Kelly

On the first question on student accommodation, I was making a point about private capital in general coming into the sector and that is visible right across the various university campuses. They are seeing that and they are all developing student accommodation plans and investment is coming into that sector. In relation to DCU in particular, that is off-balance sheet. We are talking about student accommodation for 2,000 students. In terms of the infrastructure fund, probably Mr. Eoin Dorgan is better qualified to say what is off-balance sheet and on-balance sheet. Also, there are potential state aid rules to look at. That is where the commercial return comes into play. The market test has to be met in general, that is, if one starts to offer free money or money at rates that are different from the market rate, one will get into trouble in terms of state aid. On the off-balance sheet issue, it is important that private investors and co-investors are coming in at the same time on the same rate. That is generally a key test. The infrastructure fund can be provided at a competitive rate, it could be the lowest rate possible to meet that criteria but it cannot be zero and, probably, it cannot be 1% but I guess it could be 4%. By being more creative about the long-term tenure and the payback period something like the strategic investment fund can take a view, given its remit, that other financial investors might not take.

What is the potential outturn for Activate Capital?

Mr. Conor O'Kelly

I do not have a view. The original plan was that it could help build up to 8,000 to 10,000 houses over a five-year lifecycle and then that money would come back and the fund would be recycled and it would be a permanent non-bank vehicle that could finance that on that kind of a cycle basis. However, when it was set up the financial markets were a bit tighter and probably expected that it would charge a higher rate or that there would be more demand for their service because there was no other money available. By their nature, by setting it up, this is what happens and this is what happened in the commercial property sector. The first real estate investment trust, REIT, was Green REIT which went on to the market and probably thought it was going to be the only available capital for a very long time. Yields on commercial properties were 8% and 9% and set to stay at that rate and there were going to be great returns for investors but, of course, other capital does come in and follow.

I am not saying this because we are an investor in the fund - I hope it is successful - but in the event of it having to meet other competition, that is probably a good outcome from the committee's point of view because it would mean more finance becoming available. I think that is what is happening. One is starting to see the situation loosening up a little bit.

We hope the fund will be successful this year and next year in particular because we need a catalyst in the market.

Mr. Conor O'Kelly


I welcome the witnesses and compliment them on their work over the years. The NTMA has been known to invest wisely in such a way as to achieve reductions in debt. I am interested in particular in the extent to which the NTMA borrows money and lends on to bodies such as the Housing Finance Agency, which we had before the committee recently. I seem to recall that its interest rate on lending was a bit higher, but I might be wrong about that. To what extent can the NTMA be assured that the bodies to which they lend money, having borrowed at a very competitive rate, do not take a handling fee off the top of it, any more than the NTMA does?

I am not a great supporter of housing bodies. The information came through that housing bodies are an option. That option failed. That is one of the reasons we have the current problem in respect of the deficit of local authority housing because there was a shift from the dependence on local authorities to the private sector and that did not work. My question is to what extent the NTMA can enter into an arrangement with local authorities to lend money to them, directly or indirectly, by way of housing co-operatives or by way of association with other bodies in such a way as to make the maximum amount of money available and at the same time keep within the off-balance sheet requirements.

What does the NTMA believe are procurement difficulties which obstruct the progress of what it is interested in doing, which we appreciate, because of the necessity to make rapid progress in the immediate and urgent situation of homelessness and impending homelessness arising from the issue we read about every day?

I have two or three more questions if you will bear with me for a moment, Chairman. Given that interest rates internationally are at an all-time low, there is always a tendency for people to invest in areas that produce a greater return, which in turn competes with the building of houses and the availability of money to build houses. To what extent is the NTMA conscious of that and to what extent can it take steps to ensure the vital requirement of funding and the availability of funding to build houses now is ring-fenced to a considerable extent?

My final point relates to universities. I live in Maynooth and the university there has a significant development programme, which I presume is being considered in the context of the required student accommodation and funding for same. Reference was made to that at a committee meeting last week.

I note the NTMA has told us to dampen our expectations about the debt accumulation as time goes by. We know about that. The debt will also reduce as time goes by, in particular relative to economic growth. That has been the internationally accepted norm and expectation. Could the NTMA give the committee any indication or assurance on our rate of economic growth now and for the foreseeable future if prudent policies are followed to try to reassure our constituents - the people of the country - who made considerable sacrifices to bail out the financial institutions and are anxious to see some recognition of their efforts? I refer, for example, to the way some financial institutions are progressing to make many people homeless at present, which I believe is an issue that will have an impact on the work of the NTMA and the work of this committee.

I will take the answers as we go along.

Deputy Durkan's question on procurement might be better directed to the relevant Minister and his departmental officials, although it can also be directed to those who are here today. Representatives from the Department in question will be before the committee later in the week.

I support the point the Deputy made about the Housing Finance Agency, HFA, which stated in its recent report that, based on current rates, it expects that it will be able to offer rates at less than 1.75%, fixed for 25 years, to local authorities for development finance. I believe that is the figure the Deputy sought.

Will the Chairman indicate how it is intended that we will proceed? We will hear from two very different organisations on two different issues. Is it possible to ask questions of one and then the other?

When the Deputy is directing-----

I have specific questions on the NTMA but also on this-----

The Deputy should put questions to both sets of witnesses and they will answer those which are relevant to them.

Individually. When it is her turn, the Deputy should direct the question to either person and both will answer, one after the other.

It is just that there are two separate sessions in this-----

There is an element of crossover on some issues and members were not sure who would have responsibility. That is why both sets of witnesses are present. The Deputy should direct her questions to one or both.

I have quite a few questions.

We will get to the Deputy in due course. Mr. O'Kelly might reply to Deputy Durkan.

Mr. Conor O'Kelly

I will try to recall the Deputy's questions in the order they were put. The Chairman has clarified the point about the HFA. We do not have a remit in terms of how it lends that on and the margins it charges. The HFA is under the aegis of the Department of housing. We are keen and we have tried, as much as possible, where the State is borrowing through any of its agencies, to centralise all of that in the NTMA. We have been working with the Department of Finance to do that body of work. That makes sense for everybody borrowing centrally because that is where we can achieve the lowest rates. How that money is used out through the system is a matter for each separate Department.

The Deputy asked me about the universities. I am sure Maynooth University is part of that. The availability of institutional finance now for student accommodation is widespread, and the Deputy might ask them to contact me and see the strategic investment fund if he thought that was appropriate.

In terms of the debt reducing over time and economic growth remaining, we will return to some sort of long-term potential growth rate. The Department representatives will have a view on that and I might pass that question to them. Ultimately, the discussion with Europe tends to be about our interpretation of the long-term potential growth rate for Ireland versus that in Europe, and the debate is somewhere between 2% and 4%. That has a big impact in terms of the forecast. I would point out that the absolute level of debt will only go down if we repay it. It only goes down as a percentage of our GDP.

That is, unless a loan is reinvested or sold, which is what the lending institutions are doing at present. In the past the NTMA has disposed of, reinvested or relocated their loans, which has resulted in a benefit to the Exchequer.

Mr. Conor O'Kelly

Is the Deputy talking about refinancing the IMF loans, for example?

Mr. Conor O'Kelly

Absolutely. That is a significant issue. The Deputy will recall that we refinanced €18 billion of IMF loans in the market in 2015 and the saving was between €1.5 billion to €2 billion over the lifetime of those loans, which was significant. Critically, those loans were due to mature in four to five years' time - I am cognisant of the dates I gave the Deputy earlier for other maturities - but we were able to replace them with loans with much longer maturities of 19 or 20 years. The average is 19 years in total. That was a significant improvement in the profiling of the debt and the interest we have to pay. Unfortunately, in terms of the debt we took on from the official debt, as we call it, the rates we are paying on that are very close to the current market level. There is very little room to refinance any other existing debt that would give material savings. Were rates to go even lower than they are now, some of those could come into play as being attractive to refinance but, unfortunately, all the expensive debt, in terms of our interest costs, has been refinanced already.

The Department representatives might discuss the growth rate.

Mr. Eoin Dorgan

To revert to the Deputy's local authority question, in the first instance it is a matter for the Minister with responsibility for housing to set the role of the local authorities in delivery. However, I make the point that local authorities fall within general Government expenditure in what they spend. If they structure in a certain manner, this does not exclude it from potentially going off-balance sheet. The key point we were trying to make in our initial presentation was that having a commercial return within the venture is one way it potentially could go off-balance sheet. The Deputy also mentioned the availability of funding for housing. Our thinking in respect of the development of housing is a mix of sources is needed and that to get the scale required, one must get the private sector involved. The Ireland Strategic Investment Fund, ISIF, measures have been positive in that sense and one is now beginning to see completely private sector issuances such as Cairn Homes and a number of others.

Mr. Palmer will respond in respect of the growth rate.

Mr. John Palmer

As regards the stability programme update at the end of April, the Department's forecast, which was endorsed by the Irish Fiscal Advisory Council, was that real gross domestic product, GDP, growth would be 4.9% in 2016 and would trend downwards towards the 3% mark as we move out towards 2020. Growth in nominal GDP, which is when one puts on the price effects of the GDP deflator, is expected to be approximately 7.6% this year and to trend down to just over 4% in 2021. The nominal figure is important because nominal growth in GDP is what gives us the denominator for the calculation of the debt-to-GDP ratio.

I thank the witnesses for their presentations. I have a few questions and a comment that will put the questions in context. One thing to which many members of this committee are trying to find a solution is that, while we have a huge and growing housing need for families at the lower end of the income spectrum in particular, at the same time local authorities have been starved of resources, be it capital or the ability to borrow, to provide these houses. The private sector has stated it either cannot or will not build for a variety of reasons, but at the same time, it is cheaper to build and to buy and private finance is cheaper for whoever is borrowing. Members are trying to find ways to get the finance that is available to the organisations that are best placed to build those houses, which in the view of many members are local authorities and, to a certain extent, approved housing bodies, to provide the units on a scale far in excess of what has been discussed up to now by the Government. This is one discussion members have had and I will ask my questions with that in mind.

The questions are for both the Department and the National Treasury Management Agency, NTMA, and the first pertains to general issues regarding borrowing restrictions. I state this noting clearly the witnesses' caution regarding additional borrowing and I am ascertaining whether there is a way to answer this question in that context. On the one hand, our debt-to-GDP ratio is declining as a result of growth in the economy although the absolute level of debt clearly is very high. Within the fiscal rules and in particular within the debt reduction rules that are required, is there a kind of debt space, to coin a phrase, between the reduction as a percentage of GDP and what is required under the fiscal rules that gives the Government some additional borrowing room it could take up while still remaining within the fiscal rules? Clearly the witnesses would advise the Government not to take it up because of the absolute level of debt, but if there is such a debt space, the witnesses should map that out for a couple of years on the basis of the Government's projections. This may be more of a question to Mr. Dorgan but I do not understand fully the interaction between the debt reduction requirement under the fiscal treaty and the EU regulations and the expenditure benchmark. Even if there were some additional borrowing room within the EU fiscal rules, how would that then affect the expenditure benchmark as it is set out? Mr. Dorgan should try to explain this because some members of the committee seek to ascertain whether there is additional room, either in borrowing or spending, that could be directed either on or off-balance sheet for the provision of social housing by local authorities. That is the first question.

Second, does the NTMA know why it is being suggested that commencement of the public private partnerships, PPPs, under the National Development Finance Agency, NDFA, will be in 2019 or 2020? If so, can Mr. O'Kelly explain this because I thought it would be earlier. As for the off-balance sheet stuff, are the witnesses referring to an expanded role for National Asset Residential Property Services Limited, NARPS, or to another vehicle? If they are referring to NARPS, my understanding regarding the properties the approved housing bodies currently are leasing through NARPS is that at the end of the lease term, they will not be the property of the approved housing bodies but will be the property of either NARPS or the original owner. The witnesses should clarify this and tell me whether it would be possible to use that vehicle and to have a lease-to-buy option whereby at the end of a 25-year lease, the assets would transfer over to the local authority or the approved housing body.

I have two final questions. The first concerns the Irish League of Credit Unions, whose representatives came here to discuss their proposals in the context of the Government's social housing strategy 2020, NARPS and the possibility of additional loan finance. Although they were very diplomatic, they seemed to indicate that there was a triangle of interest between themselves, the Department of the Environment, Community and Local Government and the Department of Finance and Central Bank. Does the Department of Finance think that is another viable potential option for lower interest financing, whether for approved housing bodies or local authorities?

People keep talking about off-balance sheet, but EUROSTAT has already ruled unfavourably on the first significant off-balance sheet attempt by Government, which is Irish Water. It is not just on water charges because there were governance and other issues in that EUROSTAT judgment. On 4 March 2016, EUROSTAT issued a clarification with a new note on PPPs. It talked about retrospectively ruling out certain bodies that may currently be off-balance sheet, but may be put on if they change their operations. In terms of the conversations around NARPS in the programme for Government, will we encounter greater difficulties in keeping such a vehicle off-balance sheet if it starts to provide greater levels of essentially circuitous funding for social housing off-balance sheet?

There were a number of specific questions there, so the representatives can decide among themselves who will take them.

Mr. John Palmer

I will start with the fiscal rule questions. The Deputy's first question was whether there is a debt space under the fiscal rules vis-à-vis the debt reduction rule. As the Deputy is aware, the debt reduction rule requires us to reduce the debt-to-GDP ratio in excess of 60% of GDP by one-twentieth per annum, roughly 5%. It is one of three rules, however. There is the expenditure benchmark and the balanced budget rule, or the structural balance budget rule. When one is doing a fiscal policy, including what one is going to spend and also use for tax reductions, one must look at where one lands with all three. In any given year, one of the three will be the constraint. Normally, we are expecting it to be the expenditure benchmark which limits the amount one can spend, unless additional revenue is raised to pay for additional spending. However, at other times, it will be the structural balance rule.

In general, we do not view the debt reduction rule as being a constraint for the foreseeable future, primarily because of the nominal growth rates of GDP. In other words, the heavy lifting on the debt reduction rule will be done by the growth in the GDP denominator in the calculation. The Deputy is right, therefore, in that there is fiscal space under the debt reduction rule. Were one to borrow for off-balance sheet, that is, not interfere with the structural balance rule or the expenditure benchmark, that is a theoretical possibility. However, if one were to borrow to use it for general Government investment or spending, then they would become the constraint. I hope that explains that one has to look at all three.

In Mr. Palmer's view, on the basis of the Government's projections over the next number of years, is it possible to increase the absolute level of debt but within the debt reduction rule without disrupting the other two rules, the expenditure benchmark and the structural balance? If so, by what margin?

Mr. John Palmer

I will have to go back and get some of the bright people who work with me to start figuring out the margin that would be available under that. The answer, however, is in theory "Yes", provided the money was not used for general Government expenditure. If the Government chooses to utilise the maximum available space under the expenditure benchmark, and we are still complying with the structural balance, then that is the limit. If one is borrowing in excess of that, one cannot use it for general Government expenditure. For off-balance sheet that is fine, but we are then back to the point Mr. O'Kelly made about the absolute level of debt and whether that is a wise thing to do.

Mr. Conor O'Kelly

As regards the other two, there have been discussions between the Irish League of Credit Unions, the Department of the Environment, Community and Local Government, and the Department of Finance. Essentially, we would view it as everyone engaging in a positive manner. Like any other investor, the ILCU has to come to us and said, "We can provide X amount", and we will see what we can do. Obviously we have to balance that against the taxpayer who, in many cases, will pay the interest bill on this. Therefore, we have to see if it is fair for all sides.

They are still engaging and some of Mr. O'Kelly's staff are involved as well so we are advancing that.

Mr. Conor O'Kelly

In respect of NARPS and the PPP question, the possibility of having a larger and quite ambitious version of NARPS is a runner. I think the AHBs are the current preferred supplier of houses. Obviously, under Part V, new developments could go into the vehicle. It could be open-ended in that regard. In respect of the question of whether there is a right to buy at the end of the period or who owns the properties, under the NAMA model, the tenant has a right under the lease to buy back the property after 14 years. I will certainly take that away and have a look as to whether one could build something like that into it. I do not see why this could not be done. It just changes the nature of the vehicle but one could put anything into how one structures it. It just needs to be attractive for investors but I do not see why that would be a problem.

Mr. Eoin Dorgan

We must also be conscious that anything we do with NAMA is so strictly regulated - it is the State aid clearance - that we must be very careful because any suggestion that NAMA could come on-balance sheets means any expenditure it engages eats into general public service expenditure.

Mr. Conor O'Kelly

We will be looking at replicating this vehicle over here. It will be stand-alone.

The questions that were not answered concerned the NDFA, PPPs and the length of time it is taking and whether we can maintain vehicles off-balance sheet in light of the Irish Water ruling and the EUROSTAT clarification in March on PPPs.

Mr. John Palmer

I will deal with the off-balance sheet issue. It is the old story. EUROSTAT is completely independent so in the first instance, the CSO decides on the treatment - the classification of these bodies. In what is known as the clarification process, every time the CSO makes a return twice a year in a process known as the Maastricht returns, EUROSTAT can rule one way or the other. Is there any guarantee that they will stay off-balance sheet? The answer to that question is "No" because it comes back and looks at it. In some ways, as long as it is a past event and gets reclassified on-balance sheet, it is not necessarily a huge problem because one changes the base so it is not a case of a body coming in and we must have find the money for that body within the existing fiscal parameters. One changes the base as well so one reflects what it was spending the previous year in the base as one moves forward. Thanks to the introduction of the European system of accounts, ESA, 2010, there has been a significant change. Probably the most significant feature of that is that it is not just a case of pure rules and one can tick off every rule and criterion to have something off-balance sheet. EUROSTAT also has the ability to take an overall view of the transaction. It can decide that although one ticks every rule, one is doing so specifically to try to avoid having something on-balance sheet and it can say that, ultimately, this is expenditure for a public policy good by a general Government body and is, therefore, on-balance sheet. We must be careful. The idea is that one comes up with commercial transactions and then runs them by the CSO. If the CSO accepts them, it will make the return and, hopefully, EUROSTAT will accept that.

Mr. Eoin Dorgan

Deputy Ó Broin referred to the new PPP guidance from the EU. He is probably aware that the former Minister for Public Expenditure and Reform wrote directly to the EU to complain about this and there is some ongoing discussion with other like-minded countries about those revisions.

Mr. Conor O'Kelly

In respect of the current PPP for social housing and the question as to why 2019 and 2020 have been chosen and why it is taking so long-----

Are they notional commencement dates for those first 500 units?

Mr. Conor O'Kelly

They are completion dates. Those houses will be ready for somebody to move into in 2019 and 2020.

That is the first bundle. There are three bundles of 500 and the first bundle has gone through. Neither of the other bundles has even started yet. The issue is the identification of clean sites from the local authorities. One has to have clean title and the identification of both sides to go into the vehicle that ultimately gets the private capital. That is a constraint. In general, though, while PPPs look slow, it is the public procurement side of that that is the slow part.

Five years is exceptionally long even by the standards of our long-winded public procurement processes.

Mr. Conor O'Kelly

It is extraordinary. One of the issues is legal challenge, which is common. The State is currently being challenged in respect of Grangegorman where a €200 million PPP has been delayed for a couple of years. Students have been unable to move on to the campus. A legal challenge has been taken against the State regarding the process itself. It is technical, laborious and open to challenge. The entire process has slowed down and people are now disinclined even to participate because of the time involved. There are flaws and it is an extraordinarily slow system.

I thank the officials for their presentation. I welcome Mr. O'Kelly's comments on funding and loans being made available to local authorities and private developers in the form of a bond or whatever that might be. When does he expect that to be initiated? When will the funds be available? Private developers cannot access funds at a competitive rate in the marketplace but they need to do so. The alignment with investment funds and Government funds is not meeting the requirement. The rates being charged are not better than the mezzanine funds available currently. It is paramount and essential, therefore, that this process begin.

We all acknowledge, as do all stakeholders, that housing and homelessness is in crisis and we are in an emergency. We also acknowledge on the basis of what the NTMA and others have said that conventional methods and funding models, especially in the context of the fiscal rules outlined by Mr. O'Kelly, are no longer viable. There has to be an overhaul and there has to be an extraordinary investment in housing in order that this issue will be resolved in a manner that we can all stand over and be happy about.

National Asset Residential Property Services Limited, NARPS, has the potential to be successful in its own right within the confines of NAMA and the constraints associated with it by virtue of the overarching legislation associated with the agency. That can be progressed and that is something for the Government, ourselves and everyone else who has an interest in seeking to ensure the social dividend expected from NAMA in addition to the commercial dividend can be achieved. That is one avenue by which it can be achieved but NARPS has served a purpose, as Mr. O'Kelly acknowledged, in so far as it has provided a recognition that there is potential for such a vehicle, perhaps a housing authority, that the NTMA could fund, which could then act as a means of supplying further funding, purchasing units or building units through local authorities or AHBs and even colleges. We need to stop talking about this and put it in place. We need that to be initiated as policy and driven by Government.

I do not appreciate committee members, with the best will in the world, asking the officials to come back to us. The Government has to take this by the scruff of the neck on foot of the committee's deliberations and the debate that has been going on for so long to bring forward a policy and the means and methods by which this issue can be addressed in its first 100 days, as it said itself. We are feeding into that process. It is incumbent on the committee to acknowledge that this is a way in which this can be addressed and in which extraordinary funding can be channelled down the right avenues I acknowledge Deputy Durkan's love affair with local authorities and the conventional ways and means by which they sought to address the housing crisis. Unfortunately, the rules and regulations governing the spending of public funds does not allow us to make the capital investment needed to address this.

That is the bottom line.

Some argue that it is because of this that we will not revisit the unfortunate fiscal bonds we have had in the past. Deputy Ó Broin mentioned EUROSTAT's ruling on these vehicles and their commerciality. One must differentiate between a return on investment over ten or 20 years. As the witness said, 20 years is an appropriate length of time for the leasing period through local authorities, approved housing bodies or colleges. It is also an appropriate length of time for a return on investment. That is something that should be stipulated and acknowledged by those in authority in making a decision to run with this model. It is the only show in town and the only way this can be addressed in the manner in which it must be. There is a need for extraordinary effort, funding and commitment and everybody needs to be singing from the same hymn sheet in order that we might address this matter. The rules relating to Government spending are such that we would not be able to invest as we would want and need to in a crisis or emergency. As a result, we must put in place a housing authority similar to NARPS as a vehicle to help with all the other pieces of the jigsaw so we can make this right. I ask the witnesses to insist in their deliberations with the Government that it is a means to an end.

Do the witnesses wish to comment?

Mr. Conor O'Kelly

Is there a specific question?

There is not a specific question. The time for questions is over, a point which Mr. O'Kelly acknowledged.

I agree with that statement.

Mr. O'Kelly has acknowledged that; it is the time for solutions.

We will start on the deliberations next week and some of those will be the recommendations. Do the witnesses want to comment on anything Deputy Cowen said?

Mr. Eoin Dorgan

I will comment on the financing model. It is important that there is a risk premium charged because otherwise there is a potential difficulty of subsidies to individual market operators with on-balance sheet risks.

Does Mr. Dorgan think it could be construed that a 20-year return on investment is not sufficient and does not yield the sort of return that would meet the guidelines? There were other issues on Irish Water.

Mr. Eoin Dorgan

The longer the return on investment, the more careful one has to be that there is a good return. Many of the EIB proposals or projects are structured much longer term because their cost of funding is so much lower. They are generating a commercial return but perhaps not a private market commercial return.

Mr. Conor O'Kelly

Deputy Cowen is absolutely right. The financial model we have used in the past for house building is not appropriate for the future. In the UK, before the crisis, 25% of homes were built by publicly quoted house building companies; today it is 75%. They have seen a big shift. Today they are still building the same number of homes as they did in 2007 but they are built using a completely different financial model. Ultimately, we will have to see that kind of institution exist - permanent financing vehicles whose business it is to own development land, build houses, and planning. They take the risk and are in it for the long term irrespective of the cycles. It tends to lessen the volatility of the cycle when participants are doing that. If we are to have a better functioning housing market in the long term, we will need to see those kind of publicly quoted vehicles and private vehicles established.

I want to tease out why a fund that was a pension reserve fund that was paid for by the public has now become the Ireland Strategic Investment Fund. We are being told that it cannot really be used for social housing and I am trying to tease out, for people who watch the proceedings of the Committee on Housing and Homelessness, why that is the case.

The Ireland Strategic Investment Fund, ISIF, is required to have a commercial return, which was a political decision of the last Government and not the EU. Does this mean that the ISIF is required to make a particular percentage profit on every investment it makes? Is it laid down anywhere in legislation, or is it just policy, that this fund is precluded from involvement in direct build of social or affordable housing? Many of the projects referenced are private housing projects that do not focus on social or affordable housing provision, which point I will elaborate on further later.

People are mystified. There is supposed to be consensus that the most strategic need in this country right now is housing yet the ISIF is not being utilised for housing provision. During the passage through the Dáil of the National Treasury Management Agency (Amendment) Bill, the then Socialist Party tabled amendments to it to the effect that housing be included in the list of projects, the response to which from the then Minister of State, Deputy Fergus O'Dowd, who is now sitting to my left, was that this could not be done unless the projects were being undertaken by way of public-private partnership or were non-State projects. Other parties disagreed and voted in favour of the amendments. This issue needs to be teased out.

My point is that political decisions were taken two years ago and this fund is now being disbursed but nothing is being spent on social housing provision. There is €4.5 billion remaining of the fund. Theoretically, how many social houses could be built with that €4.5 billion if the brief of the ISIF and the NTMA was changed by political decision made by a majority of the Dáil? It is laughable to hear Deputy Cowen asking the NTMA officials to raise this issue with the Government. It is for the Dáil to make these decisions. The people involved are supposed to adhere to the decisions of the elected representatives of this country. No offence, but most of the staff from the National Treasury Management Agency are from a banking background. It is for the Dáil or this committee to instruct the NTMA what to do.

Through the use of direct labour, which means the middle man or private company that is to be paid the profit would be cut out, and the large-scale economies which we heard about from the Housing Agency, including bulk buy of baths, showers and so on, theoretically a house could be built at a cost of €100,000. Many of the houses required are two-bedroom or one-bedroom units. In my estimation 50,000 social or affordable homes could be built through the Ireland Strategic Investment Fund if the majority of the current Dáil voted in favour of doing that.

Reference was made to three housing initiatives in which the NTMA is involved, two of which are Activate Capital to which the NTMA has provided €325 million of taxpayers' money and Ardstone Capital to which it has provided €25 million. The CEO of Activate Capital is, by coincidence, the former Allied Irish Banks and Ulster Bank executive who appeared before the banking inquiry and its chairperson is Mr. Dan O'Connor, former chairman of Allied Irish Banks. These points are relevant. These are people who recklessly gambled huge amounts of money. Ulster Bank had to be bailed out by the UK taxpayer to the tune of €15 billion. We all know that the truth about the solvency of Allied Irish Banks had to be dragged from its officials, yet the NTMA believes it is fine that these institutions are involved in spending the ISIF. Did they not have any pause for thought in that regard?

One of the first deals in relation to Activate Capital, of which I am aware because it relates to a development in my constituency, involves Mr. Sean Reilly of McGarrell Reilly, who is one of the Anglo Maple 10, now back in business having been bailed out by NAMA. It is nice to see him back on his feet having had his loans written down by €153 million. McGarrell Reilly is currently building houses in Hansfield SDZ, which land was designated as a strategic development zone to fast-track housing but it is a private housing development with, possibly, 10% designated as social housing. The cost of a two-bedroom house in that development increased recently from €220,000 to €240,000. This is how this public fund is being used, with all the same old developers involved. I would welcome a comment on that issue.

On the off-balance sheet debate, during the establishment of the National Treasury Management Agency, we were informed that the latter's funds could not be used for social housing. As I said earlier, that was an Irish political decision. There is no international rule which prevents the use of NTMA funding for social housing. Two years on, we are still being told that this elusive off-balance sheet model is being developed. Where is that happening? As mentioned by other speakers, such as Deputy Ó Broin earlier and Ms Michelle Norris of the Housing Finance Agency in a lecture last week, public private partnerships are being recategorised. It is impossible to fit in with the off-balance sheet model if one is working on the basis of existing revenue. In Britain, all housing agency debt is being classed as state debt. The Department of Finance, in a letter to the Minister in respect of its new funding models, has stated that no new model would be capable of meeting this off-balance sheet mirage. Mr. Palmer indicated in his introductory remarks that additional revenue would have to be raised in order to pay for the extra spending. That is the only thing we can do. If people are to continue to operate on the basis of the existing cake rather than a larger one, then, on the basis of EU fiscal strait jacket to which this Government and others signed up, it will be impossible to fund the provision of social and affordable housing in this country.

Would the witnesses support the introduction of a housing tax of, for example, 3% on a property worth over a million and an increase in the rate of corporation tax or, at least, the application of the 12.5% rate in this area, to fund social housing provision? Do they agree that there are many projects that could be paid for by way of increased taxes on wealth in this country? The remainder of the funding available to the NTMA plus the €28 billion cash reserves that NAMA has could also be used to build housing. There are other ways this could be done but they must include revenue raising measures if we are to comply with EU rules.

Mr. Eoin Dorgan

As stated by Deputy Coppinger, the ISIF was established by the previous Government under the National Treasury Management Agency (Amendment) Act. ISIF expenditure impacts the fiscal rules such that any spending by it in respect of on-balance sheet activity eats into what can be spent on other public services. In other words, it would impact on the expenditure benchmark rule.

In regard to housing construction policy, the preferred delivery mechanisms for housing is a matter for the Government and the Minister with responsibility for housing. We are here to try to identify better financing options and areas where delivery can be increased through better structuring of mechanisms. In regard to the off-balance sheet debate, it is possible to do more if we keep spending off-balance sheet.

My question relates to how it can be done off-balance sheet.

Mr. Eoin Dorgan

I think we sent the committee information on the French example of affordable housing provision. Deputy Coppinger is right that it is difficult to keep social housing provision off-balance sheet. In France, the focus is on affordable housing and the generation of a sufficient commercial return through the charging of near market rents to service the debt. It is a €2.3 billion fund which comprises €500 million from the European Investment Bank, EIB; €1 billion from the French State and €800 million from private debt investors. This is effectively a subsidised housing model which is affordable because of the requirement of a sufficient commercial return to be generated to finance it.

Mr. Conor O'Kelly

On the question regarding the ISIF commercial return rate, the rate varies depending on the risk of a particular investment. The essential number to bear in mind, which is the average cost of all of our debt, is 3.1%.

That has come down from approximately 3.4%. If one thinks of the fact that we have this debt over there and this cash here, we would certainly want to be making a return in excess of the average cost of our total debt. That means a 3.1% minimum return. Otherwise we would be losing taxpayers' money. Approximately 4% is deemed to be the commercial return, but it can be a blend. It can be lower and it can be higher.

As I said, the fund has some social housing component. First, the property element of the portfolio must be diversified. We have learned from the difficulties of having all of our eggs in one basket. As a fund, I would always advocate diversification across different sectors and different regions. There is a component of property that is appropriate for the fund and within that we are going to ensure it is diversified as well. Members have heard us talk about the NARPS initiative. That is a social housing initiative which could be very substantial.

I do not wish to comment on any individuals involved in the projects we have backed but when we put money into these projects - it is €325 million into that fund - the money is drawn down as it is needed, so we have not sunk it away somewhere. It is drawn down as it is required and only €60 million in total has been drawn down so far. Our proportion of that is approximately €35 million and we still have the rest of it. It is committed to them, but only if they can meet the criteria and only if they are going to build the houses and develop as their business plan suggested. We have all sorts of covenants which provide that if they are not doing their job, the money gets withdrawn and is brought back in. In terms of management and who they are, of course we require them to have expertise and experience. That is a critical component in any investment decision.

On that point, when the NTMA was being established, we pointed out that there should be representatives in it of people who had been affected by the housing crisis. One can have expertise on mortgages and so forth without being a former banker. This appears to be a catch-all for putting the same people who brought the economy to a standstill and cost the State so much into key positions in the NTMA and, now, in other investment companies.

Mr. Conor O'Kelly

When the NTMA was set up?

When the NTMA was set up, we told the Minister at the time that there should be representatives on the NTMA to advocate for people affected by the housing crisis. The whole point of the NTMA was the debt we had incurred, and the people who incurred the debt are now getting positions through money that is being invested by the NTMA, which is a little ironic.

Mr. Conor O'Kelly

I do not have any comment to make on the board because the Minister appoints the directors.

That is fair enough. I call Deputy Brophy.

I wish to return to Deputy Ó Broin's comments on the debt space and the answer given by the witness, particularly the ability to make a judgment as to whether the agency could increase the amount of debt. Effectively, if one short circuits the answer from the witness, as I understood it and which would worry me, one is looking at maxing out the State's credit card again if one goes down that route. The witness is talking about looking at the savings that are available and possibly looking at how borrowing can be increased to spend on housing. Is that exactly what the witness meant by that answer, that effectively there would be an increase in borrowing? We must be conscious of that and we must understand exactly where we are going with it.

I have a query on another matter. The witness mentioned the ability to set up a vehicle that would examine getting the voluntary housing associations involved and the way in which that would work, as distinct from the current situation where they access funding through the Housing Finance Agency, HFA. My experience with the voluntary housing associations, while not quite as negative as that of Deputy Durkan, is that they are not interested in ramping up to anywhere near the area one would need them to be to address the problem. There is a variety of reasons for that. Most of them just do not wish to do it; they do not want to go there. How does the witness think any other vehicle would achieve that to bring them on board?

I was very interested in the French model that was mentioned, because my understanding is that EUROSTAT is no longer interested in anything being off-balance sheet. With due respect to ourselves and to the imagination of very creative people when it comes to trying to keep stuff off-balance sheet, I believe the starting premise from which EUROSTAT addresses the problem is that it is not going to grant that and no matter what we say, that will be the answer that comes back. Would the witnesses agree with that assessment, that there is effectively an almost total block on the potential for something to come from this country in this area and be viewed as an off-balance sheet vehicle?

Mr. John Palmer

I will answer the first question. What I was trying to say is that, assuming we have put forward fiscal plans that comply with the structural balance rule and the expenditure benchmark, then, all things being equal, given the way GDP is growing, there will be no problem complying with the debt reduction rule. I think this is what Deputy Ó Broin was driving at. At that point, in theory, one could borrow additional money and still comply with the debt reduction rule.

As a rough, back-of-the-envelope calculation, in theory in 2017 in GDP terms we need to reduce the debt ratio by about 1.4% overall. We currently have a projection of 2.7%, which reflects the fiscal plans. There is a gap between the two. If we use that money for general Government expenditure, we immediately put ourselves into problems with the expenditure benchmark and probably also the structural balance rules, but if that money were used for other purposes which were deemed commercial, that would be a possibility. However, the Deputy is right. General Government debt would go up. Further, as already mentioned, ISIF has €5.4 billion that it has not committed yet. Why would we borrow when we have that money?

Why would one want to borrow? Why would one want to increase debt?

Mr. John Palmer

Technically, it is possible.

Mr. Eoin Dorgan

One needs to be very careful with on-balance sheet borrowing. That is the point we are making. Rates can change very quickly and we have had very recent experience of that. In terms of EUROSTAT and the French model, there is not a definitive view on whether that is on or off-balance sheet. The way it is structured looks like an attempt to bring it off-balance sheet. We have to work within the rules and assume that we can so long as we adhere to the regulations. As Mr. Palmer pointed out, there is this catch-all. That is why the commercial return is such a key element of putting forward a proposition, because it does illustrate that it is a commercial return, although it may not be a market return, and that is allowable in terms of delivering on housing or another element of key capital infrastructure for the State.

Mr. John Palmer

On the question of EUROSTAT and what it does, one must remember it is also operating in a Europe-wide environment, so precedents are very important. If this French model flies, then it is a good precedent, we can seek to replicate it and that is excellent. The point about commerce is true as well. We might come up with plans that might just about fly but which EUROSTAT may not be willing to let go forward because of the precedent it would set for other countries. It may be too close to a barrier for EUROSTAT. It is a very complicated environment. We can try things, but ultimately the final decision-making is outside of our control.

Mr. Conor O'Kelly

Was the question the Deputy asked about the approved housing bodies, AHBs, and why they are not keen to borrow?

My understanding is that the AHBs are not keen to borrow nor are they willing to ramp up. It is even more fundamental than them not being keen to borrow. I believe they are not keen to ramp up. We have a number of agencies that are at a size and a point with which they are comfortable and we have a direct clash. We have State agencies, the NTMA and even the Housing Finance Agency, HFA, effectively and through very good, cost-effective offerings trying to push the agencies to a point.

To use the analogy, without being in any way disparaging, if they are comfortable running a Spar corner shop, they do not want to be Dunnes Stores, and no amount of good, solid money made available at very low rates will necessarily make them want to change what it is they do. How does the NTMA's proposition work in terms of getting them to buy into it and overcoming their natural resistance?

Mr. Conor O'Kelly

The National Asset Residential Property Services Limited, NARPS, model has worked because the approved housing bodies have not wanted to borrow more money for behavioural, capacity and other reasons, so the vehicle within NAMA has bought the properties for them. All they are doing is entering into a lease. They are seeing the demand, and they are in the business they are in, which is identifying properties for which they have a demand. The risk is taken and borrowing is done by the vehicle. That has proven to be successful. There are approximately 1,100 homes in the vehicle right now. It started off as just a facilitation, as part of NAMA's business, but the growth in the vehicle demonstrates that there is demand for it. That is why we are hopeful that might be the case.

That still does not address fundamentally what I believe is the problem. Mr. O'Kelly spoke about 1,000 homes when in fact we are talking about solutions in the tens of thousands. That is the key problem. The agencies are not willing to go anywhere close to the level required as a solution. It is not just the point the witness has outlined about borrowing and incurring debt or whatever. It is that they just do not want to get to that size. I do not think that solution, therefore, is in any way for them the one which solves the problem.

Mr. Conor O'Kelly

From our point of view, we have been asked to concentrate on finding financing solutions. That is where our expertise and experience lies. Outside of that, if there are other blockages, maybe somebody else would be more expert than I would be.

I apologise for being late. It has been a very interesting debate, the part of it that I have heard. Obviously, the crisis exists but we have the land, the capacity to build, we have people who want to move into the houses and different ways of finding the finance, some which will work and some which will not. It seems the best thing to do is to get all the heads and all the expertise together - Mr. O'Kelly referred to the experience in France and elsewhere - to find a way to do it. It is just a matter of finding that way. Of course, it is also a matter of getting around the rules.

There are many large pension and investment funds - Canada is often mentioned to me - and there is a lot of money that people want to invest in countries like Ireland in solid 20 or 30-year investments with a low return but nonetheless a significant and constant return. Do the witnesses think we should be chasing these funds in terms of a new vehicle, which the witnesses mentioned, or whatever? Do they think we should be saying to these funds that we have planning permission for a certain number of houses on which we can guarantee a certain income and asking them to build them and we could lease or rent them on a long-term basis? Is that something that ought to be considered? It seems an obvious way of attracting significant investment that the State does not have to provide but benefits directly and immediately the citizens who want to live in those houses. That makes a lot of sense to me.

This country suffered greatly as a result of the financial collapse. The euro is still in existence because of what happened in this country. The issues we had and the way we dealt with them means that we are now ranked seventh in the league of most efficient economies. Is it not time to have a social dividend from the EU as a result of everything that we have done and obeying all the rules? If I am right, the programme for Government makes an indirect reference at least to making representations to the EU on this issue of housing. Is there potential in this regard for seeking separate and significant leeway for us in terms of meeting those needs?

Apart from the huge job losses, another significant impact of the recession is the appalling misery in which tens of thousands of people are currently living. We are entitled to a social dividend in that context.

There is a lot of land in State ownership, including that held by local authorities, CIE, the ESB and so forth. We should be building on that land. Perhaps that is not an issue upon which the NTMA's representatives wish to comment. There are approximately 200 acres of State-owned lands at Gormanston Camp and a proposal was put forward a number of years ago to build social and affordable housing on 60 acres of that land. It is not a criticism to say that we need new thinking in our Departments in order to push solutions that have not been tried before. We need to exploit all of the assets available to the fullest in order that we might build affordable and social housing.

Mr. Conor O'Kelly

The Deputy is correct about the availability of private international capital through institutional investors. We are trying to attract such investment in the residential sector; it has already been evident in the commercial property sector here and in the UK. Part of the ISIF mandate is to attract co-investors. The €2.4 billion invested by the ISIF to date has been matched by a multiplier of 2.5 through co-investment, which equates to almost €7 billion. We are always seeking to include co-investors in any investments we make. In the case of the Activate Capital proposal, KKR is the co-investor, the Ardstone Residential Partnership involves co-investment from Aviva Ireland and the An Post pension fund, while the DCU investment in accommodation attracted the European Investment Bank as a co-investor. There are institutional investors right across the risk spectrum and that is what we need. The An Post pension fund and Aviva, for example, would be on the conservative end, while others would occupy the higher risk end of the spectrum. I agree with the Deputy that this is the kind of investment we need to attract. Such investors, however, need to see a platform that is established and that is what we are trying to look at right now.

Mr. Eoin Dorgan

The programme for Government commitments are for others to take forward and the question on State land is one for the Ministers for Housing, Planning and Local Government and Expenditure and Reform. The latter has responsibility for the OPW, which holds a lot of that land.

How hard are we pushing it in terms of going after the international investment funds for housing? Is the ISIF following up on that?

Mr. Conor O'Kelly

We are very actively looking at that space. We have engaged with many parties and will talk to anybody.

Is there joined-up thinking between the ISIF and the aforementioned two Departments? Representatives from the relevant agencies have all been before this committee and they are very focused on the issue but is there a structured relationship between the ISIF and the Departments?

Mr. Conor O'Kelly

There is a lot of engagement with all of the stakeholders on the part of the NTMA. We do everything through the Department of Finance, which is our reporting Department. We report to the Minister for Finance but there is a lot of interdepartmental interaction and working together.

Is there a common organisation? If not, would it make sense to have a cross-agency, cross-departmental committee meeting regularly to push the various ideas forward?

Mr. Eoin Dorgan

There were groups like that in the past. The top group now is the Cabinet sub-committee on housing which supersedes all earlier structures. As the Deputy knows, there is also a senior official group beneath that sub-committee now which draws on expertise from across the public service.

I would like to make a longer statement but I know we are here to ask questions so I will try to keep my contribution fairly succinct. The problem is that social housing has not really been addressed here. All of the discussion is directed towards private financing for private developers to build houses that will probably cost between €300,000 and €350,000. People cannot access housing in that price range and we have not really come to the nub of how to address this. I have listened to the witnesses talk about restrictions, the Ireland Strategic Investment Fund, ISIF, and how one has to have all the structures and balances in place etc. Reference was made to France, and I hear through the grapevine that there is an Austrian social housing agency which is being funded to build 30,000 social housing units in Austria. If that can happen, why are we not hearing about it? Why are we not looking to find out exactly how that measure is structured and how it came about? From the committee's point of view, it needs to get that information, include it in the debate during the wrap-up and propose that kind of measure. The Department of Finance needs very quickly to look at what is going on with the European-wide situation and get on top of the situation because, as has been acknowledged, things are changing all the time. If a country is receiving money directly for social housing, then that is where we should be also.

I thank the Deputy. Is the Department aware of the situation in Austria?

Mr. Eoin Dorgan

To be honest, one of our officials has been looking across different European countries and he certainly had prepared some material on Austria. I would have to check that with him. With regard to our key avenue in the Department of Finance, the European Investment Bank is quite a useful tool. If one is looking for finance for any of these measures, one tends to route it through the European Investment Bank, which-----

That is where that funding went through, yes.

Mr. Eoin Dorgan

Yes, we have a very small group which looked through the proposals that have gone through and if they see something that looks interesting, they send it on, whether it relates to SME credit or housing or whatever. The idea is to see what is there. As Mr. Palmer said earlier on, precedent is a very useful way of rolling something out. If we see something that we think might be of interest to another Department, we will send it on and see if they want to advance it.

In a bid to be helpful to the committee, the last time the Minister for Finance was at this committee, he spoke about the French model and Mr. Dorgan subsequently sent on some information. If Mr. Dorgan has any further information regarding the measures referred to by Deputy Collins, he might forward them on by correspondence.

Mr. Eoin Dorgan


I will ensure Deputy Collins receives it also.

To follow on from what Deputy Collins has asked, we are being told that this off-balance sheet approach is, if not the only player then certainly the main player, in addressing funding for the housing situation. The witnesses said their role is finding and financing solutions, yet we have a housing crisis that requires a wider look at how that finance is going to be used. We know that social housing is a vital component of that and it needs very significant funding. It cannot just be the 10% that has been agreed. While the witnesses say they are looking at financing solutions, there is also a whole wider social aspect and I do not understand why, between the NTMA and the Department of Finance, that is not being addressed when they are looking at solutions.

In regard to the loan portfolio on properties that are being sold off, we know this is causing great fear and tension for people who are living in those housing estates. We met the residents of Tyrrelstown a few week ago. I must be careful with the words I use, but does the NTMA not have a role and could finance from it not be found to secure those loans instead of where the loans are currently going? Could one of the witnesses clarify if I heard correctly that the NTMA would purchase housing if it was identified by the local authority? I was not sure if I picked up on that right. Reference was made to engagement with DCU. Is that funding for all on-campus accommodation?

Mr. Conor O'Kelly

The DCU model is on-campus accommodation of 2,000 units. The NARPS model has been discussed and the NTMA is working on a couple of ideas, one of which is the infrastructure fund, which could be social housing. It does not make any difference. It could be freed up for either-or, and the NARPS vehicle that we are looking at replicating is a social housing vehicle.

Is there a timeframe for that? We have been talking about our housing crisis for over five years and it is worsening as we are talking about it. Certainly, in recent weeks we have become aware of many other aspects to it. The longer we talk, the greater the crisis is becoming and the more people are becoming homeless and adding to the list. Where is the urgency on the part of the Department of Finance and the National Treasury Management Agency in getting the solutions that will see a real difference?

Mr. Conor O'Kelly

We are ready to go.

Mr. O'Kelly, I wish to clarify something because you hit on a point that has come up specifically in respect of National Asset Residential Property Services. Let us call it NARPS 2 because it is outside NAMA and it is a new model. The committee's understanding is that accessing the funds is not the issue but rather the technical construction of NARPS 2 is the problem. You are saying now, Mr. O'Kelly, that you can do that more or less immediately. Is that correct?

Mr. Conor O'Kelly

Technically, it is not difficult. It is already in existence within the NAMA structure. Essentially, we would be copying it. We know it works. We know that in an administrative sense we could replicate it as a vehicle. It is not a new idea and therefore we are not concerned about whether it will work.

I realise the other Deputy expressed a view that it would not be as scalable as we thought. However, from a financing point of view, the Ireland Strategic Investment Fund could invest €250 million. We could have an additional €250 million, €500 million or €1 billion. It could continue to grow and be an effective vehicle. It could be an income-producing vehicle controlled by the State in that sense and it could be run by whoever. It could be run by the NTMA or someone else - it does not bother us where it sits.

That was the original intention but it did not happen.

Let me conclude on the question with one final point. Earlier, Mr. Dorgan, you were answering a question from Deputy Brophy in respect of NARPS. He took up the question from a slightly different angle but you mentioned that the original NARPS entered agreements with the approved housing bodies. If NARPS 2 entered agreements with local authorities rather than approved housing bodies, would it be deemed off-balance sheet?

Mr. Eoin Dorgan

Yes. We said earlier that local authorities are on-balance sheet. Like other on-balance sheet organisations and depending on the joint venture and the nature of the transaction they engage in, it can be considered off-balance sheet.

Mr. John Palmer


Are you saying with a degree of confidence, Mr. Dorgan, that if NARPS 2 were engaging with local authorities rather than approved housing bodies, the Department would be comfortable to take the view that because NARPS was off-balance sheet it follows that NARPS 2 would be off-balance sheet as well?

Mr. John Palmer

We would have to see it.


I want to hear the answer.

Mr. John Palmer

We would have to see the actual transaction.

Mr. Eoin Dorgan

We would have to consider the ratio returns. We would have to talk to the Central Statistics Office and EUROSTAT as well.

Yet the Department can do it in this way for approved housing bodies. Is that correct?

Mr. John Palmer

The approved housing bodies are off-balance sheet already. They are not classified in the normal way.

Mr. John Palmer

A key element is control and who controls it.

Mr. Eoin Dorgan

Yes. That is why we have to be careful.

Mr. Conor O'Kelly

We are looking at it urgently. That is what we are here to do and that is why we have come up with the idea. We have been meeting for the past six weeks since the Minister asked us to look at the question across the various parts of the business.

Deputy O'Sullivan, are you happy with that? Sorry for interrupting you.

What about purchases for local authorities that have identified properties already in existence? Did the NTMA representative comment on that earlier?

Mr. Conor O'Kelly

Yes, potentially.

I am struggling with the concept and trying to understand it. What criteria distinguish borrowings that are on-balance sheet from those that are off-balance sheet? One of the members of the deputation said it was difficult to keep borrowings for social housing off-balance sheet but that borrowings for affordable housing with a return could be kept off-balance sheet. Will the deputation expand on that? What Government borrowings are off-balance sheet at the moment? What type of borrowing is off-balance sheet?

Mr. John Palmer

Let us suppose a body is within general Government, for example, the NTMA, the Housing Finance Agency, local authorities or Departments. If they borrow money, it is on-balance sheet; the borrowing is on-balance sheet and it is in our general Government debt. Obviously, then, it contributes to the debt to GDP ratio. The off-balance sheet story is about when we use that money.

If that money is used in a way that is classified as general Government expenditure, it contributes to the deficit calculation on a headline basis and to the calculation of the structural balance, and will count towards the expenditure benchmark. However, certain transactions are classified as being outside general Government, for example, certain investments. Some of the investments in the banks were classified as equity investments and did not count towards the deficit but in so far as we had either borrowed the money, or not repaid money that we could have otherwise repaid, it is still within our debt. That is the dichotomy. Any money borrowed by any general Government body is general Government debt. There is no borrowing outside that. It is a question of whether it counts for the deficit calculation and for the rest of the fiscal rules, the structural balance sheet and the expenditure benchmark. I hope that explains it.

It is getting very Jesuitical here: how many angels can dance on the head of a pin? Is Mr. Palmer saying that the EU bans Ireland from spending savings, not borrowings? The Strategic Investment Fund was built up over years. We are not borrowing it. If a family needs to spend money that it has saved, it does not add to its debt. Are the EU rules so severe that we cannot even spend money we have built up over years? That is what I asked earlier and I did not really get the answer. It is getting Jesuitical. The three witnesses are the experts yet they are not even able to point to one example of where this has happened. They mentioned some vague thing about France. If we have to break the EU rules to build houses for our people, I put it to them that we should break them but if they can tell us a different way that does not break them, I will be all ears.

Mr. John Palmer

I will answer the Deputy's technical question at the start. General Government expenditure and revenue are calculated or measured by reference to the European system of accounts 2010. It is an annual system. The Deputy is perfectly correct that it examines revenue and expenditure in a given year. That is how we calculate the headline deficit. That is the starting point for the structural balance and so forth.

The Deputy is right that if money had been raised in earlier years and put aside and spent, it counts as general Government expenditure. When it came in, it was counted as revenue for the year it came in. That is a fact of life. That is the way the accounting system works. All our targets are set on this annual basis. Up to this year, it was a straight deficit. Now we are into the preventive arm and we are talking about the structural balance and complying with the expenditure benchmark. We have to consider what we spend in a given year and the revenue in a given year and revenue from earlier years does not count. There is no offset for it because it was recognised when it arrived in the first place.

Is it not ludicrous that there is no offset for it because we have money but the EU does not allow us to spend it where it is most needed in the whole country?

Mr. John Palmer

That is just getting into the overall statistical system and straying beyond us.

I want to tease out a little further the potential off-balance sheet options. We have a potentially significant investment capacity in ISIF and we have a vehicle that we know works in NAMA Asset Residential Property Services, NARPS, whether it is kept as NARPS or NARPS 2. The difficulty is that if it is used as a way of providing 100% social housing, there is no commercial return because social housing is subsidised by the State so it will fall foul on those grounds. The difficulty for many committee members is that if it is used for private housing with a Part V 10% commitment, it will not produce sufficient social housing to tackle the scale of the crisis we are concerned about. I am asking a question knowing that the witnesses probably will not be able to answer it. If, for example, NARPS, accessing ISIF funding, was to invite people with land, local authorities, approved housing bodies or whoever, to come forward with proposals for mixed tenure estates to include social housing, cost rental housing and affordable purchase housing, my preference would be for the local authorities to bring forward their landbanks and state they would like to provide 30% social housing, 30% cost rental and 30% cost or affordable purchase.

They would be local authority-managed estates, but the financing model would allow for a commercial return, both from the affordable sales and the cost rentals. Those could be used to ensure there was a commercial return to NARPS and the ISIF through the initial loan. It would allow them to produce housing on a scale which the 10% Part V commitment would not allow. It would also allow the leveraging of landbanks that many local authorities in Dublin city, south Dublin and others already have.

Deputy Brophy is wrong. It is not the case that the housing bodies do not want to borrow money. In fact, if one speaks to the five or six large approved housing bodies they will say they reckon that within a couple of years they could produce 4,000 units a year compared with the 1,500 or 1,600 produced at the current time. Even that capacity would not meet the need that exists. Could such a proposal be explored within the current framework? If we do not find some way of doing something like that, off-balance sheet schemes will simply involve private housing with 10% Part V social housing, which will provide nowhere near enough housing.

Mr. Conor O'Kelly

What the Deputy has described is exactly what we are exploring. It would qualify-----

Dublin City Council, for example, is currently considering a similar model that involves bringing in the private sector. It is leveraging its land. The difficulty when one brings in the private sector is that the cost of building the units, including all the compliance, is significantly higher than when local authorities alone are involved. I am specifically interested in a local authority partnership which leverages land and reduces the cost of producing units to a level well below that of the private sector. Such an approach is still off-balance sheet because there is a commercial return from the affordable units and those available for purchase.

Mr. Conor O'Kelly

I believe it is possible.

This is something the committee will have to tease out. The difficulty with such a scheme is that the rents could be very high to meet the criteria.

No, I understand Deputy Ó Broin referred to a mix.

There would be differential rents for a portion. There would be different-----

There would be differential proportions and below market rents for other portions.

I am well aware of what Deputy Ó Broin said. The cost would be 70% of the market rate. That is still a very high rent.

Colleagues, that is a matter for deliberations. Deputy Ó Broin asked a specific question to elicit information and received a direct answer. Deputy Durkan had a brief point.

The Chairman knows all my questions are brief. I refer to the definition of normal Government expenditure, which I presume includes capital and current expenditure for the purposes of this exercise.

Mr. John Palmer


Mr. Eoin Dorgan


That quite considerably narrows down what can be done. There is a stranglehold on what can be done. We all appreciate the collective difficulties of the witnesses, but we also have a difficulty which is pressing and becoming more so as the hours go by. It is not a question of avoiding the issue and hoping it will go away. These issues will not go away. Young people are now desperate about obtaining a home by one means or another. We have little to offer them.

We accept the rules, but they have to become amenable to the needs of the community at large in the country. If they do not, then the rules fall into disrepute. What incentive is there for local authorities to hand over their lands to private housing bodies? Is it not much more efficient for local authorities to develop the lands? How efficient and cost-effective is it for private housing bodies to obtain lands for nothing from the State through local authorities at a cost of, for example €1 per housing site, and take out 100% loans to build them? That is what the capital allowance scheme involves. It has now been phased out, to some extent, but the same general principle applies. The Chairman is a lot more intelligent than I am.

I cannot understand how it is expected we can solve a housing problem that way. Like my colleague, Deputy Brophy, I believe housing bodies are unsuitable. Their structure is unsuitable to handle the magnitude of the problem. They did not, could not and will not deal with it. That is not due to a reluctance on their part, it is because they are more suited to dealing with niche markets, such as special needs and sheltered housing, at which they are excellent. They display 100% efficiency in that regard. Nobody would quibble with that view but in the context of the general issue of the magnitude of the housing requirements, they are unsuitable. Their structure is not right.

There are - or at least there were - approximately €90 billion in personal savings in this country, unless somebody spent the money since I last counted. I made a submission on the matter to the Department of Finance and received a negative response. Is there any way those personal savings could be utilised over a period in light of the seriousness of the housing problem?

Mr. Eoin Dorgan

On the first point, there is an element of consumer choice in terms of what people do with personal savings. The NTMA has State savings products, which are available, that will go towards the provision of housing. I would urge caution in the sense that when one ties what is a sovereign loan to a specific project, sometimes it can have a perception of being less secure, whereas the State does all its borrowing as a sovereign. It is similar to taxation; we do not hypothecate taxation either.

In terms of the Deputy’s other points, to be honest, it is really for the Minister for Housing, Planning and Local Government in terms of how local authorities interact with property holders.

We know that, but we want the witnesses to know it as well.

Mr. Eoin Dorgan


Before we conclude, I have two very brief questions for Mr. O’Kelly. When the Minister for Finance, Deputy Noonan, was answering questions in the Dáil recently, he referred to the fact that the NTMA is looking at different funding models. I take it from the discussions we have had today that one of those specific models is what we are loosely calling NARPS 2 or something around that. Earlier, Mr. O’Kelly spoke about infrastructural deficits. I take it that might relate to a different funding model, again off-balance sheet. Could Mr. O’Kelly please comment on that?

Could Mr. Dorgan or Mr. O’Kelly please respond to the next point? We had the Irish League of Credit Unions before the committee. It has substantial funds available. It is the element of risk that determines exactly what is what in respect of all projects. Do the witnesses have any comment to make on the funds which are available and which possibly could be used? I realise there is a cost element as well as a risk element. I suppose the risk element determines the cost.

Mr. Conor O'Kelly

The Chairman is right. The two specific financing vehicles that we think have some legs and could have some impact are the NARPS 2, as we are now describing it, and the second one is an infrastructure fund where we would put ISIF money plus additional co-investment capital in there and provide financing for this infrastructural deficit. Homes have already been identified by the Dublin housing supply task force in this area and in other parts of the country. The idea is that one would finance either the local authority itself by providing it with attractively financed options, both through the rate and the tenure, or that one might provide funding to developers themselves on a similar basis in order to build the infrastructure for the local authorities. Right now, local authorities cannot get the infrastructure built one way or the other and a solution is needed. We think we could play a role there and we have been in active discussions both with local authorities and developers in that regard.

Does Mr. O’Kelly have a high degree of confidence in that?

Mr. Conor O'Kelly

I do.

The other issue relates to credit union funding.

Mr. Eoin Dorgan

There have been discussions in that regard. If credit unions want to invest, we would be interested in partnering with them. Cost is the issue. We must be able to justify paying. If there was a substantial difference to the State’s borrowing rates, we would have to have a very strong justification for that.

When the Irish League of Credit Unions appeared before the committee, its spokesperson indicated that the interest rate is not the big sticking point for credit unions and that they would consider a lower interest rate than they might have originally proposed to the NTMA and others a year and a half ago.

Was that the sticking point in the discussions until that point because clearly there was something-----

Mr. Eoin Dorgan

It is not; it is a separate division which is dealing with this discussion. I am not central enough to it.

I find it perverse that the Irish League of Credit Unions proposal has been before the Department of Finance since last October, when it wrote initially and we became aware of it, and not one house has been built or even gone to planning stage. The figure is €3 billion.

They have €5.4 billion over there.

That is a separate section. The only comment I would make, from the evidence before the committee, is that the Irish League of Credit Unions seems to have cash on hand. There is a necessity for State funding but there is also a necessity for it to find something useful to do with it.

On that point, when the credit union representatives came before the committee they confirmed that the problem is with their regulator and not the availability of funds. They have to get past the regulator first.

Everyone who comes in here talks about social and affordable housing. The affordable housing model that was set out has not worked. Regardless of the constituency one goes to, it has not worked. I want to hear the witnesses' view on that. In my local authority, anyone living in an affordable house had to be bailed out by the State in the difficult times. I am curious to hear the witnesses'-----

I am living in an affordable house. What does the Deputy mean when he says it has not worked out?

I should have said shared ownership.

Some of them were very expensive in the-----

The prices of some of them were crazy.

Yes, but there is not an affordable housing mortgage, and that is fine.

All the talk is about on-balance sheet and off-balance sheet. If we come up with ideas in this committee, we have to refer to the issue of finance. Is it fair to say that regardless of the ideas we come up with, they must meet the requirements in that regard or nothing will happen in terms of those ideas? We meet here every Tuesday and Thursday. The witness said the Minister came to him in the past six weeks, but this problem has been going on for the past five or six years. What new model have the witnesses come up with to get us out of this crisis? We have to get out of it, not today or tomorrow but now. We have to come up with findings to make that happen, but we are not-----

The recommendations we will make will be based on the evidence and the suggestions put forward that will stand up to scrutiny.

I thank the representatives of the NTMA and the Department of Finance, Mr. Conor O'Kelly, Mr. Eoin Dorgan and Mr. John Palmer, for their attendance, their submissions and the direct answers they gave, some of which, whether we like it or not, were helpful and informative in the deliberations of this committee.

Sitting suspended at 12.35 p.m. and resumed at 2 p.m.