Seanad Éireann díospóireacht -
Thursday, 17 May 2001

Vol. 166 No. 14

ACC Bank Bill, 2001: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

Minister of State at the Department of Finance (Mr. Cullen)

The purpose of the Bill is to provide for an increase in the authorised share capital of ACC Bank and put in place the enabling provisions required to facilitate the establishment of an employee share ownership trust in the bank and the disposal of the Minister's shareholding.

As Senators are aware, the proposed merger and flotation of ACC and TSB banks was reluctantly called off by the Minister in early 2000 following a joint recommendation to do so from the boards of both ACC and TSB banks and the non-statutory board of Newbank. The three boards made their recommendation in the light of the slim prospects for a successful flotation in the then prevailing market conditions. The Minister accepted their recommendation. In doing so, however, he reiterated his view that the status quo was not an option and asked the boards of the ACC and TSB, along with the ICC board, to review all the options for the future. Since then, both ICC and TSB banks have undertaken successful sale processes.

ACC Bank, on the other hand, had a difficult year for reasons of which we are all aware and it is now time to benefit from the lessons which have been learned and move forward in a positive manner. On Tuesday, ACC Bank published its annual report for the year ended 31 December 2000. The bank reported losses before tax of 23 million compared to a profit in 1999 of 24.5 million. The reasons for the loss include the requirement to have a special provision of 21 million for the DIRT bill arising from the audit undertaken by the Revenue Commissioners following the publication of the Committee of Public Account's report on the matter. I will return to this issue.

The bank also undertook a fundamental review of its corporate loan book during the course of last year. The effect of this review has resulted in a provision for bad and doubtful debts of over 14 million. A further factor is the special provision being made in the figure for 2000 of 16 million in relation to the voluntary separation scheme. The provision for 2000 relates to the anticipated departure of 120 staff. The figures, on the face of it, are disappointing but when one strips out the once-off factors in this set of accounts, the operating profit before provision for bad debts rose from 25.4 million to 28.4 million, an increase of 11%. This indicates that the bank is trading strongly, has a solid commercial operation and will make profits going forward. The effect of the restructuring being undertaken by the bank will be to enhance its future earnings potential.

Before addressing the issue of the ACC's business strategy, let me say a few words on the DIRT issue. The provision required in relation to the DIRT settlement is one of the main reasons for the loss in 2000. The board has expressed its deep disappointment to the Minister at the evidence of widespread deficiencies in the ACC revealed by the Committee of Public Accounts inquiry and Revenue audit. The board and management have assured the Minister of their absolute commitment to ensuring full compliance in the future and their determination that the mistakes of the past will never be repeated. The steps taken by the bank include the appointment of additional personnel to its compliance function with input from a bank-wide team of senior managers, centralising administrative control of non-resident accounts and special savings accounts in head office, and the commissioning of a comprehensive review of all procedures from a compliance viewpoint by the bank's new auditors, PricewaterhouseCoopers.

The Minister also introduced a new reporting structure which requires the chairman to brief him on a quarterly basis and requires the chief executive to brief departmental officials on a quarterly basis. The Minister also meets the full board on an annual basis. These new arrangements incorporate the reporting requirements under the State bodies guidelines, which require the chairman of a State body to make a formal annual report to the relevant Minister on the financial returns of the company, its compliance with State regulations where applicable, including the pay of the chief executive, and any developments that the chairman believes should be brought to the attention of the shareholder. The guidelines also require the chairman to make a report to the Minister on the interim results.

I will now turn to the issue of the bank's business strategy. The board and management reviewed the bank's operations in early 2000 and adopted a new strategy which involves moving away from general retail banking in order to concentrate on small and medium enterprise business banking, providing a more focused personal banking service and continuing to serve its original market, that is, the agriculture sector.

The bank is moving away from handling the whole product process in low margin areas to either serving those markets with third party products or withdrawing from them. For instance, mortgages and credit cards require large volumes to be cost effective for a provider in order to generate the necessary administrative efficiencies and minimise the credit exposures by spreading the risk over large books. In both these product areas, the ACC has taken the decision to sell these products, still branded as ACC products, on an agency basis generating fee income.

One area that the bank has withdrawn from completely is that of low margin large corporate lending. In higher value product areas, the bank will continue to offer them on its own book and is developing new products as required.

The review also examined the bank's delivery channels. It found that its Dublin branches were not cost effective because of the nature of the business being transacted. In the light of this finding, the ACC rationalised its branch structure in Dublin and replaced it with a business banking team and a personal banking unit based in head office. Outside Dublin, the ACC found that the branches are an efficient distribution network and one of its strengths. The branches were further boosted by the introduction of mobile, specialist teams of financial planners and leasing experts. Regional business banking centres were established in Cork, Galway, Limerick and Waterford.

Implementation of this strategy involves a restructuring of the bank's operations. The Minister has mandated the bank to continue its course of negotiations with staff representatives on all aspects of this restructuring, including a new employee share ownership plan. The ESOP will be in line with previous ESOPs with a 14.9% stake in the ACC being available to staff, 5% in return for change in the bank and 9.9% for purchase.

Another aspect of the restructuring is that the bank needs to reduce its overheads. This is being done mainly through a voluntary separation scheme, which comprises a voluntary redundancy scheme and a voluntary retirement scheme. The terms of the VSS were negotiated and agreed with the trade unions. When the bank launched its strategy in 2000, it stated that the target figure for departees would be 200 by 2003. This is to be achieved through a combination of normal staff turnover and the VSS. I stress to Senators that the scheme is strictly voluntary. I have already said that provision has been made in the results for 2000 for 120 departures. The bank has also concentrated on staff development, through specialist training. Overheads will also be reduced through outsourcing certain functions and streamlining of processes.

The Minister has also mandated the board to explore all options in relation to a change in the ownership structure in the next 12 months. The bank has appointed NCB Corporate Finance to be its corporate financial adviser to help in this process. The Minister has recently appointed A and L Goodbody to be his legal adviser in relation to the sale of the bank.

One of the main purposes of the Bill is to provide for an increase in the authorised share capital of the bank. The current authorised share capital of £50 million has been nearly subscribed in full and, as things stand, the Minister is unable to subscribe for further shares in ACC Bank which is not a prudent position to be in even if the company has no current requirement for additional capital. If the company requires additional capital the board's proposals will be assessed at the appropriate time. It is the Minister's intention to ensure that the company remains adequately capitalised as long as it is in State ownership. It should be stressed that the bank currently does not have a need for additional capital because its audited capital adequacy ratio stood at 11.87% at the end of December 2000, comfortably above the Central Bank's 10% requirement. Furthermore, its strategy of not pursuing balance sheet growth through mortgages and large value corporate loans should reduce its need for capital going forward. The other objective of the Bill is to put in place enabling provisions to facilitate the establishment of an ESOP and a change in ownership in line with the provisions put in place in relation to ICC Bank in the ICC Bank Acts of 1999 and 2000.

I will now turn to the main provisions of the Bill. Section 1 is the definitions section and is self-explanatory. Section 2 is a standard provision in relation to the expenses of the Minister while section 3 provides for an increase in the authorised share capital of the bank from its current limit of £50 million to £100 million. Of the current limit, £49.95 million has been subscribed so the effect of this section is to allow for the subscription of further capital. I have already stated that ACC Bank is adequately capitalised at present and any request for further capital will be considered at the appropriate time. Section 4 provides for the establishment of an employee share ownership plan which is identical to the provisions made for the ESOP in ICC Bank in the ICC Bank Act, 1999. I have already outlined the principles underlining the ESOP negotiations.

Section 5 provides for the disposal of shares by the Minister for Finance and is identical to the provisions made for ICC Bank in the ICC Bank Act, 2000. Any disposal of shares, other than to a director of the company as nominee of the Minister or to the ESOP, requires a motion of approval from the Dáil. The purpose of this section is to allow the bank and the Minister to move forward and conclude a sale process, subject to Dáil approval. Our experience is that timing is key to a successful process, as when bidders make an offer they do so under the then-prevailing market conditions. If at that point a legislative process is required to be started, it could be months before the Minister would be in a position to complete it. During that period, things could change and the bidder might drop out because of market conditions or other factors such as its own takeover with the new owners deciding not to proceed.

Section 6 provides for the continuation of existing guarantees given by the Minister. This section will be commenced following the sale of the bank in conjunction with the schedule of repeals. The effect of the repeals will be that no new guarantees can be given following the sale, however existing State guarantees cannot arbitrarily be withdrawn and the purpose of this section is to provide for the run-off of these guarantees and the circumstances under which they cease to be in force. The key point is that the bank will be required to pay the Minister in respect of any guarantees the Minister honours. If the bank fails to do so it becomes a debt, recoverable in court. Separate to the legislation, it will be a condition of sale that the purchaser gives a counter-indemnity to the Minister in respect of the outstanding guarantees provided for in this section. The counter-indemnity may be on the purchaser's own account, if the Minister is satisfied with its stature, or may require a third party indemnity. In the ICC sale, Bank of Scotland gave the Minister a counter-indemnity. I should point out that the existence of State guarantees will not benefit the purchaser because the counter-indemnity affects their capital adequacy ratio and reduces their lending capacity.

Section 7 is a standard provision requiring ACC Bank plc to take relevant action to alter its memorandum and articles of association, in the context of the Companies Acts, to make them consistent with the terms of the Bill. Section 8 provides that ACC shall no longer be subject to the requirements applying to statutory authorities under the Registration of Title Act, 1964. This section will only be commenced following a change of ownership and only applies to properties owned or leased by the bank. It is included for the avoidance of doubt as to the status of any such properties and will have no impact on property held as security by the bank in respect of loans. Section 9 provides for the amendment of the definition of a recognised lender in section 23 of the Agricultural Credit Act, 1978, which regulates chattel mortgages. This is done to eliminate the requirement for banks to be recognised separately by the Minister, in addition to their normal licensing requirements, to register a chattel mortgage.

Section 10 provides for the deletion of ACC from section 2 of the Insurance (Amendment) Act, 1978, and will only be commenced following the sale of the bank. Section 11 provides for the deletion of ACC from section 3(2)(b) of the Companies (Amendment) Act, 1990, which provides that only the Central Bank may present a petition to have an examiner appointed to a bank. Once sold, ACC will come under the provision as the holder of a licence under section 9 of the Central Bank Act, 1971. The Office of the Parliamentary Counsel to the Government has recommended that the relevant section of the Companies (Amendment) Act, 1990, should be consolidated, as it currently stands, which is the effect of section 11(1) of the Bill. Section 11(2) is a further consolidation which reflects the deletion of ACC and will only be commenced following the sale.

Section 12 and the accompanying Schedule to the Bill will only come into play if and when the bank is sold. This section provides for the repeal of most of the ACC Bank Acts, 1978 to 1999, and the deletion of references to ACC in other legislation. The purpose of these repeals and deletions is to ensure that ACC, once sold, will operate on the same basis as any other private commercial bank. They will be given effect by ministerial order under section 12(2) of the Bill, though the relevant order will not be made until ACC Bank plc is formally granted a licence by the Central Bank. Section 13 gives the short title and commencement of provisions. I commend the Bill to the House.

Mr. J. Doyle

I welcome the Minister to the House and thank him for outlining the Bill. The essential purpose of the Bill is to facilitate the future sale of ACC Bank. In the past year this House has passed legislation for the sale of the ICC Bank and the TSB, both of which were successfully sold, and I hope passing this Bill will result in similar success for the ACC. In view of what the Minister of State has said this morning and the substantial losses sustained during the year, that will take some time.

ACC Bank is wholly owned by the Government and can trace its history back to 1927, when it was originally established as the Agricultural Credit Corporation for the purpose of providing much needed finance to the agricultural sector. Over the following 60 years the bank developed its expertise as a specialist agricultural bank and became a major player in that market. Shortly after its establishment the bank was called on to play a major role in the Economic War and to stem the tide of rural depopulation. Indeed, in the early 1930s it played a major role as a development bank when other financial institutions did not want to lend to the agricultural sector. To its credit, the ACC played an important role in the development of the agricultural economy and consequently the development of rural communities. It offered the widest range of products and services available to meet the agricultural community's banking needs and was the driving force in assisting the farming community to capitalise itself, improve its efficiency and buy modern equipment. Capital lent to farmers at that time made agriculture more efficient and opened it up to European competition in the 1970s and 1980s.

In 1987 the bank was allowed to diversify outside the agricultural sector and since then the bank has become a more broadly-based commercial bank with an emphasis on the provision of retail services. Looking back on the history of the bank, one has to ask if diversification is a good policy to adopt. Certainly the bank has not become more profitable, as outlined by the Minister of State today, and there is no evidence, looking at it as a purely commercial exercise, that diversification over the past 13 years has been good for it. Some of the financial decisions made by the bank in recent years have not been very prudent to say the least.

When Mr. Colm Darling, the chief executive of the ACC Bank, addressed the Joint Committee on Finance and the Public Service recently he informed us that the bank was now focusing on implementing a strategic plan to make it a more attractive acquisition prospect. As the Minister of State outlined in his speech, that plan includes the closure of all Dublin branches and moving away from unprofitable business, such as retail banking and mortgages. It intends to maintain its rural branch network of 40 to 50 branches, but it will concentrate more on selling products to consumers rather than on administration. I am sure the bank hopes it will not lose customers along the way as a result of its restructuring programme. However, there is a strong possibility that could happen because, despite all the hype about on-line banking, most bank customers like to be able to visit a bank. If distance proves a problem, they may switch to another bank.

For any bank to trade profitably, it must be good at risk management. The fact that ACC Bank was the main bank for loans for development companies involved in the Four Seasons Hotel, which ran over budget, throws up fundamental questions about its ability to manage risk. The Minister of State stated that the bank has made provision of 14 million for bad or doubtful debts. Perhaps he might clarify in his reply if that provision was less for the Four Seasons Hotel. Mr. Colm Darling was pressed on this issue when he addressed the Joint Committee on Finance and the Public Service. He said he was not free to speak about the matter as a court case was pending. I am not sure if that court case has been completed, but if it has, perhaps the Minister of State might comment.

The decision of the ACC Bank to reach an £18 million tax settlement with the Revenue Commissioners closes an unhappy chapter in the history of the State bank. The bank was one of the financial institutions which had a serious problem with bogus non-resident accounts. The ACC Bank settlement shows that bogus non-resident accounts were rife in the bank in the late 1980s and early 1990s. What is most disturbing about this issue is that the Minister for Finance is the bank's owner and it appears from what the Minister of State told us today that proper reporting procedures were not in place between the chairman and the Minister and the chief executive and the Department of Finance. One must be critical of the way the Department of Finance handled the ACC Bank in the past. The Minister of State said that new reporting procedures have been put in place since then. However, that is like closing the door after the horse has bolted.

I welcome the provision dealing with the ESOP. It is important that employees have the right to be shareholders in an enterprise for which they work. This measure has proved quite profitable for the employees of the ICC and the TSB. I hope that employees of the ACC will benefit from their ESOP in due course.

In his first annual report the bank's chief executive stated that there is now a requirement to position the bank for a successful change in ownership. As the Minister of State outlined this morning, a strategy has been put in place to bring this about and a new management team has been appointed to steer the bank through the period of change that lies ahead.

The Bill before the House provides for an increase in the authorised share capital of the bank. The current limit on Exchequer investment in the bank is £50 million and the Minister proposes to increase the authorised share capital to £100 million. This will enable him to get additional equity share capital, if that becomes necessary, to meet ongoing business needs, as long as it remains in State ownership. The Minister and the Government hope to see a change in ownership during the coming year. However, bearing in mind the difficulties the bank has experienced in the past, which have been outlined today, and the heavy losses it has suffered this year, it will want more breathing space before that can be achieved.

Mr. Finneran

I commend the Bill to the House. It is simple in that it intends to increase the authorised share capital of the ACC Bank, to facilitate the future sale of the bank and to set up an employee share ownership trust. The restructuring of the bank, as proposed in the Bill, is prudent given its activities. The ACC Bank has provided an excellent service over the years, particularly to the agricultural community. When farmers had the door slammed in their faces by other financial institutions and banks, the ACC Bank took their business and both it and the farmers profited. The agricultural community owes it a debt of gratitude.

We were appalled recently by the attempts of financial institutions to deprive the State of the finance due to it under DIRT. It is totally unacceptable that any institution should devise a scheme to hide people's money rather than collecting tax on it and making it available to Departments for the good of the individuals in this State. It is reprehensible that a State bank could be part of any such scheme. If there is one criticism of the ACC Bank it is that it allowed itself to get involved in such a scheme. It had to pay back 21 million because of its non-compliance with DIRT, which was due to the Revenue Commissioners. It stands indicted as a result of its non-compliance. That is why the bank is now in the financial state in which it finds itself.

The new reporting, management and operating structures mean the bank will make progress and thereby make a profit in the future. Its decision to move away from general retail banking and to concentrate on small and medium enterprise banking is important and appropriate. It can identify with that niche in the market. It also wants a more focused personal banking service. Its original brief was to deal with the agricultural sector. The ACC Bank now has an opportunity to refocus on that section of the market.

I accept the point made by the Minister of State about credit cards and mortgages. Unless a bank or financial institution is heavily involved in this area, the operating and overhead costs are often too high to be able to operate at a profit. It is more practical for the bank to sell them on an agency basis.

I welcome the employee share ownership plan, which is part of a Government sponsored activity in the State and semi-State sectors. It is one that is taken on by the trade unions and staff. We have a voluntary separation scheme, a redundancy scheme and, as has been emphasised by the Minister of State, a voluntary retirement scheme, which is attractive to certain members of staff. The Minister for Finance has given a commitment on future capital needs and will keep the matter under review.

This is practical and appropriate legislation which responds to a situation being dealt with by ACC Bank. I compliment the Minister for Finance, the Minister of State and the Department of Finance on bringing it forward. It puts in place structures that will allow ACC Bank to progress and will, I hope, facilitate a sale.

Mr. Ross

I welcome the Minister of State and reiterate what I said previously about similar Bills. There is an identity of argument in the House on the Bill, as there is a similarity to the ICC Bank Bill, 2000, brought through the House not long ago. In principle, it must be right to adopt the strategy that the State should have no business in banking. This is the result of a senior Minister's policy decision which we must respect. It is an extraordinary relic of the past that the State has until recently been involved in the ICC, TSB and ACC. This is the last attempted sale of this sort and it should get the Minister for Finance out of banking, as he is right to want to do.

The State's experience in banking, despite what Senator Finneran said, is not a happy one. Its role in banking has not always been an exclusively commercial one. It has helped people out when they were in trouble, not necessarily for commercial reasons. The State has been subject to political pressures and made bad decisions as a result. It is correct for the State to relinquish its role in banking.

The problem with the Bill is that the Minister is selling a pup. However, most people are used to having a good gloss put on a bad product and are not taken in. The Minister of State, Deputy Cullen, attempted to put such a gloss on ACC Bank in his contribution. However, ACC Bank's experience in recent years has not been good; it has been deplorable. It is beyond me how the Minister for Finance expects to sell a bank which is making a loss.

I did not find the arguments of the Minister of State persuasive. There are standard arguments for explaining losses. The Minister of State explained the ACC's recent losses as a once-off situation caused by its DIRT liabilities. He suggested that there was no need for worry as the bank would move into profit after this once-off payment was made. However, the £21 million DIRT liability which has been written off is an amazing proportion of supposed profits, admittedly over a number of years. It suggests that the reason the bank was not making a profit was because it was dependent on its income from DIRT. It seems that the last existing State bank was dependent on illegal activities for a large proportion of its profits. Once its ability to break the law is taken away, or the bank is forced to pay this money back, then it no longer makes a profit.

This is no exaggeration. The settlements made by the other banks are proportionately much lower. We have seen the recent figures from the AIB and Bank of Ireland, and their DIRT settlements did not see them make losses or anything close to them.

Mr. Cullen

The operating profit of ACC Bank is up.

Mr. Ross

The operating profit is a completely different matter. Operating profit is accountancy jargon, used to write-off matters that companies do not like. Bord na Móna and the other semi-State companies used operating profit as a trick to show that they had made money when certain figures, such as interest owing, were removed from the books. Of course the operating profit is up, although at just 11% it is pretty pitiful. This is a bad situation. ACC Bank was dependent on this money for its profits, much more so than other banks.

These exceptional items are used as a justification for losses. They are convenient, but exceptional items can be found every year to explain the reason a company never makes a profit. In this case, however, there is also a provision for bad debts of £14 million.

Mr. Cullen

The figure is 14 million.

Mr. Ross

That is massive in terms of the supposed operating profit of ACC Bank.

Mr. Cullen

What does that tell the Senator?

Mr. Ross

It tells me that the bank is bad at its business. It means it lends to high risk projects and does not get paid back. This is what it is supposed to be able to do well and it has got it wrong. Now the Minister of State at the Department of Finance comes to the House and tells Members he wants to prepare this pup for sale. The bank does not know how to make money, its core business, and when it does, it makes it illegally. I pity the Minister of State who has a difficult job.

That is the downside but there is an upside. There is potential for attracting a buyer because of the customer base. The ACC recently introduced a devastatingly attractive product to the market, which is greatly to its credit. It took advantage of the Minister for Finance's savings scheme some weeks ago and introduced what is undoubtedly the most attractive deposit scheme on offer. I hope Senator Quinn, who has an indirect or direct interest in a different deposit scheme, will forgive me for saying this. Perhaps he will be able to contest what I say. However, by all the criteria used to judge such schemes, the ACC scheme comes out best.

It has the best interest rate as it is offering the European Central Bank rate. Its access to money is the best. The minimum amount required is £10 per month, up to a maximum of £200. One need look no further than the ACC for a savings scheme. The bank has received fantastic coverage in the press and has been bombarded by savers who want to join its scheme. Savers know they cannot go wrong with it. I understand the scheme is State guaranteed for as long as the ACC remains in State hands.

Mr. Cullen

It is not a State guaranteed scheme.

Mr. Ross

It must be a State guaranteed scheme. The State owns the bank. Surely, it must guarantee it.

Mr. Cullen

Not after the bank is sold.

Mr. Ross

Not after it is sold, but at present the bank is State guaranteed.

Mr. Cullen

Yes, it is.

Mr. Ross

I am asking a question because I am certainly confused about it. Once it changes ownership it will not be State guaranteed anymore – that is, if it changes ownership. I do not know how we get out of that guarantee, but never mind. It somewhat devalues it, because, and I am talking of the top of my head, you are buying something which is subject to a guarantee being lost at a later stage.

That is a big plus. I think the ACC has a potential to capitalise on that and on the great retail following which it will get out of this. I talked to them about it last week and they told me they have been bombarded with queries. I do not know how many people will go for them because there is huge inertia among customers who tend to go to their local branch. Changing, opening and moving accounts is always difficult. It is to their credit that they have concentrated on the retail element on this occasion. How they make money on it is another matter.

It seems very strange that having done that so successfully, and having launched what will be such a successful product, the Minister speaks as if they are coming out of the retail area. One does see the most extraordinary signs of confusion in this bank. They have gone hell for leather for the biggest retail product in this area in decades, which has been so successfully and rightly launched by the Minister, and then say that they are coming out of this area. What are they doing offering this product at all? It seems that this bank does not know what it is doing. All it wants is to be sold. There are lots of companies like that. This is a kind of public relations exercise which brings it to the attention of lots of people, will maybe earn it some profits, but it is not part of a strategy. It is a kind of jerky movement in the hope that it will attract someone's attention and be sold. It is either into retail or it is not. The Minister has said that it is moving out of retail and into small and medium corporate loans. This has nothing to do with small and medium corporate loans. Maybe it has a great niche in that market but I doubt it. It does not seem to have enough experience in that area. I do not believe that it is necessarily a good thing when launching itself for sale to get involved in new products. It is better to concentrate on what it is good at.

I come to a subject which I have broached with the Minister before but never had a satisfactory response. It seems to be the accepted wisdom that when State assets are privatised or sold, the workforce is automatically sold 15% of the company at heavily discounted rates. Nobody in either House dares speak against this. They are frightened of being thought of as selfish, anti-employee and not appreciating the work of the staff. Nothing could be further from the truth. If 5% of the company is given to the workforce, as is proposed here and has been done elsewhere, and then 9.99% is sold to them at a very cheap rate, does it make the company attractive for anyone to buy? The Mini ster is doing something which is obstructing the purpose of the Bill and its sales pitch.

The evidence for this is appearing by the day. I suppose the Minister is aware of the sale of a company called Telecom Éireann, 14.99% of which went to the workforce. It was a political imperative because of the strength of the union. What has been the result of that? It has not been a company which has been launched properly into the private sector. It is a company, quoted on the stock market, which has a Trojan horse of 14.99% at its rear. We can see now the consequences of that. The only people who carry real power in the commercial possibility of taking this over are the workforce. The ESOT, led by the Communications' Workers Union, now pull all the strings and call the shots on who takes over the company. We are into new territory but it looks like the ESOT shareholders may command a better price in a takeover than the ordinary shareholders. That is not acceptable. In addition, it makes the company less attractive to potential buyers. It works against the interests of the ordinary shareholders.

It is no coincidence that it took so long for Vodafone to make a bid for Eircom, which had a for sale sign outside its headquarters from the day it was launched on the stock market. There was a premium in the price, which indicated the company was for sale. What happened? For a full year nobody wanted to buy it. Nobody was interested. One of the reasons, quite obviously, was the ESOT and the fact that there was a blocking share there. Eventually a multinational bought the mobile element of Eircom but bought its way out of the ESOT. Eircom bought its way out of the ESOT in the end. There will be no ESOT in the mobile operator when it is finally sold – it was sold on Monday but a few ends still have to be tied up. Now, the rest of the company has a 14.99% block vote which is calling the shots. It is not acting in the interests of the small shareholders, but it is very much in the interest of the union bosses, who got themselves into a position of inappropriate power. It is bad for the company.

We get a lot of mumbo jumbo every time a Bill like this comes in. It goes as follows. We have decided that it is in the interests of the company and the workforce that they be given a portion of the company. In exchange, the workforce will change its work practices. I have often heard the Minister say this in this House, but I have never heard him say what those changes are. These changing work practices, if they exist at all and I doubt that they do, should happen anyway in any efficient company. They are changes which are absolutely mandatory if the company is to survive. What the Minister is really saying is that this is a bad company, with a lot of bad practices, a lot of awful semi-State hangovers and the only way to change this is to give part of the company to the workforce. It is straightforward blackmail. The Government has given in to that sort of blackmail.

I am in favour of profit sharing. It is a magnificent idea and it probably works. I am in favour of the Minister sharing the goodies of the ACC with the workforce if they make a profit. I am not in favour of building big power groups who can hold other shareholders to ransom. Unfortunately it is a very difficult position for the Minister because he is putting out a for sale sign and acknowledging there is a difficulty in his backyard. We saw that with Eircom but did not realise it until it was too late. We see it now with Aer Lingus. The flotation of that company is not going ahead, and I challenge the Minister to contradict me. Let us hear him tell us not to worry, the flotation is going ahead this year and give a guaranteed commitment. It will not. Why? Nobody will buy it, partly because of the industrial problems involved. In addition, nobody will buy it because of the 14.99% shareholding for employees which will cause mayhem for any potential buyer of the remainder of the shares. There will be retail resistance in the case of the sale of Aer Lingus and it would not be correct to state that the 14.9% will be the only reason for this. As everyone is aware, there will be other reasons.

Will the Minister of State indicate the changes that were made in Aer Lingus in exchange for the 14.99% shareholding given to the workforce? What changes were made in Eircom to allow a similar shareholding to be given away? Will the Minister of State also outline the changes made in ICC to allow another 14.99% shareholding to be given to its employees? I do not believe very many changes were made. If such changes were made, they were flimsy in nature and were mere camouflage. The Minister of State should outline the position because we will go down this road with Aer Rianta and other State-owned organisations and we will encounter the same difficulties.

In rigidly adhering to the figure to which I refer, there is a danger that, as the Labour Party has indicated, there will be no further privatisations in this decade because we will not be in a position to proceed with them. It took many years to sell the ICC. I know it is taboo to say so, and the Minister of State will not admit it, but it is common knowledge on the financial markets that several other banks considered purchasing the ICC and decided against doing so because it would be too much trouble. As a result, the bank was not sold for many years. The ACC has been up for sale for ten years but nobody really wants to buy it. Unless we obtain a good explanation regarding the benefits involved and the quid pro quo, we should not, as part of the process of selling State assets, automatically give away 15% of the shares to employees.

I acknowledge that a price is being paid. As in other cases, however, I imagine that the 9.9% part of the ESOP will be funded by soft loans. The Minister of State might be able to indicate whether that is the case in his reply. However, I believe the 9.9% has been funded in this way in other instances and I assume soft loans will also be used in this instance.

I welcome the Minister for Finance's decision that he should not be involved in banking. However, I must express serious reservations about the possibility of being able to sell an ugly sister of this sort.

Ms Cox

Senator Ross made an important point in relation to change. When discussing the provision of share schemes etc. it is important to identify the changes required within the company we intend to sell. Thereafter, we must be able to see real changes taking place. That is always a vital component in the restructuring of any organisation. If those responsible for managing the bank take anything from this debate it should be that real changes are required within their organisation. As the Minister of State indicated, there have been some disappointing results – I accept there were extenuating circumstances and I will refer to these later – but it is vital that we do not give away things merely for the sake of doing so.

One of the main purposes of the Bill is to provide for an increase in the authorised share capital of the bank. The bank's current share capital stands at £50 million and it is important that we should make provision to allow it to raise additional capital if necessary. While there is no need for it at this point, it is the Minister for Finance's intention to ensure that the company remains adequately capitalised for as long as it remains in State ownership. This is an example of one of the ways we are monitoring State assets and ensuring that, at all times, they are in a position best suited to facilitate their future development.

The other objective of the Bill is to put in place the enabling provisions to facilitate the establishment of an ESOP and a change in ownership in line with the provisions put in place in relation to the ICC Bank in the ICC Bank Acts of 1999 and 2000. As Senator Ross stated, if we are intent on doing that we must ask for real change and, in my opinion, such change will be requested.

One of the interesting matters to which the Minister of State referred was the bank's review of its branch network. On many occasions, the House has discussed the closure by the major banks – AIB and Bank of Ireland – of branches throughout the country. Most Members who represent constituencies outside Dublin are extremely dissatisfied with this policy. People do not realise that those who live in Clifden or the surrounding area in County Galway may have to travel a long distance to their local bank. Removing a bank branch from a small town or village takes away part of its lifeline. ACC Bank found that while its Dublin branches were not cost effective because of the nature of the business being transacted, its branch network throughout the remainder of the country was extremely efficient and one of its greatest strengths.

I wish the other banks would reconsider their policies on branch closures, telephone banking and on-line banking and realise that not everyone wants to do their banking via telephone or computer. People like to be able to visit a branch and conduct their business with the officials on a personal basis. If we are ever to claw back some of the confidence that has been lost in the banking sector as a result of the scandals which came to light in recent years, we must take action in this regard.

It is good that the ACC is maintaining a balance of service in the regions. Its policy is different from normal practice, under which a balance of service is maintained in Dublin and the greater Dublin area while a lack of balance obtains elsewhere. This brings me to an issue to which I referred yesterday, namely, the imbalance between the east and the west and the fact that many bodies with headquarters in Dublin believe their business revolves around the capital city and its immediate environs. It is good to see attitudes changing in that regard.

The Minister of State referred to the DIRT settlement and the scandals that have beset the banking industry and outlined the steps that were taken in this regard. The appointment of additional personnel to the bank's compliance function, with input from senior management staff, was a vital step. I welcome this development. The bank identified the need for better controls, auditing procedures and computer services to ensure that non-resident accounts and special savings accounts are adequately and properly monitored and such systems have been put in place. The appointment of the new auditors, PricewaterhouseCoopers, is a welcome development. No doubt we will see the benefit of this when the bank moves forward into what will, I hope, be a new chapter in its history.

I am delighted the Minister for Finance has introduced a reporting structure which requires the chairman of the board of directors to report to him and the chief executive to report to his Department's officials on a quarterly basis. In addition, the Minister will meet the board on an annual basis. The Minister is clearly stating that he expects the bank to move forward, to overcome the difficulties it experienced in the past and to maintain a high standard in terms of the quality of service it provides to its customers and also in terms of adhering to the rules and regulations laid down by the State. We do not want to see a return to the practices that obtained in the past. It is time to move forward by identifying the difficulties and setting out steps to address them.

ACC Bank, especially in rural areas, was always a friendly organisation which understood its customers. It was also very clear about what it needed to do to ensure people received the service they required from it. The bank deserves to be congratulated on that and for offering that service in all its branches throughout the country. In a time when we see major changes in the banking system with the closure of rural branches and the move towards computerisation, on-line banking, telephone banking and 24 hour, 365 days a year service, it is important to remember that people still want to have a personal service. I do not know that the argument that a rural branch network is too expensive or that it is too expensive to have staff managing branches on a daily basis is a fair excuse for closing branches and changing how things are done so that we do not meet bank staff.

There is not enough competition in the banking area and it is too expensive a sector in which to conduct business. It does not need to be so expensive. We have often spoken of the constantly increasing cost of drink. One cost which increases on a weekly or monthly basis is banking. While the service is still being provided to customers, I do not know if we receive a better quality or proper distribution of service. All that happens is that more profits are created for the banking sector. There should be less greed at that level and more concentration of focus towards the customer.

We saw with the entry of the Bank of Scotland into the mortgage market a number of years ago a huge change in terms of banks' attitudes to their customers. A person who had taken out a ten, 15 or 20 year mortgage suddenly began to realise he or she was very important to the bank and was able to demand a level of service not previously received from the big banks and building societies. It is indicative of the difference competition can make that we see how important it is. I would welcome greater competition in the banking area.

One of the reasons is the now widespread encashment policy of banks, something I am still amazed they get away with. It appears that everyone must have a bank account if they want to cash a cheque. If I write a cheque for cash in the amount of £15 or £20 to buy raffle tickets, the person to whom I give it must lodge the cheque to his or her bank account and withdraw the money. That is unacceptable. I do not know why members of the public have not closed their accounts and said they will not put up with such bullyboy tactics, which is the only way to describe the encashment policy. Banks honour Paymaster General cheques, such as social welfare cheques, but no other cheque will be honoured and cashed. A Bank of Ireland branch will not cash a Bank of Ireland cheque drawn on its own branch. A person has difficulty withdrawing their own money from an account. He or she can no longer withdraw money from an account using a cheque. It is a sad day for banking in Ireland when a person must go through hoops to withdraw his or her money from a bank to give to another person. I am still amazed that banks have got away with it and that we, as a nation, have allowed them do that.

ACC Bank, if it is looking to the future, must focus on last year's figures. While there are many items which will not recur, such as the provision for the DIRT bill and the cost of restructuring, something it is hoped will make the bank a leaner, fitter fighting machine, last year was a disappointing year for the bank. There was an increase of 11% in operating profits when once-off factors were removed and this is indicative that the bank is trading strongly and is a good commercial organisation. The bank and its board need to watch carefully what the market provides for the company and what opportunities exist and will focus on higher margin products which will guarantee the future of the bank, whatever the future holds for it.

I thank the Minister of State for coming to the House, look forward to the remaining Stages of the legislation and commend the Bill to the House.

Mr. Quinn

I know the Minister of State's heart is in the right place regarding the Bill. I want to be careful because the objective is to sell the bank and, if we criticise it too much, we may make it more difficult to sell. We wear several hats – as citizens, as owners of the bank through the State and wishing to ensure we do not damage an asset which belongs to us.

I have a grave concern about what we are attempting to do and how it is being attempted. Let me take the example of Sir Kenneth Cork, the leading receiver and liquidator in Britain about ten years ago. He wrote a very interesting article around the time he retired about how he could identify companies which had run or were likely to run into difficulty and which he had to close down. One of the things he could see was that when they changed head office invariably it was a sign a company was going to run into difficulty. A sure sign a company was going to run into difficulty was when they put a fountain in the foyer. I visit companies now and look to see if they have changed head office and, if they have, whether they have put a fountain in the foyer. I have not been to ACC and I am sure that, if I had been, I would not have found a fountain in the foyer.

It appears that, when a company runs into difficulty, it suddenly and rightly stops doing things it has got into the habit of doing over the years. This is because survival is so important; it must survive. I have looked at the Bill to see if we have included all the options, one of which is possibly not keeping the bank open. Is there a possibility that, in looking at those options, the Minister could decide that this is a bank without a future, that it might be better not to try to sell it to another bank and that, with the asset value it has, especially with property values having increased, an option would be not to continue with this and not to sell the bank as a going concern?

I am concerned about section 5. While the owner of the bank, in this case the Minister, does not say the bank cannot survive, if a company is committed to surviving but eventually admits it does not believe it can, the best course of action is to get the best deal for the assets. Section 5 clearly identifies the Minister's intentions, the objective of which is to allow the bank and the Minister to move forward and conclude a sale process subject to Dáil approval. Has the Minister included the fact that, as Senator Ross said, it will be much more difficult to sell the bank if he has made a deal just prior to that of 14.9% of the bank to go to the employees? I know it is a great and acceptable thing to do and was negotiated in the first place by David Beggs, then of the Communications Workers Union. For his achievement in getting 14.9% of Telecom shares for his members he has been rewarded by succeeding Mr. Peter Cassells as general secretary of the ICTU. I congratulate him on doing a very good job for his members.

The Minister is the owner of ACC Bank. He is the one who must decide what is the best thing to do with these assets. He believes the best thing to do is to sell them and for that reason he has introduced the Bill. I support him in doing so but I wonder has he been brave enough to look at every aspect of the question.

I listened to Senator Doyle speaking about the history of the bank. In the 1920s and 1930s a number of State companies were established with very worthy objectives because no alternative was available. We did not have the experience or the tradition of enterpreneurship. These companies performed a very useful service. Senator Doyle has spoken about the useful service performed by ACC Bank over many years. Times have changed and we now recognise that it is not the State's function to become involved in business, particularly banking.

I was reminded of this when I heard the Minister of State say he would introduce a new reporting structure which would require the chairman to brief him on a quarterly basis and would require the chief executive to brief departmental officials on a quarterly basis. The Minister of State said these new arrangements could incorporate the reporting requirements under the State bodies guidelines, which require the chairman of a State body to make a formal annual report to the relevant Minister on the financial affairs of the body, its compliance with State guidelines where applicable, including the pay of the chief executive and any developments which the chairman believes should be brought to the attention of the shareholder. Do we need a separate board if the Minister will do all this? I accept that these arrangements are only temporary. However, when we established State companies in the 1920s and 1930s with independent boards which reported to the Minister we gave those boards a degree of flexibility and freedom which allowed them to run their comanies as though they were independent organisations. We are unlikely to succeed if we establish independent boards and then demand that they report to the Minister on every little detail.

When companies run into difficulties they must make tough decisions. I am not sure that we are taking account of the tough decisions which must be made in this case. The bank appears to be struggling. The Government savings scheme is being used to undercut every competitor. I admit my involvement in Tusa Bank. Senator Ross has, quite rightly, asked me to defend the rate charged by Tusa Bank. The banking marketplace is competitive which I am delighted to see.

I congratulate the Minister for Finance on introducing the savings scheme and the manner in which he has introduced it because he has created fierce competition among banks. This is an ideal development from the consumer's point of view. Dr. Peter Drucker said the objective of a business is to create a customer. There is little doubt that the ACC has created customers during the years. However, one cannot create a customer and maintain that customer unless one makes a profit. One cannot make a profit unless one's company is on a solid basis.

I do not understand the reason the Minister of State is increasing the bank's share capital. Is it in order to try to sell the bank? The Minister of State said there was no need to increase the share capital.

I am delighted to see competition in many areas. In the last ten years we have enjoyed the benefits of competition in airlines, telecommunications, taxis and, to a certain extent, pubs. I congratulate the Government on encouraging competition in these areas. We must encourage competition. It is essential that the State withdraw from areas where there is no longer a need for its involvement. Ten years ago I was a supporter of a third banking force. At the time I was involved in An Post and could see the benefits of a third banking force. I am totally opposed to the concept of the State being involved in a third banking force. The only reason for State involvement in banking is to help those who would otherwise not have access to banking services. This is exactly the reason for the State not becoming involved in banking. If the State becomes involved in banking, it will be left with the soft loans and bad debts. Only those who have been turned down by every other bank will turn to the State bank for a loan. It is almost impossible for a State owned bank to succeed. This is one reason we should stay out of this area.

I attended a large meeting of retailers from all around Europe in Glasgow yesterday. There is huge concern about what will happen when the euro is introduced on 1 January next. A number of countries are horrified at what could go wrong if the European banking system breaks down on 1 January and have agreed to front load the new currency to the general public before that date in order that there will be sufficient currency available on 1 January and we do not run short within hours. Last week France agreed to join this group of countries.

If on 1 January a customer comes into a small shop to buy a newspaper and hands over a £20 note, he will be given £19 change in euro. Within hours of opening the small shop could run short of the new currency. That horror is facing the countries which are taking part in the changeover. Four countries have decided to front load currency ahead of time and last week France also agreed to do so. This has not occurred in Ireland. We have a banking problem and must use our banking and retail facilities to make sure the changeover takes place successfully. We are doing a good job in educating the public on what is going to happen on 1 January. We have a long way to go towards making sure the system is working on 2 January. We need to commit to this objective now. We should front load the new currency as is being done in other countries. If there is any purpose in the State owning a bank, it is to use the State forces to ensure the changeover to the euro takes place on that basis.

I do not understand section 9. The Minister of State says this section provides for the amendment of the definition of recognised lender. He says this is being done to eliminate the requirement for banks to be recognised separately by the Minister in addition to the normal licensing requirements in order to register a chattel mortgage. I am sure there is a simple explanation but I do not know what it means.

There is almost an assumption that all banking is developing in the same direction. In many areas throughout the world one finds more than one trend. I am in the food business, for example. In that business there is a great interest in health, and health foods are considered to be the thing of the future. At the same time there is an opposite and equally strong development towards junk food. The same phenomenon can be found in banking. While, on the one hand, there is globalisation and banks are consolidating and getting bigger, on the other smaller banks are starting and there is Internet and telephone banking.

The State's job is to encourage more competition and to deregulate as much as possible. I welcome the Minister's intention which is for the State to get out of banking. His heart is in the right place, although I am not sure if we have examined all the options. I had not realised the losses that were occurring at ACC Bank. It may well be that such a bank may not have a future as a going concern. If it does not then the Minister may have to consider the option of realising the asset values of the bank's properties. Sometimes boards have to make tough decisions. While they may have fought a good fight, if they fail they may have to close down. I hope that will not be the case with the ACC Bank. I hope there is a buyer out there who is willing to pay much more than the asset value of the bank's properties. I would encourage the Minister to keep all his options open but he will succeed only if he is totally committed to his objective.

Mr. Bonner

The primary purpose of the Bill is to oversee the future sale of the ACC Bank subject to the approval of both Houses of the Oireachtas. This proposal will be brought in by way of a motion. The Bill also provides for an increase in the authorised share capital from £50 million to £100 million. It also contains enabling provisions to permit the establishment of an employee share ownership plan with 5% guaranteed for changes and up to 9.9% for purchase by the bank's employees. Senator Ross addressed this issue earlier and I am inclined to agree with everything he said. However, I am realistic enough to realise that restructuring would not take place and that possibly there would be no sale of the ACC Bank unless this provision was included.

The Bill makes provisional arrangements for certain guarantees on borrowings of the ACC Bank. It also provides for the repeal of certain sections of the ACC Bank Acts, 1978 to 1999, should the sale take place. It provides for the continuation of existing guarantees by the Minister. I understand that there are up to £500 million in existing guarantees on total borrowings of £2.5 billion. These guarantees will automatically reduce in line with the reduction of the bank's facilities.

Senator Ross raised the issue of State guarantees for deposits that are now being undertaken. I cannot recall having seen that matter referred to anywhere in the legislation but perhaps the Minister will clarify that matter. He might also clarify that after the sale of the ACC Bank, should it take place, the State will not be guaranteeing any other bank deposits. This issue arose in the House in late 1999 with the impending sale of the ICC Bank. At that time the sale had to be aborted because there was only one intended purchaser, the Bank of Ireland, which subsequently withdrew. Both the ICC and the TSB Banks have since been sold successfully and it is now the turn of the third State bank, the ACC Bank.

The ACC Bank has had a very difficult immediate past as its results, which were announced in the past few days, show. It reported losses of over £17 million. These losses are due to a number of factors, primarily the £16 million the bank had to pay as a result of the DIRT tax inquiry and the provision of higher bad debts amounting to approximately £11 million. I am not entirely happy that no explanation has been given for the bank's involvement in the Four Seasons Hotel and what the eventual outcome will be. What is the final potential loss relating to that activity? There have also been restructuring costs to the tune of £13 million which, as the Minister said, incorporate voluntary severance agreements for 120 of the 600 staff.

The board has expressed its disappointment to the Minister about what happened concerning the DIRT inquiry. This all came about through revelations at the Committee of Public Accounts inquiry and the Revenue investigations. Senator Ross mentioned that the pro rata level of payments by the ACC Bank in relation to the larger banks was disproportionate. However, when one thinks back to that time, a small bank such as the ACC might not have survived in the marketplace without this type of activity, although I am not condoning it. I am trying to be fair in looking back at what happened. At the time there was an aggressive campaign, particularly by Allied Irish Banks, to increase its deposit base. Small banks such as the ACC were caught in that web. While the settlement may be disproportionate, it pales into insignificance compared to the number of customers the bank may have lost from its client base due to the aggressiveness of other banks.

The board has assured the Minister of its commitment to full compliance with the laws of the land in future. The board has stressed that there is now a profitable business for a new owner. The business has been realigned and in the current year it is trading ahead of expectations. Despite its difficulties the bank has performed strongly, it has a strong balance sheet and is well capitalised. The bank intends to issue an information memorandum shortly in relation to the sale. Time will tell how many potential buyers are interested but I understand that the memorandum document will be issued to at least ten possible bidders.

While the bank's pre-tax profits are poor due to the reasons I mentioned earlier, in the current year the bank is operating profitably. Its operating profits last year increased by over 11%. On current stock valuations it is possible that the sale of the bank could realise up to £200 million for the Minister for Finance. Many people have said this money should go into the national pension reserve fund. Perhaps the Minister will clarify that matter in his reply.

It has been stated that an international company may be interested in purchasing the ACC Bank when it comes on the market. It is difficult to see how this could happen, however, or what significance or value such a small bank would have for an international purchaser. It has been stressed that the owners of the National Irish Bank group, the National Australian Bank, might be interested in the purchase to extend its base here. It is most likely, however, that the sale, if it goes ahead, will eventually go to one of the major domestic players such as AIB, the Bank of Ireland, Irish Life and Permanent or First Active.

The Government is anxious to sell the bank before the end of the year and this may now be possible due to the root and branch review of the group, its repositioning in the market and the revision of its loan book. Unfortunately, the bank's results may tend to hold that situation off and it may not be possible. Eventually, however, the bank will be on the market and will be sold.

The bank will concentrate on the business market and will provide a more focused personal banking service. It will return to its original market, serving the agricultural sector and small retail outlets. It has always concentrated on rural branch distribution. It has stated it has rationalised in Dublin but many of us believe it is closing all its branches there. The bank is 50% focused on commercial lending to the SME and agriculture sectors. It only operates in these chosen sectors and personal banking following restructuring.

As Senator Ross stated, the bank is offering the most attractive and competitive variable interest rate options for those who wish to avail of the special savings investment account announced by the Minister for Finance. The intention of the scheme, which is backed by the Government, is to curb inflation and reduce personal expenditure by providing savings accounts for individuals. Many institutions are offering different products such as unit trust funds to which there are risks attached but if managed properly, could result in a greater return. However, for the small investor who does not want to take any risk the offer of a 4.75% variable interest rate by ACC Bank will be very attractive. It will be attractive not alone for small depositors and new business acquired but also for any intending purchaser because the demand for the bank's product in recent weeks would have widened its client base significantly.

The bank, which once served the farming community primarily and then switched to become a broadly based business retail bank, has turned its back on this strategy in favour of refocusing on SME, commercial lending and selective borrowing. The bank was successful with this strategy when building its client base up to the mid-1980s. There is still a niche market for this strategy which would be one of foremost attractions for a new owner.

One of the main purposes of the legislation is to increase share capital. Senator Quinn referred to the need for such an increase. The Minister is providing for an increase in the authorised share capital, whether it is ever needed, but it is necessary to do so in case costs arise in the lead-up to the sale of the bank and its restructuring in order that it is not stripped of cash that it might need.

Although I have reservations I welcome the involvement of employees in the bank's manage ment. They have been fully involved in the restructuring. While I do not agree with this, I am a realist and it is necessary to ensure the co-operation of the staff.

Following the experience of the successful sales of both the ICC Bank and the TSB it is only right that ACC Bank should also be taken out of State ownership. I have no difficulty with this. The sale of ICC Bank to Bank of Scotland achieved a price of £275 million which should encourage the staff of ACC Bank because the shareholdings of the former staff of ICC Bank have increased by up to £60,000 each in their ESOP. It was a similar case as a result of the sale of TSB to Irish Life and Permanent. The purchase price was £339 million but for ESOP purposes the value was only £200 million and the staff have achieved increases of £30,000 each. These figures should encourage the staff of ACC Bank because their futures will be consolidated and they will make gains on their shareholdings.

Many of the small branches of An Post in rural towns will be closed following restructuring by the main banks. I hope that will not happen to the ACC Bank branch network because there is still an opening to service the farming community. I have fears because most of its branches are in large provincial towns in which other bank and building society branches are located. However, there is a great future for An Post and one of the recommendations in the Flynn report is to extend its activities and facilities for customers.

ACC Bank was founded to develop agriculture but has moved away from that ethos. It would be a great loss to the agricultural community if anything major was to happen to the bank. The bank, through its sale, will become stronger and I hope its branch network will remain in place for the benefit of the farming community.

The economy is going from strength to strength. Ireland is actively participating and surviving in a free market climate both within Europe and the world. This marketplace is evolving all the time. We live in the European Union where the free movement of people, services, goods and capital applies across the territory of 15 member states encompassing a population of more than 350 million. There is a new internal market in which protectionism is a thing of the past.

Protectionism was, however, a philosophy which served an important purpose for this nation when it was founded in 1922. The State intervened in almost all the key economic and social industries. One such important economic sector which benefited from State involvement was the banking industry and in 1927 ACC Bank was formed. It was established when economic circumstances were different from today's. The bank was founded in a climate of encouraging investment in the development of agriculture. Since then the bank has become a strong supporter of agriculture and, in recent times, small and medium-sized industries, which will continue to form the bedrock of society.

I accept, however, change is necessary and we must move with it. There should not be a significant fear of change in ACC Bank. My only fear is that it will be difficult for the bank to maintain a strong presence in provincial towns because if it is amalgamated with one of the main banks they will already have a presence in them. However, I commend the Bill to the House.

Mr. Costello

I welcome the Minister of State but will give a more lukewarm welcome to the legislation than others. ACC Bank is the last of the family silver in terms of State-owned banks following the sales of ICC Bank and the TSB. The purpose of the legislation is to prepare ACC Bank for disposal by the Minister by increasing the share capital and providing for an ESOP. This has been the formula used in the disposal of other financial institutions.

I am unhappy that it has come to this. I would have much preferred if a different mechanism could have been devised. I appreciate the merger of ACC Bank and the TSB fell through when both sides examined their balance sheets and reflected on ACC Bank's liability for DIRT tax evasion on its bogus offshore accounts. Who would have wanted to merge with ACC Bank in the circumstances 12 months ago?

I do not share the view, however, that a bank which is different from the major banks such as the AIB and Bank of Ireland is not competitive. The State-owned banks, particularly ICC Bank, have been extremely competitive. This time last year we were discussing the sale of ICC Bank and heard that the figures indicated that there was a pre-tax increase in profit of 64%, the largest of any financial institution in the country. Therefore, a small bank which does its business properly and targets its niche market, then the small and medium businesses sector, can make enormous profits. As Senator Quinn said, while the big conglomerates consolidate and increase their size, at the other end of the spectrum small operations are coming in which are more streamlined and can be more profitable.

I do not agree with the theory that big is beautiful in the banking arena and that every State bank should be bought. It is a shame that we did not come up with a domestic merger whereby the TSB, ACC Bank and ICC Bank could compete with the major banks. Both the AIB and Bank of Ireland are now making profits in excess of £1 billion annually. That is nearly £3 million per day. Those are colossal profits but they have not improved the service, which has continued to deteriorate. The service provided by the big banks is scandalous. They are withdrawing from communities throughout the country, both rural and urban. For this to happen without a voice being raised and with the enormous profits being made is one of the most serious threats to the social fabric of society. As the essential services diminish, the fabric of society is threatened and it will be harder to keep communities together. The recent Flynn report on An Post indicated that there will be sweeping reductions in the number of sub-post offices throughout the country. Rural and urban areas will be hit badly and now we hear that ACC Bank is planning to withdraw entirely from Dublin.

The Minister of State did not tell us exactly what the ACC will do. I do not believe the words "farming" or "agricultural community" were mentioned once in his address in which there were two contradictory statements. He said that, in the first instance, the bank will undertake a fundamental review of its corporate loan book during the course of the year because it has lost badly in some of its corporate borrowings and lending, yet it has withdrawn completely from low margin large corporate lending. In what business is the bank engaged in terms of corporate lending? Why was it in the business in the first place if it could not obtain a decent margin? There must have been very bad management of ACC Bank. It is a disaster story all the way.

If we compare ACC Bank to ICC Bank last year, we can see that the ICC story was a constant message of good work, good management and profitability. It was a beacon of light in terms of a State financial institution doing its job better than any of the private financial institutions, yet we sold it off for a song, £275 million, to Bank of Scotland. Bank of Scotland needed that foothold in the Irish market and got it very cheaply.

What do we get now in terms of the target market of ACC Bank? It will go into the very same area in which ICC Bank is the expert. Given that the Minister of State mentioned in the debate last year that it was the market leader in the area of medium and small businesses, what is ACC Bank doing? It is going into the same market having been badly burned in the large corporate lending area, and there is not a word about the farming community other than to the extent that it is moving out of Dublin. It will have branches and regional centres throughout the country but how will it tap into the agricultural lending and borrowing market? I would like to hear something about this. ACC Bank has not presented any strategy for viability and what we have before us in terms of a banking institution is in a sorry state. The economy is booming and anybody involved in banking has a licence to print money. Everybody has been doing this in terms of returns in recent years except ACC Bank.

ACC Bank is a real disaster when we consider that the sole shareholder is the Minister for Finance, on behalf of all of us. While we hear that there will be new reporting structures, surely the Minister should have been more on top of what was going on in ACC Bank in terms of bad lending methods and the bogus offshore accounts, which I have not mentioned up to now but which everybody else raised. For a State bank, with the Minister for Finance as the sole shareholder, to be involved in illegal activity is not just an embarrassment but a very serious matter. It is amazing that there were no proper reporting facilities between the bank, its chairman, the Minister and its chief executive officer and that this should have happened to the extent that it did. The State bank decided, for whatever reason, that it would go gung-ho for the illegal markets and much of its money and its clientele were geared in that direction. When the Committee of Public Accounts focused on ACC Bank, therefore, there was by far a greater proportion of illegal activity in this area than in the other banks. Many serious questions have to be answered in that respect.

I seek clarification on the special savings scheme. ACC Bank's special savings scheme is certainly top of the range. It is almost like the Minister's special savings scheme; it is too good to be true. The Minister is giving 25% to everybody on their savings but ACC Bank is better in terms of the rates it will give, the amount that has to be saved and the guarantees it will give, although I would like to hear more about those guarantees. It is almost as though it is compensating for bad decisions made in the past in the corporate sector and in terms of bogus accounts, etc. It now promises returns which exceed those promised elsewhere.

On the continuation of existing guarantees given by the Minister, the Minister of State said:

This section will be commenced following the sale of the bank in conjunction with the schedule of repeals . however, existing State guarantees cannot arbitrarily be withdrawn and the purpose of this section is to provide for the run-off of these guarantees and the circumstances in which they cease to be in force. The key point is that the bank will be required to pay the Minister in respect of any guarantees the Minister honours.

The Minister of State also seemed to suggest that any activity in which the bank engages prior to its sale will be subject to the normal State guarantee.

Mr. Cullen

There is a counter-indemnity.

Mr. Costello

I would like to hear the Minister of State's response to this issue. If all this is above board and works out it will be a great boost for ACC Bank. However, I am concerned that may not be the case.

I hate to say so, but the ESOP is the normal bribe which has to be provided for existing staff of any institution or semi-State body being privatised. This scheme was originally negotiated by the then secretary of the Communications Workers Union – the incoming president of the ICTU – and has been accepted across the board. I have my doubts about such schemes as it is unfair that only current workers, who did not contribute to the growth of the industry or the institution, benefit, while past or future workers will not benefit from a deal agreed at a frozen point in time.

It is desirable that the workforce should participate in the company and I disagree with Senator Ross's comment that the ESOP will make it more difficult to attract a purchaser for ACC Bank. It did not take long for ICC Bank to find a buyer and a similar ESOP was built into the relevant legislation. There is no problem in that regard. ESOPs are akin to bribery and I question the morality of proactively remunerating the existing workforce when past and future workers will not benefit from the sale. However, this issue will come to an end shortly as almost all State companies have been privatised.

ACC Bank is the last State-owned financial institution to be sold. I hope we obtain a decent price for the bank, but I doubt there will be a rush to buy it. I also hope that in later Stages of the Bill we will obtain further clarification on which sectors of the market ACC Bank will target, how it will operate regarding the agribusiness sector and whether it will maintain a decent regional, rural network of branches. Banks are pulling out of many locations and post offices are under threat. It seems that ACC Bank will cease such operations, apart from its headquarters in Dublin. ACC Bank has stated that it is now focusing on particular areas. However, by strongly opting for the State's special savings scheme it is throwing an umbrella over the entire country in terms of what will be its major business for, probably, the next five years. It will be difficult for any other financial institution to match ACC Bank's special savings scheme.

The Bill contains many contradictions and I would welcome clarification. ACC Bank is still owned by the State and it may or may not attract a buyer. The bank is being prepared for sale but, perhaps, no attractive purchase offer will be made. The Minister of State has to come back to the House before the bank can be sold. However, we may be unhappy about disposing of the bank if we are not satisfied with the price being offered. While ACC Bank remains in the ownership of the State, I would like to see how it has cleaned up its act and what its target markets will be.

Minister of State at the Department of Finance (Mr. Cullen)

I thank Senators for their contributions to this debate on the ACC Bank. We have been over the course before with the ICC Bank and the TSB, but the quality of the contributions demonstrate a deep interest in these issues among Senators.

Senator Joe Doyle and others referred to the Four Seasons Hotel and bad debts in general. The Senator will appreciate that I am not in a position to answer queries regarding a particular client as, under section 16(4) of the Agricultural Credit Act, 1978, ACC Bank cannot provide information which would disclose the affairs of a depositor, borrower or loan applicant. However, I can address the issue of bad debt provisions in general.

ACC Bank conducted a full-scale review of its corporate loan book during 2000. The result of the review was that the bad debts provision in the 2000 accounts increased to 14.4 million. This is a prudent move which is in line with the view that the bank should, in so far as is possible, make full provision for all matters arising in the 2000 accounts, and it has done so.

Many Senators referred to the ESOP. The terms of the ESOP are being negotiated between the management and unions. An ESOP plays a valuable role in sorting out any issues in the relevant enterprise and aids preparations for the sale of the institution. The percentage of shares available for change and purchase must follow precedent. The share per employee depends on the nature of each enterprise – its size, profitability and the number of employees. Therefore, the ESOP is not the same in all cases.

Senator Ross views ESOPs as a disincentive to purchasers as they could form a block shareholding. I will not comment on Eircom as its situation is different from that of ACC Bank. The sale of ACC Bank will be a trade sale, following which the ESOP shares will be swapped for shares in the purchaser. In the case of ICC Bank, the ESOP shares were swapped for shares in the Bank of Scotland. However, the ESOP shareholding barely registered as a percentage of the shares in Bank of Scotland. Senator Ross spoke at some length about this case and one might presume the situation with regard to ACC Bank will be somewhat similar. However, once the swap takes place, the percentage impact on the overall group will be negligible, and hardly registered in the case of ICC Bank.

The terms of the ESOP are being negotiated. However, some of the key elements are clear. The unions have agreed to a substantial number of voluntary redundancies as a result of which there will be changes in work practices. These changes will form part of the ESOP. The ESOPs in the ICC Bank and the TSB did not prove to be barriers to the sale and purchasers in both cases accepted the changes made under the plans. Senator Costello made the point that ESOPs are not necessarily a barrier to sale as was shown by the sale of the ICC Bank and the TSB.

Other questions were raised about the DIRT liability. I did not like the spin put on it by Senator Ross – it was somewhat unfair and inaccurate. In August 2000, ACC Bank arrived at a settlement of £17.9 million with the Revenue Commissioners, in full settlement of the liabilities of the bank for DIRT and penalties for the years 1986 to 1999, inclusive. This figure represented £7.5 million in tax with interest and penalties accounting for £9.9 million and £430,000, respectively. The bank had a provision of 21 million in its 2001 results to pay for this.

Senator Ross suggested that the bank was dependent on illegally retaining DIRT to make profits. Over the period to which the £7.5 million in DIRT refers, the bank made pre-tax profits of £114 million pounds, which serves to dismiss Senator Ross's point that—

Mr. J. Doyle

It could have afforded to pay the DIRT.

Mr. Cullen

It could have, and should have like everybody else. I agree with Senator Doyle's point that the activities of the bank in this regard were unacceptable. I am not trying to defend them in any way in the information I am giving to the House. Equally, it would be wrong of me not to refer to the point of Senator Ross.

Many questions were asked about the special savings scheme. All Senators referred to the positive reaction of the press to the scheme launched by ACC Bank. There is general agreement that the ACC Bank is offering the most competitive variable rate product. The rate offered is EURIBOR for accounts opened by September. Accounts opened thereafter will receive a half percent below EURIBOR, which will still be one of the most competitive offers.

The bank is now concentrating on small and medium enterprises, offering a more focused and personal banking service and continuing to serve the agricultural sector. Senator Costello will be aware that I did refer to the agricultural sector. It is ceasing to try to be a mini-Bank of Ireland or Allied Irish Bank offering all things to all markets. That has probably been the fundamental flaw of their strategy heretofore.

The bank is going to cherrypick and find niche markets. There is nothing wrong with that – that is their strategy. It applies to the lending side of its business. The savings scheme is on the funding side. However, the bank will seek to cross-sell lending products to customers that fall within the niche markets it is concentrating on. The savings scheme is not State-guaranteed. As with other banks, it is guaranteed by the bank itself.

ACC Bank is owned by the State, but the State as shareholder does not guarantee deposits in general any more than the shareholders of Bank of Ireland guarantee its deposits. State guarantees only relate to guarantees given by the Minister under section 14 of the Agricultural Credit Act, 1978. There is no such ministerial guarantee regarding the special savings account scheme.

Some Senators and Deputies have referred to the selling of ACC Bank as some kind of fire sale, that it must be quickly sold off at all costs. That will not be the case. The bank has obvious difficulties. It has made provisions for addressing them in its accounts for the year 2000. The Minister will have to be satisfied with all conditions of the sale, including the valuation. That may take some time. One has to be ready to deal with issues that will affect the sale when they arise. The Minister does not operate like other institutions. If they have an offer for a business, bank, etc., they can hold an EGM and make a decision, and that would reflect the commercial opportunity available at any given time. That is not the case when the State is the shareholder. The Minister has to introduce legislation, as I am doing, and go through a lengthy process of putting it through both Houses. Market conditions could change fundamentally in that period. Bringing in the legislation allows for the possibility that, at any given time, an important offer may come in. The bank would want to be commercially positioned to deal with that at the time it arises. The Minister wants to be in a position to facilitate that.

A question was asked by Senator Quinn regarding chattel mortgages. Section 9 provides for the following amendments to the Agricultural Credit Act, 1978: the deletion of the term "recognised bank" from section 23(1); the amendment of the term "recognised lender" in section 23(1); and the repeal of section 25. The purpose of these amendments is to eliminate the requirement for banks to be recognised separately by the Minister for Finance in addition to their normal licensing requirements in order to provide the chattel mortgages.

Chattel mortgages are mortgages that are secured on stock, such as capital crops, farm machinery, etc. They are regulated under Part III of the Agricultural Credit Act, 1978, for historical reasons, and it is because of this that the 1978 Act cannot be repealed in its entirety. Chattel mortgages must be registered in Circuit Court offices and can only be registered by a recognised lender, which is defined as ACC Bank or a recognised bank. Under section 25 of the 1978 Act, the Minister for Finance may recognise a bank and notify the Minister for Justice of any such recognition. Legal advice was sought from the Office of the Attorney General on the basis upon which the Minister should recognise banks. The advice was that holders of banking licences should be recognised if they make an application to the Minister. It was decided, therefore, that there was unnecessary duplication involved in the system and that the Minister should no longer be required to recognise a bank. The new definition of "recognised lender" means "a credit institution authorised under the European Communities (Licensing and Supervision of Credit Institutions) Regulations, 1992 (S.I. No. 395 of 1992).". All of the major banks will be covered by this definition of "recognised lender" and the deletion of section 25 of the 1978 Act means that all such banks will be automatically recognised lenders as regards chattel mortgages. The Minister will have no role in this matter and everybody will agree to that.

Senator Quinn referred to the current position on the share capital. It is close to the statutory limit of £50 million at the moment. The Bill facilitates the authorised share capital being raised to £100 million. However, ACC Bank is adequately capitalised. Its audited capital adequacy ratio was 11.8% in December 2000. I made that point in my speech. That is comfortably in excess of the 10% required by the Central Bank, so there is no immediate need for an injection of capital. The Minister will consider any requests for additional capital from the board at the appropriate time and he is committed to keeping the company adequately capitalised for as long as it remains in State ownership. However, because we are close to the limit, let us put in place a legislative mechanism, agreed by both Houses, that will allow the Minister to inject capital if necessary.

Senator Quinn asked why we are doing this. If he wished to inject capital to his business, all he would have to do would be to call an EGM, but the Minister has to go through a lengthy process.

I hope I have answered the general points made by Senators. Most queries were on the issue of the ACC Bank's savings scheme. Obviously, during Committee Stage, more detailed questions will arise, which I will be happy to answer. I thank all the Senators who contributed to the Bill and I commend it to the House.

Question put and agreed to.

Committee Stage ordered for Tuesday, 22 May 2001.

An Cathaoirleach

When is it proposed to sit again?

Mr. T. Fitzgerald

On Tuesday, 22 May at 2.30 p.m.