The Bill will provide the legislative backing to the securitisation scheme. We will securitise certain moneys due to local authorities from the repayment of mortgages financed originally from loans from the local loans fund. Securitisation is common in the United States of America and some countries in Europe. Essentially, in securitisation, a stream of future income is sold for an up front payment. This is what the Bill involves.
Senators will be aware of the background to the problem which has arisen from the need to fund payments to meet our equal treatment obligations. However, I will briefly review the background. An EC directive on equality of treatment for men and women in social security was adopted by the Council of Ministers on 19 December 1978 with a deadline for implementation of the directive on 23 December 1984.
Equality of treatment in accordance with the provisions of the directive was provided for in the Social Welfare (No. 2) Act, 1985, which was enacted in July 1985. The provisions of that Act were brought into force in two phases with effect from May and November 1986. Consequently, the provisions of the directive were not fully provided from December 1984, the implementation date for the directive, to November 1986.
There were four areas of the social welfare code which were discriminatory within the terms of the directive during the period of delay: first married women received a lower personal rate of benefit than men and single women in the schemes of disability benefit, unemployment benefit, invalidity pension and occupational injuries benefits; second, married women were entitled to unemployment benefit for a maximum duration of 12 months as against 15 months for claimants generally; third, they were precluded from qualifying for unemployment and, fourth, as a general rule, they did not qualify for increases in respect of adult or child dependants.
In November 1986 when the Social Welfare (No. 2) Act, 1985, became operational many married men lost entitlement to an increase in respect of their spouse as an adult dependant and in certain cases to half of the increases in respect of children. The Government decided to introduce transitional payments to avoid any sudden reduction in family income for those concerned. These payments, which were paid to men but not to women, were subsequently found by the courts to have been discriminatory. The payments were reduced from 1988 onwards on an annual basis and they were discontinued entirely in July 1992.
Arising from the delay in implementing the necessary measures in accordance with the requirements of the directive, court proceedings were initiated by a number of married women in which they sought to have their entitlements in the period of delay determined on the basis of the rules applied to married men. They also sought payment of the transitional payments to them on the same basis as applied to men.
In the High Court on 3 February 1995 in what was, effectively, a test case, Miss Justice Carroll found that the married women were entitled to be paid on the basis of the rules applied to married men in the period of delay and that they were also entitled to transitional payments paid to men in similar circumstances. The judgement also provided for the payment of compensatory interest at a rate equivalent to the consumer price index on the arrears of benefit up to the date of payment.
A commitment was given in A Government of Renewal to pay the legally determined entitlements of married women to social welfare equality payments. To fulfil this commitment the Government authorised the Minister for Social Welfare to implement the High Court decision. An estimated 70,000 women involved are now receiving payments. The total cost of implementing the judgment is estimated at some £260 million of which up to £200 million will have been paid by the end of 1995. The remaining £60 million will be paid in 1996 and 1997. This is in addition to the approximately £40 million paid prior to the court cases. The total cost of the arrears, therefore, is close to £300 million.
There was a need to make provision to meet these payments and in this year's budget £60 million was provided for the payment of these obligations. This, of course, was prior to the High Court decision. In the budget speech it was indicated that if it was necessary to pay more than £60 million this year we would consider disposing of certain State assets so as not to adversely affect our budgetary targets. It was in this context that the Minister for Finance asked for an examination of the means by which certain assets of the local loans fund could be realised as a cash payment to the Exchequer.
The National Treasury Management Agency suggested that certain assets associated with local loans funds could be realised. They suggested a sale of the proceeds of the mortgages to the private sector. This proposal was useful in two respects. First, it enabled the money to be raised without any effect on the budgetary position this year and, second, the proposal would encourage the financial markets in Ireland to look afresh at the idea of securitisation of mortgages.
The Government is anxious that the financial markets should develop in Ireland. In addition, we hope to continue improvements in the markets so that any short-term fluctuations in the financial markets do not adversely affect business. To this end the development of a new investment instrument in the form of fixed rate bonds to be issued in this scheme will provide an investment opportunity for investors. In particular, it is important to develop opportunities to attract investment from Irish institutions and to offer a substitute for foreign investments.
The local loans fund was established in 1935 under the control of the Minister for Finance and financed by the Exchequer to provide a system of capital funding for local authorities. Since then it has provided loan capital to local authorities at fixed rates of interest for various purposes, including on-lending to individual house purchasers who satisfied a means test.
Since 1988 lending by the fund has been very limited. Direct Exchequer grants have now replaced the local loans fund as a route for funds for local authority capital projects. In the case of the housing loans, the Housing Finance Agency has since 1986 provided the local authorities with the requisite funds at variable rates of interest. Total loans outstanding from the local loans fund to local authorities are of the order of £480 million. These include loans for harbour developments and other areas. Of these, about £440 million are Small Dwelling Acts loans.
I would like to outline the scheme for the House. The scheme was designed by the National Treasury Management Agency after consultation with the Department of Finance and the Department of the Environment as well as various financial institutions and the local authorities. Broadly, the proposed scheme is as follows. A special purpose vehicle, or SPV, will be established in the private sector but managed by the NTMA. This SPV will raise £140 million in the current year by a bond issue to investors and pay the proceeds to the Exchequer.
The local authorities, with the help of the National Treasury Management Agency, will agree a pool of mortgage repayments, the revenue from which will be assigned to the SPV. The SPV will fund payments to the bond holders from this assigned revenue. All payments by the local authorities to the SPV will be routed through the local loans funds which will act as agent for the SPV. As a local authority makes payments through the local loans fund to the SPV, it will be deemed to have made a repayment of its local loan fund debt. The local authorities will continue the existing practice of paying over the mortgage payments as they become due to them, even if not collected.
In the very unlikely event of a local authority defaulting on its payments, the Minister would pay to the SPV the amount due and pursue the local authority by way of the local loans fund's legal powers, which give it a charge on the local authorities' general revenue. In the event of early redemption of a mortgage in the pool, the sum can be passed to the SPV by the local authority and this would be invested by the SPV. Any surplus remaining in the SPV will be handed over the Exchequer on the winding up of the company.
Essentially, as a result of this scheme the Exchequer will receive a lump sum up front in exchange for a stream of income that would have been payable to it from local authority sources over the coming years. While the proposed scheme may appear complex, similar schemes are standard financial market practice for securities bonds and a special purpose vehicle is almost always a feature of such schemes.
The structure of the scheme is necessary because the Government wishes to ensure that the underlying mortgage asset is not affected in any way by the proposed securitisation scheme and also that the local authorities are in no different a position under this scheme than they are at present. I want to emphasise this point. There will be absolutely no change in the existing relationship between the individual mortgagor and the local authority and there will be no adverse effect whatever on the finances of the local authorities.
The local authorities will have their local loans fund debt reduced to the extent of the payments made to the special purpose vehicle. As each payment is made, it will be deemed to be a repayment off their local loans fund debt. In the event of non-payment, the Minister for Finance will pay the shortfall and pursue the local authority under powers existing in the local loans fund's governing legislation.
This is no different to the present position where the local loans fund can pursue a defaulting authority. In any event the possibility of a default by a local authority is largely theoretical; no local authority has ever defaulted on its debt to the fund and I do not anticipate that any ever will.
In the Dáil a number of Deputies raised the issue of the impact the scheme might have on Government finances. The Exchequer borrowing requirement will be unaffected as the £140 million to be raised under the scheme in 1995 represents the balance between an original £60 million provision for equal treatment on budget day and the £200 million being issued to the social insurance fund for this purpose. While the current budget deficit will be higher, the capital deficit will be correspondingly lower than anticipated, because issues to the social insurance fund are treated as current expenditures in the Estimates volume but the proceeds of the scheme are classified as an Exchequer capital inflow.
I take this opportunity to nail the myth that this is the sale of a capital sum to fund current expenditure. While the arrears payments are classified as current expenditure they are a once-off cost and not an on-going future liability. To that extent they are unlike the generality of current expenditure.
In terms of qualifying for the third stage of economic and monetary union we must meet certain criteria. These include the requirement that the annual general Government deficit should be held to 3 per cent or less of GDP. The general Government deficit will be unaffected by this scheme. Under the accounting conventions from which this deficit is derived — on a standardised basis — in each member state, loan and equity transactions are not counted as either receipts or expenditure. These international conventions view such transactions as "financial" or balance sheet transactions. It follows that the proceeds of the scheme will not appear on the revenue side of the general Government accounts.
The Bill gives the legislative framework within which the current securitisation scheme can take place. It also allows future securitisation of local authority mortgages should this be required. We must make provision for all eventualities and not be too restrictive but this should be balanced by a need to keep tight control of the operation of the scheme.
Section 1 of the Bill is a definition and interpretation section. Section 2 specifies the purposes for which the Bill can be used. The immediate proposal is for the financing of part of the social welfare equality arrears payments. As I do not wish to restrict freedom of action in the future we have also included provision that the Bill can be used for other purposes but only with the approval of the Dáil. As I said earlier, this will act as an assurance that the scheme will not be abused or lead to a weakening of the ongoing commitment to our budgetary targets.
Section 3 refers to the existing power under section 14 of the Housing (Miscellaneous Provisions) Act, 1992, whereby a local authority, at the direction of the Minister for the Environment, shall transfer, sell or assign mortgages. This power is now defined as including assignment of the debt secured by a mortgage and it is provided that such an assignment shall be deemed to be an equitable assignment. The special purpose vehicle will not have any right of enforcing the debt directly against the individual borrower. There will be no circumstance in which the SPV can give notice to, pursue or otherwise deal with the individual mortgagor — that is out of the question.
Section 4 gives the Minister for Finance the power to designate the body which will, in return for a lump sum, receive the assigned payments and to arrange for its management. The management of its designated body is a function which will be delegated to the National Treasury Management Agency under section 12. Provision is also made to allow the Minister to own a company as the designated body. This provision, while it will not be utilised for this securitisation, is included to ensure flexibility in the future should a Minister wish or need to establish a company for this purpose.
The existing local loans fund legislation provides that the fund will have a lien on the general revenues of local authorities in respect of borrowings by the authorities from the fund. Section 5 excludes the amounts assigned by local authorities to the SPV from the general revenues for the purpose of that lien. This provision ensures that these revenues are ring-fenced in favour of the SPV and that the Exchequer can have no call on them.
Section 6 provides that any payments made by a local authority for the purposes of the Bill to a designated body will have the same effect as a payment directly to the local loans fund. In this way there will be no change in the arrangement for making their biannual payments to the local loans fund. The local authorities will make their payments as at present to the local loans fund. It is only at that point that the allocation of payments due to the designated body will be made.
Section 7 provides for a guarantee by the Minister for Finance of the amounts assigned by a local authority to the designated body. The reason for this provision is that the SPV is barred from recourse to the mortgagor. In a straight commercial securitisation, this recourse is the ultimate security for the bond holder. In the absence of this recourse in the present case, the Bill provides for a Government guarantee as the ultimate security for the bond.
Other sections deal with related matters, such as the tax treatment of the designated body and securities issued by it; delegation of powers to the National Treasury Management Agency; management of the assets and liabilities of a delegated body and provision of information by local authorities and expenses incurred by the Minister in the administration of the Act. The accounts of the designated body will, under section 16, be audited by the Comptroller and Auditor General.
I want to reiterate that this innovative scheme is designed to raise the money needed for the equal treatment arrears payments, to help develop the Irish financial markets and, at the same time, to ensure there will be no change in the position of the mortgagor of the local authority. All Senators, I am sure, are conscious of the need to observe the budgetary parameters yet, at the same time, meet the once-off costs of the social welfare equality payment arrears. Without this scheme, there would be a need to meet the payments through extra borrowing or taxation; neither course is attractive or possible.
I commend this Bill to the House.